<PAGE>
As filed with the Securities and Exchange Commission on February 24, 2000
Registration No. 333-______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
STRUCTURED ASSET SECURITIES CORPORATION
(Exact name of registrant as specified in its charter)
on behalf of itself and trusts with respect to which it is the settlor
or depositor
Delaware
(State or other jurisdiction of incorporation or organization)
74-2440850
(I.R.S. employer identification number)
200 Vesey Street
New York, New York 10285
(212) 526-7000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Mark L. Zusy
Structured Asset Securities Corporation
200 Vesey Street
New York, New York 10285
(212) 526-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C> <C>
William J. Cullen, Esq. Scott Kimmel, Esq. Michael S. Gambro, Esq.
Sidley & Austin Lehman Brothers Inc. Patrick T. Quinn, Esq.
875 Third Avenue 3 World Financial Center Cadwalader, Wickersham & Taft
New York, New York 10022 New York, New York 10285 100 Maiden Lane
(212) 906-2276 (212) 526-4058 New York, New York 10038
(212) 504-6000
Richard F. Kadlick, Esq. James Cotins, Esq.
Skadden, Arps, Slate, Meagher & Flom Thacher, Proffitt & Wood
919 Third Avenue Two World Trade Center
New York, New York 10022 New York, New York 10048
(212) 735-2716 (212) 912-7400
</TABLE>
<PAGE>
Approximate date of commencement of proposed sale to the public: From
time to time on or after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest plans, please check the following box. [x]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
OFFERING AMOUNT MAXIMUM PRICE AMOUNT OF REGISTRATION
TITLE OF SECURITIES BEING REGISTERED TO BE REGISTERED(1) PER UNIT(2) OFFERING PRICE (2) FEE (1)(2)
- ------------------------------------ ------------------- ----------- ------------------ ----------
<S> <C> <C> <C> <C>
Commercial Mortgage-Backed $4,000,000,000 100% $4,000,000,000 $1,056,000
Securities
</TABLE>
(1) In addition, pursuant to Rule 429 under the Securities Act of 1933,
when this Registration Statement is declared effective, any securities
that remain unsold under the Registration Statement on Form S-3 (File
No. 333-49129) of the Registrant will be carried forward. As of the
date that this Registration Statement was filed, $1,683,621,493 of
securities remained unsold under the Registration Statement on Form S-3
(File No. 333-49129) of the Registrant, for which a filing fee of
$496,668.34 has been previously paid.
(2) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 under the Securities Act of 1933, when this
Registration Statement is declared effective, each Prospectus which is part of
this Registration Statement shall relate to any securities which remain unsold
under the Registration Statement on Form S-3 (333-49129) of the Registrant.
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED )
$ (APPROXIMATE)
COLLATERALIZED MORTGAGE OBLIGATIONS, SERIES
LB COMMERCIAL MORTGAGE TRUST, , ISSUER
We, Structured Asset Securities Corporation, have prepared this prospectus
supplement in order to offer the classes of collateralized mortgage obligations
identified in the table below. These obligations, which are to be offered in the
form of bonds, are the only securities offered pursuant to this prospectus
supplement. This prospectus supplement specifically relates to, and is
accompanied by, our prospectus dated . We will not list the offered
bonds on any national securities exchange or any automated quotation system of
any registered securities associations, such as NASDAQ.
The offered bonds will be secured, nonrecourse obligations of the issuer
identified above. They will not represent interests in or obligations of any
other party. The collateral for the offered bonds will include a pool of secured
loans. The collateral for those loans primarily consists of multifamily and
commercial real properties. Those loans will have an "initial mortgage
collateral balance" of approximately $ . No governmental agency or
instrumentality or private insurer has insured or guaranteed the offered bonds
or any of the loans that back them.
----------------------------------------
YOU SHOULD FULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE S- IN THIS
PROSPECTUS SUPPLEMENT AND ON PAGE IN THE ACCOMPANYING PROSPECTUS PRIOR TO
INVESTING IN THE OFFERED BONDS.
---------------------
<TABLE>
<CAPTION>
INITIAL
AGGREGATE PRINCIPAL APPROX. % OF
BALANCE OR INITIAL MORTGAGE EXPECTED
OFFERED NOTIONAL COLLATERAL ASSUMED FINAL RATINGS
BONDS AMOUNT(1) BALANCE INTEREST RATE(3) PAYMENT DATE(4) CUSIP NO. ( )(5)
- ------- ------------------- ---------------- ---------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Class A-1............
Class A-2............
Class B..............
Class C..............
Class D..............
Class E..............
Class F..............
Class X.............. (2) N/A
</TABLE>
(FOOTNOTES TO TABLE ON NEXT PAGE)
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Lehman Brothers Inc., the "underwriter", will purchase the offered bonds
from us, subject to the satisfaction of various conditions. The underwriter is
offering the offered bonds, when, as and if delivered to and accepted by it,
subject to prior sale and subject to its right to reject orders in whole or in
part. The underwriter currently intends to sell the offered bonds from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale. See "Method of Distribution" in this prospectus supplement.
Our proceeds from the sale of the offered bonds will equal approximately %
of the initial aggregate principal balance of the offered bonds, plus accrued
interest, before deducting expenses payable by us. We expect to deliver the
offered bonds in book-entry form through the Same-day Funds Settlement System of
the Depository Trust Company on or about , against payment for those
bonds in immediately available funds.
LEHMAN BROTHERS
The date of this prospectus supplement is .
<PAGE>
FOOTNOTES TO THE TABLE ON THE COVER OF THIS PROSPECTUS SUPPLEMENT:
(1) The actual initial aggregate principal balance or notional amount of any
class of offered bonds may be larger or smaller than the aggregate principal
balance or notional amount, as the case may be, shown in the table on the
cover of this prospectus supplement, depending on the actual size of the
initial mortgage collateral balance. The initial mortgage collateral balance
may be as much as % larger or smaller than the amount set forth on the
cover of this prospectus supplement.
(2) The class "X" bonds will not have principal balances and will not entitle
their holders to any payments of principal. The class "X" bonds will accrue
interest on their respective notional amounts that, in total, equal the
aggregate principal balances outstanding from time to time of those classes
of the series " " bonds that do have principal balances.
(3) The interest rate shown in the table on the cover page for the class "X"
bonds is the approximate rate applicable for payments to be made in
. The interest rate for that class is variable as described
under "Description of the Offered Bonds--Payments--Calculation of Interest
Rates" in this prospectus supplement.
(4) The table on the cover shows the month and year in which the assumed final
payment date for each class of offered bonds occurs. The "assumed final
payment date" is discussed under "Summary of Prospectus Supplement--Relevant
Dates and Periods" in this prospectus supplement. The "rated final payment
date", which is also discussed under "Summary of Prospectus
Supplement--Relevant Dates and Periods" in this prospectus supplement,
occurs in .
(5) By . See "Ratings" in this prospectus supplement.
------------------------
IMPORTANT NOTICE ABOUT THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT,
THE ACCOMPANYING PROSPECTUS AND THE RELATED REGISTRATION STATEMENT
Information about the offered bonds is contained in two separate documents,
each of which provides summary information in the front part thereof and more
detailed information in the text that follows: (a) this prospectus supplement,
which describes the specific terms of the offered bonds; and (b) the
accompanying prospectus, which provides general information, some of which may
not apply to the offered bonds. You should read both this prospectus supplement
and the accompanying prospectus in full to obtain material information
concerning the offered bonds.
In addition, we have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended, with
respect to the offered bonds. This prospectus supplement and the accompanying
prospectus form a part of that registration statement. However, this prospectus
supplement and the accompanying prospectus do not contain all of the information
contained in our registration statement. For further information regarding the
documents referred to in this prospectus supplement and the accompanying
prospectus, you should refer to our registration statement and the exhibits to
it. Our registration statement and the exhibits to it can be inspected and
copied at prescribed rates at the public reference facilities maintained by the
SEC at its public reference section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at its regional offices located at: Chicago regional office, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661; and New York regional
office, Seven World Trade Center, New York, New York 10048. Copies of these
materials can also be obtained electronically through the SEC's internet web
site (http:\\www.sec.gov).
You should only rely on the information contained in this prospectus
supplement, the accompanying prospectus and our registration statement. We have
not authorized any person to give any other information or to make any
representation that is different from the information contained in this
prospectus supplement, the accompanying prospectus or our registration
statement.
S-2
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus includes the
words "expects", "intends", "anticipates", "estimates" and similar words and
expressions. These words and expressions are intended to identify
forward-looking statements. Any forward-looking statements are made subject to
risks and uncertainties which could cause actual results to differ materially
from those stated. These risks and uncertainties include, among other things,
declines in general economic and business conditions, increased competition,
changes in demographics, changes in political and social conditions, regulatory
initiatives and changes in customer preferences, many of which are beyond our
control and the control of any other person or entity related to this offering.
The forward-looking statements made in this prospectus supplement are accurate
as of the date stated on the cover of this prospectus supplement. We have no
obligation to update or revise any forward-looking statement.
S-3
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Important Notice about the Information Contained in this
Prospectus Supplement, the Accompanying Prospectus and the
Related Registration Statement............................ S-2
Forward-Looking Statements.................................. S-3
Summary of Prospectus Supplement............................ S-5
Risk Factors................................................ S-27
Description of the Mortgage Collateral...................... S-38
Servicing of the Mortgage Loans............................. S-58
Description of the Offered Bonds............................ S-84
Yield and Maturity Considerations........................... S-111
Use of Proceeds............................................. S-119
Federal Income Tax Consequences............................. S-119
Certain ERISA Considerations................................ S-122
Legal Investment............................................ S-127
Method of Distribution...................................... S-128
Legal Matters............................................... S-129
Ratings..................................................... S-129
ANNEX A-1--Certain Characteristics of the Mortgage Loans.... A-1-1
ANNEX A-2--Certain Monetary Terms of the Mortgage Loans..... A-2-1
ANNEX B--Term Sheet......................................... B-1
ANNEX C-1--Price/Yield Tables............................... C-1-1
ANNEX C-2--Decrement Tables................................. C-2-1
ANNEX D--Form of Delinquent Loan Status Report.............. D-1
ANNEX E--Form of Historical Loan Modification Report........ E-1
ANNEX F--Form of Historical Liquidation Report.............. F-1
ANNEX G--Form of REO Status Report.......................... G-1
ANNEX H--Form of Watch List Report.......................... H-1
ANNEX I--Form of Operating Statement Analysis............... I-1
ANNEX J--Form of NOI Adjustment Worksheet................... J-1
ANNEX K--Form of Comparative Financial Status Report........ K-1
PROSPECTUS
Important Notice about the Information Presented in this
Prospectus................................................ 3
Available Information; Incorporation by Reference........... 3
Summary of Prospectus....................................... 4
Risk Factors................................................ 15
Description of the Trust Estates............................ 36
Yield and Maturity Considerations........................... 61
Structured Asset Securities Corporation..................... 67
Issuers..................................................... 68
Description of the Bonds.................................... 68
Description of the Governing Documents...................... 78
Certain Legal Aspects of the Mortgage Loans................. 92
Federal Income Tax Consequences............................. 105
State and Other Tax Consequences............................ 136
ERISA Considerations........................................ 136
Legal Investment............................................ 141
Use of Proceeds............................................. 143
Method of Distribution...................................... 143
Legal Matters............................................... 145
Financial Information....................................... 145
Rating...................................................... 145
</TABLE>
S-4
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
This summary contains selected information regarding the offering being made
by this prospectus supplement. It does not contain all of the information you
need to consider in making your investment decision. TO UNDERSTAND ALL OF THE
TERMS OF THE OFFERING OF THE OFFERED BONDS, YOU SHOULD READ CAREFULLY THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN FULL.
INTRODUCTION TO THE TRANSACTION
The offered bonds will be part of a series of collateralized mortgage
obligations designated as the Series Collateralized Mortgage Obligations
and consisting of multiple classes. The table below identifies the respective
classes of that series, specifies various characteristics of each of those
classes and indicates which of those classes are offered by this prospectus
supplement and which are not. The footnotes to the table below follow on the
next page.
<TABLE>
<CAPTION>
SERIES COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
- -------------------------------------------------------------------
APPROX.
INITIAL AGGREGATE % OF
PRINCIPAL INITIAL
BALANCE OR MORTGAGE
NOTIONAL POOL
CLASS(1) RATINGS(2) AMOUNT(3) BALANCE
<S> <C> <C> <C>
Offered Bonds
A-1.................... $ %
A-2.................... $ %
B...................... $ %
C...................... $ %
D...................... $ %
E...................... $ %
F...................... $ %
X...................... $ (7) %
Non-Offered Bonds(8)
G...................... $ %
H...................... $ %
J...................... $ %
K...................... $ %
L...................... $ %
M...................... $ %
N...................... $ %
<CAPTION>
SERIES COMMERCIA SERIES COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
- ----------------------- ---------------------------------------------------------------
APPROX. PASS- INITIAL WEIGHTED
INITIAL THROUGH PASS- AVERAGE
CREDIT RATE THROUGH LIFE PRINCIPAL
CLASS(1) SUPPORT(4) DESCRIPTION(5) RATE(5) (YEARS)(6) WINDOW(6)
<S> <C> <C> <C> <C> <C>
Offered Bonds
A-1.................... % %
A-2.................... % %
B...................... % %
C...................... % %
D...................... % %
E...................... % %
F...................... % %
X...................... % %
Non-Offered Bonds(8)
G...................... % %
H...................... % %
J...................... % %
K...................... % %
L...................... % %
M...................... % %
N...................... % %
</TABLE>
- ------------------------
(1) The respective classes of bonds identified in the table above entitle their
holders to varying degsrees of seniority for purposes of--
- receiving payments of interest and, if and when applicable, payments of
principal; and
- bearing the effects of losses on the secured loans that will back the
bonds, as well as default-related and other unanticipated expenses of the
related trust estate.
The class "A-1", "A-2" and "X" bonds are the most senior. The remaining
classes of bonds identified in the table above are listed from top to bottom
in descending order of seniority.
(2) Ratings shown are those of .
(3) The actual initial aggregate principal balance or notional amount of any
class of bonds identified in the table above may be larger or smaller than
the amount shown above, depending on the actual size of the initial mortgage
collateral balance. The actual size of the initial mortgage collateral
balance
S-5
<PAGE>
may be as much as % larger or smaller than the amount presented in
this prospectus supplement.
(4) Represents the initial aggregate principal balance, expressed as a
percentage of the initial mortgage collateral balance, of all classes of the
series " " bonds that are subordinate to the indicated class.
(5) The "interest rate" for any class of bonds identified in the table above is
the annual rate at which that class of bonds will accrue interest from time
to time. [ADD SUMMARY DESCRIPTIONS OF VARIABLE INTEREST RATES.]
(6) Calculated based on the following assumptions with respect to each secured
loan that will back the bonds--
- the related borrower timely makes all payments on that loan,
- if that loan has an anticipated repayment date, as described under "--The
Mortgage Loans and the Underlying Real Properties" below, the loan will be
paid in full on that date, and
- that loan will not otherwise be prepaid prior to stated maturity.
Further based on the other "Maturity Assumptions" described under "Yieldand
Maturity Considerations" in this prospectus supplement.
(7) Initial aggregate notional amount. The aggregate notional amount of the
class "X" bonds will equal the aggregate principal balance of the other
classes of bonds identified in the table above outstanding from time to
time. The aggregate notional amount of the class "X" bonds will be used
solely to calculate the accrual of interest with respect to those bonds. The
class "X" bonds will not have principal balances and will not entitle their
holders to payments of principal.
(8) The non-offered bonds will also include the following classes of bonds which
are not shown above: "R-I", "R-II" and "R-III". These other non-offered
bonds do not have principal balances, notional amounts or interest rates.
They do not provide any material credit support for the offered bonds.
------------------------
<TABLE>
<S> <C>
THE TRUST ESTATE.................. The bonds will be secured, nonrecourse obligations of
the issuer. In order to secure its obligations, in
particular its payment obligations with respect to the
offered bonds, the issuer will pledge, among other
things, a pool of secured loans having the
characteristics described in this prospectus supplement.
Throughout this prospectus supplement, we refer to those
loans as the "mortgage loans". The mortgage loans,
together with any underlying real properties acquired on
behalf of the bondholders and the issuer through
foreclosure, deed in lieu of foreclosure or otherwise,
will constitute the "mortgage collateral" for the
offered bonds. The mortgage collateral, together with
any other assets intended to support payments on the
offered bonds, will constitute the "trust estate" for
the offered bonds.
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
THE GOVERNING DOCUMENTS........... We will establish the issuer and convey to it the
mortgage collateral and other assets to be included in
the trust estate, pursuant to a deposit trust agreement.
Whenever we refer in this prospectus supplement to the
"deposit trust agreement", we mean that particular
deposit trust agreement. The parties to the deposit
trust agreement will be us and an owner trustee.
Whenever we refer in this prospectus supplement to the
"owner trustee" we mean the owner trustee for the
issuer.
The issuer will issue, and pledge the collateral for,
the offered bonds pursuant to an indenture. Whenever we
refer in this prospectus supplement to the "indenture",
we mean that particular indenture. The parties to the
indenture will be--
- the issuer, and
- a bond trustee acting on behalf of the series " "
bondholders.
Whenever we refer in this prospectus supplemental to the
"bond trustee", we mean the bond trustee acting on
behalf of the series " " bondholders.
A servicing and administration agreement will govern the
servicing and administration of the mortgage loans.
Whenever we refer in this prospectus supplement to the
"servicing and administration agreement", we mean that
particular servicing and administration agreement. The
parties to the servicing and administration agreement
will be us, the bond trustee and a master servicer and
special servicer. Whenever we refer in this prospectus
supplement to the "master servicer" or the "special
servicer", we mean the person or entity acting in that
capacity under the servicing and administration
agreement.
Throughout this prospectus supplement, we refer to the
deposit trust agreement, the indenture and the servicing
and administration agreement, collectively, as the
"governing documents" for the series " " bonds.
A copy of each of the governing documents for the series
" " bonds will be filed with the SEC as an exhibit
to a current report on Form 8-K, within 15 days after
the initial issuance of those bonds. The SEC will make
that current report on Form 8-K and its exhibits
available to the public for inspection.
SOURCE OF THE MORTGAGE LOANS
SECURING THE OFFERED BONDS...... We are not the originator of the mortgage loans. We will
acquire the mortgage loans from separate parties,
which we refer to in this prospectus supplement as the
"mortgage loan sellers". Each of the mortgage loans was
originated by--
- the related mortgage loan seller,
- an affiliate of the related mortgage loan seller, or
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
- a correspondent in the related mortgage loan seller's
conduit lending program.
RELEVANT PARTIES
"WE" AND "US"..................... Our name is Structured Asset Securities Corporation. We
are a special purpose Delaware corporation. Our address
is 200 Vesey Street, New York, New York 10285 and our
telephone number is (212) 526-7000. We will form the
issuer and convey to it the assets to be included in the
trust estate. See "Structured Asset Securities
Corporation" in the accompanying prospectus.
THE ISSUER........................ LB Commercial Mortgage Trust , an owner trust
established by us under the laws of the State of
pursuant to the deposit trust agreement. We initially
will own 100% of the beneficial interests in the issuer.
See "Description of the Offered Bonds--The Issuer" in
this prospectus supplement and "The Issuers" in the
accompanying prospectus.
OWNER TRUSTEE..................... . See "Description of the Offered Bonds--The Owner
Trustee" in this prospectus supplement.
BOND TRUSTEE...................... , will act as the initial bond trustee. See "Description
of the Bonds--The Bond Trustee" in the
accompanying prospectus. The bond trustee will also
have, or be responsible for appointing an agent to
perform, additional duties with respect to tax
administration. We refer to the bond trustee or its
agent in that capacity as the "tax administrator" in
this prospectus supplement.
INITIAL MASTER SERVICER........... , a corporation, will act as the initial master
servicer. See "Servicing of the Mortgage Loans--The
Initial Master Servicer and the Initial Special
Servicer" in this prospectus supplement.
INITIAL SPECIAL SERVICER.......... , a corporation, will act as the initial special
servicer. See "Servicing of the Mortgage Loans--The
Initial Master Servicer and the Initial Special
Servicer" in this prospectus supplement.
MORTGAGE LOAN SELLERS............. We will acquire the mortgage loans, from , a
corporation, and , a corporation. See "Description of
the Mortgage Collateral--The Mortgage Loan Sellers" in
this prospectus supplement.
UNDERWRITER....................... Lehman Brothers Inc., a Delaware corporation, is the
underwriter of the offering being made by this
prospectus supplement. See "Method of Distribution" in
this prospectus supplement.
RELEVANT DATES AND PERIODS
CUT-OFF DATE...................... The mortgage collateral will be considered part of the
trust estate as of a "cut-off date" of . All
payments and collections received on the mortgage
collateral after that date, excluding any payments or
collections that represent amounts
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
due on or before that date, will be available for
payment on the offered bonds. Accordingly, is the
date as of which we present much of the information
relating to the mortgage collateral in this prospectus
supplement
ISSUE DATE........................ The date of initial issuance, or "issue date", for the
offered bonds will be on or about .
PAYMENT DATE...................... Payments on the offered bonds are scheduled to occur
monthly, commencing in . During any given month,
the "payment date" will be the calendar day of
that month or, if the calendar day of that month
is not a business day, then the next succeeding business
day.
RECORD DATE....................... The "record date" for each monthly payment on an offered
bond will be the last business day of the prior calendar
month. The registered holders of the offered bonds at
the close of business on each record date, will be
entitled to receive any payments on those bonds on the
following payment date.
COLLECTION PERIOD................. Amounts available for payment on the offered bonds on
any payment date will depend on the payments and other
collections received, and any advances of payments due,
on the mortgage collateral and other assets included in
the trust estate during the related collection period.
Each "collection period"--
- will relate to a particular payment date,
- will be approximately one month long,
- will begin when the prior collection period ends or,
in the case of the first collection period, will begin
on , and
- will end during the month of, but prior to, the
related payment date.
INTEREST ACCRUAL PERIOD........... The amount of interest payable with respect to the
offered bonds on any payment date will be a function of
the interest accrued during the related interest accrual
period. The "interest accrual period" for any payment
date will be the calendar month immediately preceding
the month in which that payment date occurs.
RATED FINAL PAYMENT DATE.......... The "rated final payment date" is the payment date in
. As discussed in this prospectus supplement, each
rating assigned to the offered bonds will represent the
respective rating agency's assessment of the likelihood
of timely receipt by the holders of those bonds of all
interest to which they are entitled on each payment date
and, except in the case of the class "X" bonds, the
ultimate receipt by the holders of those bonds of all
principal to which they are entitled by the related
final payment date.
ASSUMED FINAL PAYMENT DATE........ The "assumed final payment date" for each class of
offered bonds will be the payment date on which the
holders of those bonds would be expected to receive
their last payment based upon--
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
- the assumption that each underlying borrower timely
makes all payments on its mortgage loan,
- the assumption that each mortgage loan with an
anticipated repayment date is paid in full on that date,
- the assumption that no underlying borrower otherwise
prepays its mortgage loan prior to stated maturity,
and
- the other "Maturity Assumptions" set forth under
"Yield and Maturity Considerations" in this prospectus
supplement.
The assumed final payment date for each class of offered
bonds will occur in the calendar month and year set
forth below for that class.
</TABLE>
<TABLE>
<CAPTION>
MONTH AND YEAR
OF ASSUMED FINAL
CLASS PAYMENT DATE
----- ----------------
<S> <C>
A-1............................
</TABLE>
<TABLE>
<CAPTION>
MONTH AND YEAR
OF ASSUMED FINAL
CLASS PAYMENT DATE
----- ----------------
<S> <C>
A-2............................
</TABLE>
<TABLE>
<CAPTION>
MONTH AND YEAR
OF ASSUMED FINAL
CLASS PAYMENT DATE
----- ----------------
<S> <C>
B..............................
</TABLE>
<TABLE>
<CAPTION>
MONTH AND YEAR
OF ASSUMED FINAL
CLASS PAYMENT DATE
----- ----------------
<S> <C>
C..............................
</TABLE>
<TABLE>
<CAPTION>
MONTH AND YEAR
OF ASSUMED FINAL
CLASS PAYMENT DATE
----- ----------------
<S> <C>
D..............................
</TABLE>
<TABLE>
<CAPTION>
MONTH AND YEAR
OF ASSUMED FINAL
CLASS PAYMENT DATE
----- ----------------
<S> <C>
E..............................
</TABLE>
<TABLE>
<CAPTION>
MONTH AND YEAR
OF ASSUMED FINAL
CLASS PAYMENT DATE
----- ----------------
<S> <C>
F..............................
</TABLE>
<TABLE>
<CAPTION>
MONTH AND YEAR
OF ASSUMED FINAL
CLASS PAYMENT DATE
----- ----------------
<S> <C>
X..............................
</TABLE>
.
<TABLE>
<S> <C>
DESCRIPTION OF THE OFFERED BONDS
REGISTRATION AND DENOMINATIONS.... We intend to deliver the offered bonds in book-entry
form in original denominations of:
- in the case of the class "X" bonds, $ initial
notional amount and in any whole dollar denomination in
excess of $ ; and
- in the case of the other offered bonds, $ initial
principal balance and in any whole dollar denomination
in excess of $ .
You will initially hold your bonds through The
Depository Trust Company. As a result, you will not
receive a fully registered physical security
representing your interest in any offered bond, except
under the limited circumstances described in this
prospectus supplement and in the accompanying
prospectus. We may elect to terminate the book-entry
system through DTC with respect to any portion of any
class of offered bonds. See "Description of the Offered
Bonds--Registration and Denominations" in this
prospectus supplement and "Description of the
Bonds--Book-Entry Registration" in the accompanying
prospectus.
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
PAYMENTS
A. GENERAL........................ The bond trustee will make payments of interest and
principal to the respective classes of bondholders
entitled to those payments, sequentially as follows:
</TABLE>
<TABLE>
<CAPTION>
PAYMENT ORDER CLASS
------------- -----
<S> <C>
1............................ A-1, A-2 and X*
2............................ B
3............................ C
4............................ D
5............................ E
6............................ F
7............................ G
8............................ H
9............................ J
10........................... K
11........................... L
12........................... M
13........................... N
</TABLE>
<TABLE>
<S> <C>
------------------------
* Allocation of interest payments among these classes is
PRO RATA based on entitlement. The class "X" bonds do
not have principal balances and do not entitle their
holders to payments of principal.
See "Description of the Offered
Bonds--Payments--Priority of Payments" in this
prospectus supplement.
B. PAYMENTS OF INTEREST........... Each class of offered bonds will bear interest. In each
case, that interest will accrue during each interest
accrual period based upon--
- the interest rate applicable for the particular class
for that interest accrual period,
- the aggregate principal balance or notional amount, as
the case may be, of the particular class outstanding
immediately prior to the related payment date, and
- the assumption that each year consists of 12 30-day
months.
A whole or partial prepayment on any mortgage loan may
not be accompanied by the amount of one full month's
interest on the prepayment. As and to the extent
described in this prospectus supplement, these
shortfalls may be allocated to reduce the amount of
accrued interest otherwise payable to the holders of the
respective classes of interest-bearing bonds, including
the offered bonds, on a pro rata basis in accordance
with the respective amounts of interest otherwise
payable on those classes for the corresponding interest
accrual period.
On each payment date, subject to available funds and the
payment priorities described above, you will be entitled
to receive your proportionate share of all unpaid
distributable interest
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
accrued in respect of your class of offered bonds
through the end of the related interest accrual period.
See "Description of the Offered
Bonds--Payments--Payments of Interest" and
"--Payments--Priority of Payments" in this prospectus
supplement.
C. PAYMENTS OF PRINCIPAL.......... The class "X" bonds do not have principal balances and
do not entitle their holders to payments of principal.
Subject to available funds and the payment priorities
described above, however, the holders of each other
class of offered bonds will be entitled to receive a
total amount of principal over time equal to the
aggregate principal balance of their particular class.
The bond trustee must make payments of principal in a
specified sequential order to ensure that--
- no payments of principal will be made to the holders
of any class of non-offered bond until the aggregate
principal balance of the offered bond is reduced to
zero,
- no payments of principal will be made to the holders
of the class "B", "C", "D", "E" or "F" bonds until, in
the case of each of those classes, the aggregate
principal balance of all more senior classes of
offered bonds is reduced to zero, and
- except as described below, no payments of principal
will be made to the holders of the class "A-2" bonds
until the aggregate principal balance of the class
"A-1" bonds is reduced to zero. or
Because of losses on the mortgage collateral and/or
default-related or other unanticipated expenses of the
trust estate, the aggregate principal balance of the
class "B", "C", "D", "E", "F", "G", "H", "J", "K", "L",
"M" and "N" bonds could be reduced to zero at a time
when the class "A-1" and "A-2" bonds remain outstanding.
Under those circumstances any payments of principal on
the class "A-1" and "A-2" bonds will be made on a pro
rata basis in accordance with their respective principal
balances.
The total payments of principal to be made on the
respective classes of the bonds entitled thereto on any
payment date will be a function of--
- the amount of scheduled payments of principal due or,
in some cases, deemed due on the mortgage loans during
the related collection period, which payments are
either received as of the end of that collection
period or advanced by the master servicer, and
- the amount of any prepayments and other unscheduled
collections of previously unadvanced principal in
respect of the mortgage loans that are received during
the related collection period.
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
See "Description of the Offered
Bonds--Payments--Payments of Principal" and
"--Payments--Priority of Payments" in this prospectus
supplement.
D. PAYMENTS OF PREPAYMENT PREMI-
UMS AND YIELD MAINTENANCE
CHARGES......................... If any prepayment premium or yield maintenance charge is
collected on any mortgage loan, then the bond trustee
will pay that amount in the proportions described in
this prospectus supplement, to--
- the holders of the class "X" bonds, and/or
- the holders of any other class or classes of bonds,
senior to the class " " bonds, that are then
entitled to receive payments of principal.
See "Description of the Offered
Bonds--Payments--Payments of Prepayment Premiums and
Yield Maintenance Charges" in this prospectus
supplement.
REDUCTIONS OF BOND BALANCES IN
CONNECTION WITH LOSSES AND
CERTAIN EXPENSES................ Realized losses on the mortgage collateral, together
with default-related and other unanticipated expenses of
the trust estate, may cause the aggregate principal
balance of the mortgage collateral, net of advances of
principal, to be less than the aggregate principal
balance of the bonds. If and to the extent that those
losses and expenses cause such a deficit to exist
following the payments made on the bonds on any payment
date, then the aggregate principal balances of those
classes of bonds of that series with principal balances,
will be successively reduced in the following order,
until that deficit is eliminated:
</TABLE>
<TABLE>
<CAPTION>
REDUCTION ORDER CLASS
--------------- ------------
<S> <C>
1............................... N
2............................... M
3............................... L
4............................... K
5............................... J
6............................... H
7............................... G
8............................... F
9............................... E
10.............................. D
11.............................. C
12.............................. B
13.............................. A-1 and A-2*
</TABLE>
<TABLE>
<S> <C>
------------------------
* PRO RATA by outstanding principal balance.
See "Description of the Offered Bonds--Reductions of
Certificate Principal Balances in Connection With
Realized Losses and
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
Additional Trust Estate Expenses" in this prospectus
supplement.
ADVANCES OF DELINQUENT MONTHLY
DEBT SERVICE PAYMENTS........... Except as described below, the master servicer will be
required to make advances with respect to any delinquent
monthly payments, other than balloon payments, of
principal and/or interest due or deemed due on the
mortgage collateral. In addition, if (i) the master
servicer fails to make any advance that it is required
to make and (ii) the bond trustee is aware of the
failure, the bond trustee will be required to make the
advance. Neither of the master servicer nor the bond
trustee, however, will be required to make any advance
that it determines, in its good faith and reasonable
judgment, will not be recoverable from proceeds of the
related mortgage collateral. As described in this
prospectus supplement, any party that makes an advance
will be entitled to be reimbursed for the advance,
together with interest thereon at the prime rate
described in this prospectus supplement.
If certain adverse events or circumstances, which we
will describe later in this prospectus supplement, occur
or exist with respect to any mortgage loan included in
the trust estate or the underlying real property for
that loan, the special servicer will be obligated to
obtain a new appraisal of or, in limited cases, conduct
a valuation of that real property. If, based on that
appraisal or other valuation, it is determined that (i)
the principal balance of, and other delinquent amounts
due under, that mortgage loan exceed (ii) 90% of the new
estimated value of that real property, then the amount
otherwise required to be advanced in respect of interest
on that mortgage loan will be reduced, generally in the
same proportion that such excess bears to the principal
balance of the mortgage loan, net of related advances of
principal. Due to the payment priorities, this reduc-
tion in advances will reduce the funds available to pay
interest on the most subordinate class of
interest-bearing bonds then outstanding.
See "Description of the Offered Bonds--Advances of
Delinquent Monthly Debt Service Payments" and "Servicing
of the Mortgage Loans--Required Appraisals" in this
prospectus supplement. See also "Description of the
Bonds--Advances in Respect of Delinquencies" in the
accompanying prospectus.
REPORTS TO BONDHOLDERS............ On each payment date, the following reports will be
available to you and will contain the information
described under "Description of the Offered
Bonds--Reports to Bondholders; Certain Available
Information" in this prospectus supplement:
- Delinquent Loan Status Report
- Historical Loan Modification Report
- Historical Loss Estimate Report
- REO Status Report
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
- Watch List Report
- Loan Payoff Notification Report
- Comparative Financial Status Report
- Operating Statement Analysis
Upon reasonable prior notice, you may also review at the
bond trustee's offices during normal business hours a
variety of information and documents that pertain to the
mortgage collateral, including loan documents, borrower
operating statements, rent rolls and property inspection
reports, to the extent the bond trustee receives the
information and documents.
See "Description of the Offered Bonds--Reports to
Bondholders; Certain Available Information" in this
prospectus supplement.
OPTIONAL REDEMPTION............... The Issuer may, at its option, redeem any class of
offered bonds, in whole but not in part, on any payment
date, if--
- the aggregate principal balance of the bonds to be
redeemed is less than % of the initial aggregate
principal balance of that class, and
- no event of default under the indenture has occurred
and is continuing.
See "Description of the Offered Bonds--Optional
Redemption" in this prospectus supplement.
[PROVIDE SUMMARY DESCRIPTION OF ANY CIRCUMSTANCES IN
WHICH THE OFFERED BONDS WILL BE SUBJECT TO SPECIAL OR
MANDATORY REDEMPTION.].
</TABLE>
THE MORTGAGE COLLATERAL
<TABLE>
<S> <C>
MORTGAGE LOANS.................... Each of the mortgage loans is the obligation of a
borrower to repay a specified sum with interest. Each of
the mortgage loans will be secured by a mortgage lien on
the ownership and/or leasehold interest of the related
borrower in one or more commercial or multifamily real
properties. Except for limited permitted encumbrances,
which we will describe later in this prospectus
supplement, that mortgage lien will be a first priority
lien.
All of the mortgage loans are or should be considered
nonrecourse. None of the mortgage loans are insured or
guaranteed by any governmental agency or instrumentality
or by any private mortgage insurer.
We include in this prospectus supplement a variety of
information regarding the mortgage loans and the
underlying real properties. In reviewing this
information, you should be aware that--
- All numerical information provided with respect to the
mortgage loans is provided on an approximate basis.
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
- All weighted average information provided with respect
to the mortgage loans or any sub-group of mortgage loans
reflects the weighting of those mortgage loans by
their respective cut-off date principal balances. The
"cut-off date principal balance" of any mortgage loan
will equal its unpaid principal balance as of the
cut-off date, after application of all payments of
principal due with respect to the mortgage loan on or
before that date, whether or not those payments are
received.
- When information with respect to the underlying real
properties is expressed as a percentage of the initial
mortgage collateral balance, the percentages are based
upon the cut-off date principal balances of the
related mortgage loans.
- In certain cases involving a mortgage loan that is
secured by multiple real properties located in more than
one state, a portion of that mortgage loan has been
allocated to each of those properties.
- Statistical information regarding the mortgage loans
may change prior to the date of initial issuance of the
bonds due to changes in the composition of the
mortgage collateral prior to that date.
For more detailed information on the mortgage loans than
is provided in this "Summary of Prospectus Supplement"
section, see the following sections in this prospectus
supplement:
- "Description of the Mortgage Collateral"
- "Risk Factors--Risks Related to the Mortgage Loans"
- Annex A-1-Certain Characteristics of the Mortgage
Loans
- Annex A-2-Certain Monetary Terms of the Mortgage Loans
PAYMENT TERMS OF THE MORTGAGE
LOANS............................. Each mortgage loan currently accrues interest at the
annual rate specified with respect to that loan on Annex
A-1 to this prospectus supplement. Except as otherwise
described below, the mortgage interest rate for each
mortgage loan is, in the absence of default, fixed for
the entire term of the loan. [IF ANY OF THE MORTGAGE
LOANS HAVE FLOATING OR ADJUSTABLE MORTGAGE INTEREST
RATES PROVIDE SUMMARY DESCRIPTION OF HOW TO CALCULATE
THOSE RATES.]
Each mortgage loan provides for scheduled payments of
principal and/or interest to be due on the day of
each month. We refer to these scheduled payments as
"monthly debt service payments". [PROVIDE SUMMARY
DESCRIPTION REGARDING ANY ADJUSTMENTS TO THE MONTHLY
DEBT SERVICE PAYMENTS AND ANY POTENTIAL NEGATIVE
AMORTIZATION OF INTEREST.]
of the mortgage loans, representing % of the initial
mortgage collateral balance, provide for:
- an amortization schedule that is significantly longer
than its remaining term to stated maturity; and
- a substantial payment of principal on its maturity
date.
</TABLE>
S-16
<PAGE>
<TABLE>
<S> <C>
We refer to these mortgage loans as the "balloon
loans".
of the mortgage loans, representing % of the initial
mortgage collateral balance, provide material incentives
to the related borrower to pay the mortgage loan in full
by a specified date, which we refer to as an
"anticipated repayment date". There can be no assurance,
however, that these incentives will result in any of
these mortgage loans being paid in full on or before its
anticipated repayment date. The incentives, which in
each case will become effective as of the related
anticipated repayment date, include:
- The calculation of interest in excess of the initial
mortgage interest rate. The additional interest will be
deferred and will be payable only after the
outstanding principal balance of the mortgage loan is
paid in full.
- The application of excess cash flow from the
underlying real property to pay the principal amount of
the mortgage loan. The payment of principal will be in
addition to the principal portion of the normal
monthly debt service payment.
We refer to these mortgage loans as the "ARD
loans".
The remaining mortgage loans, representing % of
the initial mortgage collateral balance, have payment
schedules that provide for the payment of these mortgage
loans in full or substantially in full by their
respective maturity dates. We refer to these
mortgage loans as the "fully amortizing loans".
DELINQUENCY STATUS................ None of the mortgage loans was days or more
delinquent in respect of any monthly debt service
payment as of or at any time during the
-month period preceding that date.
PREPAYMENT LOCK-OUT PERIODS....... A prepayment lock-out period is currently in effect for
of the mortgage loans. Set forth below is
information regarding the remaining terms of those
lock-out periods:
Maximum remaining lock-out period: months
Minimum remaining lock-out period: months
Weighted average remaining lock-out period: months
DEFEASANCE........................ of the mortgage loans, representing % of the initial
mortgage collateral balance, permit the related borrower
to obtain a release of the underlying real property (or,
where applicable, one or more of the underlying real
properties) from the lien of the related mortgage by
delivering U.S. Treasury obligations as substitute
collateral. None of the mortgage loans permits
defeasance prior to the second anniversary of the date
of initial issuance of the bonds.
ADDITIONAL STATISTICAL INFORMATION
A. GENERAL CHARACTERISTICS........ The mortgage collateral will have the following general
characteristics as of the cut-off date:
</TABLE>
<TABLE>
<S> <C>
Initial mortgage collateral balance(1)...... $
Number of mortgage loans....................
Number of underlying real properties........
Maximum cut-off date principal balance...... $
Minimum cut-off date principal balance...... $
Average cut-off date principal balance...... $
Maximum mortgage interest rate.............. %
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
Minimum mortgage interest rate.............. %
Weighted average mortgage interest rate..... %
Maximum original term to maturity or
anticipated repayment date................ months
Minimum original term to maturity or
anticipated repayment date................ months
Weighted average original term to maturity
or anticipated repayment date............. months
Maximum remaining term to maturity or
anticipated repayment date................ months
Minimum remaining term to maturity or
anticipated repayment date................ months
Weighted average remaining term to maturity
or anticipated repayment date............. months
Maximum cut-off date debt service coverage
ratio(1).................................. x
Minimum cut-off date debt service coverage
ratio(1).................................. x
Weighted average cut-off date debt service
coverage ratio(1)......................... x
Maximum cut-off date loan-to-value
ratio(2).................................. %
Minimum cut-off date loan-to-value
ratio(2).................................. %
Weighted average cut-off date loan-to-value
ratio(2).................................. %
</TABLE>
<TABLE>
<S> <C>
(1) The "initial mortgage collateral balance" is equal
to the aggregate cut-off date principal balance of the
mortgage loans and is subject to a permitted
variance of plus or minus %.
(2) The "cut-off date debt service coverage ratio" or
"cut-off date DSCR" for any mortgage loan is equal to
.
(3) The "cut-off date loan-to-value ratio" or "cut-off
date LTV ratio" for any mortgage loan is equal to
.
C. STATE CONCENTRATION............ The table below shows the number of, and percentage of
the initial mortgage collateral balance secured by,
underlying real properties located in the indicated
states:
</TABLE>
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
STATE PROPERTIES COLLATERAL BALANCE
----- ---------- ------------------
<S> <C> <C>
%
%
%
</TABLE>
S-18
<PAGE>
<TABLE>
<S> <C>
The remaining underlying real properties are located
throughout other states and . No more than
% of the initial mortgage collateral balance is
secured by real properties located in any of these other
jurisdictions.
D. PROPERTY TYPES................. The table below shows the number of mortgage loans, and
percentage of the initial mortgage collateral balance
secured by, underlying real properties operated for each
indicated purpose:
</TABLE>
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
PROPERTY TYPE PROPERTIES COLLATERAL BALANCE
------------- ---------- ------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C>
E. ENCUMBERED INTERESTS........... The table below shows the number of mortgage loans, and
percentage of the initial mortgage collateral balance
secured by, underlying real properties for which the
encumbered interest is as indicated:
</TABLE>
<TABLE>
<CAPTION>
% OF
ENCUMBERED INTEREST IN THE NUMBER OF INITIAL MORTGAGE
UNDERLYING REAL PROPERTY PROPERTIES COLLATERAL BALANCE
------------------------------ ---------- ------------------
<S> <C> <C>
Ownership*.................... %
Ownership in part,
Leasehold in part............. %
Leasehold..................... %
Other......................... %
</TABLE>
<TABLE>
<S> <C>
------------------------
* "Ownership" also includes cases where the ownership
and leasehold interests in the same property are both
encumbered.
</TABLE>
S-19
<PAGE>
LEGAL AND INVESTMENT CONSIDERATIONS
<TABLE>
<S> <C>
FEDERAL INCOME
TAX CONSEQUENCES.................. The bond trustee or its agent will make elections to
treat designated portions of the trust estate as three
separate "real estate mortgage investment conduits"
under Sections 860A through 860G of the Internal Revenue
Code of 1986. The designations for each REMIC are as
follows:
- "REMIC I", the lowest tier REMIC, will consist
generally of the mortgage loans, as well as any of the
underlying real properties that may have been acquired
as part of the trust estate following a borrower
default, but will exclude collections of additional
interest accrued and deferred as to payment in respect
of each ARD loan with an anticipated repayment date
that remains outstanding past that date.
- "REMIC II" will hold the "regular interests" in REMIC
I.
- "REMIC III" will hold the "regular interests" in REMIC
II.
The offered bonds will be treated as "regular interests"
in REMIC III. This means that they will be treated as
newly issued debt instruments for federal income tax
purposes. You will have to report income on your offered
bonds in accordance with the accrual method of
accounting even if you are otherwise a cash method
taxpayer.
The class " " and " " bonds will be issued
with more than a DE MINIMIS amount of original issue
discount. The class " " bonds will be issued with a
DE MINIMIS amount of original issue discount. The other
offered bonds will not be issued with any original issue
discount. If you own an offered bond issued with
original issue discount, you may have to report original
issue discount income and be subject to a tax on this
income before you receive a corresponding cash payment.
For a more detailed discussion of the federal income tax
aspects of investing in the offered bonds, see "Federal
Income Tax Consequences" in this prospectus supplement
and "Federal Income Tax Consequences" in the
accompanying prospectus.
ERISA............................. Investments in the offered bonds by, on behalf of or
with assets of these entities, may be restricted as
described under "Certain ERISA Considerations" in this
prospectus supplement. If you are a fiduciary of any
retirement plan or other employee benefit plan or
arrangement subject to Title I of ERISA or section 4975
of the Internal Revenue Code of 1986, you should review
carefully with your legal advisors whether the purchase
or holding of the offered bonds could give rise to a
transaction that is prohibited under ERISA or Section
4975 of the Internal Revenue Code of 1986. See "Certain
ERISA Considerations" in this prospectus supplement and
"ERISA Considerations" in the accompanying prospectus.
</TABLE>
S-20
<PAGE>
<TABLE>
<S> <C>
LEGAL INVESTMENT.................. The following classes of offered bonds, upon initial
issuance, will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, commonly referred to as
"SMMEA":
- class "A-1",
- class "A-2", and
- class "B".
The other offered bonds will not be "mortgage related
securities" within the meaning of SMMEA.
You should consult your own legal advisors to determine
whether and to what extent the offered bonds will be
legal investments for you. See "Legal Investment" in
this prospectus supplement and in the accompanying
prospectus.
CERTAIN INVESTMENT
CONSIDERATIONS.................... The rate and timing of payments and other collections of
principal on or in respect of the mortgage collateral
will affect the yield to maturity on each offered bond.
In the case of offered bonds purchased at a discount, a
slower than anticipated rate of payments and other
collections of principal on the mortgage collateral
could result in a lower than anticipated yield. In the
case of class "X" bonds or any other offered bonds
purchased at a premium, a faster than anticipated rate
of payments and other collections of principal on the
mortgage collateral could result in a lower than
anticipated yield. If you are contemplating the purchase
of class "X" bonds, you should be aware that--
- the yield to maturity on those bonds will be highly
sensitive to the rate and timing of principal
prepayments and other liquidations on or in respect of
the mortgage collateral, and
- that an extremely rapid rate of prepayments and/or
other liquidations on or in respect of the mortgage
collateral could result in a substantial loss of your
initial investment.
See "Yield and Maturity Considerations" in this
prospectus supplement and in the accompanying
prospectus.
RATINGS........................... It is a condition to their issuance that the respective
classes of the offered bonds receive the credit ratings
shown in the table entitled "Series Bonds" on page
S- .
The ratings of the offered bonds address the timely
payment of interest and, except in the case of the class
"X "bonds, the ultimate payment of principal on or
before the rated final payment date. A security rating
is not a recommendation to buy, sell or hold securities
and the assigning rating agency may revise or withdraw
its rating at any time.
For a description of the limitations of the ratings of
the offered bonds, see "Ratings" in this prospectus
supplement.
</TABLE>
S-21
<PAGE>
RISK FACTORS
The offered bonds are not suitable investments for all investors. In
particular, you should not purchase any class of offered bonds unless you
understand and are able to bear the risks associated with that class.
The offered bonds are complex securities and it is important that you
possess, either alone or together with an investment advisor, the expertise
necessary to evaluate the information contained in this prospectus supplement
and the accompanying prospectus in the context of your financial situation.
You should consider the following factors, as well as those set forth under
"Risk Factors" in the accompanying prospectus, in deciding whether to purchase
any offered bonds. The "Risk Factors" section in the accompanying prospectus
includes a number of general risks associated with making an investment in the
offered bonds.
RISKS RELATED TO THE OFFERED BONDS
MANY FACTORS, INCLUDING LACK OF LIQUIDITY, CAN ADVERSELY AFFECT THE MARKET
VALUE OF YOUR BONDS. There is currently no secondary market for the offered
bonds. The underwriter has informed us that it intends to make a secondary
market in the offered bonds. However, it has no obligation to do so, and there
can be no assurance that a secondary market for the offered bonds will develop.
Even if a secondary market does develop for the offered bonds, there is no
assurance that it will provide you with liquidity of investment or that the
market will continue for the life of the offered bonds. We will not list the
offered bonds on any securities exchange or on any automated quotation system,
such as NASDAQ. Lack of liquidity could result in a significant reduction in the
market value of your bonds. In addition, the market value of your bonds at any
time may be affected by many factors, including then prevailing interest rates
and the then perceived riskiness of commercial mortgage-backed securities
relative to other investments. You may be forced to hold your bonds
indefinitely. Alternatively, you may only be able to sell your bonds at less
than 100% of their principal balance and/or the unamortized portion of your
purchase price for reasons unrelated to the performance of your bonds or the
mortgage loans. See "Risk Factors--Lack of Liquidity Will Impair Your Ability to
Sell Your Bonds and May Have an Adverse Effect on the Market Value of Your
Bonds" and "--The Market Value of Your Bonds Will be Sensitive to Factors
Unrelated to the Performance of Your Bonds and the Related Mortgage Collateral"
in the accompanying prospectus.
YOUR TIMELY RECEIPT OF ALL AMOUNTS PAYABLE WITH RESPECT TO YOUR BONDS WILL
COMPLETELY DEPEND ON THE PERFORMANCE OF THE MORTGAGE COLLATERAL. The mortgage
loans are subject to delinquencies, defaults and losses. The rate and timing of
delinquencies and defaults on the mortgage loans will affect the rate, timing
and amount of payments on your bonds, the yield to maturity of your bonds and
the weighted average life of your bonds. Delinquencies on the mortgage loans,
unless covered by an advance by the master servicer or the bond trustee, may
result in shortfalls in payments of interest and/or principal on your bonds for
the current month. In addition, even if an advance is made to cover a
delinquency, the party making that advance will have a right to receive interest
on that advance that is prior to the rights of the bondholders to receive
payments on their bonds. The accrual of interest on advances may result in
shortfalls in payments of interest and/or principal on the bonds. In addition,
with respect to each mortgage loan that is serviced by the special servicer, the
special servicer will receive compensation out of amounts that would otherwise
have been applied to pay interest and/or principal on the bonds.
The non-offered bonds, as well as any other class or classes of offered
bonds that are subordinate to your bonds, are intended to provide credit support
for your bonds. However, that credit support is limited. There can be no
assurance that it will protect you from shortfalls and delays in payments on
your bonds. As a holder of offered bonds, you will bear the effects of any
losses and other default-related shortfalls on the mortgage loans in excess of
the credit support provided to your bonds. Even if shortfalls in payments on
your bonds are made up on a future payment date, no interest will accrue on
those shortfalls. Thus, those shortfalls would adversely affect the yield on
your bonds.
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If you purchase class "B", "C", "D", "E" or "F" bonds, then your bonds will
provide credit support to other classes of offered bonds. As a result, you will
receive payments after, and must bear the effects of losses on the mortgage
loans before, the holders of those other classes of offered bonds.
If the assets of the trust estate are insufficient to make payments on your
bonds, no other assets will be available to you for payment of the deficiency.
Neither we nor any of our affiliates have guaranteed or will otherwise be
obligated to make payments on your bonds. No governmental agency or
instrumentality or private insurer has guaranteed or insured the payments on
your bonds.
When making an investment decision, you should consider, among other
things--
- the payment priorities of the respective classes of the bonds,
- the order in which the principal balances of the respective classes of the
bonds with balances will be reduced in connection with losses and
default-related shortfalls, and
- the characteristics and quality of the mortgage collateral.
See "Description of the Mortgage Collateral" and "Description of the
Offered Bonds--Payments" and "--Reductions of Bond Principal Balances in
Connection With Realized Losses and Additional Trust Estate Expenses" in
this prospectus supplement. See also "Risk Factors--The Investment
Performance of Your Bonds Will Depend Upon Payments, Defaults and Losses
on the Related Mortgage Loans", "--Any Credit Support for Your Bonds may
be Insufficient to Protect you Against all Potential Losses" and
"--Payments on the Offered Bonds Will be Made Solely from the Limited
Assets of the Related Trust Estate" in the accompanying prospectus.
THE OFFERED BONDS HAVE UNCERTAIN YIELDS TO MATURITY. The yield on your
bonds will depend on (a) the price you paid for your bonds and (b) the rate,
timing and amount of payments on your bonds. The rate, timing and amount of
payments on your bonds will, in turn, depend on:
- the interest rate for your bonds;
- the rate and timing of payments and other collections of principal on the
mortgage collateral;
- the rate and timing of defaults, and the severity of losses, if any, on
the mortgage collateral;
- the rate, timing, severity and allocation of other shortfalls and expenses
that reduce amounts available for payment on your bonds;
- the collection and payment of prepayment premiums and yield maintenance
charges with respect to the mortgage collateral; and
- servicing decisions with respect to the mortgage collateral.
These factors cannot be predicted with any certainty. Accordingly, you may
find it difficult to analyze the effect that these factors might have on the
yield to maturity of your bonds.
In particular, the investment performance of your bonds may vary materially
and adversely from your expectations due to the rate of prepayments and other
unscheduled collections of principal on the mortgage collateral being faster or
slower than you anticipated. In deciding whether to purchase any offered bonds,
you should make an independent decision as to the appropriate prepayment
assumptions to be used.
If you purchase your bonds at a premium, and if payments and other
collections of principal on the mortgage collateral occur at a rate faster than
you anticipated at the time of your purchase, then your actual yield to maturity
may be lower than you had assumed at the time of your purchase. Conversely, if
you purchase your bonds at a discount, and if payments and other collections of
principal on the mortgage collateral occur at a rate slower than you anticipated
at the time of your purchase, then your actual yield to maturity may be lower
than you had assumed at the time of your purchase. You should consider that
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prepayment premiums and yield maintenance charges may not be collected in all
circumstances. Furthermore, even if a prepayment premium or yield maintenance
charge is available and payable on your bonds, it may not be sufficient to
offset fully any loss in yield on your bonds.
If you purchase class "X" bonds, your yield to maturity will be particularly
sensitive to the rate and timing of principal payments and losses on the
mortgage collateral. Prior to investing in those bonds, you should fully
consider the associated risks, including the risk that an extremely rapid rate
of amortization, prepayment or other liquidation of the mortgage collateral
could result in your failure to recover fully your initial investment. The
ratings on the class "X" bonds do not address whether a purchaser of those bonds
would be able to recover its initial investment in them.
The yield on the offered bonds with variable interest rates could also be
adversely affected if the mortgage collateral with higher mortgage interest
rates pay principal faster than the mortgage collateral with lower mortgage
interest rates. This is because those classes bear interest at interest rates
equal to, based upon or limited by, as applicable, a weighted average of net
interest rates derived from the mortgage collateral.
See "Description of the Mortgage Collateral", "Servicing of the Mortgage
Loans", "Description of the Offered Bonds--Payments" and "--Reductions of Bond
Principal Balances in Connection With Realized Losses and Additional Trust
Estate Expenses" and "Yield and Maturity Considerations" in this prospectus
supplement. See also "Risk Factors--The Investment Performance of Your Bonds
Will Depend Upon Payments, Defaults and Losses on the Related Mortgage Loans"
and "Yield and Maturity Considerations" in the accompanying prospectus.
POTENTIAL CONFLICTS OF INTEREST. The master servicer, the special servicer
or any of their respective affiliates may acquire series " " bonds.
The master servicer and the special servicer each will be obligated to
observe the terms of the servicing and administration agreement and will be
governed by the servicing standard described in this prospectus supplement.
However, either of those parties may, especially if it or an affiliate holds
non-offered bonds, or has financial interests in or other financial dealings
with a borrower under any of the mortgage loans, have interests when dealing
with the mortgage loans that are in conflict with those of holders of the
offered bonds. For instance, a special servicer that holds non-offered bonds
could seek to mitigate the potential for loss to its class from a troubled
mortgage loan by deferring enforcement in the hope of maximizing future
proceeds. However, that action could result in less proceeds to the trust estate
than would have been realized if earlier action had been taken. In general,
neither the master servicer nor the special servicer is required to act in a
manner more favorable to the offered bonds or any particular class thereof than
to the non-offered bonds.
In addition, the master servicer and the special servicer each services and
will, in the future, service, in the ordinary course of its business, existing
and new loans for third parties, including portfolios of loans similar to the
loans that will be included in the trust estate. The real properties securing
these other loans may be in the same markets as, and compete with, certain of
the real properties securing the loans that will be included in the trust
estate. Consequently, personnel of the master servicer and special servicer may
perform services, on behalf of the issuer and the series " " bondholders,
with respect to the mortgage loans at the same time as they are performing
services, on behalf of other persons, with respect to other loans secured by
properties that compete with the real properties securing the mortgage loans.
This may pose inherent conflicts for the master servicer or special servicer.
Certain of the mortgage loans may have been refinancings of debt previously
held by an affiliate of one of the mortgage loan sellers.
ERISA CONSIDERATIONS. The regulations that govern pension and other
employee benefit plans subject to ERISA and plans and other retirement
arrangements subject to Section 4975(c) of the Internal Revenue Code of 1986 are
complex. Accordingly, if you are using the assets of a plan or arrangement to
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acquire offered bonds, you are urged to consult legal counsel regarding
consequences under ERISA and the Internal Revenue Code of 1986 of the
acquisition, ownership and disposition of offered bonds. The purchase or holding
of offered bonds by any plan or arrangement may result in a prohibited
transaction or the imposition of excise taxes or civil penalties. See "Certain
ERISA Considerations" in this prospectus supplement and "ERISA Considerations"
in the accompanying prospectus.
RISKS RELATED TO THE MORTGAGE LOANS
REPAYMENT OF THE MORTGAGE LOANS DEPENDS ON THE OPERATION OF THE UNDERLYING
REAL PROPERTIES. The mortgage loans are secured by mortgage liens on ownership
and/or leasehold interests in the following types of real property:
[SPECIFY PROPERTY TYPES.]
The risks associated with lending on these types of real properties are
inherently different from those associated with lending on the security of
single-family residential properties. This is because, among other reasons,
repayment of each of the mortgage loans is dependent on--
- the successful operation and value of the underlying real property, and
- the related borrower's ability to sell or refinance the underlying real
property.
See "Risk Factors--Repayment of a Commercial or Multifamily Mortgage Loan
Depends Upon the Performance and Value of the Underlying Real Property and the
Related Borrower's Ability to Refinance the Property" and "Description of the
Trust Estates--Mortgage Loans--A Discussion of Various Types of Multifamily and
Commercial Properties That May Secure Mortgage Loans Underlying a Series of
Offered Bonds" in the accompanying prospectus.
THE MORTGAGE LOANS HAVE A VARIETY OF CHARACTERISTICS WHICH MAY EXPOSE
INVESTORS TO GREATER RISK OF DEFAULT AND LOSS. When making an investment
decision, you should consider, among other things, the following characteristics
of the mortgage loans and/or the underlying real properties for those loans. Any
or all of these characteristics can affect, perhaps materially and adversely,
the investment performance of your bonds. Each of the respective items below
includes a cross-reference to where the associated risks are further discussed
in this prospectus supplement or in the accompanying prospectus. In addition,
each of those items may include a cross reference to where further information
about the particular characteristic may be found in this prospectus supplement.
- THE UNDERLYING REAL PROPERTY WILL BE THE SOLE ASSET AVAILABLE TO SATISFY
THE AMOUNTS OWING UNDER A MORTGAGE LOAN IN THE EVENT OF DEFAULT. All of
the mortgage loans are or should be considered nonrecourse loans. If the
related borrower defaults on any of the mortgage loans, only the
underlying real property, and not the other assets of the borrower, is
available to satisfy the debt. Even if the related loan documents permit
recourse to the borrower or a guarantor, the trust estate may not be able
to ultimately collect the amount due under a defaulted mortgage loan. None
of the mortgage loans are insured or guaranteed by any governmental agency
or instrumentality or by any private mortgage insurer. See "Risk
Factors--Repayment of a Commercial or Multifamily Mortgage Loan Depends
Upon the Performance and Value of the Underlying Real Property and the
Related Borrower's Ability to Refinance the Property--Most of the Mortgage
Loans Underlying Your Bonds Will be Nonrecourse" in the accompanying
prospectus.
- IN SOME CASES, AN UNDERLYING REAL PROPERTY IS DEPENDENT ON A SINGLE TENANT
OR ON ONE OR A FEW MAJOR TENANTS. In the case of mortgage loans,
representing % of the initial mortgage collateral balance, the
related borrower has leased the property to at least one tenant that
occupies % or more of the particular property. In the case of
of those mortgage loans, representing % of the initial mortgage
collateral balance, the related borrower has leased the underlying real
property to a single tenant that occupies all or substantially all of the
particular
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property. Accordingly, the full and timely payment of each of those
mortgage loans is highly dependent on the continued operation of the major
tenant or tenants, which, in some cases, is the sole tenant, at the
underlying real property. See "Risk Factors--Repayment of a Commercial or
Multifamily Mortgage Loan Depends Upon the Performance and Value of the
Underlying Real Property and the Related Borrower's Ability to Refinance
the Property--The Successful Operation of a Multifamily or Commercial
Property Depends on Tenants", "--Repayment of a Commercial or Multifamily
Mortgage Loan Depends Upon the Performance and Value of the Underlying
Real Property and the Related Borrower's Ability to Refinance the
Property--Dependence on a Single Tenant or a Small Number of Tenants Makes
a Property Riskier Collateral" and "--Repayment of a Commercial or
Multifamily Mortgage Loan Depends Upon the Performance and Value of the
Underlying Real Property and the Related Borrower's Ability to Refinance
the Property--Tenant Bankruptcy Adversely Affects Property Performance" in
the accompanying prospectus.
- % OR MORE OF THE INITIAL MORTGAGE COLLATERAL BALANCE WILL BE SECURED
BY MORTGAGE LIENS ON EACH OF THE FOLLOWING PROPERTY TYPES--[SPECIFY
PROPERTY TYPES].
[ADD DISCLOSURE RELATING TO EACH PROPERTY TYPE AS TO WHICH THERE EXISTS A
MATERIAL CONCENTRATION BASED ON CUT-OFF DATE PRINCIPAL BALANCES OF THE
MORTGAGE LOANS THAT SECURE OR UNDERLIE THE SECURITY FOR THE OFFERED BONDS.]
The inclusion in the trust estate of a significant concentration of
mortgage loans that are secured by mortgage liens on a particular type of
income-producing property makes the overall performance of the mortgage
collateral materially more dependent on the factors that affect the
operations at and value of that property type. See "Description of the
Trust Estates--Mortgage Loans--A Discussion of Various Types of Multifamily
and Commercial Properties That May Secure Mortgage Loans Underlying a
Series of Offered Bonds" in the accompanying prospectus.
- % OR MORE OF THE INITIAL MORTGAGE COLLATERAL BALANCE WILL BE SECURED
BY MORTGAGE LIENS ON REAL PROPERTY LOCATED IN EACH OF THE FOLLOWING
STATES--[SPECIFY ESTATES]. The underlying real properties located in each
of the following states secure mortgage loans or allocated portions of
mortgage loans that represent % or more of the initial mortgage
collateral balance:
<TABLE>
<CAPTION>
NUMBER % OF
OF INITIAL MORTGAGE
STATE PROPERTIES COLLATERAL BALANCE
- ----- ---------- ------------------
<S> <C> <C>
</TABLE>
The inclusion in the trust estate of a significant concentration of
mortgage loans that are secured by mortgage liens on real properties
located in a particular state makes the overall performance of the
mortgage collateral materially more depending on economic and other
conditions or events in that state. See "Risk Factors--Geographic
Concentration Within a Trust Estate Exposes Investors to Greater Risk of
Default and Loss" in the accompanying prospectus.
- THE TRUST ESTATE WILL INCLUDE ADJUSTABLE RATE MORTGAGE LOANS. of the
mortgage loans, representing % of the initial mortgage collateral
balance, provide for adjustments to their
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respective mortgage interest rates and corresponding adjustments to their
respective monthly debt service payments. See "Risk Factors--Adjustable
Rate Mortgage Loans May Entail Greater Risks of Default to Lenders than
Fixed Rate Mortgage Loans" in the accompanying prospectus.
- THE TRUST ESTATE WILL INCLUDE MATERIAL CONCENTRATIONS OF BALLOON LOANS AND
ARD LOANS. of the mortgage loans, representing % of the
initial mortgage collateral balance, are balloon loans, and of the
mortgage loans, representing % of the initial mortgage collateral
balance, are ARD loans. The ability of a borrower to make the required
balloon payment on a balloon loan at maturity, and the ability of a
borrower to repay an ARD loan on or before the related anticipated
repayment date, in each case depends upon its ability either to refinance
the loan or to sell the underlying real property. Although an ARD loan may
provide the related borrower with incentives to repay the loan by the
related anticipated repayment date, the failure of that borrower to do so
will NOT be a default under that loan. See "Description of the Mortgage
Collateral--Certain Terms and Conditions of the Mortgage Loans" in this
prospectus supplement and "Risk Factors--The Investment Performance of
Your Bonds Will Depend Upon Payments, Defaults and Losses on the
Underlying Mortgage Loans--There is an Increased Risk of Default
Associated with Balloon Payments" in the accompanying prospectus.
- THE MORTGAGE COLLATERAL WILL INCLUDE SOME DISPROPORTIONATELY LARGE
MORTGAGE LOANS AND GROUPS OF CROSS-COLLATERALIZED MORTGAGE LOANS. The
inclusion in the trust estate of one or more loans that have outstanding
principal balances that are substantially larger than the other assets
that secure or underlie the security for your bonds can result in losses
that are more severe, relative to the aggregate principal balance of the
mortgage collateral, than would be the case if the aggregate balance of
the mortgage collateral were distributed more evenly. The largest
mortgage loans and groups of cross-collateralized mortgage loans represent
% of the initial mortgage collateral balance. See "Description of
the Mortgage Collateral--General", "--Cross-Collateralized Mortgage Loans,
Multi-Property Mortgage Loans and Mortgage Loans With Affiliated
Borrowers" and "--Significant Mortgage Loans" in this prospectus
supplement and "Risk Factors--Loan Concentration Within a Trust Exposes
Investors to Greater Risk of Default and Loss" in the accompanying
prospectus.
- THE MORTGAGE COLLATERAL WILL INCLUDE LEASEHOLD MORTGAGE LOANS. of
the underlying real properties, securing % of the initial mortgage
collateral balance, are secured by mortgage liens on the related
borrower's leasehold interest in all or a portion of the underlying real
property, but not by the corresponding ownership interest in the property
that is subject to the ground lease. Because of possible termination of
the related ground lease, lending on a leasehold interest in a real
property is riskier than lending on an actual ownership interest in that
property. See "Description of the Mortgage Collateral--Additional Loan and
Property Information--Leaseholds" in this prospectus supplement. See also
"Risk Factors--Ground Leases Create Risks for Lenders That are not Present
When Lending on an Actual Ownership Interest in a Real Property" and
"Certain Legal Aspects of Mortgage Loans--Foreclosure--Leasehold
Considerations" in the accompanying prospectus.
- SOME OF THE UNDERLYING REAL PROPERTIES ARE "LEGAL NONCONFORMING USES" OR
"LEGAL NONCONFORMING STRUCTURES". Certain of the mortgage loans are
secured by a mortgage lien on a real property that is a "legal
nonconforming use" or a "legal nonconforming structure". This may impair
the ability of the borrower to restore the improvements on an underlying
real property to its current form or use following a major casualty. See
"Description of the Mortgage Collateral--Certain Underwriting
Matters--Zoning and Building Code Compliance" in this prospectus
supplement and "Risk Factors--Changes in Zoning may Adversely Affect the
Use or Value of a Real Property" in the accompanying prospectus.
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<PAGE>
- SOME OF THE UNDERLYING REAL PROPERTIES ARE ENCUMBERED BY SUBORDINATE DEBT.
of the mortgage loans, representing % of the initial mortgage
collateral balance, have underlying real properties which are known to us
to be encumbered by secured subordinate debt that is not part of the trust
estate. The existence of secured subordinate indebtedness may adversely
affect the borrower's financial viability and/or the trust estate's
security interest in the underlying real property. Any or all of the
following may result from the existence of secured subordinate
indebtedness on an underlying real property.
(i) refinancing the mortgage loan at maturity for the purpose of making any
balloon payments may be more difficult;
(ii) reduced cash flow could result in deferred maintenance at the
particular real property;
(iii) if the holder of the subordinated debt files for bankruptcy or is
placed in involuntary receivership, foreclosing on the particular real
property could be delayed; and
(iv) if the underlying real property depreciates for whatever reason, the
related borrower's equity is more likely to be wiped out, thereby
eliminating the related borrower's incentive to continue making payments
on the mortgage loan.
[The lender of any material subordinate debt on the underlying real
properties known to us has agreed not to foreclose or take other legal
action against the underlying real property or the related borrower, for
so long as the related mortgage loan is outstanding and the special
servicer has not done so.]
See "Description of the Mortgage Collateral--Additional Loan and Property
Information--Additional and Other Financing" in this prospectus supplement
and "Risk Factors--Subordinate Debt Increases the Likelihood That a
Borrower Will Default on a Mortgage Loan Backing Your Bonds" in the
accompanying prospectus.
- SOME OF THE UNDERLYING REAL PROPERTIES DO NOT COMPLY WITH THE AMERICANS
WITH DISABILITIES ACT OF 1990. Not all of the underlying real properties
securing the mortgage loans comply with the Americans with Disabilities
Act of 1990. Compliance can be expensive. See "Risk Factors--Compliance
With the Americans With Disabilities Act of 1990 May be Expensive" in the
accompanying prospectus.
- MULTIPLE UNDERLYING REAL PROPERTIES ARE OWNED BY THE SAME BORROWER OR
AFFILIATED BORROWERS OR ARE OCCUPIED, IN WHOLE OR IN PART, BY THE SAME
TENANT OR AFFILIATED TENANTS. Some groups of the mortgage loans have
borrowers that, in the case of each of those groups, are the same or under
common control. See "Description of the Mortgage
Collateral--Cross-Collateralized Mortgage Loans, Multi-Property Mortgage
Loans and Mortgage Loans With Affiliated Borrowers" in this prospectus
supplement.
In addition, there may be tenants which lease space at more than one
underlying real property, and there may be tenants that are related to or
affiliated with a borrower. See Annex A-1 to this prospectus supplement
for a list of the most significant tenants at each of the underlying
real properties used for [SPECIFY USE OF PROPERTIES].
The bankruptcy or insolvency of, or other financial problems with
respect to, any borrower or tenant that is (directly or through
affiliation) associated with two or more of the underlying real properties
could have an adverse effect on all of those properties and on the ability
of those properties to produce sufficient cash flow to make required
payments on the related mortgage loans included the trust estate. See
"Risk Factors--Repayment of a Commercial or Multifamily Mortgage Loan
Depends upon the Performance and Value of the Underlying Real Property and
the Related Borrower's Ability to Refinance the Property--Tenant
Bankruptcy Adversely Affects Property Performance", "--Borrower
Concentration Within a Trust Estate Exposes Investors to Greater
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Risk of Default and Loss" and "--Borrower Bankruptcy Proceedings can Delay
and Impair Recovery on a Mortgage Loan Backing Your Bonds" in the
accompanying prospectus.
- Some Borrowers under the Mortgage Loans Will Not Be Special Purpose
Entities. The business activities of certain of the borrowers under the
mortgage loans are not limited to owning their respective underlying real
properties. Accordingly, the financial success of each of those borrowers
may be affected by the performance of its other business activities,
including other real estate interests. Those other business activities
increase the possibility that the borrower may become bankrupt or
insolvent.
CHANGES IN THE MORTGAGE COLLATERAL COMPOSITION CAN CHANGE THE NATURE OF YOUR
INVESTMENT. If you purchase any offered bonds other than the class " "
bonds, you will be more exposed to risks associated with changes in
concentrations of borrower, loan or property characteristics than are persons
who own offered bonds that have an earlier assumed final payment date than your
bonds. See "Risk Factors--Changes in Mortgage Collateral Composition Will Change
the Nature of Your Investment" in the accompanying prospectus.
LENDING ON INCOME-PRODUCING REAL PROPERTIES ENTAILS ENVIRONMENTAL
RISKS. The issuer or the trust estate could become liable for a material
adverse environmental condition at an underlying real property. Any such
potential liability could reduce or delay payments on the offered bonds.
A third-party consultant conducted an environmental site assessment, or
updated a previously conducted assessment, with respect to of the
underlying real properties, securing % of the initial mortgage collateral
balance, during the -month period ending on . Each of those
environmental site assessments or updates, as the case may be, complied with
industry-wide standards. Not all of those environmental site assessments,
however, satisfied all the requirements necessary to be considered a "Phase I"
environmental site assessment. In certain cases, a third-party consultant also
conducted a "Phase II" environmental site assessment of the underlying real
property. If any assessment or update revealed a material adverse environmental
condition or circumstance at any underlying real property and the consultant
recommended action, then, depending on the nature of the condition or
circumstance, the borrower has--
- implemented or agreed to implement an operations and maintenance plan, in
the manner and within the time frames specified in the related loan
documents;
- agreed to monitor periodically nearby properties, in the manner and within
the time frames specified in the related loan documents; or
- established a reserve account with the lender to cover the estimated cost
of addressing the condition or circumstances.
In many cases, the identified condition related to the presence of
asbestos-containing materials, lead-based paint and/or radon. Where these
substances were present, the environmental consultant generally recommended, and
the related loan documents required, the establishment of an operation and
maintenance plan to address the issue or, in the case of asbestos-containing
materials and lead-based paint, an abatement or removal program. In a few cases,
the particular asbestos-containing materials or lead-based paint was in poor
condition. This could result in a claim for damages by any party injured by such
condition.
In some cases, the cost to remediate, prevent or otherwise deal with an
adverse environmental condition at a particular underlying real property was
estimated to be more than [$ ].
[In some cases, the environmental consultant did not recommend that any
action be taken with respect to a potential adverse environmental condition at
an underlying real property or a nearby property because a responsible party
with respect to that condition had already been identified.]
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[In the case of of the underlying real properties, securing % of
the initial mortgage collateral balance, either--
- no environmental site assessment was conducted in connection with the
origination of the related mortgage loan, or
- a "Phase II" environmental site assessment was recommended but not
performed.]
[In general, the related originator's election not to take the foregoing
actions with respect to any of those underlying real properties was based upon
the delivery of a secured creditor impaired property policy covering certain
environmental matters with respect to the property. Some of those
underlying real properties are, in each case, are covered by individual
secured creditor impaired property policies. In addition, we will obtain a
separate secured creditor impaired property policy covering certain
environmental matters with respect to all of the underlying real properties that
are not covered by individual policies. All of the policies referred to in the
prior two sentences provide for certain coverage limits. In addition, those
policies do not provide coverage for adverse environmental conditions at levels
below legal limits or for conditions involving asbestos and lead-based paint. In
some cases, the originator of the related mortgage loan agreed to release a
principal of the related borrower from its obligations under an environmental or
hazardous substances indemnity with respect to the particular underlying real
property in connection with the delivery of a secured creditor impaired property
policy covering that property. See "Description of the Mortgage
Collateral--Certain Underwriting Matters--Environmental Insurance" in this
prospectus supplement.]
See "Risk Factors--Environmental Liabilities Will Adversely Affect the Value
and Operation of the Contaminated Property and May Deter a Lender from
Foreclosing" and "Certain Legal Aspects of Mortgage Loans--Environmental
Considerations" in the accompanying prospectus.
LENDING ON INCOME-PRODUCING PROPERTIES ENTAILS RISKS RELATED TO PROPERTY
CONDITION. Licensed engineers inspected all of the underlying real properties
during the -month period preceding to assess the structure,
exterior walls, roofing, interior construction, mechanical and electrical
systems and general condition of the site, buildings and other improvements
located at each underlying real property. At certain of the underlying real
properties, the inspections identified conditions requiring escrows to be
established for repairs or replacements estimated to cost in excess of
[$ ]. In most of these cases, the originator required the related borrower
to fund reserves, or deliver letters of credit or other instruments, to cover
these costs.
LIMITATIONS ON ENFORCEABILITY OF CROSS-COLLATERALIZATION. The mortgage
collateral will include mortgage loans that are secured, including through
cross-collateralization with other mortgage loans, by multiple underlying real
properties. These mortgage loans are identified in the tables contained in Annex
A-1. The purpose of securing any particular mortgage loan or group of
cross-collateralized mortgage loans with multiple real properties is to reduce
the risk of default or ultimate loss as a result of an inability of any
particular property to generate sufficient net operating income to pay debt
service. [However, of these mortgage loans permit--
- the release of one or more of the underlying real properties from the
related mortgage lien, and/or
- a full or partial termination of the applicable cross-collateralization,
in each case, upon the satisfaction of the conditions described under
"Description of the Mortgage Collateral--Certain Terms and Conditions of
the Mortgage Loans" in this prospectus supplement.]
In addition, when multiple real properties secure a mortgage loan or group
of cross-collateralized mortgage loans, the amount of the mortgage encumbering
any particular one of those properties may be less than the full amount of the
related mortgage loan or group of cross-collateralized mortgage loans (in
general, to avoid recording tax). This mortgage amount may equal the appraised
value or allocated loan amount for the underlying real property and will limit
the extent to which proceeds from the property will
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be available to offset declines in value of the other properties securing the
same mortgage loan or group of cross-collateralized mortgage loans.
mortgage loans are, in each case, secured by real properties located
in two or more states. These mortgage loans represent % of the initial
mortgage collateral balance. Foreclosure actions are brought in state court and
the courts of one state cannot exercise jurisdiction over property in another
state. Upon a default under any of these mortgage loans, it may not be possible
to foreclose on the related underlying real properties simultaneously.
LIMITED INFORMATION CAUSES UNCERTAINTY. Some of the mortgage loans are
acquisition financing. Accordingly, limited or no operating information is
available with respect to the underlying real properties for those mortgage
loans. As a result, you may find it difficult to analyze the performance of
those properties.
[PRIOR BANKRUPTCIES. Some of the borrowers under the mortgage loans or
their affiliates have been parties to, and/or some of the underlying real
properties have been the subject of, prior bankruptcy proceedings.]
S-31
<PAGE>
DESCRIPTION OF THE MORTGAGE COLLATERAL
GENERAL
The mortgage collateral will primarily consist of the mortgage loans, which
have the characteristics described in this prospectus supplement. The mortgage
collateral will have an initial mortgage collateral balance of $ ,
subject to a variance of plus or minus %. The "initial mortgage collateral
balance" will equal the aggregate cut-off date principal balance of the mortgage
loans. The "cut-off date principal balance" of any mortgage loan is equal to its
unpaid principal balance as of the cut-off date, after application of all
monthly debt service payments due in respect of the mortgage loan on or before
that date, whether or not those payments were received. The cut-off date
principal balances of the mortgage loans will range from $ to
$ , and the average cut-off date principal balance of the mortgage
loans will be $ .
Each of the mortgage loans is an obligation of the related borrower to repay
a specified sum with interest. Each of the mortgage loans is evidenced by a
promissory note and secured by a mortgage, deed of trust, deed to secure debt or
other similar security instrument (each, for purposes of this prospectus
supplement, a "mortgage") that creates a [first] mortgage lien on the ownership
and/or leasehold interest of the related borrower or another party in one or
more commercial or multifamily real properties, subject only to the following
(collectively, the "Permitted Encumbrances")--
- the lien of current real property taxes, ground rents, water charges,
sewer rents and assessments not yet due and payable,
- covenants, conditions and restrictions, rights of way, easements and other
matters that are of public record and/or are referred to in the related
lender's title insurance policy (or, if not yet issued, referred to in a
pro forma title policy or a "marked-up" commitment), none of which
materially interferes with the security intended to be provided by the
mortgage, the current use of the related underlying real property or the
current ability of the related underlying real property to generate income
sufficient to service the related mortgage loan,
- exceptions and exclusions specifically referred to in such lender's title
insurance policy (or such pro forma title policy or "marked-up"
commitment), none of which materially interferes with the security
intended to be provided by the mortgage, the current use of the related
underlying real property or the current ability of the related underlying
real property to generate income sufficient to service the related
mortgage loan,
- other matters to which like properties are commonly subject, none of which
materially interferes with the security intended to be provided by the
mortgage, the use of the related underlying real property or the current
ability of the related underlying real property to generate income
sufficient to service the related mortgage loan,
- the rights of tenants to remain, whether under ground leases or space
leases, at the underlying real property following a foreclosure or similar
proceeding, provided that those tenants are performing under such leases,
and
- if the related mortgage loan is a cross-collateralized mortgage loan, the
lien of the mortgage for another mortgage loan contained in the same group
of cross-collateralized mortgage loans.
You should consider each of the mortgage loans a nonrecourse obligation of
the related borrower. In the event of a payment default by the related borrower,
recourse will be limited to the underlying real property or properties for
satisfaction of that borrower's obligations. In those cases where recourse to a
borrower or guarantor is permitted under the related mortgage loan documents, we
have not undertaken an evaluation of the financial condition of any of these
persons. None of the mortgage loans is insured or guaranteed by any governmental
entity or by any other person.
S-32
<PAGE>
We include in this prospectus supplement a variety of information regarding
the mortgage loans and the underlying real properties for those loans. In
reviewing this information, you should be aware that--
- All numerical information provided with respect to the mortgage loans is
provided on an approximate basis.
- All weighted average information provided with respect to the mortgage
loans or any sub-group of mortgage loans reflects the weighting of those
mortgage loans by their respective cut-off date principal balances.
- When information with respect to the underlying real properties is
expressed as a percentage of the initial mortgage collateral balance, the
percentages are based upon the cut-off date principal balances of the
related mortgage loans.
- In certain cases involving a mortgage loan that is secured by multiple
underlying real properties located in more than one state, a portion of
such mortgage loan has been allocated to each such underlying real
property.
- Statistical information regarding the mortgage loans may change prior to
the date of initial issuance of the bonds due to changes in the
composition of the mortgage collateral prior to that date.
CROSS-COLLATERALIZED MORTGAGE LOANS, MULTI-PROPERTY MORTGAGE LOANS AND MORTGAGE
LOANS WITH AFFILIATED BORROWERS
The mortgage collateral includes mortgage loans that are, in each
case, individually or through cross-collateralization with other mortgage loans,
secured by two or more real properties. [However, the amount of the mortgage
encumbering any particular one of those properties may be less than the full
amount of the related mortgage loan or group of cross-collateralized mortgage
loans included in the trust estate, generally to avoid recording tax. The
mortgage amount may equal the appraised value or allocated loan amount for the
particular real property, thereby limiting the extent to which proceeds from
that property would be available to offset declines in value of the other
underlying real properties securing the same mortgage loan or group of
cross-collateralized mortgage loans.]
of the mortgage loans referred to in the prior paragraph entitle the
related borrower(s) to obtain a release of one or more of the underlying real
properties and/or a termination of any applicable cross-collateralization,
subject, in each case, to the fulfillment of one or more of the following
conditions--
- the pay down of the mortgage loan(s) in an amount equal to a specified
percentage, which is usually %, of the portion of the total loan
amount allocated to the property or properties to be released;
- the satisfaction of certain debt service coverage and loan-to-value tests
for the property or properties that will remain as collateral; and/or
- receipt by the lender of confirmation from each applicable rating agency
that the action will not result in a qualification, downgrade or
withdrawal of any of the then-current ratings of the bonds.
In addition, certain of the mortgage loans referred to in the prior paragraph
also entitle the related borrower to a release of one or more of the underlying
real properties through defeasance. See "--Certain Terms and Conditions of the
Mortgage Loans--Defeasance Loans" below.
S-33
<PAGE>
The table below identifies the underlying real properties that secure the
individual multi-property mortgage loans ("Multi") and groups of
cross-collateralized mortgage loans ("Cross") that will, in each case, represent
at least % of the initial mortgage collateral balance.
<TABLE>
<CAPTION>
NUMBER OF STATES % OF
WHERE THE INITIAL MORTGAGE
PROPERTY NAMES MULTI/CROSS PROPERTIES ARE LOCATED COLLATERAL BALANCE
- -------------- ----------- ---------------------- ------------------
<S> <C> <C> <C>
</TABLE>
The table below shows the underlying real properties that secure the groups
of non-cross-collateralized mortgage loans that, in the case of each of those
groups, represent % or more of the initial mortgage collateral balance and
generally are secured by underlying real properties with the same managing
entity and/or have the same or affiliated borrowers.
<TABLE>
<CAPTION>
NUMBER OF STATES % OF
WHERE THE INITIAL MORTGAGE
PROPERTY NAMES PROPERTIES ARE LOCATED COLLATERAL BALANCE
- -------------- ---------------------- ------------------
<S> <C> <C>
</TABLE>
CERTAIN TERMS AND CONDITIONS OF THE MORTGAGE LOANS
DUE DATES. All of the mortgage loans provide for monthly debt service
payments to be due on the day of each month.
MORTGAGE RATES; CALCULATIONS OF INTEREST. In general, each of the mortgage
loans bears interest at a mortgage interest rate that, in the absence of
default, is fixed until maturity. However, as described below, each of the
mortgage loans that has an anticipated repayment date will accrue interest after
that date at a rate that is in excess of its mortgage interest rate prior to
that date. [IF ANY OF THE MORTGAGE LOANS HAVE FLOATING OR ADJUSTABLE MORTGAGE
INTEREST RATES, DISCUSS CALCULATION OF THOSE RATES, INCLUDING INDICES, GROSS
MARGINS, ADJUSTMENT DATES, FLOORS AND CAPS.]
As of , the mortgage interest rates for the mortgage loans
ranged from % per annum to % per annum, and the weighted average
mortgage interest rate for the mortgage loans was %.
S-34
<PAGE>
None of the mortgage loans provides for negative amortization or, except as
described below with respect to the ARD loans, which have anticipated repayment
dates, for the deferral of interest. [DESCRIBE ANY POTENTIAL NEGATIVE
AMORTIZATION.]
Each of the mortgage loans will accrue interest on the basis of one of the
following conventions:
- the actual number of days elapsed during each one-month accrual period in
a year of 360 days (an "actual/360 basis"); or
- a 360-day year consisting of twelve 30-day months (a "30/360 basis"); or
- [SPECIFY ANY OTHER BASIS].
The table below shows the number of, and percentage of initial mortgage
collateral balance represented by, mortgage loans that accrue interest based on
each of the foregoing conventions.
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
INTEREST ACCRUAL BASIS MORTGAGE LOANS COLLATERAL BALANCE
- ---------------------- -------------- ------------------
<S> <C> <C>
Actual/360 Basis.............................. %
30/360 Basis.................................. %
[OTHER]....................................... %
</TABLE>
BALLOON LOANS. of the mortgage loans, representing % of the
initial mortgage collateral balance, are balloon loans.
A "balloon loan" is characterized by--
- an amortization schedule that is significantly longer than the actual term
of the mortgage loan, and
- a substantial payment being due in respect of the mortgage loan on its
stated maturity date.
ARD LOANS. of the mortgage loans, representing % of the initial
mortgage collateral balance, are ARD loans.
An "ARD loan" is characterized by the following features:
- A maturity date that is more than years following origination.
- The designation of an "anticipated repayment date" that is generally
years following origination. The anticipated repayment date for each
of the ARD loans is listed on Annex A-1 to this prospectus supplement.
- The ability of the related borrower to prepay the mortgage loan, without
restriction, including without any obligation to pay a prepayment premium
or a yield maintenance charge, at any time on or after a date that is
generally to months prior to the related anticipated repayment
date.
- Until its anticipated repayment date, the calculation of interest at its
initial mortgage interest rate.
- From and after its anticipated repayment date, the accrual of interest at
a revised annual rate that is, in most cases, equal to the sum of (i) its
initial mortgage interest rate, plus (ii) a specified margin that is, in
some cases, not more than percentage points.
- The deferral of any additional interest, which we refer to as "Post-ARD
Additional Interest", accrued in respect of the mortgage loan from and
after the related anticipated repayment date at the difference between its
revised mortgage interest rate and its initial mortgage interest rate.
Post-ARD Additional Interest may, in some cases, compound at the new
revised mortgage interest
S-35
<PAGE>
rate. Any Post-ARD Additional Interest accrued in respect of an ARD loan
following its anticipated repayment date will not be payable until the
entire principal balance of the mortgage loan has been paid in full.
- From and after its anticipated repayment date, the accelerated
amortization of the mortgage loan out of any and all monthly cash flow
from the underlying real property which remains after payment of the
applicable monthly debt service payments and permitted operating expenses
and capital expenditures. These accelerated amortization payments and the
Post-ARD Additional Interest are considered separate from the monthly debt
service payments due in respect of an ARD loan.
In the case of each of the ARD loans, the related borrower has agreed to
enter into a cash management agreement not less than months prior to the
related anticipated repayment date if it has not already done so. The related
borrower or the manager of the underlying real property will be required under
the terms of that cash management agreement to deposit or cause the deposit of
all revenue from that property received after the related anticipated repayment
date into a designated account controlled by the lender under the ARD loan.
FULLY AMORTIZING LOANS. of the mortgage loans, representing %
of the initial mortgage collateral balance, are fully amortizing loans.
A "fully amortizing loan" is generally characterized by--
- constant monthly debt service payments throughout the substantial term of
the mortgage loan, and
- an amortization schedule that is approximately equal to the actual term of
the mortgage loan.
However, a "fully amortizing loan" does not have either--
- an anticipated repayment date, or
- the associated repayment incentives.
AMORTIZATION OF PRINCIPAL. The table below shows, in months, the original
and, as of , the remaining amortization schedules and terms to
maturity for the mortgage loans [or the specified
S-36
<PAGE>
sub-groups of mortgage loans] backing the series " " bonds. For purposes of
the following table, ARD loans are assumed to "mature" on their respective
anticipated repayment dates.
<TABLE>
<CAPTION>
FULLY AMORTIZING
BALLOON LOANS ARD LOANS LOANS ALL MORTGAGE LOANS
------------- --------- ---------------- ------------------
<S> <C> <C> <C> <C>
Original Term to Maturity (mos.)
Maximum
Minimum
Weighted Average
Remaining Term to Maturity (mos.)
Maximum
Minimum
Weighted Average
Original Amortization Term (mos.)
Maximum
Minimum
Weighted Average
Remaining Amortization Term (mos.)
Maximum
Minimum
Weighted Average
</TABLE>
Some of the mortgage loans provide for a recast of the amortization schedule
and an adjustment of the monthly debt service payments on the mortgage loan upon
application of specified amounts of condemnation proceeds or insurance proceeds
to pay the unpaid principal balance of the mortgage loan.
[DISCUSS ANY ADJUSTMENTS TO THE MONTHLY DEBT SERVICE PAYMENTS FOR THE
MORTGAGE LOANS.]
VOLUNTARY PREPAYMENT PROVISIONS. In general, at origination, the mortgage
loans provided for:
- a period (a "prepayment lock-out period") during which voluntary principal
prepayments are prohibited, followed by
- a period (a "prepayment consideration period") during which voluntary
prepayments are permitted, subject to the payment of an additional
consideration for the prepayment, followed by
- a period (an "open prepayment period") during which voluntary principal
prepayments may be made without any prepayment consideration.
Notwithstanding otherwise applicable lock-out periods, partial prepayments
of some of the mortgage loans are required under the circumstances described
under "--Certain Terms and Conditions of the Mortgage Loans--Other Prepayment
Provisions" below.
The prepayment terms of each of the mortgage loans are more particularly
described in Annex A-1 to this prospectus supplement.
As described below under "--Defeasance Loans", [substantially all] of the
mortgage loans permit the borrower to obtain a release of the underlying real
property (or, where applicable, one or more of the underlying real properties)
from the lien of the related mortgage by delivering U.S. government securities
as substitute collateral. None of the mortgage loans permit defeasance prior to
the anniversary of the date of initial issuance of the bonds.
S-37
<PAGE>
Prepayment Lock-out Periods. mortgage loans, representing % of
the initial mortgage collateral balance, backing the series " " bonds
provide for prepayment lock-out periods as of and--
- the maximum remaining prepayment lock-out period of those mortgage loans
as of that date is months,
- the minimum remaining prepayment lock-out period of those mortgage loans
as of that date is months, and
- the weighted average remaining prepayment lock-out period of those
mortgage loans as of that date is months.
Notwithstanding otherwise applicable lock-out periods, partial prepayments
of some mortgage loans are required under the circumstances described under
"--Certain Terms and Conditions of the Mortgage Loans--Other Prepayment
Provisions" below.
PREPAYMENT CONSIDERATION. Following an initial prepayment lock-out period,
mortgage loans, representing % of the initial mortgage collateral
balance, provide for the payment of prepayment consideration in connection with
a voluntary prepayment during part of the loan term. That prepayment
consideration will equal [SPECIFY CALCULATION OF PREPAYMENT CONSIDERATION].
Prepayment premiums and yield maintenance charges received on the mortgage
loans, whether in connection with voluntary or involuntary prepayments, will be
allocated and paid to the persons, in the amounts and in accordance with the
priorities described under "Description of the Offered Bonds--
Payments--Payments of Prepayment Premiums and Yield Maintenance Charges" in this
prospectus supplement. Limitations may exist under applicable state law on the
enforceability of the provisions of the mortgage loans that require payment of
prepayment premiums or yield maintenance charges, and neither we nor the
underwriter makes any representation or warranty as to the collectability of any
prepayment premium or yield maintenance charge in respect of any of the those
mortgage loans. See "Risk Factors--Some Provisions in the Mortgage Loans
Securing Your Bonds May be Challenged as Being Unenforceable--Prepayment
Premiums, Fees and Charges" and "Certain Legal Aspects of Mortgage Loans--
Default Interest and Limitations on Prepayments" in the accompanying prospectus.
OPEN PREPAYMENT PERIODS. Where a mortgage loan provides for an open
prepayment period, the open prepayment period generally begins to
months prior to stated maturity [(or, in the case of an ARD loan, prior to
the related anticipated repayment date).]
OTHER PREPAYMENT PROVISIONS. Certain of the mortgage loans provide for
mandatory partial prepayments, notwithstanding any lock-out period that may
otherwise be in effect. In some cases, the related borrower has established
reserves or delivered a letter of credit that will be applied to a partial
prepayment of the mortgage loan if one or more property performance conditions
do not occur.
Investors should not expect any prepayment consideration to be paid in
connection with any mandatory partial prepayment described above.
"DUE-ON-SALE" AND "DUE-ON-ENCUMBRANCE" PROVISIONS. of the mortgage
loans, representing % of the initial mortgage collateral balance, contain
both a "due-on-sale" clause and a "due-on-encumbrance" clause. In general,
except for the permitted transfers discussed below, these clauses either permit
the holder of the related mortgage to accelerate the maturity of the mortgage
loan if the borrower sells or otherwise transfers or encumbers the underlying
real property or prohibit the borrower from doing so without the consent of the
holder of the mortgage. See, however, "Risk Factors--The Investment Performance
of Your Bonds Will Depend upon Payments, Defaults and Losses on the Related
Mortgage Loans--Delinquencies, Defaults and Losses on the Securing Mortgage
Loans May Affect the Amount and Timing of Payments on Your Bonds" and "--Some
Provisions in the Mortgage
S-38
<PAGE>
Loans Securing Your Bonds may be Challenged as Being Unenforceable--Due-on-Sale
and Debt Acceleration Clauses" and "Certain Legal Aspects of Mortgage Loans--Due
on Sale and Due-on-Encumbrance Provisions" in the accompanying prospectus.
Many of the mortgage loans permit one or more of the following types of
transfers:
- transfers of the underlying real property if specified conditions are
satisfied, which conditions normally include--
(i) confirmation by each applicable rating agency that the transfer will
not result in a qualification, downgrade or withdrawal of any of its
then current ratings of the bonds, or
(ii) the reasonable acceptability of the transferee to the lender;
- a transfer of the underlying real property to a person that is affiliated
with or otherwise related to the borrower;
- certain specified transfers by the borrower of the underlying real
property in accordance with the provisions of the mortgage loan; or
- a transfer of certain ownership interests in the borrower.
DEFEASANCE LOANS. of the mortgage loans, representing % of the
initial mortgage collateral balance, permit the borrower to deliver U.S.
government securities as substitute collateral.
Each of these mortgage loans permits the related borrower, during specified
periods and subject to certain conditions, to pledge to the holder of the
mortgage loan the requisite amount of direct, non-callable U.S. government
securities (the "defeasance collateral") and obtain a release of the underlying
real property (or, in the case of a mortgage loan secured by multiple real
properties, one or more of the underlying real properties). In general, the
defeasance collateral to be delivered in connection with the defeasance of any
mortgage loan must provide for a series of payments that--
- will be made prior, but as closely as possible, to all successive due
dates through and including the maturity date, and
- will, in the case of each due date, be in a total amount equal to or
greater than the monthly debt service payment (including, if applicable,
any balloon payment) scheduled to be due on that date (with any excess to
be returned to the related borrower).
[For purposes of determining the defeasance collateral for an ARD loan,
however, that mortgage loan will be treated as if a balloon payment is due on
its anticipated repayment date.]
If fewer than all of the real properties securing any particular mortgage
loan or group of cross-collateralized mortgage loans are to be released in
connection with any defeasance, the requisite defeasance collateral will be
calculated based on the allocated loan amount for the properties to be released
and the portion of the monthly debt service payments attributable to that
allocated loan amount.
In connection with any delivery of defeasance collateral, the related
borrower will be required to deliver a security agreement granting the bond
trustee, for the benefit of the bondholders and the issuer, a first priority
security interest in the defeasance collateral, together with an opinion of
counsel confirming the first priority status of the security interest.
None of the mortgage loans may be defeased prior to the anniversary of
the date of initial issuance of the series " " bonds.
S-39
<PAGE>
CERTAIN MORTGAGE COLLATERAL CHARACTERISTICS
GENERAL. A detailed presentation of certain characteristics of the mortgage
loans and the underlying real properties, on an individual basis and in tabular
format, is shown on Annex A-1 and Annex A-2 to this prospectus supplement.
Certain terms that appear in those exhibits, as well as elsewhere in this
prospectus supplement, are defined or otherwise discussed below. The statistics
in the tables and schedules on Annex A-1 and Annex A-2 to this prospectus
supplement were derived, in many cases, from information and operating
statements furnished by or on behalf of the respective borrowers. The
information and the operating statements were generally unaudited and have not
been independently verified by us or the underwriter.
1. "Net cash flow" is, with respect to each of the underlying real properties,
.
2. "Cut-off date debt service coverage ratio", "cut-off date DSC ratio" or
"cut-off date DSCR" means .
3. "Cut-off date loan-to-value ratio", "cut-off date LTV ratio" or "cut-off
date LTV" means .
4. "Maturity loan-to-value ratio", maturity date loan-to-value ratio",
"maturity LTV ratio" or "maturity date LTV ratio" means .
5. "Loan per unit", "loan per pad" or "loan per room" means .
6. "Loan per sq/ft." means .
7. "Year built/renovated" means .
8. "Weighted average" or "wtd. avg." means .
9. "Underwriting reserves" means .
10. "Administrative cost rate" means .
11. "Original amortization term" means .
12. "Remaining amortization term" means .
13. The following abbreviations relating to any prepayment provisions have the
indicated meanings:
14. "D" means .
15. "Occupancy percentage" or "occupancy rate" means .
16. "Remaining term to maturity" means .
17. "Original term to maturity" means .
18. "Capital improvement reserve" means .
19. "Replacement reserve" means .
20. "TI/LC reserve" means .
21. "Original interest-only period" means .
22. "Remaining interest-only period" means .
23. "Shadow" means .
24. "NAP" means .
25. "NAV" means .
S-40
<PAGE>
SIGNIFICANT MORTGAGE LOANS
[INSERT DESCRIPTION OF SIGNIFICANT MORTGAGE LOANS]
ADDITIONAL MORTGAGE LOAN AND PROPERTY INFORMATION
DELINQUENCIES. None of the mortgage loans was as of , or has
been at any time during the -month period preceding that date, days
or more delinquent in respect of any monthly debt service payment.
TENANT MATTERS. Described below are special considerations regarding
tenants at the underlying real properties--
[- of the underlying real properties, securing % of the initial
mortgage collateral balance, are, in each case, a [SPECIFY PROPERTY TYPES] that
is leased to one or more major tenants that each occupy % or more of the
net rentable area of the particular property.
- A number of companies are major tenants at more than one of the underlying
real properties.
- There are cases in which a particular entity is a tenant at multiple
underlying real properties, and although it may not be a major tenant at
any of those properties, it may be significant to the success of the
properties.
- of the mortgage loans, representing % of the initial mortgage
collateral balance, are secured by multifamily rental properties that have
material concentrations of student tenants.]
[GROUND LEASES. of the mortgage loans, representing % of the
initial mortgage collateral balance, are secured, in whole or in material part,
by a mortgage on the borrower's leasehold interest in the underlying real
property. In each case, the related ground lease (giving effect to all extension
options) expires more than ten years after the stated maturity of the related
mortgage loan and either:
- the ground lessor has subordinated its interest in the underlying real
property to the interest of the holder of that mortgage loan; or
- the ground lessor has agreed to give the holder of that mortgage loan
notice of, and the right to cure, any default or breach by the lessee.]
[SPECIFY ANY EXCEPTIONS.]
See "Risk Factors--Ground Leases Create Risks for Lenders That are not
Present When Lending on an Actual Ownership Interest in a Real Property" and
"Certain Legal Aspects of Mortgage Loans--Foreclosure--Leasehold Considerations"
in the accompanying prospectus.
[ADDITIONAL AND OTHER FINANCING. of the underlying real properties,
securing % of the initial mortgage collateral balance, are known to us to
be encumbered by secured subordinate debt that is not part of the mortgage
collateral. The following table identifies those properties, indicates the
initial principal amount of the secured subordinate debt and sets forth the
cut-off date principal balances of the related mortgage loans. The table also
shows, in the case of each of those properties, whether the subordinate lender
has entered into a "subordination and standstill agreement" with the holder of
the related mortgage loan whereby that subordinate lender--
- expressly subordinated its right to receive collections and proceeds from,
and otherwise deal with, that property, and
S-41
<PAGE>
- agrees not to take any enforcement or other legal action against that
property or the related borrower as long as the related mortgage loan is
outstanding and the special servicer has not taken any such enforcement or
other legal action.]
<TABLE>
<CAPTION>
% OF INITIAL
CUT-OFF DATE MORTGAGE COLLATERAL
PRINCIPAL BALANCE BALANCE REPRESENTED INITIAL PRINCIPAL
OF RELATED BY RELATED AMOUNT OF SECURED
PROPERTY NAMES MORTGAGE LOANS MORTGAGE LOANS SUBORDINATE DEBT*
- -------------- ----------------- ------------------- -----------------
<S> <C> <C> <C>
</TABLE>
- ------------------------------
* In these cases, the subordinate lender has entered into a subordination and
standstill agreement in favor of the mortgagee under the related mortgage
loan.
[In addition, borrowers under of the mortgage loans, representing
% of the initial mortgage collateral balance, have unsecured debt of which
we are aware. In some cases, the lender on the debt is an affiliate of the
borrower. In each case, the lender on the unsecured debt has executed and
delivered a subordination and standstill agreement in favor of the mortgagee
under the related mortgage loan. In addition, some of the mortgage loans permit
the related borrower to incur unsecured subordinated debt in the future, subject
to conditions such as limiting the use of proceeds to refurbishing or renovating
the underlying real property and/or acquiring furniture, fixtures and equipment
for the underlying real property. Borrowers that do not meet special purpose
entity, bankruptcy-remote criteria, generally do not have any restriction on the
incurrence of unsecured debt. Additional debt, in any form, may cause a
diversion of funds from property maintenance and increase the likelihood that
the borrower will become the subject of a bankruptcy proceeding.] See "Risk
Factors--Subordinate Debt Increases the Likelihood that a Borrower Will Default
on a Mortgage Loan Backing Your Bonds" and "Certain Legal Aspects of Mortgage
Loans--Subordinate Financing" in the accompanying prospectus.
Except as described above, we have not been able to confirm whether the
respective borrowers under the mortgage loans have any other debt outstanding.
ZONING AND BUILDING CODE COMPLIANCE. [In connection with the origination of
the related mortgage loans, the related originator examined whether the use and
operation of the underlying real property were in material compliance with
zoning, land-use, building, fire and health ordinances, rules, regulations and
orders then-applicable to the underlying real property. Evidence of this
compliance may have been in the form of legal opinions, certifications from
government officials, title insurance endorsements, engineering or consulting
reports and/or representations by the related borrower. In certain instances, a
certificate of occupancy was not available. Where the property as currently
operated is a permitted nonconforming use and/or structure, an analysis was
generally conducted as to--
- the likelihood that a material casualty would occur that would prevent the
property from being rebuilt in its current form, and
- whether existing replacement cost hazard insurance or, if necessary,
supplemental "law or ordinance coverage" would, in the event of a material
casualty, be sufficient to satisfy the entire
S-42
<PAGE>
mortgage loan or, taking into account the cost of repair, be sufficient to
pay down that mortgage loan to a level that the remaining collateral would
be adequate security for the remaining loan amount.]
HAZARD, LIABILITY AND OTHER INSURANCE. [Although exceptions exist, the
related loan documents generally require the related borrower to maintain with
respect to each of the underlying real properties the following insurance
coverage--
- Hazard insurance in an amount that is subject to a customary deductible,
at least equal to the lesser of the outstanding principal balance of the
related mortgage loan and 100% of the full insurable replacement cost of
the improvements located on the insured property. In general, the standard
form of hazard insurance policy covers physical damage to, or destruction
of, the improvements on the insured property by fire, lightning,
explosion, smoke, windstorm and hail, riot or strike and civil commotion,
subject to the conditions and exclusions set forth in each policy. In some
cases, however, a borrower or tenant is permitted to self-insure the
subject property, provided that the insuring party or an affiliate
maintains a specified net worth.
- If any portion of the property was in an area identified in the federal
register by the Flood Emergency Management Agency as having special flood
hazards, flood insurance meeting the requirements of the Federal Insurance
Administration guidelines was required. Such insurance is required to be
in an amount that is equal to the lesser of: (i) the outstanding principal
balance of the related mortgage loan; (ii) except in certain cases, the
full insurable value of the insured property; and (iii) the maximum amount
of insurance available under the National Flood Insurance Act of 1968.
- Comprehensive general liability insurance against claims for personal and
bodily injury, death or property damage occurring on, in or about the
insured property, in an amount at least equal to $ per
occurrence.
- Business interruption or rent loss insurance either in an amount not less
than 100% of the projected rental income or revenue from the insured
property for at least months or, alternatively, in a specified
dollar amount.]
[In general, the underlying real properties, including those located in
California, are not insured against earthquake risks. In the case of properties
(other than those that are manufactured housing communities or self storage
facilities) located in California, a third party consultant conducted seismic
studies to assess the "probable maximum loss" for the property. In general, when
the resulting reports concluded that an underlying real property was likely to
experience a "probable maximum loss" in excess of % of the estimated
replacement cost of the improvements, the related originator required the
borrower to obtain earthquake insurance or establish reserves to cover the
estimated costs of completing seismic retrofitting recommended by the
consultant, unless the original loan-to-value ratio was relatively low.]
[With respect to each of the underlying real properties, the master servicer
is required to cause the maintenance of all insurance coverage as is required
under the related mortgage to the extent (i) the bond trustee, on behalf of the
bondholders and the issuer, has an insurable interest and (ii) the master
servicer can require maintenance of insurance under applicable law.]
[Under the terms of several of the mortgage loans, the related borrower is
required to keep its property insured against loss by fire, hazards, rent loss
and other hazards, casualties, liabilities and contingencies as the lender
determines to require and in the amounts and for the periods as the lender
determines to require. The master servicer will be required to use reasonable
efforts to cause the related borrowers under those mortgage loans to maintain
insurance generally in the amounts, type and scopes of coverage required under
the other mortgage loans.]
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[Various forms of insurance maintained with respect to any of the underlying
real properties, including casualty insurance, environmental insurance,
earthquake insurance or other insurance, may be provided under a blanket policy
that also covers other underlying real properties and/or other properties that
will not secure loans included the trust estate. As a result of total limits
under any blanket policy, losses at other properties covered by the blanket
insurance policy may reduce the amount of insurance coverage with respect to a
property securing one of the loans included the trust estate. See "Risk
Factors--Lack of Insurance Coverage Exposes a Lender to Risk for Certain Special
Hazard Losses" in the accompanying prospectus.]
[With limited exception, the mortgage loans generally provide that insurance
and condemnation proceeds are to be applied either--
- to restore the underlying real property; or
- towards payment of the related mortgage loan.]
[If any underlying real property is acquired as part of the trust estate
through foreclosure, deed in lieu of foreclosure or otherwise following a
default on the related mortgage loan, the special servicer will be required to
maintain for that property generally the same types of insurance policies
providing coverages in the same amounts as were previously required under the
mortgage that had covered the property.]
[The master servicer and the special servicer may each satisfy its
obligations regarding maintenance of the hazard insurance policies referred to
in this prospectus supplement by maintaining a blanket policy or master force
placed insurance policy insuring against hazard losses on all of the related
mortgage loans. If any blanket or master policy contains a deductible clause,
however, the master servicer or the special servicer, as the case may be, will
be required, in the event of a casualty covered by the blanket or master policy,
to pay out of its own funds all sums that--
- are not paid because of the deductible clause, and
- would have been paid if an individual hazard insurance policy referred to
above had been in place.]
[The applicable originator and its successors and assigns are the
beneficiaries under separate title insurance policies with respect to each
mortgage loan. Each title insurer will enter into co-insurance and reinsurance
arrangements with respect to the title insurance policy as are customary in the
title insurance industry. Subject to certain exceptions, including standard
exceptions regarding claims made in the context of insolvency proceedings, each
title insurance policy will provide coverage to the bond trustee for the benefit
of the bondholders and the issuer for claims made against the bond trustee
regarding the priority and validity of the borrowers' title to the subject
underlying real property.]
ASSESSMENTS OF PROPERTY CONDITION
PROPERTY INSPECTIONS. [ of the underlying real properties were
inspected in connection with the origination or acquisition of the related
mortgage loans to assess their general condition.][DISCUSS RESULTS AND
CORRESPONDING ACTIONS.]
APPRAISALS. [In connection with the origination of the related mortgage
loans, of the underlying real properties were appraised by a state
certified appraiser or an appraiser belonging to the Appraisal Institute, and
such appraisals were conducted in accordance with the Uniform Standards of
Professional Appraisal Practices. In general, the appraisal for each such
underlying real property or a separate letter contains a statement by the
appraiser stating that the guidelines in Title XI of the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA") were followed in
preparing such appraisal.] We have not independently verified the accuracy of
such statement. The primary purpose of each of those appraisals was to provide
an opinion of the fair market value of the related underlying real property.
There can be no assurance that another appraiser would have arrived at the same
opinion of value. The resulting "Appraised Values" are shown on Annex A-1 to
this prospectus supplement.
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ENVIRONMENTAL ASSESSMENTS. [A "Phase I" environmental site assessment was
performed with respect to of the underlying real properties in connection
with the origination of the related mortgage loans. In certain cases, additional
environmental testing, as recommended by that "Phase I" assessment, was
performed.] [DISCUSS RESULTS AND CORRESPONDING ACTIONS.]
ENGINEERING ASSESSMENTS. [In connection with the origination of the related
mortgage loans, a licensed engineer inspected of the underlying real
properties to assess the structure, exterior walls, roofing, interior structure
and mechanical and electrical systems.][DISCUSS RESULTS AND CORRESPONDING
ACTIONS.]
THE MORTGAGE LOAN SELLERS
[INSERT DESCRIPTION OF MORTGAGE LOAN SELLERS]
The information set forth in this prospectus supplement concerning each of
the mortgage loan sellers has been provided by the respective mortgage loan
sellers, and neither we nor the underwriter makes any representation or warranty
as to the accuracy or completeness of this information.
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ASSIGNMENT OF THE MORTGAGE COLLATERAL
On or before the date of initial issuance of the bonds, the following
transfers of the mortgage collateral will occur. In each case, the transferor
will transfer or assign the subject mortgage collateral, without recourse, to
the transferee.
[GRAPHIC]
In connection with the foregoing transfers, we will be required to deliver
the following documents, among others, to the bond trustee with respect to each
of its mortgage loans--
[SPECIFY SELECT DOCUMENTS.]
The bond trustee, either directly or through a custodian, is required to
hold all of the documents delivered to it with respect to the mortgage loans in
trust for the benefit of the bondholders and, within a specified period of time
following the delivery, to conduct a review of those documents. All of the
above-described documents actually delivered to the bond trustee in respect of
any of the mortgage loans will collectively be the "mortgage file" for that
mortgage loan. The scope of the bond trustee's review of each mortgage file is,
in general, limited solely to confirming that the documents listed above have
been received. None of the bond trustee, the master servicer, the special
servicer or any custodian is under any duty or obligation to inspect, review or
examine any of the documents relating to the mortgage loans
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included in the trust estate to determine whether the document is valid,
effective, enforceable, in recordable form or otherwise appropriate for the
represented purpose.
If any of the above-described documents required to be delivered by us to
the bond trustee is not delivered by us or is otherwise defective, and that
omission or defect materially and adversely affects the value of the subject
mortgage loan or the interests of the bondholders therein, then that omission or
defect will be a "material document defect" with respect to the subject mortgage
loan. The rights of the bondholders and the issuer against us with respect to
any material document defect are described under "--Cures and Repurchases"
below.
Within a specified period following the later of (i) the date on which the
offered bonds are initially issued and (ii) the date on which all recording
information necessary to complete the subject document is received by the bond
trustee, the bond trustee must submit for recording in the real property records
of the applicable jurisdiction each of the assignments of recorded loan
documents in its favor described above. Because most of the mortgage loans are
newly originated, many of those assignments cannot be completed and recorded
until the related mortgage and/or assignment of leases and rents, reflecting the
necessary recording information, is returned from the applicable recording
office.
REPRESENTATIONS AND WARRANTIES
As of the date of initial issuance of the bonds, we will make with respect
to each mortgage loan, certain representations and warranties generally to the
effect listed below, together with such other representations and warranties as
may be required by the rating agencies.
The representations and warranties to be made by us in respect of each
mortgage loan will include:
[SPECIFY SELECT REPRESENTATIONS AND WARRANTIES.]
If there exists a breach of any of the above-described representations and
warranties made by us that materially and adversely affects the value of the
subject mortgage loan or the interests of the bondholders therein, then that
breach will be a "material breach" of the representation and warranty. The
rights of the bondholders and the issuer against us with respect to any material
breach are described under "--Cures and Repurchases" below.
CURES AND REPURCHASES
If there exists, with respect to any mortgage loan, a material breach of any
of the representations and warranties made by us, as discussed under
"--Representations and Warranties" above, or a material document defect as
discussed under "--Assignment of the Mortgage Collateral" above, then we will be
required either:
- to remedy the material breach or the material document defect in all
material respects, or
- repurchase the affected mortgage loan at a price generally equal to the
sum of (i) the unpaid principal balance of that mortgage loan at the time
of purchase, plus (ii) all unpaid interest (other than additional interest
and default interest) due in respect of that mortgage loan through the due
date in the collection period of purchase, plus (iii) all unreimbursed
advances to cover certain costs and expenses relating to the servicing and
administration of that mortgage loan.
The time period within which we must complete such remedy or repurchase will
generally be limited to 90 days (or, if we are diligently attempting to correct
the problem and certain other conditions are satisfied, 180 days) following the
earlier of our discovery or receipt of notice of the subject material breach or
material document defect, as the case may be. However, if any material document
defect arises solely out of the failure of the applicable recording office to
return a recorded mortgage loan document, and if we are diligently attempting to
retrieve that document, then the time period may be extended for up to two years
following the date of initial issuance of the offered bonds.
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Our cure/repurchase obligations described above will constitute the sole
remedy available to the bondholders and the issuer in connection with a material
breach of any of our representations or warranties or a material document
defect, with respect to any mortgage loan. No other person will be obligated to
repurchase any affected mortgage loan in connection with a material breach of
any of the representations and warranties or a material document defect, if we
default on our obligation to do so.
CHANGES IN MORTGAGE COLLATERAL CHARACTERISTICS
The description in this prospectus supplement of the mortgage collateral and
the underlying real properties is based upon the mortgage collateral as it is
expected to be constituted at the time the offered bonds are issued, with
adjustments for the monthly debt service payments due on the mortgage loans on
or before . Prior to the issuance of the offered bonds, one or more
mortgage loans may be removed from the trust estate if we consider the removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the trust estate prior to the issuance of the offered bonds, unless
including those mortgage loans would materially alter the characteristics of the
mortgage collateral as described in this prospectus supplement. We believe that
the information in this prospectus supplement will be generally representative
of the characteristics of the mortgage collateral as it will be constituted at
the time the offered bonds are issued. However, the range of mortgage rates and
maturities, as well as the other characteristics of the mortgage loans described
in this prospectus supplement, may vary, and the actual initial mortgage
collateral balance may be as much as % larger or smaller than the initial
mortgage collateral balance specified in this prospectus supplement.
A current report on Form 8-K will be available to purchasers of the offered
bonds on or shortly after the date of initial issuance of the bonds. That
current report on Form 8-K will be filed, together with the governing documents,
with the SEC within 15 days after the initial issuance of the offered bonds. In
the event mortgage loans are removed from or added to the trust estate, such
removal or addition will be noted in that current report on Form 8-K.
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SERVICING OF THE MORTGAGE LOANS
GENERAL
The servicing of the mortgage loans will be governed by the servicing and
administration agreement. The following summaries describe certain provisions of
the servicing and administration agreement relating to the servicing and
administration of the mortgage loans and any real estate included in the trust
estate. You should also refer to the accompanying prospectus, in particular the
section captioned "Description of the Governing Documents" for additional
important information regarding provisions of the servicing and administration
agreement that relate to the rights and obligations of the master servicer and
the special servicer. See "Description of the Governing Documents--The Servicing
and Administration Agreement(s)--Collection and Other Servicing Procedures with
Respect to Mortgage Loans" in the accompanying prospectus.
The servicing and administration agreement provides that the master servicer
and the special servicer must each service and administer the mortgage loans and
any real estate included in the trust estate for which it is responsible,
directly or through sub-servicers, in accordance with--
- any and all applicable laws, and
- the express terms of the servicing and administration agreement and the
respective mortgage loans.
Furthermore, to the extent consistent with the foregoing, the master
servicer and the special servicer must each service and administer the mortgage
loans and any real estate included in the trust estate for which it is
responsible in accordance with the following standard (the "Servicing
Standard"), which is set forth in further detail in the servicing and
administration agreement:
- with the same care, skill and diligence as is normal and usual in its
general mortgage servicing and asset management activities with respect to
comparable loans and real properties that either are part of other third
party portfolios (giving due consideration to customary and usual
standards of practice of prudent institutional commercial lenders) or are
held as part of its own portfolio, whichever servicing procedures are of a
higher standard;
- with a view to the timely collection of all monthly debt service payments
under the mortgage loans, the full collection of all prepayment premiums
and yield maintenance charges that may become payable under the mortgage
loans and, in the case of the special servicer, if a mortgage loan comes
into and continues in default and, in the judgment of the special
servicer, no satisfactory arrangements can be made for the collection of
the delinquent payments, including payments of prepayment premiums and
yield maintenance charges, the maximization of the recovery on that
defaulted mortgage loan to the series " " bondholders (as a
collective whole) on a present value basis; and
- without regard to:
(i) any known relationship that the master servicer or the special
servicer, as the case may be, or any of its affiliates may have with
any of the underlying borrowers or any other party to the servicing
and administration agreement;
(ii) the ownership of any series " " bond by the master servicer or
the special servicer, as the case may be, or by any of its
affiliates;
(iii) the obligation of the master servicer or the special servicer, as
the case may be, to make advances;
(iv) the right of the master servicer or the special servicer, as the
case may be, or any of its affiliates to receive reimbursement of
costs, or the sufficiency of any compensation payable
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to it under the servicing and administration agreement or with
respect to any particular transaction; and
(v) the ownership, servicing or management by the master servicer or the
special servicer, as the case may be, or any of its affiliates of
any other loans or real properties not included in or securing, as
the case may be, the mortgage collateral, or the right to service or
manage for others any such other loans or real properties.
In general, the master servicer will be responsible for the servicing and
administration of--
- all mortgage loans as to which no Servicing Transfer Event (as defined
below) has occurred, and
- all worked-out mortgage loans as to which no new Servicing Transfer Event
has occurred.
The special servicer, on the other hand, will be responsible for the
servicing and administration of each mortgage loan as to which a Servicing
Transfer Event has occurred and which has not yet become a worked-out mortgage
loan with respect to that Servicing Transfer Event. The special servicer will
also be responsible for the administration of each underlying real property that
has been acquired as part of the trust estate in respect of a defaulted mortgage
loan through foreclosure, deed-in-lieu of foreclosure or otherwise (each such
property, for so long as it is real estate owned by the trust, an "REO
property").
Mortgage loans as to which no Servicing Transfer Event has ever occurred,
and worked-out mortgage loans as to which no new Servicing Transfer Event has
occurred, are collectively referred to in this prospectus supplement as
"performing mortgage loans". Specially serviced mortgage loans and REO
properties are collectively referred to in this prospectus supplement as
"specially serviced assets". Performing mortgage loans will include mortgage
loans which may be delinquent, but not to the point of resulting in a Servicing
Transfer Event.
Despite the foregoing, the servicing and administration agreement will
require the master servicer to continue to collect information and prepare all
reports to the bond trustee required to be collected or prepared with respect to
any specially serviced assets and, otherwise, to render certain incidental
services with respect to any specially serviced assets. Neither the master
servicer nor the special servicer will have responsibility for the performance
by the other of its respective obligations and duties under the servicing and
administration agreement.
A mortgage loan will become a specially serviced mortgage loan, if it has
not already done so, upon the occurrence of a Servicing Transfer Event. A
"Servicing Transfer Event" will be considered to have occurred with respect to
any mortgage loan included in the trust estate if--
(1) the related borrower fails to make when due any monthly debt service
payment, including a balloon payment, or any other payment required under
the related promissory note or the related mortgage, and either the failure
actually continues, or the master servicer believes it will continue,
unremedied for days;
(2) the master servicer determines that a default in the making of a monthly
debt service payment, including a balloon payment, or any other material
payment required to be made under the related promissory note or the related
mortgage, is likely to occur within days and either (a) the default is
likely to remain unremedied for at least days or (b) the related
borrower has requested a material modification of the mortgage loan;
(3) the master servicer determines that a non-payment default has occurred under
the mortgage loan that may materially impair the value of the related
underlying real property as security for the mortgage loan and the default
continues unremedied for the applicable cure period under the terms of the
mortgage loan or, if no cure period is specified, for days;
(4) certain events of bankruptcy, insolvency, readjustment of debt, marshalling
of assets and liabilities, or similar proceedings occur with respect to the
related borrower or the related underlying real property,
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or the related borrower takes certain actions indicating its bankruptcy,
insolvency or inability to pay its obligations; or
(5) the master servicer receives notice of the commencement of foreclosure or
similar proceedings with respect to the related underlying real property.
So long as no other Servicing Transfer Event then exists, a mortgage loan
will cease to be a specially serviced mortgage loan and will become a
"worked-out mortgage loan" as to which the master servicer will re-assume
servicing responsibilities, if and when:
(a) with respect to the circumstances described in clause (1) of the
preceding paragraph, the related borrower makes consecutive full
and timely monthly debt service payments under the terms of the mortgage
loan, as those terms may be changed or modified in connection with a
bankruptcy or similar proceeding involving the related borrower or by
reason of a modification, waiver or amendment granted or agreed to by the
master servicer or the special servicer;
(b) with respect to the circumstances described in clauses (2) and
(4) above, those circumstances cease to exist in the good faith,
reasonable judgment of the special servicer, but, with respect to any
bankruptcy or insolvency proceedings contemplated by clause (4), no later
than the entry of an order or decree dismissing such proceeding;
(c) with respect to the circumstances described in clause (3) above, the
default is cured in the judgment of the special servicer; and
(d) with respect to the circumstances described in clause (5) above, the
proceedings are terminated.
THE INITIAL MASTER SERVICER AND THE INITIAL SPECIAL SERVICER
THE MASTER SERVICER.
[DESCRIBE THE INITIAL MASTER SERVICER.]
The information set forth in this prospectus supplement concerning
has been provided by it. Neither we nor the underwriter makes any
representation or warranty as to the accuracy or completeness of this
information.
THE SPECIAL SERVICER.
[DESCRIBE THE INITIAL SPECIAL SERVICER.]
The information set forth in this prospectus supplement concerning
has been provided by it. Neither we nor the underwriter makes any
representation or warranty as to the accuracy of this information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
THE MASTER SERVICING FEE. The principal compensation to be paid to the
master servicer with respect to its master servicing activities will be the
master servicing fee.
The "master servicing fee":
- will be earned in respect of each and every mortgage loan, including each
specially serviced mortgage loan, if any, and each mortgage loan, if any,
as to which the related underlying real property has become an REO
property; and
- in the case of each such mortgage loan, will--
(i) be calculated on a 30/360 basis,
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(ii) accrue at the related master servicing fee rate,
(iii) accrue on the same principal amount as interest accrues or is
deemed to accrue from time to time with respect to that mortgage
loan, and
(iv) be payable monthly from amounts received in respect of interest on
that mortgage loan.
The "master servicing fee" will be % per annum.
ADDITIONAL MASTER SERVICING COMPENSATION. As additional master servicing
compensation, the master servicer will be entitled to receive--
- All prepayment interest excesses, if any, collected in respect of all
mortgage loans securing the series " " bonds. If a borrower prepays
its mortgage loan, in whole or in part, after the borrower has made its
monthly debt service payment on the related due date during any collection
period, the amount of any interest collected on the subject prepayment for
the period following that due date, less the amount of related master
servicing fees payable therefrom and exclusive of any Default Interest and
Post-ARD Additional Interest included therein, will be a "Prepayment
Interest Excess". "Default Interest" is any interest that (i) accrues on a
defaulted mortgage loan solely by reason of the subject default and
(ii) is in excess of all interest at the related mortgage rate and any
Post-ARD Additional Interest accrued on the mortgage loan.
- All late payment charges and Default Interest, if any, that were collected
in respect of any mortgage loan and that accrued while such mortgage loan
was a performing mortgage loan (but only to the extent that any such late
payment charges and default interest have not otherwise been applied to
pay the master servicer, the special servicer or the bond trustee, as
applicable, interest on advances made thereby with respect to the related
mortgage loan as described in this prospectus supplement).
In addition, all modification fees, assumption fees, assumption application
fees, consent/waiver fees and other comparable transaction fees and charges, if
any, collected in respect of the mortgage loans will be allocated between the
master servicer and the special servicer, as additional compensation, or
otherwise applied to cover related expenses, as provided in the servicing and
administration agreement.
The master servicer will be authorized to invest or direct the investment of
funds held in its custodial account (see "--Custodial Account" below), or in any
and all accounts maintained by it that are escrow and/or reserve accounts, in
certain government securities and other investment grade obligations specified
in the servicing and administration agreement ("Permitted Investments"). The
master servicer will be entitled to retain any interest or other income earned
on those funds and will be required to cover any losses of principal from its
own funds. The master servicer will not be obligated, however, to cover any
losses resulting from the bankruptcy or insolvency of any depository institution
or trust company holding any of those accounts.
PREPAYMENT INTEREST SHORTFALLS. If a borrower prepays a mortgage loan, in
whole or in part, prior to the related due date during any collection period and
does not pay interest on the prepayment through that due date, then the
shortfall in a full month's interest, less the amount of related master
servicing fees that would have been payable therefrom and exclusive of any
Default Interest and Post-ARD Additional Interest that would have been included
therein, will be a "prepayment interest shortfall".
The servicing and administration agreement provides that, if any prepayment
interest shortfalls are incurred with respect to the mortgage collateral during
any collection period, the master servicer must make a non-reimbursable payment
(a "Compensating Interest Payment") with respect to the related payment date in
an amount equal to the lesser of:
(a) the total amount of those prepayment interest shortfalls, and
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(b) the sum of the following components of the master servicer's aggregate
servicing compensation for that same collection period--
-
-
-
No other master servicing compensation will be available to cover prepayment
interest shortfalls.
Any Compensating Interest Payment made by the master servicer with respect
to any payment date will be included among the amounts payable as principal and
interest on the bonds on that payment date as described under "Description of
the Offered Bonds--Payments" in this prospectus supplement. If the amount of the
Compensating Interest Payment made by the master servicer with respect to any
payment date is less than the total of all prepayment interest shortfalls
incurred with respect to the mortgage collateral during the related collection
period, then that shortfall (a "Net Aggregate Prepayment Interest Shortfall")
will be allocated among the respective classes of interest-bearing bonds, in
reduction of the interest payable on those bonds, as and to the extent described
under "Description of the Offered Bonds--Payments--Payments of Interest" in this
prospectus supplement.
PRINCIPAL SPECIAL SERVICING COMPENSATION. The principal compensation to be
paid to the special servicer with respect to its special servicing activities
will be--
- the special servicing fee,
- the workout fee, and
- the liquidation fee.
The "special servicing fee":
- will be earned with respect to each specially serviced mortgage loan, and
each mortgage loan as to which the related underlying real property has
become an REO property,
- with respect to each such mortgage loan, will--
(i) be calculated on a 30/360 basis,
(ii) accrue at a "special servicing fee rate" of % per annum, and
(iii) accrue on the same principal amount as interest accrues or is deemed to
accrue from time to time on that mortgage loan, and
- will be payable monthly from general collections on all the mortgage loans
and any REO properties on deposit in the master servicer's custodial
account from time to time.
THE WORKOUT FEE. The special servicer will, in general, be entitled to
receive a workout fee with respect to each worked-out mortgage loan. The
"workout fee" will be payable out of, and will be calculated by application of a
"workout fee rate" of % to, each collection of interest and principal
received on the mortgage loan for so long as it remains a worked-out mortgage
loan, exclusive of any portion of that collection that represents a recovery of
Default Interest or Post-ARD Additional Interest. The workout fee with respect
to any worked-out mortgage loan will cease to be payable if a new Servicing
Transfer Event occurs with respect to the loan. However, a new workout fee would
become payable if the mortgage loan again became a worked-out mortgage loan with
respect to that new Servicing Transfer Event. If the special servicer is
terminated other than for cause or resigns, it will retain the right to receive
any and all workout fees payable with respect to mortgage loans that became
worked-out mortgage loans during the period that it acted as special servicer
and remained worked-out mortgage loans at the time of its termination or
resignation. The successor special servicer will not be entitled to any portion
of those workout fees.
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Although workout fees are intended to provide the special servicer with an
incentive to better perform its duties, the payment of any workout fee will
reduce amounts payable to the bondholders.
THE LIQUIDATION FEE. The special servicer will be entitled to receive a
liquidation fee with respect to each specially serviced mortgage loan for which
it obtains a full or discounted payoff from the related borrower. The special
servicer will also be entitled to receive a liquidation fee with respect to any
specially serviced mortgage loan or REO property as to which it receives any
liquidation proceeds, condemnation proceeds or insurance proceeds, except as
described below. As to each specially serviced mortgage loan and REO property,
the "liquidation fee" will be payable from, and will be calculated by
application of a "liquidation fee rate" of % to, the related payment or
proceeds, exclusive of any portion of that payment or proceeds that represents a
recovery of Default Interest or Post-ARD Additional Interest.
Despite anything to the contrary described above, no liquidation fee will be
payable based on, or out of, proceeds received in connection with:
- the repurchase or replacement of any mortgage loan by us for a breach of
representation or warranty or for defective or deficient mortgage loan
documentation so long as such repurchase occurs within the 180-day cure
period (see "Description of the Mortgage Collateral--Cures and
Repurchases" in this prospectus supplement); or
- the purchase of any defaulted mortgage loan or REO property by the master
servicer or special servicer (See "--Sale of Defaulted Mortgage Loans"
below).
Although liquidation fees are intended to provide the special servicer with
an incentive to better perform its duties, the payment of any liquidation fee
will reduce amounts payable to the bondholders.
ADDITIONAL SPECIAL SERVICING COMPENSATION. As additional special servicing
compensation, the special servicer will be entitled to receive all late payment
charges and Default Interest, if any, collected in respect of any mortgage loan
that accrued while the mortgage loan was a specially serviced mortgage loan, but
only to the extent that those late payment charges and Default Interest have not
otherwise been applied to pay the master servicer, the special servicer or the
bond trustee, as applicable, interest on advances made the master servicer, the
special servicer or the bond trustee, as the case may be, with respect to the
related mortgage loan as described in this prospectus supplement.
All modification fees, assumption fees, assumption application fees and
other comparable transaction fees and charges, if any, collected in respect of
the specially serviced mortgage loans, will be allocated between the master
servicer and the special servicer, as additional compensation, or otherwise
applied to cover related expenses, as provided in the servicing and
administration agreement.
In addition, the special servicer will be authorized to invest or direct the
investment of funds held in its REO account (see "--REO Properties" below) in
Permitted Investments. The special servicer will be entitled to retain any
interest or other income earned on those funds and will be required to cover any
losses of principal from its own funds without any right to reimbursement. The
special servicer will not be obligated, however, to cover any losses resulting
from the bankruptcy or insolvency of any depository institution or trust company
holding the special servicer's REO account.
PAYMENT OF EXPENSES; SERVICING ADVANCES. Each of the master servicer and
the special servicer will be required to pay its overhead and any general and
administrative expenses incurred by it in connection with its servicing
activities under the servicing and administration agreement. The master servicer
and the special servicer will not be entitled to reimbursement for these
expenses except as expressly provided in the servicing and administration
agreement.
Any and all customary, reasonable and necessary "out of pocket" costs and
expenses incurred by the master servicer or the special servicer in connection
with the servicing of a mortgage loan after a default, delinquency or other
unanticipated event, or in connection with the administration of any REO
property,
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will be "servicing advances". Servicing advances will be reimbursable from
future payments and other collections, including insurance proceeds,
condemnation proceeds and liquidation proceeds, in connection with the related
mortgage loan or REO property. In addition, the special servicer may
periodically require the master servicer to reimburse the special servicer for
any servicing advances made by it. Upon reimbursing the special servicer for any
servicing advance, the master servicer will be deemed to have made the advance.
The special servicer may request the master servicer to make servicing
advances with respect to a specially serviced mortgage loan or REO property, in
lieu of the special servicer's making that advance itself. The special servicer
must make the request in writing, in a timely manner that does not adversely
affect the interests of any bondholder. The master servicer must make the
requested servicing advance within a specified number of days following the
master servicer's receipt of the request. If the request is timely and properly
made, the special servicer will be relieved of any obligations with respect to a
servicing advance that it requests the master servicer to make, regardless of
whether or not the master servicer actually makes that advance.
If the master servicer or the special servicer is required under the
servicing and administration agreement to make a servicing advance, but neither
does so within days after the servicing advance is required to be made,
then the bond trustee will be required: (a) if it has actual knowledge of the
failure, to give the defaulting party notice of its failure; and (b) if the
failure continues for more business days, to make the servicing advance.
Despite the foregoing discussion or anything else to the contrary in this
prospectus supplement, none of the master servicer, the special servicer or the
bond trustee will be obligated to make servicing advances that, in the
reasonable and good faith judgment of any such party, would not be ultimately
recoverable from expected collections on the related mortgage loan or REO
property. If the master servicer, the special servicer or the bond trustee makes
any servicing advance that it subsequently determines, in its judgment, is not
recoverable from expected collections on the related mortgage loan or REO
property, it may obtain reimbursement for that advance, together with interest
thereon, out of general collections on the mortgage loans and any REO properties
on deposit in the master servicer's custodial account from time to time.
The master servicer will be permitted to pay, and the special servicer may
direct the payment of, certain servicing expenses directly out of the master
servicer's custodial account and at times without regard to the relationship
between the expense and the funds from which it is being paid, including in
connection with the remediation of any adverse environmental circumstance or
condition at any of the underlying real properties. In addition, the servicing
and administration agreement will require the master servicer, at the direction
of the special servicer if a specially serviced asset is involved, to pay
directly out of the master servicer's custodial account any servicing expense
that, if advanced by the master servicer or the special servicer, would not be
recoverable from expected collections on the related mortgage loan or REO
property, provided that the master servicer, or the special servicer if a
specially serviced asset is involved, has determined in accordance with the
Servicing Standard that making the payment is in the best interests of the
bondholders (as a collective whole).
The master servicer, the special servicer and the bond trustee will be
entitled to receive interest on servicing advances made by them. The interest
will accrue on the amount of each servicing advance, and compound monthly, for
so long as the servicing advance is outstanding, at a rate per annum equal to
the "prime rate" as published in the "Money Rates" section of THE WALL STREET
JOURNAL, as that "prime rate" may change from time to time. Interest accrued
with respect to any servicing advance will be payable in the collection period
in which that advance is reimbursed--
- FIRST, out of Default Interest and late payment charges collected on the
related mortgage loan during that collection period, and
- THEN, if and to the extent that the Default Interest and late charges
referred to in clause FIRST above are insufficient to cover the advance
interest, out of any amounts then on deposit in the master servicer's
custodial account.
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SUB-SERVICERS
The master servicer and, subject to certain restrictions, the special
servicer may each delegate any of its servicing obligations under the servicing
and administration agreement to any one or more third-party servicers. The
master servicer or the special servicer, as the case may be, will remain
obligated under the servicing and administration agreement for any duties
delegated to a sub-servicer. Some of the mortgage loans are currently being
serviced by third-party servicers that are entitled to and will become
sub-servicers of these loans on behalf of the master servicer (those
sub-servicers, the "Designated Sub-Servicers"). Each sub-servicing agreement
between the master servicer or special servicer, as the case may be, and a
sub-servicer must provide that, if for any reason the master servicer or special
servicer, as the case may be, is no longer acting in that capacity, the bond
trustee or any other successor to the master servicer or special servicer, as
applicable, may:
- assume the party's rights and obligations under the sub-servicing
agreement;
- enter into a new sub-servicing agreement with the sub-servicer on terms
which are acceptable to the bond trustee or successor master servicer or
special servicer, as the case may be, and that sub-servicer; or
- terminate the sub-servicing agreement without cause.
Notwithstanding the foregoing, neither the bond trustee nor any other successor
master servicer may terminate the sub-servicing agreement for a Designated
Sub-Servicer without cause, unless it pays that Designated Sub-Servicer a
termination fee.
The master servicer and special servicer will each be required to monitor
the performance of sub-servicers retained by it. The master servicer and special
servicer will each be solely liable for all fees owed by it to any sub-servicer
retained by it, irrespective of whether its compensation pursuant to the
servicing and administration agreement is sufficient to pay those fees. Each
sub-servicer will be reimbursed by the master servicer or special servicer, as
the case may be, for certain expenditures which it makes, generally to the same
extent the master servicer or special servicer, as the case may be, would be
reimbursed under the servicing and administration agreement.
ENFORCEMENT OF "DUE-ON-SALE" AND "DUE-ON-ENCUMBRANCE" PROVISIONS
The master servicer or the special servicer, as applicable, will be required
to determine, in a manner consistent with the Servicing Standard, whether to
exercise any right the lender under any mortgage loan may have under either a
"due-on-sale" or "due-on-encumbrance clause" to accelerate payment of that
mortgage loan. However, under the circumstances described below, neither the
master servicer nor the special servicer may waive its rights or grant its
consent under any "due-on-sale" or "due-on-encumbrance" clause unless it has
received written confirmation from each applicable rating agency that this
action would not result in the qualification, downgrade or withdrawal of any of
the then-current ratings then assigned by the rating agency to the bonds. With
respect to "due-on-sale" clauses, this requirement will apply only if the
outstanding principal balance of the subject mortgage loan, together with the
total outstanding principal balance of all other mortgage loans that are
cross-collateralized with the subject mortgage loan or have been made to the
same borrower or affiliated borrowers, is equal to or greater than a specified
percentage of the then total principal balance of the mortgage collateral. In
the case of "due-on-encumbrance" provisions, this requirement will always apply.
In addition, the master servicer may not waive its rights or grant its consent
under any "due-on-sale" or "due-on-encumbrance" clause without the consent of
the special servicer.
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MODIFICATIONS, WAIVERS, AMENDMENTS AND CONSENTS
The special servicer, with respect to specially serviced mortgage loans, and
the master servicer, with respect to performing mortgage loans, each may,
consistent with the Servicing Standard, agree to:
- any modification, waiver or amendment of any term of any mortgage loan;
- extend the maturity of any mortgage loan;
- defer or forgive the payment of interest on and principal of any mortgage
loan;
- defer or forgive the payment of prepayment premiums, yield maintenance
charges and late payment charges on any mortgage loan;
- permit the release, addition or substitution of collateral securing any
mortgage loan; or
- permit the release, addition or substitution of the borrower or any
guarantor of any mortgage loan.
The ability of the special servicer, in the case of specially serviced mortgage
loans, and the master servicer, in the case of performing mortgage loans, to
agree to any of the foregoing, however, is subject to each of the following
limitations, conditions and restrictions:
- With limited exception, including with respect to certain routine matters,
the master servicer may not agree to any modification, waiver or amendment
of any term of, or take any of the other above-referenced actions with
respect to, any mortgage loans without the consent of the special
servicer, provided that such consent--
(i) is to be withheld or granted by the special servicer in accordance with
the Servicing Standard, and
(ii) will be deemed to have been granted if not expressly denied within
business days following the special servicer's receipt from the
master servicer of all information reasonably requested by it in order
to make an informed decision.
- With limited exception, including with respect to Post-ARD Additional
Interest as described below, the special servicer may not agree to or
consent to the master servicer's agreeing to any modification, waiver or
amendment of any term of any mortgage loan, or take or consent to the
master servicer's taking any of the other above-referenced actions with
respect to any mortgage loan, if doing so would--
(i) affect the amount or timing of any related payment of principal,
interest or other amount payable under the mortgage loans, or
(ii) in the special servicer's judgment, materially impair the security for
the mortgage loan or reduce the likelihood of timely payment of amounts
due thereon,
unless a material default on the mortgage loan has occurred or, in the
special servicer's judgment, a default in respect of payment on the
mortgage loan is reasonably foreseeable, and the modification, waiver,
amendment or other action is reasonably likely to produce a greater
recovery to the bondholders, as a collective whole, on a present value
basis than would liquidation.
- The special servicer may not extend or consent to the master servicer's
extending the date on which any balloon payment is scheduled to be due on
any mortgage loan to a date beyond the earliest of--
(i) the anniversary of the mortgage loan's original stated maturity
date,
(ii) years prior to the rated final payment date, and
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(iii) if the mortgage loan is secured by a mortgage solely or primarily on
the related borrower's leasehold interest in the related underlying real
property, years prior to the end of the then current term of the
related ground lease, plus any unilateral options to extend.
- Neither the master servicer nor the special servicer may make or permit
any modification, waiver or amendment of any term of, or take any of the
other above-referenced actions with respect to, any mortgage loan that
would--
(i) cause any of REMIC I, REMIC II or REMIC III to fail to qualify as a
REMIC under the Internal Revenue Code of 1986, or
(ii) result in the imposition of any tax on "prohibited transactions" or
"contributions" after the startup date of any of REMIC I, REMIC II or
REMIC III under the Internal Revenue Code of 1986;
- The special servicer may not permit or consent to the master servicer's
permitting any borrower to add or substitute any real estate collateral
for its mortgage loans, unless the special servicer has first--
(i) determined, based upon an environmental assessment prepared by an
independent person who regularly conducts environmental assessments, at
the expense of the borrower, that:
(a) the additional or substitute collateral is in compliance with
applicable environmental laws and regulations, and
(b) that there are no circumstances or conditions present with respect to
the new collateral relating to the use, management or disposal of any
hazardous materials for which investigation, testing, monitoring,
containment, clean-up or remediation would be required under any then
applicable environmental laws or regulations, and
(ii) received confirmation from each of and that
the addition or substitution of collateral will not result in a
qualification, downgrade or withdrawal of any rating then assigned by
the rating agency to a class of bonds.
- Subject to limited exceptions, the special servicer may not release or
consent to the master servicer's releasing any material collateral
securing an outstanding mortgage loan other than in accordance with the
terms of, or upon satisfaction of, the mortgage loan.
The limitations, conditions and restrictions described above will not apply
to any of the acts referenced in this "--Modifications, Waivers, Amendments and
Consents" section that is required under the terms of the subject mortgage loan
in effect on the date of initial issuance of the offered bonds or that is solely
within the control of the related borrower. Also, neither the master servicer
nor the special servicer will be required to oppose the confirmation of a plan
in any bankruptcy or similar proceeding involving a borrower if, in its
judgment, opposition would not ultimately prevent the confirmation of the plan
or one substantially similar, despite the discussion above.
Notwithstanding the foregoing, the master servicer will be permitted, in the
case of certain ARD loans, in its discretion, after the related anticipated
repayment date, to waive any or all of the Post-ARD Additional Interest accrued
on that mortgage loan, if, prior to the related maturity date, the related
borrower has requested the right to prepay the mortgage loan in full, together
with all payments required by the related loan documents in connection with the
prepayment except for that Post-ARD Additional Interest. However, the master
servicer's determination to waive the trust estate's right to receive that
Post-ARD Additional Interest--
- must be in accordance with the Servicing Standard, and
- will be subject to approval by the special servicer.
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The master servicer will not have any liability to the trust estate, the
bondholders or any other person for any such determination that is made in
accordance with the Servicing Standard. The servicing and administration
agreement will also limit the master servicer's and the special servicer's
ability to institute an enforcement action solely for the collection of Post-ARD
Additional Interest.
All modifications, waivers and amendments entered into in respect of the
mortgage loans securing or underlying the security for the bonds are to be in
writing. Each of the master servicer and the special servicer must deliver to
the bond trustee for deposit in the related mortgage file, an original
counterpart of the agreement relating to each modification, waiver or amendment
agreed to by it, promptly following its execution.
REQUIRED APPRAISALS
Promptly following the occurrence of any of the following events (each, an
"Appraisal Trigger Event") with respect to any of the mortgage loans, the
special servicer must obtain, and deliver to the bond trustee and master
servicer a copy of, an appraisal of the related underlying real property from an
independent appraiser meeting certain specified qualifications (a "Required
Appraisal"), unless such an appraisal had previously been obtained within the
prior months--
- the mortgage loan becomes a Modified Mortgage Loan (as defined below);
- the related borrower fails to make any monthly debt service payment with
respect to the mortgage loan and the failure continues for days;
- a receiver is appointed and continues in that capacity in respect of the
underlying real property securing the mortgage loan;
- the related borrower becomes the subject of bankruptcy, insolvency or
similar proceedings; or
- the underlying real property securing the mortgage loan becomes an REO
property.
Notwithstanding the foregoing, if the unpaid principal balance of the
subject mortgage loan, net of related unreimbursed advances of principal, is
less than $ , the special servicer may perform an internal valuation
of the underlying real property.
As a result of any such appraisal or other valuation, it may be determined
that an Appraisal Reduction Amount exists with respect to the subject mortgage
loan. The "Appraisal Reduction Amount" for any mortgage loan as to which an
Appraisal Trigger Event has occurred--
- will be determined shortly following the later of the date on which the
relevant appraisal or other valuation is obtained or performed and the
date on which the first relevant Appraisal Trigger Event occurred, and
- will equal the excess, if any, of "x" over "y" where--
(a) "x" is equal to the sum of:
(i) the unpaid principal balance of the mortgage loan, net of any
related unreimbursed advances of principal;
(ii) to the extent not previously advanced by or on behalf of the master
servicer or the bond trustee, all unpaid interest, other than any
Default Interest and Post-ARD Additional Interest, accrued on the
mortgage loan through the most recent due date prior to the date of
determination;
(iii) all accrued but unpaid special servicing fees in respect of the
mortgage loan;
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(iv) all related unreimbursed advances made by or on behalf of the
master servicer, the special servicer or the bond trustee with
respect to the required appraisal loan, together with interest
thereon; and
(v) all currently due and unpaid real estate taxes and assessments,
insurance premiums and, if applicable, ground rents in respect of
the related underlying real property, net of any escrow reserves
held by the master servicer or the special servicer which covers the
particular item and certain other related reserves; and
(b) "y" is equal to 90% of the resulting appraised or estimated value of
the related underlying real property or REO property, as such appraised
or estimated value may be reduced, to not less than zero, by the amount
of any obligations secured by liens on the property that are prior to
the lien of the mortgage loan.
If, however, any Required Appraisal or other valuation is not obtained or
performed within days of an Appraisal Trigger Event, and no comparable
appraisal or other valuation had been obtained or performed during the
-month period prior to that Appraisal Trigger Event, then until the
Required Appraisal or other valuation is obtained or performed, the "Appraisal
Reduction Amount" for the subject mortgage loan will equal approximately %
of the unpaid principal balance of that mortgage loan, net of any related
unreimbursed advances of principal. After receipt of the Required Appraisal or
other valuation, the special servicer will determine the Appraisal Reduction
Amount, if any, for the subject mortgage loan as described in the prior
paragraph.
An Appraisal Reduction Amount is relevant to the determination of the amount
of any advances of delinquent interest required to be made with respect to the
affected mortgage loan. See "Description of the Offered Bonds--Advances of
Delinquent Monthly Debt Service Payments" in this prospectus supplement.
If an Appraisal Trigger Event occurs with respect to any mortgage loan, then
the special servicer will have an ongoing obligation to obtain or perform, as
the case may be, within days of each anniversary of the occurrence of that
Appraisal Trigger Event, an update of the prior Required Appraisal or other
valuation. Based upon that update, the special servicer is to redetermine and
report to the bond trustee and the master servicer the new Appraisal Reduction
Amount, if any, with respect to the mortgage loan. This ongoing obligation will
cease if and when--
- the subject mortgage loan has become a worked-out mortgage loan as
contemplated under "--General" above,
- the subject mortgage loan has remained current for at least
consecutive monthly debt service payments, and
- no other Servicing Transfer Event has occurred with respect to the subject
mortgage loan during the preceding months.
The cost of each required appraisal (and any update thereof) will be
advanced by the master servicer and will be reimbursable to the master servicer
as a servicing advance.
A "Modified Mortgage Loan" is any mortgage loan as to which any Servicing
Transfer Event has occurred and which has been modified by the special servicer
in a manner that:
(A) affects the amount or timing of any monthly debt service payment due
thereon, other than, or in addition to, bringing current monthly debt
service payments with respect to the mortgage loan;
(B) except as expressly contemplated by the related loan documents, results
in a release of the lien of the mortgage on any material portion of the
related underlying real property without a corresponding principal
prepayment in an amount not less than the fair market value (as is) of
the property to be released; or
(C) in the judgment of the special servicer, otherwise materially impairs
the security for the mortgage loan or reduces the likelihood of timely
payment of amounts due thereon.
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CUSTODIAL ACCOUNT
GENERAL. The master servicer will be required to establish and maintain an
account for purposes of holding payments and other collections that it receives
with respect to the mortgage loans. That "custodial account" must be maintained
in a manner and with a depository institution that satisfies rating agency
standards for securitizations similar to the one involving the bonds.
The funds held in the master servicer's custodial account may be held as
cash or invested in Permitted Investments. Any interest or other income earned
on funds in the master servicer's custodial account will be paid to the master
servicer as additional compensation subject to the limitations set forth in the
servicing and administration agreement.
DEPOSITS. Under the servicing and administration agreement, the master
servicer must deposit or cause to be deposited in its custodial account within
one business day following receipt, in the case of payments and other
collections on the mortgage loans, or as otherwise required under the servicing
and administration agreement, the following payments and collections received or
made by or on behalf of the master servicer with respect to the mortgage
collateral subsequent to the date of initial issuance of the bonds, other than
monthly debt service payments due on or before , which monthly debt
service payments belong to the related mortgage loan seller:
(i) all payments on account of principal on the mortgage loans, including
principal prepayments;
(ii) all payments on account of interest on the mortgage loans, including
Default Interest and Post-ARD Additional Interest;
(iii) all prepayment premiums, yield maintenance charges and late payment
charges collected with respect to the mortgage loans;
(iv) all proceeds received under any hazard, flood, title or other insurance
policy that provides coverage with respect to an underlying real
property or the related mortgage loan, and all proceeds received in
connection with the condemnation or the taking by right of eminent
domain of an underlying real property, in each case to the extent not
otherwise required to be applied to the restoration of the underlying
real property or released to the related borrower;
(v) all amounts received and retained in connection with the liquidation of
defaulted mortgage loans by foreclosure or as otherwise contemplated
under "--Realization Upon Defaulted Mortgage Loans" below;
(vi) any amounts paid by us in connection with the repurchase or replacement
of a mortgage loan as described under "Description of the Mortgage
Collateral--Cures and Repurchases" in this prospectus supplement;
(vii) any amounts required to be deposited by the master servicer in
connection with losses incurred with respect to Permitted Investments
of funds held in the custodial account;
(viii) all payments required to be paid by the master servicer or the special
servicer with respect to any deductible clause in any blanket insurance
policy as described under "Description of the Mortgage
Collateral--Certain Underwriting Matters--Hazard, Liability and Other
Insurance" in this prospectus supplement;
(ix) any amount required to be transferred from the special servicer's REO
account (see "--REO Properties" below); and
(x) any amounts required to be transferred from any debt service reserve
accounts with respect to the mortgage loans.
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Upon receipt of any of the amounts described in clauses (i) through
(v) above with respect to any specially serviced mortgage loan, the special
servicer is required to promptly remit these amounts to the master servicer for
deposit in the master servicer's custodial account.
WITHDRAWALS. The master servicer may make withdrawals from its custodial
account for any of the following purposes, which are not listed in any order of
priority:
(i) to remit to the bond trustee for deposit in the bond trustee's payment
account (see "Description of the Offered Bonds--Payment Account" in this
prospectus supplement) on the business day preceding each payment date,
all payments and other collections on the mortgage loans and any REO
properties that are then on deposit in the custodial account, exclusive
of any portion of those payments and other collections that represents
one or more of the following--
- monthly debt service payments due on a due date subsequent to the end
of the related collection period,
- payments and other collections received after the end of the related
collection period, and
- amounts that are payable or reimbursable from the custodial account to
any person other than the bondholders in accordance with any of clauses
(ii) through (xvii) below;
(ii) to reimburse itself, the special servicer or the bond trustee, as
applicable, for any unreimbursed advances made by that party, such
reimbursement to be made out of collections on the mortgage loan or REO
property as to which the advance was made;
(iii) to pay itself earned and unpaid master servicing fees in respect of
each mortgage loan, such payment to be made out of collections on that
mortgage loan that are allocable as interest;
(iv) to pay the special servicer, out of general collections on the mortgage
loans and any REO properties, earned and unpaid special servicing fees
in respect of each specially serviced mortgage loan and each mortgage
loan as to which the related underlying property has become an REO
property;
(v) to pay the special servicer (or, if applicable, any predecessor special
servicer) earned and unpaid workout fees and liquidation fees to which
it is entitled, such payment to be made from the sources described under
"--Servicing and Other Compensation and Payment of Expenses" above;
(vi) to reimburse itself, the special servicer or the bond trustee, as
applicable, out of general collections on the mortgage loans and any
REO properties, for any unreimbursed advance made by that party that
has been determined not to be ultimately recoverable pursuant to
clause (ii) above;
(vii) to pay itself, the special servicer or the bond trustee, as applicable,
unpaid interest on any advance made by that party, such payment to be
made out of Default Interest and late payment charges received
(A) with respect to the mortgage loan as to which the advance was made
and (B) during the collection period in which that advance is
reimbursed;
(viii) in connection with the reimbursement of advances as described in
clause (ii) or (vi) above, to pay itself, the special servicer or the
bond trustee, as the case may be, out of general collections on the
mortgage loans and any REO properties, any interest accrued and payable
on that advance and not otherwise payable pursuant to clause (vii)
above;
(ix) to pay itself any items of additional master servicing compensation on
deposit in the custodial account as discussed under "--Servicing and
Other Compensation and Payment of Expenses--Additional Master Servicing
Compensation" above;
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(x) to pay the special servicer any items of additional special servicing
compensation on deposit in the custodial account as discussed under
"--Servicing and Other Compensation and Payment of Expenses--Additional
Special Servicing Compensation" above;
(xi) to pay any unpaid liquidation expenses incurred with respect to any
liquidated mortgage loan or REO property, such payments to be made out
of collections on that mortgage loan or REO property, as the case may
be;
(xii) to pay, out of general collections on the mortgage loans and any REO
properties, any servicing expenses that would, if advanced, be
nonrecoverable pursuant to clause (ii) above;
(xiii) to pay, out of general collections on the mortgage loans and any REO
properties, for certain costs and expenses incurred by the trust estate
in connection with the remediation of adverse environmental conditions
at any underlying real property that secures a defaulted mortgage loan;
(xiv) to pay itself, the special servicer, the bond trustee or any of their
or our respective directors, officers, employees and agents, as the
case may be, out of general collections on the mortgage loans and any
REO properties, any of the reimbursements or indemnities to which any
of those other persons or entities are entitled as described under
"Description of the Governing Documents--Certain Matters Regarding the
Master Servicer, the Special Servicer, the Manager and the Issuers" in
the accompanying prospectus;
(xv) to pay, out of general collections on the mortgage loans and any REO
properties, for the costs of certain opinions of counsel, the cost of
recording the servicing and administration agreement and certain
expenses incurred by the tax administrator in connection with providing
advice to the special servicer;
(xvi) to pay any other items described in this prospectus supplement as being
payable from the custodial account;
(xvii) to withdraw amounts deposited in the custodial account in error,
including amounts received on any mortgage loan or REO property that
has been purchased or otherwise removed from the trust estate; and
(xviii) to clear and terminate the custodial account upon the termination of
the servicing and administration agreement.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The servicing and administration agreement grants to the master servicer and
the special servicer, a right to purchase from the trust estate certain
defaulted mortgage loans in the priority described below.
If the special servicer has determined, in its judgment, that the sale of
any defaulted mortgage loan under the circumstances described below is in
accordance with the Servicing Standard, the special servicer must give prompt
written notice of its determination to the bond trustee and the master servicer.
For a limited period, either the special servicer or the master servicer, in
that order of priority, may at its option purchase the defaulted mortgage loan
at a cash generally equal to the outstanding principal balance of, all accrued
and unpaid interest on and all unreimbursed servicing advances with respect to,
the subject mortgage loan. Each of the master servicer and the special servicer
may designate an affiliate to complete the purchase.
The special servicer may offer to sell any defaulted mortgage loan not
otherwise purchased as described in the preceding paragraph, if and when the
special servicer determines, consistent with the Servicing Standard, that a sale
would be in the best economic interests of the bondholders (as a collective
whole). Any offer must be made in a commercially reasonable manner for a period
of not less than days. Subject to the discussion in the next paragraph,
the special servicer will be required to accept the
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highest cash bid received from any person that is a "fair price", determined in
accordance with the servicing and administration agreement, for the mortgage
loan.
The special servicer will not be obligated to accept the highest cash bid if
the special servicer determines, in accordance with the Servicing Standard, that
rejection of the highest cash bid would be in the best interests of the
bondholders, as a collective whole. Furthermore, the special servicer may accept
a lower cash bid from any person or entity other than itself or an affiliate if
it determines, in accordance with the Servicing Standard, that acceptance of the
bid would be in the best interests of the bondholders, as a collective whole.
For example, the prospective buyer making the lower bid may be more likely to
perform its obligations or the terms, other than the price, offered by the
prospective buyer making the lower bid may be more favorable.
Neither the bond trustee, in its individual capacity, nor any of its
affiliates may bid for or purchase any defaulted mortgage loan or any REO
property.
In connection with the sale of any defaulted mortgage loan, the special
servicer may charge prospective bidders, and retain, fees that approximate the
special servicer's actual costs in the preparation and delivery of information
pertaining to the sales or evaluating bids without obligation to deposit the
amounts into its collection account.
If a default on a mortgage loan has occurred or, in the special servicer's
judgment, a payment default is imminent, then the special servicer may, on
behalf of the bondholders and the issuer, take any of the following actions:
- institute foreclosure proceedings;
- exercise any power of sale contained in the related mortgage;
- obtain a deed in lieu of foreclosure; or
- otherwise acquire title to the related underlying real property, by
operation of law or otherwise.
The special servicer may not, however, acquire title to any underlying real
property, have a receiver of rents appointed with respect to any underlying real
property or take any other action with respect to any underlying real property
that would cause the bond trustee, for the benefit of the bondholders and the
issuer, or any other specified person to be considered to hold title to, to be a
"mortgagee-in-possession" of, or to be an "owner" or an "operator" of the
particular real property within the meaning of certain federal environmental
laws, unless--
- the special servicer has previously received a report prepared by a person
who regularly conducts environmental audits, which report will be an
expense of the trust, and
- either:
(a) the report indicates that (i) the particular real property is in
compliance with applicable environmental laws and regulations and
(ii) there are no circumstances or conditions present at the real
property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or remediation
could be required under any applicable environmental laws and
regulations; or
(b) the special servicer, based solely as to environmental matters and
related costs on the information set forth in the report, determines
that taking the actions necessary to bring the particular real property
into compliance with applicable environmental laws and regulations
and/or taking the actions contemplated by clause (a)(ii) above, is
reasonably likely to produce a greater recovery, taking into account the
time value of money, than not taking those actions.
If the trust estate acquires title to any underlying real property, the
special servicer, on behalf of the bondholders and the issuer, has to sell the
particular real property prior to the close of the third taxable
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year following the taxable year in which that acquisition occurred, subject to
limited exceptions as described under "--REO Properties" below.
If liquidation proceeds collected with respect to a defaulted mortgage loan
are less than the outstanding principal balance of the defaulted mortgage loan,
together with accrued interest on and reimbursable expenses incurred by the
special servicer and/or the master servicer in connection with the defaulted
mortgage loan, then the trust estate will realize a loss in the amount of the
shortfall. The special servicer and/or the master servicer will be entitled to
reimbursement out of the liquidation proceeds recovered on any defaulted
mortgage loan, prior to the payment of the liquidation proceeds to the
bondholders, for any and all amounts that represent unpaid servicing
compensation in respect of the mortgage loan, unreimbursed servicing expenses
incurred with respect to the mortgage loan and any unreimbursed advances,
including interest thereon, of delinquent payments made with respect to the
mortgage loan. In addition, amounts otherwise payable on the bonds may be
further reduced by interest payable to the master servicer and/or special
servicer on the servicing expenses and advances.
If any underlying real property suffers sufficient damage that the proceeds,
if any, of the related hazard insurance policy are insufficient to restore fully
the damaged property, neither the special servicer nor the master servicer will
be required to expend its own funds to complete the restoration unless it
determines that--
- the restoration would be in accordance with the Servicing Standard; and
- the expenses will be recoverable by it from related insurance proceeds,
condemnation proceeds and/or liquidation proceeds.
REO PROPERTIES
If title to any underlying real property is acquired by the special servicer
on behalf of the trust estate, the special servicer will be required to sell
that property not later than the end of the third calendar year following the
year of acquisition, unless--
- the IRS grants an extension of time to sell the property, or
- the special servicer obtains an opinion of independent counsel generally
to the effect that the holding of the property subsequent to the end of
the third calendar year following the year in which the acquisition
occurred will not result in the imposition of a tax on the trust estate or
cause any of REMIC I, REMIC II or REMIC III to fail to qualify as a REMIC
under the Internal Revenue Code of 1986.
Subject to the foregoing, the special servicer will generally be required to
solicit cash offers for any REO property in a manner that will be reasonably
likely to realize a fair price for the property. The special servicer may retain
an independent contractor to operate and manage any REO property. The retention
of an independent contractor will not relieve the special servicer of its
obligations with respect to the REO property. Regardless of whether the special
servicer applies for or is granted an extension of time to sell the property,
the special servicer shall act in accordance with the Servicing Standard to
liquidate an REO property on a timely basis. If an extension is granted or
opinion given, the special servicer must sell the REO property within the period
specified in the extension or opinion.
In general, the special servicer or an independent contractor employed by
the special servicer at the expense of the trust estate will be obligated to
operate and manage any underlying real property acquired as REO property in a
manner that:
(i) maintains its status as "foreclosure property" under the REMIC
provisions of the Internal Revenue Code of 1986, and
(ii) is in accordance with the Servicing Standard.
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The special servicer must review the operation of each REO property and
consult with the bond trustee, or any person appointed by the bond trustee to
act as tax administrator, to determine the trust estate's federal income tax
reporting position with respect to the income it is anticipated that the trust
estate would derive from the property. The special servicer could determine that
it would not be consistent with the Servicing Standard to manage and operate the
property in a manner that would avoid the imposition of a tax on "net income
from foreclosure property", within the meaning of Section 857(b)(4)(B) of the
Internal Revenue Code of 1986, or a tax on "prohibited transactions" under
Section 860F of the Internal Revenue Code of 1986. This determination is most
likely to occur in the case of an REO property that is a hotel or residential
health care facility. To the extent that income the trust estate receives from
an REO property is subject to--
- a tax on "net income from foreclosure property", that income would be
subject to federal tax at the highest marginal corporate tax rate, which
is currently 35%,
- a tax on "prohibited transactions", that income would be subject to
federal tax at a 100% rate.
The determination as to whether income from an REO property would be subject
to a tax will depend on the specific facts and circumstances relating to the
management and operation of each REO property. Generally, income from an REO
property that is directly operated by the special servicer would be apportioned
and classified as "service" or "non-service" income. The "service" portion of
the income could be subject to federal tax either at the highest marginal
corporate tax rate or at the 100% rate. The "non-service" portion of the income
could be subject to federal tax at the highest marginal corporate tax rate or,
although it appears unlikely, at the 100% rate. Any tax imposed on the trust
estate's income from an REO property would reduce the amount available for
payment to the bondholders. See "Federal Income Tax Consequences" in this
prospectus supplement and in the accompanying prospectus. The reasonable
"out-of-pocket" costs and expenses of obtaining professional tax advice in
connection with the foregoing will be payable out of the master servicer's
custodial account.
The special servicer will be required to segregate and hold all funds
collected and received in connection with any REO property separate and apart
from its own funds and general assets. If an REO property is acquired, the
special servicer will be required to establish and maintain an account for the
retention of revenues and other proceeds derived from the REO property. That
"REO account" must be maintained in a manner and with a depository institution
that satisfies rating agency standards for securitizations similar to the one
involving the bonds. The special servicer will be required to deposit, or cause
to be deposited, in its REO account, upon receipt, all net income, insurance
proceeds, condemnation proceeds and liquidation proceeds received with respect
to an REO property. The funds held in this REO account may be held as cash or
invested in Permitted Investments. Any interest or other income earned on funds
in the special servicer's REO account will be payable to the special servicer,
subject to the limitations described in the servicing and administration
agreement.
The special servicer will be required to withdraw from its REO account funds
necessary for the proper operation, management, leasing, maintenance and
disposition of any REO property, but only to the extent of amounts on deposit in
the account relating to that particular REO property. Promptly following the end
of each collection period, the special servicer will be required to withdraw
from the REO account and deposit, or deliver to the master servicer for deposit,
into the master servicer's custodial account the total of all amounts received
in respect of each REO property during that collection period, net of (i) any
withdrawals made out of those amounts as described in the preceding sentence and
(ii) any portion of those amounts that may be retained as reserves as described
in the next sentence. The special servicer may, subject to certain limitations
described in the servicing and administration agreement, retain in its REO
account the portion of the proceeds and collections as may be necessary to
maintain a reserve of sufficient funds for the proper operation, management,
leasing, maintenance and disposition of the related REO property, including the
creation of a reasonable reserve for repairs, replacements, necessary capital
improvements and other related expenses.
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The special servicer shall keep and maintain separate records, on a
property-by-property basis, for the purpose of accounting for all deposits to,
and withdrawals from, its REO account.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The special servicer will be required, at the expense of the trust estate,
to inspect or cause an inspection of the related underlying real property as
soon as practicable after any mortgage loan becomes a specially serviced
mortgage loan. The master servicer also will be required, at its own expense, to
inspect or cause an inspection of each underlying real property at least once
per (or, in the case of each mortgage loan with an unpaid principal
balance of under $ , once every years), if the special servicer
has not already undertaken an inspection in that period as described in the
preceding sentence. The master servicer and the special servicer will each be
required to prepare or cause to be prepared a written report of each inspection
performed by it that generally describes the condition of the particular real
property and that specifies--
- any sale, transfer or abandonment of the property of which the master
servicer or the special servicer, as applicable, is aware, or
- any change in the property's condition, occupancy or value that the master
servicer or the special servicer, as applicable, in accordance with the
Servicing Standard, considers to be material.
The special servicer, in the case of each specially serviced mortgage loan,
and the master servicer, in the case of each performing mortgage loan, will each
be required to use reasonable efforts to collect from the related borrower and
review the following items, to the extent that those items are required to be
delivered pursuant to the related loan documents:
(i) the quarterly and annual operating statements, budgets and rent rolls of
the underlying real property; and
(ii) the quarterly and annual financial statements of the borrower.
The special servicer will also be required to cause quarterly and annual
operating statements, budgets and rent rolls to be prepared for each REO
property. However, there can be no assurance that any operating statements
required to be delivered by a borrower will in fact be delivered, nor is the
master servicer or the special servicer likely to have any practical means of
compelling delivery.
EVIDENCE AS TO COMPLIANCE
On or before of each year, beginning , each of the
master servicer and the special servicer must--
- at its expense, cause a firm of independent public accountants, that is a
member of the American Institute of Certified Public Accountants to
furnish a statement to the bond trustee, among others, to the effect that
the firm has examined the servicing operations of the master servicer or
the special servicer, as the case may be, for the previous year and, on
the basis of that examination, conducted substantially in compliance with
the Uniform Single Attestation Program for Mortgage Bankers established by
the Mortgage Bankers of America ("USAP"), the firm confirms that the
master servicer or the special servicer, as applicable, has complied with
the minimum servicing standards identified in USAP, in all material
respects, except for the significant exceptions or errors in records that,
in the opinion of the firm, USAP requires it to report. In rendering its
report the firm may rely, as to matters relating to the direct servicing
of commercial and multifamily mortgage loans by sub-servicers, upon
comparable reports of firms of independent certified public accountants
rendered on the basis of examinations conducted in accordance with the
same standards, within one year of the report, with respect to those
sub-servicers.
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- deliver to the bond trustee, among others, a statement signed by an
officer of the master servicer or the special servicer, as the case may
be, to the effect that, to the best knowledge of that officer, the master
servicer or special servicer, as the case may be, has fulfilled its
obligations under the servicing and administration agreement in all
material respects throughout the preceding calendar year or portion
thereof during which the series " " bonds were outstanding.
SERVICING EVENTS OF DEFAULT
Each of the following events, circumstances and conditions will be
considered "events of default" under the servicing and administration agreement:
- the master servicer or the special servicer fails to deposit, or to remit
to the appropriate party for deposit, into the master servicer's custodial
account or the special servicer's REO account, as applicable, any amount
required to be so deposited, and that failure continues unremedied for
business days following the date on which the deposit or remittance
was required to be made;
- the master servicer fails to remit to the bond trustee for deposit in the
bond trustee's payment account any amount required to be so remitted, and
that failure continues unremedied for business days following the
date on which the remittance was required to be made;
- the master servicer or the special servicer fails to timely make any
servicing advance required to be made by it under the servicing and
administration agreement, and that failure continues unremedied for
business days following the date on which notice has been given to
the master servicer or the special servicer, as the case may be, by the
bond trustee;
- the master servicer or the special servicer fails to observe or perform in
any material respect any of its other covenants or agreements under the
servicing and administration agreement, and that failure continues
unremedied for days after written notice of it has been given to the
master servicer or the special servicer, as the case may be, by any other
party to the servicing and administration agreement or by series " "
bondholders entitled to not less than % of the voting rights for the
series;
- it is determined that there is a breach by the master servicer or the
special servicer of any of its representations or warranties contained in
the servicing and administration agreement that materially and adversely
affects the interests of any class of series " " bondholders, and
that breach continues unremedied for days after written notice of it
has been given to the master servicer or the special servicer, as the case
may be, by any other party to the servicing and administration agreement
or by the series " " bondholders entitled to not less than % of
the voting rights for the series;
- a decree or order of a court having jurisdiction in an involuntary case
for the appointment of a receiver, liquidator, bond trustee or similar
official in any bankruptcy, insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings is entered against the
master servicer or the special servicer and the decree or order remains in
force for a period of days;
- the master servicer or special servicer consents to the appointment of a
receiver, liquidator, bond trustee or similar official relating to it or
of or relating to all or substantially all of its property;
- the master servicer or special servicer admits in writing its inability to
pay its debts or take certain other actions indicating its insolvency or
inability to pay its obligations;
- one or more ratings assigned by either or to the
series " " bonds are qualified, downgraded or withdrawn as a result
of the master servicer or special servicer acting in that capacity; and
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- the bond trustee receives written notice from either or
that the continuation of the master servicer or the special
servicer, as the case may be, in that capacity would result in a
qualification, downgrade or withdrawal of any rating then assigned by that
rating agency to any class of the series " " bonds.
When a single entity acts as master servicer and special servicer, an event
of default in one capacity will be an event of default in the other capacity.
RIGHTS UPON EVENT OF DEFAULT
If an event of default described above under "--Events of Default" occurs
with respect to the master servicer or the special servicer and remains
unremedied, the bond trustee will be authorized, and at the direction of series
" " bondholders entitled to % of the voting rights for the series,
the trustee will be required, to terminate all of the rights and obligations of
the defaulting party under the servicing and administration agreement and in and
to the trust estate other than any rights the defaulting party may have as a
bondholder. Upon any termination, the bond trustee must either:
- succeed to all of the responsibilities, duties and liabilities of the
master servicer or special servicer, as the case may be, under the
servicing and administration agreement; or
- appoint an established mortgage loan servicing institution to act as
successor master servicer or special servicer, as the case may be.
Series " " bondholders entitled to % of the voting rights for the
series may require the bond trustee to appoint an established mortgage loan
servicing institution to act as successor master servicer or special servicer,
as the case may be, rather than have the bond trustee act as that successor.
In general, the series " " bondholders entitled to at least % of
the voting rights allocated to each class of bonds affected by any event of
default may waive the event of default. However, certain of the events of
default described under "--Events of Default" above may only be waived by all of
the series " " bondholders. Upon any waiver of an event of default, the
event of default will cease to exist and will be deemed to have been remedied
for every purpose under the servicing and administration agreement.
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DESCRIPTION OF THE OFFERED BONDS
GENERAL
The bonds will be issued, on or about , pursuant to the
indenture. They will be secured, nonrecourse obligations of the issuer and will
be payable solely out of the mortgage collateral and the other assets of the
trust estate. The trust estate will include:
- the mortgage loans;
- any and all payments under and proceeds of the mortgage loans received
after the cut-off date, exclusive of payments of principal, interest and
other amounts due on or before that date;
- the loan documents for the mortgage loans;
- any REO properties acquired in respect of defaulted mortgage loans;
- those funds or assets as from time to time are deposited in the master
servicer's custodial account, the special servicer's REO account, the bond
trustee's collection account (see "--Collection Account" below) or the
bond trustee's interest reserve account (see "--Payments--Interest Reserve
Account" below); and
- various rights incidental to the representations and warranties made by us
as described under "Description of the Mortgage
Collateral--Representations and Warranties" and "--Cures and Repurchases"
in this prospectus supplement.
The bonds will include the following classes:
- the "A-1", "A-2", "B", "C", "D", "E", "F" and "X" classes, which are the
classes of bonds that are offered by this prospectus supplement, and
- the "G", "H", "J", "K", "L", "M", "N", "R-I", "R-II" and "R-III" classes,
which are the classes of bonds that--
(i) will be retained or privately placed by us, and
(ii) are not offered by this prospectus supplement.
The tables below set forth the approximate initial aggregate principal
balance or notional amount and the interest rate for each class of series
" " bonds.
OFFERED BONDS
<TABLE>
<CAPTION>
INITIAL % OF THE
AGGREGATE PRINCIPAL INITIAL MORTGAGE APPROXIMATE
BALANCE OR COLLATERAL INITIAL
CLASS DESIGNATION NOTIONAL AMOUNT(1) BALANCE CREDIT SUPPORT(2) INTEREST RATE
- ----------------- ------------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
Class A-1........................ $ % % %
Class A-2........................ $ % % %
Class B.......................... $ % % %
Class C.......................... $ % % %
Class D.......................... $ % % %
Class E.......................... $ % % %
Class F.......................... $ % % %
Class X.......................... $(3) N/A N/A %(4)
</TABLE>
- ------------------------
(1) The actual initial aggregate principal balance or notional amount of any
class of offered bonds at the date of issuance may be larger or smaller than
the amount shown above, depending on the actual size
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of the initial mortgage collateral balance. The actual size of the initial
mortgage collateral balance may be as much as % larger or smaller than
the amount presented in this prospectus supplement.
(2) Represents the initial aggregate principal balance, expressed as a
percentage of the initial mortgage collateral balance, of all classes of
series " " bonds that are subordinate to the indicated class.
(3) Notional amount. The class "X" bonds will not have a principal balance.
(4) The interest rate shown above for the class " " bonds is the
approximate rate applicable for the payment date in . The
interest rate for the class " " bonds is variable and will be
calculated pursuant to a formula described under "--Payments--Calculations
of Interest Rates" below.
PRIVATE BONDS(1)
<TABLE>
<CAPTION>
INITIAL % OF THE
AGGREGATE PRINCIPAL INITIAL MORTGAGE
CLASS DESIGNATION BALANCE(2) COLLATERAL BALANCE INTEREST RATE
- ----------------- ------------------- ------------------ -------------
<S> <C> <C> <C>
Class G....................................... $ % %
Class H....................................... $ % %
Class J....................................... $ % %
Class K....................................... $ % %
Class L....................................... $ % %
Class M....................................... $ % %
Class N....................................... $ % %
</TABLE>
- ------------------------
(1) The private bonds will also include the class "R-I", class "R-II" and class
"R-III" bonds. However, the class "R-I", class "R-II" and class "R-III"
bonds do not have principal balances, notional amounts or interest rates.
(2) The actual initial aggregate principal balance of any class of private bonds
at the date of issuance may be larger or smaller than the amount shown
above, depending on the actual size of the initial mortgage collateral
balance. The actual size of the initial mortgage collateral balance may be
as much as % larger or smaller than the amount presented in this
prospectus supplement.
The class "A-1", "A-2", "B", "C", "D", "E", "F", "G", "H", "J", "K", "L",
"M" and "N" bonds are the only bonds that will have principal balances. We refer
to these bonds as the "principal balance bonds". The principal balance of any of
these bonds will represent the total payments of principal to which the holder
of the certificate is entitled over time out of payments, or advances in lieu
thereof, and other collections on the mortgage collateral and other assets of
the trust estate. Accordingly, on each payment date, the principal balance of
each of these bonds will be permanently reduced by any payments of principal
actually made with respect to the bond on that payment date. See "--Payments"
below. On any particular payment date, the principal balance of each of these
bonds may also be permanently reduced, without any corresponding payment, in
connection with losses on the mortgage collateral and default-related and
otherwise unanticipated trust estate expenses. See "--Reductions in Certificate
Principal Balances in Connection with Realized Losses and Additional Mortgage
Collateral Expenses" below.
The class "X" bonds will not have principal balances, and the holders of the
class "X" bonds will not be entitled to receive payments of principal. However,
each class "X" bond will have a notional amount for purposes of calculating the
accrual of interest with respect to that bond. The aggregate notional amount of
all the class "X" bonds will equal the aggregate principal balance of all the
principal balance bonds outstanding from time to time.
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In general, principal balances and notional amounts will be reported on a
class-by-class basis. In order to determine the principal balance or notional
amount of any of your bonds from time to time, you may multiply the original
principal balance or notional amount of that bond as of the date of initial
issuance of the bonds, as specified on the face of that bond, by the
then-applicable bond factor for the relevant class. The "bond factor" for any
class of offered bonds, as of any date of determination, will equal a fraction,
expressed as a percentage, the numerator of which will be the then outstanding
aggregate principal balance or notional amount, as applicable, of that class,
and the denominator of which will be the original aggregate principal balance or
notional amount, as applicable, of that class. Bond factors will be reported
monthly in the bond trustee's payment date statement.
REGISTRATION AND DENOMINATIONS
GENERAL. The offered bonds will be issued in book-entry form in original
denominations of:
- in the case of the class "X" bonds, $ initial notional amount and in
any whole dollar denomination in excess of $ ; and
- in the case of the other offered bonds, $ initial principal balance
and in any whole dollar denomination in excess of $ .
Each class of offered bonds will initially be represented by one or more
bonds registered in the name of Cede & Co., as nominee of The Depository Trust
Company. You will not be entitled to receive an offered bond issued in fully
registered, certificated form, except under the limited circumstances described
in the accompanying prospectus under "Description of the Bonds--Book-Entry
Registration". For so long as any class of offered bonds is held in book-entry
form--
- all references to actions by holders of those bonds will refer to actions
taken by DTC upon instructions received from beneficial owners of those
bonds through its participating organizations, and
- all references in this prospectus supplement to payments, notices,
reports, statements and other information to holders of those bonds will
refer to payments, notices, reports and statements to DTC or Cede & Co.,
as the registered holder of those bonds, for payment to beneficial owners
of offered bonds through its participating organizations in accordance
with DTC's procedures.
The bond trustee will initially serve as registrar for purposes of providing
for the registration of the offered bonds and, if and to the extent physical
securities are issued to the actual beneficial owners of any of the offered
bonds, the registration of transfers and exchanges of those bonds.
For a discussion of DTC, see "Description of the Bonds--Book-Entry
Registration" in the accompanying prospectus.
COLLECTION ACCOUNT
GENERAL. The bond trustee must establish and maintain an account in which
it will hold funds pending their payment on the bonds and from which it will
make those payments. That "collection account" must be maintained in a manner
and with a depository institution that satisfies rating agency standards for
securitizations similar to the one involving the bonds. Funds held in the bond
trustee's collection account will remain uninvested.
DEPOSITS. On the business day prior to each payment date, the master
servicer will be required to remit to the bond trustee for deposit in the
collection account the following funds:
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- All payments and other collections on the mortgage loans and any REO
properties that are then on deposit in the master servicer's custodial
account, exclusive of any portion of those payments and other collections
that represents one or more of the following:
(a) monthly debt service payments due on a due date subsequent to the end
of the related collection period;
(b) payments and other collections received after the end of the related
collection period;
(c) amounts that are payable or reimbursable from the master servicer's
custodial account to any person other than the bondholders,
including--
(i) amounts payable to the master servicer or the special servicer
as compensation, including master servicing fees, special
servicing fees, workout fees, liquidation fees, assumption fees,
modification fees and, to the extent not otherwise applied to
cover interest on advances, Default Interest and late payment
charges,
(ii) amounts payable in reimbursement of outstanding advances,
together with interest thereon, and
(iii) amounts payable in respect of other expenses of the trust
estate; and
(d) amounts deposited in the master servicer's custodial account in
error.
- Any advances of delinquent monthly debt service payments and Compensating
Interest Payments made with respect to that payment date.
See "--Advances of Delinquent Monthly Debt Service Payments" below and
"Servicing of the Mortgage Loans--Custodial Account" and "Servicing and Other
Compensation and Payment of Expenses" in this prospectus supplement.
With respect to each payment date that occurs during March, commencing in
March , the bond trustee will be required to transfer from its interest
reserve account, which we describe under "--Interest Reserve Account" below, to
its collection account the interest reserve amounts that are then being held in
that interest reserve account with respect to those mortgage loans that accrue
interest on an actual/360 basis.
WITHDRAWALS. The bond trustee may from time to time make withdrawals from
its collection account for any of the following purposes:
- to pay itself a monthly fee which is described under "--The Bond Trustee"
below;
- to indemnify itself and certain related persons as described under
"Description of the Governing Documents--General--The Bond Trustee" in the
accompanying prospectus;
- to pay for any opinions of counsel required to be obtained in connection
with any amendments to the governing documents;
- to pay any federal, state and local taxes imposed on the trust estate, the
mortgage collateral or other assets included in the trust estate, and/or
transactions involving the trust estate, together with all incidental
costs and expenses, that are required to be borne by the trust estate as
described under "Federal Income Tax Consequences--REMICs--Prohibited
Transactions Tax and Other Taxes" in the accompanying prospectus and
"Servicing of the Mortgage Loans--REO Properties" in this prospectus
supplement;
- with respect to each payment date during February of any year or during
January of any year that is not a leap year, commencing in , to
transfer to the bond trustee's interest reserve account the interest
reserve amounts required to be so transferred in that month with respect
to those mortgage loans that accrue interest on an actual/360 basis; and
- to pay to the person entitled thereto any amounts deposited in the
collection account in error.
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<PAGE>
On each payment date, all amounts on deposit in the bond trustee's
collection account, exclusive of any portion of those amounts that are to be
withdrawn for the purposes contemplated in the foregoing paragraph, will be
withdrawn and applied to make payments on the bonds. We refer to those funds
that are available to make payments on the bonds on any payment date as the
"Available Funds" for that date. The Available Funds for any payment date will
reflect the deposits to be made to the bond trustee's collection account in
connection with that payment date as described under "--Collection
Account--Deposits" above.
The Available Funds for any payment date will consist of two separate
components--
- the portion of those funds that represent prepayment consideration
collected on the mortgage loans as a result of voluntary or involuntary
prepayments that occurred during the related collection period, which will
be paid to the holders of the offered bonds as described under
"--Payments--Payments of Prepayment Premiums and Yield Maintenance
Charges" below, and
- the remaining portion of those funds, which we refer to as the "Available
P&I Funds" and which will be paid to the holders of all the bonds, other
than the class "E" bonds, as described under "--Payments--Priority of
Payments" below.
INTEREST RESERVE ACCOUNT
The bond trustee must maintain an account in which it will hold certain
"interest reserve amounts" described below with respect to those mortgage loans
that accrue interest on an actual/360 basis. That "interest reserve account"
must be maintained in a manner and with a depository that satisfies rating
agency standards for similar securitizations as the one involving the bonds.
Funds held in the bond trustee's interest reserve account will remain
uninvested.
During January, except in a leap year, and February of each calendar year,
beginning in , the bond trustee will, on or before the payment date in
that month, withdraw from its collection account and deposit in its interest
reserve account the interest reserve amount with respect to each mortgage loan
that accrues interest on an actual/360 basis and for which the monthly debt
service payment due in that month was either received or advanced. That
"interest reserve amount" for each such mortgage loan will equal one day's
interest accrued at the related mortgage interest rate on the unpaid principal
balance of that loan as of the end of the related collection period, net of all
unreimbursed advances of principal then outstanding with respect to that loan.
During March of each calendar year, beginning in , the bond trustee
will, on or before the payment date in that month, withdraw from its interest
reserve account and deposit in its collection account any and all interest
reserve amounts then on deposit in the interest reserve account with respect to
those mortgage loans that accrue interest on an actual/360 basis. All interest
reserve amounts that are so transferred from the interest reserve account to the
collection account will be included in the Available P&I Funds for the payment
date during the month of transfer.
PAYMENTS
GENERAL. On each payment date, the bond trustee will, subject to the
Available Funds, make all payments required to be made on the series " "
bonds on that date to the holders of record as of the close of business on the
last business day of the calendar month preceding the month in which those
payments are to occur. The final payment of principal and/or interest on any
offered bond, however, will be made only upon presentation and surrender of that
bond at the location to be specified in a notice of the pendency of that final
payment.
In order for a series " " bondholder to receive payments by wire
transfer on and after any particular payment date, that bondholder must provide
the bond trustee with written wiring instructions no
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<PAGE>
later than the last day of the calendar month preceding the month in which that
payment date occurs. Otherwise, that bondholder will receive its payments by
check mailed to it.
Cede & Co. will be the registered holder of your bonds, and you will receive
payments on your bonds through DTC and its participating organizations, until
physical securities are issued to the actual beneficial owners. See
"--Registration and Denominations" above.
PAYMENTS OF INTEREST. All of the classes of the series " " bonds will
bear interest, except for the "R-I", "R-II" and "R-III" classes.
With respect to each class of interest-bearing bonds, that interest will
accrue during each interest accrual period based upon--
- the interest rate for that class and the related payment date,
- the aggregate principal balance or notional amount, as the case may be, of
that class outstanding immediately prior to the related payment date, and
- the assumption that each year consists of twelve 30-day months.
On each payment date, subject to the Available P&I Funds for that date and
the priorities of payment described under "--Payments--Priority of Payments"
below, the holders of each class of interest-bearing bonds will be entitled to
receive--
- the total amount of interest accrued during the related interest accrual
period with respect to that class of bonds, reduced by
- the portion of any Net Aggregate Prepayment Interest Shortfall for that
payment date that is allocable to that class of bonds.
If the holders of any class of interest-bearing bonds do not receive all of
the interest to which they are entitled on any payment date, then they will
continue to be entitled to receive the unpaid portion of that interest on future
payment dates, subject to the Available P&I Funds for those future payment dates
and the priorities of payment described under "--Payments--Priority of Payments"
below.
The portion of any Net Aggregate Prepayment Interest Shortfall for any
payment date that is allocable to any particular class of interest-bearing bonds
will equal the product of--
- the total amount of interest accrued during the related interest accrual
period with respect to that class of bonds, multiplied by
- a fraction, the numerator of which is the total amount of interest accrued
during the related interest accrual period with respect to that class of
bonds, and the denominator of which is the total amount of interest
accrued during the related interest accrual period with respect to all of
the interest-bearing classes.
CALCULATION OF INTEREST RATES.
GENERAL. The interest rates each class of principal balance bonds will be
[fixed] at the rate per annum set forth with respect to each such class in the
tables on pages S- and S- .
The interest rate applicable to the class "X" bonds for each payment date
will equal the excess, if any, of--
- the Weighted Average Mortgage Collateral Pass-Through Rate for that
payment date, over
- the weighted average of the interest rates for each of the respective
classes of the principal balance bonds for that payment date, weighted on
the basis of the relative aggregate principal balances of those classes of
principal balance bonds outstanding immediately prior to that payment
date.
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<PAGE>
The class "R-I", "R-II" and "R-III" bonds will not be interest-bearing and,
therefore, will not have interest rates.
WEIGHTED AVERAGE MORTGAGE COLLATERAL PASS-THROUGH RATE. The "Weighted
Average Mortgage Collateral Pass-Through Rate" for each payment date will equal
the weighted average of the following annual rates with respect to all of the
mortgage loans, weighted on the basis of the mortgage loans' respective stated
principal balances immediately prior to that payment date:
- in the case of each mortgage loan that accrues interest on a 30/360 basis,
an annual rate equal to--
(a) the mortgage interest rate in effect for that mortgage loan as of
, minus
(b) the sum of (i) the related master servicing fee rate and (ii) %
per annum; and
- in the case of each mortgage loan that accrues interest on an actual/360
basis, an annual rate generally equal to--
(x) a fraction, expressed as a percentage, the numerator of which is,
subject to adjustment as described below, the product of (i) 12,
multiplied by (ii) the amount of interest that accrued or would have
accrued with respect to that mortgage loan on an actual/360 basis during
the related interest accrual period, based on its stated principal
balance immediately preceding that payment date and its mortgage
interest rate in effect as of , and the denominator of which
is the stated principal balance of the mortgage loan immediately prior
to that payment date, minus
(y) the sum of (i) the related master servicing fee rate and (ii) %
per annum.
Notwithstanding the foregoing, if the subject payment date occurs during
January (except during a leap year) or February, then, in the case of any
particular mortgage loan that accrues interest on an actual/360 basis, the
amount of interest referred to in subclause (ii) of the numerator of the
fraction described in clause (x) of the second bullet point above will be
decreased by any interest reserve amount with respect to that mortgage loan that
is transferred from the bond trustee's collection account to the bond trustee's
interest reserve account during that month. Furthermore, if the subject payment
date occurs during March, then, in the case of any particular mortgage loan that
accrues interest on an actual/360 basis, the amount of interest referred to in
subclause (ii) of the numerator of the fraction described in clause (x) of the
second bullet point above will be increased by any interest reserve amounts with
respect to that mortgage loan that are transferred from the bond trustee's
interest reserve account to the bond trustee's collection account during that
month.
The calculation of the Weighted Average Mortgage Collateral Pass-Through
Rate will be unaffected by any change in the mortgage interest rate for any
mortgage loan, including in connection with any bankruptcy or insolvency of the
related borrower or any modification of that mortgage loan agreed to by the
master servicer or the special servicer.
Stated Principal Balance. The "stated principal balance" of each mortgage
loan:
- will initially equal its outstanding principal balance as of ;
and
- will be permanently reduced on each subsequent payment date, to not less
than zero, by--
(i) that portion, if any, of the Total Principal Payment Amount for that
payment date that is attributable to that mortgage loan (see
"--Payments--Payments of Principal" below), and
(ii) the principal portion of any Realized Loss incurred in respect of that
mortgage loan during the related collection period (see "--Reductions to
Certificate Principal Balances in Connection with Realized Losses and
Additional Trust Estate Expenses" below).
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<PAGE>
However, the stated principal balance of a mortgage loan will, in all cases,
be zero as of the payment date following the collection period in which it is
determined that all amounts ultimately collectible with respect to the mortgage
loan or any related REO property have been received.
PAYMENTS OF PRINCIPAL. Subject to the Available P&I Funds and the priority
of payments described under "--Payments--Priority of Payments" below, the total
amount of principal payable with respect to each class of the principal balance
bonds on each payment date will equal that class' allocable share of the Total
Principal Payment Amount for that payment date.
The "Total Principal Payment Amount" for any payment date will, in general,
equal the total, without duplication, of the following:
- all payments of principal (other than voluntary principal prepayments)
received on the mortgage loans during the related collection period,
exclusive of any of those payments that represents a late collection of
principal for which an advance was previously made for a prior payment
date or that represents a monthly payment of principal due on or before
or on a due date subsequent to the end of the related
collection period;
- all monthly payments of principal received on the mortgage loans prior to,
but that are due during, the related collection period;
- all voluntary principal prepayments received on the mortgage loans during
the related collection period;
- all other collections, including liquidation proceeds, condemnation
proceeds, insurance proceeds and repurchase proceeds, that were received
on or in respect of any of the mortgage loans during the related
collection period and that were identified and applied by the master
servicer as recoveries of principal thereof, in each case net of any
portion of the particular collection that represents a late collection of
principal due on or before or for which an advance of
principal was previously made for a prior payment date; and
- all advances of principal made in respect of the mortgage loans for that
payment date.
In general, the aggregate portion of the Total Principal Payment Amount that
will be allocated to the class "A-1" and "A-2" bonds on each payment date will
equal:
- in the case of the class "A-1" bonds, the lesser of (i) the entire Total
Principal Payment Amount for that payment date and (ii) the aggregate
principal balance of the class "A-1" bonds immediately prior to that
payment date; and
- in the case of the class "A-2" bonds, the lesser of (i) the entire Total
Principal Payment Amount for that payment date, reduced by any portion
thereof allocable to the class "A-1" bonds as described in the preceding
bullet point, and (ii) the aggregate principal balance of the class "A-2"
bonds immediately prior to that payment date.
However, if both of those classes are outstanding as of the occurrence of
any Class A Principal Payment Cross-Over Date, then the Total Principal Payment
Amount for each payment date on and after that Class A Principal Payment
Cross-Over Date will be allocable between those two classes on a PRO RATA basis
in accordance with their respective aggregate principal balances immediately
prior to that payment date, in each case up to that aggregate principal balance.
The "Class A Principal Payment Cross-Over Date" will be the first payment date,
if any, as of which the aggregate principal balance of the class "A-1" and "A-2"
bonds outstanding immediately prior to that payment date, equals or exceeds the
sum of:
(a) the aggregate stated principal balance of the mortgage loans that will
be outstanding immediately following that payment date, plus
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<PAGE>
(b) the lesser of--
(i) the Total Principal Payment Amount for that payment date, and
(ii) the portion of the Available P&I Funds for that payment date that will
remain after all required payments of interest on the class "X", "A-1"
and "A-2" bonds have been made on that payment date.
While the class "A-1" and "A-2" bonds are outstanding, no portion of the
Total Principal Payment Amount for any payment date will be allocated to any
other class of principal balance bonds. Following the retirement of the class
"A-1" and "A-2" bonds, the Total Principal Payment Amount for each payment date
will be allocated to the remaining classes of the principal balance bonds in the
order of priority set forth below, in each such case up to the lesser of
(i) the portion of that Total Principal Payment Amount that remains unallocated
and (ii) the principal balance of the particular class immediately prior to that
payment date. In general, this means that, following the retirement of the class
"A-1" and "A-2" bonds, the holders of the outstanding class of principal balance
bonds that is ranked the highest in the following table will be entitled to
receive payments of principal in an amount equal to the entire Total Principal
Payment Amount for each payment date until the aggregate principal balance of
that class is reduced to zero. In no event will the holders of any class of
principal balance bonds listed in the following table be entitled to receive any
payments of principal until the aggregate principal balance of the class "A-1"
and "A-2" bonds is reduced to zero. Furthermore, in no event will the holders of
any class of principal balance bonds listed in the following table be entitled
to receive any payments of principal until the aggregate principal balance of
all other classes, if any, of principal balance bonds listed above it in the
following table is reduced to zero.
<TABLE>
<CAPTION>
ORDER OF ALLOCATION CLASS
- ------------------- --------
<S> <C>
1....................................................... B
2....................................................... C
3....................................................... D
4....................................................... E
5....................................................... F
6....................................................... G
7....................................................... H
8....................................................... J
9....................................................... K
10...................................................... L
11...................................................... M
12...................................................... N
</TABLE>
REIMBURSEMENT AMOUNTS. As discussed under "--Reductions of Certificate
Principal Balances in Connection with Realized Losses and Additional Trust
Estate Expenses" below, the aggregate principal balance of any class of the
principal balance bonds may be reduced without a corresponding payment of
principal. If that occurs with respect to any such class of principal balance
bonds, then, subject to Available P&I Funds and the priority of payment
described under "--Payments--Priority of Payments" below, the holders of that
class will be entitled to be reimbursed for the amount of that reduction,
WITHOUT INTEREST. References in this prospectus supplement to the "reimbursement
amount" mean, in the case of any class of the principal balance bonds for any
payment date, the total amount to which the holders of that class are entitled
as reimbursement for all reductions, if any, made in the aggregate principal
balance of that class on all prior payment dates as discussed under
"--Reductions of Bond Principal Balances in Connection with Realized Losses and
Additional Trust Estate Expenses" below.
S-78
<PAGE>
PRIORITY OF PAYMENTS. On each payment date, the bond trustee will apply the
Available P&I Funds for that date to make the following payments in the
following order of priority, in each case to the extent of the remaining
Available P&I Funds:
<TABLE>
<CAPTION>
ORDER OF RECIPIENT
PAYMENT CLASS OR CLASSES TYPE AND AMOUNT OF PAYMENT
- --------------------- ---------------- ------------------------------------------------------------
<C> <S> <C>
1 A-1, A-2 and Interest up to the total interest payable on those
X............... classes(1)
2 A-1............. Principal up to the total principal payable on that class
3 A-1............. Reimbursement up to the reimbursement amounts for those
classes
4 A-2............. Interest up to the total interest payable on that class
5 A-2............. Principal up to the total principal payable on that class(2)
6 A-2............. Reimbursement up to the reimbursement amount for that class
7 B............... Interest up to the total interest payable on that class
8 B............... Principal up to the total principal payable on that class(2)
9 B............... Reimbursement up to the reimbursement amount for that class
10 C............... Interest up to the total interest payable on that class
11 C............... Principal up to the total principal payable on that class(2)
12 C............... Reimbursement up to the reimbursement amount for that class
13 D............... Interest up to the total interest payable on that class
14 D............... Principal up to the total principal payable on that class(2)
15 D............... Reimbursement up to the reimbursement amount for that class
16 E............... Interest up to the total interest payable on that class
17 E............... Principal up to the total principal payable on that class(2)
18 E............... Reimbursement up to the reimbursement amount for that class
19 F............... Interest up to the total interest payable on that class
20 F............... Principal up to the total principal payable on that class(2)
21 F............... Reimbursement up to the reimbursement amount for that class
22 G............... Interest up to the total interest payable on that class
23 G............... Principal up to the total principal payable on that class(2)
24 G............... Reimbursement up to the reimbursement amount for that class
25 H............... Interest up to the total interest payable on that class
26 H............... Principal up to the total principal payable on that class(2)
27 H............... Reimbursement up to the reimbursement amount for that class
</TABLE>
S-79
<PAGE>
<TABLE>
<CAPTION>
ORDER OF RECIPIENT
PAYMENT CLASS OR CLASSES TYPE AND AMOUNT OF PAYMENT
- --------------------- ---------------- ------------------------------------------------------------
<C> <S> <C>
28 J............... Interest up to the total interest payable on that class
29 J............... Principal up to the total principal payable on that class(2)
30 J............... Reimbursement up to the reimbursement amount for that class
31 K............... Interest up to the total interest payable on that class
32 K............... Principal up to the total principal payable on that class(2)
33 K............... Reimbursement up to the reimbursement amount for that class
34 L............... Interest up to the total interest payable on that class
35 L............... Principal up to the total principal payable on that class(2)
36 L............... Reimbursement up to the reimbursement amount for that class
37 M............... Interest up to the total interest payable on that class
38 M............... Principal up to the total principal payable on that class(2)
39 M............... Reimbursement up to the reimbursement amount for that class
40 N............... Interest up to the total interest payable on that class
41 N............... Principal up to the total principal payable on that class(2)
42 N............... Reimbursement up to the reimbursement amount for that class
43 R-I, R-II and Any remaining Available P&I Funds
R-III...........
</TABLE>
- ------------------------
(1) PRO RATA among the recipient classes based on the respective amounts of
interest payable thereon.
(2) No principal will be payable on the recipient class unless and until the
aggregate principal balance of all classes of the principal balance bonds
listed above the recipient class in the foregoing table has been reduced to
zero.
PAYMENTS OF PREPAYMENT PREMIUMS AND YIELD MAINTENANCE CHARGES. If any
prepayment consideration is collected during any particular collection period
with respect to any mortgage loan, regardless of whether that prepayment
consideration is calculated as a percentage of the amount prepaid pursuant to a
yield maintenance formula, then the amount of that prepayment consideration will
be paid as additional interest on the payment date corresponding to that
collection period to the holders of the class of principal balance bonds senior
to the class " " bonds that is then entitled to payments of principal on
that payment date, up to its prepayment consideration entitlement in connection
with the particular prepayment consideration or specified portion thereof.
If there are two or more classes of principal balance bonds senior to the
class " " bonds that are entitled to payments of principal on any
particular payment date on which any prepayment consideration is payable, the
aggregate amount of that prepayment consideration will be allocated among all of
those classes up to, and on a PRO RATA basis in accordance with, their
respective prepayment consideration entitlements.
The "prepayment consideration entitlement" of the holders of any class of
principal balance bonds senior to the class " " bonds with respect to any
prepayment consideration, or specified portion thereof, net of workout fees and
liquidation fees payable therefrom, for any payment date on which that
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<PAGE>
class of bonds is entitled to payments of principal, will be an amount equal to
(a) that prepayment consideration, multiplied by (b) a fraction, which in no
event may be greater than 1.0, the numerator of which is equal to the excess, if
any, of the interest rate for that class of principal balance bonds over the
relevant discount rate, and the denominator of which is equal to the excess, if
any, of the mortgage interest rate of the prepaid mortgage loan over the
relevant discount rate, and further multiplied by (c) a fraction, the numerator
of which is equal to the amount of principal payable to such class of principal
balance bonds on that payment date, and the denominator of which is the amount
of principal to be paid on that payment date.
The "discount rate" applicable to any class of principal balance bonds with
respect to any prepaid mortgage loan will equal the yield (when compounded
monthly) on the U.S. Treasury issue (primary issue) with a maturity date closest
to the maturity date for the prepaid mortgage loan. In the event that there are
two U.S. Treasury issues (a) with the same coupon, the issue with the lower
yield will be utilized, and (b) with maturity dates equally close to the
maturity date for the prepaid mortgage loan, the issue with the earliest
maturity date will be utilized.
The portion of any prepayment premium and/or yield maintenance charge
remaining after payment of the amounts calculated as described above to the
holders of the respective classes of principal balance bonds senior to the class
" " bonds will be paid to the holders of the class "X" bonds. After the
payment date on which the principal balances of all classes of principal balance
bonds senior to the class " " bonds have been reduced to zero, any
prepayment premium and/or yield maintenance charge collected on the mortgage
loans will be paid entirely to the holders of the class "X" bonds.
Neither we nor the underwriter makes any representation as to the
enforceability of the provision of any promissory note evidencing one of the
mortgage loans requiring the payment of a prepayment premium or yield
maintenance charge or as to the collectability of any prepayment premium or
yield maintenance charge. See "Description of the Mortgage Collateral--Certain
Terms and Conditions of the Mortgage Loans--Prepayment Provisions" in this
prospectus supplement.
PAYMENTS OF ADDITIONAL INTEREST. The class " " bonds will entitle the
holders to all amounts, if any, applied as Post-ARD Additional Interest
collected on the ARD loans.
TREATMENT OF REO PROPERTIES. Notwithstanding that any underlying real
property may be acquired as part of the trust estate through foreclosure, deed
in lieu of foreclosure or otherwise, the related mortgage loan will be treated
as having remained outstanding, until the REO property is liquidated, for
purposes of determining--
- payments on the bonds,
- allocations of Realized Losses and Additional Trust Estate Expenses to the
bonds, and
- the amount of all fees payable to the master servicer, the special
servicer and the bond trustee under the governing documents.
In connection with the foregoing, that mortgage loan will be taken into
account when determining the Weighted Average Mortgage Collateral Pass-Through
Rate and the Total Principal Payment Amount for each payment date.
Operating revenues and other proceeds derived from an REO property will be
applied--
- FIRST, to pay, or to reimburse the master servicer, the special servicer
and/or the bond trustee for the payment of, certain costs and expenses
incurred in connection with the operation and disposition of the REO
property, and
- THEREAFTER, as collections of principal, interest and other amounts "due"
on the related mortgage loan.
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<PAGE>
To the extent described under "--Advances of Delinquent Monthly Debt Service
Payments" below, the master servicer and the bond trustee will be required to
make advances of principal and/or interest in respect of each mortgage loan as
to which the related underlying real property has become an REO property, in all
cases as if the mortgage loan had remained outstanding.
REDUCTIONS TO BOND PRINCIPAL BALANCES IN CONNECTION WITH REALIZED LOSSES AND
ADDITIONAL TRUST ESTATE EXPENSES
As a result of Realized Losses and Additional Trust Estate Expenses, the
aggregate stated principal balance of the mortgage collateral may decline below
the aggregate principal balance of the principal balance bonds. If this occurs
following the payments made to the bondholders on any payment date, then the
respective aggregate principal balances of the various classes of the principal
balance bonds are to be successively reduced in the following order, until the
aggregate principal balance of the principal balance bonds equals the aggregate
stated principal balance of the mortgage collateral that will be outstanding
immediately following that payment date.
<TABLE>
<CAPTION>
ORDER OF ALLOCATION CLASS
- ------------------- ---------------
<S> <C>
1....................................................... N
2....................................................... M
3....................................................... L
4....................................................... K
5....................................................... J
6....................................................... H
7....................................................... G
8....................................................... F
9....................................................... E
10...................................................... D
11...................................................... C
12...................................................... B
13...................................................... A-1 and A-2*
</TABLE>
- ------------------------
* PRO RATA based on aggregate principal balance.
The reductions in the aggregate principal balances of the respective classes
of the principal balance bonds, as described in the previous paragraph, will
represent an allocation of the Realized Losses and/or Additional Trust Estate
Expenses that caused the particular mismatch in balances between the mortgage
loans and the principal balance bonds. A reduction of this type in the aggregate
principal balance of a class of the principal balance bonds will result in a
corresponding reduction in the aggregate notional amount of the class "X" bonds.
Any "Realized Losses" are losses on or in respect of the mortgage loans
arising from the inability of the master servicer and/or the special servicer to
collect all amounts due and owing under the mortgage loans, including by reason
of the fraud or bankruptcy of a borrower or, to the extent not covered by
insurance, a casualty of any nature at an underlying real property. The Realized
Loss in respect of a liquidated mortgage loan (or related REO property) is an
amount generally equal to the excess, if any, of:
- the outstanding principal balance of the mortgage loan as of the date of
liquidation, together with (i) all accrued and unpaid interest on the
mortgage loan to but not including the due date in the collection period
in which the liquidation occurred, exclusive, however, of any portion of
that interest that represents Default Interest or Post-ARD Additional
Interest, and (ii) all related unreimbursed servicing advances and unpaid
liquidation expenses, over
- the total amount of liquidation proceeds, if any, recovered in connection
with the liquidation.
S-82
<PAGE>
If any portion of the debt due under a mortgage loan is forgiven, whether in
connection with a modification, waiver or amendment granted or agreed to by the
master servicer or the special servicer or in connection with the bankruptcy,
insolvency or similar proceeding involving the related borrower, the amount
forgiven, other than Default Interest and Post-ARD Additional Interest, also
will be treated as a Realized Loss.
An "Additional Trust Estate Expense" is, in general, an expense of the trust
estate that (i) arises out of a default on a mortgage loan or an otherwise
unanticipated event and (ii) is not covered by a servicing advance or a
corresponding collection from the related borrower. Some examples of Additional
Trust Estate Expenses are:
- any special servicing fees, workout fees and liquidation fees paid to the
special servicer;
- any interest paid to the master servicer, the special servicer and/or the
bond trustee in respect of unreimbursed advances, which interest payment
is not covered out of late payment charges and Default Interest actually
collected on the related mortgage loan;
- the cost of various opinions of counsel required or permitted to be
obtained in connection with the servicing of the mortgage loans and the
administration of the trust estate;
- certain unanticipated, non-mortgage loan specific expenses of the trust
estate, including--
(i) certain reimbursements and indemnifications to the bond trustee as
described under "Description of the Governing Documents--The
Indenture--The Bond Trustee" in the accompanying prospectus,
(ii) certain reimbursements to the master servicer, the special servicer
and the issuer as described under "Description of the Governing
Documents--The Servicing and Administration Agreement(s)--Certain
Matters Regarding the Master Servicer, the Special Servicer, the Manager
and the Issuer" in the accompanying prospectus, and
(iii) certain federal, state and local taxes, and certain tax-related
expenses, payable out of the trust estate as described under "Federal
Income Tax Consequences--REMICs--Prohibited Transactions Tax and Other
Taxes" in the accompanying prospectus;
- rating agency fees, other than on-going surveillance fees, that cannot be
recovered from the borrower; and
- any amounts expended on behalf of the trust estate to remediate an adverse
environmental condition at any underlying real property securing a
defaulted mortgage loan as described under "Servicing of the Mortgage
Loans--Realization Upon Defaulted Mortgage Loans" in this prospectus
supplement.
ADVANCES OF DELINQUENT MONTHLY DEBT SERVICE PAYMENTS
The master servicer will be required to make, for each payment date, an
aggregate amount of advances of principal and/or interest ("P&I advances")
generally equal to all monthly debt service payments (other than balloon
payments) and assumed monthly debt service payments, in each case net of related
master servicing fees, that (a) were due or deemed due, as the case may be, in
respect of the mortgage loans during the related collection period and (b) were
not paid by or on behalf of the respective borrowers or otherwise collected as
of the close of business on the last day of the related collection period.
Notwithstanding the foregoing, if it is determined that an Appraisal Reduction
Amount exists with respect to any mortgage loan, then the master servicer will
reduce the interest portion, but not the principal portion, of each P&I advance
that it must make with respect to that mortgage loan during the period that the
Appraisal Reduction Amount exists. The interest portion of any P&I advance
required to be made with
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respect to any mortgage loan as to which there exists an Appraisal Reduction
Amount, will equal the product of:
- the amount of the interest portion of that P&I advance that would
otherwise be required to be made for the subject payment date without
regard to this sentence and the prior sentence, multiplied by
- a fraction, the numerator of which is equal to the stated principal
balance of the mortgage loan, net of the Appraisal Reduction Amount, and
the denominator of which is equal to the stated principal balance of the
mortgage loan. See "Servicing of the Mortgage Loans--Required Appraisals"
in this prospectus supplement.
With respect to any payment date, the master servicer will be required to
make P&I advances either out of its own funds or, subject to the replacement
thereof as and to the extent provided in the servicing and administration
agreement, funds held in the master servicer's custodial account that are not
required to be part of the Available Funds for that payment date.
If the master servicer fails to make a required P&I advance and the bond
trustee is aware of that failure, the bond trustee will be obligated to make the
advance. See "--The Bond Trustee" below.
The master servicer and the bond trustee will each be entitled to recover
any P&I advance made by it, out of its own funds, from collections on the
mortgage loan as to which the advance was made. Neither the master servicer nor
the bond trustee will be obligated to make any P&I advance that, in its
judgment, would not ultimately be recoverable out of collections on the related
mortgage loan. If the master servicer or the bond trustee makes any P&I advance
that it subsequently determines, in its judgment, will not be recoverable out of
collections on the related mortgage loan, it may obtain reimbursement for that
advance, together with interest accrued thereon as described below, out of
general collections on the mortgage loans and any REO properties on deposit in
the master servicer's custodial account from time to time. See "Description of
the Bonds--Advances in Respect of Delinquencies" in the accompanying prospectus
and "Servicing of the Mortgage Loans--Custodial Account" in this prospectus
supplement.
The master servicer and the bond trustee will each be entitled to receive
interest on P&I advances made thereby out of its own funds. That interest will
accrue on the amount of each P&I advance, and compound monthly, for so long as
that advance is outstanding at an annual rate equal to the "prime rate" as
published in the "Money Rates" section of THE WALL STREET JOURNAL,as that "prime
rate" may change from time to time. Interest accrued with respect to any P&I
advance will be payable in the collection period in which that advance is
reimbursed--
- FIRST, out of Default Interest and late payment charges collected on the
related mortgage loan during that collection period, and
- THEN, if and to the extent that the Default Interest and late charges
referred to in clause FIRST are insufficient to cover the advance
interest, out of any amounts then on deposit in the master servicer's
custodial account.
Any delay between a sub-servicer's receipt of a late collection of a monthly
debt service payment as to which a P&I advance was made and the forwarding of
that late collection to the master servicer, will increase the amount of
interest accrued and payable to the master servicer or the bond trustee, as the
case may be, on that P&I advance. To the extent not offset by Default Interest
and/or late payment charges accrued and actually collected, interest accrued on
outstanding P&I advances will result in a reduction in amounts payable on the
bonds.
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An "assumed monthly debt service payment" will be an amount of principal
and/or interest deemed due with respect to:
- each mortgage loan that is delinquent in respect of its balloon payment
beyond the end of the collection period in which its maturity date occurs
and as to which no arrangements have been agreed to for the collection of
the delinquent amounts, including an extension of maturity; and
- each mortgage loan as to which the related underlying real property has
become an REO property.
The assumed monthly debt service payment deemed due on any mortgage loan
described in the prior sentence that is delinquent as to its balloon payment,
will equal, for its stated maturity date and for each successive due date that
it remains outstanding and part of the trust estate, the monthly debt service
payment that would have been due on the mortgage loan on the relevant date if
the related balloon payment had not come due and the mortgage loan had, instead,
continued to amortize and accrue interest according to its terms in effect prior
to that stated maturity date. The assumed monthly debt service payment deemed
due on any mortgage loan described in the second preceding sentence as to which
the related underlying real property has become an REO property, will equal, for
each due date that the REO property remains part of the trust estate, the
monthly debt service payment (or, in the case of a mortgage loan delinquent in
respect of its balloon payment, the assumed monthly debt service payment) due
(or deemed due) on the last due date prior to the acquisition of that REO
property. [Assumed monthly debt service payments for ARD loans do not include
Post-ARD Additional Interest or accelerated amortization payments.]
ISSUER EVENTS OF DEFAULT
Each of the following constitute an issuer event of default with respect to
the series " " bonds--
[SPECIFY EVENTS OF DEFAULT]
RIGHTS UPON THE OCCURRENCE OF AN ISSUER EVENT OF DEFAULT
Upon the occurrence of an issuer event of default, the bond trustee shall--
[SPECIFY ACTIONS TO BE TAKEN AND NOTICES TO BE GIVEN BY THE BOND TRUSTEE.]
The bond trustee upon written request of the bondholders representing more
than % of the aggregate principal amount of the series " " bonds
shall--
[SPECIFY REMEDIES AVAILABLE TO THE BONDHOLDERS AND THE ACTIONS TO BE TAKEN
BY THE BOND TRUSTEE.]
If following an issuer event of default, the series " " bonds have been
declared due and payable, the bond trustee may liquidate the mortgage
collateral, if--
[SPECIFY LIQUIDATION CONDITIONS AS WELL AS CIRCUMSTANCES UNDER WHICH THE
BOND TRUSTEE MAY ELECT TO MAINTAIN POSSESSION OF THE MORTGAGE COLLATERAL. ]
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REPORTS TO BONDHOLDERS; CERTAIN AVAILABLE INFORMATION
BONDHOLDER REPORTS. Based solely on information provided in monthly reports
prepared by the master servicer and the special servicer and delivered to the
bond trustee, the bond trustee will be required to prepare and deliver (or, if
not prepared by the bond trustee, to forward) on each payment date to the
holders of each class of series " " bonds and to each beneficial owner of
an offered bond held in book-entry form that is identified to the reasonable
satisfaction of the bond trustee, or make available as described below under
"--Information Available Electronically":
(1) A "Payment Date Statement" setting forth, among other things: [LIST
INFORMATION TO BE DISCLOSED.]
(2) A "CMSA Loan Periodic Update File" and a "CMSA Property File" setting forth
certain information with respect to the mortgage loans and the underlying
real properties, respectively.
(3) A "Mortgage Collateral Data Update Report", which may be included as part of
the Payment Date Statement, containing information regarding the mortgage
loans as of the end of the related collection period.
The master servicer or the special servicer, as specified in the servicing
and administration agreement, is required to deliver to the bond trustee
monthly, and the bond trustee is required to make available as described below
under "--Information Available Electronically," a copy of each of the following
reports:
(a) A "Delinquent Loan Status Report" containing substantially the
information set forth in Annex D to this prospectus supplement.
(b) An "Historical Loan Modification Rep E to this prospectus supplement.
(c) An "Historical Liquidation Report" containing substantially the
information set forth in Annex F to this prospectus supplement.
(d) An "REO Status Report" containing substantially the information set
forth in Annex G to this prospectus supplement.
(e) A "Servicer Watch List" containing substantially the content set forth
in Annex H to this prospectus supplement.
(f) A "Loan Payoff Notification Report" setting forth, among other things,
for each mortgage loan where written notice of anticipated payoff has
been received as of the determination date at least business days
prior to the preparation of the report, the control number, the property
name, the amount of principal expected to be paid, the expected date of
payment and the estimated amount of the yield maintenance charge or
prepayment premium due.
(g) A "Comparative Financial Status Report" containing substantially the
information set forth in Annex K to this prospectus supplement.
In this prospectus supplement, we refer to these reports, together with the
Payment Date Statement, as the "bondholder reports".
In addition, upon the request of any holder of a series " " bond or, to
the extent identified to the reasonable satisfaction of the bond trustee,
beneficial owner of an offered bond, the bond trustee will be required to
request from the master servicer, and, upon receipt, make available to the
requesting party, during normal business hours at the offices of the bond
trustee, copies of the following reports required to be prepared and maintained
by the master servicer and/or special servicer:
(x) with respect to any underlying real property or REO property, an
"Operating Statement Analysis Report" containing substantially the
information set forth in Annex I to this prospectus supplement; and
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(y) with respect to any underlying real property or REO property, an "NOI
Adjustment Worksheet" containing substantially the content set forth in
Annex J to this prospectus supplement.
In this prospectus supplement, we refer to the reports identified in clauses
(a), (b), (c), (d) and (f) above as the "unrestricted servicer reports", and the
reports identified in clauses (e), (g), (x) and (y) above as the "restricted
servicer reports".
BOOK-ENTRY BONDS. If you hold your bonds in book-entry from through DTC,
you may obtain direct access to the monthly reports of the bond trustee as if
you were a bondholder, provided that you deliver a written certification to the
bond trustee confirming your beneficial ownership in the offered bonds.
Otherwise, until definitive securities are issued in respect of your bonds, the
information contained in the bondholder reports will be available to you only to
the extent that it is made available through DTC and the DTC participants or is
available on the bond trustee's internet website. Conveyance of notices and
other communications by DTC to the DTC participants, and by the DTC participants
to beneficial owners of the offered bonds, will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time. The issuer, the master servicer, the special servicer,
the bond trustee and the bond registrar are required to recognize as bondholders
only those persons in whose names the bonds are registered on the books and
records of the bond registrar.
INFORMATION AVAILABLE ELECTRONICALLY. The bond trustee will make available
each month, to any interested party, the Payment Date Statement, any Mortgage
Collateral Data Update Report, the Unrestricted Servicer Reports, the CMSA Loan
Periodic Update Files and the CMSA Loan Setup Files via the bond trustee's
internet website, electronic bulletin board and fax-on-demand service. The bond
trustee's internet website will initially be located at " ".
The bond trustee's electronic bulletin board may be accessed by calling ( )
- , and its fax-on- demand service may be accessed by calling ( )
- . For assistance with regard to the services described above, investors
may call ( ) - .
The bond trustee will make no representations or warranties as to the
accuracy or completeness of, and may disclaim responsibility for, any
information made available by the bond trustee for which it is not the original
source.
The bond trustee may require registration and the acceptance of a disclaimer
in connection with providing access to its electronic bulletin board and
internet website. The bond trustee shall not be liable for the dissemination of
information made in accordance with the servicing and administration agreement.
OTHER INFORMATION. The servicing and administration agreement will obligate
the bond trustee to make available at its offices, during normal business hours,
upon reasonable advance written notice, for review by any holder or beneficial
owner of an offered bond or any person identified to the bond trustee by any
such holder or beneficial owner as a prospective transferee of an offered bond
or any interest therein, subject to the discussion in the following paragraph,
originals or copies of, among other things, the following items:
- the indenture, the deposit trust agreement and the servicing and
administration agreement, including exhibits, and any amendments thereto;
- all monthly reports of the bond trustee delivered to bondholders since the
date of initial issuance of the bonds;
- all officer's certificates delivered to the bond trustee by the master
servicer and/or the special servicer since the date of initial issuance of
the bonds, as described under "Servicing of the Mortgage Loans--Evidence
as to Compliance" in this prospectus supplement;
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- all accountant's reports delivered to the bond trustee in respect of the
master servicer and/or the special servicer since the date of initial
issuance of the bonds, as described under "Servicing of the Mortgage
Loans--Evidence as to Compliance" in this prospectus supplement;
- the most recent inspection report in respect of each underlying real
property prepared by the master servicer or the special servicer and
delivered to the bond trustee as described under "Servicing of the
Mortgage Loans--Inspections; Collection of Operating Information" in this
prospectus supplement;
- the most recent appraisal, if any, with respect to each underlying real
property obtained by the master servicer or the special servicer and
delivered to the bond trustee (see "Servicing of the Mortgage
Loans--Required Appraisals" in this prospectus supplement);
- the most recent quarterly and annual operating statement and rent roll for
each underlying real property and financial statements of the related
borrower collected by the master servicer or the special servicer and
delivered to the bond trustee as described under "Servicing of the
Mortgage Loans--Inspections; Collection of Operating Information" in this
prospectus supplement; and
- the mortgage files, including all documents, such as modifications,
waivers and amendments of the mortgage loans, that are to be added to the
mortgage files from time to time.
Copies of any and all of the foregoing items will be available from the bond
trustee upon request. However, the bond trustee will be permitted to require
payment of a sum sufficient to cover the reasonable costs and expenses of
providing the copies.
In connection with providing access to or copies of the items described
above, the bond trustee may require:
- in the case of a beneficial owner of a bond held in book-entry form, a
written confirmation executed by the requesting person or entity, in a
form reasonably acceptable to the bond trustee, generally to the effect
that the person or entity is a beneficial owner of offered bonds and will
keep the information confidential; and
- in the case of a prospective purchaser of bonds or interests therein,
confirmation executed by the requesting person or entity, in a form
reasonably acceptable to the bond trustee, generally to the effect that
the person or entity is a prospective purchaser of bonds or an interest
therein, is requesting the information for use in evaluating a possible
investment in the bonds and will otherwise keep the information
confidential.
Bondholders will be deemed to have agreed to keep the information described
above confidential by the acceptance of their bonds. However, no holder,
beneficial owner or prospective transferee of any bond or interest therein will
be required to keep confidential any information that has previously been filed
with the SEC, and the bond trustee will not be required to obtain either of the
confirmations referred to in the second preceding sentence in connection with
providing any information that has previously been filed with the SEC.
VOTING RIGHTS
% of the voting rights for the series " " bonds will be allocated
among the respective classes of principal balance bonds in proportion to the
aggregate principal balances thereof at all times during the term of the
governing documents. % of the voting rights will be allocated to the class
"X" bonds. Voting rights allocated to a class of bonds will be allocated among
those bonds in proportion to the percentage interests in that class evidenced by
each such bond.
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OPTIONAL REDEMPTION
The issuer may, at its option, redeem any class of offered bonds, in whole
but not in part, on any payment date, if--
(i) the then aggregate principal balance of such class of bonds is less than
% of the initial aggregate principal balance of such class, and
(ii) no event of default has occurred and is continuing under the governing
documents.
The redemption price will be equal to 100% of the unpaid aggregate principal
balance of the bonds to be redeemed, plus any accrued and unpaid interest due on
such bonds. No yield maintenance amount will be payable in connection with an
option redemption. See "Yield and Maturity Consideration in this prospectus
supplement."
Notice of any optional redemption must be mailed by the issuer or the bond
trustee at least days prior to the date set for optional redemption.
[PROVIDE DESCRIPTION OF ANY SPECIAL OR MANDATORY REDEMPTION.]
THE BOND TRUSTEE
[INSERT DESCRIPTION OF THE BOND TRUSTEE.]
The bond trustee will be entitled to a monthly fee for its services, which
fee will accrue on a 30/360 basis at % per annum on the stated principal
balance outstanding from time to time of the mortgage collateral and other
assets of the mortgage collateral. The bond trustee fee is payable out of the
mortgage collateral.
See also "Description of the Governing Documents--The Bond Trustee" in the
accompanying prospectus.
THE ISSUER
LB Commercial Mortgage Trust is an owner trust formed by us
under the laws of the State of , pursuant to the deposit trust
agreement. We will initially hold 100% of the beneficial ownership interests in
the issuer, but we may transfer some or all of such ownership interests to one
or more other persons or entities.
The issuer will not have any activities other than:
- acquiring, holding and, pursuant to the indenture, pledging the mortgage
collateral and other assets of the trust estate to the bond trustee;
- issuing the series " " bonds and the ownership certificates;
- making payments on the series " " bonds and the ownership
certificates; and
- taking any action necessary to accomplish the foregoing.
The issuer's principal offices are located at . Its telephone
number is .
THE OWNER TRUSTEE
is the owner trustee under the deposit trust agreement. Its principal
trust offices are located at . Its telephone number is .
The owner trustee will be paid a fee of $ as compensation for the
performance of its duties under the deposit trust agreement. will be
responsible for payment of the owner trustee fee.
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YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
GENERAL. The yield on any offered bond will depend on:
(a) the price at which the bond is purchased by an investor, and
(b) the rate, timing and amount of payments on the bond.
The rate, timing and amount of payments on any offered bond will in turn
depend on, among other things,
- the interest rate for the bond,
- the rate and timing of principal payments, including principal
prepayments, and other principal collections on the mortgage loans and the
extent to which those amounts are to be applied or otherwise result in
reduction of the principal balance or notional amount of the bond,
- the rate, timing and severity of Realized Losses and Additional Trust
Estate Expenses and the extent to which those losses and expenses result
in the reduction of the principal balance or notional amount of the bond,
and
- the timing and severity of any Net Aggregate Prepayment Interest
Shortfalls and the extent to which those shortfalls result in the
reduction of the interest payments on the bond.
INTEREST RATES. The interest rates for the respective classes of the
principal balance bonds are, in each case, fixed. However, the interest rate
applicable to the class "X" bonds will be variable and will be calculated based
in part on the Weighted Average Mortgage Collateral Pass-Through Rate from time
to time. Accordingly, the yield on the class "X" bonds will be sensitive to
changes in the relative composition of the mortgage collateral as a result of
scheduled amortization, voluntary prepayments and liquidations of mortgage loans
following default. In addition, the interest rate for the class "X" bonds will
vary with changes in the relative sizes of the aggregate principal balances of
the respective classes of principal balance bonds. The Weighted Average Mortgage
Collateral Pass-Through Rate and the interest rate for the class "X" bonds will
not be affected by modifications, waivers and amendments in respect of the
mortgage loans.
See "Description of the Offered Bonds--Payments--Calculation of Interest
Rates" and "Description of the Mortgage Collateral" in this prospectus
supplement and "--Rate and Timing of Principal Payments" below.
RATE AND TIMING OF PRINCIPAL PAYMENTS. The yield to maturity on the class
"X" bonds will be extremely sensitive to, and the yield to maturity on any other
offered bonds purchased at a discount or a premium will be affected by, the rate
and timing of principal payments made in reduction of the bond principal
balances or certified notional amounts of the bonds. In turn, the rate and
timing of principal payments that are paid or otherwise result in reduction of
the aggregate principal balance or notional amount, as the case may be, of each
class of offered bonds will be directly related to the rate and timing of
principal payments on or in respect of the mortgage loans. Finally, the rate and
timing of principal payments on or in respect of the mortgage loans will be
affected by their amortization schedules, the dates on which balloon payments
are due and the rate and timing of principal prepayments and other unscheduled
collections thereon, including for this purpose, collections made in connection
with liquidations of mortgage loans due to defaults, casualties or condemnations
affecting the underlying real properties, or purchases or other removals of
mortgage loans from the trust estate.
Prepayments and other early liquidations of the mortgage loans will result
in payments on the principal balance bonds of amounts that would otherwise be
paid over the remaining terms of the mortgage loans. This will tend to shorten
the weighted average lives of those bonds. Defaults on the
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mortgage loans, particularly at or near their maturity dates, may result in
significant delays in payments of principal on the mortgage loans and,
accordingly, on the principal balance bonds, while work-outs are negotiated or
foreclosures are completed. These delays will tend to lengthen the weighted
average lives of those bonds. See "Servicing of The Mortgage
Loans--Modifications, Waivers, Amendment and Consent" in this prospectus
supplement. In addition, the ability of a borrower under an ARD loan, to repay
that loan on the related anticipated repayment date will generally depend on its
ability to either refinance the mortgage loan or sell the related underlying
real property. Also, a borrower may have little incentive to repay its mortgage
loan on the related anticipated repayment date if then prevailing interest rates
are relatively high. Accordingly, there can be no assurance that any ARD loan
will be paid in full on its anticipated repayment date.
The extent to which the yield to maturity on any offered bond may vary from
the anticipated yield will depend upon the degree to which the bond is purchased
at a discount or premium and when, and to what degree, payments of principal on
the mortgage loans are in turn paid or otherwise result in a reduction of the
principal balance or notional amount of the bond. If you purchase your bonds at
a discount, you should consider the risk that a slower than anticipated rate of
principal payments on the mortgage loans could result in an actual yield to you
that is lower than your anticipated yield. If you purchase class "X" bonds, or
if you purchase any other offered bonds at a premium, you should consider the
risk that a faster than anticipated rate of principal payments on the mortgage
loans could result in an actual yield to you that is lower than your anticipated
yield.
If you are contemplating an investment in the class "X" bonds, you should
fully consider the risk that an extremely rapid rate of principal payments on
the mortgage loans could result in your failure to recoup fully your initial
investment.
Because the rate of principal payments on or in respect of the mortgage
loans will depend on future events and a variety of factors, as described more
fully below, no assurance can be given as to the rate or the rate of principal
prepayments in particular. We are not aware of any relevant publicly available
or authoritative statistics with respect to the historical prepayment experience
of a large group of real estate loans comparable to those in the trust estate.
Even if they are available and payable on your bonds, prepayment premiums
and yield maintenance charges may not be sufficient to offset fully any loss in
yield on your bonds attributable to the related prepayments of the mortgage
loans.
DELINQUENCIES AND DEFAULTS ON THE MORTGAGE LOANS. The rate and timing of
delinquencies and defaults on the mortgage loans will affect the amount of
payments on your bonds, the yield to maturity of your bonds, the rate of
principal payments on your bonds and the weighted average life of your bonds.
Delinquencies on the mortgage loans, unless covered by P&I advances, may result
in shortfalls in payments of interest and/or principal on your bonds for the
current month. Although any shortfalls in payments of interest may be made up on
future payment dates, no interest would accrue on those shortfalls. Thus, any
shortfalls in payments of interest would adversely affect the yield to maturity
of your bonds.
If--
- you calculate the anticipated yield to maturity for your bonds based on an
assumed rate of default and amount of losses on the mortgage loans that is
lower than the default rate and amount of losses actually experienced, and
- the additional losses result in a reduction of the total payments on or
the aggregate principal balance or notional amount of your bonds,
then your actual yield to maturity will be lower than you calculated and could,
under certain scenarios, be negative.
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The timing of any loss on a liquidated mortgage loans that results in a
reduction of the total payments on or the aggregate principal balance or
notional amount of your bonds will also affect your actual yield to maturity,
even if the rate of defaults and severity of losses are consistent with your
expectations. In general, the earlier your loss occurs, the greater the effect
on your yield to maturity.
Even if losses on the mortgage loans do not result in a reduction of the
total payments on or the aggregate principal balance or bond notional amount of
your bonds, the losses may still affect the timing of payments on (and,
accordingly, the weighted average life and yield to maturity of) your bonds.
CERTAIN RELEVANT FACTORS. The following factors, among others, will affect
the rate and timing of principal payments and defaults and the severity of
losses on or in respect of the mortgage loans:
- prevailing interest rates;
- the terms of the mortgage loans, including provisions that require the
payment of prepayment premiums and yield maintenance charges, provisions
that impose prepayment lock-out periods and amortization terms that
require balloon payments;
- the demographics and relative economic vitality of the areas in which the
underlying real properties are located;
- the general supply and demand for commercial and multifamily rental space
of the type available at the underlying real properties in the areas in
which the underlying real properties are located;
- the quality of management of the underlying real properties;
- the servicing of the mortgage loans;
- possible changes in tax laws; and
- other opportunities for investment.
See "Risk Factors--Risks Related to the Mortgage Loans", "Description of the
Mortgage Collateral" and "Servicing of the Mortgage Loans" in this prospectus
supplement and "Description of the Governing Documents" and "Yield and Maturity
Considerations--Yield and Prepayment Considerations" in the accompanying
prospectus.
The rate of prepayment on the mortgage loans is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below the annual
rate at which a mortgage loan accrues interest, the related borrower may have an
increased incentive to refinance the mortgage loan. Conversely, to the extent
prevailing market interest rates exceed the annual rate at which a mortgage loan
accrues interest, the related borrower may be less likely to voluntarily prepay
the mortgage loan. Assuming prevailing market interest rates exceed the revised
mortgage interest rate at which an ARD loan accrues interest following its
anticipated repayment date, the primary incentive for the related borrower to
prepay the mortgage loan on or before its anticipated repayment date is to give
the borrower access to excess cash flow, all of which, net of the minimum
required debt service, approved property expenses and any required reserves,
must be applied to pay down principal of the mortgage loan. Accordingly, there
can be no assurance that any ARD loan will be prepaid on or before its
anticipated repayment date or on any other date prior to maturity.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
underlying real properties in order to realize their equity therein, to meet
cash flow needs or to make other investments. In addition, some underlying
borrowers may be motivated by federal and state tax laws, which are subject to
change, to sell their underlying real properties prior to the exhaustion of tax
depreciation benefits.
A number of the underlying borrowers are limited or general partnerships.
Under certain circumstances, the bankruptcy of the general partner in a
partnership may result in the dissolution of the
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partnership. The dissolution of a borrower partnership, the winding-up of its
affairs and the distribution of its assets could result in an acceleration of
its payment obligations under the related mortgage loan.
We make no representation or warranty regarding:
- the particular factors that will affect the rate and timing of prepayments
and defaults on the mortgage loans;
- the relative importance of those factors;
- the percentage of the aggregate principal balance of the mortgage loans
that will be prepaid or as to which a default will have occurred as of any
particular date; or
- the overall rate of prepayment or default on the mortgage loans.
UNPAID INTEREST. If the portion of the Available P&I Funds payable in
respect of interest on any class of offered bonds on any payment date is less
than the total amount of interest then payable for the class, the shortfall will
be payable to the holders of those bonds on subsequent payment dates, subject to
the Available P&I Funds on those subsequent payment dates and the priority of
payments described under "Description of the Offered Bonds--Payments--Priority
of Payments" in this prospectus supplement. That shortfall will not bear
interest, however, and will therefore negatively affect the yield to maturity of
that class of offered bonds for so long as it is outstanding.
DELAY IN PAYMENTS. Because monthly payments will not be made on the bonds
until several days after the due dates for the mortgage loans during the related
collection period, your effective yield will be lower than the yield that would
otherwise be produced by your interest rate and purchase price, assuming such
price did not account for such delay.
YIELD SENSITIVITY
The tables on Annex C-1 hereto (the "yield tables") show the pre-tax
corporate bond equivalent ("CBE") yield to maturity, modified duration (except
in the case of the class "X" bonds), weighted average life, first payment date
on which principal is to be paid and final payment date on which principal is to
be paid with respect to each class of offered bonds, prepared using the Modeling
Assumptions (as described below). Where applicable, they also show the specified
assumed purchase prices, which prices do not include accrued interest. Assumed
purchase prices are expressed in 32nds (E.G., means %) as a
percentage of the initial aggregate principal balance or notional amount of each
class of offered bonds. For purposes of the yield tables relating to the class
"X" bonds, the information therein relating to weighted average life, first
principal payment date and last principal payment date is being calculated in
respect of the notional amount of class "X" bonds as if it were a principal
balance.
The yields set forth in the yield tables were calculated by
- determining the monthly discount rates which, when applied to the assumed
stream of cash flows to be paid on each class of offered bonds, would
cause the discounted present value of such assumed stream of cash flows to
equal the assumed purchase prices, plus accrued interest from and
including to but excluding the assumed settlement date (as
described below), and
- converting such monthly rates to semi-annual corporate bond equivalent
rates.
That calculation does not take into account variations that may occur in the
interest rates at which investors may be able to reinvest funds received by them
as payments on the offered bonds and, consequently, does not purport to reflect
the return on any investment in the offered bonds when such reinvestment rates
are considered.
For purposes of the yield tables, "modified duration" has been calculated
using the modified Macaulay Duration as specified in the "PSA Standard
Formulas". The Macaulay Duration is calculated as
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the present value weighted average time to receive future payments of principal
and interest, and the PSA Standard Formula modified duration is calculated by
dividing the Macaulay Duration by the appropriate semi-annual compounding
factor. The duration of a security may be calculated according to various
methodologies. Accordingly, no representation is made by us or any other person
that the "modified duration" approach used in this prospectus supplement is
appropriate. Duration, like yield, will be affected by the prepayment rate of
the mortgage loans and extensions in respect of balloon payments that actually
occur during the life of the class "A-1", class "A-2", class "B", class "C",
class "D", class "E" and class "F" bonds and by the actual performance of the
mortgage loans, all of which may differ, and may differ significantly, from the
assumptions used in preparing the yield tables.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this prospectus supplement is the "Constant Prepayment
Rate" or "CPR" model. The CPR model represents an assumed constant annual rate
of prepayment each month, expressed as a per annum percentage of the then
outstanding principal balance of one or more mortgage loans.
The yield tables were derived from calculations based on the following
assumptions (collectively, the "Modeling Assumptions"):
- the mortgage loans have the characteristics set forth on Annex A-1 and the
initial mortgage collateral balance is approximately $ ;
- the initial aggregate principal balance or notional amount, as the case
may be, of each class of principal balance bonds is as described in this
prospectus supplement;
- the interest rate for each class of principal balance bonds is as
described in this prospectus supplement.
- there are no delinquencies or losses in respect of the mortgage loans,
there are no modifications, extensions, waivers or amendments affecting
the monthly debt service payments by borrowers on the mortgage loans,
there are no Appraisal Reduction Amounts with respect to the mortgage
loans and there are no casualties or condemnations affecting the
underlying real properties;
- all mortgage loans have due dates on the day of each month the
monthly debt service payments are due and accrue interest on the
respective basis described in this prospectus supplement (I.E., a 30/360
basis or an actual/360 basis);
- all prepayments are assumed to be accompanied by a full month's interest;
- there are no breaches of our representations and warranties regarding the
mortgage loans;
- monthly debt service payments on the mortgage loans are timely received on
the day of each month;
- no voluntary or involuntary prepayments are received as to any mortgage
loan during that mortgage loan's lockout period ("LOP"), yield maintenance
period ("YMP") or declining premium period ("Declining Premium"), in each
case if any; each ARD loan is paid in full on its anticipated repayment
date; and, otherwise, prepayments are made on each of the mortgage loans
at the indicated CPRs set forth in the tables (without regard to any
limitations in such mortgage loans on partial voluntary principal
prepayments);
- no mortgage loan is required to be repurchased by us;
- no prepayment interest shortfalls are incurred and no prepayment premiums
or yield maintenance charges are collected;
- there are no Additional Trust Estate Expenses;
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- payments on the offered bonds are made on the day of each month,
commencing in ; and
- the offered bonds are settled on (the "assumed settlement
date").
The characteristics of the mortgage loans will differ in certain respects
from those assumed in preparing the yield tables, and the yield tables are
presented for illustrative purposes only. Thus, neither the mortgage collateral
nor any mortgage loan will prepay at any constant rate, and it is unlikely that
the mortgage loans will prepay in a manner consistent with any designated
scenario for the yield tables. In addition, there can be no assurance that--
- the mortgage loans will prepay at any particular rate,
- the mortgage loans will not prepay, involuntarily or otherwise, during
lockout periods, yield maintenance periods and/or declining premium
periods,
- the ARD loans will be paid in full on their respective anticipated
repayment dates,
- the actual pre-tax yields on, or any other payment characteristics of, any
class of offered bonds will correspond to any of the information shown in
the yield tables, or
- the aggregate purchase prices of the offered bonds will be as assumed.
You must make your own decision as to the appropriate assumptions, including
prepayment assumptions, to be used in deciding whether to purchase the offered
bonds.
For purposes of the modeling assumptions, a "yield maintenance period" is
any period during which a mortgage loan provides that voluntary prepayments be
accompanied by a yield maintenance charge, or a "declining premium period" is
any period during which a mortgage loan provides that voluntary prepayments be
accompanied by a prepayment premium calculated as a declining percentage of the
principal amount prepaid.
WEIGHTED AVERAGE LIVES OF CERTAIN CLASSES OF OFFERED BONDS
The weighted average life of any offered bond, other than a class "X" bond,
refers to the average amount of time that will elapse from the date of its
issuance until each dollar to be applied in reduction of the principal balance
of that bond is distributed to the investor. For purposes of this prospectus
supplement, the weighted average life of any offered bond, other than a class
"X" bond, is determined as follows:
- multiply the amount of each principal payment on the bond by the number of
years from the assumed settlement date to the related payment date;
- sum the results; and
- divide the sum by the aggregate amount of the reductions in the principal
balance of the bond.
Accordingly, the weighted average life of any offered bond, other than a
class "X" bond, will be influenced by, among other things, the rate at which
principal of the mortgage loans is paid or otherwise collected or advanced and
the extent to which such payments, collections and/or advances of principal are
in turn applied in reduction of the principal balance of the class of principal
to which the bond belongs.
As described in this prospectus supplement, the principal payment amount for
each payment date will be payable first in respect of the class "A-1" and/or
class "A-2" bonds until the principal balances of those classes are reduced to
zero, and will thereafter be distributable entirely in respect of the other
classes of principal balance bonds, sequentially based upon their relative
seniority, in each such case until the related principal balance is reduced to
zero. As a consequence of the foregoing, the weighted average lives of the class
"A-1" and class "A-2" bonds may be shorter, and the weighted average lives of
the other classes of
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principal balance bonds may be longer, than would otherwise be the case if the
principal payment amount for each payment date was being paid on a PRO RATA
basis among the respective classes of principal balance bonds.
The tables (the "decrement tables") set forth in Annex C-2 show with respect
to each class of offered bonds (other than the class "X" bonds) the weighted
average life thereof, and the percentage of the related initial aggregate
principal balance that would be outstanding after each of the specified dates,
based upon each of the indicated levels of CPR and the modeling assumptions.
As used in each of the decrement tables, the column headed "0%" assumes that
none of the mortgage loans is prepaid before maturity, except that each ARD loan
is paid in full on its anticipated repayment date. The columns headed "25%",
"50%", "75%" and "100%" assume that no prepayments are made on any mortgage loan
during such mortgage loan's lockout period, yield maintenance period or
declining premium period, in each case if any, and are otherwise made on each of
the mortgage loans at the indicated CPRs, except that each ARD loan is paid in
full on its anticipated repayment date. There is no assurance, however, that
prepayments of the mortgage loans, whether or not in a lockout period, a yield
maintenance period or a declining premium period, will conform to any particular
CPR. We make no representation that--
- the mortgage loans will prepay in accordance with the assumptions set
forth in this prospectus supplement at any of the CPRs shown or at any
other particular prepayment rate,
- all the mortgage loans will prepay in accordance with the assumptions set
forth in this prospectus supplement at the same rate, or
- mortgage loans backing your bonds that are in a lockout period, a yield
maintenance period or declining premium period will not prepay as a result
of involuntary liquidations upon default or otherwise.
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the offered bonds will be
used by the issuer to purchase the mortgage loans and to pay certain expenses in
connection with the issuance of the bonds.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
Upon the issuance of the bonds, , our counsel, will deliver its
opinion generally to the effect that, assuming compliance with the governing
documents, and subject to certain other assumptions set forth in the opinion,
REMIC I, REMIC II and REMIC III, respectively, will each qualify as a REMIC
under the Internal Revenue Code of 1986 (for purposes of this "Federal Income
Tax Consequences" section, the "Code"). The assets of REMIC I will generally
include the mortgage loans, any REO properties acquired on behalf of the
bondholders and the issuer, the master servicer's custodial account, the special
servicer's REO account and the bond trustee's collection account and interest
reserve account, but will exclude any collections of Post-ARD Additional
Interest on the ARD loans. For federal income tax purposes,
- the separate non-certificated regular interests in REMIC I will be the
"regular interests" in REMIC I and will be the assets of REMIC II,
- the class "R-I" bonds will evidence the sole class of "residual interests"
in REMIC I,
- the separate non-certificated regular interests in REMIC II will be the
"regular interests" in REMIC II and will be the assets of REMIC III,
- the class "R-II" bonds will evidence the sole class of "residual
interests" in REMIC II,
- the class "A-1", "A-2", "X", "B", "C", "D", "E", "F", "G", "H", "J", "K",
"L", "M" and "N" bonds will evidence the "regular interests" in, and will
generally be treated as debt obligations of, REMIC III, and
- the class "R-III" bonds will evidence the sole class of "residual
interests" in REMIC III.
DISCOUNT AND PREMIUM; PREPAYMENT CONSIDERATION
For federal income tax reporting purposes, it is anticipated that the class
" " and class " " bonds will be issued with more than a DE MINIMIS
amount of original issue discount. The class " " bonds will be issued with
a DE MINIMIS amount of original issue discount. The other classes of offered
bonds will not be issued with original issue discount. When determining the rate
of accrual of market discount and premium, if any, for federal income tax
purposes the prepayment assumption used will be that subsequent to the date of
any determination:
[- the ARD loans will be paid in full on their respective anticipated
repayment dates,]
- no mortgage loan will otherwise be prepaid prior to maturity, and
- there will be no extension of maturity for any mortgage loan.
However, no representation is made as to the actual rate at which the mortgage
loans will prepay, if at all. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Bonds" in the
accompanying prospectus.
The IRS has issued regulations under Sections 1271 to 1275 of the Code
generally addressing the treatment of debt instruments issued with original
issue discount. You should be aware, however, that those regulations and
Section 1272(a)(6) of the Code do not adequately address certain issues relevant
to, or are not applicable to, prepayable securities such as the offered bonds.
We recommend that you consult with your own tax advisor concerning the tax
treatment of your bonds.
If the method for computing original issue discount described in the
accompanying prospectus results in a negative amount for any period with respect
to any holder of offered bonds, the amount of original issue discount allocable
to that period would be zero. This is a possibility of particular relevance to a
holder
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of a class "X" bond. The holder would be permitted to offset the negative amount
only against future original issue discount, if any, attributable to the bonds.
Although the matter is not free from doubt, a holder of a class "X" bond may be
permitted to deduct a loss to the extent that his or her respective remaining
basis in the bond exceeds the maximum amount of future payments to which the
holder is entitled, assuming no further prepayments of the mortgage loans. Any
loss might be treated as a capital loss.
Certain classes of the offered bonds may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of these classes
of offered bonds will be treated as holding a bond with amortizable bond premium
will depend on the bondholder's purchase price and the payments remaining to be
made on the certificate at the time of its acquisition by the bondholder. If you
acquire an interest in any class of offered bonds issued at a premium, you
should consider consulting your own tax advisor regarding the possibility of
making an election to amortize the premium. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium"
in the accompanying prospectus.
Prepayment premiums and yield maintenance charges actually collected on the
mortgage loans will be paid on the offered bonds as and to the extent described
in this prospectus supplement. It is not entirely clear under the Code when the
amount of a prepayment premium or yield maintenance charge should be taxed to
the holder of a class of offered bonds entitled to that amount. For federal
income tax reporting purposes, will report prepayment premiums or
yield maintenance charges as income to the holders of a class of offered bonds
entitled thereto only after the master servicer's actual receipt thereof. The
IRS may nevertheless seek to require that an assumed amount of prepayment
premiums and yield maintenance charges be included in payments projected to be
made on the offered bonds and that taxable income be reported based on the
projected constant yield to maturity of the offered bonds. Therefore, the
projected prepayment premiums and yield maintenance charges would be included
prior to their actual receipt by holders of the offered bonds. If the projected
prepayment premiums and yield maintenance charges were not actually received,
presumably the holder of an offered bond would be allowed to claim a deduction
or reduction in gross income at the time the unpaid prepayment premiums and
yield maintenance charges had been projected to be received. Moreover, it
appears that prepayment premiums and yield maintenance charges are to be treated
as ordinary income rather than capital gain. The correct characterization of the
income is not entirely clear. We recommend you consult your own tax advisors
concerning the treatment of prepayment premiums and yield maintenance charges.
CONSTRUCTIVE SALES OF CLASS X BONDS
The Taxpayer Relief Act of 1997 added a provision to the Code that requires
the recognition of gain upon the "constructive sale of an appreciated financial
position". A constructive sale of a financial position occurs if a taxpayer
enters into certain transactions or series of transactions that have the effect
of substantially eliminating the taxpayer's risk of loss and opportunity for
gain with respect to the financial instrument. Debt instruments that:
- entitle the holder to a specified principal amount,
- pay interest at a fixed or variable rate, and
- are not convertible into the stock of the issuer or a related party,
cannot be the subject of a constructive sale for this purpose. Accordingly, only
class "X" bonds, which do not have principal balances, could be subject to this
provision and only if a holder of those bonds engages in a constructive sale
transaction.
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CHARACTERIZATION OF INVESTMENTS IN OFFERED BONDS
Except to the extent noted below, the offered bonds will be "real estate
assets" within the meaning of Section 856(c)(5)(B) of the Code in the same
proportion that the assets of the trust estate would be so treated. In addition,
interest, including original issue discount, if any, on the offered bonds will
be interest described in Section 856(c)(3)(B) of the Code to the extent that the
bonds are treated as "real estate assets" within the meaning of
Section 856(c)(5)(B) of the Code.
Most of the mortgage loans are not secured by real estate used for
residential or certain other purposes prescribed in Section 7701(a)(19)(C) of
the Code. Consequently, the offered bonds will be treated as assets qualifying
under that section to only a limited extent. Accordingly, investment in the
offered bonds may not be suitable for a thrift institution seeking to be treated
as a "domestic building and loan association" under Section 7701(a)(19)(C) of
the Code. The offered bonds will be treated as "qualified mortgages" for another
REMIC under Section 860G(a)(3)(C) of the Code and "permitted assets" for a
"financial asset securitization investment trust" under Section 860L(c) of the
Code.
To the extent an offered bond represents ownership of an interest in a
mortgage loan that is secured in part by the related borrower's interest in a
bank account, that mortgage loan is not secured solely by real estate.
Therefore:
- a portion of that bond may not represent ownership of "loans secured by an
interest in real property" or other assets described in
Section 7701(a)(19)(C) of the Code;
- a portion of that bond may not represent ownership of "real estate assets"
under Section 856(c)(5)(B) of the Code; and
- the interest on that bond may not constitute "interest on obligations
secured by mortgages on real property" within the meaning of
Section 856(c)(3)(B) of the Code.
See "Description of the Mortgage Collateral" in this prospectus supplement and
"Federal Income Tax Consequences--REMICs--Characterization of Investments in
REMIC Bonds" in the accompanying prospectus.
For further information regarding the federal income tax consequences of
investing in the offered bonds, see "Federal Income Tax Consequences" in the
accompanying prospectus.
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CERTAIN ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Internal Revenue Code of 1986 impose various requirements on--
- employee benefit plans, and on certain other retirement plans,
arrangements and accounts, that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the Internal
Revenue Code of 1986 (each, an "ERISA Plan"), and
- persons that are fiduciaries with respect to ERISA Plans,
in connection with the investment of the assets of an ERISA Plan ("Plan
Assets"). For purposes of this discussion, ERISA Plans may include individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts, including as applicable, insurance company general
accounts, in which other ERISA Plans are invested.
A fiduciary of any ERISA Plan should carefully review with its legal
advisors whether the purchase or holding of offered bonds could be or give rise
to a transaction that is prohibited or is not otherwise permitted either under
ERISA or Section 4975 of the Internal Revenue Code of 1986 or whether there
exists any statutory or administrative exemption applicable thereto. Certain
fiduciary and prohibited transaction issues arise only if the assets of the
trust estate are "plan assets" for purposes of Part 4 of Title I of ERISA and
Section 4975 of the Internal Revenue Code of 1986. Whether the assets of the
trust estate will be plan assets at any time will depend on a number of factors,
including the portion of any class of bonds that is held by "benefit plan
investors" (as defined in U.S. Department of Labor Regulation
Section 2510.3-101).
The U.S. Department of Labor has issued an individual prohibited transaction
exemption to the underwriter, identified as Prohibited Transaction Exemption
91-14 (the "Exemption"). The Exemption applies to bonds that are equity
interests in a trust or are debt issued by a REMIC or FASIT. Subject to the
satisfaction of certain conditions set forth therein, the Exemption generally
exempts from the application of the prohibited transaction provisions of
Sections 406(a) and (b) and 407(a) of ERISA, and the excise taxes imposed on
these prohibited transactions pursuant to Sections 4975(a) and (b) of the U.S.
tax code, certain transactions relating to, among other things, the servicing
and operation of pools of real estate loans, such as the mortgage collateral,
and the purchase, sale and holding of bonds, which are equity interests in a
trust or debt issued by a REMIC or FASIT, evidencing interests in those pools,
such as the class "A-1", "A-2" and "X" bonds, that are underwritten by one of
the following parties (each, an "Exemption-Favored Party")--
(a) the underwriter,
(b) any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the underwriter,
and
(c) any member of the underwriting syndicate or selling group of which a
person described in (a) or (b) is a manager or co-manager with respect to
those bonds.
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of a class "A-1", "A-2"
or "X" bond to be eligible for exemptive relief thereunder. The conditions are
as follows:
- FIRST, the acquisition of the bond by a plan must be on terms that are at
least as favorable to the ERISA Plan as they would be in an arm's-length
transaction with an unrelated party;
- SECOND, the rights and interests evidenced by that bond must not be
subordinated to the rights and interests evidenced by the other bonds;
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- THIRD, at the time of its acquisition by the plan, that bond must be rated
in one of the three highest generic rating categories by Moody's, Fitch,
Standard & Poor's or Duff & Phelps;
- FOURTH, the bond trustee cannot be an affiliate of any other member of the
"restricted group", which (in addition to the bond trustee) consists of
the Exemption-Favored Parties, us, the issuer, the master servicer, the
special servicer, any sub-servicers, the mortgage loan sellers, each
borrower, if any, with respect to mortgage loans constituting more than
5.0% of the aggregate unamortized principal balance of the initial
mortgage collateral balance and any and all affiliates of any of the
aforementioned persons;
- FIFTH, the sum of all payments made to and retained by the
Exemption-Favored Parties must represent not more than reasonable
compensation for underwriting the relevant class of bonds; the sum of all
payments made to and retained by us pursuant to the assignment of the
mortgage loans to the bond trustee must represent not more than the fair
market value of the obligations; and the sum of all payments made to and
retained by the master servicer, the special servicer and any sub-servicer
must represent not more than reasonable compensation for that person's
services under the servicing and administration agreement and
reimbursement of that person's reasonable expenses in connection
therewith; and
- SIXTH, the investing ERISA Plan must be an accredited investor as defined
in Rule 501(a)(1) of Regulation D under the Securities Act of 1933, as
amended.
Because the class "A-1", "A-2" and "X" bonds are not subordinated to any
other class of bonds, the second general condition set forth above is satisfied
with respect to the class "A-1", "A-2" and "X" bonds. It is a condition of their
issuance that the class "A-1", "A-2" and "X" bonds be rated not lower than
" " by and " " by . In addition, the initial
bond trustee is not an affiliate of any other member of the restricted group.
Accordingly, as of the date of initial issuance of the bonds, the third and
fourth general conditions set forth above will be satisfied with respect to the
class "A-1", "A-2" and "X" bonds. A fiduciary of an ERISA Plan contemplating the
purchase of a class "A-1", "A-2" or "X" bond in the secondary market must make
its own determination that, at the time of the purchase, the bond continues to
satisfy the third and fourth general conditions set forth above. A fiduciary of
an ERISA Plan contemplating the purchase of a class "A-1", "A-2" or "X" bond,
whether in the initial issuance of the bond or in the secondary market, must
make its own determination that the first and fifth general conditions set forth
above will be satisfied with respect to the bond as of the date of the purchase.
An ERISA Plan's authorizing fiduciary will be deemed to make a representation
regarding satisfaction of the sixth general condition set forth above in
connection with the purchase of a class "A-1", "A-2" or "X" bond.
The Exemption also requires that the trust estate meet the following
requirements:
- the assets of the trust estate must consist solely of assets of the type
that have been included in other investment pools;
- bonds evidencing interests in those other investment pools must have been
rated in one of the three highest generic categories of Moody's, Fitch,
Standard & Poor's or Duff & Phelps for at least one year prior to the
ERISA Plan's acquisition of a class "A-1", "A-2" or "X" bond; and
- bonds evidencing interests in those other investment pools must have been
purchased by investors other than ERISA Plans for at least one year prior
to any ERISA Plan's acquisition of a class "A-1", "A-2" or "X" bond.
We believe that these requirements have been satisfied as of the date of
this prospectus supplement.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, as well as the excise taxes imposed
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by Sections 4975(a) and (b) of the Internal Revenue Code of 1986 by reason of
Sections 4975(c)(1)(A) through (D) of the Internal Revenue Code of 1986, in
connection with--
- the direct or indirect sale, exchange or transfer of class "A-1", "A-2" or
"X" bonds acquired by an ERISA Plan upon initial issuance from us or an
Exemption-Favored Party when we are, or either mortgage loan seller, the
bond trustee, the issuer, the master servicer, the special servicer or any
sub-servicer, provider of credit support, Exemption-Favored Party or
mortgagor is, a Party in Interest (as defined in the accompanying
prospectus) with respect to the investing ERISA Plan,
- the direct or indirect acquisition or disposition in the secondary market
of class "A-1", "A-2" or "X" bonds by an ERISA Plan, and
- the continued holding of class "A-1", "A-2" or "X" bonds by an ERISA Plan.
However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
class "A-1", "A-2" or "X" bond on behalf of an Excluded ERISA Plan by any person
who has discretionary authority or renders investment advice with respect to the
assets of that ERISA Plan. For purposes of this prospectus supplement, an
"Excluded ERISA Plan" is an ERISA Plan sponsored by any member of the restricted
group referred to above.
Moreover, if the general conditions of the Exemption, as well as certain
other conditions set forth in the Exemption, are satisfied, the Exemption may
also provide an exemption from the restrictions imposed by Sections 406(b)(1)
and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of the
Internal Revenue Code of 1986 in connection with--
- the direct or indirect sale, exchange or transfer of class "A-1", "A-2" or
"X" bonds in the initial issuance of those bonds between us or an
Exemption-Favored Party and an ERISA Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of the assets of the ERISA Plan in those bonds is (i) a
borrower with respect to 5.0% or less of the fair market value of the
mortgage loans or (ii) an affiliate of this person,
- the direct or indirect acquisition or disposition in the secondary market
of class "A-1", "A-2" or "X" bonds by an ERISA Plan, and
- the holding of class "A-1", "A-2" or "X" bonds by an ERISA Plan.
Further, if the general conditions of the Exemption, as well as certain
other conditions set forth in the Exemption, are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a), 406(b)
and 407(a) of ERISA, and the taxes imposed by Sections 4975(a) and (b) of the
Internal Revenue Code of 1986 by reason of Section 4975(c) of the Internal
Revenue Code of 1986, for transactions in connection with the servicing,
management and operation of the trust estate.
Lastly, if the general conditions of the Exemption are satisfied, the
Exemption also may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Internal Revenue Code of 1986 by reason of Sections 4975(c)(1)(A)
through (D) of the Internal Revenue Code of 1986 if the restrictions are deemed
to otherwise apply merely because a person is deemed to be a Party in Interest
with respect to an investing plan by virtue of providing services to the ERISA
Plan (or by virtue of having certain specified relationships to this person)
solely as a result of the ERISA Plan's ownership of class "A-1", "A-2" or "X"
bonds.
Before purchasing a class "A-1", "A-2" or "X" bond, a fiduciary of an ERISA
Plan should itself confirm that:
- the class "A-1", "A-2" and "X" bonds are the type of instruments covered
by the Exemption, and
- the general and other conditions set forth in the Exemption and the other
requirements set forth in the Exemption would be satisfied at the time of
the purchase.
S-102
<PAGE>
In addition to determining the availability of the exemptive relief provided
in the Exemption, a fiduciary of an ERISA Plan considering an investment in
class "A-1", "A-2" or "X" bonds should consider the availability of any other
prohibited transaction class exemptions. See "ERISA Considerations" in the
accompanying prospectus. There can be no assurance that any such exemption will
apply with respect to any particular investment by an ERISA Plan in class "A-1",
"A-2" or "X" bonds or, even if it were deemed to apply, that it would apply to
all prohibited transactions that may occur in connection with the investment. A
purchaser of class "A-1", "A-2" or "X" bonds should be aware, however, that even
if the conditions specified in one or more class exemptions are satisfied, the
scope of relief provided by a class exemption may not cover all acts which might
be construed as prohibited transactions.
The characteristics of the class "B", "C", "D", "E" and "F" bonds do not
meet the requirements of the Exemption. Accordingly, those offered bonds may not
be acquired by, on behalf of or with the assets of an ERISA Plan, except in the
case of an insurance company using funds in its general account, which may be
able to rely on Section III of Prohibited Transaction Class Exemption 95-60
("PTCE 95-60"), which we discuss below.
So long as certain conditions are satisfied, Section III of PTCE 95-60
exempts from the application of the prohibited transaction provisions of
Sections 406(a), 406(b) and 407(a) of ERISA and Section 4975 of the Internal
Revenue Code of 1986 transactions in connection with the servicing, management
and operation of the trust estate under circumstances where an insurance company
general account has an interest in the trust estate as a result of its
acquisition of bonds. If these conditions are met, insurance company general
accounts would be allowed to purchase certain classes of the bonds, such as the
class "B", "C", "D", "E" and "F" bonds, that do not meet the requirements of the
Exemption solely because they (a) are subordinated to other classes of the bonds
or (b) have not received a rating at the time of the purchase in one of the
three highest rating categories from Moody's, Fitch, Standard & Poor's or
Duff & Phelps. All other conditions of the Exemption would have to be satisfied
in order for PTCE 95-60 to be available. Before purchasing any class "B", "C",
"D", "E" or "F" bonds, an insurance company general account seeking to rely on
Section III of PTCE 95-60 should itself confirm that all applicable conditions
and other requirements have been satisfied.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
Title I of ERISA or Section 4975 of the Internal Revenue Code of 1986. However,
a governmental plan may be subject to a federal, state or local law which is, to
a material extent, similar to the foregoing provisions of ERISA or the Internal
Revenue Code of 1986. A fiduciary of a governmental plan should make its own
determination as to the need for and the availability of any exemptive relief
under any such similar law.
Any fiduciary of an ERISA Plan considering whether to purchase an offered
bond on behalf of that ERISA Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Internal Revenue Code of 1986 to the investment.
The sale of offered bonds to an ERISA Plan is in no way a representation or
warranty by us, the issuer or the underwriter that the investment meets all
relevant legal requirements with respect to investments by ERISA Plans generally
or by any particular ERISA Plan, or that the investment is appropriate for ERISA
Plans generally or for any particular ERISA Plan.
S-103
<PAGE>
LEGAL INVESTMENT
[Upon issuance, the class "A-1" and "A-2" bonds (collectively, the "SMMEA
bonds") will constitute "mortgage related securities" for purposes of SMMEA.
However, in order to remain "mortgage related securities", the SMMEA bonds must,
among other things, continue to be rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. In addition, the SMMEA bonds will constitute "mortgage related
securities" in part because they evidence interest in notes secured by first
mortgage liens on one or more real properties upon which is located a
residential, commercial or mixed residential and commercial structure.
The remaining offered bonds will NOT be "mortgage related securities" for
purposes of SMMEA. As a result, the appropriate characterization of such bonds
under various legal investment restrictions, and thus the ability of investors
subject to these restrictions to purchase such bonds, is subject to significant
interpretive uncertainties.]
Neither we, the issuer nor the underwriter makes any representation as to
the ability of particular investors to purchase the offered bonds under
applicable legal investment or other restrictions. All institutions whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the offered bonds--
- are legal investments for them, or
- are subject to investment, capital or other restrictions.
All depository institutions considering an investment in the offered bonds
should review the Federal Financial Institutions Examination Council's
Supervisory Policy Statement on the Selection of Securities Dealers and
Unsuitable Investment Practices (to the extent adopted by their respective
regulatory authorities), setting forth, in relevant part, certain investment
practices deemed to be unsuitable for an institution's investment portfolio, as
well as guidelines for investing in certain types of mortgage related
securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase the offered bonds or to
purchase offered bonds representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the offered bonds are legal investments
for the investors.
See "Legal Investment" in the accompanying prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement dated
between the issuer and the underwriter, the underwriter has agreed
to purchase from the issuer and the issuer has agreed to sell to the underwriter
% of each class of the offered bonds. It is expected that delivery of the
offered bonds will be made to the underwriter in book-entry form through the
same day funds settlement system of DTC on or about against payment
therefor in immediately available funds.
The underwriting agreement provides that the obligation of the underwriter
to pay for and accept delivery of the offered bonds is subject to, among other
things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of our registration
statement
S-104
<PAGE>
shall be in effect, and that no proceedings for the purpose of obtaining a stop
order shall be pending before or threatened by the SEC.
The distribution of the offered bonds by the underwriter may be accomplished
from time to time in one or more negotiated transactions, or otherwise, at
varying prices to be determined at the time of sale. Proceeds to the issuer from
the sale of the offered bonds, before deducting expenses payable by the issuer,
will be approximately % of the aggregate principal balance of the offered
bonds, plus accrued interest on all the offered bonds from . The
underwriter may accomplish the transactions by selling the offered bonds to or
through dealers, and the dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the underwriter. The
underwriter may be deemed to have received compensation from the issuer, in
connection with the sale of the offered bonds, in the form of underwriting
compensation. The underwriter and any dealers that participate with the
underwriter in the distribution of the offered bonds may be deemed to be
statutory underwriters and any profit on the resale of the offered bonds
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
The underwriting agreement provides that we will indemnify the underwriter,
and that under limited circumstances the underwriter will indemnify us, against
certain civil liabilities under the Securities Act of 1933, as amended, or
contribute to payments required to be made in respect of any such liabilities.
We have also been advised by the underwriter that it presently intends to
make a market in the offered bonds. The underwriter has no obligation to do so,
however, and any market making may be discontinued at any time. There can be no
assurance that an active public market for the offered bonds will develop. See
"Risk Factors--Risks Related to the Offered Bonds--Many Factors, Including Lack
of Liquidity, Can Adversely Affect the Market Value of Your Bonds" in this
prospectus supplement and "Risk Factors--Lack of Liquidity Will Impair Your
Ability to Sell Your Bonds and May Have an Adverse Effect on the Market Value of
Your Bonds" in the accompanying prospectus.
LEGAL MATTERS
Certain legal matters relating to the bonds will be passed upon for the
issuer and the underwriter by .
RATINGS
It is a condition to their issuance that the respective classes of offered
bonds be rated as follows:
<TABLE>
<CAPTION>
CLASS [RATING AGENCY] [RATING AGENCY]
- ----- ------------------------ ------------------------
<S> <C> <C>
Class A-1
Class A-2
Class B
Class C
Class D
Class E
Class F
Class X
</TABLE>
The ratings on the offered bonds address the likelihood of the timely
receipt by their holders of all payments of interest to which they are entitled
on each payment date and, except in the case of the class "X" bonds, the
ultimate receipt by their holders of all payments of principal to which they are
entitled on or before the rated final payment date. The ratings take into
consideration the credit quality of the mortgage collateral, structural and
legal aspects associated with the offered bonds, and the extent to which the
payment stream from the mortgage collateral is adequate to make payments of
interest and/or principal required under the offered bonds.
S-105
<PAGE>
The ratings on the respective classes of offered bonds do not represent any
assessment of--
- the tax attributes of the offered bonds or of the trust estate,
- whether or to what extent prepayments of principal may be received on the
mortgage loans,
- the likelihood or frequency of prepayments of principal on the mortgage
loans,
- the degree to which the amount or frequency of prepayments of principal on
the mortgage loans might differ from those originally anticipated,
- whether or to what extent the interest payable on any class of offered
bonds may be reduced in connection with Net Aggregate Prepayment Interest
Shortfalls, and
- whether and to what extent prepayment premiums, yield maintenance charges,
Default Interest or Post-ARD Additional Interest will be received.
Also, a security rating does not represent any assessment of the yield to
maturity that investors may experience or the possibility that the class "X"
bondholders might not fully recover their investment in the event of rapid
prepayments and/or other liquidations of the mortgage loans.
In general, the ratings address credit risk and not prepayment risk. As
described in this prospectus supplement, the amounts payable with respect to the
class "X" bonds consist primarily of interest. Even if all the mortgage
collateral were to prepay in the initial month, with the result that the class
"X" bondholders receive only a single month's interest payment and, accordingly,
suffer a nearly complete loss of their investment, all amounts "due" to those
bondholders will nevertheless have been paid. This result would be consistent
with the respective ratings received on the class "X" bonds. The aggregate
notional amount of the class "X" bonds is subject to reduction in connection
with each reduction in the aggregate principal balance of a class of principal
balance bonds, whether as a result of payments of principal or in connection
with Realized Losses and Additional Trust Estate Expenses. The ratings of the
class "X" bonds do not address the timing or magnitude of reduction of the
aggregate notional amount of those bonds, but only the obligation to pay
interest timely on that aggregate notional amount as so reduced from time to
time.
There can be no assurance as to whether any rating agency not requested to
rate the offered bonds will nonetheless issue a rating to any class of offered
bonds and, if so, what the rating would be. A rating assigned to any class of
offered bonds by a rating agency that has not been requested by us to do so may
be lower than the rating assigned thereto by or .
The ratings on the offered bonds should be evaluated independently from
similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating organization. Each security
rating should be evaluated independently of any other security rating. See
"Rating" in the accompanying prospectus.
S-106
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Important Notice about the Information Contained
in this Prospectus Supplement, the
Accompanying Prospectus and the Related
Registration Statement........................ S-2
Forward-Looking Statements...................... S-3
Summary of Prospectus Supplement................ S-5
Risk Factors.................................... S-27
Description of the Mortgage Collateral.......... S-38
Servicing of the Mortgage Loans................. S-58
Description of the Offered Bonds................ S-84
Yield and Maturity Considerations............... S-111
Use of Proceeds................................. S-119
Federal Income Tax Consequences................. S-119
Certain ERISA Considerations.................... S-122
Legal Investment................................ S-127
Method of Distribution.......................... S-128
Legal Matters................................... S-129
Ratings......................................... S-129
ANNEX A-1--Certain Characteristics of the
Mortgage Loans................................ A-1-1
ANNEX A-2--Certain Monetary Terms of the
Mortgage Loans................................ A-2-1
ANNEX B--Term Sheet............................. B-1
ANNEX C-1--Price/Yield Tables................... C-1-1
ANNEX C-2--Decrement Tables..................... C-2-1
ANNEX D--Form of Delinquent Loan Status
Report........................................ D-1
ANNEX E--Form of Historical Loan Modification
Report........................................ E-1
ANNEX F--Form of Historical Liquidation
Report........................................ F-1
ANNEX G--Form of REO Status Report.............. G-1
ANNEX H--Form of Watch List Report.............. H-1
ANNEX I--Form of Operating Statement Analysis... I-1
ANNEX J--Form of NOI Adjustment Worksheet....... J-1
ANNEX K--Form of Comparative Financial Status
Report........................................ K-1
PROSPECTUS
Important Notice about the Information Presented
in this Prospectus............................ 3
Available Information; Incorporation by
Reference..................................... 3
Summary of Prospectus........................... 4
Risk Factors.................................... 15
Description of the Trust Estates................ 36
Yield and Maturity Considerations............... 61
Structured Asset Securities Corporation......... 67
Issuers......................................... 68
Description of the Bonds........................ 68
Description of the Governing Documents.......... 78
Certain Legal Aspects of the Mortgage Loans..... 92
Federal Income Tax Consequences................. 105
State and Other Tax Consequences................ 136
ERISA Considerations............................ 136
Legal Investment................................ 141
Use of Proceeds................................. 143
Method of Distribution.......................... 143
Legal Matters................................... 145
Financial Information........................... 145
Rating.......................................... 145
</TABLE>
------------------------------
UNTIL , ALL DEALERS THAT EFFECT TRANSACTIONS IN THE OFFERED BONDS,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$
(APPROXIMATE)
LB COMMERCIAL MORTGAGE
TRUST
(DEPOSITOR)
CLASS A-1, CLASS A-2,
CLASS B, CLASS C, CLASS D, CLASS E, CLASS F AND CLASS X
SERIES
COLLATERALIZED MORTGAGE
OBLIGATIONS
- ---------------------------------
PROSPECTUS SUPPLEMENT
- ---------------------------------
- ---------------------------------
LEHMAN BROTHERS
- ---------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
STRUCTURED ASSET SECURITIES CORPORATION, THE DEPOSITOR
COLLATERALIZED MORTGAGE OBLIGATIONS (ISSUABLE IN SERIES)
Our name is Structured Asset Securities Corporation. We intend to offer
from time to time collateralized mortgage obligations in the form of bonds.
These offers may be made through one or more different methods, including
offerings through underwriters. We do not currently intend to list those bonds
on any national securities exchange or the NASDAQ stock market. See "Method of
Distribution."
<TABLE>
<CAPTION>
THE OFFERED BONDS: THE MORTGAGE COLLATERAL AND OTHER ASSETS OF THE
TRUST ESTATES:
<S> <C>
The offered bonds will be issuable in series.
Each series of offered bonds will-- In order to secure its obligations, in particular
its payment obligations, with respect to a series of
- - have its own series designation, offered bonds, the related issuer will pledge, among
other things, the following mortgage assets--
- - consist of one or more classes with
various payment characteristics, - mortgage loans secured by first and junior
liens on, or security interests in, various
- - be issued by an owner trust established by interests in commercial and multifamily real
us, properties,
- - be secured, nonrecourse obligations of the - mortgage-backed securities that directly or
related issuer, and indirectly evidence interests in, or are directly
or indirectly secured by, such types of
- - be payable solely out of the related mortgage loans, or
mortgage collateral and the other assets of
the related trust estate. - some combination of such types of mortgage
loans and mortgage-backed securities.
No governmental agency or instrumentality will
insure or guarantee payment on the offered bonds. The trust estate for a series of offered bonds may also
Neither we nor any of our affiliates, other than the include letters of credit, surety bonds, insurance
related issuer, are responsible for making policies, guarantees, credit derivatives, reserve funds,
payments on any series of offered bonds if guaranteed investment contracts, interest rate
collections on the assets of the related trust estate exchange agreements, interest rate cap or floor
are insufficient. agreements, currency exchange agreements, or other
similar instruments and agreements.
</TABLE>
In connection with each offering, we will prepare a supplement to this
prospectus in order to describe in more detail the particular bonds being
offered and the related trust estate. In that document, we will also state the
price to public for each class of offered bonds or explain the method for
determining that price. In addition, in that document, we will identify the
applicable lead or managing underwriter(s), if any, and the relevant
underwriting arrangements. You may not purchase the offered bonds of any series
unless you have also received the prospectus supplement for that series. YOU
SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 16 IN THIS
PROSPECTUS, AS WELL AS THOSE SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT,
PRIOR TO INVESTING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED BONDS OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ______________, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Important Notice about the Information Presented in this Prospectus..................3
Available Information; Incorporation by Reference....................................3
Summary of Prospectus................................................................4
Risk Factors........................................................................16
Description of the Trust Estates....................................................39
Yield and Maturity Considerations...................................................64
Structured Asset Securities Corporation.............................................70
Issuers.............................................................................70
Description of the Bonds............................................................71
Description of the Governing Documents..............................................81
Certain Legal Aspects of Mortgage Loans............................................100
Federal Income Tax Consequences....................................................114
State and Other Tax Consequences...................................................156
Erisa Considerations...............................................................156
Legal Investment...................................................................161
Use of Proceeds....................................................................163
Method of Distribution.............................................................164
Legal Matters......................................................................165
Financial Information..............................................................165
Rating.............................................................................166
</TABLE>
-2-
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS
When deciding whether to invest in any of the offered bonds, you should
only rely on the information contained in this prospectus and the related
prospectus supplement. We have not authorized any dealer, salesman or other
person to give any information or to make any representation that is different.
In addition, information in this prospectus or any related prospectus supplement
is current only as of the date on its cover. By delivery of this prospectus and
any related prospectus supplement, we are not offering to sell any securities,
and are not soliciting an offer to buy any securities, in any state where the
offer and sale is not permitted.
AVAILABLE INFORMATION; INCORPORATION BY REFERENCE
We have filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the bonds offered by this
prospectus. This prospectus forms a part of the registration statement. This
prospectus and the related prospectus supplement do not contain all of the
information with respect to an offering that is contained in the registration
statement. For further information regarding the documents referred to in this
prospectus and the related prospectus supplement, you should refer to the
registration statement and its exhibits. You can inspect the registration
statement and its exhibits, and make copies of these documents at prescribed
rates, at the public reference facilities maintained by the SEC at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: Chicago Regional Office, 500 West Madison,
14th Floor, Chicago, Illinois 60661; and New York Regional Office, Seven World
Trade Center, New York, New York 10048. You can also obtain copies of such
materials electronically through the SEC's Web site (http://www.sec.gov).
In connection with each series of offered bonds, we will file or
arrange to have filed with the SEC any periodic reports that are required under
the Securities Exchange Act of 1934, as amended. All documents and reports that
are so filed with respect to any particular series of offered bonds prior to the
termination of the offering of those bonds are incorporated by reference into,
and should be considered a part of, this prospectus. Upon request, we will
provide without charge to each person receiving this prospectus in connection
with an offering, a copy of any or all documents or reports that are so
incorporated by reference. All requests should be directed to us in writing at
200 Vesey Street, New York, New York 10285, attention: Secretary, or by
telephone at (212) 526-7000.
-3-
<PAGE>
SUMMARY OF PROSPECTUS
This summary contains selected information from this prospectus. It
does not contain all of the information you need to consider in making your
investment decision. TO UNDERSTAND ALL OF THE TERMS OF A PARTICULAR OFFERING OF
BONDS, YOU SHOULD READ CAREFULLY THIS PROSPECTUS AND THE RELATED PROSPECTUS
SUPPLEMENT IN FULL.
<TABLE>
<S> <C>
WHO WE ARE............................................. Structured Asset Securities Corporation is a Delaware
corporation. Our principal offices are located at 200
Vesey Street, New York, New York 10285. Our main
telephone number is (212) 526-7000. See "Structured
Asset Securities Corporation."
THE SECURITIES BEING OFFERED........................... The securities that will be offered pursuant to this
prospectus and the related prospectus supplements consist
of collateralized mortgage obligations issued in the form
of bonds. These bonds will be issued in series, and each
series will, in turn, consist of one or more classes. Each
class of offered bonds must, at the time of issuance, be
assigned an investment grade rating by at least one
nationally recognized statistical rating organization.
Typically, the four highest rating categories, within which
there may be sub-categories or gradations to indicate
relative standing, signify investment grade. See "Rating."
Each series of offered bonds will in general be secured,
nonrecourse obligations of the related issuer. The primary
collateral for each series of offered bonds will consist of
commercial and/or multifamily mortgage assets having the
characteristics described in this prospectus and the related
prospectus supplement. The collateral for any series of
offered bonds, together with any other assets intended to
support payments thereon, will collectively constitute the
trust estate for those bonds. Each series of offered bonds
will be payable solely from the mortgage collateral and
other assets of the related trust estate.
THE OFFERED BONDS MAY BE
ISSUED WITH OTHER BONDS .......................... We may not publicly offer all the bonds of a particular
series. We may elect to retain some of those bonds, or, to
place some privately with institutional investors or to
deliver some to the applicable seller as partial
consideration for the related mortgage assets. In addition,
some of those bonds may not satisfy the rating
requirement described above for offered bonds.
</TABLE>
-4-
<PAGE>
<TABLE>
<S> <C>
ISSUER................................................. The issuer of each series of offered bonds will be an
owner trust established by us. We do not expect any such
owner trust to have any significant assets other than those
pledged to secure bonds.
We will initially hold 100% of the beneficial interests in
each owner trust that issues a series of offered bonds. We
may elect, however, to transfer some or all of those
beneficial interests to one or more persons or entities,
including our affiliates. The transfer of those beneficial
interests could occur simultaneously with the initial
issuance of the related series of offered bonds.
If so specified in the related prospectus supplement, and
subject to the satisfaction of all applicable conditions
precedent, an issuer of offered bonds may be permitted to--
- transfer the mortgage collateral and other assets
pledged to secure those bonds to another trust or
other limited purpose entity that assumes all of its
obligations with respect to those bonds, thereby
relieving the transferor of those obligations, and
- issue additional series of bonds.
THE GOVERNING DOCUMENTS................................ As stated above, the issuer of each series of offered bonds
will be an owner trust. We will establish that owner trust,
and convey to it the related mortgage collateral and other
assets to be included in the related trust estate, pursuant to
a deposit trust agreement between us, as depositor, and a
bank, trust company, corporation, association or other
fiduciary, as owner trustee.
The issuer of each series of offered bonds will--
- issue those bonds and any non-offered bonds of the
same series, and
- pledge, among other things, the related mortgage
collateral to secure its obligations, in particular
its payment obligations, with respect to those bonds
and any non-offered bonds of the same series,
pursuant to an indenture between the related owner trustee,
on behalf of the issuer, and a bank, trust company,
corporation, association or other fiduciary, as bond trustee
on behalf of the bondholders.
</TABLE>
-5-
<PAGE>
<TABLE>
<S> <C>
The indenture for each series of offered bonds will set
forth, among other things--
- the terms and conditions of those bonds and any
non-offered bonds of the same series,
- the obligations of the related issuer with respect to
those bonds and any non-offered bonds of the
same series, and
- the obligations of the related issuer and the related
bond trustee with respect to the related trust
estate.
In general, with respect to each series of offered bonds, a
servicing and administration agreement or other similar
agreement or collection of agreements will govern the
servicing and administration of the related mortgage assets
to the extent that those matters are not covered by the
related indenture. The parties to the servicing and
administration agreement(s) for any series of offered bonds
will in all cases include the related issuer and the related
bond trustee.
If the mortgage collateral for a series of offered bonds
includes mortgage loans, the parties to the related
servicing and administration agreement(s) will also
include--
- a master servicer that will generally be responsible
for performing customary servicing duties with
respect to those mortgage loans that are not
defaulted, nonperforming or otherwise problematic in
any material respect, and
- a special servicer that will generally be
responsible for servicing and administering such of
those mortgage loans that are defaulted,
nonperforming or otherwise problematic in any
material respect and real estate assets acquired in
respect of defaulted mortgage loans.
The same person or entity, or affiliated entities, may act
as both master servicer and special servicer for any series
of offered bonds.
If the mortgage collateral for a series of offered bonds
includes mortgage-backed securities, the parties to the
related servicing and administration agreement(s) may
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C>
also include a manager that will be responsible for
performing various administrative duties with respect to
those mortgage-backed securities. If the related bond
trustee assumes those duties, however, there will be no
manager.
In the related prospectus supplement, we will identify the
owner trustee, bond trustee and any master servicer, special
servicer or manager for each series of offered bonds and
will describe their respective duties in further detail. See
"Description of the Governing Documents."
CERTAIN CHARACTERISTICS OF
THE MORTGAGE COLLATERAL........................... The mortgage collateral for any series of offered bonds
will, in general, include mortgage loans. Each of those
mortgage loans will constitute the obligation of one or
more persons to repay a debt, and the performance of that
obligation will be secured by a first or junior lien on, or
security interest in, the ownership, leasehold or other
interest(s) of the related borrower or another person in or
with respect to one or more commercial or multifamily
real properties. In particular, the those properties may
include:
- rental or cooperatively-owned buildings with
multiple dwelling units;
- retail properties related to the sale of consumer
goods and other products, or related to providing
entertainment, recreational or personal services, to
the general public;
- office buildings;
- hospitality properties;
- casino properties;
- health care-related facilities;
- industrial facilities;
- warehouse facilities, mini-warehouse facilities and
self-storage facilities;
- restaurants, taverns and other establishments
involved in the food and beverage industry;
</TABLE>
-7-
<PAGE>
<TABLE>
<S> <C>
- manufactured housing communities, mobile home
parks and recreational vehicle parks;
- recreational and resort properties;
- arenas and stadiums;
- churches and other religious facilities;
- parking lots and garages;
- mixed use properties;
- other income-producing properties; and
- unimproved land.
The mortgage loans securing a series of offered bonds will
have a variety of payment terms. For example, any of those
mortgage loans--
- may provide for the accrual of interest at a
mortgage interest rate that is fixed over its term,
that resets on one or more specified dates or that
otherwise adjusts from time to time;
- may provide for the accrual of interest at a
mortgage interest rate that may be converted at the
borrower's election from an adjustable to a fixed
interest rate or from a fixed to an adjustable
interest rate;
- may provide for no accrual of interest;
- may provide for level payments to stated maturity,
for payments that reset in amount on one or more
specified dates or for payments that otherwise
adjust from time to time to accommodate changes in
the mortgage interest rate or to reflect the
occurrence of certain events;
- may be fully amortizing or, alternatively, may be
partially amortizing or nonamortizing, with a
substantial payment of principal due on its stated
maturity date;
- may permit the negative amortization or deferral
of accrued interest;
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- may prohibit some or all voluntary prepayments
or require payment of a premium, fee or charge in
connection with those prepayments;
- may permit defeasance and the release of real
property collateral in connection with that
defeasance;
- may provide for payments of principal, interest or
both, on due dates that occur monthly, bi-monthly,
quarterly, semi-annually, annually or at some other
interval; and/or
- may have two or more component parts, each having
characteristics that are otherwise described in this
prospectus as being attributable to separate and
distinct mortgage loans.
Most, if not all, of the mortgage loans pledged as security
for a series of offered bonds will, in turn, be secured by
liens on real properties located in the United States, its
territories and possessions. However, some of those mortgage
loans may be secured by liens on real properties located
outside the United States, its territories and possessions,
provided that the "foreign mortgage loans" do not represent
more than 10% of the related mortgage collateral, by
balance.
We do not originate mortgage loans. However, some or all of
the mortgage loans pledged as security for a series of
offered bonds may be originated by our affiliates.
Neither we nor any of our affiliates will guarantee or
insure repayment of any of the mortgage loans pledged as
security for a series of offered bonds. Unless we expressly
state otherwise in the related prospectus supplement, no
governmental agency or instrumentality will guarantee or
insure repayment of any of the mortgage loans pledged as
security for a series of offered bonds. See "Description of
the Trust Estates--Mortgage Loans."
The mortgage collateral for any series of offered bonds may
also include mortgage participations, mortgage pass-through
certificates, collateralized mortgage obligations and other
mortgage-backed securities, that evidence an interest in, or
are secured by a pledge of, one or more mortgage loans of
the type described above. We will not include a
mortgage-backed security among the mortgage collateral for
any series of offered bonds unless
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- the security has been registered under the
Securities Act of 1933, as amended, or
- we would be free to publicly resell the security
without that registration.
See "Description of the Trust Estates--Mortgage-Backed
Securities."
We will describe the specific characteristics of the
mortgage collateral securing a series of offered bonds in
the related prospectus supplement.
In general, the aggregate outstanding principal balance of
the mortgage collateral securing any particular series of
bonds will equal or exceed the initial aggregate outstanding
principal balance those bonds. In the event that the
aggregate outstanding principal balance of the related
mortgage collateral is less than the initial aggregate
outstanding principal balance of any series of bonds, the
related issuer may deposit or arrange for the deposit of
cash or liquid investments on an interim basis with the
related bond trustee to cover the shortfall. For 90 days
following the date of initial issuance of that series of
bonds, the related issuer will be entitled to obtain a
release of the deposited cash or investments if it delivers
or arranges for delivery of a corresponding amount of
mortgage collateral that satisfies the criteria specified in
the related prospectus supplement. If the related issuer
fails, however, to deliver mortgage collateral sufficient to
make up the entire shortfall, any of the cash or, following
liquidation, investments remaining on deposit with the
related bond trustee will be used by that trustee to redeem
bonds of the related series, as described in the related
prospectus supplement.
SUBSTITUTION, ACQUISITION AND
RELEASE OF MORTGAGE COLLATERAL.................... If so specified in the related prospectus supplement, we,
the related issuer or another specified person or entity
may be permitted, at our or its option, but subject to the
conditions specified in that prospectus supplement, to
obtain a release of particular items of mortgage
collateral--
- in connection with a redemption of bonds, or
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- in exchange for other mortgage loans or
mortgage-backed securities that (i) conform to the
description of mortgage collateral in this
prospectus, and (ii) satisfy the criteria set forth
in the related prospectus supplement.
In addition, if so specified in the related prospectus
supplement, the related bond trustee may be authorized or
required, including at the direction of the related issuer,
to apply collections on the related mortgage collateral to
acquire new mortgage loans or mortgage-backed securities
that (i) conform to the description of mortgage collateral
in this prospectus, and (ii) satisfy the criteria set forth
in the related prospectus supplement. No such replacement of
mortgage collateral or acquisition of new mortgage
collateral will be permitted if it would result in a
qualification, downgrade or withdrawal of the then-current
rating assigned by any rating agency to any class of
affected offered bonds.
CERTAIN CHARACTERISTICS OF
THE OFFERED BONDS................................. An offered bond may entitle the holder to receive:
- a stated principal amount;
- interest on a principal balance or notional amount,
at a fixed, variable or adjustable pass-through rate;
- specified, fixed or variable portions of the interest,
principal or other amounts received on the related
mortgage collateral;
- payments of principal, with disproportionate,
nominal or no payments of interest;
- payments of interest, with disproportionate,
nominal or no payments of principal;
- payments of interest or principal that commence only
as of a specified date or only after the occurrence
of certain events, such as the payment in full of
the interest and principal outstanding on one or
more other classes of bonds of the same series;
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- payments of principal to be made, from time to time
or for designated periods, at a rate that is faster
(and, in some cases, substantially faster) or slower
(and, in some cases, substantially slower) than the
rate at which payments or other collections of
principal are received on the related mortgage
collateral;
- payments of principal to be made, subject to
available funds, based on a specified principal
payment schedule or other methodology;
- payments of all or part of the prepayment or
repayment premiums, fees and charges, equity
participations payments or other similar items
received on the related mortgage collateral; or
- any other payments described in the related
prospectus supplement and payable out of the
assets of the related trust estate.
Any class of offered bonds may be senior or subordinate to
one or more other classes of bonds of the same series,
including a non-offered class of bonds of that series, for
purposes of some or all payments and/or allocations of
losses.
A class of offered bonds may have two or more component
parts, each having characteristics that are otherwise
described in this prospectus as being attributable to
separate and distinct classes.
We will describe the specific characteristics of each class
of offered bonds in the related prospectus supplement.
See "Description of the Bonds."
CREDIT SUPPORT, REINVESTMENT,
INTEREST RATE AND CURRENCY RELATED
PROTECTION FOR THE OFFERED BONDS.................. Some classes of offered bonds may be protected in full or
in part against certain defaults and losses on the related
mortgage collateral; through the subordination of one or
more other classes of bonds of the same series, the
subordination of the related issuer's interest in and its
right to receive payment on its interest, if any, in the
related mortgage collateral or by other types of credit
support. The other types of credit support may include a
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letter of credit, a surety bond, an insurance policy, a
guarantee, a credit derivative or a reserve fund. We will
describe the credit support, if any, for each class of
offered bonds in the related prospectus supplement.
The trust estate for any series of offered bonds may also
include any of the following agreements:
- guaranteed investment contracts pursuant to which
moneys held in the funds and accounts established
for those bonds will be invested at a specified
rate;
- interest rate exchange agreements, interest rate cap
or floor agreements, or other agreements and
arrangements designed to reduce the effects of
interest rate fluctuations on the related mortgage
assets or on one or more classes of those bonds; or
- currency exchange agreements or other agreements
designed to reduce the effects of currency exchange
rate fluctuations with respect to the related
mortgage collateral and one or more classes of
offered bonds.
We will describe the types of reinvestment, interest rate
and currency related protection, if any, for each class of
offered bonds in the related prospectus supplement.
See "Risk Factors" and "Description of Credit Support."
ADVANCES WITH RESPECT TO
THE MORTGAGE COLLATERAL........................... If the mortgage collateral for a series of offered bonds
includes mortgage loans, then, as and to the extent
described in the related prospectus supplement, the related
master servicer, the related special servicer, the related
bond trustee, any related provider of credit support and/or
any other specified person may be obligated to make, or
may have the option of making, certain advances with
respect to those mortgage loans to cover--
- delinquent scheduled payments of principal and/or
interest, other than balloon payments,
- property protection expenses,
- other servicing expenses, or
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- any other items specified in the related prospectus
supplement.
Any party making advances will be entitled to reimbursement
from subsequent recoveries on the related mortgage loan and
as otherwise described in this prospectus or the related
prospectus supplement. That party may also be entitled to
receive interest on its advances for a specified period. See
"Description of the Bonds--Advances."
If the mortgage collateral for a series of offered bonds
includes mortgage-backed securities, we will describe in the
related prospectus supplement any comparable advancing
obligations in respect of those mortgage-backed securities
or the underlying mortgage loans.
REDEMPTION OF BONDS.................................... We will describe in the related prospectus supplement any
circumstances in which the offered bonds of any series
will be subject to--
- special redemption,
- optional redemption, or
- mandatory redemption.
See "Description of the Bonds--Redemption."
FEDERAL INCOME TAX CONSEQUENCES........................ For federal income tax purposes, any class of offered
bonds will constitute or evidence ownership of:
- "regular interests" or "residual interests" in a
"real estate mortgage investment conduit" under
Sections 860A through 860G of the Internal Revenue
Code of 1986; or
- "regular interests" in a "financial asset
securitization investment trust" within the meaning
of Section 860L(a) of the Internal Revenue Code of
1986; or
- indebtedness of, or notional principal contract
obligations issued by, the related issuer.
If no REMIC election is made with respect to any issuer of
offered bonds, that issuer may, depending on the
characteristics of the offered bonds and the issuer, be
subject to taxation as a "taxable mortgage pool" within
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the meaning of Section 7701(i) of the Internal Revenue Code
of 1986. A taxable mortgage pool is subject to corporate
income taxation. The imposition of taxes on the taxable
income of such an issuer would reduce amounts available to
make payments on the offered bonds.
See "Federal Income Tax Consequences."
ERISA CONSIDERATIONS................................... If you are a fiduciary of an employee benefit plan or other
retirement plan or arrangement, you should review with
your legal advisor whether the purchase or holding of
offered bonds could give rise to a transaction that is
prohibited or is not otherwise permissible under
applicable law. See "ERISA Considerations."
LEGAL INVESTMENT....................................... If your investment authority is subject to legal
restrictions, you should consult your legal advisor to
determine whether and to what extent the offered bonds
constitute a legal investment for you. We will specify in
the related prospectus supplement which classes of the
offered bonds will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended. See "Legal
Investment."
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RISK FACTORS
You should consider the following factors (as well as the factors set
forth under "Risk Factors" in the related prospectus supplement) in deciding
whether to purchase offered bonds.
LACK OF LIQUIDITY WILL IMPAIR YOUR ABILITY TO SELL YOUR BONDS AND MAY HAVE AN
ADVERSE EFFECT ON THE MARKET VALUE OF YOUR BONDS
The offered bonds may have limited or no liquidity. We cannot assure
you that a secondary market for your bonds will develop. There will be no
obligation on the part of anyone to establish a secondary market. Even if a
secondary market does develop for your bonds, it may provide you with less
liquidity than you anticipated and it may not continue for the life of your
bonds.
We will describe in the related prospectus supplement the information
that will be available to you with respect to your bonds. The limited nature of
such information may adversely affect the liquidity of your bonds.
We do not currently intend to list the offered bonds on any national
securities exchange or the NASDAQ stock market.
Lack of liquidity will impair your ability to sell your bonds and may
prevent you from doing so at a time when you may want or need to. Lack of
liquidity could adversely affect the market value of your bonds. We will
describe in the related prospectus supplement any redemption rights with respect
to your bonds.
If you decide to sell your bonds, you may have to sell them at a
discount from the price you paid for reasons unrelated to the performance of
your bonds or the related mortgage collateral. Pricing information regarding
your bonds may not be generally available on an ongoing basis.
THE MARKET VALUE OF YOUR BONDS WILL BE SENSITIVE TO FACTORS UNRELATED TO THE
PERFORMANCE OF YOUR BONDS AND THE RELATED MORTGAGE COLLATERAL
The market value of your bonds can decline even if those bonds and the
related mortgage collateral are performing at or above your expectations.
The market value of your bonds will be sensitive to fluctuations in
current interest rates. However, a change in the market value of your bonds as a
result of an upward or downward movement in current interest rates may not equal
the change in the market value of your bonds as a result of an equal but
opposite movement in interest rates.
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The market value of your bonds will also be influenced by the supply of
and demand for commercial mortgage-backed securities generally. The supply of
commercial mortgage-backed securities will depend on, among other things, the
amount of commercial and multifamily mortgage loans, whether newly originated or
held in portfolio, that are available for securitization. A number of factors
will affect investors' demand for commercial mortgage-backed securities,
including--
- the availability of alternative investments that offer higher
yields or are perceived as being a better credit risk, having
a less volatile market value or being more liquid,
- legal and other restrictions that prohibit a particular entity
from investing in commercial mortgage-backed securities or
limit the amount or types of commercial mortgage-backed
securities that it may acquire,
- investors' perceptions regarding the commercial and
multifamily real estate markets, which may be adversely
affected by, among other things, a decline in real estate
values or an increase in defaults and foreclosures on mortgage
loans secured by income-producing properties, and
- investors' perceptions regarding the capital markets in
general, which may be adversely affected by political, social
and economic events completely unrelated to the commercial and
multifamily real estate markets.
If you decide to sell your bonds, you may have to sell at discount from
the price you paid for reasons unrelated to the performance of your bonds or the
related mortgage assets. Pricing information regarding your bonds may not be
generally available on an ongoing basis.
PAYMENTS ON THE OFFERED BONDS WILL BE MADE SOLELY FROM THE LIMITED ASSETS OF THE
RELATED TRUST ESTATE
We do not expect that the issuer of any series of offered bonds will
have any significant assets other than those pledged to secure bonds.
Furthermore, the offered bonds will in general be nonrecourse obligations of the
related issuer. No governmental agency or instrumentality will guarantee or
insure payment on the offered bonds. In addition, neither we nor any of our
affiliates, other than the related issuer, are responsible for making payments
on any series of offered bonds if collections on the assets of the related trust
estate are insufficient. If the assets of the related trust estate are
insufficient to make payments on your bonds, no other assets will be available
to you for payment of the deficiency, and you will bear the resulting loss. Any
advances made by a master servicer or other party with respect to the mortgage
assets securing your bonds are intended solely to provide liquidity and not
credit support. The party making those advances will have a right to
reimbursement, probably with interest, which is senior to your right to receive
payment on your bonds.
YOU MAY HAVE A LIMITED ABILITY TO DECLARE AN ISSUER IN DEFAULT AND FORCE A SALE
OF THE COLLATERAL
A series of offered bonds may be structured to be no more than mortgage
pay-through bonds with limited defaults. For example, the maturity of the bonds
may be substantially later than the maturity of any of the mortgage assets
pledged to secure them. In addition, it may not be an issuer event of default
if--
- the issuer fails to pay interest on the bonds on a current
basis, or
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- payments on the related mortgage collateral no longer support
payments on the bonds.
In addition, you may have only limited rights to declare, or cause the
related bond trustee to declare, a default with respect to your bonds and
accelerate payment thereunder. Any such declaration and acceleration may require
the direction or consent of bondholders in addition to yourself or may be
entirely in the discretion of the related bond trustee. Conversely, you may be
unable to prevent any such declaration and acceleration from occurring.
Even if your bonds are declared due and payable following an issuer
event of default, there can be no assurance that you will be able to force the
sale of the related trust estate or any portion thereof. Any such liquidation
may also require the direction or consent of bondholders in addition to yourself
or may be wholly within the discretion of the related bond trustee. Conversely,
you may be unable to prevent any such liquidation from occurring.
The market value of the mortgage collateral for any series of offered
bonds will vary from time to time. The market value of that mortgage collateral
may decline, perhaps substantially, in connection with, among other things,
increases in market interest rates and/or defaults and losses on the constituent
mortgage assets. Many of the factors affecting the market value of your bonds
would also affect the market value of the related mortgage collateral.
Accordingly, there can be no assurance that a sale of that mortgage collateral
will generate proceeds sufficient to pay all amounts due under the bonds that it
secures, together with the costs and expenses of liquidating that mortgage
collateral.
Acceleration of payment under the bonds and liquidation of the related
collateral will, in general, be the sole remedy against an issuer following an
issuer event of default. Each holder of an offered bond will be deemed to have
agreed by the acceptance of its bond not to file a bankruptcy petition or
commence similar proceedings in respect of the related issuer.
The lack of control that any single holder of offered bonds may have
with respect to the acceleration of payments thereunder and the sale of the
related trust estate following an issuer event of default, may adversely affect
the value and marketability of those bonds.
We will discuss issuer events of default and available remedies more
fully in the related prospectus supplement.
ISSUER BANKRUPTCY PROCEEDINGS CAN DELAY AND IMPAIR PAYMENT OF YOUR BONDS
Under the U.S. Bankruptcy Code, upon the filing of a bankruptcy
petition, the commencement or continuation of proceedings against a debtor are
automatically stayed. Where the issuer of any series of offered bonds is that
debtor, the automatic stay would, until it was modified, prevent--
- the enforcement of the obligations of that issuer under those
bonds and the related indenture, and
- actions against the property of that issuer, including the
related mortgage collateral.
In addition, the trustee in bankruptcy for that issuer may be able to accelerate
payment of the offered bonds and liquidate the related mortgage collateral. In
the event that the principal of bonds issued at a discount from par is declared
due and payable, the holders thereof may be entitled, under applicable
provisions of the
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U.S. Bankruptcy Code, to receive no more than an amount equal to the unpaid
principal amount thereof less the unamortized portion of that discount.
ANY CREDIT SUPPORT FOR YOUR BONDS MAY BE INSUFFICIENT TO PROTECT YOU AGAINST ALL
POTENTIAL LOSSES
THE AMOUNT OF CREDIT SUPPORT WILL BE LIMITED. The rating agencies that
assign ratings to your bonds will establish the amount of credit support, if
any, for your bonds based on, among other things, an assumed level of defaults,
delinquencies and losses with respect to the related mortgage collateral. Actual
losses may, however, exceed the assumed levels. See "Description of the
Bonds--Allocation of Losses and Shortfalls" and "Description of Credit Support."
If actual losses on the related mortgage collateral exceed the assumed levels,
you may be required to bear the additional losses.
CREDIT SUPPORT MAY NOT COVER ALL TYPES OF LOSSES. The credit support,
if any, for your bonds may not cover all of your potential losses. For example,
certain forms of credit support may not cover or may provide limited protection
against losses that you may suffer by reason of fraud or negligence or as a
result of certain uninsured casualties at the real properties securing the
related mortgage loans. You may be required to bear any losses which are not
covered by the credit support.
DISPROPORTIONATE BENEFITS TO CERTAIN CLASSES AND SERIES. If a form of
credit support covers multiple classes or series and losses exceed the amount of
such credit support, it is possible that the holders of offered bonds of another
series or class will be disproportionately benefited by such credit support to
your detriment.
THE INVESTMENT PERFORMANCE OF YOUR BONDS WILL DEPEND UPON PAYMENTS, DEFAULTS AND
LOSSES ON THE RELATED MORTGAGE LOANS
THE TERMS OF THE RELATED MORTGAGE LOANS WILL AFFECT PAYMENTS ON YOUR
BONDS. Each of the mortgage loans that secures or underlies the security for
your bonds will specify the terms on which the related borrower must repay the
outstanding principal amount of the loan. The rate, timing and amount of
scheduled payments of principal may vary, and may vary significantly, from
mortgage loan to mortgage loan. The rate at which those mortgage loans amortize
will directly affect the rate at which the principal balance or notional amount
of your bonds is paid down or otherwise reduced.
In addition, any mortgage loan that secures or underlies the security
for your bonds may permit the related borrower during some or all of the loan
term to prepay the loan. In general, a borrower will be more likely to prepay
its mortgage loan when it has an economic incentive to do so, such as obtaining
a larger loan on the same underlying real property or a lower or otherwise more
advantageous interest rate through refinancing. If a mortgage loan includes some
form of prepayment restriction, the likelihood of prepayment should decline.
These restrictions may include--
- an absolute or partial prohibition against voluntary
prepayments during some or all of the loan term, or
- a requirement that voluntary prepayments be accompanied by
some form of prepayment premium, fee or charge during some or
all of the loan term.
In many cases, there will be no restriction associated with the application of
insurance proceeds or condemnation proceeds as a prepayment of principal.
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Notwithstanding the terms of the mortgage loans backing your bonds, the
amount, rate and timing of payments and other collections thereon will, to some
degree, be unpredictable because of borrower defaults and because of casualties
and condemnations with respect to the underlying real properties.
The investment performance of your bonds may vary materially and
adversely from your expectations due to--
- the rate of prepayments and other unscheduled collections of
principal on the related mortgage loans being faster or slower
than you anticipated, or
- the rate of defaults on the related mortgage loans being
faster, or the severity of losses on the related mortgage
loans being greater, than you anticipated.
The actual yield to you, as a holder of an offered bond, may not equal
the yield you anticipated at the time of your purchase, and the total return on
investment that you expected may not be realized. In deciding whether to
purchase any offered bonds, you should make an independent decision as to the
appropriate prepayment, default and loss assumptions to be used. If the mortgage
assets securing your bonds include mortgage-backed securities, the terms of
those securities may soften or enhance the effects to you that may result from
prepayments, defaults and losses on the mortgage loans that ultimately back
those securities.
PREPAYMENTS ON THE RELATED LOANS WILL AFFECT THE AVERAGE LIFE OF YOUR
BONDS. Payments of principal and/or interest on your bonds will depend upon,
among other things, the rate and timing of payments on the mortgage assets
securing your bonds. Prepayments on the mortgage loans that constitute or
ultimately back those assets may result in a faster rate of principal payments
on your bonds, thereby resulting in a shorter average life for your bonds than
if those prepayments had not occurred. The rate and timing of principal
prepayments on pools of mortgage loans varies among pools and is influenced by a
variety of economic, demographic, geographic, social, tax and legal factors.
Accordingly, neither you nor we can predict the rate and timing of principal
prepayments on the mortgage loans that secure or underlie the security for your
bonds. As a result, repayment of your bonds could occur significantly earlier or
later, and the average life of your bonds could be significantly shorter or
longer, than you expected.
The extent to which prepayments on the related mortgage loans
ultimately affect the average life of your bonds depends on the terms and
provisions of your bonds. A class of offered bonds may entitle the holders to a
PRO RATA share of any prepayments on the related mortgage loans, to all or a
disproportionately large share of those prepayments, or to none or a
disproportionately small share of those prepayments. If you are entitled to a
disproportionately large share of any prepayments on the related mortgage loans,
your bonds may be retired at an earlier date. If, however, you are only entitled
to a small share of the prepayments on the related mortgage loans, the average
life of your bonds may be extended. Your entitlement to receive payments,
including prepayments, of principal of the related mortgage loans may--
- vary based on the occurrence of certain events, such as the
retirement of one or more other classes of bonds of the same
series, or
- be subject to certain contingencies, such as prepayment and
default rates with respect to the related mortgage loans.
We will describe the terms and provisions of your bonds more fully in
the related prospectus supplement.
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PREPAYMENTS ON THE RELATED MORTGAGE LOANS WILL AFFECT THE YIELD ON YOUR
BONDS. If you purchase your bonds at a discount or premium, the yield on your
bonds will be sensitive to prepayments on the mortgage loans that secure or
underlie the security for those bonds. If you purchase your bonds at a discount,
you should consider the risk that a slower than anticipated rate of principal
payments on the related mortgage loans could result in your actual yield being
lower than your anticipated yield. Alternatively, if you purchase your bonds at
a premium, you should consider the risk that a faster than anticipated rate of
principal payments on the related mortgage loans could result in your actual
yield being lower than your anticipated yield. The potential effect that
prepayments may have on the yield of your bonds will increase as the discount
deepens or the premium increases. If the amount of interest payable on your
bonds is disproportionately large, as compared to the amount of principal
payable on your bonds, you may fail to recover your original investment under
some prepayment scenarios.
DELINQUENCIES, DEFAULTS AND LOSSES ON THE RELATED MORTGAGE LOANS MAY
AFFECT THE AMOUNT AND TIMING OF PAYMENTS ON YOUR BONDS. The rate and timing of
delinquencies and defaults, and the severity of losses, on the related mortgage
loans will impact the amount and timing of payments on a series of offered bonds
to the extent that their effects are not offset by delinquency advances or some
form of credit support.
Unless otherwise covered by delinquency advances or some form of credit
support, defaults on the related mortgage loans may delay payments on a series
of offered bonds while the defaulted mortgage loans are worked-out or
liquidated. However, liquidations of defaulted mortgage loans prior to maturity
could affect the yield and average life of an offered bond in a manner similar
to a voluntary prepayment.
If you calculate your anticipated yield to maturity based on an assumed
rate of default and amount of losses on the related mortgage loans that is lower
than the default rate and amount of losses actually experienced, then, to the
extent that you are required to bear the additional losses, your actual yield to
maturity will be lower than you calculated and could, under certain scenarios,
be negative. Furthermore, the timing of losses on the related mortgage loans can
affect your yield. In general, the earlier you bear any loss on a mortgage loan,
the greater the negative effect on your yield.
See "--Repayment of a Commercial or Multifamily Mortgage Loan Depends
Upon the Performance and Value of the Underlying Real Property and the Related
Borrower's Ability to Refinance the Property" below.
THERE IS AN INCREASED RISK OF DEFAULT ASSOCIATED WITH BALLOON PAYMENTS.
Any of the mortgage loans that secures or underlies the security for your bonds
may be nonamortizing or only partially amortizing. The borrower under a mortgage
loan of that type is required to make substantial payments of principal and
interest (that is, balloon payments) on the maturity date of the loan. The
ability of the borrower to make a balloon payment depends upon the borrower's
ability to refinance or sell the real property securing the loan. The ability of
the borrower to refinance or sell the property will be affected by a number of
factors, including:
- the fair market value and condition of the underlying real
property;
- the level of interest rates;
- the borrower's equity in the underlying real property;
- the borrower's financial condition;
- the operating history of the underlying real property;
- changes in zoning and tax laws;
- changes in competition in the relevant area;
- changes in rental rates in the relevant area;
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- changes in governmental regulation and fiscal policy;
- prevailing general and regional economic conditions;
- the state of the fixed income and mortgage markets; and
- the availability of credit for multifamily rental or commercial
properties.
See "--Repayment of a Commercial or Multifamily Mortgage Loan Depends
Upon the Performance and Value of the Underlying Real Property and the Related
Borrower's Ability to Refinance the Property" below.
Neither we nor any of our affiliates will be obligated to refinance any
mortgage loan that secures or underlies the security for your bonds.
The related master servicer or special servicer may (within prescribed
limits) extend and modify mortgage loans securing your bonds that are in default
or as to which a payment default is imminent in order to maximize recoveries on
the defaulted loans. The related master servicer or special servicer is only
required to determine that any such extension or modification is reasonably
likely to produce a greater recovery than a liquidation of the real property
securing the defaulted loan. There is a risk that the decision of the master
servicer or special servicer to extend or modify a mortgage loan may not in fact
produce a greater recovery.
YOUR BONDS MAY BE REDEEMED BY THE RELATED ISSUER PRIOR TO MATURITY
The issuer of a series of offered bonds may have the option of
redeeming those bonds, in whole or in part, prior to maturity. Generally, an
issuer will have an economic incentive to exercise its right of optional
redemption when it can obtain alternative financing at a more advantageous
interest rate. The yield on your bonds may be adversely affected by any such
optional redemption if and to the extent that the related issuer is not required
to pay any redemption premium.
We will describe the terms and conditions of any optional redemption
rights more fully in the related prospectus supplement.
REPAYMENT OF A COMMERCIAL OR MULTIFAMILY MORTGAGE LOAN DEPENDS UPON THE
PERFORMANCE AND VALUE OF THE UNDERLYING REAL PROPERTY AND THE RELATED BORROWER'S
ABILITY TO REFINANCE THE PROPERTY
MOST OF THE MORTGAGE LOANS THAT SECURE OR UNDERLIE THE SECURITY FOR
YOUR BONDS WILL BE NONRECOURSE. You should consider all of the mortgage loans
that secure or underlie the security for your bonds to be nonrecourse loans.
This means that, in the event of a default, recourse will be limited to the
related real property or properties securing the defaulted mortgage loan. In
those cases where recourse to a borrower or guarantor is permitted by the loan
documents, we generally will not undertake any evaluation of the financial
condition of such borrower or guarantor. Consequently, full and timely payment
on each mortgage loan that secures or underlies the security for your bonds will
depend on one or more of the following:
- the sufficiency of the net operating income of the applicable
real property;
- the market value of the applicable real property at or prior to
maturity; and
- the ability of the related borrower to refinance or sell the
applicable real property.
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In general, the value of a multifamily or commercial property will depend on its
ability to generate net operating income. The ability of an owner to finance a
multifamily or commercial property will depend, in large part, on the property's
value and ability to generate net operating income.
Unless we state otherwise in the related prospectus supplement, none of
the mortgage loans that secures or underlies the security for your bonds will be
insured or guaranteed by any governmental entity or private mortgage insurer.
The risks associated with lending on multifamily and commercial
properties are inherently different from those associated with lending on the
security of single-family residential properties. This is because multifamily
rental and commercial real estate lending involves larger loans and, as
described above, repayment is dependent upon the successful operation and value
of the related real estate project.
MANY RISK FACTORS ARE COMMON TO MOST OR ALL MULTIFAMILY AND COMMERCIAL
PROPERTIES. The following factors, among others, will affect the ability of a
multifamily or commercial property to generate net operating income and,
accordingly, its value:
- the age, design and construction quality of the property;
- perceptions regarding the safety, convenience and attractiveness
of the property;
- the characteristics of the neighborhood where the property is
located;
- the proximity and attractiveness of competing properties;
- the existence and construction of competing properties;
- the adequacy of the property's management and maintenance;
- national, regional or local economic conditions, including plant
closings, industry slowdowns and unemployment rates;
- local real estate conditions, including an increase in or
oversupply of comparable commercial or residential space;
- demographic factors;
- customer tastes and preferences;
- retroactive changes in building codes; and
- changes in governmental rules, regulations and fiscal policies,
including environmental legislation.
Particular factors that may adversely affect the ability of a
multifamily or commercial property to generate net operating income include:
- an increase in interest rates, real estate taxes and other
operating expenses;
- an increase in the capital expenditures needed to maintain the
property or make improvements;
- a decline in the financial condition of a major tenant and, in
particular, a sole tenant or anchor tenant;
- an increase in vacancy rates;
- a decline in rental rates as leases are renewed or replaced; and
- natural disasters and civil disturbances such as earthquakes,
hurricanes, floods, eruptions or riots.
The volatility of net operating income generated by a multifamily or
commercial property over time will be influenced by many of the foregoing
factors, as well as by:
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- the length of tenant leases;
- the creditworthiness of tenants;
- the rental rates at which leases are renewed or replaced;
- the percentage of total property expenses in relation to revenue;
- the ratio of fixed operating expenses to those that vary with
revenues; and
- the level of capital expenditures required to maintain the
property and to maintain or replace tenants.
Therefore, commercial and multifamily properties with short-term or less
creditworthy sources of revenue and/or relatively high operating costs, such as
those operated as hospitality and self-storage properties, can be expected to
have more volatile cash flows than commercial and multifamily properties with
medium- to long-term leases from creditworthy tenants and/or relatively low
operating costs. A decline in the real estate market will tend to have a more
immediate effect on the net operating income of commercial and multifamily
properties with short-term revenue sources and may lead to higher rates of
delinquency or defaults on the mortgage loans secured by those properties.
THE SUCCESSFUL OPERATION OF A MULTIFAMILY OR COMMERCIAL PROPERTY
DEPENDS ON TENANTS. Generally, multifamily and commercial properties are subject
to leases. The owner of a multifamily or commercial property typically uses
lease or rental payments for the following purposes:
- to pay for maintenance and other operating expenses associated
with the property;
- to fund repairs, replacements and capital improvements at the
property; and
- to service mortgage loans secured by, and any other debt
obligations associated with operating, the property.
Factors that may adversely affect the ability of a multifamily or
commercial property to generate net operating income from lease and rental
payments include:
- an increase in vacancy rates, which may result from tenants
deciding not to renew an existing lease or discontinuing
operations;
- an increase in tenant payment defaults;
- a decline in rental rates as leases are entered into, renewed or
extended at lower rates;
- an increase in the capital expenditures needed to maintain the
property or to make improvements; and
- a decline in the financial condition of a major or sole tenant.
Various factors that will affect the operation and value of a
commercial property include:
- the business operated by the tenants;
- the creditworthiness of the tenants; and
- the number of tenants.
DEPENDENCE ON A SINGLE TENANT OR A SMALL NUMBER OF TENANTS MAKES A
PROPERTY RISKIER COLLATERAL. In those cases where an income-producing property
is leased to a single tenant or is primarily leased to one or a small number of
major tenants, a deterioration in the financial condition or a change in the
plan of operations of any such tenant can have particularly significant effects
on the net operating income generated by the property. If any such tenant
defaults under or fails to renew its lease, the resulting adverse financial
effect on the operation of the property will be substantially more severe than
would be the case with respect to a property occupied by a large number of less
significant tenants.
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An income-producing property operated for retail, office or industrial
purposes also may be adversely affected by a decline in a particular business or
industry if a concentration of tenants at the property is engaged in that
business or industry.
TENANT BANKRUPTCY ADVERSELY AFFECTS PROPERTY PERFORMANCE. The
bankruptcy or insolvency of a major tenant, or a number of smaller tenants, at a
commercial property may adversely affect the income produced by the property.
Under the U.S. Bankruptcy Code, a tenant has the option of assuming or rejecting
any unexpired lease. If the tenant rejects the lease, the landlord's claim for
breach of the lease would be a general unsecured claim against the tenant unless
there is collateral securing the claim. The claim would be limited to:
(i) the unpaid rent reserved under the lease for the periods prior
to the bankruptcy petition or any earlier surrender of the
leased premises, plus
(ii) an amount, not to exceed three years' rent, equal to the
greater of one year's rent and 15% of the remaining reserved
rent.
THE SUCCESS OF AN INCOME-PRODUCING PROPERTY DEPENDS ON RELETTING VACANT
SPACES. The operations at an income-producing property will be adversely
affected if the owner or property manager is unable to renew leases or relet
space on comparable terms when existing leases expire and/or become defaulted.
Even if vacated space is successfully relet, the costs associated with
reletting, including tenant improvements and leasing commissions in the case of
income-producing properties operated for retail, office or industrial purposes,
can be substantial and could reduce cash flow from the income-producing
properties. Moreover, if a tenant at a income-producing property defaults in its
lease obligations, the landlord may incur substantial costs and experience
significant delays associated with enforcing its rights and protecting its
investment, including costs incurred in renovating and reletting the property.
If an income-producing property has multiple tenants, re-leasing
expenditures may be more frequent than in the case of a property with fewer
tenants, thereby reducing the cash flow generated by the multi-tenanted
property. Multi-tenanted properties may also experience higher continuing
vacancy rates and greater volatility in rental income and expenses.
PROPERTY VALUE MAY BE ADVERSELY AFFECTED EVEN WHEN CURRENT OPERATING
INCOME IS NOT. Various factors may affect the value of multifamily and
commercial properties without affecting their current net operating income,
including:
- changes in interest rates;
- the availability of refinancing sources;
- changes in governmental regulations, licensing or fiscal policy;
- changes in zoning or tax laws; and
- potential environmental or other legal liabilities.
PROPERTY MANAGEMENT MAY AFFECT PROPERTY OPERATIONS AND VALUE. The
operation of an income-producing property will depend upon the property
manager's performance and viability. The property manager generally is
responsible for:
- responding to changes in the local market;
- planning and implementing the rental structure, including
staggering durations of leases and establishing levels of rent
payments;
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- operating the property and providing building services;
- managing operating expenses; and
- ensuring that maintenance and capital improvements are carried
out in a timely fashion.
Income-producing properties that derive revenues primarily from
short-term rental commitments, such as hospitality or self-storage properties,
generally require more intensive management than properties leased to tenants
under long-term leases.
By controlling costs, providing appropriate and efficient services to
tenants and maintaining improvements in good condition, a property manager can
maintain or improve occupancy rates, business and cash flow, reduce operating
and repair costs and preserve building value. On the other hand, management
errors can, in some cases, impair the long term viability of an income-producing
property.
MAINTAINING A PROPERTY IN GOOD CONDITION IS EXPENSIVE. The owner may be
required to expend a substantial amount to maintain, renovate or refurbish a
commercial or multifamily property. Failure to do so may materially impair the
property's ability to generate cash flow. The effects of poor construction
quality will increase over time in the form of increased maintenance and capital
improvements. Even superior construction will deteriorate over time if
management does not schedule and perform adequate maintenance in a timely
fashion. There can be no assurance an income-producing property will generate
sufficient cash flow to cover the increased costs of maintenance and capital
improvements in addition to paying debt service on the mortgage loan(s) that may
encumber that property.
COMPETITION WILL ADVERSELY AFFECT THE PROFITABILITY AND VALUE OF AN
INCOME-PRODUCING PROPERTY. Some income-producing properties are located in
highly competitive areas. Comparable income-producing properties located in the
same area compete on the basis of a number of factors including:
- rental rates;
- location;
- type of business or services and amenities offered; and
- nature and condition of the particular property.
The profitability and value of an income-producing property may be
adversely affected by a comparable property that:
- offers lower rents;
- has lower operating costs;
- offers a more favorable location; or
- offers better facilities.
Costs of renovating, refurbishing or expanding an income-producing
property in order to remain competitive can be substantial.
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VARIOUS TYPES OF INCOME-PRODUCING PROPERTIES MAY PRESENT SPECIAL RISKS.
The relative importance of any factor affecting the value or operation of an
income-producing property will depend on the type and use of the property. In
addition, the type and use of a particular income-producing property may present
special risks. For example--
- Health care-related facilities and casinos are subject to
significant governmental regulation of the ownership,
operation, maintenance and/or financing of such properties.
- Multifamily rental properties, manufactured housing
communities and mobile home parks may be subject to rent
control or rent stabilization laws and laws governing
landlord/tenant relationships.
- Hospitality and restaurant properties are often operated
pursuant to franchise, management or operating agreements,
which may be terminable by the franchisor or operator.
Moreover, the transferability of a hotel's or restaurant's
operating, liquor and other licenses upon a transfer of the
hotel or restaurant is subject to local law requirements.
- Recreational and resort properties, properties that provide
entertainment services, hospitality properties, restaurants
and taverns, mini-warehouses and self-storage facilities tend
to be adversely affected more quickly by a general economic
downturn than other types of commercial properties.
- Marinas will be affected by various statutes and government
regulations that govern the use of, and construction on,
rivers, lakes and other waterways.
- Certain recreational and hospitality properties may have
seasonal fluctuations and/or may be adversely affected by
prolonged unfavorable weather conditions.
- Churches and other religious facilities may be highly
dependent on donations which are likely to decline as economic
conditions decline.
- Properties used as gas stations, automotive sales and service
centers, dry cleaners, warehouses and industrial facilities
may be more likely to have environmental issues.
Additionally, many types of commercial properties are not readily
convertible to alternative uses if the original use is not successful or may
require significant capital expenditures to effect any conversion to an
alternative use. As a result, the liquidation value of any of those types of
property would be substantially less than would otherwise be the case. See
"Description of the Trust Estates--Mortgage Loans--A Discussion of the Various
Types of Multifamily and Commercial Properties That May Secure Mortgage Loans
Backing a Series of Offered Bonds."
BORROWER CONCENTRATION IN THE MORTGAGE COLLATERAL EXPOSES INVESTORS TO GREATER
RISK OF DEFAULT AND LOSS
A particular borrower or group of related borrowers may be associated
with multiple real properties underlying the mortgage collateral for a series of
offered bonds. The bankruptcy or insolvency of, or other financial problems with
respect to, that borrower or group of borrowers could have an adverse effect on
the operation of all of the related real properties and on the ability of those
properties to produce sufficient cash flow to make required payments on the
related mortgage loans. For example, if a borrower or group of related borrowers
that owns or controls several real properties experiences financial difficulty
at one of those properties, it could defer maintenance at another of those
properties in order to satisfy current expenses with respect to the first
property. That borrower or group of related borrowers could also attempt to
avert foreclosure by filing a bankruptcy petition that might have the effect of
interrupting debt service payments on all the related mortgage loans for an
indefinite period. In addition, multiple real properties owned by the same
borrower or related borrowers are likely to have common management. This would
increase the risk
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that financial or other difficulties experienced by the property manager could
have a greater impact on the owner of the related loans.
LOAN CONCENTRATION IN THE MORTGAGE COLLATERAL EXPOSES INVESTORS TO GREATER RISK
OF DEFAULT AND LOSS
Any of the mortgage assets included as part of the mortgage collateral
for a series of offered bonds may be substantially larger than the other assets
that are part of that collateral. In general, the inclusion in a mortgage asset
pool of one or more mortgage assets that have outstanding principal balances
that are substantially larger than the other mortgage assets in that pool can
result in losses that are more severe, relative to the size of the pool, than
would be the case if the aggregate principal balance of the pool were
distributed more evenly.
GEOGRAPHIC CONCENTRATION IN THE MORTGAGE COLLATERAL EXPOSES INVESTORS TO GREATER
RISK OF DEFAULT AND LOSS
If a material concentration of mortgage loans securing or underlying
the security for a series of offered bonds is secured by real properties in a
particular locale, state or region, then the holders of those bonds will have a
greater exposure to:
- any adverse economic developments that occur in the locale, state
or region where the properties are located;
- changes in the real estate market where the properties are
located;
- changes in governmental rules and fiscal policies in the
governmental jurisdiction where the properties are located; and
- acts of nature, including floods, tornadoes and earthquakes, in
the areas where properties are located.
CHANGES IN COLLATERAL COMPOSITION WILL CHANGE THE NATURE OF YOUR INVESTMENT
The mortgage loans that directly or indirectly back any series of
offered bonds will amortize at different rates and mature on different dates. In
addition, some of those mortgage loans may be prepaid or liquidated. As a
result, the relative composition of the mortgage collateral for those bonds will
change over time.
If you purchase bonds with an interest rate that is equal to or
calculated based upon a weighted average of interest rates on the mortgage
assets securing those bonds, your interest rate will be affected, and may
decline, as the relative composition of the related mortgage collateral changes.
In addition, as payments and other collections of principal are
received with respect to the related mortgage loans, the remaining mortgage
loans that directly or indirectly back your bonds may exhibit an increased
concentration with respect to property type, number and affiliation of borrowers
and geographic location.
ADJUSTABLE RATE MORTGAGE LOANS MAY ENTAIL GREATER RISKS OF DEFAULT TO LENDERS
THAN FIXED RATE MORTGAGE LOANS
Some or all of the mortgage loans that secure or underlie the security
for a series of offered bonds may provide for adjustments to their respective
mortgage interest rates and corresponding adjustments to their respective
periodic debt service payments. As the periodic debt service payments for any of
those
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mortgage loans increase, there is an increased likelihood that cash flow from
the underlying real property will be insufficient to make that periodic debt
service payment and pay operating expenses.
SUBORDINATE DEBT INCREASES THE LIKELIHOOD THAT A BORROWER WILL DEFAULT ON A
MORTGAGE LOAN BACKING YOUR BONDS
Certain mortgage loans included as part of the mortgage collateral for
a series of offered bonds may either (i) prohibit the related borrower from
encumbering the related real property with additional secured debt or (ii)
require the consent of the holder of the mortgage loan prior to so encumbering
such property. However, a violation of this prohibition may not become evident
until the affected mortgage loan otherwise defaults, and a lender may not
realistically be able to prevent a borrower from incurring subordinate debt.
The existence of any secured subordinated indebtedness increases the
difficulty of refinancing a mortgage loan at the loan's maturity. In addition,
the related borrower may have difficulty repaying multiple loans. Moreover, the
filing of a petition in bankruptcy by, or on behalf of, a junior lienholder may
stay the senior lienholder from taking action to foreclose out the junior lien.
See "Certain Legal Aspects of Mortgage Loans--Subordinate Financing."
BORROWER BANKRUPTCY PROCEEDINGS CAN DELAY AND IMPAIR RECOVERY ON A MORTGAGE LOAN
BACKING YOUR BONDS
Under the U.S. Bankruptcy Code, the filing of a petition in bankruptcy
by or against a borrower will stay the sale of a real property owned by that
borrower, as well as the commencement or continuation of a foreclosure action.
In addition, if a court determines that the value of a real property is less
than the principal balance of the mortgage loan it secures, the court may reduce
the amount of secured indebtedness to the then-value of the property. Such an
action would make the lender a general unsecured creditor for the difference
between the then-value of the property and the amount of its outstanding
mortgage indebtedness. A bankruptcy court also may:
- grant a debtor a reasonable time to cure a payment default on a
mortgage loan;
- reduce monthly payments due under a mortgage loan;
- change the rate of interest due on a mortgage loan; or
- otherwise alter a mortgage loan's repayment schedule.
Additionally, the borrower, as debtor-in-possession, or its bankruptcy
trustee has certain special powers to avoid, subordinate or disallow debts. In
certain circumstances, the claims of a secured lender may be subordinated to
financing obtained by a debtor-in-possession subsequent to its bankruptcy.
Under the U.S. Bankruptcy Code, a lender will be stayed from enforcing
a borrower's assignment of rents and leases. The U.S. Bankruptcy Code also may
interfere with a lender's ability to enforce lockbox requirements. The legal
proceedings necessary to resolve these issues can be time consuming and may
significantly delay the receipt of rents. Rents also may escape an assignment to
the extent they are used by borrower to maintain its property or for other court
authorized expenses.
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As a result of the foregoing, the related trust estate's recovery with
respect to borrowers in bankruptcy proceedings may be significantly delayed, and
the aggregate amount ultimately collected may be substantially less than the
amount owed.
TAXES ON FORECLOSURE PROPERTY WILL REDUCE AMOUNTS AVAILABLE TO MAKE PAYMENTS ON
THE OFFERED BONDS
If all or part of the trust estate for a series of offered bonds is
designated as a "real estate mortgage investment conduit," and if it were to
acquire a mortgaged property pursuant to a foreclosure or deed in lieu of
foreclosure, then the related special servicer may be required to retain an
independent contractor to operate and manage the property. Any net income from
that operation and management, other than qualifying "rents from real property"
within the meaning of Section 856(d) of the Internal Revenue Code of 1986, as
well as any rental income based on the net profits of a tenant or sub-tenant or
allocable to a service that is non-customary in the area and for the type of
building involved, will subject the trust estate to federal, and possibly state
or local, tax on that income at the highest marginal corporate tax rate. This
would reduce the net proceeds available for payment with respect to the related
offered bonds.
ENVIRONMENTAL LIABILITIES WILL ADVERSELY AFFECT THE VALUE AND OPERATION OF THE
CONTAMINATED PROPERTY AND MAY DETER A LENDER FROM FORECLOSING
There can be no assurance--
- as to the degree of environmental testing conducted at any of the
real properties securing the mortgage loans that directly or
indirectly back your bonds;
- that the environmental testing conducted by or on behalf of the
applicable originators or any other parties in connection with
the origination of those mortgage loans or otherwise identified
all adverse environmental conditions and risks at the related
real properties;
- that the results of the environmental testing were accurately
evaluated in all cases;
- that the related borrowers have implemented or will implement all
operations and maintenance plans and other remedial actions
recommended by any environmental consultant that may have
conducted testing at the related real properties; or
- that the recommended action will fully remediate or otherwise
address all the identified adverse environmental conditions and
risks.
Environmental site assessments vary considerably in their content,
quality and cost. Even when adhering to good professional practices,
environmental consultants will sometimes not detect significant environmental
problems because to do an exhaustive environmental assessment would be far too
costly and time-consuming to be practical.
In addition, the current environmental condition of a real property
securing a mortgage loan that directly or indirectly backs your bonds could be
adversely affected by tenants, such as gasoline stations or dry cleaners, or by
the conditions or operations in the vicinity of the properties, such as leaking
underground storage tanks at another property nearby.
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Various environmental laws may make a current or previous owner or
operator of real property liable for the costs of removal or remediation of
hazardous or toxic substances on, under or adjacent to the property. Those laws
often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic substances. For example,
certain laws impose liability for release of asbestos containing materials into
the air or require the removal or containment of the materials. The owner's
liability for any required remediation generally is unlimited and could exceed
the value of the property and/or the aggregate assets of the owner. In addition,
the presence of hazardous or toxic substances, or the failure to remediate the
adverse environmental condition, may adversely affect the owner's or operator's
ability to use the affected property. In certain states, contamination of a
property may give rise to a lien on the property to ensure the costs of cleanup.
In some of those states, this lien has priority over the lien of an existing
mortgage, deed of trust or other security instrument. In addition, third parties
may seek recovery from owners or operators of real property for personal injury
associated with exposure to hazardous substances, including asbestos and
lead-based paint. Persons who arrange for the disposal or treatment of hazardous
or toxic substances may be liable for the costs of removal or remediation of the
substances at the disposal or treatment facility.
The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, commonly referred to as "CERCLA," together
with certain other federal and state laws, provide that a secured lender, such
as the issuer or trust estate for a series of offered bonds, may be liable as an
"owner" or "operator" of the real property, regardless of whether the borrower
or a previous owner caused the environmental damage, if
- agents or employees of the lender are deemed to have participated
in the management of the borrower, or
- under certain conditions, the lender actually takes possession of
a borrower's property or control of its day-to-day operations,
including through the appointment of a receiver or foreclosure.
Although recently enacted legislation clarifies the activities in which a lender
may engage without becoming subject to liability under CERCLA and similar
federal laws, that legislation has no applicability to state environmental laws.
Moreover, future laws, ordinances or regulations could impose material
environmental liability.
Federal law requires owners of residential housing constructed prior to
1978 to disclose to potential residents or purchasers--
- any condition on the property that causes exposure to lead-based
paint, and
- the potential hazards to pregnant women and young children,
including that the ingestion of lead-based paint chips and/or the
inhalation of dust particles from lead-based paint by children
can cause permanent injury, even at low levels of exposure.
Property owners may be liable for injuries to their tenants resulting from
exposure under various laws that impose affirmative obligations on property
owners of residential housing containing lead-based paint.
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SOME PROVISIONS IN THE MORTGAGE LOANS SECURING YOUR BONDS MAY BE CHALLENGED AS
BEING UNENFORCEABLE
CROSS-COLLATERALIZATION ARRANGEMENTS. It may be possible to challenge
cross-collateralization arrangements involving more than one borrower as a
fraudulent conveyance, even if the borrowers are related. If one of those
borrowers were to become a debtor in a bankruptcy case, creditors of the
bankrupt party or the representative of the bankruptcy estate of the bankrupt
party could seek to have the bankruptcy court avoid any lien granted by the
bankrupt party to secure repayment of another borrower's loan. In order to do
so, the court would have to determine that--
- the bankrupt party was insolvent at the time of granting the
lien, was rendered insolvent by the granting of the lien, was
left with inadequate capital, or was not able to pay its debts
as they matured; and
- the bankrupt party did not, when it allowed its property to be
encumbered by a lien securing the other borrower's loan,
receive fair consideration or reasonably equivalent value for
pledging its property for the equal benefit of the other
borrower.
If the court were to conclude that the granting of the lien was an avoidable
fraudulent conveyance, it could nullify the lien or security instrument
effecting the cross-collateralization. The court could also allow the bankrupt
party to recover payments it made pursuant to the avoided
cross-collateralization.
PREPAYMENT PREMIUMS, FEES AND CHARGES. Under the laws of a number of
states, the enforceability of any mortgage loan provisions that require payment
of a prepayment premium, fee or charge upon an involuntary prepayment, is
unclear. If those provisions were unenforceable, borrowers would have an
incentive to default in order to prepay their loans.
DUE-ON-SALE AND DEBT ACCELERATION CLAUSES. Some or all of the mortgage
loans included as part of the mortgage collateral for a series of offered bonds
may contain a due-on-sale clause, which permits the lender, with some
exceptions, to accelerate the maturity of the mortgage loan upon the sale,
transfer or conveyance of (i) the related real property or (ii) a majority
ownership interest in the related borrower. We anticipate that all of the
mortgage loans included as part of the mortgage collateral for a series of
offered bonds will contain some form of debt-acceleration clause, which permits
the lender to accelerate the debt upon specified monetary or non-monetary
defaults by the related borrower. The courts of all states will enforce
acceleration clauses in the event of a material payment default. The equity
courts of any state, however, may refuse to allow the foreclosure of a mortgage,
deed of trust or other security instrument or to permit the acceleration of the
indebtedness if:
- the default is deemed to be immaterial,
- the exercise of such remedies would be inequitable or unjust, or
- the circumstances would render the acceleration unconscionable.
ASSIGNMENTS OF LEASES. Some or all of the mortgage loans included as
part of the mortgage collateral for a series of offered bonds may be secured by,
among other things, an assignment of leases and rents. Pursuant to that
document, the related borrower will assign its right, title and interest as
landlord under the leases on the related real property and the income derived
therefrom to the lender as further security for the related mortgage loan, while
retaining a license to collect rents for so long as there is no default. In the
event the borrower defaults, the license terminates and the lender is entitled
to collect rents. In some cases, those assignments may not be perfected as
security interests prior to actual possession of the cash flow.
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Accordingly, state law may require that the lender take possession of the
property and obtain a judicial appointment of a receiver before becoming
entitled to collect the rents. In addition, the commencement of bankruptcy or
similar proceedings by or in respect of the borrower will adversely affect the
lender's ability to collect the rents. See "Certain Legal Aspects of Mortgage
Loans--Bankruptcy Laws."
DEFEASANCE. A mortgage loan securing a series of offered bonds may
permit the related borrower, during specified periods and subject to certain
conditions, to pledge to the holder of the mortgage loan a specified amount of
direct, non-callable United States government securities and thereby obtain a
release of the related mortgaged property. The cash amount which a Borrower must
expend to purchase, or must deliver to a master servicer in order for the master
servicer to purchase, the required United States government securities may be in
excess of the principal balance of the mortgage loan. There can be no assurance
that a court would not interpret that excess amount as a form of prepayment
premium or would not take it into account for usury purposes. In some states,
some forms of prepayment premiums are unenforceable. If the payment of that
excess amount were held to be unenforceable, the remaining portion of the cash
amount to be delivered may be insufficient to purchase the requisite amount of
United States government securities.
LACK OF INSURANCE COVERAGE EXPOSES A LENDER TO RISK FOR CERTAIN SPECIAL HAZARD
LOSSES
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of a property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in the
related policy. Most insurance policies typically do not cover any physical
damage resulting from:
- war,
- revolution,
- governmental actions,
- floods and other water-related causes,
- earth movement, including earthquakes, landslides and mudflows,
- wet or dry rot,
- vermin,
- domestic animals, and
- certain other kinds of risks.
Unless the related mortgage loan documents specifically require the
borrower to insure against physical damage arising from such causes, then the
resulting losses may be borne by you as a holder of offered bonds.
GROUND LEASES CREATE RISKS FOR LENDERS THAT ARE NOT PRESENT WHEN LENDING ON AN
ACTUAL OWNERSHIP INTEREST IN A REAL PROPERTY
In order to secure a mortgage loan, a borrower may grant a lien on its
leasehold interest in a real property as tenant under a ground lease. If the
ground base does not provide for notice to a lender of a default thereunder on
the part of the borrower, together with a reasonable opportunity for the lender
to cure the default, the lender may be unable to prevent termination of the
lease and may lose its collateral.
In addition, upon the bankruptcy of a landlord or a tenant under a
ground lease, the debtor entity has the right to assume or reject the ground
lease. If a debtor landlord rejects the lease, the tenant has the right to
remain in possession of its leased premises at the rent reserved in the lease
for the term, including
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renewals. If a debtor tenant rejects any or all of its leases, the tenant's
lender may not be able to succeed to the tenant's position under the lease
unless the landlord has specifically granted the lender that right. If both the
landlord and the tenant are involved in bankruptcy proceedings, your bond
trustee may be unable to enforce the bankrupt tenant's obligation to refuse to
treat as terminated a ground lease rejected by a bankrupt landlord. In those
circumstances, it is possible that your bond trustee could be deprived of its
security interest in the leasehold estate, notwithstanding lender protection
provisions contained in the lease or mortgage loan documents.
CHANGES IN ZONING LAWS MAY ADVERSELY AFFECT THE USE OR VALUE OF A REAL PROPERTY
Due to changes in zoning requirements since the construction thereof,
an income-producing property may not comply with current zoning laws, including
density, use, parking and set back requirements. Accordingly, the property may
be a "permitted non-conforming structure" or the operation of the property may
be a "permitted non-conforming use." This means that the owner is not required
to alter the property's structure or use to comply with the new law, but the
owner may be limited in its ability to rebuild the premises "as is" in the event
of a substantial casualty loss. This may adversely affect the cash flow
available following the casualty. If a substantial casualty were to occur,
insurance proceeds may not be sufficient to pay a mortgage loan secured by the
property in full. In addition, if the property were repaired or restored in
conformity with the current law, its value or revenue-producing potential may be
less than that which existed before the casualty.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT OF 1990 MAY BE EXPENSIVE
Under the Americans with Disabilities Act of 1990, all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. If a property does not currently comply with
that Act, the owner thereof may be required to incur significant costs in order
to effect such compliance. This will reduce the amount of cash flow available to
cover other required maintenance and capital improvements and to pay debt
service on the mortgage loan(s) that may encumber that property. There can be no
assurance that the owner will have sufficient funds to cover the costs necessary
to comply with that Act. In addition, noncompliance could result in the
imposition of fines by the federal government or an award or damages to private
litigants.
LITIGATION MAY ADVERSELY AFFECT A BORROWER'S ABILITY TO REPAY ITS MORTGAGE LOAN
The owner of a multifamily or commercial property may be a defendant in
a litigation arising out of, among other things, the following:
- breach of contract involving a tenant, a supplier or other party;
- negligence resulting in a personal injury, or
- responsibility for an environmental problem.
Litigation will divert the owner's attention from operating its
property. If the litigation were decided adversely to the owner, the award to
the plaintiff may adversely affect the owner's ability to repay a mortgage loan
secured by the property.
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"RESIDUAL INTERESTS" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" HAVE ADVERSE
TAX CONSEQUENCES
INCLUSION OF TAXABLE INCOME IN EXCESS OF CASH RECEIVED. If you own a
bond that is a "residual interest" in a "real estate mortgage investment
conduit," or "REMIC," you will have to report on your income tax return as
ordinary income your PRO RATA share of the taxable income of the REMIC,
regardless of the amount or timing of your possible receipt of any cash on the
bond. As a result, your bond may have "phantom income" early in the term of the
REMIC because the taxable income from the bond may exceed the amount of economic
income, if any, attributable to the bond. While you will have a corresponding
amount of tax losses later in the term of the REMIC, the present value of the
"phantom income" may significantly exceed the present value of the tax losses.
Therefore, the after-tax yield on any "residual interest" bond may be
significantly less than that of a corporate bond or other instrument having
similar cash flow characteristics. In fact, certain offered bonds which are
"residual interests" may have a negative value.
You have to report your share of the taxable income and net loss of the
REMIC until all the bonds in the related series have a principal balance of
zero. See "Federal Income Tax Consequences--REMICs."
SOME TAXABLE INCOME OF A "RESIDUAL INTEREST" CAN NOT BE OFFSET UNDER
THE INTERNAL REVENUE CODE OF 1986. A portion of the taxable income from a
"residual interest" bond may be treated as "excess inclusions" under the
Internal Revenue Code of 1986. You will have to pay tax on the "excess
inclusions" regardless of whether you have other credits, deductions or losses.
In particular, the tax on "excess inclusion":
- generally will not be reduced by losses from other activities,
- for a tax-exempt holder, will be treated as unrelated business
taxable income, and
- for a foreign holder, will not qualify for any exemption from
withholding tax.
CERTAIN ENTITIES SHOULD NOT INVEST IN BONDS WHICH ARE "RESIDUAL
INTERESTS." The fees and non-interest expenses of a REMIC will be allocated
PRO RATA to bonds that are "residual interests" in REMIC. However, individuals
will only be able to deduct these expenses as miscellaneous itemized deductions,
which are subject to numerous restrictions and limitations under the Internal
Revenue Code of 1986. Therefore, the bonds that are "residual interests"
generally are not appropriate investments for:
- individuals,
- estates,
- trusts beneficially owned by any individual or estate, and
- pass-through entities having any individual, estate or trust as a
shareholder, member or partner.
In addition, the "residual interest" bonds are subject to numerous
transfer restrictions. These restrictions reduce your ability to liquidate a
"residual interest" bond. For example, unless we indicate otherwise in the
related prospectus supplement, you will not be able to transfer a "residual
interest" bond to a foreign person under the Internal Revenue Code of 1986.
See "Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Residual Bonds."
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TAXATION OF ISSUERS THAT ARE TREATED AS A TAXABLE MORTGAGE POOLS
If no REMIC or FASIT election is made with respect to an issuer of
offered bonds, depending on the characteristics of the offered bonds and the
issuer, the issuer may be treated as a "taxable mortgage pool," or "TMP," for
federal income tax purposes under Section 7701(i) of the Internal Revenue
Code of 1986. In general, a TMP is treated as a separate corporation not
includible with any other corporation in a consolidated return, and is
subject to federal income taxation. If the issuer is, or is wholly-owned by,
a "real estate investment trust," or "REIT," however, classification of the
issuer as a TMP does not cause it to be subject to corporate income tax.
Rather, the consequence of the issuer being classified as a TMP is that the
shareholders of the issuer, or of the REIT that wholly owns the issuer, are
required to treat a portion of their income attributable to their shares as
though it were "excess inclusions" with respect to a residual interest in a
REMIC. See "Federal Income Tax Consequences--REMICs."
It is therefore possible that certain issuers as to which no REMIC
or FASIT election is made may be structured to qualify as, and elect to be
treated as, REITs or wholly-owned subsidiaries of REITs for federal income
tax purposes. In that event, the related prospectus supplement will describe
the consequences of such classification and of the failure of such an issuer
to be, or to maintain its status as, a REIT or a wholly owned subsidiary of a
REIT. The related prospectus supplement will also describe the conditions to
which any such issuer has agreed relating to the maintenance of its status as
a REIT or a wholly-owned subsidiary of a REIT, and the consequences under the
Governing Documents if it does not do so.
To the extent that any such issuer is a TMP, and is not a REIT or a
wholly-owned subsidiary of a REIT, the corporate income taxes imposed on its
taxable income, that is, the excess of its interest and other income over its
deductions for interest, discount, servicing and other expenses, will reduce the
cash flow available to make payments on the offered bonds. In addition, the need
for cash to pay taxes could result in the liquidation of part or all of the
collateral and the consequent retirement of offered bonds at a time earlier than
anticipated. See "Federal Income Tax Consequences--Debt and Notional Principal
Contracts--Taxation of the Issuer."
PROBLEMS WITH BOOK-ENTRY REGISTRATION
Your bonds may be issued in book-entry form through the facilities of
the Depository Trust Company. As a result
- you will be able to exercise your rights as a bondholder only
indirectly through the Depository Trust Company and its
participating organizations;
- you may have only limited access to information regarding your
bonds;
- you may suffer delays in the receipt of payments on your bonds;
and
- your ability to pledge or otherwise take action with respect to
your bonds may be limited due to the lack of a physical bond
evidencing your ownership of those bonds.
See "Description of the Bonds--Book-Entry Registration."
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POTENTIAL CONFLICTS OF INTEREST CAN AFFECT A PERSON'S PERFORMANCE
The master servicer or special servicer for a series of offered bonds,
or any of their respective affiliates, may purchase bonds, including non-offered
bonds, of that series.
In addition, the master servicer or special servicer for a series of
offered bonds, or any of their respective affiliates, may have interests in, or
other financial relationships with, borrowers under the related mortgage loans.
In servicing the mortgage loans securing a series of offered bonds, the
related master servicer and special servicer will each be required to observe
the terms of the servicing and administration agreement(s) for that series of
offered bonds and, in particular, to act in accordance with the servicing
standard described in the related prospectus supplement. You should consider,
however, that either of these parties, if it or an affiliate owns bonds, or has
financial interests in or other financial dealings with any of the related
borrowers, may have interests when dealing with the mortgage loans backing your
bonds that are in conflict with your interests. For example, if the related
special servicer owns any bonds, it could seek to mitigate the potential loss on
its bonds from a troubled mortgage loan by delaying enforcement in the hope of
realizing greater proceeds in the future. However, this action by a special
servicer could result a lower recovery to the related trust than would have been
the case if the special servicer had not delayed in taking enforcement action.
Furthermore, the master servicer or special servicer for a series of
offered bonds may service existing and new loans for third parties, including
portfolios of loans similar to the mortgage loans included as part of the
related mortgage collateral. The properties securing these other loans may be in
the same markets as and compete with the properties securing mortgage loans
included as part of the related mortgage collateral. Accordingly, that master
servicer or special servicer may be acting on behalf of parties with conflicting
interests.
THE TRANSITION FROM THE YEAR 1999 TO THE YEAR 2000 MAY DISRUPT THE ABILITY OF
COMPUTERIZED SYSTEMS TO PROCESS INFORMATION
The collection of payments on the mortgage assets securing your bonds,
the servicing and administration of those mortgage assets and the payments on
your bonds are highly dependent upon computer systems of the related master
servicer, special servicer, manager, bond trustee, borrowers and other third
parties.
We will inquire from each of the parties to the governing documents for
a series of offered bonds whether and how the transition from 1999 to 2000 has
affected their computer systems. We also will obtain assurances from these
parties that they are taking the necessary steps to cure any problems their
computer systems may have with the manipulation or calculation of dates after
December 31, 1999. Notwithstanding those inquiries and assurances, unforeseen
problems in this regard could still occur.
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DESCRIPTION OF THE TRUST ESTATES
GENERAL
The trust estate for each series of offered bonds will consist of
- all collateral pledged by the related issuer to secure its
obligations, in particular its payment obligations, with respect
to those bonds, and
- all other assets intended to support payments on those bonds.
The collateral for each series of offered bonds will primarily consist
of:
- various types of multifamily and/or commercial mortgage loans;
- mortgage participations, pass-through certificates,
collateralized mortgage obligations or other mortgage-backed
securities that directly or indirectly evidence interests in, or
are secured by pledges of, one or more of various types of
multifamily and/or commercial mortgage loans; or
- a combination of mortgage loans and mortgage-backed securities of
the types described above.
We do not originate mortgage loans. Accordingly, we must acquire each
of the mortgage loans to be pledged as security for a series of offered bonds
from the originator or a subsequent assignee. In some cases, that originator or
subsequent assignee will be one of our affiliates.
Unless we indicate otherwise in the related prospectus supplement, we
will acquire, directly or through one of our affiliates, in the secondary
market, any mortgage-backed security to be included in one of our trusts.
Neither we nor any of our affiliates will guarantee any of the mortgage
assets pledged as security for a series of offered bonds. Furthermore, unless we
indicate otherwise in the related prospectus supplement, no governmental agency
or instrumentality will guarantee or insure any of those mortgage assets.
MORTGAGE LOANS
GENERAL. Each mortgage loan securing a series of offered bonds will
constitute the obligation of one or more persons to repay a debt. That
obligation will be evidenced by a promissory note or bond. In addition, that
obligation will be secured by a mortgage, deed of trust or other security
instrument that creates a first or junior lien on, or security interest in, an
interest in one or more of the following types of real property:
- rental or cooperatively-owned buildings with multiple dwelling
units;
- retail properties related to the sale of consumer goods and other
products to the general public, such as shopping centers, malls,
factory outlet centers, automotive sales centers, department
stores and other retail stores, grocery stores, specialty shops,
convenience stores and gas stations;
- retail properties related to providing entertainment,
recreational and personal services to the general public, such as
movie theaters, fitness centers, bowling alleys, salons, dry
cleaners and automotive service centers;
- office properties;
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- hospitality properties, such as hotels, motels and other lodging
facilities;
- casino properties;
- health care-related properties, such as hospitals, skilled
nursing facilities, nursing homes, congregate care facilities
and, in some cases, assisted living centers and senior housing;
- industrial properties;
- warehouse facilities, mini-warehouse facilities and self-storage
facilities;
- restaurants, taverns and other establishments involved in the
food and beverage industry;
- manufactured housing communities, mobile home parks and
recreational vehicle parks;
- recreational and resort properties, such as recreational vehicle
parks, golf courses, marinas, ski resorts and amusement parks;
- arenas and stadiums;
- churches and other religious facilities;
- parking lots and garages;
- mixed use properties;
- other income-producing properties; and
- unimproved land.
The real property interests that may be encumbered in order to secure a
mortgage loan securing your bonds, include
- a fee interest or estate, which consists of ownership of the
property for an indefinite period,
- an estate for years, which consists of ownership of the property
for a specified period of years,
- a leasehold interest or estate, which consists of a right to
occupy and use the property for a specified period of years,
subject to the terms and conditions of a lease,
- shares in a cooperative corporation which owns the property, or
- any other real estate interest under applicable local law.
Any of these real property interests may be subject to deed
restrictions, easements, rights of way and other matters of public record with
respect to the related property. In addition, the use of, and improvements that
may be constructed on, any particular real property will, in most cases, be
subject to zoning laws and other legal restrictions.
Most, if not all, of the mortgage loans pledged as security for a
series of offered bonds will, in turn, be secured by liens on real properties
located in the United States, its territories and possessions. However, some of
those mortgage loans may be secured by liens on real properties located outside
the United States, its territories and possessions, provided that the "foreign
mortgage loans" do not represent more than 10% of the related mortgage
collateral, by balance.
If we so indicate in the related prospectus supplement, one or more of
the mortgage loans securing a series of offered bonds may be secured by a junior
lien on the related real property. However, the loan or loans secured by the
more senior liens on that property may not be pledged as security for the
related series of offered bonds. The primary risk to the holder of a mortgage
loan secured by a junior lien on a real property is the possibility that the
foreclosure proceeds remaining after payment of the loans secured by more senior
liens on that property will be insufficient to pay the junior loan in full. In a
foreclosure proceeding, the sale proceeds are applied first to the payment of
court costs and fees in connection with the foreclosure, second to the payment
of real estate taxes, and third to the payment of all principal, interest,
prepayment or acceleration penalties, if any, and all other amounts owing to the
holder of the senior loans. The claims of the holders of the senior loans must
be satisfied in full before the holder of the junior loan
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receives any payments in respect of the junior loan. If a lender forecloses on a
junior loan, it does so subject to any related senior loans.
If we so indicate in the related prospectus supplement, the mortgage
loans securing a series of offered bonds may be delinquent as of the date the
bonds are initially issued. In those cases, we will describe in the related
prospectus supplement the period of the delinquency, any forbearance arrangement
then in effect, the condition of the related real property and the ability of
the related real property to generate income to service the mortgage debt. We
will not, however, allow the related issuer to pledge any mortgage loan as
security for a series of offered bonds if we know that the mortgage loan is, at
the time of the pledge, more than 90 days delinquent in respect of any scheduled
payment of principal or interest or in foreclosure.
A DISCUSSION OF THE VARIOUS TYPES OF MULTIFAMILY AND COMMERCIAL
PROPERTIES THAT MAY SECURE MORTGAGE LOANS BACKING A SERIES OF OFFERED BONDS. The
mortgage loans securing a series of offered bonds may, in turn, be secured by
numerous types of multifamily and commercial properties. As we discuss below
under "--Mortgage Loans--Default and Loss Considerations with Respect to
Commercial and Multifamily Mortgage Loans," the adequacy of an income-producing
property as security for a mortgage loan depends in large part on its value and
ability to generate net operating income. Set forth below is a discussion of
some of the various factors that may affect the value and operations of the
indicated types of multifamily and commercial properties.
MULTIFAMILY RENTAL PROPERTIES. Factors affecting the value and
operation of a multifamily rental property include:
- the physical attributes of the property, such as its age,
appearance, amenities and construction quality;
- the types of services offered at the property;
- the location of the property;
- the characteristics of the surrounding neighborhood, which may
change over time;
- the rents charged for dwelling units at the property relative to
the rents charged for comparable units at competing properties;
- the ability of management to provide adequate maintenance and
insurance;
- the property's reputation;
- the level of mortgage interest rates, which may encourage tenants
to purchase rather than lease housing;
- the existence or construction of competing or alternative
residential properties, including other apartment buildings and
complexes, manufactured housing communities, mobile home parks
and single-family housing;
- the ability of management to respond to competition;
- the tenant mix and whether the property is primarily occupied by
workers from a particular company or type of business, personnel
from a local military base or students;
- adverse local, regional or national economic conditions, which
may limit the amount that may be charged for rents and may result
in a reduction in timely rent payments or a reduction in
occupancy levels;
- state and local regulations, which may affect the property
owner's ability to increase rent to the market rent for an
equivalent apartment;
- the extent to which the property is subject to land use
restrictive covenants or contractual covenants that require that
units be rented to low income tenants;
- the extent to which the cost of operating the property, including
the cost of utilities and the cost of required capital
expenditures, may increase; and
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- the extent to which increases in operating costs may be passed
through to tenants.
Because units in a multifamily rental property are leased to
individuals, usually for no more than a year, the property is likely to respond
relatively quickly to a downturn in the local economy or to the closing of a
major employer in the area.
Certain states regulate the relationship of an owner and its tenants at
a multifamily rental property. Among other things, these states may--
- require written leases;
- require good cause for eviction;
- require disclosure of fees;
- prohibit unreasonable rules;
- prohibit retaliatory evictions;
- prohibit restrictions on a resident's choice of unit vendors;
- limit the bases on which a landlord may increase rent; or
- prohibit a landlord from terminating a tenancy solely by reason
of the sale of the owner's building.
Apartment building owners have been the subject of suits under state
"Unfair and Deceptive Practices Acts" and other general consumer protection
statutes for coercive, abusive or unconscionable leasing and sales practices.
Some counties and municipalities also impose rent control regulations
on apartment buildings. These regulations may limit rent increases to--
- fixed percentages,
- percentages of increases in the consumer price index,
- increases set or approved by a governmental agency, or
- increases determined through mediation or binding arbitration.
In many cases, the rent control laws do not provide for decontrol of
rental rates upon vacancy of individual units. Any limitations on a landlord's
ability to raise rents at a multifamily rental property may impair the
landlord's ability to repay a mortgage loan secured by the property or to meet
operating costs.
Some multifamily rental properties are subject to land use restrictive
covenants or contractual covenants in favor of federal or state housing
agencies. These covenants generally require that a minimum number or percentage
of units be rented to tenants who have incomes that are substantially lower than
median incomes in the area or region. These covenants may limit the potential
rental rates that may be charged at a multifamily rental property, the potential
tenant base for the property or both. An owner may subject a multifamily rental
property to these covenants in exchange for tax credits or rent subsidies. When
the credits or subsidies cease, net operating income will decline.
Some mortgage loans securing the offered bonds will, in turn, be
secured by the related borrower's interest in multiple units in a residential
condominium project and the related voting rights in the owners' association for
such project. Due to the nature of condominiums, a default on any of those
mortgage loans will not allow the related special servicer the same flexibility
in realizing on the real property collateral as is generally available with
respect to multifamily rental properties that are not condominiums. The rights
of other unit owners, the governing documents of the owners' association and the
state and local laws
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applicable to condominiums must be considered and respected. Consequently,
servicing and realizing upon the collateral for those mortgage loans could
subject the related trust estate to greater delay, expense and risk than a loan
secured by a multifamily rental property that is not a condominium.
COOPERATIVELY-OWNED APARTMENT BUILDINGS. Some multifamily properties
are owned or leased by cooperative corporations. In general, each shareholder in
the corporation is entitled to occupy a particular apartment unit pursuant to a
long-term proprietary lease or occupancy agreement.
A tenant/shareholder of a cooperative corporation must make a monthly
maintenance payment to the corporation. The monthly maintenance payment
represents a tenant/shareholder's PRO RATA share of the corporation's mortgage
loan payments, real property taxes, maintenance expenses and other capital and
ordinary expenses of the property. These monthly maintenance payments are in
addition to any payments of principal and interest the tenant/shareholder must
make on any loans of the tenant/shareholder secured by its shares in the
corporation.
A cooperative corporation is directly responsible for building
maintenance and payment of real estate taxes and hazard and liability insurance
premiums. A cooperative corporation's ability to meet debt service obligations
on a mortgage loan secured by, and to pay all other operating expenses of, the
cooperatively owned property depends primarily upon the receipt of--
- maintenance payments from the tenant/shareholders, and
- any rental income from units or commercial space that the
cooperative corporation might control.
A cooperative corporation may have to impose special assessments on the
tenant/shareholders in order to pay unanticipated expenditures. Accordingly, a
cooperative corporation is highly dependent on the financial well being of its
tenant/shareholders. A cooperative corporation's ability to pay the amount of
any balloon payment due at the maturity of a mortgage loan secured by the
cooperatively owned property depends primarily on its ability to refinance the
property.
In a typical cooperative conversion plan, the owner of a rental
apartment building contracts to sell the building to a newly formed cooperative
corporation. Shares are allocated to each apartment unit by the owner or
sponsor, and the current tenants have a certain period to subscribe at prices
discounted from the prices to be offered to the public after such period. As
part of the consideration for the sale, the owner or sponsor receives all the
unsold shares of the cooperative corporation. In general the sponsor controls
the corporation's board of directors and management for a limited period of
time. If the sponsor holds the shares allocated to a large number of apartment
units, the lender on a mortgage loan secured by a cooperatively owned property
may be adversely affected by a decline in the creditworthiness of the sponsor.
Many cooperative conversion plans are "non-eviction" plans. Under a
non-eviction plan, a tenant at the time of conversion who chooses not to
purchase shares is entitled to reside in the unit as a subtenant from the owner
of the shares allocated to such apartment unit. Any applicable rent control or
rent stabilization laws would continue to be applicable to such subtenancy. In
addition, the subtenant may be entitled to renew its lease for an indefinite
number of years with continued protection from rent increases above those
permitted by any applicable rent control and rent stabilization laws. The
owner/shareholder is responsible for the maintenance payments to the cooperative
corporation without regard to whether it receives rent from the subtenant or
whether the rent payments are lower than maintenance payments on the unit.
Newly-formed cooperative corporations typically have the greatest concentration
of non-tenant/shareholders.
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RETAIL PROPERTIES. The term "retail property" encompasses a broad range
of properties at which businesses sell consumer goods and other products and
provide various entertainment, recreational or personal services to the general
public. Some examples of retail properties include:
- shopping centers
- factory outlet centers
- malls
- automotive sales and service centers
- consumer oriented businesses
- department stores
- grocery stores
- convenience stores
- specialty shops
- gas stations
- movie theaters
- fitness centers
- bowling alleys
- salons
- dry cleaners
Unless owner occupied, retail properties generally derive all or a
substantial percentage of their income from lease payments from commercial
tenants. Therefore, it is important for the owner of a retail property to
attract and keep tenants, particularly significant tenants, that are able to
meet their lease obligations. In order to attract tenants, the owner of a retail
property may be required--
- to lower rents;
- to grant a potential tenant a "free rent" or reduced rent period;
- to improve the condition of the property generally; or
- to make at its own expense, or grant a rent abatement to cover,
tenant improvements for a potential tenant.
A prospective tenant will also be interested in the number and type of
customers that it will be able to attract at a particular retail property. The
ability of a tenant at a particular retail property to attract customers will be
affected by a number of factors related to the property and the surrounding
area, including--
- competition from other retail properties;
- perceptions regarding the safety, convenience and attractiveness
of the property;
- perceptions regarding the safety of the surrounding area;
- demographics of the surrounding area;
- the strength and stability of the local, regional and national
economies;
- traffic patterns and access to major thoroughfares;
- the visibility of the property;
- availability of parking;
- the particular mixture of the goods and services offered at the
property;
- customer tastes, preferences and spending patterns; and
- the drawing power of other tenants.
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The success of a retail property is often dependent on the success of
its tenants' businesses. A significant component of the total rent paid by
tenants of retail properties is often tied to a percentage of gross sales or
revenues. Declines in sales or revenues of the tenants will likely cause a
corresponding decline in percentage rents and/or impair the tenants' ability to
pay their rent or other occupancy costs. A default by a tenant under its lease
could result in delays and costs in enforcing the landlord's rights. Retail
properties would be directly and adversely affected by a decline in the local
economy and reduced consumer spending.
Repayment of a mortgage loan secured by a retail property will be
affected by the expiration of space leases at the property and the ability of
the borrower to renew or relet the space on comparable terms. Even if vacant
space is successfully relet, the costs associated with reletting, including
tenant improvements, leasing commissions and free rent, may be substantial and
could reduce cash flow from a retail property.
The presence or absence of an anchor tenant in a multi-tenanted retail
property can be important. Anchor tenants play a key role in generating customer
traffic and making the center desirable for other tenants. An "anchor tenant"
is, in general, a retail tenant whose space is substantially larger in size than
that of other tenants at the same retail property and whose operation is vital
in attracting customers to the property. At some retail properties, the anchor
tenant owns the space it occupies. In those cases where the property owner does
not control the space occupied by the anchor tenant, the property owner may not
be able to take actions with respect to the space that it otherwise typically
would, such as granting concessions to retain an anchor tenant or removing an
ineffective anchor tenant. In some cases, an anchor tenant may cease to operate
at the property, thereby leaving its space unoccupied even though it continues
to own or pay rent on the vacant space. If an anchor tenant ceases operations at
a retail property, other tenants at the property may be entitled to terminate
their leases prior to the scheduled termination date or to pay rent at a reduced
rate for the remaining term of the lease.
Various factors will adversely affect the economic performance of an
"anchored" retail property, including:
- an anchor tenant's failure to renew its lease;
- termination of an anchor tenant's lease;
- the bankruptcy or economic decline of an anchor tenant or a
self-owned anchor;
- the cessation of the business of a self-owned anchor or of an
anchor tenant, notwithstanding its continued ownership of the
previously occupied space or its continued payment of rent, as
the case may be; or
- a loss of an anchor tenant's ability to attract shoppers.
Retail properties may also face competition from sources outside a
given real estate market or with lower operating costs. For example, all of the
following compete with more traditional department stores and specialty shops
for consumer dollars:
- factory outlet centers;
- discount shopping centers and clubs;
- catalogue retailers;
- television shopping networks and programs;
- internet web sites; and
- telemarketing.
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Similarly, home movie rentals and pay-per-view movies provide alternate sources
of entertainment to movie theaters. Continued growth of these alternative retail
outlets (which are often characterized by lower operating costs) and
entertainment sources could adversely affect the rents collectible at retail
properties.
Gas stations, automotive sales and service centers and dry cleaners
also pose unique environmental risks because of the nature of their businesses.
OFFICE PROPERTIES. Factors affecting the value and operation of an
office property include:
- the number and quality of the tenants, particularly significant
tenants, at the property;
- the physical attributes of the building in relation to competing
buildings;
- the location of the property with respect to the central business
district or population centers;
- demographic trends within the metropolitan area to move away from
or towards the central business district;
- social trends combined with space management trends, which may
change towards options such as telecommuting or hoteling to
satisfy space needs;
- tax incentives offered to businesses or property owners by cities
or suburbs adjacent to or near where the building is located;
- local competitive conditions, such as the supply of office space
or the existence or construction of new competitive office
buildings;
- the quality and philosophy of building management;
- access to mass transportation; and
- changes in zoning laws.
Office properties may be adversely affected by an economic decline in
the business operated by their tenants. The risk of such an economic decline is
increased if revenue is dependent on a single tenant or if there is a
significant concentration of tenants in a particular business or industry.
Office properties are also subject to competition with other office
properties in the same market. Competitive factors affecting an office property
include:
- rental rates;
- the building's age, condition and design, including floor sizes
and layout;
- access to public transportation and availability of parking; and
- amenities offered to its tenants, including sophisticated
building systems, such as fiber optic cables, satellite
communications or other base building technological features.
The cost of refitting office space for a new tenant is often higher
than for other property types.
The success of an office property also depends on the local economy.
Factors influencing a company's decision to locate in a given area include:
- the cost and quality of labor;
- tax incentives; and
- quality of life matters, such as schools and cultural amenities.
The strength and stability of the local or regional economy will affect
an office property's ability to attract stable tenants on a consistent basis. A
central business district may have a substantially different economy from that
of a suburb.
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HOSPITALITY PROPERTIES. Hospitality properties may involve different
types of hotels and motels, including:
- full service hotels;
- resort hotels with many amenities;
- limited service hotels;
- hotels and motels associated with national or regional franchise
chains;
- hotels that are not affiliated with any franchise chain but may
have their own brand identity; and
- other lodging facilities.
Factors affecting the economic performance of a hospitality property
include:
- the location of the property and its proximity to major
population centers or attractions;
- the seasonal nature of business at the property;
- the level of room rates relative to those charged by competitors;
- quality and perception of the franchise affiliation;
- economic conditions, either local, regional or national, which
may limit the amount that can be charged for a room and may
result in a reduction in occupancy levels;
- the existence or construction of competing hospitality
properties;
- nature and quality of the services and facilities;
- financial strength and capabilities of the owner and operator;
- the need for continuing expenditures for modernizing,
refurbishing and maintaining existing facilities;
- increases in operating costs, which may not be offset by
increased room rates;
- the property's dependence on business and commercial travelers
and tourism; and
- changes in travel patterns caused by changes in access, energy
prices, labor strikes, relocation of highways, the reconstruction
of additional highways or other factors.
Because limited service hotels and motels are relatively quick and
inexpensive to construct and may quickly reflect a positive value, an
over-building of these hotels and motels could occur in any given region, which
would likely adversely affect occupancy and daily room rates. Further, because
rooms at hospitality properties are generally rented for short periods of time,
hospitality properties tend to be more sensitive to adverse economic conditions
and competition than many other types of commercial properties. Additionally,
the revenues of certain hospitality properties, particularly those located in
regions whose economies depend upon tourism, may be highly seasonal in nature.
Hospitality properties may be operated pursuant to franchise
agreements. The continuation of a franchise is typically subject to specified
operating standards and other terms and conditions. The franchisor periodically
inspects its licensed properties to confirm adherence to its operating
standards. The failure of the hospitality property to maintain those standards
or adhere to those other terms and conditions could result in the loss or
cancellation of the franchise license. It is possible that the franchisor could
condition the continuation of a franchise license on the completion of capital
improvements or the making of certain capital expenditures that the owner of the
hospitality property determines are too expensive or are otherwise unwarranted
in light of the operating results or prospects of the property. In that event,
the owner of the hospitality property may elect to allow the franchise license
to lapse. In any case, if the franchise is terminated, the owner of the
hospitality property may seek to obtain a suitable replacement franchise or to
operate property independently of a franchise license. The loss of a franchise
license could have a material
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adverse effect upon the operations or value of the hospitality property because
of the loss of associated name recognition, marketing support and centralized
reservation systems provided by the franchisor.
The viability of any hospitality property that is a franchise of a
national or a regional hotel or motel chain is dependent upon:
- the continued existence and financial strength of the franchisor;
- the public perception of the franchise service mark; and
- the duration of the franchise licensing agreement.
The transferability of franchise license agreements may be restricted.
The consent of the franchisor would be required for the continued use of the
franchise license by the hospitality property following a foreclosure.
Conversely, a lender may be unable to remove a franchisor that it desires to
replace following a foreclosure. Further, in the event of a foreclosure on a
hospitality property, the lender or other purchaser of the hospitality property
may not be entitled to the rights under any associated liquor license. That
party would be required to apply in its own right for a new liquor license.
There can be no assurance that a new license could be obtained or that it could
be obtained promptly.
CASINO PROPERTIES. Factors affecting the economic performance of a
casino property include:
- location, including proximity to or easy access from major
population centers;
- appearance;
- economic conditions, either local, regional or national, which
may limit the amount of disposable income that potential patrons
may have for gambling;
- the existence or construction of competing casinos;
- dependence on tourism; and
- local or state governmental regulation.
Competition among major casinos may involve attracting patrons by
providing alternate forms of entertainment, such as performers and sporting
events, and offering low-priced or free food and lodging. In addition, casino
owners may expend substantial sums to modernize, refurbish and maintain existing
facilities.
Because of their dependence on disposable income of patrons, casino
properties are likely to respond quickly to a downturn in the economy.
To avoid criminal influence, the ownership and operation of casino
properties is often subject to local or state governmental regulation. A
government agency or authority may have jurisdiction over or influence with
respect to the foreclosure of a casino property and/or the bankruptcy of its
owner or operator. In some jurisdictions, it may be necessary to receive
governmental approval before foreclosing, thereby resulting in substantial
delays to a lender. Gaming licenses are not transferable, including in
connection with a foreclosure. There can be no assurance that a lender or
another purchaser in foreclosure or otherwise will be able to obtain the
requisite approvals to continue operating the foreclosed property as a casino.
Any given state or municipality that currently allows legalized
gambling could pass legislation banning it.
The loss of a gaming license for any reason would have a material
adverse effect on the value of a casino property.
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HEALTH CARE-RELATED PROPERTIES. Health-care related properties include
- hospitals;
- skilled nursing facilities;
- nursing homes;
- congregate care facilities; and
- in some cases, assisted living centers and housing for seniors.
Health care-related facilities, particularly nursing homes, may receive
a substantial portion of their revenues from government reimbursement programs,
primarily Medicaid and Medicare. Medicaid and Medicare are subject to
- statutory and regulatory changes;
- retroactive rate adjustments;
- administrative rulings;
- policy interpretations;
- delays by fiscal intermediaries; and
- government funding restrictions.
All of the foregoing can adversely affect revenues from the operation a health
care-related facility. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers. In
addition, there are currently under consideration various proposals for national
health care relief that could further limit these payments.
Providers of long-term nursing care and other medical services are
highly regulated by federal, state and local law. They are subject to numerous
factors which can increase the cost of operation, limit growth and, in extreme
cases, require or result in suspension or cessation of operations, including:
- federal and state licensing requirements;
- facility inspections;
- rate setting;
- reimbursement policies; and
- laws relating to the adequacy of medical care, distribution of
pharmaceuticals, use of equipment, personnel operating policies
and maintenance of and additions to facilities and services.
Under applicable federal and state laws and regulations, Medicare and
Medicaid reimbursements generally may not be made to any person other than the
provider who actually furnished the related material goods and services.
Accordingly, in the event of foreclosure on a health care-related facility,
neither a lender nor other subsequent lessee or operator of the property would
generally be entitled to obtain from federal or state governments any
outstanding reimbursement payments relating to services furnished at the
property prior to such foreclosure. Furthermore, in the event of foreclosure,
there can be no assurance that a lender or other purchaser in a foreclosure sale
would be entitled to the rights under any required licenses and regulatory
approvals. The lender or other purchaser may have to apply in its own right for
such licenses and approvals. There can be no assurance that a new license could
be obtained or that a new approval would be granted.
Health care-related facilities are generally "special purpose"
properties that could not be readily converted to general residential, retail or
office use. This will adversely affect their liquidation value.
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Furthermore, transfers of health care-related facilities are subject to
regulatory approvals under state, and in some cases federal, law not required
for transfers of most other types of commercial properties.
INDUSTRIAL PROPERTIES. Industrial properties may be adversely affected
by reduced demand for industrial space occasioned by a decline in a particular
industry segment and/or by a general slowdown in the economy. In addition, an
industrial property that suited the particular needs of its original tenant may
be difficult to relet to another tenant or may become functionally obsolete
relative to newer properties.
The value and operation of an industrial property depends on:
- location of the property, the desirability of which in a
particular instance may depend on--
(i) availability of labor services,
(ii) proximity to supply sources and customers, and
(iii) accessability to various modes of transportation and
shipping, including railways, roadways, airline
terminals and ports;
- building design of the property, the desirability of which in a
particular instance may depend on--
(i) ceiling heights,
(ii) column spacing,
(iii) number and depth of loading bays,
(iv) divisibility,
(v) floor loading capacities,
(vi) truck turning radius,
(vii) overall functionality, and
(viii) adaptability of the property, because industrial
tenants often need space that is acceptable for
highly specialized activities; and
- the quality and creditworthiness of individual tenants, because
industrial properties frequently have higher tenant
concentrations.
Industrial properties are generally "special purpose" properties that
could not be readily converted to general residential, retail or office use.
This will adversely affect their liquidation value.
WAREHOUSE, MINI-WAREHOUSE AND SELF-STORAGE FACILITIES. Warehouse,
mini-warehouse and self-storage properties are considered vulnerable to
competition because both acquisition costs and break-even occupancy are
relatively low. In addition, it would require substantial capital expenditures
to convert a warehouse, mini-warehouse or self-storage property to an
alternative use. This will materially impair the liquidation value of the
property if its operation for storage purposes becomes unprofitable due to
decreased demand, competition, age of improvements or other factors.
Successful operation of a warehouse, mini-warehouse or self-store
property depends on--
- building design;
- location and visibility;
- tenant privacy;
- efficient access to the property;
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- proximity to potential users, including apartment complexes or
commercial users;
- services provided at the property, such as security;
- age and appearance of the improvements; and
- quality of management.
RESTAURANTS AND TAVERNS. Factors affecting the economic viability of
individual restaurants, taverns and other establishments that are part of the
food and beverage service industry include:
- competition from facilities having businesses similar to a
particular restaurant or tavern;
- perceptions by prospective customers of safety, convenience,
services and attractiveness;
- the cost, quality and availability of food and beverage products;
- negative publicity, resulting from instances of food
contamination, food-borne illness and similar events;
- changes in demographics, consumer habits and traffic patterns;
- the ability to provide or contract for capable management; and
- retroactive changes to building codes, similar ordinances and
other legal requirements.
Adverse economic conditions, whether local, regional or national, may
limit the amount that may be charged for food and beverages and the extent to
which potential customers dine out. Because of the nature of the business,
restaurants and taverns tend to respond to adverse economic conditions more
quickly than do many other types of commercial properties. Furthermore, the
transferability of any operating, liquor and other licenses to an entity
acquiring a bar or restaurant, either through purchase or foreclosure, is
subject to local law requirements.
The food and beverage service industry is highly competitive. The
principal means of competition are--
- segment,
- product,
- price,
- value,
- quality,
- service,
- convenience,
- location, and
- the nature and condition of the restaurant facility.
A restaurant or tavern operator competes with the operators of
comparable establishments in the area in which its restaurant or tavern is
located. Other restaurants could have--
- lower operating costs,
- more favorable locations,
- more effective marketing,
- more efficient operations, or
- better facilities.
The location and condition of a particular restaurant or tavern will
affect the number of customers and, to a certain extent, the prices that may be
charged. The characteristics of an area or neighborhood in which a restaurant or
tavern is located may change over time or in relation to competing facilities.
Also, the cleanliness and maintenance at a restaurant or tavern will affect its
appeal to customers. In the case of
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a regionally- or nationally-known chain restaurant, there may be costly
expenditures for renovation, refurbishment or expansion, regardless of its
condition.
Factors affecting the success of a regionally- or nationally-known
chain restaurant include:
- actions and omissions of any franchisor, including management
practices that adversely affect the nature of the business or
that require renovation, refurbishment, expansion or other
expenditures;
- the degree of support provided or arranged by the franchisor,
including its franchisee organizations and third-party providers
of products or services; and
- the bankruptcy or business discontinuation of the franchisor or
any of its franchisee organizations or third-party providers.
Chain restaurants may be operated under franchise agreements, and such
agreements typically do not contain provisions protective of lenders. A
borrower's rights as franchisee typically may be terminated without informing
the lender, and the borrower may be precluded from competing with the franchisor
upon such termination. In addition, a lender that acquires title to a restaurant
site through foreclosure or similar proceedings may be restricted in the use of
such site or may be unable to succeed to the rights of the franchisee under the
related franchise agreement. The transferability of a franchise may be subject
to other restrictions. Also, federal and state franchise regulations may impose
additional risk, including the risk that the transfer of a franchise acquired
through foreclosure or similar proceedings may require registration with
governmental authorities or disclosure to prospective transferees.
MANUFACTURED HOUSING COMMUNITIES, MOBILE HOME PARKS AND RECREATIONAL
VEHICLE PARKS. Manufactured housing communities and mobile home parks consist of
land that is divided into "spaces" or "home sites" that are primarily leased to
owners of the individual mobile homes or other housing units. The home owner
often invests in site-specific improvements such as carports, steps, fencing,
skirts around the base of the home, and landscaping. The land owner typically
provides private roads within the park, common facilities and, in many cases,
utilities. Due to relocation costs and, in some cases, demand for homesites, the
value of a mobile home or other housing unit in place in a manufactured housing
community or mobile home park is generally higher, and can be significantly
higher, than the value of the same unit not placed in a manufactured housing
community or mobile home park. As a result, a well-operated manufactured housing
community or mobile home park that has achieved stabilized occupancy is
typically able to maintain occupancy at or near that level. For the same reason,
a lender that provided financing for the home of a tenant who defaulted in his
or her space rent generally has an incentive to keep rental payments current
until the home can be resold in place, rather than to allow the unit to be
removed from the park. In general, the individual mobile homes and other housing
units will not constitute collateral for a mortgage loan securing a series of
offered bonds.
Recreational vehicle parks lease spaces primarily or exclusively for
motor homes, travel trailers and portable truck campers, primarily designed for
recreational, camping or travel use. In general, parks that lease recreational
vehicle spaces can be viewed as having a less stable tenant population than
parks occupied predominantly by mobile homes. However, it is not unusual for the
owner of a recreational vehicle to leave the vehicle at the park on a year-round
basis or to use the vehicle as low cost housing and reside in the park
indefinitely.
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Factors affecting the successful operation of a manufactured housing
community, mobile home park or recreational vehicle park include:
- the number of comparable competing properties in the local
market;
- the age, appearance and reputation of the property;
- the quality of management; and
- the types of facilities and services it provides.
Manufactured housing communities and mobile home parks also compete
against alternative forms of residential housing, including multifamily rental
properties, cooperatively-owned apartment buildings, condominium complexes and
single-family residential developments. Recreational vehicle parks also compete
against alternative forms of recreation and short-term lodging, such as staying
at a hotel at the beach.
Manufactured housing communities, mobile home parks and recreational
vehicle parks are "special purpose" properties that could not be readily
converted to general residential, retail or office use. This will adversely
affect the liquidation value of the property if its operation as a manufactured
housing community, mobile home park or recreational vehicle park, as the case
may be, becomes unprofitable due to competition, age of the improvements or
other factors.
Certain states regulate the relationship of an owner of a manufactured
housing community or mobile home park and its tenants in a manner similar to the
way they regulate the relationship between a landlord and tenant at a
multifamily rental property. In addition, some states also regulate changes in
the use of a manufactured housing community or mobile home park and require that
the owner give written notice to its tenants a substantial period of time prior
to the projected change.
In addition to state regulation of the landlord-tenant relationship,
numerous counties and municipalities impose rent control on manufactured housing
communities and mobile home parks. These ordinances may limit rent increases to:
- fixed percentages,
- percentages of increases in the consumer price index,
- increases set or approved by a governmental agency, or
- increases determined through mediation or binding arbitration.
In many cases, the rent control laws either do not permit vacancy decontrol or
permit vacancy decontrol only in the relatively rare event that the mobile home
or manufactured housing unit is removed from the homesite. Local authority to
impose rent control on manufactured housing communities and mobile home parks is
pre-empted by state law in certain states and rent control is not imposed at the
state level in those states. In some states, however, local rent control
ordinances are not pre-empted for tenants having short-term or month-to-month
leases, and properties there may be subject to various forms of rent control
with respect to those tenants.
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RECREATIONAL AND RESORT PROPERTIES. Any mortgage loan securing a series
of offered bonds may, in turn, be secured by a golf course, marina, ski resort,
amusement park or other property used for recreational purposes or as a resort.
Factors affecting the economic performance of a property of this type include:
- the location and appearance of the property;
- the appeal of the recreational activities offered;
- the existence or construction of competing properties, whether
are not they offer the same activities;
- the need to make capital expenditures to maintain, refurbish,
improve and/or expand facilities in order to attract potential
patrons;
- geographic location and dependence on tourism;
- changes in travel patterns caused by changes in energy prices,
strikes, location of highways, construction of additional
highways and similar factors;
- seasonality of the business, which may cause periodic
fluctuations in operating revenues and expenses;
- sensitivity to weather and climate changes; and
- local, regional and national economic conditions.
A marina or other recreational or resort property located next to water
will also be affected by various statutes and government regulations that govern
the use of, and construction on, rivers, lakes and other waterways.
Because of the nature of the business, recreational and resort
properties tend to respond to adverse economic conditions more quickly than do
many other types of commercial properties.
Recreational and resort properties are generally "special purpose"
properties that are not readily convertible to alternative uses. This will
adversely affect their liquidation value.
ARENAS AND STADIUMS. The success of an arena or stadium generally
depends on its ability to attract patrons to a variety of events, including:
- sporting events;
- musical events;
- theatrical events;
- animal shows; and/or
- circuses.
The ability to attract patrons is dependent on such factors as:
- the appeal of the particular event;
- the cost of admission;
- perceptions by prospective patrons of the safety, convenience,
services and attractiveness of the arena or stadium;
- perceptions by prospective patrons of the safety of the
surrounding area; and
- the alternative forms of entertainment available in the
particular locale.
In some cases, an arena's or stadium's success will depend on its
ability to attract and keep a sporting team as a tenant. An arena or stadium may
become unprofitable, or unacceptable to such a tenant, due to
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decreased attendance, competition and age of improvements. Often, substantial
expenditures must be made to modernize, refurbish and/or maintain existing
facilities.
Arenas and stadiums are "special purpose" properties which cannot be
readily convertible to alternative uses. This will adversely affect their
liquidation value.
CHURCHES AND OTHER RELIGIOUS FACILITIES. Churches and other religious
facilities generally depend on charitable donations to meet expenses and pay for
maintenance and capital expenditures. The extent of such donations is dependent
on the attendance at any particular religious facility and the extent to which
attendees are prepared to make donations, which is influenced by a variety of
social, political and economic factors. Donations may be adversely affected by
economic conditions, whether local, regional or national. Religious facilities
are "special purpose" properties that are not readily convertible to alternative
uses. This will adversely affect their liquidation value.
PARKING LOTS AND GARAGES. The primary source of income for parking lots
and garages is the rental fees charged for parking spaces. Factors affecting the
success of a parking lot or garage include:
- the number of rentable parking spaces and rates charged;
- the location of the lot or garage and, in particular, its
proximity to places where large numbers of people work, shop
or live;
- the amount of alternative parking spaces in the area;
- the availability of mass transit; and
- the perceptions of the safety, convenience and services of the
lot or garage.
UNIMPROVED LAND. The value of unimproved land is largely a function of
its potential use. This may depend on--
- its location,
- its size,
- the surrounding neighborhood, and
- local zoning laws.
DEFAULT AND LOSS CONSIDERATIONS WITH RESPECT TO COMMERCIAL AND
MULTIFAMILY MORTGAGE LOANS. Mortgage loans secured by liens on income-producing
properties are substantially different from mortgage loans made on the security
of owner-occupied single-family homes. The repayment of a loan secured by a lien
on an income-producing property is typically dependent upon the successful
operation of the property and its ability to generate income sufficient to make
payments on the loan. This is particularly true because most or all of the
mortgage loans securing the offered bonds will be nonrecourse loans.
The debt service coverage ratio of a multifamily or commercial mortgage
loan is an important measure of the likelihood of default on the loan. In
general, the "debt service coverage ratio" of a multifamily or commercial
mortgage loan at any given time is the ratio of--
(a) the amount of income derived or expected to be derived from
the related real property for a twelve-month period that is
available to pay debt service, to
(b) the annualized scheduled payments of principal and/or interest
on the mortgage loan and any other senior loans that are
secured by the related real property.
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The amount described in clause (a) of the preceding sentence is often a highly
subjective number based on a variety of assumptions regarding, and adjustments
to, revenues and expenses in respect of the related real property. We will
provide a more detailed discussion of its calculation in the related prospectus
supplement.
The cash flow generated by a multifamily or commercial property will
generally fluctuate over time and may or may not be sufficient to make the loan
payments on the related mortgage loan, cover operating expenses and fund capital
improvements at any given time. Operating revenues of a nonowner occupied,
income- producing property may be affected by the condition of the applicable
real estate market and/or area economy. Properties leased, occupied or used on a
short-term basis (such as certain health care-related facilities, hotels and
motels, recreational vehicle parks, and mini-warehouse and self-storage
facilities) tend to be affected more rapidly by changes in market or business
conditions than do properties typically leased for longer periods (such as
warehouses, retail stores, office buildings and industrial facilities).
Some commercial properties may be owner-occupied or leased to a small
number of tenants. Accordingly, the operating revenues may depend substantially
on the financial condition of the borrower or one or a few tenants. Mortgage
loans secured by liens on owner-occupied and single tenant properties may pose a
greater likelihood of default and loss than loans secured by liens on
multifamily properties or on multi-tenant commercial properties.
Increases in property operating expenses can increase the likelihood of
a borrower default on a multifamily or commercial mortgage loan secured by the
property. Increases in property operating expenses may result from:
- increases in energy costs and labor costs;
- increases in interest rates and real estate tax rates; and
- changes in governmental rules, regulations and fiscal
policies.
Some "net leases" of commercial properties may provide that the lessee,
rather than the borrower/landlord, is responsible for payment of operating
expenses. However, a net lease will result in stable net operating income to the
borrower/landlord only if the lessee is able to pay the increased operating
expense while also continuing to make rent payments.
Lenders also look to the loan-to-value ratio of a mortgage loan as a
factor in evaluating the likelihood of loss if a property is liquidated
following a default. In general, the "loan-to-value ratio" of a multifamily or
commercial mortgage loan at any given time is the ratio, expressed as a
percentage, of--
(a) the then outstanding principal balance of the mortgage loan
and any other senior loans that are secured by the related
real property, to
(b) the estimated value of the related real property based on an
appraisal, a cash flow analysis, a recent sales price or
another method or benchmark of valuation.
A low loan-to-value ratio means the borrower has a large amount of its
own equity in the multifamily or commercial property that secures its loan. In
these circumstances--
(x) the borrower has a greater incentive to perform under the
terms of the related mortgage loan in order to protect that
equity, and
(y) the lender has greater protection against loss on liquidation
following a borrower default.
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Loan-to-value ratios are not necessarily an accurate measure of the
likelihood of liquidation loss in a pool of multifamily and commercial mortgage
loans. For example, the value of a multifamily or commercial property as of the
date of initial issuance of a series of offered bonds may be less than the
estimated value determined at loan origination. The value of any real property,
in particular a multifamily or commercial property, will likely fluctuate from
time to time. Moreover, even a current appraisal is not necessarily a reliable
estimate of value. Appraised values of income-producing properties are generally
based on--
- the market comparison method, which takes into account the
recent resale value of comparable properties at the date of
the appraisal;
- the cost replacement method, which takes into account the cost
of replacing the property at such date;
- the income capitalization method, which takes into account the
property's projected net cash flow; or
- a selection from the values derived from the foregoing
methods.
Each of these appraisal methods presents analytical difficulties. For
example,
- it is often difficult to find truly comparable properties that
have recently been sold;
- the replacement cost of a property may have little to do with
its current market value; and
- income capitalization is inherently based on inexact
projections of income and expense and the selection of an
appropriate capitalization rate and discount rate.
If more than one appraisal method is used and significantly different results
are produced, an accurate determination of value and, correspondingly, a
reliable analysis of the likelihood of default and loss, is even more difficult.
The value of a multifamily or commercial property will be affected by
property performance. As a result, if a multifamily or commercial mortgage loan
defaults because the income generated by the related property is insufficient to
pay operating costs and expenses as well as debt service, then the value of the
property will decline and a liquidation loss may occur.
We believe that the foregoing considerations are important factors that
generally distinguish mortgage loans secured by liens on income-producing real
estate from single-family mortgage loans. However, the originators of the
mortgage loans directly or indirectly backing a series of offered bonds may not
have considered all of those factors for all or any of those loans.
See "Risk Factors--Repayment of a Commercial or Multifamily Mortgage
Loan Depends Upon the Performance and Value of the Underlying Real Property and
the Related Borrower's Ability to Refinance the Property."
PAYMENT PROVISIONS OF THE MORTGAGE LOANS. Each of the mortgage loans
securing a series of offered bonds will have the following features:
- an original term to maturity of not more than approximately 40
years; and
- scheduled payments of principal, interest or both, to be made
on specified dates, that occur monthly, bi-monthly, quarterly,
semi-annually, annually or at some other interval.
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A mortgage loan securing a series of offered bonds may also include
terms that:
- provide for the accrual of interest at a mortgage interest
rate that is fixed over its term, that resets on one or more
specified dates or that otherwise adjusts from time to time;
- provide for the accrual of interest at a mortgage interest
rate that may be converted at the borrower's election from an
adjustable to a fixed interest rate or from a fixed to an
adjustable interest rate;
- provide for no accrual of interest;
- provide for level payments to stated maturity, for payments
that reset in amount on one or more specified dates or for
payments that otherwise adjust from time to time to
accommodate changes in the coupon rate or to reflect the
occurrence of certain events;
- be fully amortizing or, alternatively, may be partially
amortizing or nonamortizing, with a substantial payment of
principal due on its stated maturity date;
- permit the negative amortization or deferral of accrued
interest;
- permit defeasance and the release of real property collateral
in connection with that defeasance; and/or
- prohibit some or all voluntary prepayments or require payment
of a premium, fee or charge in connection with those
prepayments.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS. We will describe
in the related prospectus supplement the characteristics of the mortgage loans
that will secure a series of offered bonds. In general, we will provide in the
related prospectus supplement, among other items, the following information on
the particular mortgage loans securing a series of offered bonds:
- the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the
mortgage loans;
- the type or types of property that provide security for
repayment of the mortgage loans;
- the earliest and latest origination date and maturity date of
the mortgage loans;
- the original and remaining terms to maturity of the mortgage
loans, or the range thereof, and the weighted average original
and remaining terms to maturity of the mortgage loans;
- loan-to-value ratios of the mortgage loans either at
origination or as of a more recent date, or the range thereof,
and the weighted average of those loan-to-value ratios;
- the mortgage interest rates of the mortgage loans, or the
range thereof, and the weighted average mortgage interest rate
of the mortgage loans;
- if any mortgage loans have adjustable mortgage interest rates,
the index or indices upon which the adjustments are based, the
adjustment dates, the range of gross margins and the weighted
average gross margin, and any limits on mortgage interest rate
adjustments at the time of any adjustment and over the life of
the loan;
- information on the payment characteristics of the mortgage
loans, including applicable prepayment restrictions;
- debt service coverage ratios of the mortgage loans either at
origination or as of a more recent date, or the range thereof,
and the weighted average of those debt service coverage
ratios; and
- the geographic distribution of the properties securing the
mortgage loans on a state-by-state basis.
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If we are unable to provide the specific information described above at
the time a series of offered bonds is initially offered, we will provide--
- more general information in the related prospectus supplement,
and
- specific information in a report which will be filed with the
SEC as part of a Current Report on Form 8-K within 15 days
following the issuance of the bonds.
If any mortgage loan, or group of related mortgage loans, securing a
series of offered bonds represents a material concentration of credit risk, we
will include in the related prospectus supplement financial statements or other
financial information on the related real property or properties.
MORTGAGE-BACKED SECURITIES
The mortgage backed-securities securing a series of offered bonds may
include:
- mortgage participations, mortgage pass-through certificates,
collateralized mortgage obligations or other mortgage-backed
securities that are not insured or guaranteed by any
governmental agency or instrumentality, or
- certificates issued and/or insured or guaranteed by the
Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA"), the Governmental
National Mortgage Association ("GNMA"), the Federal
Agricultural Mortgage Corporation ("FAMC") or another federal
or state governmental agency or instrumentality.
In addition, each of those mortgage-backed securities will directly or
indirectly evidence an interest in, or be secured by a pledge of, multifamily
and/or commercial mortgage loans.
Each mortgage-backed security included as part of the mortgage
collateral for a series of offered bonds--
- will have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), or
- will be exempt from the registration requirements of the
Securities Act, or
- will have been held for at least the holding period specified
in Rule 144(k) under the Securities Act, or
- would otherwise be able to be resold by us publicly without
registration under the Securities Act.
We will describe in the related prospectus supplement the
characteristics of the mortgage-backed securities that will be included as part
of the mortgage collateral for a series of offered bonds. In general, we will
provide in the related prospectus supplement, among other items, the following
information on the particular mortgage-backed securities included as part of the
mortgage collateral for a series of offered bonds:
- the initial and outstanding principal amount(s) and type of
the securities;
- the original and remaining term(s) to stated maturity of the
securities;
- the pass-through or bond rate(s) of the securities or the
formula for determining such rate(s);
- the payment characteristics of the securities;
- the identity of the issuer(s), servicer(s) and trustee(s) for
the securities;
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- a description of the related credit support (if any);
- the type of mortgage loans underlying the securities;
- the circumstances under which the related underlying mortgage
loans, or the securities themselves, may be purchased prior to
maturity;
- the terms and conditions for substituting mortgage loans
backing the securities; and
- the characteristics of any agreements or instruments providing
interest rate protection to the securities.
With respect to any mortgage-backed security included as part of the
mortgage collateral for a series of offered bonds, we will provide in our
reports filed under the Exchange Act of 1934, as amended (the "Exchange Act")
the same information regarding the security as is provided by the issuer of the
security in its own reports filed under the Exchange Act, if the security was
publicly offered, or in the reports the issuer of the security provides to the
related trustee, if the security was privately issued.
SUBSTITUTION, ACQUISITION AND RELEASE OF MORTGAGE COLLATERAL
If so specified in the related prospectus supplement, we, the related
issuer or another specified person or entity may be permitted, at our or its
option, but subject to the conditions specified in that prospectus supplement,
to obtain a release of particular items of the related mortgage collateral--
- in connection with a redemption of bonds, or
- in exchange for other mortgage loans or mortgage-backed
securities that (i) conform to the description of mortgage
collateral in this prospectus, and (ii) satisfy the criteria
set forth in the related prospectus supplement.
In addition, if so specified in the related prospectus supplement, the
related bond trustee may be authorized or required, including at the direction
of the related issuer, to apply collections on the related mortgage collateral
to acquire new mortgage loans or mortgage-backed securities that (i) conform to
the description of mortgage collateral in this prospectus and (ii) satisfy the
criteria set forth in the related prospectus supplement. No such replacement of
mortgage collateral or acquisition of new mortgage collateral will be permitted
if it would result in a qualification, downgrade or withdrawal of the
then-current rating assigned by any rating agency to any class of affected
offered bonds.
UNDELIVERED MORTGAGE ASSETS
In general, the aggregate outstanding principal balance of the mortgage
collateral securing any particular series of bonds will equal or exceed the
initial aggregate outstanding principal balance of those bonds. In the event
that the aggregate outstanding principal balance of the related mortgage
collateral is less than the initial aggregate outstanding principal balance of
any series of bonds, the related issuer may deposit or arrange for the deposit
of cash or liquid investments on an interim basis with the related bond trustee
to cover the shortfall. For 90 days following the date of initial issuance of
that series of bonds, the related issuer will be entitled to obtain a release of
the deposited cash or investments if it delivers or arranges for delivery of a
corresponding amount of mortgage collateral that satisfies the criteria
specified in the related prospectus supplement. If the related issuer fails,
however, to deliver mortgage collateral sufficient to make up the entire
shortfall, any of the cash or, following liquidation, investments remaining on
deposit with the related bond trustee will be used by that trustee to redeem
bonds of the related series, as described in the related prospectus supplement.
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ACCOUNTS
The trust estate for a series of offered bonds will include one or more
accounts established and maintained on behalf of the holders. All payments and
collections received or advanced on the related mortgage collateral and the
other assets of the related trust estate will be deposited and held in those
accounts. We will identify and describe those accounts, and will further
describe the deposits to and withdrawals from those accounts, in the related
prospectus supplement.
CREDIT SUPPORT
GENERAL. The holders of any class of offered bonds may be the
beneficiaries of credit support designed to protect them partially or fully
against all or particular defaults and losses on the related mortgage
collateral. The types of credit support that may benefit the holders of a class
of offered bonds include:
- the subordination or one or more other classes of bonds of the
same series;
- a letter of credit;
- a surety bond;
- an insurance policy;
- a guarantee;
- a credit derivative; and/or
- a reserve fund.
In the related prospectus supplement, we will describe the amount and
types of any credit support benefiting the holders of a class of offered bonds.
If applicable, we will also identify the provider of that credit support.
ARRANGEMENTS PROVIDING REINVESTMENT, INTEREST RATE AND CURRENCY RELATED
PROTECTION
The trust estate for a series of offered bonds may include guaranteed
investment contracts pursuant to which moneys held in the funds and accounts
established for that series will be invested at a specified rate. The trust
estate for a series of offered bonds may also include:
- interest rate exchange agreements;
- interest rate cap agreements;
- interest rate floor agreements;
- currency exchange agreements; or
- other agreements or arrangements designed to reduce the
effects of interest rate or currency exchange rate
fluctuations with respect to the related mortgage assets or
one or more classes of those offered bonds.
In the related prospectus supplement, we will describe any agreements
or other arrangements designed to protect the holders of a class of offered
bonds against shortfalls resulting from movements or fluctuations in interest
rates or currency exchange rates. If applicable, we will also identify any
obligor under the agreement or other arrangement.
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YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on your bonds will depend on--
- the price you paid for your bonds,
- the interest rate on your bonds,
- the amount and timing of payments on your bonds.
The following discussion contemplates that the mortgage collateral for
a series of offered bonds consists only of mortgage loans. If the related
mortgage collateral also includes mortgage-backed securities, the payment terms
of those securities will soften or enhance the effects that the characteristics
and behavior of mortgage loans backing them can have on the yield to maturity
and/or weighted average life of a class of offered bonds. If the mortgage
collateral for a series of offered bonds includes mortgage-backed securities, we
will discuss in the related prospectus supplement the effect, if any, that those
mortgage-backed securities may have on the yield to maturity and weighted
average lives of those bonds.
INTEREST RATE
A class of interest-bearing offered bonds may have a fixed, variable or
adjustable interest rate. We will specify in the related prospectus supplement
the interest rate for each class of interest-bearing offered bonds or, if the
interest rate is variable or adjustable, the method of determining that interest
rate.
PAYMENT DELAYS
There will be a delay between the date on which payments on the
mortgage loans securing your bonds are due and the date on which those payments
are passed through to you and other investors. That delay will reduce the yield
that would otherwise be produced if those payments were passed through on your
bonds on the same date that they were due.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity on your bonds will be affected by the rate of
principal payments on the related mortgage loans and the allocation of those
principal payments to reduce the principal balance or notional amount of your
bonds. The rate of principal payments on those mortgage loans will be affected
by the following:
- the amortization schedules of the mortgage loans, which may
change from time to time to reflect, among other things,
changes in mortgage interest rates or partial prepayments of
principal;
- the dates on which any balloon payments are due; and
- the rate of principal prepayments on the mortgage loans,
including voluntary prepayments by borrowers and involuntary
prepayments resulting from liquidations, casualties or
purchases of mortgage loans.
Because the rate of principal prepayments on the mortgage loans
securing your bonds will depend on future events and a variety of factors, we
cannot give you any assurance as to that rate.
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The extent to which the yield to maturity of your bonds may vary from
your anticipated yield will depend upon--
- whether you purchased your bonds at a discount or premium and,
if so, the extent of that discount or premium, and
- when, and to what degree, payments of principal on the
mortgage loans securing your bonds are applied or otherwise
result in the reduction of the principal balance or notional
amount of your bonds.
If you purchase your bonds at a discount, you should consider the risk
that a slower than anticipated rate of principal payments on the related
mortgage loans could result in an actual yield to you that is lower than your
anticipated yield. If you purchase your bonds at a premium, you should consider
the risk that a faster than anticipated rate of principal payments on the
related mortgage loans could result in an actual yield to you that is lower than
your anticipated yield.
If your bonds entitle you to payments of interest, with
disproportionate, nominal or no payments of principal, you should consider that
your yield will be extremely sensitive to prepayments on the related mortgage
loans and, under some prepayment scenarios, may be negative.
If a class of offered bonds accrues interest on a notional amount, that
notional amount will, in general, either--
(a) be based on the principal balances of some or all of the
mortgage assets included as part of the related mortgage
collateral, or
(b) equal the aggregate principal balance of one or more of the
other classes of bonds of the same series.
Accordingly, the yield on that class of bonds will be inversely related
to, as applicable, the rate at which payments and other collections of principal
are received on the mortgage assets referred to in clause (a) above or payments
are made in reduction of the aggregate principal balance of the class or classes
of bonds referred to in clause (b) above.
The extent of prepayments of principal of the mortgage loans securing
your bonds may be affected by a number of factors, including:
- the availability of mortgage credit;
- the relative economic vitality of the area in which the
related real properties are located;
- the quality of management of the related real properties;
- the servicing of the mortgage loans;
- possible changes in tax laws; and
- other opportunities for investment.
In general, those factors that increase the attractiveness of selling or
refinancing a commercial or multifamily property, as well as those factors that
increase the likelihood of default under a commercial or multifamily mortgage
loan, would be expected to cause the rate of prepayment to accelerate. In
contrast, those factors having an opposite effect would be expected to cause the
rate of prepayment to slow.
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The rate of principal payments on the mortgage loans securing your
bonds may also be affected by the existence and enforceability of prepayment
restrictions, such as prepayment lock-out periods and requirements that
voluntary principal prepayments be accompanied by prepayment premiums, fees or
charges. If enforceable, those provisions could constitute either an absolute
prohibition, in the case of a prepayment lock-out period, or a disincentive, in
the case of a prepayment premium, fee or charge, to a borrower's voluntarily
prepaying its mortgage loan, thereby slowing the rate of prepayments.
The rate of prepayment on a pool of mortgage loans is likely to be
affected by prevailing market interest rates for mortgage loans of a comparable
type, term and risk level. As prevailing market interest rates decline, a
borrower may have an increased incentive to refinance its mortgage loan. Even in
the case of adjustable rate mortgage loans, as prevailing market interest rates
decline, the related borrowers may have an increased incentive to refinance for
the following purposes:
- to convert to a fixed rate loan and thereby "lock in" that
rate, or
- to take advantage of a different index, margin or rate cap or
floor on another adjustable rate mortgage loan.
Subject to prevailing market interest rates and economic conditions
generally, a borrower may sell a real property in order to--
- realize its equity in the property,
- meet cash flow needs or
- make other investments.
Additionally, some borrowers may be motivated by federal and state tax laws,
which are subject to change, to sell their properties prior to the exhaustion of
tax depreciation benefits. We make no representation as to--
- the particular factors that will affect the prepayment of the
mortgage loans securing any series of offered bonds,
- the relative importance of those factors,
- the percentage of the principal balance of those mortgage
loans that will be paid as of any date, or
- the overall rate of prepayment on those mortgage loans.
WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the mortgage loans
securing any series of offered bonds will affect the ultimate maturity and the
weighted average life of one or more classes of those bonds. In general,
weighted average life refers to the average amount of time that will elapse from
the date of issuance of an instrument until each dollar allocable as principal
of such instrument is repaid to the investor.
The weighted average life and maturity of a class of offered bonds will
be influenced by the rate at which principal on the related mortgage loans is
paid to that class, whether in the form of scheduled amortization or
prepayments, including voluntary prepayments by borrowers and involuntary
prepayments resulting from liquidations, casualties or condemnations and
purchases of mortgage loans out of the related trust estate.
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Prepayment rates on loans are commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model.
CPR represents an assumed constant rate of prepayment each month, expressed as
an annual percentage, relative to the then outstanding principal balance of a
pool of mortgage loans for the life of such loans. SPA represents an assumed
variable rate of prepayment each month, expressed as an annual percentage,
relative to the then outstanding principal balance of a pool of mortgage loans,
with different prepayment assumptions often expressed as percentages of SPA. For
example, a prepayment assumption of 100% of SPA assumes prepayment rates of 0.2%
per annum of the then outstanding principal balance of those loans in the first
month of the life of the loans and an additional 0.2% per annum in each month
thereafter until the 30th month. Beginning in the 30th month, and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption is a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical prepayment
experience for single-family mortgage loans. It is unlikely that the prepayment
experience of the mortgage loans securing your offered bonds will conform to any
particular level of CPR or SPA.
In the prospectus supplement for a series of offered bonds, we will
include tables, if applicable, setting forth the projected weighted average life
of each class of those offered bonds with an aggregate principal balance, and
the percentage of the initial aggregate principal balance of each such class
that would be outstanding on specified dates, based on the assumptions stated in
that prospectus supplement, including assumptions regarding prepayments on the
mortgage loans included as part of the related mortgage collateral. Those tables
and assumptions illustrate the sensitivity of the weighted average lives of the
bonds to various assumed prepayment rates and are not intended to predict, or to
provide information that will enable you to predict, the actual weighted average
lives of your bonds.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITy
BALLOON PAYMENTS; EXTENSIONS OF MATURITY. Some or all of the mortgage
loans securing a series of offered bonds may require that balloon payments be
made at maturity. The ability of a borrower to make a balloon payment typically
will depend upon its ability either (a) to refinance the loan, or (b) to sell
the related real property. If a borrower is unable to refinance or sell the
related real property, there is a possibility that the borrower may default on
the mortgage loan or that the maturity of the mortgage loan may be extended in
connection with a workout. If a borrower defaults, recovery of proceeds may be
delayed by (a) the bankruptcy of the borrower, or (b) adverse economic
conditions in the market where the related real property is located.
In order to minimize losses on defaulted mortgage loans, the related
master servicer or special servicer may be authorized within prescribed limits
to modify mortgage loans that are in default or as to which a payment default is
reasonably foreseeable. Any defaulted balloon payment or modification that
extends the maturity of a mortgage loan may delay payments of principal on your
bonds and extend the weighted average life of your bonds.
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NEGATIVE AMORTIZATION. The weighted average life of a class of offered
bonds can be affected by mortgage loans that permit negative amortization to
occur. Those are the mortgage loans that provide for the current payment of
interest calculated at a rate lower than the rate at which interest accrues on
the mortgage loan, with the unpaid portion of that interest being added to the
related principal balance. Negative amortization most commonly occurs in respect
of an adjustable rate mortgage loan that:
- limits the amount by which its scheduled payment may adjust in
response to a change in its mortgage interest rate;
- provides that its scheduled payment will adjust less
frequently than its mortgage interest rate; or
- provides for constant scheduled payments regardless of
adjustments to its mortgage interest rate.
Negative amortization on one or more mortgage loans securing a series
of offered bonds may result in negative amortization on one or more classes of
those bonds. We will describe in the related prospectus supplement, if
applicable, the manner in which negative amortization in respect of the mortgage
loans securing a series of offered bonds is allocated among the respective
classes of those bonds.
The portion of any mortgage loan negative amortization allocated to a
class of offered bonds may result in a deferral of some or all of the interest
payable on those bonds. Deferred interest may be added to the aggregate
principal balance of a class of offered bonds. In addition, an adjustable rate
mortgage loan that permits negative amortization would be expected during a
period of increasing interest rates to amortize, if at all, at a slower rate
than if interest rates were declining or were remaining constant. This slower
rate of mortgage loan amortization would be reflected in a slower rate of
amortization for one or more classes of bonds of the related series.
Accordingly, there may be an increase in the weighted average lives of those
classes of bonds to which any mortgage loan negative amortization would be
allocated or that would bear the effects of a slower rate of amortization of the
related mortgage loans.
The extent to which the yield on your bonds may be affected by any
negative amortization on mortgage loans included as part of the related mortgage
collateral will depend, in part, upon whether you purchase your bonds at a
premium or a discount.
During a period of declining interest rates, the scheduled payment on
an adjustable rate mortgage loan may exceed the amount necessary to amortize the
loan fully over its remaining amortization schedule and pay interest at the then
applicable mortgage interest rate. The result is the accelerated amortization of
the mortgage loan. The acceleration in amortization of a mortgage loan will
shorten the weighted average lives of those classes of offered bonds, if any,
that entitle their holders to a portion of the principal payments on the
mortgage loan.
FORECLOSURES AND PAYMENT PLANS. The weighted average life of and yield
on your bonds will be affected by--
- the number of foreclosures with respect to the mortgage loans
securing those bonds; and
- the principal amount of the foreclosed mortgage loans in
relation to the principal amount of those mortgage loans that
are repaid in accordance with their terms.
Servicing decisions made with respect to the related mortgage loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of mortgage loans in bankruptcy proceedings
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or otherwise, may also affect the payment patterns of particular mortgage loans
and, as a result, the weighted average life of and yield on your bonds.
LOSSES AND SHORTFALLS ON THE MORTGAGE COLLATERAL. The yield on your
bonds will directly depend on the extent to which you are required to bear the
effects of any losses or shortfalls in collections on the related mortgage
collateral and the timing of those losses and shortfalls. In general, the
earlier that you bear any loss or shortfall, the greater will be the negative
effect on the yield of your bonds.
The amount of any losses or shortfalls in collections on the mortgage
assets securing a series of offered bonds will, to the extent not covered or
offset by draws on any reserve fund or under any instrument of credit support,
be allocated among the various classes of bonds, including non-offered bonds, of
that series in the priority and manner, and subject to the limitations, that we
specify in the related prospectus supplement. As described in the related
prospectus supplement, those allocations may be effected by the following:
- a reduction in the entitlements to interest and/or the
aggregate principal balances of one or more classes of bonds;
and/or
- the establishment of a priority of payments among classes of
bonds.
If you purchase subordinated bonds, the yield to maturity on those
bonds may be extremely sensitive to losses and shortfalls in collections on the
related mortgage collateral.
ADDITIONAL BOND AMORTIZATION. If your bonds have a principal balance,
then they entitle you to a specified portion of the principal payments received
on the related mortgage collateral. They may also entitle you to payments of
principal from the following sources:
- amounts attributable to interest accrued but not currently
payable on one or more other classes of bonds of the
applicable series;
- interest received or advanced on the related mortgage
collateral that is in excess of the interest currently accrued
on the bonds of the applicable series;
- prepayment premiums, fees and charges, payments from equity
participations or any other amounts received on the related
mortgage collateral that do not constitute interest or
principal; or
- any other amounts described in the related prospectus
supplement.
The amortization of your bonds out of the sources described in the
prior paragraph would shorten their weighted average life and, if your bonds
were purchased at a premium, reduce their yield to maturity.
STRUCTURED ASSET SECURITIES CORPORATION
We were incorporated in Delaware on January 2, 1987. We were organized,
among other things, for the purposes of--
- acquiring mortgage loans, or interests therein, secured by
first or junior liens on commercial and multifamily real
properties;
- acquiring mortgage-backed securities that evidence interests
in mortgage loans that are secured by commercial and
multifamily real properties;
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- forming pools of mortgage loans and mortgage-backed
securities; and
- acting as depositor of trusts formed to issue bonds,
certificates of interest or other evidences of indebtedness
that are secured by or represent interests in, pools of
mortgage loans and mortgage-backed securities.
Our principal executive offices are located at 200 Vesey Street, New York, New
York 10285. Our telephone number is (212) 526-7000. There can be no assurance
that at any particular time we will have any significant assets.
ISSUERS
The issuer of each series of offered bonds will be an owner trust
established by us, pursuant to a deposit trust agreement between us, as
depositor, and a bank, trust company, corporation, association or other
fiduciary named in the related prospectus supplement, as owner trustee. We do
not expect any of those owner trusts to have any significant assets other than
those pledged to secure bonds. Concurrently with or prior to the initial
issuance of a series of offered bonds, we will convey to the related owner trust
the assets to be included in the trust estate for those bonds in exchange for--
- certificates of beneficial interest in the related owner
trust,
- bonds, and/or
- net proceeds from the sale of bonds.
We may in turn sell or assign those certificates of beneficial interest and/or
bonds so received to one or more persons or entities, including our affiliates.
The related deposit trust agreement and/or the related indenture will
provide that an issuer of offered bonds may not conduct any activities other
than those related to the issuance and sale of one or more series of bonds. The
holders of the beneficial interests in an owner trust that issues a series of
offered bonds will not be liable for the payment of those bonds. Furthermore,
the holders of those bonds will be deemed to have released the beneficial owners
of that owner trust from any such liability.
If so specified in the related prospectus supplement, and subject to
the satisfaction of all applicable conditions precedent, an issuer of offered
bonds may be permitted to--
- transfer the mortgage collateral and other assets pledged to
secure those bonds to another trust or other limited purpose
entity that assumes all of its obligations with respect to
those bonds, thereby relieving the transferor of those
obligations, and
- issue additional series of bonds.
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DESCRIPTION OF THE BONDS
GENERAL
In general, each series of offered bonds will be secured, nonrecourse
obligations of the related issuer. As part of the same series, an issuer may
also issue bonds that will not be offered pursuant to this prospectus. Each
series of offered bonds will consist of one or more classes. Any non-offered
bonds of that series will likewise consist of one or more classes.
A "series" of bonds are all those bonds that--
- have the same series designation;
- were issued pursuant to the same indenture; and
- are secured by the same mortgage collateral.
A "class" of bonds are all those bonds of a particular series that--
- have the same class designation; and
- have the same payment terms.
The respective classes of offered and non-offered bonds of any series
may have a variety of payment terms. An offered bond may entitle the holder to
receive:
- a stated principal amount, which will be represented by its
principal balance;
- interest on a principal balance or notional amount, at a
fixed, variable or adjustable interest rate;
- specified, fixed or variable portions of the interest,
principal or other amounts received on the related mortgage
collateral;
- payments of principal, with disproportionate, nominal or no
payments of interest;
- payments of interest, with disproportionate, nominal or no
payments of principal;
- payments of interest or principal that commence only as of a
specified date or only after the occurrence of certain events,
such as the payment in full of the interest and principal
outstanding on one or more other classes of bonds of the same
series;
- payments of principal to be made, from time to time or for
designated periods, at a rate that is faster (and, in some
cases, substantially faster) or slower (and, in some cases,
substantially slower) than the rate at which payments or other
collections of principal are received on the related mortgage
collateral;
- payments of principal to be made, subject to available funds,
based on a specified principal payment schedule or other
methodology;
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- payments of all or part of the prepayment or repayment
premiums, fees and charges, equity participations payments or
other similar items received on the related mortgage
collateral; or
- any other payments described in the related prospectus
supplement and payable out of the assets of the related trust
estate.
Any class of offered bonds may be senior or subordinate to one or more
other classes of bonds of the same series, including a non-offered class of
bonds of that series, for purposes of some or all payments and/or allocations of
losses or other shortfalls.
A class of offered bonds may have two or more component parts, each
having characteristics that are described in this prospectus as being
attributable to separate and distinct classes. For example, a class of offered
bonds may have an aggregate principal balance on which it accrues interest at a
fixed, variable or adjustable rate. That class of offered bonds may also accrue
interest on an aggregate notional amount at a different fixed, variable or
adjustable rate. In addition, a class of offered bonds may accrue interest on
one portion of its aggregate principal balance or notional amount at one fixed,
variable or adjustable rate and on another portion of its aggregate principal
balance or notional amount at a different fixed, variable or adjustable rate.
Each class of offered bonds will be issued in minimum denominations
corresponding to specified principal balances, notional amounts or percentage
interests, as described in the related prospectus supplement. A class of offered
bonds may be issued--
- in fully registered, definitive form and evidenced by physical
securities, or
- in book-entry form through the facilities of The Depository
Trust Company.
Offered bonds held in fully registered, definitive form may be transferred or
exchanged, subject to any restrictions on transfer described in the related
prospectus supplement, at the location specified in the related prospectus
supplement, without the payment of any service charges, except for any tax or
other governmental charge payable in connection with the transfer or exchange.
Interests in offered bonds held in book-entry form will be transferred on the
book-entry records of DTC and its participating organizations. If we so specify
in the related prospectus supplement, we will arrange for clearance and
settlement through Clearstream Banking, societe anonyme or the Euroclear System,
for so long as they are participants in DTC.
PAYMENTS ON THE BONDS
GENERAL. Payments on a series of offered bonds may occur monthly,
bi-monthly, quarterly, semi-annually, annually or at any other specified
interval. In the prospectus supplement for each series of offered bonds, we will
identify:
- the periodic payment date for that series, and
- the record date as of which bondholders entitled to payments
on any particular payment date will be established.
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All payments with respect to a class of offered bonds on any payment
date will be allocated PRO RATA among the outstanding bonds of that class in
proportion to the respective principal balances, notional amounts or percentage
interests, as the case may be, of those bonds. Payments on an offered bond will
be made to the holder entitled thereto either--
- by wire transfer of immediately available funds to the account
of that holder at a bank or similar entity, provided that the
holder has furnished the party making the payments with wiring
instructions no later than the applicable record date and has
satisfied any other conditions specified in the related
prospectus supplement, or
- by check mailed to the address of that holder as it appears in
the bond register, in all other cases.
In general, the final payment on any offered bond will be made only
upon presentation and surrender of that bond at the location specified to the
holder in notice of final payment.
PAYMENTS OF INTEREST. In the case of each class of interest-bearing
offered bond, interest will accrue from time to time, at the applicable interest
rate and in accordance with the applicable interest accrual method, on the
aggregate outstanding principal balance or notional amount of that class.
The interest rate for a class of interest-bearing offered bonds may be
fixed, variable or adjustable. We will specify in the related prospectus
supplement the interest rate for each class of interest-bearing offered bonds
or, in the case of a variable or adjustable interest rate, the method for
determining that interest rate.
Interest may accrue with respect to any offered bond on the basis of:
- a 360-day year consisting of 12 30-day months,
- the actual number of days elapsed during each relevant period
in a year assumed to consist of 360 days,
- the actual number of days elapsed during each relevant period
in a normal calendar year, or
- such other method identified in the related prospectus
supplement.
We will identify the interest accrual method for each class of offered
bonds in the related prospectus supplement.
Subject to available funds and any adjustments to interest entitlements
described in the related prospectus supplement, accrued interest in respect of
each class of interest-bearing offered bonds will normally be payable on each
payment date. However, in the case of some classes of interest-bearing offered
bonds, which we will refer to as "compound interest bonds," payments of accrued
interest will only begin on a particular payment date or under the circumstances
described in the related prospectus supplement. Prior to that time, the amount
of accrued interest otherwise payable on that class will be added to its
aggregate principal balance on each date or otherwise deferred as described in
the related prospectus supplement.
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If a class of offered bonds accrues interest on an aggregate notional
amount, that aggregate notional amount, in general, will be either:
(a) based on the principal balances of some or all of the mortgage
assets included as part of the related mortgage collateral; or
(b) equal to the aggregate principal balances of one or more other
classes of bonds of the same series.
Reference to the notional amount of any bond is solely for convenience in making
certain calculations of interest and does not represent the right to receive any
payments of principal.
We will describe in the related prospectus supplement the extent to
which the amount of accrued interest that is payable on, or that may be added to
the aggregate principal balance of, a class of interest-bearing offered bonds
may be reduced as a result of any contingencies, including shortfalls in
interest collections due to prepayments, delinquencies, losses and deferred
interest on the related mortgage assets.
PAYMENTS OF PRINCIPAL. A class of offered bonds may or may not have an
aggregate principal balance. If it does, that aggregate principal balance
outstanding from time to time will represent the maximum amount that the holders
of that class will be entitled to receive as principal out of the future cash
flow on the related mortgage collateral and the other assets of the related
trust estate. The aggregate outstanding principal balance of any class of
offered bonds will be reduced by--
- payments of principal actually made to the holders of that
class, and
- if and to the extent that we so specify in the related
prospectus supplement, losses of principal on the related
mortgage collateral that are allocated to or are required to
be borne by that class.
If a class of offered bonds are compound interest bonds, then the aggregate
outstanding principal balance of that class may be increased by the amount of
any interest accrued, but not currently payable, on that class. We will describe
in the related prospectus supplement any other adjustments to the aggregate
outstanding principal balance of a class of offered bonds.
Unless we so state in the related prospectus supplement, the initial
aggregate principal balance of all classes of a series of bonds will not be
greater than the aggregate outstanding principal balance of the related mortgage
collateral. We will specify the expected initial aggregate principal balance of
each class of offered bonds in the related prospectus supplement.
The payments of principal to be made on a series of offered bonds from
time to time will, in general, be a function of the payments, other collections
and advances received or made with respect to the related prospectus supplement.
Payments of principal on a series of offered bonds may also be made from the
following sources:
- amounts attributable to interest accrued but not currently
payable on one or more other classes of bonds of the
applicable series;
- interest received or advanced on the related mortgage
collateral that is in excess of the interest currently accrued
on the bonds of the applicable series;
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- prepayment premiums, fees and charges, payments from equity
participations or any other amounts received on the related
mortgage collateral that do not constitute interest or
principal; or
- any other amounts described in the related prospectus
supplement.
We will describe in the related prospectus supplement the principal
entitlement of each class of offered bonds on each payment date.
ALLOCATION OF LOSSES AND SHORTFALLS
If and to the extent that any losses or shortfalls in collections on
the mortgage assets securing a series of offered bonds are not covered or offset
by delinquency advances or draws on any reserve fund or under any instrument of
credit support, they will be allocated among the various classes of bonds,
including non- offered bonds, of that series in the priority and manner, and
subject to the limitations, specified in the related prospectus supplement. As
described in the related prospectus supplement, the allocations may be effected
by one or both of the following methods:
(i) by reducing the entitlements to interest and/or the aggregate
principal balances of one or more of those classes; and
(ii) by establishing a priority of payments among those classes.
See "Description of Credit Support."
ADVANCES
If any series of offered bonds are secured by mortgage loans, then as
and to the extent described in the related prospectus supplement, then, as and
to the extent described in the related prospectus supplement, the related master
servicer, the related special servicer, the related bond trustee, any related
provider of credit support and/or any other specified person may be obligated to
make, or may have the option of making, certain advances with respect to those
mortgage loans to cover--
- delinquent payments of principal and/or interest, other than
balloon payments,
- property protection expenses,
- other servicing expenses, or
- any other items specified in the related prospectus
supplement.
If there are any limitations with respect to a party's advancing obligations, we
will discuss those limitations in the related prospectus supplement.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to bondholders. Advances are not a guarantee against
losses. The advancing party will be entitled to recover all of its advances out
of subsequent recoveries on the related mortgage loans, including amounts drawn
under any fund or instrument constituting credit support, and out of any other
specific sources identified in the related prospectus supplement.
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If and to the extent that we so specify in the related prospectus
supplement, any entity making advances will be entitled to receive interest on
some or all of those advances for a specified period during which they are
outstanding at the rate specified in that prospectus supplement. That entity may
be entitled to payment of interest on its outstanding advances periodically from
general collections on the related mortgage collateral, prior to any payment to
the related series of bondholders, or at such other times and from such sources
as we may describe in the related prospectus supplement.
If any series of offered bonds are secured by mortgage-backed
securities, we will discuss in the related prospectus supplement any comparable
advancing obligations in respect of those securities or the mortgage loans that
back them.
REPORTS TO BONDHOLDERS
On or about each payment date, the related master servicer, manager or
bond trustee will forward to each holder of an offered bond a statement
substantially in the form, or specifying the information, set forth in the
related prospectus supplement. In general, that statement will include
information regarding (i) the payments made on that payment date with respect to
the applicable class of offered bonds and (ii) the recent performance of the
related mortgage collateral.
Within a reasonable period of time after the end of each calendar year,
the related master servicer, manager or bond trustee, as the case may be, will
be required to furnish to each person who at any time during the calendar year
was a holder of an offered bond a statement containing information regarding the
principal, interest and other amounts paid on the applicable class of offered
bonds, aggregated for that calendar year or the applicable portion thereof
during which the person was a bondholder. The obligation to provide that annual
statement will be deemed to have been satisfied by the related master servicer,
manager or trustee, as the case may be, to the extent that substantially
comparable information is provided pursuant to any requirements of the Internal
Revenue Code of 1986.
If the related mortgage collateral includes mortgage-backed securities,
the ability of the related master servicer, manager or bond trustee, as the case
may be, to include in any payment date statement information regarding the
mortgage loans that back those securities will depend on comparable reports
being received with respect to them.
VOTING RIGHTS
Voting rights will be allocated among the respective classes of offered
and non-offered bonds of each series in the manner described in the related
prospectus supplement. Bondholders will generally not have a right to vote,
except with respect to certain amendments to the governing documents or as
otherwise specified this prospectus or in the related prospectus supplement. See
"Description of the Governing Documents--Amendment."
As and to the extent described in the related prospectus supplement,
the bondholders entitled to a specified amount of voting rights for a particular
series will have the right to act as a group to remove or replace the related
bond trustee, master servicer, special servicer or manager. In general, any such
removal or replacement must be for cause. We will identify exceptions in the
related prospectus supplement.
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REDEMPTION
If we so specify in the related prospectus supplement, any series of
offered bonds may be redeemable in whole or in part, as follows:
- by special redemption, if the bond trustee determines that the
amount available to make payments on the bonds on the next
regular payment date is insufficient,
- by optional redemption, at the option of the related issuer,
or
- by mandatory redemption, at the request of certain
bondholders.
Written notice of any redemption will be given to each affected
bondholder, and payment of the redemption price will be made only upon
presentation and surrender of the bonds of the related series at the location to
be specified in the notice of redemption.
We will describe in the related prospectus supplement the conditions
and procedures under which any redemption may occur.
BOOK-ENTRY REGISTRATION
GENERAL. Any class of offered bonds may be issued in book-entry form
through the facilities of DTC. If so, that class will be represented by one or
more global securities registered in the name of DTC or its nominee. If we so
specify in the related prospectus supplement, we will arrange for clearance and
settlement through the Euroclear System or Clearstream Banking, societe anonyme
for so long they are participants in DTC.
DTC, EUROCLEAR AND CLEARSTREAM. DTC is:
- a limited-purpose trust company organized under the New York
Banking Law,
- a "banking corporation" within the meaning of the New York
Banking Law,
- a member of the Federal Reserve System,
- a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and
- a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act.
DTC was created to hold securities for participants in the DTC system
and to facilitate the clearance and settlement of securities transactions
between those participants through electronic computerized book-entry changes in
their accounts, thereby eliminating the need for physical movement of securities
certificates. Organizations that maintain accounts with DTC include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include other organizations. DTC is owned by a number of its participating
organizations and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as banks, brokers, dealers
and trust companies that directly or indirectly clear through or maintain a
custodial relationship with one of the organizations that maintains an account
with DTC. The rules applicable to DTC and its participating organizations are on
file with the SEC.
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It is our understanding that Clearstream was incorporated in 1970 as
"Cedel S.A.," a company with limited liability under the laws of Luxembourg.
Cedel S.A. subsequently changed its name to Cedelbank. On January 10, 2000,
Cedelbank's parent company, Cedel International, societe anonyme merged its
clearing, settlement and custody business with that of Deutsche Borse Clearing
AG. The merger involved the transfer by Cedel International of substantially all
of its assets and liabilities, including its shares in Cedelbank, to a new
Luxembourg company, New Cedel International, societe anonyme. New Cedel
International is 50% owned by Cedel International and 50% by Deutsche Borse AG,
the parent of Deutsche Borse Clearing AG. The shareholders of these two entities
are recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. On January 18, 2000, Cedelbank was renamed
Clearstream Banking, societe anonyme. Clearstream holds securities for its
member organizations and facilitates the clearance and settlement of securities
transactions between its member organizations through electronic book-entry
changes in accounts of those organizations, thereby eliminating the need for
physical movement of bonds. Transactions may be settled in Clearstream in any of
36 currencies, including United States dollars. Clearstream provides to its
member organizations, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream interfaces with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream is registered as a bank in Luxembourg, and
as such is subject to regulation by the Commission de Surveillance du Secteur
Financier, which supervises Luxembourg banks. Clearstream's customers are
world-wide financial institutions including underwriters, securities brokers and
dealers, banks, trust companies and clearing corporations. Clearstream's U.S.
customers are limited to securities brokers and dealers, and banks. Currently,
Clearstream has approximately 2,000 customers located in over 80 countries,
including all major European countries, Canada and the United States. Indirect
access to Clearstream is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream.
Clearstream and Euroclear have established an electronic bridge between their
two systems across which their respective participants may settle trades with
each other.
It is our understanding that Euroclear was founded in December 1968 to
hold securities for its member organizations and to clear and settle
transactions between its member organizations through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of bonds and any risk from lack of simultaneous transfers of securities
and cash. Over 100,000 different securities are accepted for settlement through
Euroclear, the majority of which are domestic securities from over 30 markets.
Transactions may be settled in Euroclear in any of over 35 currencies, including
United States dollars. The Euroclear system includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described below. Euroclear is operated by Morgan Guaranty
Trust Company of New York, Brussels, Belgium office (the "Euroclear Operator"),
under contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation ("ECS"). All operations are conducted by the Euroclear Operator, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not ECS. ECS establishes policy for the
Euroclear system on behalf of the more than 120 member organizations of
Euroclear. Those member organizations include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to the Euroclear system is also available to other firms that
clear through or maintain a custodial relationship with a member organization of
Euroclear, either directly or indirectly. Euroclear and Clearstream have
established an electronic bridge between their two systems across which their
respective participants may settle trades with each other.
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The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Euroclear Terms and Conditions"). The Euroclear Terms
and Conditions govern transfers of securities and cash within the Euroclear
system, withdrawal of securities and cash from the Euroclear system, and
receipts of payments with respect to securities in the Euroclear system. All
securities in the Euroclear system are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Euroclear Terms and Conditions only on
behalf of member organizations of Euroclear and has no record of or relationship
with persons holding through those member organizations.
The information in this prospectus concerning DTC, Euroclear and
Clearstream, and their book-entry systems, has been obtained from sources
believed to be reliable, but we do not take any responsibility for the accuracy
or completeness thereof.
HOLDING AND TRANSFERRING BOOK-ENTRY BONDS. Purchases of book-entry
bonds under the DTC system must be made by or through, and will be recorded on
the records of, the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for that purpose. In turn, the Financial Intermediary's
ownership of those bonds will be recorded on the records of DTC or,
alternatively, if the Financial Intermediary does not maintain an account with
DTC, on the records of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC. A
beneficial owner of book-entry bonds must rely on the foregoing procedures to
evidence its beneficial ownership of those bonds. DTC has no knowledge of the
actual beneficial owners of the book-entry bonds. DTC's records reflect only the
identity of the direct participants to whose accounts those bonds are credited,
which may or may not be the actual beneficial owners. The participants in the
DTC system will remain responsible for keeping account of their holdings on
behalf of their customers.
Transfers between participants in the DTC system will be effected in
the ordinary manner in accordance with DTC's rules and will be settled in
same-day funds. Transfers between direct account holders at Euroclear and
Clearstream, or between persons or entities participating indirectly in
Euroclear or Clearstream, will be effected in the ordinary manner in accordance
with their respective procedures and in accordance with DTC's rules.
Cross-market transfers between direct participants in DTC, on the one
hand, and member organizations at Euroclear or Clearstream, on the other, will
be effected through DTC in accordance with DTC's rules and the rules of
Euroclear or Clearstream, as applicable. Such cross-market transactions will
require, among other things, delivery of instructions by the applicable member
organization to Euroclear or Clearstream, as the case may be, in accordance with
the rules and procedures and within deadlines (Brussels time) established in
Euroclear or Clearstream, as the case may be. If the transaction complies with
all relevant requirements, Euroclear or Clearstream, as the case may be, will
then deliver instructions to its depositary to take action to effect final
settlement on its behalf.
Because of time-zone differences, the securities account of a member
organization of Euroclear or Clearstream purchasing an interest in a global
security from a DTC participant that is not such a member
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organization, will be credited during the securities settlement processing day
(which must be a business day for Euroclear or Clearstream, as the case may be)
immediately following the DTC settlement date. Transactions in interests in a
book-entry security settled during any securities settlement processing day will
be reported to the relevant member organization of Euroclear or Clearstream on
the same day. Cash received in Euroclear or Clearstream as a result of sales of
interests in a book-entry security by or through a member organization thereof
to a DTC participant that is not such a member organization will be received
with value on the DTC settlement date, but will not be available in the relevant
Euroclear or Clearstream cash account until the business day following
settlement in DTC. The related prospectus supplement will contain additional
information regarding clearance and settlement procedures for the book-entry
bonds and with respect to tax documentation procedures relating to the
book-entry bonds.
Conveyance of notices and other communications by DTC to DTC
participants, and by DTC participants to Financial Intermediaries and beneficial
owners, will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Payments on the book-entry bonds will be made to DTC. DTC's practice is
to credit DTC participants' accounts on the related payment date in accordance
with their respective holdings shown on DTC's records, unless DTC has reason to
believe that it will not receive payment on that date. Disbursement of such
payments by DTC participants to Financial Intermediaries and beneficial owners
will be--
- governed by standing instructions and customary practices, as
is the case with securities held for the accounts of customers
in bearer form or registered in "street name," and
- the sole responsibility of each such DTC participant, subject
to any statutory or regulatory requirements in effect from
time to time.
Under a book-entry system, beneficial owners may receive payments after the
related payment date.
The only "bondholder" of book-entry bonds will be DTC or its nominee.
Parties to the governing documents for any series of offered bonds need not
recognize beneficial owners of book-entry bonds as "bondholders." The beneficial
owners of book-entry bonds will be permitted to exercise the rights of
"bondholders" only indirectly through the DTC participants, who in turn will
exercise their rights through DTC. We have been informed that DTC will take
action permitted to be taken by a "bondholder" only at the direction of one or
more DTC participants. DTC may take conflicting actions with respect to the
book-entry bonds to the extent that those actions are taken on behalf of
Financial Intermediaries whose holdings include those bonds.
Because DTC can act only on behalf of DTC participants, who in turn act
on behalf of Financial Intermediaries and certain beneficial owners, the ability
of a beneficial owner to pledge its interest in a class of book-entry bonds to
persons or entities that do not participate in the DTC system, or otherwise to
take actions in respect of its interest in a class of book-entry bonds, may be
limited due to the lack of a physical security evidencing that interest.
ISSUANCE OF DEFINITIVE BONDS. Unless we specify otherwise in the
related prospectus supplement, beneficial owners of affected offered bonds
initially issued in book-entry form will not be able to obtain physical
securities that represent those offered bonds, unless:
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- we advise the related bond trustee in writing that DTC is no
longer willing or able to discharge properly its
responsibilities as depository with respect to those offered
bonds and we are unable to locate a qualified successor; or
- we elect, at our option, to terminate the book-entry system
through DTC with respect to those offered bonds.
Upon the occurrence of either of the two events described above, DTC
will be required to notify all DTC participants of the availability through DTC
of physical bonds with respect to the affected offered bonds. Upon surrender by
DTC of the global security or securities representing a class of book-entry
offered bonds, together with instructions for registration, the related bond
trustee or other designated party will be required to issue to the beneficial
owners identified in those instructions physical securities representing those
offered bonds.
DESCRIPTION OF THE GOVERNING DOCUMENTS
GENERAL
From time to time in this prospectus, we refer to the deposit trust
agreement, the indenture and any servicing and administration agreement(s) for a
series of offered bonds as the "Governing Documents" for that series.
Any party to the Governing Documents for a series of offered bonds, or
any of its affiliates, may own bonds, including non-offered bonds, of that
series. However, except in limited circumstances, including with respect to
consents to certain amendments to the related Governing Documents, bonds that
are held by parties to those Governing Documents will not be allocated voting
rights.
A form of a deposit trust agreement, trust indenture and servicing and
administration agreement have been filed as exhibits to the registration
statement of which this prospectus is a part. However, the provisions of the
Governing Documents for each series of offered bonds will vary based upon the
nature of those bonds and the nature of the related trust estate. The following
summaries describe certain provisions that may appear in the Governing Documents
for each series of offered bonds. The prospectus supplement for each series of
offered bonds will provide material additional information regarding the
Governing Documents for that series. The summaries in this prospectus do not
purport to be complete. You should refer to the provisions of the Governing
Documents for your bonds and, further, to the description of those provisions in
the related prospectus supplement. We will provide you with a copy of the
Governing Documents, exclusive of exhibits, that relate to your bonds, without
charge, upon written request addressed to our principal executive offices
specified under "Structured Asset Securities Corporation."
THE DEPOSIT TRUST AGREEMENT
GENERAL. The issuer of each series of offered bonds will be an owner
trust. We will establish that owner trust pursuant to a deposit trust agreement
between us, as depositor, and a bank, trust company, corporation, association or
other fiduciary named in the related prospectus supplement, as owner trustee.
The related deposit trust agreement will limit the activities of each issuer of
offered bonds to those incidental to the issuance of one or more series of
bonds.
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CONVEYANCE OF THE TRUST ESTATE. Under the terms of the related deposit
trust agreement, we will convey to the issuer of a series of offered bonds the
related mortgage collateral and the other assets of the related trust estate. We
will specify in the related prospectus supplement all material documents to be
delivered, and all other material actions to be taken, by us or any prior holder
of the related mortgage collateral in connection with that conveyance. We will
also specify in the related prospectus supplement any remedies available to the
related bondholders, or the related bond trustee on their behalf, in the event
that any of those material documents are not delivered or any of those other
material actions are not taken as required.
In exchange for our conveyance of the related mortgage collateral and
the other assets of the related trust estate to the owner trust that will issue
a series of offered bonds, we will receive certificates of beneficial interest
in that owner trust, bonds of that series and/or net proceeds from the sale of
bonds of that series.
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO MORTGAGE ASSETS. Unless
we state otherwise in the prospectus supplement for any series of offered bonds,
we will, with respect to each mortgage asset pledged to secure that series, make
or assign, or cause to be made or assigned, certain representations and
warranties (the person or entity making those representations and warranties,
the "Warranting Party") covering, by way of example:
- the accuracy of the information set forth for each mortgage
asset on the schedule of mortgage assets appearing as an
exhibit to the related deposit trust agreement;
- the Warranting Party's title to each mortgage asset and its
authority to transfer that mortgage asset; and
- in the case of a mortgage loan, the enforceability of the
related mortgage note and mortgage, the existence of title
insurance insuring the lien priority of the related mortgage
and the payment status of the mortgage loan.
We will identify the Warranting Party, and give a more complete
sampling of the representations and warranties to be made by it, in the related
prospectus supplement. We will also specify in the related prospectus supplement
any remedies available to the related bondholders, or the related bond trustee
on their behalf, in the event of a breach of any of those representations and
warranties. In most cases, the Warranting Party will be us or another prior
holder of the particular mortgage assets.
THE INDENTURE
GENERAL. The issuer of each series of offered bonds will--
- issue those bonds and any non-offered bonds of the same
series, and
- pledge, among other things, the related mortgage collateral to
secure its obligations, in particular its payment obligations,
with respect to those bonds and any non-offered bonds of the
same series,
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pursuant to an indenture between the related owner trustee, on behalf of the
issuer, and a bank, trust company, corporation, association or other fiduciary
named in the related prospectus supplement, as bond trustee on behalf of the
bondholders.
The indenture for each series of offered bonds will set forth, among
other things--
- the terms and conditions of those bonds and any non-offered
bonds of the same series,
- the obligations of the related issuer with respect to those
bonds and any non-offered bonds of the same series, and
- the obligations of the related issuer and the related bond
trustee with respect to the related trust estate.
PLEDGE OF MORTGAGE ASSETS. At the time of initial issuance of any
series of offered bonds, the related issuer will pledge to the related bond
trustee, among other things, the related mortgage collateral and various related
rights and assets to secure the obligations, in particular the payment
obligations, of that issuer with respect to those bonds and any non-offered
bonds of the same series. We will specify in the related prospectus supplement
all material documents in respect of the related mortgage assets that will be
delivered to the related bond trustee, and all other actions to be taken by us
or any prior holder of the related mortgage assets, in connection with that
pledge. Concurrently with that pledge of assets, the related trustee will
deliver to the related issuer or its designee, which may include us, the bonds
of the applicable series in exchange for those assets. The related bond trustee
will hold the trust estate for each series of offered bonds as security for
those bonds and any non-offered bonds of the same series, and the respective
classes of bondholders of that series will be entitled to the equal and
proportionate benefits of that security, subject to the express subordination of
certain of those classes.
Each mortgage asset securing a series of offered bonds will be
identified in a schedule appearing as an exhibit to the related indenture. That
schedule generally will include detailed information about each of those
mortgage assets, including:
- in the case of a mortgage loan, the address of the related
real property and the type of that property, the mortgage
interest rate and, if applicable, the applicable index, gross
margin, adjustment date and any rate cap information, the
remaining term to maturity, the remaining amortization term,
and the outstanding principal balance; and
- in the case of a mortgage-backed security, the outstanding
principal balance and the pass- through rate or coupon rate.
CERTAIN COVENANTS OF THE ISSUER. For so long as the offered bonds of
any series are outstanding, the related issuer may not liquidate or dissolve,
without the consent of the holders of bonds, including non- offered bonds, of
that series entitled to not less than 66-2/3% (or such other percentage
specified in the related prospectus supplement) of the related voting rights. In
addition, for so long as the offered bonds of any series are outstanding, the
related issuer also may not consolidate or merge with or into any other person
or entity or, except as described in this prospectus, convey or transfer its
properties and assets substantially as an entirety:
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- without the consent of the holders of bonds, including
non-offered bonds, of that series entitled to not less than
66-2/3% (or such other percentage specified in the related
prospectus supplement) of the related voting rights, and
- unless, among other things--
(a) the person or entity, if other than the issuer,
formed or surviving that merger or consolidation or
acquiring those assets is organized under the laws of
the United States of America or any State thereof and
has expressly assumed, by supplemental indenture, the
due and punctual payment of principal of and interest
on all bonds of that series and the performance of
every applicable covenant of the related indenture to
be performed by the related issuer,
(b) immediately after giving effect to that transaction,
no issuer event of default will have occurred and be
continuing,
(c) the related bond trustee will have received written
confirmation from each rating agency with respect to
that series to the effect that the consummation of
that transaction will not cause that rating agency to
downgrade or withdraw its then-current rating of any
class of bonds of that series, and
(d) the related bond trustee will have received from the
related issuer an officers' certificate and an
opinion of counsel, each to the effect that, among
other things, that transaction complies with the
foregoing requirements.
With limited exception, no issuer of offered bonds may incur, assume,
have outstanding or guarantee any indebtedness other than secured, nonrecourse
bonds pursuant to an indenture and other than obligations incidental to the
issuance of those bonds.
MODIFICATION OF INDENTURE. The issuer and bond trustee for any series
of offered bonds may amend the related indenture or enter into supplemental
indentures, without obtaining the consent of the holders of any bonds, including
non-offered bonds, of that series--
- to evidence the succession of another person to the related
issuer for that series,
- to add to the conditions, limitations and restrictions on
certain terms of that series and to the covenants of the
related issuer or bond trustee,
- to surrender any right or power conferred upon the related
issuer,
- to convey, transfer, assign, mortgage or pledge any property
to the related bond trustee,
- to correct or amplify the description of any property subject
to the lien of the related indenture,
- to modify the related indenture to the extent necessary to
effect the related bond trustee's qualifications under the
Trust Indenture Act or comply with the requirements of the
Trust Indenture Act,
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- to make any amendment necessary or desirable to maintain the
status of any portion of the related trust estate as a REMIC,
to avoid classification as a TMP or to avoid certain taxes
that may be imposed on REMICs, or
- to evidence and provide for the acceptance of appointment by a
successor bond trustee, or
- for any other reason specified in the related prospectus
supplement.
The issuer and bond trustee for any series of offered bonds may also
amend the related indenture or enter into supplemental indentures, without
obtaining the consent of the holders of any bonds, including non-offered bonds,
of that series--
- to cure an ambiguity,
- to correct or supplement any provision of that indenture or
any supplemental indenture which may be defective or
inconsistent with any other provisions,
- to make or amend other provisions with respect to matters or
questions arising under the related indenture or any
supplemental indenture, or
- for any other purpose specified in the related prospectus
supplement,
provided that such action will not materially adversely affect the interests of
the holders of the offered and non-offered bonds of that series.
In general, with the consent of the holders of offered bonds and
non-offered bonds representing greater than 50%, or such other percentage
specified in the related prospectus supplement, of the voting rights for the
applicable series, the related bond trustee and issuer may amend the related
indenture or execute a supplemental indenture--
- to add provisions to, or change or eliminate any provisions
of, the related indenture, or
- to modify the rights of the holders of the bonds of the
applicable series.
However, unless otherwise specified in the related prospectus
supplement, no amendment or supplemental indenture contemplated by the preceding
paragraph may, without the consent of the holder of each outstanding bond
affected:
- change the date of payment of any installment of principal of
or interest on any bond, or reduce the principal amount of,
the interest rate for or the redemption price with respect to
any bond, or change the provisions of the related indenture
relating to the application of collections on or with respect
to the related trust estate to payment of principal of or
interest on any bond, or change any place of payment where, or
the coin or currency in which, any bond or any interest
thereon is payable, or impair the right to institute suit for
the enforcement of the provisions of the related indenture
regarding payment;
- reduce the percentage of voting rights represented by the
bonds of the applicable series (or any class of that series),
the consent of the holders of which is required for the
authorization of any such amendment or supplemental indenture
or for any waiver of compliance with
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certain provisions of the related indenture or certain
defaults thereunder and their consequences;
- modify or alter the provisions of the related indenture
defining the term "Outstanding;"
- permit the creation of any lien ranking prior to or on a
parity with the lien of the related indenture with respect to
any part of the property subject to the lien of that indenture
or terminate the lien of that indenture on any property at any
time subject thereto or deprive the holder of any bond of the
security afforded by the lien of that indenture;
- reduce the percentage of voting rights represented by the
bonds of the applicable series (or any class of that series),
the consent of the holders of which is required to direct the
related bond trustee to liquidate the mortgage collateral for
that series;
- modify any of the provisions of the related indenture
regarding the calculation of the amount of any payment of
interest or principal due and payable on any bond on any
payment date, or to affect the rights of the holders of bonds
to the benefit of any provisions for the mandatory redemption
of those bonds; or
- modify the provisions of the related indenture regarding any
modifications of that indenture requiring consent of the
holders of bonds, except to increase the percentage of voting
rights held by holders required to consent to those
modifications of that indenture or to provide that additional
provisions of the related indenture cannot be modified or
waived without the consent of the holder of each bond affected
thereby.
ISSUER EVENTS OF DEFAULT. We will specify in the related prospectus
supplement the issuer events of default with respect to any series of offered
bonds and the available remedies, including the circumstances under which those
bonds may be declared due and payable and the related trust estate may be
liquidated in connection with any of those issuer events of default.
AUTHENTICATION AND DELIVERY OF BONDS. The issuer for any series of
offered bonds may from time to time deliver bonds of that series executed by it
to the related bond trustee and order that trustee to authenticate those bonds.
Upon the receipt of those bonds and that order, and subject to the related
issuer's compliance with certain conditions specified in the related indenture,
that bond trustee will authenticate and deliver those bonds as the related
issuer may direct. Unless otherwise specified in the related prospectus
supplement, the related bond trustee will be authorized to appoint an agent for
purposes of authenticating and delivering the bonds of any series (the
"Authenticating Agent").
SATISFACTION AND DISCHARGE OF THE INDENTURE. The indenture for any
series of offered bonds will be discharged as to those bonds and any non-offered
bonds of the same series (except with respect to certain continuing rights
specified in such indenture) either:
- upon the delivery to the related bond trustee or other bond
registrar for cancellation of all the bonds of that series
other than bonds which have been mutilated, lost or stolen and
have been replaced or paid and bonds for which money has been
deposited in trust for the full payment thereof (and
thereafter repaid to the related issuer or discharged from
that trust) as provided in that indenture; or
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- at such time as all bonds of that series not previously canceled
by the related bond trustee or other bond registrar have become
due and payable or, within one year, will become due and payable
or be called for redemption, and the related issuer has deposited
with the related bond trustee an amount sufficient to repay all
of the bonds of that series;
provided that the related issuer has paid all other amounts payable under the
related indenture and certain other conditions specified in the related
indenture have been satisfied.
RELEASE OF COLLATERAL. Mortgage collateral for any series of offered
bonds may be released from the lien of the related indenture:
- upon satisfaction and discharge of that indenture;
- in connection with the liquidation of a defaulted mortgage loan
or any real property acquired as part of the related trust estate
with respect to a defaulted mortgage loan;
- in connection with a material breach of a representation and
warranty or the failure to deliver certain required material
documentation with respect to a particular item of mortgage
collateral;
- as contemplated under "Description of the Trust
Estates--Substitution, Acquisition and Release of Mortgage
Collateral;" and
- as otherwise specified in the related prospectus supplement.
COMPLIANCE CERTIFICATES AND OPINIONS. In connection with the
authentication and delivery of any series of offered bonds at initial issuance,
the release or the release and substitution of property subject to the lien of
the related indenture, and the satisfaction and discharge of the related
indenture, and otherwise upon any application or request by the related issuer
to the related bond trustee to take any action under any provision of the
related indenture, the related issuer will be required to furnish to the related
bond trustee:
- an officer's certificate stating that all conditions precedent,
if any, provided for in the related indenture relating to the
proposed action have been complied with,
- an opinion of counsel stating that in the opinion of that counsel
all of those conditions precedent, if any, have been complied
with, and
- if required by the Trust Indenture Act, a certificate or opinion
from an accountant stating that in the opinion of that accountant
all of those conditions precedent, if any, subject to
verification by accountants have been complied with.
In connection with the authentication and delivery of any series of offered
bonds at initial issuance, the accountant rendering the certificate or opinion
referred to in the third bullet point of the preceding sentence is to be an
accountant independent of the related issuer, us or any of our affiliates that
was selected or approved by the related bond trustee in the exercise of
reasonable care.
Each of the certificates or opinions with respect to compliance with a
condition or covenant will be required to include:
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- a statement that each signatory of that certificate or opinion
has read or has caused to be read that covenant or condition;
- a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained
in that certificate or opinion are based;
- a statement that, in the opinion of each such signatory, that
signatory has made such examination or investigation as is
necessary to enable that signatory to express an informed opinion
as to whether or not that covenant or condition has been complied
with; and
- a statement as to whether, in the opinion of each such signatory,
that condition or covenant has been complied with.
In addition, the issuer for each series of offered bonds will be
required to file annually with the related bond trustee a written statement as
to fulfillment of its obligations under the related indenture.
LIST OF BONDHOLDERS. Three or more holders of bonds of any series which
have each owned those bonds for at least six months may, by written application
to the related bond trustee, request access to the list maintained by that
trustee of all holders of the same series for the purpose of communicating with
other bondholders of that series with respect to their rights under the related
indenture. The related bond trustee will be required, with limited exception, to
afford those applicants access to the most recent form of that list in the
possession of the related bond trustee or, at the expense of those applicants,
to mail copies of the particular communication to the other bondholders of the
same series.
MEETINGS OF BONDHOLDERS. Meetings of bondholders of any series or class
thereof may be called at any time and from time to time in connection with any
of the following acts:
- to give any notice to the related issuer or the related bond
trustee, give directions to the related bond trustee, consent to
the waiver of any issuer event of default under the related
indenture, or to take any other action authorized to be taken by
bondholders in connection therewith;
- to remove the related bond trustee and appoint a successor bond
trustee;
- to consent to the execution of supplemental indentures; or
- to take any other action authorized to be taken by or on behalf
of those bondholders.
Such meetings may be called by the related bond trustee, the related issuer or
the holders of bonds of the applicable series representing at least 10% (or such
other percentage specified in the related prospectus supplement) of the related
voting rights.
FISCAL YEAR. The fiscal year of each issuer of a series of offered
bonds ends on December 31.
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TRUSTEE'S ANNUAL REPORT. The bond trustee for each series of offered
bonds will be required to mail each year to all bondholders of that series, a
brief report relating to its eligibility and qualification to continue as the
bond trustee under the related indenture, any amounts advanced by it under the
related indenture which remain unpaid on the date of that report, the amount,
interest rate and maturity date of certain indebtedness owing by the related
issuer (or any other obligor on the bonds of that series) to that bond trustee
in its individual capacity, the property and funds physically held by that bond
trustee in its capacity as such, any release or release and substitution of
property subject to the lien of the related mortgage which has not been
previously reported, any additional issuance of bonds of the same issuer not
previously reported and any action taken by that bond trustee which materially
affects the bonds of that series and which has not been previously reported.
CERTAIN AGENTS OF THE ISSUER. The issuer for any series of offered
bonds may contract with other persons or entities to assist it in performing its
duties under the related indenture, including certain administrative and
accounting matters relating to the bonds of that series. Any performance of
those duties (other than execution of issuer orders, issuer requests and
officer's certificates of the issuer) by a person or entity identified to the
related bond trustee in an officer's certificate of the related issuer will be
deemed action taken by that issuer for all purposes under the applicable
indenture.
THE BOND TRUSTEE.
GENERAL. The bond trustee for each series of offered bonds will be
named in the related prospectus supplement. That bond trustee will be a bank,
trust company, corporation or association qualified under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). The bank, trust company,
corporation or association that serves as bond trustee for any series of offered
bonds may have typical banking relationships with us and our affiliates and with
any related master servicer, special servicer or manager or its affiliates.
CERTAIN MATTERS REGARDING THE BOND TRUSTEE. If no event of default on
the part of the related issuer or any related master servicer, special servicer
or manager has occurred and is continuing, the bond trustee for each series of
offered bonds will be required to perform only those duties specifically
required under the related indenture and the related servicing and
administration agreement(s).
As and to the extent described in the related prospectus supplement,
the fees and normal disbursements of the bond trustee for each series of offered
bonds may be an expense of the related issuer, master servicer or other
specified person or entity or may be payable out of collections on the related
mortgage collateral.
Unless otherwise specified in the related prospectus supplement, the
bond trustee for each series of offered bonds will be entitled to
indemnification, from assets in the related trust estate, for any loss,
liability or expense incurred by that bond trustee in connection with its
acceptance or administration of its trusts under the related indenture and the
related servicing and administration agreement(s). However, that indemnification
will not extend to any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence on the part of that bond trustee in
the performance of its obligations and duties under those documents.
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The rights of the bond trustee for any series of offered bonds to
receive, out of the assets of the related trust estate, any compensation or
reimbursement to which it is entitled under the related indenture or any related
servicing and administration agreement, will be senior to the rights of the
holders of those bonds to receive payments thereon.
No bond trustee for a series of offered bonds will be required to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties under the related indenture or any related
servicing and administration agreement, or in the exercise of any of its rights
or powers, if it has reasonable grounds for believing that repayment of those
funds or adequate indemnity against that risk or liability is not reasonably
assured to it.
The bond trustee for each series of offered bonds will be entitled to
execute any of its trusts or powers under the related indenture or any related
servicing and administration agreement, or to perform any of its duties
thereunder, either directly or by or through agents or attorneys. However, that
bond trustee will generally not be responsible for any willful misconduct or
gross negligence on the part of any such agent or attorney appointed by it with
due care.
RESIGNATION AND REMOVAL OF THE BOND TRUSTEE. The bond trustee for any
series of offered bonds may resign at any time, in which event we or the related
issuer will be obligated to appoint a successor bond trustee. We or the related
issuer may also remove the bond trustee for a series of offered bonds if that
bond trustee ceases to be eligible to continue in that capacity under the
related indenture or if that bond trustee becomes insolvent. Upon becoming aware
of those circumstances, we or the related issuer will be obligated to appoint a
successor bond trustee. In addition, unless otherwise specified in the related
prospectus supplement, the bond trustee for any series of offered bonds may also
be removed at any time by the holders of bonds, including non-offered bonds, of
that series representing more than 50% of the voting rights of that series.
However, if that removal was without cause, the bondholders effecting the
removal may be responsible for any costs and expenses incurred by the terminated
bond trustee in connection with its removal. Any resignation or removal of the
bond trustee for a series of offered bonds and the appointment of a successor
bond trustee for that series will not become effective until acceptance of the
appointment by that successor bond trustee.
THE SERVICING AND ADMINISTRATION AGREEMENT(S)
GENERAL. In general, with respect to each series of offered bonds, a
servicing and administration agreement or other similar agreement or collection
of agreements will govern the servicing and administration of the related
mortgage collateral to the extent that those matters are not covered by the
related indenture. The parties to the servicing and administration agreement(s)
for any series of offered bonds will in all cases include the related issuer and
the related bond trustee.
If the mortgage collateral for a series of offered bonds includes
mortgage loans, the parties to the related servicing and administration
agreement(s) will also include--
- a master servicer that will generally be responsible for
performing customary servicing duties with respect to those
mortgage loans that are not defaulted, nonperforming or otherwise
problematic in any material respect, and
- a special servicer that will generally be responsible for
servicing and administering such of those mortgage loans that are
defaulted, nonperforming or otherwise problematic in any material
respect and real estate assets acquired in respect of defaulted
mortgage loans.
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The same person or entity, or affiliated entities, may act as both master
servicer and special servicer for any series of offered bonds.
If the mortgage collateral for a series of offered bonds includes
mortgage-backed securities, the parties to the related servicing and
administration agreement(s) may also include a manager that will be responsible
for performing various administrative duties with respect to those
mortgage-backed securities. If the related bond trustee assumes those duties,
however, there will be no manager.
In the related prospectus supplement, we will identify any master
servicer, special servicer or manager for each series of offered bonds and will
describe their respective duties in further detail. If we so specify in the
related prospectus supplement, a party from whom we acquire mortgage assets or
one of its affiliates may perform the functions of master servicer, special
servicer or manager for the series of offered bonds secured by those mortgage
assets. If we so specify in the related prospectus supplement, the same person
or entity may act as both master servicer and special servicer for a series of
offered bonds.
COLLECTION AND OTHER SERVICING PROCEDURES WITH RESPECT TO MORTGAGE
LOANS. In general, the related master servicer and special servicer, directly or
through sub-servicers, will be obligated to service and administer for the
benefit of the related bondholders the mortgage loans securing any series of
offered bonds. The master servicer and the special servicer will be required to
service and administer those mortgage loans in accordance with applicable law
and, further, in accordance with the terms of the related servicing and
administration agreement(s), the mortgage loans themselves and any instrument of
credit support included as part of the related trust estate. Subject to the
foregoing, the master servicer and the special servicer will each have full
power and authority to do any and all things in connection with that servicing
and administration that it may deem necessary and desirable.
As part of its servicing duties, each of the master servicer and the
special servicer for a series of offered bonds will be required to make
reasonable efforts to collect all payments called for under the terms and
provisions of the related mortgage loans that it services and, in general, will
be obligated to follow the same collection procedures as it would follow for
comparable mortgage loans held for its own account, provided that:
(i) those procedures are consistent with the terms of the related
servicing and administration agreement(s); and
(ii) they do not impair recovery under any instrument of credit
support included as part of the related trust estate.
Consistent with the foregoing, the master servicer and the special servicer will
each be permitted, in its discretion, to waive any default charge in connection
with collecting a late payment on any defaulted mortgage loan.
The master servicer and/or the special servicer for a series of offered
bonds, directly or through sub-servicers, will also be required to perform
various other customary functions of a servicer of comparable loans, including:
- maintaining escrow or impound accounts for the payment of taxes,
insurance premiums, ground rents and similar items, or otherwise
monitoring the timely payment of those items;
- ensuring that the related properties are properly insured;
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- attempting to collect delinquent payments;
- supervising foreclosures;
- negotiating modifications;
- responding to borrower requests for partial releases of the
encumbered property, easements, consents to alteration or
demolition and similar matters;
- protecting the interests of bondholders with respect to senior
lienholders;
- conducting inspections of the related real properties on a
periodic or other basis;
- collecting and evaluating financial statements for the related
real properties;
- managing or overseeing the management of real properties acquired
as part of the related trust estate through foreclosure,
deed-in-lieu of foreclosure or otherwise; and
- maintaining servicing records relating to mortgage loans in the
related trust estate.
We will specify in the related prospectus supplement when, and the
extent to which, servicing of a mortgage loan is to be transferred from a master
servicer to a special servicer. In general, a special servicer for any series of
offered bonds will be responsible for the servicing and administration of:
- mortgage loans that are delinquent in respect of a specified
number of scheduled payments;
- mortgage loans as to which there is a material non-monetary
default;
- mortgage loans as to which the related borrower has entered into
or consented to bankruptcy, appointment of a receiver or
conservator or similar insolvency proceeding, or the related
borrower has become the subject of a decree or order for such a
proceeding which shall have remained in force undischarged or
unstayed for a specified number of days; and
- real properties acquired as part of the related trust estate with
respect to defaulted mortgage loans.
The related servicing and administration agreement(s) may also may provide that
if a default on a mortgage loan has occurred or, in the judgment of the related
master servicer, a payment default is reasonably foreseeable, the related master
servicer may elect to transfer the servicing of that mortgage loan, in whole or
in part, to the related special servicer. When the circumstances no longer
warrant a special servicer's continuing to service a particular mortgage loan,
such as when the related borrower is paying in accordance with the forbearance
arrangement entered into between the special servicer and that borrower, the
master servicer will generally resume the servicing duties with respect to the
particular mortgage loan.
A borrower's failure to make required mortgage loan payments may mean
that operating income from the related real property is insufficient to service
the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a borrower that is unable to make
mortgage loan payments may also be unable to make timely payment of taxes and
otherwise to maintain and insure the related real property. In general, with
respect to each series of offered bonds, the related special servicer
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will be required to monitor any mortgage loan in the related trust estate that
is in default, evaluate whether the causes of the default can be corrected over
a reasonable period without significant impairment of the value of the related
real property, initiate corrective action in cooperation with the borrower if
cure is likely, inspect the related real property and take such other actions as
it deems necessary and appropriate. A significant period of time may elapse
before a special servicer is able to assess the success of any such corrective
action or the need for additional initiatives. The time within which a special
servicer can make the initial determination of appropriate action, evaluate the
success of corrective action, develop additional initiatives, institute
foreclosure proceedings and actually foreclose, or accept a deed to a real
property in lieu of foreclosure, on behalf of the bondholders and issuer of the
related series may vary considerably depending on the particular mortgage loan,
the related real property, the borrower, the presence of an acceptable party to
assume the mortgage loan and the laws of the jurisdiction in which the related
real property is located. If a borrower files a bankruptcy petition, the special
servicer may not be permitted to accelerate the maturity of the defaulted loan
or to foreclose on the related real property for a considerable period of time.
See "Certain Legal Aspects of Mortgage Loans--Bankruptcy Laws."
A special servicer for any series of offered bonds may also perform
certain limited duties in respect of mortgage loans in the related trust estate
for which the related master servicer is primarily responsible, such as
performing property inspections and collecting and evaluating financial
statements. A master servicer for any series of offered bonds may perform
certain limited duties in respect of any mortgage loan in the related trust
estate for which the related special servicer is primarily responsible, such as
continuing to receive payments on the mortgage loan, making certain calculations
with respect to the mortgage loan and making remittances and preparing certain
reports to the related bond trustee and/or bondholders with respect to the
mortgage loan. The duties of the master servicer and special servicer for your
series will be more fully described in the related prospectus supplement.
Unless we state otherwise in the related prospectus supplement, the
master servicer for your series will be responsible for filing and settling
claims in respect of particular mortgage loans for your series under any
applicable instrument of credit support. See "Description of Credit Support" in
this prospectus.
SUB-SERVICERS. A master servicer or special servicer may delegate its
servicing obligations to one or more third-party servicers or sub-servicers.
However, unless we specify otherwise in the related prospectus supplement, the
master servicer or special servicer will remain obligated under the related
servicing and administration agreement(s). Each sub-servicing agreement between
a master servicer or special servicer, as applicable, and a sub-servicer must
provide for servicing of the applicable mortgage loans consistent with the
related servicing and administration agreement(s). Any master servicer and
special servicer for a series of offered bonds will each be required to monitor
the performance of sub-servicers retained by it.
Unless we specify otherwise in the related prospectus supplement, any
master servicer or special servicer for a series of offered bonds will be solely
liable for all fees owed by it to any sub-servicer, regardless of whether the
master servicer's or special servicer's compensation pursuant to the related
servicing and administration agreement(s) is sufficient to pay those fees. Each
sub-servicer will be entitled to reimbursement from the master servicer or
special servicer, as the case may be, that retained it, for certain expenditures
which it makes, generally to the same extent that the master servicer or special
servicer, as the case may be, would be reimbursed under the related servicing
and administration agreement(s).
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COLLECTION OF PAYMENTS ON MORTGAGE-BACKED SECURITIES. Unless we specify
otherwise in the related prospectus supplement, if a mortgage-backed security is
included among the trust assets securing any series of offered bonds, then--
- that mortgage-backed security will be registered in the name of
the related bond trustee or its designee;
- the related trustee will receive payments on that mortgage-backed
security; and
- subject to any conditions described in the related prospectus
supplement, the related trustee or a designated manager will, on
behalf and at the expense of the related trust estate, exercise
all rights and remedies in respect of that mortgaged-backed
security, including the prosecution of any legal action necessary
in connection with any payment default.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE SPECIAL SERVICER,
THE MANAGER AND THE ISSUER. Unless we specify otherwise in the related
prospectus supplement, no master servicer, special servicer or manager for any
series of offered bonds may resign from its obligations in that capacity, except
upon--
- the appointment of, and the acceptance of that appointment by, a
successor to the resigning party and receipt by the related bond
trustee of written confirmation from each applicable rating
agency that the resignation and appointment will not result in a
withdrawal or downgrade of any rating assigned by that rating
agency to any class of bonds, including non- offered bonds, of
that series, or
- a determination that those obligations are no longer permissible
under applicable law or are in material conflict by reason of
applicable law with any other activities carried on by the
resigning party.
In general, no resignation will become effective until the related bond
trustee or other successor has assumed the obligations and duties of the
resigning master servicer, special servicer or manager, as the case may be.
In no event will any issuer, master servicer, special servicer or
manager for any series of offered bonds, or any of their respective directors,
officers, employees or agents, be under any liability to the related trust
estate or bondholders for any action taken, or not taken, in good faith pursuant
to the related servicing and administration agreement(s) or for errors in
judgment. None of those persons or entities will be protected, however, against
any liability that would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of obligations or duties under
the related servicing and administration agreement(s) or by reason of reckless
disregard of those obligations and duties.
Furthermore, the servicing and administration agreement(s) for each
series of offered bonds will entitle the issuer, master servicer, special
servicer and/or manager for that series, and their respective directors,
officers, employees and agents, to indemnification out of the assets of the
related trust estate for any loss, liability or expense incurred in connection
with any legal action that relates to those bonds, any non-offered bonds of the
same series, the servicing and administration agreement(s) for that series or
the related trust estate. The indemnification will not extend, however, to any
loss, liability or expense--
- specifically required to be borne by the relevant party, without
right of reimbursement, pursuant to the terms of the related
servicing and administration agreement(s),
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- incurred in connection with any legal action against the relevant
party resulting from any breach of a representation or warranty
made in the related servicing and administration agreement(s), or
- incurred in connection with any legal action against the relevant
party resulting from any willful misfeasance, bad faith or gross
negligence in the performance of obligations or duties under the
related servicing and administration agreement(s).
None of the issuer or any master servicer, special servicer or manager
for a series of offered bonds will be under any obligation to appear in,
prosecute or defend any legal action unless--
- the action is related to the respective responsibilities of that
party under the related servicing and administration
agreement(s), and
- either (i) that party is specifically required to bear the
expense of the action, or (ii) the action will not, in its
opinion, involve that party in any ultimate expense or liability
for which it would not be reimbursed under the related servicing
and administration agreement(s).
However, each of those parties may undertake any legal action that it may deem
necessary or desirable with respect to the enforcement or protection of the
rights and duties of the parties to the related servicing and administration
agreement(s) and the interests of the related bondholders thereunder. In that
event, the legal expenses and costs of the action, and any liability resulting
therefrom, will be expenses, costs and liabilities of the related trust estate
and payable out of the assets of that trust estate.
With limited exception, any person or entity--
- into which the issuer or any master servicer, special servicer or
manager for a series of offered bonds may be merged or
consolidated, or
- resulting from any merger or consolidation to which the issuer or
any master servicer, special servicer or manager for a series of
offered bonds is a party, or
- succeeding to the business of the issuer or any master servicer,
special servicer or manager for a series of offered bonds,
will be the successor of the issuer, master servicer, special servicer or
manager, as the case may be, under the related servicing and administration
agreement(s).
The compensation arrangements with respect to any master servicer,
special servicer or manager for any series of offered bonds will be set forth in
the related prospectus supplement. In general, that compensation will be payable
out of the assets of the related trust estate.
SERVICING AND ADMINISTRATION EVENTS OF DEFAULT. We will identify in
related prospectus supplement the various events of default under the servicing
and administration agreement(s) for each series of offered bonds for which any
related master servicer, special servicer or manager may be terminated in that
capacity.
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AMENDMENT. The servicing and administration agreement(s) for each
series of offered bonds may be amended by the parties thereto, without the
consent of any of the holders of those bonds, or of any non- offered bonds of
the same series, for the following reasons:
(i) to cure any ambiguity;
(ii) to correct, modify or supplement any provision in those
servicing and administration agreement(s) which may be
inconsistent with any other provision therein or with the
description thereof set forth in the related prospectus
supplement;
(iii) to add any other provisions with respect to matters or
questions arising under those servicing and administration
agreement(s) that are not inconsistent with the existing
provisions thereof;
(iv) to the extent applicable, to relax or eliminate any
requirement under those servicing and administration
agreement(s) imposed by the provisions of the Internal Revenue
Code of 1986 relating to REMICs if the provisions of that Code
are amended or clarified so as to allow for the relaxation or
elimination of that requirement;
(v) to comply with any requirements imposed by the Internal
Revenue Code of 1986 or any final, temporary or, in some
cases, proposed regulation, revenue ruling, revenue procedure
or other written official announcement or interpretation
relating to federal income tax laws, or to avoid a prohibited
transaction or reduce the incidence of any tax that would
arise from any actions taken with respect to the operation of
any REMIC or REIT created under the applicable Governing
Documents; or
(vi) to otherwise modify or delete existing provisions of those
servicing and administration agreement(s).
However, no amendment of the servicing and administration agreement(s)
for any series of offered bonds covered solely by clause (iii) or (vi) above,
may adversely affect in any material respect the interests of any holders of
offered or non-offered bonds of that series.
In general, the servicing and administration agreement(s) for a series
of offered bonds may also be amended by the parties to that document, with the
consent of the holders of offered and non-offered bonds representing, in the
aggregate, greater than 50%, or such other percentage specified in the related
prospectus supplement, of all the related voting rights. However, no such
amendment of the servicing and administration agreement(s) for a series of
offered bonds may materially adversely affect the interests of the holders of
any class of offered or non-offered bonds of that series without the consent of
the holders of all bonds of that class.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit support may be provided with respect to one or more classes of
the offered bonds of any series or with respect to the related mortgage
collateral. That credit support may be in the form of any of the following:
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- the subordination of one or more other classes of bonds of the
same series;
- the use of a letter of credit, a surety bond, an insurance
policy, a guarantee or a credit derivative;
- the establishment of one or more reserve funds; or
- any combination of the foregoing.
If and to the extent described in the related prospectus supplement,
any of the above forms of credit support may provide credit enhancement for
non-offered bonds, as well as offered bonds, or for more than one series of
bonds.
If you are the beneficiary of any particular form of credit support,
that credit support may not protect you against all risks of loss and will not
guarantee payment to you of all amounts to which you are entitled under your
bonds. If losses or shortfalls occur that exceed the amount covered by that
credit support or that are of a type not covered by that credit support, you
will bear your allocable share of deficiencies. Moreover, if that credit support
covers the offered bonds of more than one class or series and total losses on
the related mortgage collateral exceed the amount of that credit support, it is
possible that the holders of offered bonds of other classes and/or series will
be disproportionately benefited by that credit support to your detriment.
If you are the beneficiary of any particular form of credit support, we
will include in the related prospectus supplement a description of the
following:
- the nature and amount of coverage under that credit support;
- any conditions to payment not otherwise described in this
prospectus;
- any conditions under which the amount of coverage under that
credit support may be reduced and under which that credit support
may be terminated or replaced; and
- the material provisions relating to that credit support.
Additionally, we will set forth in the related prospectus supplement certain
information with respect to the obligor, if any, under any instrument of credit
support.
SUBORDINATE BONDS
If and to the extent described in the related prospectus supplement,
one or more classes of bonds of any series may be subordinate to one or more
other classes of bonds of that series. If you purchase subordinate bonds, your
right to receive payments out of collections and advances on the assets of the
related trust estate on any payment date will be subordinated to the
corresponding rights of the holders of the more senior classes of bonds. If and
to the extent described in the related prospectus supplement, the subordination
of a class of bonds may apply only in the event of certain types of losses or
shortfalls. In the related prospectus supplement, we will set forth information
concerning the method and amount of subordination provided by a class or classes
of subordinate bonds in a particular series and the circumstances under which
that subordination will be available.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
The mortgage loans included as part of the mortgage collateral for any
series of offered bonds may be covered for certain default risks by insurance
policies or guarantees. If so, we will describe in the related prospectus
supplement the nature of such default risks and the extent of such coverage.
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LETTER OF CREDIT
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered bonds or
certain classes of those bonds will be covered by one or more letters of credit,
issued by a bank or other financial institution specified in the related
prospectus supplement (the "Letter of Credit Bank"). Under a letter of credit,
the Letter of Credit Bank will be obligated to honor draws under the letter of
credit in an aggregate fixed dollar amount, net of unreimbursed payments under
the letter of credit, generally equal to a percentage specified in the related
prospectus supplement of the aggregate principal balance of some or all of the
related mortgage assets as of the date they are pledged to secure a series of
offered bonds or of the initial aggregate principal balance of one or more
classes of bonds of the applicable series. The letter of credit may permit draws
only in the event of certain types of losses and shortfalls. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder and may otherwise be reduced as
described in the related prospectus supplement. The obligations of the Letter of
Credit Bank under the letter of credit for any series of offered bonds will
expire at the earlier of the date specified in the related prospectus supplement
or the satisfaction and discharge of the related indenture.
INSURANCE POLICIES AND SURETY BONDS
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered bonds or
certain classes of those bonds will be covered by insurance policies or surety
bonds provided by one or more insurance companies or sureties. Those instruments
may cover, with respect to one or more classes of the offered bonds of the
related series, timely payments of interest and principal or timely payments of
interest and payments of principal on the basis of a schedule of principal
payments set forth in or determined in the manner specified in the related
prospectus supplement. We will describe in the related prospectus supplement any
limitations on the draws that may be made under any such instrument.
CREDIT DERIVATIVE
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered bonds or
certain classes of those bonds will be covered by credit derivatives, such as
credit default swaps and total return swaps. A credit derivative is a financial
instrument designed to offset losses and shortfalls derived from the credit risk
of an underlying or reference asset or the credit risk of an underlying or
reference credit. We will describe in the related prospectus supplement when and
how payments are made under any such instrument and the specific credit risk
that is being covered.
RESERVE FUNDS
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered bonds or
certain classes of those bonds will be covered, to the extent of available
funds, by one or more reserve funds in which cash, a letter of credit, permitted
investments, a demand note or a combination of the foregoing, will be deposited,
in the amounts specified in the related prospectus supplement. If and to the
extent described in the related prospectus supplement, the reserve fund for the
related series of offered bonds may also be funded over time.
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Amounts on deposit in any reserve fund for a series of offered bonds
will be applied for the purposes, in the manner, and to the extent specified in
the related prospectus supplement. If and to the extent described in the related
prospectus supplement, reserve funds may be established to provide protection
only against certain types of losses and shortfalls. Following each payment date
for the related series of offered bonds, amounts in a reserve fund in excess of
any required balance may be released from the reserve fund under the conditions
and to the extent specified in the related prospectus supplement.
CREDIT SUPPORT WITH RESPECT TO MBS
If and to the extent described in the related prospectus supplement,
any mortgage-backed security included in one of our trusts and/or the mortgage
loans that back that security may be covered by one or more of the types of
credit support described in this prospectus. We will specify in the related
prospectus supplement, as to each such form of credit support, the information
indicated above with respect to that mortgage-backed security, to the extent
that the information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
Most, if not all, of the mortgage loans that secure or underlie the
security for a series of offered bonds will, in turn, be secured by multifamily
and commercial properties in the United States, its territories and possessions.
However, some of those mortgage loans may be secured by multifamily and
commercial properties outside the United States, its territories and
possessions.
The following discussion contains general summaries of certain legal
aspects of mortgage loans secured by multifamily and commercial properties in
the United States. Because these legal aspects are governed by applicable state
law, which may differ substantially from state to state, the summaries do not
purport to be complete, to reflect the laws of any particular state, or to
encompass the laws of all jurisdictions in which the security for the mortgage
loans securing or underlying the security for a series of offered bonds, is
situated. Accordingly, you should be aware that the summaries are qualified in
their entirety by reference to the applicable laws of those states. See
"Description of the Trust Estates--Mortgage Loans."
If a significant percentage of mortgage loans backing a series of
offered bonds are secured by properties in a particular state, we will discuss
the relevant state laws, to the extent they vary materially from this
discussion, in the related prospectus supplement.
GENERAL
Each mortgage loan backing a series of offered bonds will be evidenced
by a note or bond and secured by an instrument granting a security interest in
real property. The instrument granting a security interest in real property may
be a mortgage, deed of trust or a deed to secure debt, depending upon the
prevailing practice and law in the state in which that real property is located.
Mortgages, deeds of trust and deeds to secure debt are often herein collectively
referred to as "mortgages." A mortgage creates a lien upon, or grants a title
interest in, the real property covered by the mortgage, and represents the
security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on--
- the terms of the mortgage,
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- the terms of separate subordination agreements or intercreditor
agreements with others that hold interests in the real property,
- the knowledge of the parties to the mortgage, and
- in general, the order of recordation of the mortgage in the
appropriate public recording office.
However, the lien of a recorded mortgage will generally be subordinate to
later-arising liens for real estate taxes and assessments and other charges
imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage--
- a mortgagor, who is the owner of the encumbered interest in the
real property, and
- a mortgagee, who is the lender.
In general, the mortgagor is also the borrower.
In contrast, a deed of trust is a three-party instrument. The parties
to a deed of trust are--
- the trustor, who is the equivalent of a mortgagor,
- the trustee to whom the real property is conveyed, and
- the beneficiary for whose benefit the conveyance is made, who is
the lender.
Under a deed of trust, the trustor grants the property, irrevocably until the
debt is paid, in trust and generally with a power of sale, to the trustee to
secure repayment of the indebtedness evidenced by the related note.
A deed to secure debt typically has two parties. Pursuant to a deed to
secure debt, the grantor, who is the equivalent of a mortgagor, conveys title to
the real property to the grantee, who is the lender, generally with a power of
sale, until the debt is repaid.
Where the borrower is a land trust, there would be an additional party
because legal title to the property is held by a land trustee under a land trust
agreement for the benefit of the borrower. At origination of a mortgage loan
involving a land trust, the borrower may execute a separate undertaking to make
payments on the mortgage note. In no event is the land trustee personally liable
for the mortgage note obligation.
The mortgagee's authority under a mortgage, the trustee's authority
under a deed of trust and the grantee's authority under a deed to secure debt
are governed by:
- the express provisions of the related instrument,
- the law of the state in which the real property is located,
- certain federal laws, and
- in some deed of trust transactions, the directions of the
beneficiary.
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LEASES AND RENTS
A mortgage that encumbers an income-producing property often contains
an assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases. Under an assignment of rents and leases, the
borrower assigns to the lender the borrower's right, title and interest as
landlord under each lease and the income derived from each lease. However, the
borrower retains a revocable license to collect the rents, provided there is no
default and the rents are not directly paid to the lender. If the borrower
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect the
rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code (the "UCC"). Room rates are
generally pledged by the borrower as additional security for the loan when a
mortgage loan is secured by a hotel or motel. In general, the lender must file
financing statements in order to perfect its security interest in the room rates
and must file continuation statements, generally every five years, to maintain
that perfection. Mortgage loans secured by hotels or motels may be included in
the mortgage collateral for a series of offered bonds even if the security
interest in the room rates was not perfected or the requisite UCC filings were
allowed to lapse. A lender will generally be required to commence a foreclosure
action or otherwise take possession of the property in order to enforce its
rights to collect the room rates following a default, even if the lender's
security interest in room rates is perfected under applicable nonbankruptcy law.
In the bankruptcy setting, the lender will be stayed from enforcing its
rights to collect hotel and motel room rates. However, the room rates will
constitute "cash collateral" and cannot be used by the bankrupt borrower--
- without a hearing or the lender's consent, or
- unless the lender's interest in the room rates is given adequate
protection.
Such "adequate protection" may include a cash payment for otherwise encumbered
funds or a replacement lien on unencumbered property, in either case equal in
value to the amount of room rates that the bankrupt borrower proposes to use.
See "--Bankruptcy Laws" below.
PERSONALTY
Certain types of income-producing real properties, such as hotels,
motels and nursing homes, may include personal property, which may, to the
extent it is owned by the borrower and not previously pledged, constitute a
significant portion of the property's value as security. The creation and
enforcement of liens on personal property are governed by the UCC. Accordingly,
if a borrower pledges personal property as security for a mortgage loan, the
lender generally must file UCC financing statements in order to perfect its
security interest in the personal property and must file continuation
statements, generally every five years, to maintain that perfection. In certain
cases, mortgage loans secured in part by personal property may be included as
part of the mortgage collateral for a series of offered bonds even if the
security interest in the personal property was not perfected or the requisite
UCC filings were allowed to lapse.
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FORECLOSURE
GENERAL. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property security at public auction to
satisfy the indebtedness.
FORECLOSURE PROCEDURES VARY FROM STATE TO STATE. The two primary
methods of foreclosing a mortgage are--
- judicial foreclosure, involving court proceedings, and
- nonjudicial foreclosure pursuant to a power of sale granted in
the mortgage instrument.
Other foreclosure procedures are available in some states, but they are
either infrequently used or available only in limited circumstances.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed. A
foreclosure action sometimes requires several years to complete.
JUDICIAL FORECLOSURE. A judicial foreclosure proceeding is conducted in
a court having jurisdiction over the mortgaged property. Generally, a lender
initiates the action by the service of legal pleadings upon--
- all parties having a subordinate interest of record in the real
property, and
- all parties in possession of the property, under leases or
otherwise, whose interests are subordinate to the mortgage.
Delays in completion of the foreclosure may occasionally result from
difficulties in locating defendants. When the lender's right to foreclose is
contested, the legal proceedings can be time-consuming. The court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property upon successful completion of a
judicial foreclosure proceeding. The proceeds of that public sale are used to
satisfy the judgment. The procedures that govern these public sales vary from
state to state.
EQUITABLE AND OTHER LIMITATIONS ON ENFORCEABILITY OF CERTAIN
PROVISIONS. United States courts have traditionally imposed general equitable
principles to limit the remedies available to lenders in foreclosure actions.
These principles are generally designed to relieve borrowers from the effects of
mortgage defaults perceived as harsh or unfair. Relying on such principles, a
court may:
- alter the specific terms of a loan to the extent it considers
necessary to prevent or remedy an injustice, undue oppression or
overreaching;
- require the lender to undertake affirmative actions to determine
the cause of the borrower's default and the likelihood that the
borrower will be able to reinstate the loan;
- require the lender to reinstate a loan or recast a payment
schedule in order to accommodate a borrower that is suffering
from a temporary financial disability; or
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- limit the right of the lender to foreclose in the case of a
nonmonetary default, such as a failure to adequately maintain the
mortgaged property or an impermissible further encumbrance of the
mortgaged property.
Some courts have addressed the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have--
- upheld the reasonableness of the notice provisions, or
- found that a public sale under a mortgage providing for a power
of sale does not involve sufficient state action to trigger
constitutional protections.
In addition, some states may have statutory protection such as the
right of the borrower to reinstate its mortgage loan after commencement of
foreclosure proceedings but prior to a foreclosure sale.
NONJUDICIAL FORECLOSURE/POWER OF SALE. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale pursuant to a power of sale
typically granted in the deed of trust. A power of sale may also be contained in
any other type of mortgage instrument if applicable law so permits. A power of
sale under a deed of trust allows a nonjudicial public sale to be conducted
generally following--
- a request from the beneficiary/lender to the trustee to sell the
property upon default by the borrower, and
- notice of sale is given in accordance with the terms of the deed
of trust and applicable state law.
In some states, prior to a nonjudicial public sale, the trustee under
the deed of trust must--
- record a notice of default and notice of sale, and
- send a copy of those notices to the borrower and to any other
party who has recorded a request for a copy of them.
In addition, in some states, the trustee must provide notice to any other party
having an interest of record in the real property, including junior lienholders.
A notice of sale must be posted in a public place and, in most states, published
for a specified period of time in one or more newspapers. Some states require a
reinstatement period during which the borrower or junior lienholder may have the
right to cure the default by paying the entire actual amount in arrears, without
regard to the acceleration of the indebtedness, plus the lender's expenses
incurred in enforcing the obligation. In other states, the borrower or the
junior lienholder has only the right to pay off the entire debt to prevent the
foreclosure sale. Generally, state law governs the procedure for public sale,
the parties entitled to notice, the method of giving notice and the applicable
time periods.
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PUBLIC SALE. A third party may be unwilling to purchase a mortgaged
property at a public sale because of--
- the difficulty in determining the exact status of title to the
property due to, among other things, redemption rights that may
exist, and
- the possibility that physical deterioration of the property may
have occurred during the foreclosure proceedings.
As a result of the foregoing, it is common for the lender to purchase
the mortgaged property and become the owner thereof, subject to the borrower's
right in some states to remain in possession during a redemption period. In that
case, the lender will have both the benefits and burdens of ownership, including
the obligation to pay debt service on any senior mortgages, to pay taxes, to
obtain casualty insurance and to make repairs necessary to render the property
suitable for sale. The costs of operating and maintaining a commercial or
multifamily residential property may be significant and may be greater than the
income derived from that property. The lender also will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale or lease of the property. Whether, the ultimate proceeds of the
sale of the property equal the lender's investment in the property depends upon
market conditions. Moreover, because of the expenses associated with acquiring,
owning and selling a mortgaged property, a lender could realize an overall loss
on the related mortgage loan even if the mortgaged property is sold at
foreclosure, or resold after it is acquired through foreclosure, for an amount
equal to the full outstanding principal amount of the loan plus accrued
interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens. In addition, it
may be obliged to keep senior mortgage loans current in order to avoid
foreclosure of its interest in the property. Furthermore, if the foreclosure of
a junior mortgage triggers the enforcement of a "due-on-sale" clause contained
in a senior mortgage, the junior mortgagee could be required to pay the full
amount of the senior mortgage indebtedness or face foreclosure.
RIGHTS OF REDEMPTION. The purposes of a foreclosure action are--
- to enable the lender to realize upon its security, and
- to bar the borrower, and all persons who have interests in the
property that are subordinate to that of the foreclosing lender,
from exercising their "equity of redemption."
The doctrine of equity of redemption provides that, until the property
encumbered by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having interests that are subordinate to
that of the foreclosing lender have an equity of redemption and may redeem the
property by paying the entire debt with interest. Those having an equity of
redemption must generally be made parties to the foreclosure proceeding in order
for their equity of redemption to be terminated.
The equity of redemption is a common-law, nonstatutory right which
should be distinguished from post-sale statutory rights of redemption. In some
states, the borrower and foreclosed junior lienors are given a statutory period
in which to redeem the property after sale pursuant to a deed of trust or
foreclosure of a mortgage. In some states, statutory redemption may occur only
upon payment of the foreclosure sale price. In other states, redemption may be
permitted if the former borrower pays only a portion of the sums due. A
statutory right of redemption will diminish the ability of the lender to sell
the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure.
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Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION. Some or all of the mortgage loans backing
a series of bonds may be nonrecourse loans. Therefore, recourse in the case of
default on such a mortgage loan will be limited to the mortgaged property and
such other assets, if any, that were pledged to secure the mortgage loan.
However, even if a mortgage loan by its terms provides for recourse to the
borrower's other assets, a lender's ability to realize upon those assets may be
limited by state law. For example, in some states, a lender cannot obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal to the difference between the net amount realized upon the public
sale of the real property and the amount due to the lender. Other statutes may
require the lender to exhaust the security afforded under a mortgage before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting the security, but in doing so, the lender may be
deemed to have elected a remedy and thus may be precluded from foreclosing upon
the security. Consequently, lenders will usually proceed first against the
security in states where an election of remedy provision exists. Finally, other
statutory provisions limit any deficiency judgment to the excess of the
outstanding debt over the fair market value of the property at the time of the
sale. These other statutory provisions are intended to protect borrowers from
exposure to large deficiency judgments that might result from bidding at
below-market values at the foreclosure sale.
LEASEHOLD CONSIDERATIONS. Some or all of the mortgage loans backing a
series of offered bonds may be secured by a mortgage on the borrower's leasehold
interest under a ground lease. Leasehold mortgage loans are subject to certain
risks not associated with mortgage loans secured by a lien on the fee estate of
the borrower. The most significant of these risks is that if the borrower's
leasehold were to be terminated upon a lease default, the leasehold mortgagee
would lose its security. This risk may be lessened if the ground lease:
- requires the lessor to give the leasehold mortgagee notices of
lessee defaults and an opportunity to cure them,
- permits the leasehold estate to be assigned to and by the
leasehold mortgagee or the purchaser at a foreclosure sale, and
- contains certain other protective provisions typically included
in a "mortgageable" ground lease.
Certain mortgage loans backing a series of offered bonds, however, may
be secured by ground leases which do not contain these provisions.
COOPERATIVE SHARES. Some or all of the mortgage loans backing a series
of bonds may be secured by a security interest on the borrower's ownership
interest in shares, and the proprietary leases belonging to those shares,
allocable to cooperative dwelling units that may be vacant or occupied by
nonowner tenants. Loans secured in this manner are subject to certain risks not
associated with mortgage loans secured by a lien on the fee estate of a borrower
in real property. Loans secured in this manner typically are subordinate to the
mortgage, if any, on the cooperative's building. That mortgage, if foreclosed,
could extinguish the equity in the building and the proprietary leases of the
dwelling units derived from ownership of the shares of the cooperative. Further,
transfer of shares in a cooperative is subject to various regulations as well as
to restrictions under the governing documents of the cooperative. The shares may
be canceled in the event
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that associated maintenance charges due under the related proprietary leases are
not paid. Typically, a recognition agreement between the lender and the
cooperative provides, among other things, that the lender may cure a default
under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner,
which may be dependent upon, among other things, the notice given the debtor and
the method, manner, time, place and terms of the sale. Article 9 of the UCC
provides that the proceeds of the sale will be applied first to pay the costs
and expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. A recognition agreement, however, generally provides
that the lender's right to reimbursement is subject to the right of the
cooperative corporation to receive sums due under the proprietary leases.
BANKRUPTCY LAWS
Operation of the U.S. Bankruptcy Code and related state laws may
interfere with or affect the ability of a lender to realize upon collateral or
to enforce a deficiency judgment. For example, under the U.S. Bankruptcy Code,
virtually all actions, including foreclosure actions and deficiency judgment
proceedings, to collect a debt are automatically stayed upon the filing of the
bankruptcy petition. Often, no interest or principal payments are made during
the course of the bankruptcy case. The delay caused by an automatic stay and its
consequences can be significant. Also, under the U.S. Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out the junior lien.
Under the U.S. Bankruptcy Code, the amount and terms of a mortgage loan
secured by a lien on property of the debtor may be modified provided that
substantive and procedural safeguards protective of the lender are met. A
bankruptcy court may, among other things--
- reduce the secured portion of the outstanding amount of the loan
to the then-current value of the property, thereby leaving the
lender a general unsecured creditor for the difference between
the then-current value of the property and the outstanding
balance of the loan;
- reduce the amount of each scheduled payment, by means of a
reduction in the rate of interest and/or an alteration of the
repayment schedule, with or without affecting the unpaid
principal balance of the loan;
- extend or shorten the term to maturity of the loan;
- permit the bankrupt borrower to cure of the subject loan default
by paying the arrearage over a number of years; or
- permit the bankrupt borrower, through its rehabilitative plan, to
reinstate the loan payment schedule even if the lender has
obtained a final judgment of foreclosure prior to the filing of
the debtor's petition.
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Federal bankruptcy law may also interfere with or affect the ability of
a secured lender to enforce the borrower's assignment of rents and leases
related to the mortgaged property. A lender may be stayed from enforcing the
assignment under the U.S. Bankruptcy Code. In addition, the legal proceedings
necessary to resolve the issue could be time-consuming, and result in delays in
the lender's receipt of the rents. However, recent amendments to the U.S.
Bankruptcy Code may minimize the impairment of the lender's ability to enforce
the borrower's assignment of rents and leases. In addition to the inclusion of
hotel revenues within the definition of "cash collateral" as noted above, the
amendments provide that a pre- petition security interest in rents or hotel
revenues is designed to overcome those cases holding that a security interest in
rents is unperfected under the laws of certain states until the lender has taken
some further action, such as commencing foreclosure or obtaining a receiver
prior to activation of the assignment of rents.
A borrower's ability to make payment on a mortgage loan may be impaired
by the commencement of a bankruptcy case relating to the tenant under a lease of
the related property. Under the U.S. Bankruptcy Code, the filing of a petition
in bankruptcy by or on behalf of a tenant results in a stay in bankruptcy
against the commencement or continuation of any state court proceeding for--
- past due rent,
- accelerated rent,
- damages, or
- a summary eviction order with respect to a default under the
lease that occurred prior to the filing of the tenant's
bankruptcy petition.
In addition, the U.S. Bankruptcy Code generally provides that a trustee
or debtor-in-possession may, subject to approval of the court:
- assume the lease and either retain it or assign it to a third
party, or
- reject the lease.
If the lease is assumed, the trustee, debtor-in-possession or assignee,
if applicable, must cure any defaults under the lease, compensate the lessor for
its losses and provide the lessor with "adequate assurance" of future
performance. These remedies may be insufficient, and any assurances provided to
the lessor may be inadequate. If the lease is rejected, the lessor will be
treated, except potentially to the extent of any security deposit, as an
unsecured creditor with respect to its claim for damages for termination of the
lease. The U.S. Bankruptcy Code also limits a lessor's damages for lease
rejection to:
- the rent reserved by the lease without regard to acceleration for
the greater of one year, or 15%, not to exceed three years, of
the remaining term of the lease, plus
- unpaid rent to the earlier of the surrender of the property or
the lessee's bankruptcy filing.
ENVIRONMENTAL CONSIDERATIONS
GENERAL. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties that
are or have been used for industrial, manufacturing, military or disposal
activity. Those environmental risks include the possible diminution of the value
of a contaminated property or, as discussed below, potential liability for
clean-up costs or other remedial actions that could exceed the value of the
property or the amount of the lender's loan. In certain circumstances, a lender
may decide to abandon a contaminated real property as collateral for its loan
rather than foreclose and risk liability for clean-up costs.
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SUPERLIEN LAWS. Under the laws of many states, contamination on a
property may give rise to a lien on the property for clean-up costs. In several
states, that lien has priority over all existing liens, including those of
existing mortgages. In these states, the lien of a mortgage may lose its
priority to such a "superlien."
CERCLA. The federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
participated in the management of the property or the operations of the
borrower. Liability may exist even if the lender did not cause or contribute to
the contamination and regardless of whether the lender has actually taken
possession of the contaminated mortgaged property through foreclosure, deed in
lieu of foreclosure or otherwise. Moreover, liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Excluded from CERCLA's definition of "owner" or
"operator," however, is a person who, without participating in the management of
the facility, holds indicia of ownership primarily to protect his security
interest. This is the so called "secured creditor exemption."
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Lender Liability Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Lender Liability Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Lender Liability Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if--
- it exercises decision-making control over a borrower's
environmental compliance and hazardous substance handling and
disposal practices, or
- assumes day-to-day management of operational functions of a
mortgaged property.
The Lender Liability Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed- in-lieu of
foreclosure, provided that the lender seeks to sell that property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
CERTAIN OTHER FEDERAL AND STATE LAWS. Many states have statutes similar
to CERCLA, and not all those statutes provide for a secured creditor exemption.
In addition, under federal law, there is potential liability relating to
hazardous wastes and underground storage tanks under the federal Resource
Conservation and Recovery Act.
Certain federal, state and local laws, regulations and ordinances
govern the management, removal, encapsulation or disturbance of
asbestos-containing materials. These laws, as well as common law standards, may
impose liability for releases of or exposure to asbestos-containing materials
and may provide for third parties to seek recovery from owners or operators of
real properties for personal injuries associated with such releases.
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Recent federal legislation will require owners of residential housing
constructed prior to 1978 to disclose to potential residents or purchasers any
known lead-based paint hazards and will impose treble damages for any failure to
disclose. In addition, the ingestion of lead-based paint chips or dust particles
by children can result in lead poisoning. If lead-based paint hazards exist at a
property, then the owner of that property may be held liable for injuries and
for the costs of removal or encapsulation of the lead-based paint.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action related to hazardous environmental conditions on a property,
such as actions based on nuisance or on toxic tort resulting in death, personal
injury or damage to property. While it may be more difficult to hold a lender
liable under common law causes of action, unanticipated or uninsured liabilities
of the borrower may jeopardize the borrower's ability to meet its loan
obligations.
Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. These costs may jeopardize
the borrower's ability to meet its loan obligations.
ADDITIONAL CONSIDERATIONS. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard. However, that individual or entity may be without
substantial assets. Accordingly, it is possible that the costs could become a
liability of the related issuer and/or trust estate and occasion a loss to the
related bondholders.
If the operations on a foreclosed property are subject to environmental
laws and regulations, the lender will be required to operate the property in
accordance with those laws and regulations. This compliance may entail
substantial expense, especially in the case of industrial or manufacturing
properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers,
including prospective buyers at a foreclosure sale or following foreclosure.
This disclosure may decrease the amount that prospective buyers are willing to
pay for the affected property, sometimes substantially.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the mortgage loans backing a series of offered bonds may
contain "due-on-sale" and "due-on-encumbrance" clauses that purport to permit
the lender to accelerate the maturity of the loan if the borrower transfers or
encumbers the a mortgaged property. In recent years, court decisions and
legislative actions placed substantial restrictions on the right of lenders to
enforce these clauses in many states. However, the Garn-St Germain Depository
Institutions Act of 1982 generally preempts state laws that prohibit the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to the limitations prescribed in that
Act and the regulations promulgated thereunder.
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JUNIOR LIENS; RIGHTS OF HOLDERS OF SENIOR LIENS
The mortgage collateral for a series of offered bonds may include
mortgage loans secured by junior liens, while the loans secured by the related
senior liens may not be included as part of that mortgage collateral. The
primary risk to holders of mortgage loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related senior liens to satisfy fully both the senior loans
and the junior loan.
In the event that a holder of a senior lien forecloses on a mortgaged
property, the proceeds of the foreclosure or similar sale will be applied as
follows:
- FIRST, to the payment of court costs and fees in connection with
the foreclosure;
- SECOND, to real estate taxes;
- THIRD, in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing
to the holder of the senior liens; and
- LAST, in satisfaction of all principal, interest, prepayment and
acceleration penalties, if any, and any other sums due and owing
to the holder of the junior mortgage loan.
SUBORDINATE FINANCING
The terms of certain mortgage loans backing a series of offered bonds
may not restrict the ability of the borrower to use the mortgaged property as
security for one or more additional loans, or the restrictions may be
unenforceable. Where a borrower encumbers a mortgaged property with one or more
junior liens, the senior lender is subjected to the following additional risks:
- the borrower may have difficulty servicing and repaying multiple
loans;
- if the subordinate financing permits recourse to the borrower, as
is frequently the case, and the senior loan does not, a borrower
may have more incentive to repay sums due on the subordinate
loan;
- acts of the senior lender that prejudice the junior lender or
impair the junior lender's security, such as the senior lender's
agreeing to an increase in the principal amount of or the
interest rate payable on the senior loan, may create a superior
equity in favor of the junior lender;
- if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior
lender and can interfere with or delay the taking of action by
the senior lender; and
- the bankruptcy of a junior lender may operate to stay foreclosure
or similar proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made.
They may also contain provisions that prohibit prepayments for a specified
period and/or condition prepayments upon the borrower's payment of prepayment
premium, fee or charge. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower for
delinquent payments. Certain states also limit the
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amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. In addition, the enforceability of provisions that provide for
prepayment premiums, fees and charges upon an involuntary prepayment is unclear
under the laws of many states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 ("Title V") provides that state usury limitations shall not
apply to certain types of residential, including multifamily, first mortgage
loans originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a law
or constitutional provision that expressly rejects application of the federal
law. In addition, even where Title V is not rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and
rules promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, owners of public accommodations, such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments, must remove architectural and communication barriers which are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, the altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected property
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, because the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender that is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a borrower who enters military service after the
origination of the borrower's mortgage loan, including a borrower who was in
reserve status and is called to active duty after origination of the mortgage
loan, may not be charged interest, including fees and charges, above an annual
rate of 6% during the period of the borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
individuals who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service, including reservists who are called to
active duty, after origination of the related mortgage loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of a master servicer or special
servicer to collect full amounts of interest on an affected mortgage loan. Any
shortfalls in interest collections resulting from the application of the Relief
Act would result in a reduction of the amounts payable to the holders of bonds
of the related series, and would not be covered by advances
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or, unless otherwise specified in the related prospectus supplement, any form of
credit support provided in connection with the bonds. In addition, the Relief
Act imposes limitations that would impair the ability of a master servicer or
special servicer to foreclose on an affected mortgage loan during the borrower's
period of active duty status and, under certain circumstances, during an
additional three month period after the active duty status ceases.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that--
- its mortgage was executed and recorded before commission of the
crime upon which the forfeiture is based, or
- the lender was, at the time of execution of the mortgage,
"reasonably without cause to believe" that the property was used
in, or purchased with the proceeds of, illegal drug or RICO
activities.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This is a general discussion of the material federal income tax
consequences of owning the offered bonds. This discussion is directed to
bondholders that hold the offered bonds as "capital assets" within the meaning
of Section 1221 of the Internal Revenue Code of 1986, which we will refer to
throughout this "Federal Income Tax Consequences" section as the "Code." It does
not discuss all federal income tax consequences that may be relevant to owners
of offered bonds, particularly as to investors subject to special treatment
under the Code, including:
- banks,
- insurance companies, and
- foreign investors.
Further, this discussion and any legal opinions referred to in this
discussion are based on authorities that can change, or be differently
interpreted, with possible retroactive effect. No rulings have been or will be
sought from the IRS with respect to any of the federal income tax consequences
discussed below.
Accordingly, the IRS may take contrary positions.
Investors and preparers of tax returns should be aware that under
applicable Treasury regulations a provider of advice on specific issues of law
is not considered an income tax return preparer unless the advice is--
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- given with respect to events that have occurred at the time the
advice is rendered, and
- is directly relevant to the determination of an entry on a tax
return.
Accordingly, even if this discussion addresses an issue regarding the tax
treatment of the owner of the offered bonds, investors should consult their own
tax advisors regarding that issue. Investors should do so not only as to federal
taxes, but also state and local taxes. See "State and Other Tax Consequences."
The following discussion addresses securities of three general types:
- "REMIC bonds" that are or represent "regular interests" or
"residual interests" in a "real estate mortgage investment
conduit," or "REMIC," within the meaning of Section 860D of
the Code;
- "FASIT Bonds" that are or represent "regular interests" in a
financial asset securitization investment trust, or "FASIT,"
within the meaning of Section 860L(a) of the Code; and
- "bonds," as to which no REMIC or FASIT election is made,
and which are characterized as indebtedness of, or a notional
principal contract issued by, the related issuer for federal
income tax purposes.
We will indicate in the prospectus supplement for each series
whether the related bond trustee, another party to the related Governing
Documents or an agent appointed by that trustee or other party (in any event,
a "tax administrator") will make a REMIC or FASIT election for the related
mortgage collateral. If the related tax administrator is required to make a
REMIC or FASIT election, we also will identify in the related prospectus
supplement all "regular interests", "residual interests" and/or "ownership
interests", as applicable, in the resulting REMIC or FASIT.
The following discussion is limited to bonds offered under this
prospectus. In addition, this discussion applies only to the extent that the
related trust estate consists only of mortgage loans. If a trust estate includes
assets other than mortgage loans, such as mortgage-backed securities, we will
disclose in the related prospectus supplement the tax consequences associated
with those other assets being included. In addition, if agreements other than
guaranteed investment contracts are included as part of a trust estate to
provide interest rate protection for the related offered bonds, the anticipated
material tax consequences associated with those agreements also will be
discussed in the related prospectus supplement. See "Description of the Trust
Estates--Arrangements Providing Reinvestment, Interest Rate and Currency Related
Protection."
The following discussion is based in part on the rules governing
original issue discount in Sections 1271-1273 and 1275 of the Code and in the
Treasury regulations issued under those sections. It is also based in part on
the rules governing REMICs in Sections 860A-860G of the Code and in the Treasury
regulations issued under those sections. The regulations relating to original
issue discount do not adequately address certain issues relevant to, and in some
instances provide that they are not applicable to, securities such as the
offered bonds.
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REMICS
GENERAL. With respect to each series of offered bonds as to which
the related tax administrator will make a REMIC election, our counsel will
deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Governing Documents, and subject to certain
assumptions set forth in the opinion:
- the related trust estate, or the relevant designated portion of
the trust estate, will qualify as a REMIC, and
- those offered bonds will be considered to evidence ownership of--
(i) REMIC "regular interests," or
(ii) REMIC "residual interests."
We refer in this discussion to--
- bonds that evidence REMIC "regular interests" as the "REMIC
regular bonds," and
- bonds that represent REMIC "residual interests" as the "REMIC
residual bonds."
If an entity electing to be treated as a REMIC fails to comply with the
ongoing requirements of the Code for REMIC status, it may lose its REMIC status.
If so, the entity may become taxable as a corporation. Therefore, the related
bonds may not be given the tax treatment summarized below. Although the Code
authorizes the Treasury Department to issue regulations providing relief in the
event of an inadvertent termination of REMIC status, the Treasury Department has
not done so. Any relief mentioned above, moreover, may be accompanied by
sanctions. These sanctions could include the imposition of a corporate tax on
all or a portion of a trust estate's income for the period in which the
requirements for REMIC status are not satisfied. The Governing Documents with
respect to each REMIC will include provisions designed to maintain its status as
a REMIC under the Code.
CHARACTERIZATION OF INVESTMENTS IN REMIC BONDS. Unless we state
otherwise in the related prospectus supplement, the offered bonds that are REMIC
bonds will be treated as--
- "real estate assets" within the meaning of Section 856(c)(5)(B)
of the Code in the hands of a real estate investment trust, and
- "loans secured by an interest in real property" or other assets
described in Section 7701(a)(19)(C) of the Code in the hands of a
thrift institution,
in the same proportion that the assets of the related REMIC are so treated.
However, to the extent that the REMIC assets constitute mortgage loans
on property not used for residential or certain other prescribed purposes, the
related offered bonds will not be treated as assets qualifying under Section
7701(a)(19)(C). If 95% or more of the assets of the REMIC qualify for any of the
foregoing characterizations at all times during a calendar year, the related
offered bonds will qualify for the corresponding status in their entirety for
that calendar year.
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In addition, offered bonds that are REMIC regular bonds will be:
- "qualified mortgages" within the meaning of Section 860G(a)(3) of
the Code in the hands of another REMIC; and
- "permitted assets" under Section 860L(c)(1)(G) for a financial
asset securitization investment trust or "FASIT."
Finally, interest, including original issue discount, on offered bonds
that are REMIC regular bonds, and income allocated to offered bonds that are
REMIC residual bonds, will be interest described in Section 856(c)(3)(B) of the
Code if received by a real estate investment trust, to the extent that these
bonds are treated as "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code.
The related tax administrator will determine the percentage of the
REMIC's assets that constitute assets described in the above-referenced sections
of the Code with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC during that calendar
quarter. The related tax administrator will report those determinations to
bondholders in the manner and at the times required by applicable Treasury
regulations.
The assets of the REMIC will include, in addition to mortgage loans,
collections on mortgage loans held pending payment on the related offered bonds
and any property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale, and amounts in reserve accounts, would be
considered to be part of the mortgage loans, or whether these assets otherwise
would receive the same treatment as the mortgage loans for purposes of the
above-referenced sections of the Code. In addition, in some instances, the
mortgage loans may not be treated entirely as assets described in those sections
of the Code. If so, we will describe in the related prospectus supplement those
mortgage loans that are characterized differently. The Treasury regulations do
provide, however, that cash received from collections on mortgage loans held
pending payment is considered part of the mortgage loans for purposes of Section
856(c)(5)(B) of the Code, relating to real estate investment trusts.
To the extent a REMIC bond is backed by a mortgage loan that is secured
in part by the related borrower's interest in a bank account, that mortgage loan
is not secured solely by real estate and therefore:
- a portion of that bond may not represent ownership of "loans
secured by an interest in real property" or other assets
described in Section 7701(a)(19)(C) of the Code;
- a portion of that bond may not represent ownership of "real
estate assets" under Section 856(c)(5)(B) of the Code; and
- the interest on that bond may not constitute "interest on
obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code.
TIERED REMIC STRUCTURES. For certain series of REMIC bonds, the related
tax administrator may make two or more REMIC elections as to the related trust
estate for federal income tax purposes. As to each of these series of REMIC
bonds, our counsel will opine that each portion of the related trust estate as
to which a REMIC election is to be made will qualify as a REMIC. Each of these
series will be treated as one REMIC solely for purposes of determining:
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- whether the related REMIC bonds will be "real estate assets"
within the meaning of Section 856(c)(5)(B) of the Code,
- whether the related REMIC bonds will be "loans secured by an
interest in real property" under Section 7701(a)(19)(C) of the
Code, and
- whether the interest/income on the related REMIC bonds is
interest described in Section 856(c)(3)(B) of the Code.
TAXATION OF OWNERS OF REMIC REGULAR BONDS.
GENERAL. Except as otherwise stated in this discussion, the Code treats
REMIC regular bonds as debt instruments issued by the REMIC and not as ownership
interests in the REMIC or its assets. Holders of REMIC regular bonds that
otherwise report income under the cash method of accounting must nevertheless
report income with respect to REMIC regular bonds under the accrual method.
ORIGINAL ISSUE DISCOUNT. Certain REMIC regular bonds may be issued with
"original issue discount" within the meaning of Section 1273(a) of the Code. Any
holders of REMIC regular bonds issued with original issue discount generally
will have to include original issue discount in income as it accrues, in
accordance with the "constant yield" method described below, prior to the
receipt of the cash attributable to that income. The IRS has issued regulations
under Sections 1271 to 1275 of the Code generally addressing the treatment of
debt instruments issued with original issue discount. Section 1272(a)(6) of the
Code provides special rules applicable to the accrual of original issue discount
on, among other things, REMIC regular bonds. The Treasury Department has not
issued regulations under that section. You should be aware, however, that
Section 1272(a)(6) and the regulations under Sections 1271 to 1275 of the Code
do not adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the offered bonds. We recommend that you consult
your own tax advisor concerning the tax treatment of your bonds.
The Code requires, in computing the accrual of original issue discount
on REMIC regular bonds, that a reasonable assumption be used concerning the rate
at which borrowers will prepay the mortgage loans held by the related REMIC.
Further, adjustments must be made in the accrual of that original issue discount
to reflect differences between the prepayment rate actually experienced and the
assumed prepayment rate. The prepayment assumption is to be determined in a
manner prescribed in Treasury regulations that the Treasury Department has not
yet issued. The Conference Committee Report accompanying the Tax Reform Act of
1986 (the "Committee Report") indicates that the regulations should provide that
the prepayment assumption used with respect to a REMIC regular bond is
determined once, at initial issuance, and must be the same as that used in
pricing. The prepayment assumption used in reporting original issue discount for
each series of REMIC regular bonds will be consistent with this standard and
will be disclosed in the related prospectus supplement. However, neither we nor
any other person will make any representation that the mortgage loans backing
any series of REMIC regular bonds will in fact prepay at a rate conforming to
the prepayment assumption or at any other rate or that the IRS will not
challenge on audit the prepayment assumption used.
The original issue discount, if any, on a REMIC regular bond will be
the excess of its stated redemption price at maturity over its issue price.
The issue price of a particular class of REMIC regular bonds will be
the first cash price at which a substantial amount of those bonds are sold,
excluding sales to bond houses, brokers and underwriters. If less than a
substantial amount of a particular class of REMIC regular bonds is sold for cash
on or prior to the
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related date of initial issuance of those bonds, the issue price for that class
will be the fair market value of that class on the date of initial issuance.
Under the Treasury regulations, the stated redemption price of a REMIC
regular bond is equal to the total of all payments to be made on that bond other
than "qualified stated interest." "Qualified stated interest" is interest that
is unconditionally payable at least annually, during the entire term of the
instrument, at:
- a single fixed rate,
- a "qualified floating rate,"
- an "objective rate,"
- a combination of a single fixed rate and one or more "qualified
floating rates,"
- a combination of a single fixed rate and one "qualified inverse
floating rate," or
- a combination of "qualified floating rates" that does not operate
in a manner that accelerates or defers interest payments on the
REMIC regular bond.
In the case of REMIC regular bonds bearing adjustable interest rates,
the determination of the total amount of original issue discount and the timing
of the inclusion thereof will vary according to the characteristics of those
bonds. If the original issue discount rules apply to those bonds, we will
describe in the related prospectus supplement the manner in which those rules
will be applied with respect to those bonds in preparing information returns to
the bondholders and the IRS.
Certain classes of REMIC regular bonds may provide that the first
interest payment with respect to those bonds be made more than one month after
the date of initial issuance, a period that is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" for
original issue discount is the monthly period that ends on each payment date,
then, as a result of this "long first accrual period," some or all interest
payments may be required to be included in the stated redemption price of the
REMIC regular bond and accounted for as original issue discount. Because
interest on REMIC regular bonds must in any event be accounted for under an
accrual method, applying this analysis would result in only a slight difference
in the timing of the inclusion in income of the yield on the REMIC regular
bonds.
In addition, if the accrued interest to be paid on the first payment
date is computed with respect to a period that begins prior to the date of
initial issuance, a portion of the purchase price paid for a REMIC regular bond
will reflect that accrued interest. In those cases, information returns provided
to the bondholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued prior to the date of initial
issuance is treated as part of the overall cost of the REMIC regular bond.
Therefore, the portion of the interest paid on the first payment date in excess
of interest accrued from the date of initial issuance to the first payment date
is included in the stated redemption price of the REMIC regular bond. However,
the Treasury regulations state that all or some portion of this accrued interest
may be treated as a separate asset, the cost of which is recovered entirely out
of interest paid on the first payment date. It is unclear how an election to do
so would be made under these regulations and whether this election could be made
unilaterally by a bondholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC regular bond will be considered to be DE
MINIMIS if it is less than 0.25% of the stated redemption price of the bond
multiplied by its weighted average maturity. For this purpose, the weighted
average maturity of a REMIC regular bond is computed as the sum of the amounts
determined, as to each payment included in the stated redemption price of the
bond, by multiplying:
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- the number of complete years, rounding down for partial years,
from the date of initial issuance, until that payment is
expected to be made, presumably taking into account the
prepayment assumption, by
- a fraction--
(i) the numerator of which is the amount of the payment,
and
(ii) the denominator of which is the stated redemption
price at maturity of the bond.
Under the Treasury regulations, original issue discount of only a DE
MINIMIS amount, other than DE MINIMIS original issue discount attributable to a
so-called "teaser" interest rate or an initial interest holiday, will be
included in income as each payment of stated principal is made, based on the
product of:
- the total amount of the DE MINIMIs original issue discount,
and
- a fraction--
(i) the numerator of which is the amount of the principal
payment, and
(ii) the denominator of which is the outstanding stated
principal amount of the subject REMIC regular bond.
The Treasury regulations also would permit you to elect to accrue DE
MINIMIS original issue discount into income currently based on a constant yield
method. See "--REMICs--Taxation of Owners of REMIC Regular Bonds--Market
Discount" below for a description of that election under the applicable Treasury
regulations.
If original issue discount on a REMIC regular bond is in excess of a DE
MINIMIS amount, the holder of the bond must include in ordinary gross income the
sum of the "daily portions" of original issue discount for each day during its
taxable year on which it held the bond, including the purchase date but
excluding the disposition date. In the case of an original holder of a REMIC
regular bond, the daily portions of original issue discount will be determined
as described below.
As to each accrual period, the related tax administrator will calculate
the original issue discount that accrued during that accrual period. For these
purposes, an accrual period is, unless we otherwise state in the related
prospectus supplement, the period that begins on a date that corresponds to a
payment date, or in the case of the first accrual period, begins on the date of
initial issuance, and ends on the day preceding the immediately following
payment date. The portion of original issue discount that accrues in any accrual
period will equal the excess, if any, of:
- the sum of:
(i) the present value, as of the end of the accrual
period, of all of the payments remaining to be made
on the subject REMIC regular bond, if any, in future
periods, presumably taking into account the
prepayment assumption, and
(ii) the payments made on that bond during the accrual
period of amounts included in the stated redemption
price, over
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- the adjusted issue price of the subject REMIC regular bond at
the beginning of the accrual period.
The adjusted issue price of a REMIC regular bond is:
- the issue price of the bond, increased by
- the aggregate amount of original issue discount previously
accrued on the bond, reduced by
- the amount of all prior payments of amounts included in its
stated redemption price.
The present value of the remaining payments referred to in item (i) of the
second preceding sentence, will be calculated:
- assuming that payments on the REMIC regular bond will be
received in future periods based on the related mortgage loans
being prepaid at a rate equal to the prepayment assumption;
- using a discount rate equal to the original yield to maturity
of the bond, based on its issue price and the assumption that
the related mortgage loans will be prepaid at a rate equal to
the prepayment assumption; and
- taking into account events, including actual prepayments, that
have occurred before the close of the accrual period.
The original issue discount accruing during any accrual period,
computed as described above, will be allocated ratably to each day during the
accrual period to determine the daily portion of original issue discount for
that day.
A subsequent purchaser of a REMIC regular bond that purchases the bond
at a cost, excluding any portion of that cost attributable to accrued qualified
stated interest, that is less than its remaining stated redemption price, will
also be required to include in gross income the daily portions of any original
issue discount with respect to the bond. However, the daily portion will be
reduced, if the cost is in excess of its "adjusted issue price," in proportion
to the ratio that such excess bears to the aggregate original issue discount
remaining to be accrued on the bond. The adjusted issue price of a REMIC regular
bond, as of any date of determination, equals the sum of:
(i) the adjusted issue price or, in the case of the first accrual
period, the issue price, of the bond at the beginning of the
accrual period which includes that date of determination, and
(ii) the daily portions of original issue discount for all days
during such accrual period prior to that date of
determination.
If the foregoing method for computing original issue discount results
in a negative amount of original issue discount as to any accrual period with
respect to a REMIC regular bond held by you, the amount of original issue
discount accrued for that accrual period will be zero. You may not deduct the
negative amount currently. Instead, you will only be permitted to offset it
against future positive original issue discount, if any, attributable to the
bond. Although not free from doubt, it is possible that you may be permitted to
recognize a loss to the extent your basis in the bond exceeds the maximum amount
of payments that you could ever receive with respect to the bond. However, any
such loss may be a capital loss, which is limited
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in its deductibility. The foregoing considerations are particularly relevant to
bonds that have no, or a disproportionately small, amount of principal because
they can have negative yields if the mortgage loans held by the related REMIC
prepay more quickly than anticipated. See "Risk Factors--The Investment
Performance of Your Bond Will Depend Upon Payments, Defaults and Losses on the
Underlying Mortgage Loans."
The Treasury regulations in some circumstances permit the holder of a
debt instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, it is possible that you may be able
to select a method for recognizing original issue discount that differs from
that used by the trust in preparing reports to you and the IRS. Prospective
purchasers of the REMIC regular bonds should consult their tax advisors
concerning the tax treatment of these bonds in this regard.
MARKET DISCOUNT. You will be considered to have purchased a REMIC
regular bond at a market discount if--
- in the case of a bond issued without original issue discount,
you purchased the bond at a price less than its remaining
stated principal amount, or
- in the case of a bond issued with original issue discount, you
purchased the bond at a price less than its adjusted issue
price.
If you purchase a REMIC regular bond with more than a DE MINIMIS amount
of market discount, you will recognize gain upon receipt of each payment
representing stated redemption price. Under Section 1276 of the Code, you
generally will be required to allocate the portion of each payment representing
some or all of the stated redemption price first to accrued market discount not
previously included in income. You must recognize ordinary income to that
extent. You may elect to include market discount in income currently as it
accrues rather than including it on a deferred basis in accordance with the
foregoing. If made, this election will apply to all market discount bonds
acquired by you on or after the first day of the first taxable year to which
this election applies.
The Treasury regulations also permit you to elect to accrue all
interest and discount, including DE MINIMIS market or original issue discount,
in income as interest, and to amortize premium, based on a constant yield
method. Your making this election with respect to a REMIC regular bond with
market discount would be deemed to be an election to include currently market
discount in income with respect to all other debt instruments with market
discount that you acquire during the taxable year of the election or thereafter,
and possibly previously acquired instruments. Similarly, your making this
election as to a bond acquired at a premium would be deemed to be an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that you own or acquire. See "--REMICs--Taxation of Owners of REMIC
Regular Bonds--Premium" below.
Each of the elections described above to accrue interest and discount,
and to amortize premium, with respect to a bond on a constant yield method or as
interest would be irrevocable except with the approval of the IRS.
However, market discount with respect to a REMIC regular bond will be
considered to be DE MINIMIS for purposes of Section 1276 of the Code if the
market discount is less than 0.25% of the remaining stated redemption price of
the bond multiplied by the number of complete years to maturity remaining after
the date of its purchase. In interpreting a similar rule with respect to
original issue discount on obligations payable in installments, the Treasury
regulations refer to the weighted average maturity of obligations. It
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is likely that the same rule will be applied with respect to market discount,
presumably taking into account the prepayment assumption. If market discount is
treated as DE MINIMIS under this rule, it appears that the actual discount would
be treated in a manner similar to original issue discount of a DE MINIMIS
amount. See "--REMICs--Taxation of Owners of REMIC Regular Bonds--Original Issue
Discount" above. ThIS treatment would result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period, you may accrue market discount on a REMIC regular
bond held by you, at your option:
- on the basis of a constant yield method,
- in the case of a bond issued without original issue discount,
in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual
period bears to the total amount of stated interest remaining
to be paid on the bond as of the beginning of the accrual
period, or
- in the case of a bond issued with original issue discount, in
an amount that bears the same ratio to the total remaining
market discount as the original issue discount accrued in the
accrual period bears to the total amount of original issue
discount remaining on the bond at the beginning of the accrual
period.
The prepayment assumption used in calculating the accrual of original
issue discount is also used in calculating the accrual of market discount.
To the extent that REMIC regular bonds provide for monthly or other
periodic payments throughout their term, the effect of these rules may be to
require market discount to be includible in income at a rate that is not
significantly slower than the rate at which the discount would accrue if it were
original issue discount. Moreover, in any event a holder of a REMIC regular bond
generally will be required to treat a portion of any gain on the sale or
exchange of the bond as ordinary income to the extent of the market discount
accrued to the date of disposition under one of the foregoing methods, less any
accrued market discount previously reported as ordinary income.
Further, Section 1277 of the Code may require you to defer a portion of
your interest deductions for the taxable year attributable to any indebtedness
incurred or continued to purchase or carry a REMIC regular bond purchased with
market discount. For these purposes, the DE MINIMIS rule referred to above
applies. Any deferred interest expense would not exceed the market discount that
accrues during the related taxable year and is, in general, allowed as a
deduction not later than the year in which the related market discount is
includible in income. If you have elected, however, to include market discount
in income currently as it accrues, the interest deferral rule described above
would not apply.
PREMIUM. A REMIC regular bond purchased at a cost, excluding any
portion of the cost attributable to accrued qualified stated interest, that is
greater than its remaining stated redemption price will be considered to be
purchased at a premium. You may elect under Section 171 of the Code to amortize
the premium under the constant yield method over the life of the bond. If you
elect to amortize bond premium, bond premium would be amortized on a constant
yield method and would be applied as an offset against
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qualified stated interest. If made, this election will apply to all debt
instruments having amortizable bond premium that you own or subsequently
acquire. The IRS has issued regulations on the amortization of bond premium, but
they specifically do not apply to holders of REMIC regular bonds.
The Treasury regulations also permit you to elect to include all
interest, discount and premium in income based on a constant yield method,
further treating you as having made the election to amortize premium generally.
See "--Taxation of Owners of REMIC Regular Bonds--Market Discount" above. The
Committee Report states that the same rules that apply to accrual of market
discount and require the use of a prepayment assumption in accruing market
discount with respect to REMIC regular bonds without regard to whether those
bonds have original issue discount, will also apply in amortizing bond premium
under Section 171 of the Code.
Whether you will be treated as holding a REMIC regular bond with
amortizable bond premium will depend on--
- the purchase price paid for your bond, and
- the payments remaining to be made on your bond at the time of
its acquisition by you.
If you acquire an interest in any class of REMIC regular bonds issued at a
premium, you should consider consulting your own tax advisor regarding the
possibility of making an election to amortize the premium.
REALIZED LOSSES. Under Section 166 of the Code, if you are either a
corporate holder of a REMIC regular bond and or a noncorporate holder of a REMIC
regular bond that acquires the bond in connection with a trade or business, you
should be allowed to deduct, as ordinary losses, any losses sustained during a
taxable year in which your bond becomes wholly or partially worthless as the
result of one or more realized losses on the related mortgage loans. However, if
you are a noncorporate holder that does not acquire a REMIC regular bond in
connection with a trade or business, it appears that--
- you will not be entitled to deduct a loss under Section 166 of
the Code until your bond becomes wholly worthless, which is
when its principal balance has been reduced to zero, and
- the loss will be characterized as a short-term capital loss.
You will also have to accrue interest and original issue discount with
respect to your REMIC regular bond, without giving effect to any reductions in
payments attributable to defaults or delinquencies on the related mortgage
loans, until it can be established that those payment reductions are not
recoverable. As a result, your taxable income in a period could exceed your
economic income in that period. If any such amounts previously included in
taxable income are not ultimately received due to a loss on the related mortgage
loans, you should be able to recognize a loss or reduction in income. However,
the law is unclear with respect to the timing and character of this loss or
reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL BONDS.
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, the Code does not subject a REMIC to entity-level taxation, except
with regard to prohibited transactions and certain other transactions. See
"--REMICs--Prohibited Transactions Tax and Other Taxes" below. Rather, a holder
of REMIC residual bonds must generally take in income the taxable income or net
loss of the related REMIC.
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Accordingly, the Code treats the REMIC residual bonds much differently than it
would if they were direct ownership interests in the related mortgage loans or
as debt instruments issued by the related REMIC.
Holders of REMIC residual bonds generally will be required to report
their daily portion of the taxable income or, subject to the limitations noted
in this discussion, the net loss of the related REMIC for each day during a
calendar quarter that they own those bonds. For this purpose, the taxable income
or net loss of the REMIC will be allocated to each day in the calendar quarter
ratably using a "30 days per month/90 days per quarter/360 days per year"
convention unless we otherwise disclose in the related prospectus supplement.
These daily amounts then will be allocated among the holders of the REMIC
residual bonds in proportion to their respective ownership interests on that
day. Any amount included in the bondholders' gross income or allowed as a loss
to them by virtue of this paragraph will be treated as ordinary income or loss.
The taxable income of the REMIC will be determined under the rules described
below in "--REMICs--Taxation of Owners of REMIC Residual Bonds--Taxable Income
of the REMIC." Holders of REMIC residual bonds must report the taxable income of
the related REMIC without regard to the timing or amount of cash payments by the
REMIC until the REMIC's termination. Income derived from REMIC residual bonds
will be "portfolio income" for purposes of the limitations under Section 469 of
the Code on the deductibility of "passive losses."
A holder of a REMIC residual bond that purchased the bond from a prior
holder also will be required to report on its federal income tax return amounts
representing its daily share of the taxable income, or net loss, of the related
REMIC for each day that it holds the REMIC residual bond. These daily amounts
generally will equal the amounts of taxable income or net loss determined as
described above. The Committee Report indicates that certain modifications of
the general rules may be made, by regulations, legislation or otherwise to
reduce, or increase, the income of a holder of a REMIC residual bond. These
modifications would occur when a holder purchases the REMIC residual bond from a
prior holder at a price other than the adjusted basis that the REMIC residual
bond would have had in the hands of an original holder of that bond. The
Treasury regulations, however, do not provide for these modifications.
Any payments that you receive from the seller of a REMIC residual bond
in connection with the acquisition of that bond will be income to you. Although
it is possible that these payments would be includible in income immediately
upon receipt, the IRS might assert that you should include these payments in
income over time according to an amortization schedule or according to some
other method. Because of the uncertainty concerning the treatment of these
payments, we recommend that you consult your tax advisor concerning the
treatment of these payments for income tax purposes.
Tax liability with respect to the amount of income that holders of
REMIC residual bonds will be required to report, will often exceed the amount of
cash payments received from the related REMIC for the corresponding period.
Consequently, you should have (i) other sources of funds sufficient to pay any
federal income taxes due as a result of your ownership of REMIC residual bonds
or (ii) unrelated deductions against which income may be offset. See, however,
the rules discussed below relating to:
- "excess inclusions,"
- residual interests without "significant value," and
- "noneconomic" residual interests.
The fact that the tax liability associated with this income allocated to you may
exceed the cash payments received by you for the corresponding period may
significantly and adversely affect their after-tax rate of return. This
disparity between income and payments may not be offset by corresponding losses
or reductions of income attributable to your REMIC residual bonds until
subsequent tax years. Even then, the
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extra income may not be completely offset due to changes in the Code, tax rates
or character of the income or loss. Therefore, REMIC residual bonds will
ordinarily have a negative "value" at the time of issuance. See "Risk
Factors--'Residual Interests' in a 'Real Estate Mortgage Investment Conduit'
Have Adverse Tax Consequences."
TAXABLE INCOME OF THE REMIC. The taxable income of a REMIC will equal:
- the income from the mortgage loans and other assets of the
REMIC; plus
- any cancellation of indebtedness income due to the allocation
of realized losses to those REMIC bonds constituting "regular
interests" in the REMIC;
- less the following items--
(i) the deductions allowed to the REMIC for interest,
including original issue discount but reduced by any
premium on issuance, on any class of REMIC bonds
constituting "regular interests" in the REMIC,
whether offered or not,
(ii) amortization of any premium on the mortgage loans
held by the REMIC,
(iii) bad debt losses with respect to the mortgage loans
held by the REMIC, and
(iv) except as described below, servicing, administrative
and other expenses.
For purposes of determining its taxable income, a REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC bonds, or in the case of REMIC bonds not sold initially, their fair
market values. The aggregate basis will be allocated among the mortgage loans
and the other assets of the REMIC in proportion to their respective fair market
values. The issue price of any REMIC bonds offered hereby will be determined in
the manner described above under "--REMICs--Taxation of Owners of REMIC Regular
Bonds--Original Issue Discount." The issue price of a REMIC bond received in
exchange for an interest in mortgage loans or other property will equal the fair
market value of the interests in the mortgage loans or other property.
Accordingly, if one or more classes of REMIC bonds are retained initially rather
than sold, the related tax administrator may be required to estimate the fair
market value of these interests in order to determine the basis of the REMIC in
the mortgage loans and other property held by the REMIC.
Subject to possible application of the DE MINIMIS rules, the method of
accrual by a REMIC of original issue discount income and market discount income
with respect to mortgage loans that it holds will be equivalent to the method
for accruing original issue discount income for holders of REMIC regular bonds.
That method is a constant yield method taking into account the prepayment
assumption. However, a REMIC that acquires loans at a market discount must
include that market discount in income currently, as it accrues, on a constant
yield basis. See "--REMICs--Taxation of Owners of REMIC Regular Bonds" above,
which describes a method for accruing the discount income that is analogous to
that required to be used by a REMIC as to mortgage loans with market discount
that it holds.
A REMIC will acquire a mortgage loan with discount, or premium, to the
extent that the REMIC's basis determined as described in the preceding
paragraph, is different from its stated redemption price. Discount will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to that income, under a method similar to the method
described above for accruing original issue discount on the REMIC regular bonds.
A REMIC probably will elect under Section 171 of the Code to amortize any
premium on the mortgage loans that it holds. Premium on any mortgage loan to
which this
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election applies may be amortized under a constant yield method, presumably
taking into account the prepayment assumption.
A REMIC will be allowed deductions for interest, including original
issue discount, on all of the bonds that constitute "regular interests" in the
REMIC, whether or not offered hereby, as if those bonds were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose as
described above under "--REMICs--Taxation of Owners of REMIC Regular
Bonds--Original Issue Discount." However, the DE MINIMIS rule, described in that
section will not apply in determining deductions.
If a class of REMIC regular bonds is issued at a price in excess of the
stated redemption price of that class, the net amount of interest deductions
that are allowed to the REMIC in each taxable year with respect to those bonds
will be reduced by an amount equal to the portion of that excess that is
considered to be amortized in that year. It appears that this excess should be
amortized under a constant yield method in a manner analogous to the method of
accruing original issue discount described above under "--REMICs--Taxation of
Owners of REMIC Regular Bonds--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined as
if the REMIC were an individual having the calendar year as its taxable year and
using the accrual method of accounting. However, no item of income, gain, loss
or deduction allocable to a prohibited transaction will be taken into account.
See "--REMICs--Prohibited Transactions Tax and Other Taxes" below. Further, the
limitation on miscellaneous itemized deductions imposed on individuals by
Section 67 of the Code will not be applied at the REMIC level so that the REMIC
will be allowed full deductions for servicing, administrative and other
noninterest expenses in determining its taxable income. All of such expenses
will be allocated as a separate item to the holders of the related REMIC bonds,
subject to the limitation of Section 67 of the Code. See "--REMICs--Taxation of
Owners of REMIC Residual Bonds--Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, the excess will be the net loss for the REMIC for
that calendar quarter.
BASIS RULES, NET LOSSES AND PAYMENTS. The adjusted basis of a REMIC
residual bond will be equal to:
(i) the amount paid for that REMIC residual bond,
(ii) increased by, amounts included in the income of the holder of
that REMIC residual bond, and
(iii) decreased, but not below zero, by payments made, and by net
losses allocated, to the holder of that REMIC residual bond.
A holder of a REMIC residual bond is not allowed to take into account
any net loss for any calendar quarter to the extent that the net loss exceeds
the adjusted basis to that holder as of the close of that calendar quarter,
determined without regard to that net loss. Any loss that is not currently
deductible by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC residual bond.
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Any payment on a REMIC residual bond will be treated as a nontaxable
return of capital to the extent it does not exceed the holder's adjusted basis
in the REMIC residual bond. To the extent a payment on a REMIC residual bond
exceeds the holder's adjusted basis, it will be treated as gain from the sale of
that REMIC residual bond.
A holder's basis in a REMIC residual bond will initially equal the
amount paid for the bond and will be increased by that holder's allocable share
of taxable income of the related REMIC. However, these increases in basis may
not occur until the end of the calendar quarter, or perhaps the end of the
calendar year, with respect to which the related REMIC's taxable income is
allocated to that holder. To the extent the initial basis of the holder of a
REMIC residual bond is less than the payments to that holder, and increases in
the initial basis either occur after these payments or, together with the
initial basis, are less than the amount of these payments, gain will be
recognized to that holder on these payments. This gain will be treated as gain
from the sale of its REMIC residual bond.
The effect of these rules is that a holder of a REMIC residual bond may
not amortize its basis in a REMIC residual bond, but may only recover its basis:
- through payments,
- through the deduction of any net losses of the REMIC, or
- upon the sale of its REMIC residual bond. See "--REMICs--Sales
of REMIC Bonds" below.
For a discussion of possible modifications of these rules that may
require adjustments to income of a holder of a REMIC residual bond other than an
original holder, see "--REMICs--Taxation of Owners of REMIC Residual
Bonds--General" above. These adjustments could require a holder of a REMIC
residual bond to account for any difference between the cost of the bond to the
holder and the adjusted basis of the bond would have been in the hands of an
original holder.
EXCESS INCLUSIONS. Any "excess inclusions" with respect to a REMIC
residual bond will be subject to federal income tax in all events. In general,
the "excess inclusions" with respect to a REMIC residual bond for any calendar
quarter will be the excess, if any, of:
(i) the daily portions of REMIC taxable income allocable to that
bond, over
(ii) the sum of the "daily accruals" for each day during the
quarter that the bond was held by that holder.
The daily accruals of a holder of a REMIC residual bond will be
determined by allocating to each day during a calendar quarter its ratable
portion of a numerical calculation. That calculation is the product of the
"adjusted issue price" of the REMIC residual bond at the beginning of the
calendar quarter and 120% of the "long-term Federal rate" in effect on the date
of initial issuance. For this purpose, the adjusted issue price of a REMIC
residual bond as of the beginning of any calendar quarter will be equal to:
(i) the issue price of the bond, increased by
(ii) the sum of the daily accruals for all prior quarters, and
decreased, but not below zero, by
(iii) any payments made with respect to the bond before the
beginning of that quarter.
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The issue price of a REMIC residual bond is the initial offering price
to the public at which a substantial amount of the REMIC residual bonds were
sold, but excluding sales to bond houses, brokers and underwriters or, if no
sales have been made, their initial value. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
Although it has not done so, the Treasury Department has authority to
issue regulations that would treat the entire amount of income accruing on a
REMIC residual bond as excess inclusions if the REMIC residual interest
evidenced by that bond is considered not to have "significant value."
For holders of REMIC residual bonds, excess inclusions:
- will not be permitted to be offset by deductions, losses or
loss carryovers from other activities,
- will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization, and
- will not be eligible for any rate reduction or exemption under
any applicable tax treaty with respect to the 30% United
States withholding tax imposed on payments to holders of REMIC
residual bonds that are foreign investors. See, however,
"--REMICs--Foreign Investors in REMIC Bonds" below.
Furthermore, for purposes of the alternative minimum tax:
- excess inclusions will not be permitted to be offset by the
alternative tax net operating loss deduction, and
- alternative minimum taxable income may not be less than the
taxpayer's excess inclusions.
This last rule has the effect of preventing non-refundable tax credits from
reducing the taxpayer's income tax to an amount lower than the alternative
minimum tax on excess inclusions.
In the case of any REMIC residual bonds held by a real estate
investment trust, or REIT, the aggregate excess inclusions with respect to these
REMIC residual bonds will be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Any
amount so allocated will be treated as an excess inclusion with respect to a
REMIC residual bond as if held directly by the shareholder. The aggregate excess
inclusions referred to in the previous sentence will be reduced, but not below
zero, by any REIT taxable income, within the meaning of Section 857(b)(2) of the
Code, other than any net capital gain. Treasury regulations yet to be issued
could apply a similar rule to:
- regulated investment companies,
- common trusts, and
- certain cooperatives.
The Treasury regulations, however, currently do not address this subject.
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NONECONOMIC REMIC RESIDUAL BONDS. Under the Treasury regulations,
transfers of "noneconomic" REMIC residual bonds will be disregarded for all
federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If a
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on the "noneconomic" REMIC residual
bond. The Treasury regulations provide that a REMIC residual bond is noneconomic
unless, based on the prepayment assumption and on any required or permitted
clean up calls, or required liquidation provided for in the related Governing
Documents:
- the present value of the expected future payments on the REMIC
residual bond equals at least the present value of the
expected tax on the anticipated excess inclusions, and
- the transferor reasonably expects that the transferee will
receive payments with respect to the REMIC residual bond at or
after the time the taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued
taxes.
The present value calculation referred to above is calculated using the
"applicable Federal rate" for obligations whose term ends on the close of the
last quarter in which excess inclusions are expected to accrue with respect to
the REMIC residual bond. This rate is computed and published monthly by the IRS.
Accordingly, all transfers of REMIC residual bonds that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Governing Documents that are intended to reduce the
possibility of any transfer being disregarded. These restrictions will require
an affidavit:
- from each party to the transfer, stating that no purpose of
the transfer is to impede the assessment or collection of tax,
- from the prospective transferee, providing certain
representations as to its financial condition, and
- from the prospective transferor, stating that it has made a
reasonable investigation to determine the transferee's
historic payment of its debts and ability to continue to pay
its debts as they come due in the future.
The Treasury recently issued proposed regulations that would revise
this safe harbor. The proposed regulations would make the safe harbor
unavailable unless the present value of the anticipated tax liabilities
associated with holding the residual interest did not exceed the sum of:
- the present value of any consideration given to the transferee
to acquire the interest,
- the present value of the expected future distributions on the
interest, and
- the present value of the anticipated tax savings associated
with the holding of the interest as the REMIC generates
losses.
Present values would be computed using a discount rate equal to an "applicable
Federal rate," except that if a transferee could demonstrate that it borrowed
regularly in the course of its trade or business substantial funds at a lower
rate from unrelated third parties, that lower rate could be used as the discount
rate.
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IT IS NOT CLEAR WHEN THOSE REGULATIONS WOULD BE EFFECTIVE. ALTHOUGH
THE TEXT OF THE PROPOSED REGULATIONS STATES THAT THEY WOULD BE EFFECTIVE ON
FEBRUARY 4, 2000, THE PREAMBLE TO THE PROPOSED REGULATIONS SAYS THAT THESE
REGULATIONS WILL APPLY TO TRANSFERS OF REMIC RESIDUAL INTERESTS MADE AFTER
THE DATE THE FINAL REGULATIONS ARE PUBLISHED IN THE FEDERAL REGISTER. THE
TREASURY DEPARTMENT IS ANTICIPATED TO ISSUE CLARIFICATION WITH REGARD TO
THESE CONFLICTING STATEMENTS REGARDING THE EFFECTIVE DATE OF THE PROPOSED
REGULATIONS SHORTLY.
Prior to purchasing a REMIC residual bond, prospective purchasers
should consider the possibility that a purported transfer of a REMIC residual
bond to another party at some future date may be disregarded in accordance with
the above-described rules. This would result in the retention of tax liability
by the transferor in respect of that purported transfer.
We will disclose in the related prospectus supplement whether the
offered REMIC residual bonds may be considered "noneconomic" residual interests
under the Treasury regulations. However, we will base any disclosure that a
REMIC residual bond will not be considered "noneconomic" upon certain
assumptions. Further, we will make no representation that a REMIC residual bond
will not be considered "noneconomic" for purposes of the above-described rules.
See "--REMICs--Foreign Investors in REMIC Bonds" below for additional
restrictions applicable to transfers of certain REMIC residual bonds to foreign
persons.
MARK-TO-MARKET RULES. Regulations under Section 475 of the Code require
that a securities dealer mark to market securities held for sale to customers.
This mark-to-market requirement applies to all securities owned by a dealer,
except to the extent that the dealer has specifically identified a security as
held for investment. These regulations provide that for purposes of this
mark-to-market requirement, a REMIC residual bond is not treated as a security
for purposes of Section 475 of the Code. Thus, a REMIC residual bond is not
subject to the mark-to-market rules. We recommend that prospective purchasers of
a REMIC residual bond consult their tax advisors regarding these new
regulations.
FOREIGNERS MAY NOT HOLD REMIC RESIDUAL BONDS. Unless we otherwise state
in the related prospectus supplement, transfers of REMIC residual bonds to
investors that are foreign persons under the Code will be prohibited under the
related Governing Documents. If transfers of REMIC residual bonds to investors
that are foreign persons are permitted pursuant to the related Governing
Documents, we will describe in the related prospectus supplement additional
restrictions applicable to transfers of certain REMIC residual bonds to these
persons.
PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. Fees and expenses of
a REMIC generally will be allocated to the holders of the related REMIC residual
bonds. The applicable Treasury regulations indicate, however, that in the case
of a REMIC that is similar to a single class grantor trust, all or a portion of
these fees and expenses should be allocated to the holders of the related REMIC
regular bonds. Unless we state otherwise in the related prospectus supplement,
however, these fees and expenses will be allocated to holders of the related
REMIC residual bonds in their entirety and not to the holders of the related
REMIC regular bonds.
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If the holder of a REMIC bond receives an allocation of fees and
expenses in accordance with the preceding discussion, and if that holder is:
- an individual,
- an estate or trust, or
- a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts,
then--
- an amount equal to this individual's, estate's or trust's
share of these fees and expenses will be added to the gross
income of this holder, and
- the individual's, estate's or trust's share of these fees and
expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code,
which permits the deduction of these fees and expenses only to
the extent they exceed in the aggregate 2% of a taxpayer's
adjusted gross income.
In addition, Section 68 of the Code provides that the amount of
itemized deductions otherwise allowable for an individual whose adjusted gross
income exceeds a specified amount will be reduced by the lesser of:
- 3% of the excess of the individual's adjusted gross income
over the specified amount, or
- 80% of the amount of itemized deductions otherwise allowable
for the taxable year.
Furthermore, in determining the alternative minimum taxable income of a
holder of a REMIC bond
that is--
- an individual,
- an estate or trust, or
- a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts,
no deduction will be allowed for the holder's allocable portion of servicing
fees and other miscellaneous itemized deductions of the REMIC, even though an
amount equal to the amount of these fees and other deductions will be included
in the holder's gross income.
The amount of additional taxable income reportable by holders of REMIC
bonds that are subject to the limitations of either Section 67 or Section 68 of
the Code, or to the complete disallowance of the related expenses for
alternative minimum tax purposes, may be substantial.
Accordingly, REMIC bonds to which these expenses are allocated will
generally not be appropriate investments for:
- an individual,
- an estate or trust, or
- a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts.
We recommend that such prospective investors consult with their tax
advisors prior to making an investment in a REMIC bond to which these expenses
are allocated.
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SALES OF REMIC BONDS. If a REMIC bond is sold, the selling bondholder
will recognize gain or loss equal to the difference between the amount realized
on the sale and its adjusted basis in the REMIC bond.
The adjusted basis of a REMIC regular bond generally will equal:
- the cost of the bond to that bondholder, increased by
- income reported by that bondholder with respect to the bond,
including original issue discount and market discount income,
and reduced, but not below zero, by
- payments on the bond received by that bondholder and by that
amortized premium.
The adjusted basis of a REMIC residual bond will be determined as
described above under "--REMICs--Taxation of Owners of REMIC Residual
Bonds--Basis Rules, Net Losses and Distributions." Except as described below,
any gain or loss from your sale of a REMIC bond will be capital gain or loss,
provided that you hold the bond as a capital asset within the meaning of Section
1221 of the Code, which is generally property held for investment.
In addition to the recognition of gain or loss on actual sales, the
Code requires the recognition of gain (but not loss) upon the "constructive sale
of an appreciated financial position." A constructive sale of an appreciated
financial position occurs if a taxpayer enters into certain transactions or
series of such transactions that have the effect of substantially eliminating
the taxpayer's risk of loss and opportunity for gain with respect to the
financial instrument. Debt instruments that--
- entitle the holder to a specified principal amount,
- pay interest at a fixed or variable rate, and
- are not convertible into the stock of the issuer or a related
party,
cannot be the subject of a constructive sale for this purpose. Because most
REMIC regular bonds meet this exception, Section 1259 will not apply to most
REMIC regular bonds. However, REMIC regular bonds that have no, or a
disproportionately small, amount of principal can be the subject of a
constructive sale.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for the taxable year. A taxpayer
would do so because of the rule that limits the deduction of interest on
indebtedness incurred to purchase or carry property held for investment to a
taxpayer's net investment income.
As of the date of this prospectus, the Code provides for lower rates as
to long-term capital gains than those applicable to the short-term capital gains
and ordinary income recognized or received by individuals. No such rate
differential exists for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss is relevant for other purposes
to both individuals and corporations.
Gain from the sale of a REMIC regular bond that might otherwise be a
capital gain will be treated as ordinary income to the extent that the gain does
not exceed the excess, if any, of:
- the amount that would have been includible in the seller's
income with respect to that REMIC regular bond assuming that
income had accrued thereon at a rate equal to 110% of the
"applicable Federal rate" determined as of the date of
purchase of the bond, which is a rate based on an average of
current yields on Treasury securities having a maturity
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comparable to that of the bond based on the application of the
prepayment assumption to the bond, over
- the amount of ordinary income actually includible in the
seller's income prior to that sale.
In addition, gain recognized on the sale of a REMIC regular bond by a
seller who purchased the bond at a market discount will be taxable as ordinary
income in an amount not exceeding the portion of that discount that accrued
during the period the bond was held by the seller, reduced by any market
discount included in income under the rules described above under
"--REMICs--Taxation of Owners of REMIC Regular Bonds--Market Discount" and
"--Premium."
REMIC bonds will be "evidences of indebtedness" within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a REMIC bond by a bank or thrift institution to which that section of the Code
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC regular bond that might
otherwise be capital gain may be treated as ordinary income to the extent that a
holder holds the bond as part of a "conversion transaction" within the meaning
of Section 1258 of the Code. A conversion transaction generally is one in which
the taxpayer has taken two or more positions in the same or similar property
that reduce or eliminate market risk, if substantially all of the taxpayer's
return is attributable to the time value of the taxpayer's net investment in
that transaction. The amount of gain so realized in a conversion transaction
that is recharacterized as ordinary income generally will not exceed the amount
of interest that would have accrued on the taxpayer's net investment at 120% of
the appropriate "applicable Federal rate" at the time the taxpayer enters into
the conversion transaction, subject to appropriate reduction for prior inclusion
of interest and other ordinary income items from the transaction.
Except as may be provided in Treasury regulations yet to be issued, a
loss realized on the sale of a REMIC residual bond will be subject to the "wash
sale" rules of Section 1091 of the Code, if during the period beginning six
months before, and ending six months after, the date of that sale the seller of
that bond:
- reacquires that same REMIC residual bond,
- acquires any other residual interest in a REMIC, or
- acquires any similar interest in a "taxable mortgage pool," as
is defined in Section 7701(i) of the Code.
In that event, any loss realized by the holder of a REMIC residual bond on the
sale will not be recognized or deductible currently, but instead will be added
to that holder's adjusted basis in the newly-acquired asset.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES. The Code imposes a tax on
REMICs equal to 100% of the net income derived from "prohibited transactions."
In general, subject to certain specified exceptions, a prohibited transaction
includes:
- the disposition of a non-defaulted mortgage loan,
- the receipt of income from a source other than a mortgage loan
or certain other permitted investments,
- the receipt of compensation for services, or
- the gain from the disposition of an asset purchased with
collections on the mortgage loans for temporary investment
pending payment on the REMIC bonds.
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It is not anticipated that any REMIC will engage in any prohibited transactions
as to which it would be subject to this tax.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property. The
related Governing Documents will include provisions designed to prevent the
acceptance of any contributions that would be subject to this tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to REITs. "Net income from foreclosure property" generally
means income from foreclosure property other than qualifying rents and other
qualifying income for a REIT. Under certain circumstances, the special servicer
may be authorized to conduct activities with respect to a mortgaged property
acquired as part of a trust estate that causes the trust estate to incur this
tax if doing so would, in the reasonable discretion of the special servicer,
maximize the net after-tax proceeds to bondholders. However, under no
circumstance will the special servicer cause the acquired mortgaged property to
cease to be a "permitted investment" under Section 860G(a)(5) of the Code.
Unless we otherwise disclose in the related prospectus supplement, it
is not anticipated that any material state or local income or franchise tax will
be imposed on any REMIC.
Unless we state otherwise in the related prospectus supplement, and to
the extent permitted by then applicable laws, any tax on prohibited
transactions, certain contributions or "net income from foreclosure property,"
and any state or local income or franchise tax, that may be imposed on the REMIC
will be borne by the related bond trustee, tax administrator, master servicer,
special servicer or manager, in any case out of its own funds, provided that--
- the person has sufficient assets to do so, and
- the tax arises out of a breach of that person's obligations
under the related Governing Documents.
Any tax not borne by one of these persons would be charged against the related
trust estate resulting in a reduction in amounts payable to holders of the
related REMIC bonds.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL BONDS TO CERTAIN
ORGANIZATIONS. If a REMIC residual bond is transferred to a "disqualified
organization," a tax will be imposed in an amount equal to the product of:
(i) the present value of the total anticipated excess inclusions
with respect to the REMIC residual bond for periods after the
transfer, and
(ii) the highest marginal federal income tax rate applicable to
corporations.
The value of the anticipated excess inclusions is discounted using the
"applicable Federal rate" for obligations whose term ends on the close of the
last quarter in which excess inclusions are expected to accrue with respect to
the REMIC residual bond.
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The anticipated excess inclusions must be determined as of the date
that the REMIC residual bond is transferred and must be based on:
- events that have occurred up to the time of the transfer,
- the prepayment assumption, and
- any required or permitted clean up calls or required
liquidation provided for in the related Governing Documents.
The tax on transfers to "disqualified organizations" generally would be
imposed on the transferor of the REMIC residual bond, except when the transfer
is through an agent for a disqualified organization. In that case, the tax would
instead be imposed on the agent. However, a transferor of a REMIC residual bond
would in no event be liable for the tax with respect to a transfer if:
- the transferee furnishes to the transferor an affidavit that
the transferee is not a disqualified organization, and
- as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC residual bond, and a disqualified
organization is the record holder of an interest in that entity, then a tax will
be imposed on that entity equal to the product of:
- the amount of excess inclusions on the bond that are allocable
to the interest in the pass- through entity held by the
disqualified organization, and
- the highest marginal federal income tax rate imposed on
corporations.
A pass-through entity will not be subject to this tax for any period,
however, if each record holder of an interest in that pass-through entity
furnishes to that pass-through entity:
- the holder's social security number and a statement under
penalties of perjury that the social security number is that
of the record holder, or
- a statement under penalties of perjury that the record holder
is not a disqualified organization.
For taxable years beginning on or after January 1, 1998, if an
"electing large partnership" holds a REMIC residual bond, all interests in the
electing large partnership are treated as held by disqualified organizations for
purposes of the tax imposed on pass-through entities described in the second
preceding paragraph. This tax on electing large partnerships must be paid even
if each record holder of an interest in that partnership provides a statement
mentioned in the prior paragraph.
For these purposes, a "disqualified organization" means:
- the United States,
- any State or political subdivision thereof,
- any foreign government,
- any international organization,
- any agency or instrumentality of the foregoing, except for
instrumentalities described in Section 168(h)(2)(D) of the
Code or the FHLMC,
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- any organization, other than a cooperative described in
Section 521 of the Code, that is exempt from federal income
tax, except if it is subject to the tax imposed by Section 511
of the Code, or
- any organization described in Section 1381(a)(2)(C) of the
Code.
For these purposes, a "pass-through entity" means any:
- regulated investment company,
- real estate investment trust,
- trust,
- partnership, or
- certain other entities described in Section 860E(e)(6) of the
Code.
For these purposes, an "electing large partnership" means any
partnership having more than 100 members during the preceding tax year which
elects to apply simplified reporting provisions under the Code, except for
certain service partnerships and commodity pools.
In addition, a person holding an interest in a pass-through entity as a
nominee for another person will, with respect to that interest, be treated as a
pass-through entity.
Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that:
- the residual interests in the entity are not held by
disqualified organizations, and
- the information necessary for the application of the tax
described herein will be made available.
We will include in the related Governing Documents restrictions on the
transfer of REMIC residual bonds and certain other provisions that are intended
to meet this requirement, and we will discuss those restrictions and provisions
in any prospectus supplement relating to the offering of any REMIC residual
bond.
The Clinton Administration recently proposed in its budget certain
amendments to the REMIC provisions designed to ensure that income taxes
imposed on the holder of a REMIC residual interest are paid when due. Those
provisions would impose secondary liability on the REMIC itself for any tax
required to be paid with respect to the income allocated to a REMIC residual
interest if the holder does not pay its taxes on that income when they are
due. If adopted, the amendments would be effective for REMICs created after
the date of enactment. It is not possible to predict whether the legislation
will be adopted or, if so, in what form.
TERMINATION. A REMIC will terminate immediately after the payment date
following receipt by the REMIC of the final payment in respect of the related
mortgage loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last payment on a REMIC regular
bond will be treated as a payment in retirement of a debt instrument. In the
case of a REMIC residual bond, if the last payment on that bond is less than the
REMIC residual bondholder's adjusted basis in the bond, that holder should, but
may not, be treated as realizing a capital loss equal to the amount of that
difference.
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REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Code, a REMIC will be treated as a partnership
and holders of the related REMIC residual bonds will be treated as partners.
Unless we otherwise state in the related prospectus supplement, the related tax
administrator will file REMIC federal income tax returns on behalf of the REMIC,
and will be designated as and will act as or on behalf of the "tax matters
person" with respect to the REMIC in all respects. The related tax administrator
may hold at least a nominal amount of REMIC residual bonds.
As, or as agent for, the tax matters person, the related tax
administrator, subject to certain notice requirements and various restrictions
and limitations, generally will have the authority to act on behalf of the REMIC
and the holders of the REMIC residual bonds in connection with the
administrative and judicial review of the REMIC's--
- income,
- deductions
- gains,
- losses, and
- classification as a REMIC.
Holders of REMIC residual bonds generally will be required to report
these REMIC items consistently with their treatment on the related REMIC's tax
return. In addition, these holders may in some circumstances be bound by a
settlement agreement between the related tax administrator, as, or as agent for,
the tax matters person, and the IRS concerning any REMIC item. Adjustments made
to the REMIC's tax return may require these holders to make corresponding
adjustments on their returns. An audit of the REMIC's tax return, or the
adjustments resulting from that audit, could result in an audit of a holder's
return.
No REMIC will be registered as a tax shelter pursuant to Section 6111
of the Code. Any person that holds a REMIC residual bond as a nominee for
another person may be required to furnish to the related REMIC, in a manner to
be provided in Treasury regulations, the name and address of that other person,
as well as other information.
Reporting of interest income, including any original issue discount,
with respect to REMIC regular bonds is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent or made readily available through electronic means to
individual holders of REMIC regular bonds and the IRS. Holders of REMIC regular
bonds that are--
- corporations,
- trusts,
- securities dealers, and
- certain other non-individuals,
will be provided interest and original issue discount income information and the
information set forth in the following paragraphs. This information will be
provided upon request in accordance with the requirements of the applicable
regulations. The information must be provided by the later of:
- 30 days after the end of the quarter for which the information
was requested, or
- two weeks after the receipt of the request.
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The REMIC must also comply with rules requiring a REMIC regular bond
issued with original issue discount to disclose on its face the amount of
original issue discount and the issue date, and requiring that information to be
reported to the IRS. Reporting with respect to REMIC residual bonds, including--
- income,
- excess inclusions,
- investment expenses, and
- relevant information regarding qualification of the REMIC's
assets,
will be made as required under the Treasury regulations, generally on a
quarterly basis.
As applicable, the REMIC regular bond information reports will include
a statement of the adjusted issue price of the REMIC regular bond at the
beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, the regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--REMICs--Taxation of Owners of REMIC Regular
Bonds--Market Discount."
Unless we otherwise specify in the related prospectus supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the related tax administrator.
BACKUP WITHHOLDING WITH RESPECT TO REMIC BONDS. Payments of interest
and principal, as well as payments of proceeds from the sale of REMIC bonds, may
be subject to the "backup withholding tax" under Section 3406 of the Code at a
rate of 31% if recipients of these payments:
- fail to furnish to the payor certain information, including
their taxpayer identification numbers, or
- otherwise fail to establish an exemption from this tax.
Any amounts deducted and withheld from a payment to a recipient would
be allowed as a credit against the recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC BONDS. Unless we otherwise disclose in the
related prospectus supplement, a holder of a REMIC regular bond that is--
- a foreign person, and
- not subject to federal income tax as a result of any direct or
indirect connection to the United States in addition to its
ownership of that bond,
will normally not be subject to United States federal income or withholding tax
in respect of a payment on a REMIC regular bond. To avoid withholding or tax,
that holder must comply with certain identification requirements. These
requirements include delivery of a statement, signed by the bondholder under
penalties of perjury, certifying that the bondholder is a foreign person and
providing the name and address of the bondholder.
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On October 6, 1997, the Treasury Department issued new regulations that
modify the withholding, backup withholding and information reporting rules
described above. These regulations, as modified by Treasury Decision 8856, will
generally be effective for investments made after December 31, 2000, subject to
certain transition rules. Prospective investors are urged to consult their own
tax advisors regarding these regulations.
For these purposes, a foreign person is anyone other than a United
States person. A "United States person" is:
- a citizen or resident of the United States,
- a corporation, partnership or other entity created or
organized in, or under the laws of, the United States or any
political subdivision thereof,
- an estate whose income from sources without the United States
is includible in gross income for United States federal income
tax purposes regardless of its connection with the conduct of
a trade or business within the United States, or
- a trust as to which--
(i) a court in the United States is able to exercise
primary supervision over the administration of the
trust, and
(ii) one or more United States persons have the authority
to control all substantial decisions of the trust.
In addition, to the extent provided in the Treasury Regulations, a trust will be
a United States person if it was in existence on August 20, 1996 and it elected
to be treated as a United States person.
It is possible that the IRS may assert that the foregoing tax exemption
should not apply with respect to a REMIC regular bond held by a person or entity
that owns directly or indirectly a 10% or greater interest in the related REMIC
residual bonds. If the holder does not qualify for exemption, payments of
interest, including payments in respect of accrued original issue discount, to
that holder may be subject to a tax rate of 30%, subject to reduction under any
applicable tax treaty.
It is possible, under regulations promulgated under Section 881 of the
Code concerning conduit financing transactions, that the exemption from
withholding taxes described above may also not be available to a holder who is a
foreign person and either--
- owns 10% or more of one or more underlying mortgagors, or
- if the holder is a controlled foreign corporation, is related
to one or more mortgagors in the applicable trust.
Further, it appears that a REMIC regular bond would not be included in
the estate of a nonresident alien individual and would not be subject to United
States estate taxes. However, it is recommended that bondholders who are
nonresident alien individuals consult their tax advisors concerning this
question.
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Unless we otherwise state in the related prospectus supplement, the
related Governing Documents will prohibit transfers of REMIC residual bonds to
investors that are:
- foreign persons, or
- United States persons, if classified as a partnership under
the Code, unless all of their beneficial owners are United
States persons.
FASITs
GENERAL. An election may be made to treat the trust estate for a
series of offered bonds or specified assets thereof, as a financial asset
securitization investment trust, or "FASIT," within the meaning of Section
860L(a) of the Code. Such an election would be noted in the applicable
prospectus supplement. If such an election is made, the offered bonds will be
designated as classes of "regular interests" in the FASIT. With respect to
each series of offered bonds as to which the related tax administrator makes
a FASIT election and assuming:
- the making of an appropriate election,
- compliance with the related Governing Documents, and
- subject to certain assumptions set forth in the opinion,
our counsel will deliver its opinion generally to the effect that,
- the relevant assets will qualify as a FASIT, and
- the "FASIT bonds" will represent "regular interests" in that
FASIT.
On February 4, 2000, the Treasury Department issued proposed
regulations relating to FASITs. References to the "FASIT proposed regulations"
in this discussion refer to those proposed regulations. The proposed regulations
have not been adopted as final and, in general, are not proposed to be effective
as of the date of this prospectus. They nevertheless are indicative of the rules
the Treasury Department currently views as appropriate with regard to the FASIT
provisions.
CHARACTERIZATION OF INVESTMENTS IN FASIT BONDS. FASIT bonds held by
a real estate investment trust will constitute "real estate assets" within
the meaning of Section 856(c)(4)(A) of the Code and interest on the FASIT
bonds will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Section
856(c)(3)(B) of the Code in the same proportion, for both purposes, that the
assets and income of the FASIT would be so treated. FASIT bonds held by a
domestic building and loan association will be treated as "regular interest[s]
in a FASIT" under section 7701(a)(19)(C)(xi) of the Code, but only in the
proportion that the FASIT holds "loans secured by an interest in real
property which is . . . residential real property" within the meaning of
section 7701(a)(19)(C)(v) of the Code. For this purpose, mortgage loans
secured by multifamily residential housing should qualify. It is also likely
that mortgage loans secured by health care related facilities would qualify
as "loans secured by an interest in . . . health institutions or facilities,
including structures designed or used primarily for residential purposes for
. . . persons under care" within the meaning of Section 7701(a)(19)(C)(vii)
of the Code. If at all times 95% or more of the assets of the FASIT or the
income thereon qualify for the foregoing treatments, the FASIT bonds will
qualify for the corresponding status in their entirety. Mortgage loans which
have been defeased with Treasury obligations and the income therefrom will
not qualify for the foregoing treatments. Accordingly, the FASIT bonds may
not be a suitable investment for you if you require a specific amount or
percentage of assets or income meeting the foregoing treatments. For purposes
of Section 856(c)(4)(A) of the Code, payments of principal and interest on a
mortgage loan that are reinvested pending distribution to holders of
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FASIT bonds should qualify for that treatment. FASIT bonds held by a regulated
investment company will not constitute "government securities" within the
meaning of Section 851(b)(4)(A)(i) of the Code. FASIT bonds held by certain
financial institutions will constitute an "evidence of indebtedness" within the
meaning of Section 582(c)(1) of the Code.
QUALIFICATION AS A FASIT.
GENERAL. In order to qualify as a FASIT, the trust estate for a
series of offered bonds or specified assets thereof must comply with the
requirements set forth in the Code on an ongoing basis. The FASIT must
fulfill an asset test, which requires that substantially all of the assets of
the FASIT, as of the close of the third calendar month beginning after the
"startup day" (which for purposes of this discussion is the date of the
initial issuance of the FASIT bonds) and at all times thereafter, be
"permitted assets." "Permitted assets" include cash or cash equivalents,
certain debt instruments (other than debt instruments issued by the owner of
the FASIT or a related party) and hedges (and contracts to acquire the same),
foreclosure property and regular interests in another FASIT or in a REMIC.
Certain restrictions apply to each type of permitted asset, as discussed
below. Under the FASIT proposed regulations, the "substantially all"
requirement would be met if at all times the aggregate adjusted basis of the
"permitted assets" is more than 99 percent of the aggregate adjusted basis of
all the assets held by the FASIT, including assets deemed to be held by the
FASIT under Section 860I(b)(2) of the Code because they "support" a regular
interest in the FASIT. The FASIT provisions also require the FASIT ownership
interest to be held only by certain fully taxable domestic corporations and
do not recognize transfers of certain "high-yield" regular interests
(described below) to taxpayers other than fully taxable domestic corporations
or other FASITs. The related Governing Documents will provide that no legal
or beneficial interest in the ownership interest or in any class or classes
of bonds that we determine to be a high-yield regular interests may be
transferred or registered unless certain conditions, designed to prevent
violation of this requirement, are met.
PERMITTED ASSETS. The proposed regulations enumerate certain types of
debt that qualify as permitted assets for a FASIT. The FASIT provisions provide
that permitted debt instruments must bear interest, if any, at a fixed or
qualified variable rate. Under the FASIT proposed regulations, the definition of
permitted debt would include REMIC regular interests, regular interests of other
FASITs, inflation indexed debt instruments, credit card receivables and certain
stripped bonds and coupons. However, the FASIT proposed regulations except
equity linked debt instruments and defaulted debt instruments from "permitted
assets." In addition, debt of the owner of the FASIT ownership interest, debt
guaranteed by the owner of the FASIT ownership interest in circumstances such
that the owner is in substance the primary obligor on the debt instrument, or
debt issued by third-parties that is linked to the performance or payments of
debt instruments issued by the owner or a related person, are not "permitted
assets. Finally, debt that is traded on an established securities market and
subject to a foreign withholding tax is not a "permitted asset."
Permitted hedges include interest rate or foreign currency notional
principal contracts, letters of credit, insurance, guarantees of payment
default and similar instruments. Such hedges must be reasonably required to
guarantee or hedge against the FASIT's risks associated with being the
obligor on interests issued by the FASIT. The FASIT proposed regulations do
not include a list of specified permitted hedges or guarantees, but rather
focus on the intended function of a hedge and permit such a contract to
offset the following risk factors:
- fluctuations in market interest rates;
- fluctuations in currency exchange rates;
- the credit quality of, or default on, the FASIT's assets or
debt instruments underlying the FASIT's assets; and
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- the receipt of payments on the FASIT's assets earlier or later
than originally anticipated.
The FASIT proposed regulations prohibit a hedge or guarantee from
referencing assets other than permitted assets, indices, economic indicators or
financial averages that are not both widely disseminated and designed to
correlate closely with the changes in one or more of the risk factors described
above. However, under the FASIT proposed regulations, FASIT owners will be able
to hold hedges or guarantees inside a FASIT that do not relate to the already
issued regular interests, or to assets the FASIT already holds, if the FASIT
expects to issue regular interests, or expects to hold assets, that are related
to the hedge or guarantee in question. The proposed regulations also place
certain restrictions on hedges and guarantees entered into with the holder of
the FASIT ownership interest or a related party.
Property acquired in connection with the default or imminent default of
a debt instrument held by a FASIT may qualify both as foreclosure property and
as a type of permitted asset under the FASIT provisions. It will in general
continue to qualify as foreclosure property during a grace period that runs
until the end of the third taxable year beginning after the taxable year in
which the FASIT acquires the foreclosure property. Under the FASIT proposed
regulations, if the foreclosure property also would qualify as another type of
permitted asset, it may be held beyond the close of that grace period. However,
at the close of the grace period, gain, if any, on the property must be
recognized as if the property had been contributed by the owner of the FASIT on
that date. In addition, the FASIT proposed regulations provide that, after the
close of the grace period, disposition of the foreclosure property is
potentially subject to a 100% prohibited transactions tax (described below)
without the benefit of an exception to this tax applicable to sales of
foreclosure property.
PERMITTED INTERESTS. In addition to the foregoing, interests in a FASIT also
must meet certain requirements. All of the interests in a FASIT must be either
of the following:
- a single class of ownership interest, or
- one or more classes of regular interests.
An ownership interest is an interest in a FASIT other than a regular interest
that is issued on the startup day, is designated an ownership interest and is
held by a single, fully-taxable, domestic corporation. A regular interest is an
interest in a FASIT that is issued on or after the startup day with fixed terms,
is designated as a regular interest, and--
1. unconditionally entitles the holder to receive a specified
principal amount (or other similar amount),
2. provides that interest payments (or other similar amounts), if
any, at or before maturity either are payable based on a fixed
rate or a qualified variable rate,
3. has a stated maturity of not longer than 30 years,
4. has an issue price not greater than 125% of its stated
principal amount, and
5. has a yield to maturity not greater than 5 percentage points
higher than the applicable Federal rate (as defined in Section
1274(d) of the Code) for Treasury obligations of a similar
maturity.
A regular interest that is described in the preceding sentence except that it
fails to meet one or more of requirements 1, 4 or 5, is a "high-yield" regular
interest. Further, to be a high-yield regular interest, an
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interest that fails requirement 2 must consist of a "specified portion" of
the interest payments on the permitted assets, determined by reference to the
rules related to permitted rates for REMIC regular interests that have no, or
a disproportionately small, amount of principal. An interest in a FASIT may
be treated as a regular interest even if payments of principal with respect
to that interest are subordinated to payments on other regular interests or
the ownership interest in the FASIT, and are contingent on--
- the absence of defaults or delinquencies on permitted assets,
- lower than reasonably expected returns on permitted assets,
- unanticipated expenses incurred by the FASIT, or
- prepayment interest shortfalls.
CESSATION OF FASIT. If an entity fails to comply with one or more of
the ongoing requirements of the Code for status as a FASIT during any taxable
year, the Code provides that the entity or applicable portion thereof will not
be treated as a FASIT thereafter. In this event, any entity that holds mortgage
loans and is the obligor with respect to debt obligations with two or more
maturities will be classified, presumably, as a taxable mortgage pool under
general federal income tax principles , and the FASIT bonds may be treated as
equity interests therein. Under the FASIT proposed regulations, the underlying
arrangement generally cannot reelect FASIT status and any election a FASIT owner
made (other than the FASIT election) and any method of accounting adopted with
respect to the FASIT assets, binds the underlying arrangement as if the
underlying arrangement itself had made those elections or adopted that method.
In the case of an inadvertent cessation of a FASIT, under the FASIT proposed
regulations, the Commissioner of the IRS may grant relief from the adverse
consequences of that cessation, subject to such adjustments as the Commissioner
may require the FASIT and all holders of interests in the FASIT to accept with
respect to the period in which the FASIT failed to qualify as such.
Under the proposed FASIT regulation, apart from failure to qualify as a
FASIT, a FASIT may not revoke its election or cease to be a FASIT without the
consent of the Commissioner of the IRS.
Regular interest holders, in the case of cessation of a FASIT, are
treated as exchanging their FASIT regular interests for new interests in the
underlying arrangement. The FASIT proposed regulations would classify the new
interests under general principles of Federal income tax law, for example, as
interests in debt instruments, as interest in a partnership or interests in an
entity subject to corporate taxation, depending on what the classification of
those interests would have been in the absence of a FASIT election. On the
deemed receipt of that new interest, under the FASIT proposed regulations, you
would be required to mark the new interests to market and to recognize gain, but
would not be permitted to recognize loss, as though the old interest had been
sold for an amount equal to the fair market value of the new interest. Your
basis in the new interest deemed received in the underlying arrangement would
equal your basis in the FASIT regular interest exchanged for it, increased by
any gain you recognized on the deemed exchange.
TAXATION OF FASIT BONDS. The FASIT bonds generally will be treated for
federal income tax purposes as newly-originated debt instruments. In general,
subject to the discussion below concerning "high-yield interests," interest,
original issue discount ("OID") and market discount on a FASIT bond will be
treated as ordinary income to the holder of that certificate, and principal
payments (other than principal payments that do not exceed accrued market
discount) on a FASIT bond will be treated as a return of capital to the extent
of the holder's basis allocable thereto. You must use the accrual method of
accounting with respect to FASIT bonds, regardless of the method of accounting
you otherwise use.
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Except as set forth in the applicable prospectus supplement and in
the immediately following discussion concerning "high-yield interests," the
discussions above under the headings "--REMICs--Taxation of Owners of REMIC
Regular Bonds--Original Issue Discount," "--Market Discount," "--Premium,"
and "--Realized Losses" will apply to the FASIT bonds. The discussion under
the headings "--REMICs--Sales of REMIC Bonds" will also apply to the FASIT
bonds, except that the treatment of a portion of the gain on a REMIC regular
interest as ordinary income to the extent the yield thereon did not exceed
110% of the applicable Federal rate will not apply.
HIGH YIELD INTERESTS; ANTI-AVOIDANCE EXCISE TAXES ON TIERED
ARRANGEMENTS. The taxable income, and the alternative minimum taxable income, of
any holder of a high-yield interest may not be less than the taxable income from
all high-yield interests and FASIT ownership interests that it holds, together
with any "excess inclusions" with respect to REMIC residual interests that it
owns.
High yield interests may only be held by fully taxable, domestic C
corporations or another FASIT. Any attempted transfer of a high-yield
interest to any other type of taxpayer will be disregarded, and the
transferor will be required to include in its gross income the amount of
income attributable to the high-yield interest notwithstanding its attempted
transfer. The related Governing Documents will contain provisions and
procedures designed to assure that, in general, only domestic C corporations
or other FASITs may acquire high-yield interests. There is an exception
allowing non-corporate taxpayers that hold high-yield interest exclusively
for sale to customers in the ordinary course of business to do so, subject to
an excise tax imposed at the corporate income tax rate if the holder ceases
to be a dealer or begins to hold the high-yield interest for investment.
Unless otherwise specified in the prospectus supplement, the related
Governing Documents will also allow such holders to hold high-yield interests.
To prevent the avoidance of these rules through tiered arrangements, an
excise tax is imposed on any pass-through entity, such as a partnership, REIT,
regulated investment company, grantor trust or, under the FASIT proposed
regulations, REMIC, that holds any FASIT regular interest, whether or not that
FASIT regular interest is a high-yield interest, and issues a debt or equity
interest that is (i) supported by that FASIT regular interest and (ii) has a
yield, higher than the yield on that FASIT regular interest, that would cause
such debt or equity interest to be a high yield interest if it had been issued
by a FASIT. Under the statute, the amount of that tax, which is imposed on the
pass-through entity, is the highest corporate income tax rate applied to the
income of the holder of the debt or equity interest properly attributable to the
FASIT regular interest that supports it. The proposed FASIT regulations provide
that the tax is an excise tax that must be paid on or before the due date of the
pass-through entity's tax return for the taxable year in which it issues such a
debt or equity interest. This appears to contemplate a one-time payment on all
future income from the FASIT regular interest that is projected to be properly
attributable to the debt or equity interest it supports. It is not clear how
this amount is to be determined.
PROHIBITED TRANSACTIONS AND OTHER TAXES. Income or gain from certain
"prohibited transactions" by a FASIT are taxable to the holder of the ownership
interest in that FASIT at a 100% rate. Prohibited transactions generally
include, under the FASIT statutory provisions and proposed FASIT regulations:
- the receipt of income from other than permitted assets;
- the receipt of compensation for services;
- the receipt of any income derived from a loan originated by
the FASIT; or
- the disposition of a permitted asset (including disposition
pursuant to a cessation of FASIT status) other than for--
1. foreclosure, default, or imminent default of a
qualified mortgage,
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2. bankruptcy or insolvency of the FASIT,
3. substitution for another permitted debt instrument or
distribution of the debt instrument to the holder of
the ownership interest to reduce
overcollateralization, but only if a principal
purpose of acquiring the debt instrument which is
disposed of was not the recognition of gain (or the
reduction of a loss) on the withdrawn asset as a
result of an increase in the market value of the
asset after its acquisition by the FASIT, or
4. the retirement of a class of FASIT regular interests.
The proposed regulations presume that certain transactions will be loan
originations, but also provide certain safe harbors for loans originated by the
FASIT. The proposed safe harbors apply in the following circumstances:
- if the FASIT acquires the loan from an established securities
market as described in Treasury regulation Sections
1.1273-2(f)(2) through (4),
- if the FASIT acquires the loan more than one year after the
loan was issued,
- if the FASIT acquires the loan from a person that regularly
originates similar loans in the ordinary course of business,
- if the FASIT receives any new loan from the same obligor in
exchange for the obligor's original loan in the context of a
work out, and
- when the FASIT makes a loan pursuant to a contract or
agreement in the nature of a line of credit the FASIT is
permitted to hold.
The FASIT provisions generally exclude from prohibited transactions the
substitution of a debt instruments for another debt instrument which is a
permitted asset and the distribution of a debt instrument contributed by the
holder of the ownership interest to that holder in order to reduce
over-collateralization of the FASIT. In addition, the FASIT proposed regulations
also exclude transactions involving the disposition of hedges from the category
of prohibited transactions. However, the proposed regulations deem a
distribution of debt to be carried out principally to recognize gain, and to be
a prohibited transaction, if the owner (or related person) sells the substituted
or distributed debt instrument at a gain within 180 days of the substitution or
distribution. It is unclear the extent to which tax on those transactions could
be collected from the FASIT directly under the applicable statutes rather than
from the holder of the ownership interest. However, under the related Governing
Documents, any such prohibited transactions tax that is not payable by a party
thereto as a result of its own actions will be paid by the FASIT. It is not
anticipated that the FASIT will engage in any prohibited transactions.
The Clinton Administration recently proposed in its budget certain
amendments to the FASIT provisions designed to ensure that income taxes imposed
on the holder of a FASIT ownership interest are paid when due. Such provisions
would impose secondary liability on the FASIT itself for any tax required to be
paid with respect to the income allocated to the FASIT ownership interest if
that holder does not pay its taxes on that income when they are due. If adopted,
the amendments would be effective for FASITs created after the date of
enactment. It is not possible to predict whether the legislation will be adopted
or, if so, in what form.
TAXATION OF CERTAIN FOREIGN INVESTORS. The federal income tax treatment
of non-U.S. persons who own FASIT bonds that are not "high-yield interests" is
the same as that described above under "--REMICs--Foreign Investors in REMIC
Bonds." However, if you are a non-U.S. person, you should
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note that under the FASIT proposed regulations certain interest paid or accrued
on a debt instrument held by the FASIT, if you hold a regular interest (either
directly or indirectly) in the FASIT, is treated as being received by you
directly from a conduit debtor for purposes of Subtitle A of the Code and the
regulations thereunder if:
- you are a 10% shareholder of an obligor on a debt instrument
held by the FASIT;
- you are a controlled foreign corporation to which an obligor
on a debt instrument held by the FASIT is a related person; or
- you are related to such an obligor that is a corporation or
partnership, in general, having common ownership to a greater
than 50% extent.
If you believe you may be in one of these categories, you should
consult with your tax advisors, in particular concerning the possible imposition
of United States withholding taxes at a 30% rate on interest paid with respect
to a FASIT regular interest under these circumstances.
High-yield FASIT bonds may not be sold to or beneficially owned by
non-U.S. persons. Any such purported transfer will be null and void and, upon
the related bond trustee's discovery of any purported transfer in violation
of this requirement, the last preceding owner of those FASIT bonds will be
restored to ownership thereof as completely as possible. The last preceding
owner will, in any event, be taxable on all income with respect to those
FASIT bonds for federal income tax purposes. The related Governing Documents
will provide that, as a condition to transfer of a high-yield FASIT bonds,
the proposed transferee must furnish an affidavit as to its status as a U.S.
person and otherwise as a permitted transferee.
BACKUP WITHHOLDING. Payments made on the FASIT bonds, and proceeds
from the sale of the FASIT bonds to or through certain brokers, may be subject
to a "backup" withholding tax under code Section 3406 of the Code in the same
manner as described under "--REMICs--Backup Withholding with Respect to
REMIC Bonds" above.
REPORTING REQUIREMENTS. Reports of accrued interest, OID, if any, and
information necessary to compute the accrual of any market discount on the FASIT
bonds will be made annually to the IRS and to investors in the same manner as
described above under "--REMICs--Reporting and Other Administrative Matters"
above.
DEBT AND NOTIONAL PRINCIPAL CONTRACTS
GENERAL. If the related Governing Documents do not provide for any
person or entity to make a REMIC or FASIT election with respect to a series of
offered bonds, then our counsel will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the Governing
Documents, and subject to certain assumptions set forth in the opinion, those
bonds will be characterized as indebtedness of, or notional principal
contracts issued by, the related issuer, and not as an ownership interest in
the related issuer or related trust estate.
TAXATION OF ISSUERS THAT ARE TREATED AS TAXABLE MORTGAGE POOLS. Taxable
mortgage pool, or "TMP," rules enacted as part of the Tax Reform Act of 1986
generally treat as taxable corporations certain arrangements in which debt
obligations are directly or indirectly secured or backed by real estate mortgage
loans. An entity (or a portion of an entity) is classified as a TMP if--
- substantially all of its assets are debt obligations and more
than 50 percent of those debt obligations are real estate
mortgage loans or interests therein,
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- the entity is the obligor under debt obligations with two or
more maturities, and
- the timing of payments on the debt obligations issued by that
entity bears a relationship to the timing of payments on the
financial assets securing or backing those obligations.
A group of mortgage loans or similar assets held by an entity can be treated as
a separate TMP if those loans or assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
One or more of the issuers of the offered bonds as to which no REMIC
or FASIT election is made may be treated as TMPs for federal income tax
purposes. In general, a TMP is treated for federal income tax purposes as a
corporation not includible with any other corporation in filing a
consolidated return. Subject to the remainder of this discussion, corporate
tax will be imposed on such an issuer's taxable income. That taxable income
will consist of the interest, discount and gain accrued or realized with
respect to the entity's mortgage loans and other assets, reduced by the
interest and original issue discount expense, servicing fees, bad debt losses
and other expenses or losses accrued or realized by the issuer. The corporate
income taxes imposed on such an issuer will reduce the cash flow available to
make payments on the offered bonds. In addition, if such an issuer has gross
income not accompanied by current cash (such as accrued discount, negative
amortization or post-default interest) or is obligated to use income received
to make non-deductible payments (such as principal payments on the offered
bonds), the need for cash to pay taxes could require a liquidation of part or
all of the collateral and, possibly, a retirement of offered bonds at a time
earlier than anticipated. It is not anticipated that any issuer will hold
assets or issue bonds having characteristics that would, in the absence of
default on its underlying assets, require cash flow otherwise intended to be
used to make bond payments to be instead used to make tax payments.
If an issuer is a REIT, or a wholly-owned subsidiary of a REIT that is
treated as a "qualified REIT subsidiary," or "QRS," under the Code,
classification of the issuer as a TMP will not cause it to be subject to
corporate income taxation. Rather, the shareholder of the issuer, or of the REIT
that wholly owns the issuer, will be required to treat a portion of their
dividends from the REIT as "excess inclusions," generally in an amount equal to
the amount that would be so treated if the issuer were a REMIC and the REIT held
the residual interest in that REMIC.
It is therefore possible that certain issuers as to which no REMIC
or FASIT election is made may be structured to qualify as, and elect to be
treated as, REITs or QRSs for federal income tax purposes. In that event, the
related prospectus supplement will describe the consequences of that
classification and of the failure of such an issuer to be, or to maintain its
status as, a REIT or a QRS. The related prospectus supplement will also
describe the conditions to which any such issuer has agreed relating to the
maintenance of its status as a REIT or a QRS, and the consequences under the
governing documents if it does not do so. No assurance beyond that contained
in the governing documents will be given that an issuer that initially is
treated as a REIT or a QRS will continue to qualify as such. If it failed to
continue so to qualify, it would be subject to the general rules with respect
to TMPs described above.
CHARACTERIZATION OF INVESTMENTS IN ISSUER INDEBTEDNESS AND NOTIONAL
PRINCIPAL CONTRACTS. If offered bonds are characterized as indebtedness of,
or notional principal contracts issued by, the related issuer, then:
- those bonds will not constitute "loans... secured by an interest in
real property" within the meaning of Section 7701(a)(19)(C)(v) of the
Code when held by a domestic building and loan association;
- those bonds will not constitute "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code when held by a REIT;
- interest on those bonds (or, if they are characterized as notional
principal contracts, payments received on those bonds) will not be
considered "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code; and
- those bonds will not be "qualified mortgages" within the meaning of
Section 860(G)(a)(3) of the Code.
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TAXATION OF HOLDERS OF ISSUER INDEBTEDNESS.
INTEREST AND ORIGINAL ISSUE DISCOUNT. Certain offered bonds that are
characterized as indebtedness of the related issuer, may be issued with
"original issue discount" within the meaning of Section 1273(a) of the Code.
If so, you will be taxed with respect to any such bond similarly to how you
would be taxed with respect to REMIC regular bonds. See "--REMICs--Taxation
of Owners of REMIC Regular Bonds--Original Issue Discount."
The Code requires, in computing the accrual of original issue
discount on the offered bonds, that a reasonable prepayment assumption be
used concerning the rate at which borrowers will prepay the mortgage loans
securing or supporting such non-REMIC bonds. Further, adjustments must be
made in the accrual of that original issue discount to reflect differences
between the prepayment rate actually experienced and the assumed prepayment
rate. The prepayment assumption is to be determined in a manner prescribed in
Treasury regulations that the Treasury Department has not yet issued. The
Committee Report indicates that the regulation should provide that the
prepayment assumption is determined once, at initial issuance, and must be
the same as that used in pricing. The prepayment assumption used in reporting
original issue discount for each series of Bonds that do not contemplate the
substitution, acquisition and release of mortgage collateral, and the
consequent changes in the composition of the collateral over time, will be
consistent with this standard and will be disclosed in the related prospectus
supplement. However, neither we nor any other person will make any
representation that the mortgage loans will in fact prepay at a rate
conforming to the prepayment assumption or at any other rate, or that the IRS
will not challenge on audit the prepayment assumption used.
Neither regulations nor the Committee Report adequately address
securities whose interest rates, average lives and anticipated prepayments may
change as a result of the substitution, acquisition or release of collateral, as
may be the case with certain series of offered bonds. However, each issuer will
determine the accrual of original issue discount with respect to any such series
on its own tax returns, and will cause federal income tax information reporting
with respect to any such original issue discount, to be computed in accordance
with the principles of Section 1272(a)(6) of the Code, as amplified by the
Committee Report. The precise method of that accrual will depend on the
characteristics of the mortgage loan collateral, the criteria for substitution,
acquisition or release of the mortgage loan collateral and the terms of the
particular series of offered bonds, and will be described in the related
prospectus supplement.
MARKET DISCOUNT. An offered bond that is characterized as
indebtedness of the related issuer, may be purchased with market discount.
You will be considered to have purchased a non-REMIC bond at a market
discount, if--
- in the case of a bond issued without original issue
discount, you purchased the bond at a purchase price less
than its remaining stated principal amount, or
- in the case of a bond issued with original issue discount,
you purchased the bond at a purchase price less than its
adjusted issue price.
If you purchase an offered bond with more than a DE MINIMIS amount of market
discount, you will recognize gain upon receipt of each payment representing
stated redemption price. In particular, under Section 1276 of the Code, you
generally will be required to allocate the portion of each payment
representing some or all of the stated redemption price first to accrued
market discount not previously included in income. You must recognize
ordinary income to that extent. You may elect to include market
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discount in income currently as it accrues rather than including it on a
deferred basis in accordance with the foregoing. If made, this election will
apply to all market discount bonds acquired by you on or after the first day of
the first taxable year to which this election applies.
Treasury regulations also permit you to elect to accrue all interest
and discount, including DE MINIMIS market or original issue discount, in
income as interest, and to amortize premium, based on a constant yield
method. If you make this election with respect to an offered bond with market
discount, you would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that you acquire during the taxable year of the election or
thereafter, and possibly previously acquired instruments. Similarly, if you
make this election for an offered bond that is acquired at a premium, you
would be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that you own
or acquire. See "--Debt and Notional Principal Contracts--Taxation of Holders
of Issuer Indebtedness--Premium" below.
Each of the elections described above to accrue interest and
discount, and to amortize premium, with respect to an offered bond on a
constant yield method or as interest would be irrevocable, except with the
approval of the IRS.
However, market discount with respect to an offered bond will be
considered to be DE MINIMIS for purposes of Section 1276 of the Code if the
market discount is less than 0.25% of the remaining stated redemption price
of the bond multiplied by the number of complete years to maturity remaining
after the date of its purchase. In interpreting a similar rule with respect
to original issue discount on obligations payable in installments, the
Treasury regulations refer to the weighted average maturity of obligations.
It is likely that the same rule will be applied with respect to market
discount, presumably taking into account the prepayment assumption. If market
discount is treated as DE MINIMIS under this rule, it appears that the actual
discount would be treated in a manner similar to original issue discount of a
DE MINIMIS amount. See "--Debt and Notional Principal Contracts--Taxation of
Holders of Issuer Indebtedness--Interest and Original Issue Discount" above.
Such treatment would result in discount being included in income at a slower
rate than discount would be required to be included in income using the
method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period, you may accrue market discount on an offered bond
held by you, at your option:
- on the basis of a constant yield method,
- in the case of a bond issued without original issue discount,
in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual
period bears to the total amount of stated interest remaining
to be paid on the bond as of the beginning of the accrual
period, or
- in the case of a bond issued with original issue discount, in
an amount that bears the same ratio to the total remaining
market discount as the original issue discount accrued in the
accrual period bears to the total amount of original issue
discount remaining on the offered bond at the beginning of the
accrual period.
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The prepayment assumption that would be used in calculating the accrual of
original issue discount is also used in calculating the accrual of market
discount.
To the extent that your bonds provide for monthly or other periodic
payments throughout their term, the effect of these rules may be to require
market discount to be includible in income at a rate that is not significantly
slower than the rate at which that discount would accrue if it were original
issue discount. Moreover, in any event you generally will be required to treat a
portion of any gain on the sale or exchange of the bond as ordinary income to
the extent of the market discount accrued to the date of disposition under one
of the foregoing methods, less any accrued market discount previously reported
as ordinary income.
Further, Section 1277 of the Code may require you to defer a portion
of your interest deductions for the taxable year attributable to any
indebtedness incurred or continued to purchase or carry an offered bond
purchased with market discount. For these purposes, the DE MINIMIS rule
referred to above applies. Any deferred interest expense would not exceed the
market discount that accrues during the related taxable year and is, in
general, allowed as a deduction not later than the year in which the related
market discount is includible in income. If you have elected, however, to
include market discount in income currently as it accrues on all market
discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM. An offered bond that is characterized as indebtedness of
the related issuer, may be purchased at a premium. An offered bond purchased
at a cost, excluding any portion of the cost attributable to accrued
qualified stated interest, greater than its remaining stated redemption price
will be considered to be purchased at a premium. You may elect under Section
171 of the Code to amortize that premium under the constant yield method over
the remaining term of the bond. If made, this election will apply to all debt
instruments having amortizable bond premium that you own or subsequently
acquire. You should treat amortizable premium as an offset to interest income
on the related bond, rather than as a separate interest deduction. The
Treasury regulations also permit you to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating you as having made the election to amortize premium generally. See
"--Debt and Notional Principal Contracts--Taxation of Holders of Issuer
Indebtedness--Market Discount" above.
The Committee Report states that the same rules that apply to
accrual of market discount and requires the use of a prepayment assumption in
accruing market discount with respect to the offered bonds without regard to
whether those bonds have original issue discount, will also apply in
amortizing bond premium under Section 171 of the Code.
REALIZED LOSSES. Under Section 166 of the Code, if you are a
corporate holder of a bond that is characterized as indebtedness of the
related issuer, or if you are a noncorporate holder of such a bond and you
acquired the bond in connection with a trade or business, you should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which your bond becomes wholly or partially worthless as the result
of one or more realized losses on the related mortgage loans. However, if you
are a noncorporate holder and you did not acquire the bond in connection with
a trade or business, it appears that--
- you will not be entitled to deduct a loss under the Code until
your bond becomes wholly worthless, and
- the loss will be characterized as a short-term capital loss.
You must accrue interest and original issue discount with respect to
your bond, without giving effect to any reductions in payments
attributable to defaults or delinquencies on the related mortgage
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loans, until it can be established that any reduction ultimately will not be
recoverable. As a result, the amount of taxable income you report in any period
could exceed the amount of economic income actually realized by you in that
period. You should be able to recognize a loss or reduction in income
attributable to previously accrued and included income that, as the result of a
realized loss, ultimately will not be realized. However, the law is unclear with
respect to the timing and character of this loss or reduction in income.
TAXATION OF HOLDERS OF NOTIONAL PRINCIPAL CONTRACTS. A notional
principal contract is defined for federal income tax purposes as a financial
instrument that provides for the payments of amounts by one party to another
at specified intervals calculated by reference to a specified index applied
to a notional principal amount in exchange for either (i) a promise to pay
similar amounts or (ii) specified consideration such as, for example, a cash
payment made at the time that the contract is entered into. All notional
principal contracts offered hereunder will be issued in exchange for cash.
There are two types of payments with respect to notional principal
contracts under the regulations promulgated under Section 446 of the Code
(which we will refer to in the remainder of this discussion as the "Section
446 regulations"): "periodic payments" and "non-periodic payments." "Periodic
payments" will include any payments that are based on an interest rate
applied to a notional principal amount that are made by the issuer to you at
intervals of one year or less throughout the term of the notional principal
contract. Your payment to the issuer for the notional principal contract at
the time of its issuance (sometimes referred to as an "upfront payment") will
be treated as a "non-periodic payment."
Under the Section 446 regulations, periodic payments should be
included in your income as ordinary income at the times they accrue,
regardless of your regular method of accounting for federal income tax
purposes. Under the Section 446 regulations, you should be able to deduct
against that income an allocable portion of the non-periodic payment you made
to the issuer at the time the notional principal contract was issued to you.
Generally, the manner in which deductions are claimed with respect to a non-
periodic payment must reflect the economic substance of the notional
principal contract.
The notional principal contracts offered under this prospectus will
have notional principal amounts based on the underlying mortgage loans and
related assets of the issuer or on the principal amounts of one or more
classes of bonds of the same series. The amount and timing of payments on
those notional principal contracts will accordingly depend on the rate at
which the mortgage loans and related assets of the issuer are repaid or
retired, either directly or as a result of principal payments being made on
the relevant bonds of the same series due to those repayments or retirements.
That is, any offered notional principal contract will have characteristics
similar or identical to those of instruments that are covered by Section
1272(a)(6) of the Code. The rules under Section 1272(a)(6) of the Code are
thought to reflect the economic substance of those instruments.
The Section 446 regulations are not clear as to the reporting of net
income or expense with respect to offered notional principal contracts. For
federal income tax information reporting purposes, and for purposes of its
own tax returns, in the absence of further legislative, administrative or
judicial clarification to the contrary and unless otherwise disclosed in the
related prospectus supplement, each issuer will report net income or loss
with respect to notional principal contracts based on the same rules that
apply with respect to REMIC regular bonds that have no, or a nominal,
principal amount. One consequence of doing so may be that any net loss with
respect to a notional principal contract might not be able to be recognized
currently but rather must be used to offset future net income, if any, with
respect to that notional principal contract. See the last paragraph of
"--REMICs--Taxation of Owners of REMIC Regular Bonds--Original Issue
Discount."
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There is no assurance that the IRS will agree with the method
proposed to be used for federal income tax information reporting purposes by
issuers of notional principal contracts. In the event any challenge to that
method by the IRS were successful, it could be applied with retroactive
effect and could be detrimental to you if an alternative method accelerated
the recognition of taxable income, or deferred the recognition of losses,
attributable to an offered notional principal contract.
SALES OF BONDS CHARACTERIZED AS INDEBTEDNESS OF, OR NOTIONAL
PRINCIPAL CONTRACTS ISSUED BY, THE RELATED ISSUER. If you sell a bond, that
is characterized as indebtedness of, or a notional principal contract issued
by, the related issuer, you will recognize gain or loss equal to the
difference between the amount realized on the sale and your adjusted basis in
the bond. Your adjusted basis in such a bond generally will equal--
- the cost of the bond to you, increased by
- income reported by you with respect to the bond, including
original issue discount and market discount income, and
reduced, but not below zero, by
- any amortized premium or non-periodic payment on the
bond, and any payments on the bond received by you.
Except as described below, any gain or loss from your sale of such a bond
will be capital gain or loss, provided you hold the bond as a capital asset
within the meaning of Section 1221 of the Code, which is generally property
held for investment.
As of the date of this prospectus, the Code provides for lower rates as
to long-term capital gains than those applicable to the short-term capital gains
and ordinary income realized or received by individuals. No such rate
differential exists for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss remains relevant for other
purposes.
If you purchase an offered bond at a market discount, gain
recognized on your sale of that bond will be taxable as ordinary income in an
amount not exceeding the portion of that discount that accrued during the
period that the bond was held by you, reduced by any market discount included
in income under the rules described above under "--Debt and Notional
Principal Contracts--Taxation of Holders of Issuer Indebtedness--Market
Discount" and "--Debt and Notional Principal Contracts--Taxation of Holders
of Issuer Indebtedness--Premium."
Gain from the sale of an offered bond that might otherwise be
capital gain may be treated as ordinary income to the extent that the bond is
held as part of a "conversion transaction" within the meaning of Section 1258
of the Code. A conversion transaction generally is one in which the taxpayer
has taken two or more positions in the same or similar property that reduce
or eliminate market risk, if substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in the
transaction. The amount of gain realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of
the appropriate "applicable Federal rate" at the time the taxpayer enters
into the conversion transaction, subject to appropriate reduction for prior
inclusion of interest and other ordinary income items from the transaction.
Finally, a you may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the relevant taxable year. This
election would be done for purposes of the rule that limits the deduction of
interest on indebtedness incurred to purchase or carry property held for
investment to your net investment income.
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BACKUP WITHHOLDING AND INFORMATION REPORTING. Payments of interest
and principal on, as well as payments of proceeds from the sale of, offered
bonds that are characterized as indebtedness of, or notional principal
contracts issued by, the related issuer may be subject to the "backup
withholding tax" under Section 3406 of the Code at a rate of 31% if
recipients of those payments--
- fail to furnish to the payor taxpayer identification number in
the manner required, or
- otherwise fail to establish an exemption from such tax.
Backup withholding is not an additional tax. Rather, any amounts
withheld from a payment to a recipient under the backup withholding rules are
allowed as a refund or credit against the recipient's U.S. Federal Income tax,
provided that the required information is furnished to the IRS. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
The related bond trustee, the related tax administrator or another
specified party on behalf of the related issuer will report to bondholders and
to the IRS for each calendar year the amount of any "reportable payments" during
that year and the amount of tax withheld, if any, with respect to payments on
the offered bonds.
TAX TREATMENT OF FOREIGN INVESTORS. If an offered bond is
characterized as indebtedness of the related issuer, then interest paid on
that bond to a nonresident alien individual, foreign partnership or foreign
corporation that has no connection with the United States other than holding
bonds will normally qualify as portfolio interest and will be exempt from
federal income tax, except where:
- the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in us or the
related issuer or, possibly, in a borrower on a related
mortgage loan, or
- the recipient is a controlled foreign corporation to which we
or the related issuer or, possibly, a borrower on a related
mortgage loan is a related person.
Upon receipt of appropriate ownership statements, the related issuer
and bond trustee normally will be relieved of obligations to withhold tax from
interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the related issuer
or bond trustee to withhold at a 30% rate (unless such rate were reduced or
eliminated by an applicable tax treaty) on, among other things, interest and
other fixed or determinable, annual or periodic income paid to nonresidents.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences concerning the offered bonds. State tax law may
differ substantially from the corresponding federal law, and the discussion
above does not purport to describe any aspect of the tax laws of any state or
other jurisdiction. Therefore, we recommend that prospective investors consult
their tax advisors with respect to the various tax consequences of investments
in the offered bonds.
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ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Internal Revenue Code of 1986 impose various requirements
on--
- employee benefit plans, and on certain other retirement plans,
arrangements and accounts, that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the
Internal Revenue Code of 1986 ("ERISA Plans"), and
- persons that are fiduciaries with respect to ERISA Plans
("Plan Fiduciaries"),
in connection with the investment of the assets of an ERISA Plan ("Plan
Assets"). For purposes of this discussion, ERISA Plans may include individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts, including as applicable, insurance company general
accounts, in which other ERISA Plans are invested.
Governmental plans and, if they have not made an election under Section
410(d) of the Internal Revenue Code of 1986, church plans are not subject to
ERISA requirements. Accordingly, assets of those plans may be invested in the
offered bonds without regard to the ERISA considerations described below,
subject to the provisions of other applicable federal and state law. Any such
plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Internal Revenue Code of 1986, however, is subject to the
prohibited transaction rules in Section 503 of that Code.
ERISA imposes certain general fiduciary requirements on Plan
Fiduciaries that are investing Plan Assets, including--
- investment prudence and diversification, and
- compliance with the investing ERISA Plan's governing the
documents.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code of
1986 also prohibit a broad range of transactions involving Plan Assets and a
Party in Interest, unless a statutory or administrative exemption exists. A
"Party in Interest" is any person that is a "party in interest" within the
meaning of ERISA or a "disqualified person" within the meaning of the Internal
Revenue Code of 1986.
The types of transactions between ERISA Plans and Parties in Interest
that are prohibited include:
- sales, exchanges or leases of property;
- loans or other extensions of credit; and
- the furnishing of goods and services.
Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed under Section 4975 of the
Internal Revenue Code of 1986 or a penalty imposed under Section 502(i) of
ERISA, unless a statutory or administrative exemption is available. In addition,
the persons involved in the prohibited transaction may have to cancel the
transaction and pay an amount to the affected
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ERISA Plan for any losses realized by that ERISA Plan or profits realized by
those persons. In addition, individual retirement accounts involved in the
prohibited transaction may be disqualified which would result in adverse tax
consequences to the owner of the account.
PLAN ASSET REGULATIONS
An ERISA Plan's investment in offered bonds may cause the related
mortgage collateral and other assets of the related trust estate to be deemed
assets of that ERISA Plan if those bonds are characterized as "equity" for
purposes of the regulations of the U.S. Department of Labor (the "Plan Asset
Regulations"). Section 2510.3-101 of the Plan Asset Regulations provides that
when an ERISA Plan acquires an equity interest in an entity, the assets that
ERISA Plan or arrangement include both that equity interest and an undivided
interest in each of the underlying assets of the entity, unless an exception
applies. One such exemption is that the equity participation in the entity by
"benefit plan investors," which include both ERISA Plans and certain employee
benefit plans not subject to ERISA, is not "significant." The equity
participation by benefit plan investors will be "significant" on any date if 25%
or more of the value of any class of equity interests in the entity is held by
benefit plan investors. The percentage owned by benefit plan investors is
determined by excluding the investments of the following persons:
(i) those with discretionary authority or control over the assets
of the entity,
(ii) those who provide investment advice directly or indirectly for
a fee with respect to the assets of the entity, and
(iii) those who are affiliates of the persons described in the
preceding clauses (i) and (ii).
In the case of offered bonds characterized as "equity" for purposes of the Plan
Asset Regulations, investments by the related issuer, bond trustee, master
servicer or special servicer, by any other party with discretionary authority
over the assets of the related trust estate, or by the affiliates of those
persons, will be excluded.
If a class of offered bonds is characterized as "debt" rather than
"equity" for purposes of the Plan Asset Regulations, then the assets of the
related trust estate would not be treated as assets of ERISA Plans that directly
or indirectly purchase those bonds, solely on account of that purchase. In order
to be characterized as "debt" for purposes of the Plan Asset Regulations, an
offered bond--
- must constitute "debt" under applicable state law, and
- must not have any substantial equity features.
A fiduciary of an investing ERISA Plan is any person who--
- has discretionary authority or control over the management or
disposition of the assets of that ERISA Plan, or
- provides investment advice with respect to the assets of that
ERISA Plan for a fee.
If the mortgage collateral and other assets included in the trust estate for a
series of offered bonds are Plan Assets, then any party exercising management or
discretionary control regarding those assets, such as the related bond trustee,
master servicer or special servicer, or affiliates of any of these parties, may
be deemed
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to be a "fiduciary" with respect to the investing ERISA Plan and, therefore,
subject to the fiduciary responsibility provisions of ERISA. In addition, if the
mortgage collateral and other assets included in the trust estate for a series
of offered bonds are Plan Assets, then the operation of that trust estate may
involve prohibited transactions under ERISA or the Internal Revenue Code of
1986. For example, if a borrower under a mortgage loan in that trust estate is a
Party in Interest to an investing ERISA Plan, then the purchase by that ERISA
Plan of offered bonds characterized as "equity" in that trust estate, could be a
prohibited loan between that ERISA Plan and the Party in Interest.
The Plan Asset Regulations provide that where an ERISA Plan purchases a
"guaranteed governmental mortgage pool certificate," the assets of that ERISA
Plan include the certificate but do not include any of the mortgages underlying
the certificate. The Plan Asset Regulations include in the definition of a
"guaranteed governmental mortgage pool certificate" certain certificates issued
and/or guaranteed by FHLMC, GNMA and FNMA, but do not include certificates
issued or guaranteed by FAMC. Accordingly, even if these types of
mortgaged-backed securities, other than the FAMC certificates, were deemed to be
Plan Assets, the underlying mortgages would not be treated as Plan Assets.
Private label mortgage participations, mortgage pass-through certificates, FAMC
certificates or other mortgage-backed securities are not "guaranteed
governmental mortgage pool certificates" within the meaning of the Plan Asset
Regulations.
In addition, the acquisition or holding of offered bonds by or on
behalf of an ERISA Plan could give rise to a prohibited transaction if we or the
related bond trustee, master servicer or special servicer or any related
underwriter, sub-servicer, tax administrator, manager, borrower or obligor under
any credit enhancement mechanism, or certain of their affiliates, is or becomes
a Party in Interest with respect to an investing ERISA Plan.
If you are a Plan Fiduciary, you should consult your counsel and review
the ERISA discussion in the related prospectus supplement before purchasing any
offered bonds.
PROHIBITED TRANSACTION EXEMPTIONS
If you are a Plan Fiduciary, then, in connection with your deciding
whether to purchase any of the offered bonds on behalf of an ERISA Plan, you
should consider the availability of one of the following prohibited transaction
class exemptions issued by the U.S. Department of Labor:
- Prohibited Transaction Class Exemption ("PTCE") 75-1, which
exempts certain transactions involving ERISA Plans and certain
broker-dealers, reporting dealers and banks;
- PTCE 90-1, which exempts certain transactions between
insurance company separate accounts and Parties in Interest;
- PTCE 91-38, which exempts certain transactions between bank
collective investment funds and Parties in Interest;
- PTCE 84-14, which exempts certain transactions effected on
behalf of an ERISA Plan by a "qualified professional asset
manager;"
- PTCE 95-60, which exempts certain transactions between
insurance company general accounts and Parties in Interest;
and
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- PTCE 96-23, which exempts certain transactions effected on
behalf of an ERISA Plan by an "in-house asset manager."
We cannot provide any assurance that any of these class exemptions will
apply with respect to any particular investment by or on behalf of an ERISA Plan
in any class of offered bonds. Furthermore, even if any of them were deemed to
apply, that particular class exemption may not apply to all transactions that
could occur in connection with the investment. The prospectus supplement with
respect to the offered bonds of any series may contain additional information
regarding the availability of other exemptions, with respect to those bonds.
UNDERWRITER'S EXEMPTION
It is expected that Lehman Brothers Inc. will be the sole, lead or
co-lead underwriter in each underwritten offering of bonds made pursuant to this
prospectus. The U.S. Department of Labor issued prohibited transaction exemption
("PTE") 91-14 to a predecessor in interest to Lehman Brothers Inc. Subject to
the satisfaction of certain exemptions set forth therein, PTE 91-14, as amended
(including by PTE 97-34) generally exempts from the application of the
prohibited transaction provisions of ERISA and the Internal Revenue Code of 1986
certain transactions relating to, among other things--
- the servicing and operation of certain mortgage asset pools,
and
- the purchase, sale and holding of certain securities
evidencing interests in those pools that are underwritten by
Lehman Brothers Inc. or any person affiliated with Lehman
Brothers Inc.
PTE 91-14 applies only to offered bonds that are equity interests or
are debt issued by a REMIC or FASIT. The related prospectus supplement will
state whether PTE 91-14 is or may be available with respect to any offered bonds
underwritten by Lehman Brothers Inc.
INSURANCE COMPANY GENERAL ACCOUNTS
The Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides relief from the fiduciary and prohibited
transaction provisions of ERISA and the Internal Revenue Code of 1986 for
transactions involving an insurance company general account. This exemption is
in addition to any exemption that may be available under prohibited transaction
class exemption 95-60 for the purchase and holding of offered bonds by an
insurance company general account.
Pursuant to Section 401(c) of ERISA, the U.S. Department of Labor
issued a final regulation on January 5, 2000, providing guidance for
determining, in cases where insurance policies supported by an insurer's general
account are issued to or for the benefit of an ERISA Plan on or before December
31, 1998, which general account assets are Plan Assets. That regulation
generally provides that, if certain specified requirements are satisfied with
respect to insurance policies issued on or before December 31, 1998, the assets
of an insurance company general account will not be Plan Assets.
Any assets of an insurance company general account which support
insurance policies issued to an ERISA Plan after December 31, 1998, or issued to
an ERISA Plan on or before December 31, 1998 for which the insurance company
does not comply with the requirements set forth in the final regulation under
Section 401(c) of ERISA, may be treated as Plan Assets. In addition, because
Section 401(c) of ERISA and the regulation issued under Section 401(c) of ERISA
do not relate to insurance company separate accounts, separate account assets
are still treated as Plan Assets, invested in the separate account. If you are
an
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insurance company are contemplating the investment of general account assets in
offered bonds, you should consult your legal counsel as to the applicability of
Section 401(c) of ERISA.
CONSULTATION WITH COUNSEL
If you are a Plan Fiduciary which proposes to purchase offered bonds on
behalf of or with assets of an ERISA Plan, account or arrangement, you should
consider your general fiduciary obligations under ERISA and you should consult
with your legal counsel as to the potential applicability of ERISA and the
Internal Revenue Code of 1986 to that investment and the availability of any
prohibited transaction exemption in connection with that investment.
TAX EXEMPT INVESTORS
An ERISA Plan that is exempt from federal income taxation pursuant to
Section 501 of the Internal Revenue Code of 1986 will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" within the meaning of Section 512 of the Internal Revenue Code of 1986.
All "excess inclusions" of a REMIC allocated to a REMIC residual bond held by a
tax-exempt ERISA Plan will be considered "unrelated business taxable income" and
will be subject to federal income tax.
See "Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Residual Bonds--Excess Inclusions" in this prospectus.
LEGAL INVESTMENT
If and to the extent specified in the related prospectus supplement,
the offered bonds of any series may constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
"Mortgage related securities" are legal investments for entities--
- that are created or existing under the laws of the United
States or any state, including the District of Columbia and
Puerto Rico, and
- whose authorized investments are subject to state regulations,
to the same extent that, under applicable law, obligations issued by or
guaranteed as to principal and interest by the United States or any of its
agencies or instrumentalities are legal investments for those entities.
Prior to December 31, 1996, classes of offered bonds would be "mortgage
related securities" for purposes of SMMEA only if they:
- were rated in one of the two highest rating categories by at
least one nationally recognized statistical rating
organization; and
- were secured by, and by their terms provided for payments of
principal in relation to payments (or reasonable projections
of payments) on, loans directly secured by a first lien on a
single parcel of real estate upon which is located a dwelling
or mixed residential and commercial structure, which loans had
been originated by the types of originators specified in
SMMEA.
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Further, under SMMEA as originally enacted, if a state enacted
legislation on or before October 3, 1991 that specifically limited the legal
investment authority of any entities referred to in the preceding paragraph with
respect to "mortgage related securities" under that definition, offered bonds
would constitute legal investments for entities subject to the legislation only
to the extent provided in that legislation.
Effective December 31, 1996, the definition of "mortgage related
securities" was modified to include among the types of loans to which the
securities may relate, loans secured by "one or more parcels of real estate upon
which is located one or more commercial structures." In addition, the related
legislative history states that this expanded definition includes multifamily
loans secured by more than one parcel of real estate upon which is located more
than one structure. Until September 23, 2001, any state may enact legislation
limiting the extent to which "mortgage related securities" under this expanded
definition would constitute legal investments under that state's laws.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows:
- federal savings and loan associations and federal savings
banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of
their assets represented by those securities; and
- federal credit unions may invest in "mortgage related
securities" and national banks may purchase "mortgage related
securities" for their own account without regard to the
limitations generally applicable to investment securities
prescribed in 12 U.S.C. 24 (Seventh),
subject in each case to the regulations that the applicable federal regulatory
authority may prescribe.
Effective December 31, 1996, the Office of the Comptroller of the
Currency (the "OCC") amended 12 C.F.R. Part 1 to authorize national banks to
purchase and sell for their own account, without limitation as to a percentage
of the bank's capital and surplus, but subject to compliance with certain
general standards concerning "safety and soundness" and retention of credit
information in 12 C.F.R. Section 1.5, certain "Type IV securities," which are
defined in 12 C.F.R. Section 1.2(1) to include certain "commercial
mortgage-related securities" and "residential mortgage-related securities." As
defined, "commercial mortgage-related security" and "residential
mortgage-related security" mean, in relevant part, a "mortgage related security"
within the meaning of SMMEA, provided that, in the case of a "commercial
mortgage-related security," it "represents ownership of a promissory note or
certificate of interest or participation that is directly secured by a first
lien on one or more parcels of real estate upon which one or more commercial
structures are located and that is fully secured by interests in a pool of loans
to numerous obligors." In the absence of any rule or administrative
interpretation by the OCC defining the term "numerous obligors," we make no
representation as to whether any class of offered bonds will qualify as
"commercial mortgage-related securities," and thus as "Type IV securities," for
investment by national banks.
The National Credit Union Administration (the "NCUA") has adopted
rules, codified at 12 C.F.R. Part 703, which permit federal credit unions to
invest in "mortgage related securities" under certain limited circumstances,
other than stripped mortgage related securities, residual interests in mortgage
related securities and commercial mortgage related securities, unless the credit
union has obtained written approval from the NCUA to participate in the
"investment pilot program" described in 12 C.F.R. Section 703.140.
The Office of Thrift Supervision (the "OTS") has issued Thrift Bulletin
13a (December 1, 1998), "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities," which thrift
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institutions subject to the jurisdiction of the OTS should consider before
investing in any of the offered bonds.
All depository institutions considering an investment in the offered
bonds should review the "Supervisory Policy Statement on Investment Securities
and End-User Derivatives Activities" (the "1998 Policy Statement") of the
Federal Financial Institutions Examination Council, which has been adopted by
the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation (the "FDIC"), the OCC and the OTS effective May 26, 1998,
and by the NCUA effective October 1, 1998. The 1998 Policy Statement sets forth
general guidelines which depository institutions must follow in managing risks,
including market, credit, liquidity, operational (transaction), and legal risks,
applicable to all securities, including mortgage pass-through securities and
mortgage-derivative products used for investment purposes.
There may be other restrictions on your ability either to purchase
certain classes of offered bonds or to purchase offered bonds representing more
than a specified percentage of your assets. We make no representations as to the
proper characterization of any class of offered bonds for legal investment or
other purposes. Also, we make no representations as to the ability of particular
investors to purchase any class of offered bonds under applicable legal
investment restrictions. These uncertainties may adversely affect the liquidity
of any class of offered bonds. Accordingly, if your investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities, you should consult with your
legal advisor in determining whether and to what extent--
- the offered bonds of any class and series constitute legal
investments or are subject to investment, capital or other
restrictions; and
- if applicable, SMMEA has been overridden in your State.
USE OF PROCEEDS
Unless otherwise specified in the related prospectus supplement, the
net proceeds to be received from the sale of the offered bonds of any series
will be applied by us to the purchase of the related mortgage collateral or will
be used by us to cover expenses related to that purchase and the issuance of
those bonds. We expect to sell the offered bonds from time to time, but the
timing and amount of offerings of those bonds will depend on a number of
factors, including the volume of mortgage assets acquired by us, prevailing
interest rates, availability of funds and general market conditions.
METHOD OF DISTRIBUTION
The bonds offered by this prospectus and the related prospectus
supplements will be offered in series through one or more of the methods
described below. The prospectus supplement prepared for the offered bonds of
each series will describe the method of offering being utilized for those bonds
and will state the net proceeds to us from the sale of those bonds.
We intend that offered bonds will be offered through the following
methods from time to time. We further intend that offerings may be made
concurrently through more than one of these methods or that an offering of the
offered bonds of a particular series may be made through a combination of two or
more of these methods. The methods are as follows:
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1. by negotiated firm commitment or best efforts underwriting and
public offering by one or more underwriters specified in the
related prospectus supplement;
2. by placements by us with institutional investors through
dealers; and
3. by direct placements by us with institutional investors.
In addition, if specified in the related prospectus supplement, the offered
bonds of a series may be offered in whole or in part to the seller of the
mortgage assets that would back those bonds. Furthermore, the related trust
estate for any series of offered bonds may include other securities, the
offering of which was registered pursuant to the registration statement of which
this prospectus is a part.
If underwriters are used in a sale of any offered bonds, other than in
connection with an underwriting on a best efforts basis, the offered bonds will
be acquired by the underwriters for their own account. These bonds may be resold
from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. The
managing underwriter or underwriters with respect to the offer and sale of
offered bonds of a particular series will be described on the cover of the
prospectus supplement relating to the series and the members of the underwriting
syndicate, if any, will be named in the relevant prospectus supplement.
Underwriters may receive compensation from us or from purchasers of the
offered bonds in the form of discounts, concessions or commissions. Underwriters
and dealers participating in the payment of the offered bonds may be deemed to
be underwriters in connection with those bonds. In addition, any discounts or
commissions received by them from us and any profit on the resale of those
offered bonds by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the
sale of the offered bonds of any series will provide that--
- the obligations of the underwriters will be subject to certain
conditions precedent,
- the underwriters will be obligated to purchase all the bonds
if any are purchased, other than in connection with an
underwriting on a best efforts basis, and
- in limited circumstances, we will indemnify the several
underwriters and the underwriters will indemnify us against
certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or will contribute to
payments required to be made in respect of any liabilities.
The prospectus supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of the
offering and any agreements to be entered into between us and purchasers of
offered bonds of that series.
We anticipate that the offered bonds will be sold primarily to
institutional investors. Purchasers of offered bonds, including dealers, may,
depending on the facts and circumstances of the purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended, in
connection with reoffers and sales by them of offered bonds. Holders of offered
bonds should consult with their legal advisors in this regard prior to any
reoffer or sale.
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LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement,
certain legal matters in connection with the bonds of each series, including
certain federal income tax consequences, will be passed upon for us by--
- Sidley & Austin;
- Cadwalader, Wickersham & Taft;
- Skadden, Arps, Slate, Meagher & Flom; or
- Thacher, Proffitt & Wood.
FINANCIAL INFORMATION
A new owner trust may be formed with respect to each series of offered
bonds. None of those owner trusts will engage in any business activities or have
any assets or obligations other than in connection with the issuance of the
related series of offered bonds. Accordingly, no financial statements with
respect to any owner trust will be included in this prospectus or in the related
prospectus supplement. We have determined that our financial statements will not
be material to the offering of any offered bonds.
RATING
It is a condition to the issuance of any class of offered bonds that,
at the time of issuance, at least one nationally recognized statistical rating
organization has rated those bonds in one of its generic rating categories which
signifies investment grade. Typically, the four highest rating categories,
within which there may be sub-categories or gradations indicating relative
standing, signify investment grade.
Ratings on bonds address the likelihood of receipt by the holders of
all payments of interest and/or principal to which they are entitled. These
ratings address the structural, legal and issuer-related aspects associated with
the bonds, the nature of the related mortgage collateral and the credit quality
of any third-party credit enhancer. The rating(s) on a class of offered bonds
will not represent any assessment of--
- whether the price paid for those bonds is fair;
- whether those bonds are a suitable investment for any
particular investor;
- the tax attributes of those bonds, the related issuer or the
related trust estate;
- the yield to maturity or, if they have principal balances, the
average life of those bonds;
- the likelihood or frequency of prepayments of principal on the
mortgage loans securing or underlying the security for those
bonds;
- the degree to which the amount or frequency of prepayments on
the mortgage loans securing or underlying the security for
those bonds might differ from those originally anticipated;
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- whether or to what extent the interest payable on those bonds
may be reduced in connection with interest shortfalls
resulting from the timing of voluntary prepayments;
- the likelihood that any amounts other than interest at the
related mortgage interest rates and principal will be received
with respect to the mortgage loans securing or underlying the
security for those bonds; or
- if those bonds provide solely or primarily for payments of
interest, whether the holders, despite receiving all payments
of interest to which they are entitled, would ultimately
recover their initial investments in those bonds.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED )
$ (APPROXIMATE)
LB COMMERCIAL MORTGAGE TRUST ,
COMMERCIAL MORTGAGE PASS THROUGH CERTIFICATES, SERIES
We, Structured Asset Securities Corporation, have prepared this prospectus
supplement in order to offer the classes of commercial mortgage pass-through
certificates identified in the table below. These certificates are the only
securities offered pursuant to this prospectus supplement. This prospectus
supplement specifically relates to, and is accompanied by, our prospectus dated
. We will not list the offered certificates on any national
securities exchange or any automated quotation system of any registered
securities associations, such as NASDAQ.
The offered certificates will represent interests only in the trust
identified above. They will not represent interests in or obligations of any
other party. The assets of the trust will include a pool of secured loans, the
collateral for which primarily consists of multifamily and commercial real
properties. Those loans will have an "initial mortgage pool balance" of
approximately $ . No governmental agency or instrumentality or
private insurer has insured or guaranteed the offered certificates or any of the
loans that back them.
----------------------------------------
YOU SHOULD FULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE S- IN THIS
PROSPECTUS SUPPLEMENT AND ON PAGE IN THE ACCOMPANYING PROSPECTUS PRIOR TO
INVESTING IN THE OFFERED CERTIFICATES.
---------------------
<TABLE>
<CAPTION>
INITIAL AGGREGATE
PRINCIPAL BALANCE APPROX. % OF PASS-
OFFERED OR NOTIONAL INITIAL MORTGAGE THROUGH ASSUMED FINAL EXPECTED RATINGS
CERTIFICATES AMOUNT(1) POOL BALANCE RATE(3) PAYMENT DATE (4) CUSIP NO. ( ) (5)
- ------------ ----------------- ---------------- -------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Class A-1............
Class A-2............
Class B..............
Class C..............
Class D..............
Class E..............
Class F..............
Class X.............. (2) N/A
</TABLE>
(FOOTNOTES TO TABLE ON NEXT PAGE)
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Lehman Brothers Inc., the "underwriter", will purchase the offered
certificates from us, subject to the satisfaction of various conditions. The
underwriter is offering the offered certificates when, as and if delivered to
and accepted by it, subject to prior sale and subject to its right to reject
orders in whole or in part. The underwriter currently intends to sell the
offered certificates from time to time in negotiated transactions or otherwise
at varying prices to be determined at the time of sale. See "Method of
Distribution" in this prospectus supplement. Our proceeds from the sale of the
offered certificates will equal approximately % of the initial aggregate
principal balance of the offered certificates, plus accrued interest, before
deducting expenses payable by us. We expect to deliver the offered certificates
in book-entry form through the Same-Day Funds Settlement System of the
Depository Trust Company on or about , against payment for those
certificates in immediately funds.
LEHMAN BROTHERS
The date of this prospectus supplement is .
<PAGE>
FOOTNOTES TO THE TABLE ON THE COVER OF THIS PROSPECTUS SUPPLEMENT:
(1) The actual initial aggregate principal balance or notional amount of any
class of offered certificates may be larger or smaller than the aggregate
principal balance or notional amount, as the case may be, shown in the table
on the cover of this prospectus supplement, depending on the actual size of
the initial mortgage pool balance. The initial mortgage pool balance may be
as much as % larger or smaller than the amount set forth on the cover
of this prospectus supplement.
(2) The class "X" certificates will not have principal balances and will not
entitle their holders to any payments of principal. The class "X"
certificates will accrue interest on their respective notional amounts that,
in total, equal the aggregate principal balances outstanding from time to
time of those classes of series " " certificates that do have principal
balances.
(3) The pass-through rate shown in the table on the cover page for the class "X"
certificates is the approximate rate applicable for payments to be made in
. The pass-through rate for that class is variable as described
under "Description of the Offered Certificates--Payments--Calculation of
Pass-Through Rates" in this prospectus supplement.
(4) The table on the cover shows the month and year in which the assumed final
payment date for each class of offered certificates occurs. The "assumed
final payment date" is discussed under "Summary of Prospectus
Supplement--Relevant Dates and Periods" in this prospectus supplement. The
"rated final payment date", which is also discussed under "Summary of
Prospectus Supplement--Relevant Dates and Periods" in this prospectus
supplement, occurs in .
(5) By . See "Ratings" in this prospectus supplement.
------------------------
IMPORTANT NOTICE ABOUT THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT,
THE ACCOMPANYING PROSPECTUS AND THE RELATED REGISTRATION STATEMENT
Information about the offered certificates is contained in two separate
documents, each of which provides summary information in the front part thereof
and more detailed information in the text that follows: (a) this prospectus
supplement, which describes the specific terms of the offered certificates; and
(b) the accompanying prospectus, which provides general information, some of
which may not apply to the offered certificates. You should read both this
prospectus supplement and the accompanying prospectus in full to obtain material
information concerning the offered certificates.
In addition, we have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended, with
respect to the offered certificates. This prospectus supplement and the
accompanying prospectus form a part of that registration statement. However,
this prospectus supplement and the accompanying prospectus do not contain all of
the information contained in our registration statement. For further information
regarding the documents referred to in this prospectus supplement and the
accompanying prospectus, you should refer to our registration statement and the
exhibits to it. Our registration statement and the exhibits to it can be
inspected and copied at prescribed rates at the public reference facilities
maintained by the SEC at its public reference section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices located at: Chicago regional
office, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661; and
New York regional office, Seven World Trade Center, New York, New York 10048.
Copies of these materials can also be obtained electronically through the SEC's
internet web site (http:\\www.sec.gov).
You should only rely on the information contained in this prospectus
supplement, the accompanying prospectus and our registration statement. We have
not authorized any person to give any other information or to make any
representation that is different from the information contained in this
prospectus supplement, the accompanying prospectus or our registration
statement.
S-2
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus includes the
words "expects", "intends", "anticipates", "estimates" and similar words and
expressions. These words and expressions are intended to identify
forward-looking statements. Any forward-looking statements are made subject to
risks and uncertainties which could cause actual results to differ materially
from those stated. These risks and uncertainties include, among other things,
declines in general economic and business conditions, increased competition,
changes in demographics, changes in political and social conditions, regulatory
initiatives and changes in customer preferences, many of which are beyond our
control and the control of any other person or entity related to this offering.
The forward-looking statements made in this prospectus supplement are accurate
as of the date stated on the cover of this prospectus supplement. We have no
obligation to update or revise any forward-looking statement.
S-3
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Important Notice about the Information Contained in this
Prospectus Supplement, the Accompanying Prospectus and the
Related Registration Statement............................ S-2
Forward-Looking Statements.................................. S-3
Summary of Prospectus Supplement............................ S-5
Risk Factors................................................ S-26
Description of the Mortgage Pool............................ S-38
Servicing of the Mortgage Loans............................. S-57
Description of the Offered Certificates..................... S-87
Yield and Maturity Considerations........................... S-114
Use of Proceeds............................................. S-122
Federal Income Tax Consequences............................. S-122
Certain ERISA Considerations................................ S-125
Legal Investment............................................ S-130
Method of Distribution...................................... S-131
Legal Matters............................................... S-132
Ratings..................................................... S-132
ANNEX A-1--Certain Characteristics of the Mortgage Loans.... A-1-1
ANNEX A-2--Certain Monetary Terms of the Mortgage Loans..... A-2-1
ANNEX B--Term Sheet......................................... B-1
ANNEX C-1--Price/Yield Tables............................... C-1-1
ANNEX C-2--Decrement Tables................................. C-2-1
ANNEX D--Form of Delinquent Loan Status Report.............. D-1
ANNEX E--Form of Historical Loan Modification Report........ E-1
ANNEX F--Form of Historical Liquidation Report.............. F-1
ANNEX G--Form of REO Status Report.......................... G-1
ANNEX H--Form of Watch List Report.......................... H-1
ANNEX I--Form of Operating Statement Analysis............... I-1
ANNEX J--Form of NOI Adjustment Worksheet................... J-1
ANNEX K--Form of Comparative Financial Status Report........ K-1
PROSPECTUS
Important Notice about the Information Presented in this
Prospectus................................................ 3
Available Information; Incorporation by Reference........... 3
Summary of Prospectus....................................... 4
Risk Factors................................................ 13
Description of the Trust Assets............................. 33
Yield and Maturity Considerations........................... 56
Structured Asset Securities Corporation..................... 62
Description of the Certificates............................. 63
Description of the Governing Documents...................... 73
Description of Credit Support............................... 82
Certain Legal Aspects of Mortgage Loans..................... 85
Federal Income Tax Consequences............................. 99
State and Other Tax Consequences............................ 141
ERISA Considerations........................................ 141
Legal Investment............................................ 146
Use of Proceeds............................................. 148
Method of Distribution...................................... 148
Legal Matters............................................... 150
Financial Information....................................... 150
Rating...................................................... 150
</TABLE>
S-4
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
This summary contains selected information regarding the offering being made
by this prospectus supplement. It does not contain all of the information you
need to consider in making your investment decision. TO UNDERSTAND ALL OF THE
TERMS OF THE OFFERING OF THE OFFERED CERTIFICATES, YOU SHOULD READ CAREFULLY
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN FULL.
INTRODUCTION TO THE TRANSACTION
The offered certificates will be part of a series of commercial mortgage
pass-through certificates designated as the Series Commercial Mortgage
Pass-Through Certificates and consisting of multiple classes. The table below
identifies the respective classes of that series, specifies various
characteristics of each of those classes and indicates which of those classes
are offered by this prospectus supplement and which are not. The footnotes to
the table below follow on the next page.
<TABLE>
<CAPTION>
SERIES COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
- -------------------------------------------------------------------
APPROX.
INITIAL AGGREGATE % OF
PRINCIPAL INITIAL
BALANCE OR MORTGAGE
NOTIONAL POOL
CLASS(1) RATINGS(2) AMOUNT(3) BALANCE
<S> <C> <C> <C>
Offered Certificates
A-1.................... $ %
A-2.................... $ %
B...................... $ %
C...................... $ %
D...................... $ %
E...................... $ %
F...................... $ %
X...................... $ (7) %
Non-Offered Certificates(8)
G...................... $ %
H...................... $ %
J...................... $ %
K...................... $ %
L...................... $ %
M...................... $ %
N...................... $ %
<CAPTION>
SERIES COMMERCIA SERIES COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
- ----------------------- ---------------------------------------------------------------
APPROX. PASS- INITIAL WEIGHTED
INITIAL THROUGH PASS- AVERAGE
CREDIT RATE THROUGH LIFE PRINCIPAL
CLASS(1) SUPPORT(4) DESCRIPTION(5) RATE(5) (YEARS)(6) WINDOW(6)
<S> <C> <C> <C> <C> <C>
Offered Certificates
A-1.................... % %
A-2.................... % %
B...................... % %
C...................... % %
D...................... % %
E...................... % %
F...................... % %
X...................... % %
Non-Offered Certificate
G...................... % %
H...................... % %
J...................... % %
K...................... % %
L...................... % %
M...................... % %
N...................... % %
</TABLE>
- ------------------------
(1) The respective classes of certificates identified in the table above entitle
their holders to varying degrees of seniority for purposes of--
- receiving payments of interest and, if and when applicable, payments of
principal; and
- bearing the effects of losses on the secured loans that will back the
certificates, as well as default-related and other unanticipated expenses
of the related commercial mortgage trust.
The class "A-1", "A-2" and "X" certificates are the most senior. The
remaining classes of certificates identified in the table above are listed
from top to bottom in descending order of seniority.
(2) Ratings shown are those of .
(3) The actual initial aggregate principal balance or notional amount of any
class of certificates identified in the table above may be larger or smaller
than the amount shown above, depending on the actual size of the initial
mortgage pool balance. The actual size of the initial mortgage pool balance
may be as much as 5% larger or smaller than the amount presented in this
prospectus supplement.
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(4) Represents the initial aggregate principal balance, expressed as a
percentage of the initial mortgage pool balance, of all classes of the
series certificates that are subordinate to the indicated class.
(5) The "pass-through rate" for any class of certificates identified in the
table above is the annual rate at which that class of certificates will
accrue interest from time to time. [ADD SUMMARY DESCRIPTIONS OF VARIABLE
PASS-THROUGH RATES.]
(6) Calculated based on the following assumptions with respect to each secured
loan that will back the certificates--
- the related borrower timely makes all payments on that loan,
- if that loan has an anticipated repayment date, as described under "--The
Mortgage Loans and the Underlying Real Properties" below, the loan will be
paid in full on that date, and
- that loan will not otherwise be prepaid prior to stated maturity.
Further based on the other "Maturity Assumptions" described under "Yield and
Maturity Considerations" in this prospectus supplement.
(7) Initial aggregate notional amount. The aggregate notional amount of the
class "X" certificates will equal the aggregate principal balance of the
other classes of certificates identified in the table above outstanding from
time to time. The aggregate notional amount of the class "X" certificates
will be used solely to calculate the accrual of interest with respect to
those certificates. The class "X" certificates will not have principal
balances and will not entitle their holders to payments of principal.
(8) The non-offered certificates will also include the following classes of
certificates which are not shown above: "R-I", "R-II" and "R-III". These
other non-offered certificates do not have principal balances, notional
amounts or pass-through rates. They do not provide any material credit
support for the offered certificates.
------------------------
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THE TRUST......................... The certificates will evidence the entire beneficial
ownership of a common law trust designated as the LB
Commercial Mortgage Trust . Throughout this
prospectus supplement, we refer to the LB Commercial
Mortgage Trust as the "trust".
We will form the trust at or prior to the time of
initial issuance of the certificates. The assets of the
trust will include a pool of secured loans, the
collateral for which primarily consists of multifamily
and commercial real properties. We will deposit those
loans into the trust at the time of initial issuance of
the certificates. Throughout this prospectus supplement,
we refer to those loans as the "mortgage loans" and to
the pool thereof as the "mortgage pool".
THE GOVERNING DOCUMENT............ The governing document for purposes of forming the trust
and issuing the certificates will be a pooling and
servicing agreement to be dated as of . Whenever
we refer in this prospectus supplement to the "pooling
and servicing agreement", we mean that particular
pooling and servicing agreement. The pooling and
servicing agreement will also govern the servicing and
administration of the mortgage loans and the other
assets of the trust. A copy of the pooling and servicing
agreement will be filed with the SEC as an exhibit to a
current report on Form 8-K, within 15 days after the
initial issuance of the certificates. The SEC will make
that current report on Form 8-K and its exhibits
available to the public for inspection.
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The parties to the pooling and servicing agreement will
include us, a trustee, a master servicer and a special
servicer. Whenever we refer in this prospectus
supplement to the "trustee", the "master servicer" or
the "special servicer", we mean the person or entity
acting in that capacity under the pooling and servicing
agreement.
SOURCE OF THE MORTGAGE LOANS...... We are not the originator of the mortgage loans. We will
acquire the mortgage loans from separate parties,
which we refer to in this prospectus supplement as the
"mortgage loan sellers". Each of the mortgage loans was
originated by--
- the related mortgage loan seller,
- an affiliate of the related mortgage loan seller, or
- a correspondent in the related mortgage loan seller's
conduit lending program.
RELEVANT PARTIES
"WE" AND "US"..................... Our name is Structured Asset Securities Corporation. We
are a special purpose Delaware corporation. Our address
is 200 Vesey Street, New York, New York 10285 and our
telephone number is (212) 526-7000. We will form the
trust and deposit the mortgage loans into it. See
"Structured Asset Securities Corporation" in the
accompanying prospectus.
INITIAL TRUSTEE................... , will act as the initial trustee. See "Description of
the Offered Certificates--The Trustee" in this
prospectus supplement. The trustee will also have, or be
responsible for appointing an agent to perform,
additional duties with respect to tax administration. We
refer to the trustee or its agent in that capacity as
the "tax administrator" in this prospectus supplement.
INITIAL MASTER SERVICER........... , a corporation, will act as the initial master
servicer. See "Servicing of the Mortgage Loans--The
Initial Master Servicer and the Initial Special
Servicer" in this prospectus supplement.
INITIAL SPECIAL SERVICER.......... , a corporation, will act as the initial special
servicer. See "Servicing of the Mortgage Loans--The
Initial Master Servicer and the Initial Special
Servicer" in this prospectus supplement.
CONTROLLING CLASS OF The holders of certificates representing a majority
CERTIFICATEHOLDERS................ interest in a designated "controlling class" of the
series certificates will have the right, subject
to the conditions described in this prospectus
supplement, to--
- replace the special servicer, and
- select a representative that may direct and advise the
special servicer on various servicing matters.
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Unless there are significant losses on the mortgage
pool, the controlling class of the series
certificates will be a class of non-offered
certificates. See "Servicing of the Mortgage Loans--The
Controlling Class Representative" and
"--Replacement of the Special Servicer" in this
prospectus supplement.
MORTGAGE LOAN SELLERS............. We will acquire the mortgage loans of the initial
mortgage pool balance, from , a corporation,
and , a corporation. See "Description of the
Mortgage Pool--The Mortgage Loan Sellers" in this
prospectus supplement.
UNDERWRITER....................... Lehman Brothers Inc., a Delaware corporation, is the
underwriter of the offering being made by this
prospectus supplement. See "Method of Distribution" in
this prospectus supplement.
RELEVANT DATES AND PERIODS
CUT-OFF DATE...................... The mortgage loans will be considered part of the trust
as of a "cut-off date" of . All payments and
collections received on the mortgage loans after that
date, excluding any payments or collections that
represent amounts due on or before that date, will
belong to the trust. Accordingly, is the date as
of which we present much of the information relating to
the mortgage pool and the underlying real properties in
this prospectus supplement.
ISSUE DATE........................ The date of initial issuance, or "issue date", for the
offered certificates will be on or about .
PAYMENT DATE...................... Payments on the offered certificates are scheduled to
occur monthly, commencing in . During any given
month, the "payment date" will be the calendar day
of that month, or, if the calendar day of that
month is not a business day, then the next succeeding
business day.
RECORD DATE....................... The "record date" for each monthly payment on an offered
certificate will be the last business day of the prior
calendar month. The registered holders of the offered
certificates at the close of business on each record
date, will be entitled to receive any payments on those
certificates on the following payment date.
COLLECTION PERIOD................. Amounts available for payment on the offered
certificates on any payment date will depend on the
payments and other collections received, and any
advances of payments due, on the mortgage loans during
the related collection period. Each "collection
period"--
- will relate to a particular payment date,
- will be approximately one month long,
- will begin when the prior collection period ends or,
in the case of the first collection period, will begin
on , and
- will end during the month of, but prior to, the
related payment date.
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INTEREST ACCRUAL PERIOD........... The amount of interest payable with respect to the
offered certificates on any payment date will be a
function of the interest accrued during the related
interest accrual period. The "interest accrual period"
for any payment date will be the calendar month
immediately preceding the month in which that payment
date occurs.
RATED FINAL PAYMENT DATE.......... The "rated final payment date" is the payment date in
. As discussed in this prospectus supplement, each
rating assigned to the offered certificates will
represent the respective rating agency's assessment of
the likelihood of timely receipt by the holders of those
certificates of all interest to which they are entitled
on each payment date and, except in the case of the
class "X" certificates, the ultimate receipt by the
holders of those certificates of all principal to which
they are entitled by the related final payment date.
ASSUMED FINAL PAYMENT DATE........ The "assumed final payment date" for each class of
offered certificates will be the payment date on which
the holders of those certificates would be expected to
receive their last payment based upon--
- the assumption that each underlying borrower timely
makes all payments on its mortgage loan,
- the assumption that each mortgage loan with an
anticipated repayment date is paid in full on that date,
- the assumption that no underlying borrower otherwise
prepays its mortgage loan prior to stated maturity,
and
- the other "Maturity Assumptions" set forth under
"Yield and Maturity Considerations" in this prospectus
supplement.
The assumed final payment date for each class of offered
certificates will occur in the calendar month and year
set forth below for that class.
</TABLE>
<TABLE>
<CAPTION>
MONTH AND YEAR
OF ASSUMED FINAL
CLASS PAYMENT DATE
----- ----------------
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A-1......................................
A-2......................................
B........................................
C........................................
D........................................
E........................................
F........................................
X........................................
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DESCRIPTION OF THE OFFERED CERTIFICATES
REGISTRATION AND DENOMINATIONS.... We intend to deliver the offered certificates in
book-entry form in original denominations of:
- in the case of the class "X" certificates, $
initial notional amount and in any whole dollar
denomination in excess of $ ; and
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- in the case of the other offered certificates, $
initial principal balance and in any whole dollar
denomination in excess of $ .
You will initially hold your certificates through The
Depository Trust Company. As a result, you will not
receive a fully registered physical certificate
representing your interest in any offered certificate,
except under the limited circumstances described in this
prospectus supplement and in the accompanying
prospectus. We may elect to terminate the book-entry
system through DTC with respect to all or any portion of
any class of offered certificates. See "Description of
the Offered Certificates--Registration and
Denominations" in this prospectus supplement and
"Description of the Certificates--Book-Entry
Registration" in the accompanying prospectus.
PAYMENTS
A. GENERAL........................ The trustee will make payments of interest and principal
to the respective classes of certificateholders entitled
to those payments, sequentially as follows:
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<TABLE>
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PAYMENT ORDER CLASS
------------- -----
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1.......... A-1, A-2 and X*
2.......... B
3.......... C
4.......... D
5.......... E
6.......... F
7.......... G
8.......... H
9.......... J
10......... K
11......... L
12......... M
13......... N
</TABLE>
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* Allocation of interest payments among these classes is
PRO RATA based on entitlement. Allocation of principal
payments between the class "A-1" and "A-2"
certificates is described below. The class "X"
certificates do not have principal balances and do not
entitle their holders to payments of principal.
See "Description of the Offered
Certificates--Payments--Priority of Payments" in this
prospectus supplement.
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B. PAYMENTS OF INTEREST........... Each class of offered certificates will bear interest.
In each case, that interest will accrue during each
interest accrual period based upon--
- the pass-through rate applicable for the particular
class for that interest accrual period,
- the aggregate principal balance or notional amount, as
the case may be, of the particular class outstanding
immediately prior to the related payment date, and
- the assumption that each year consists of 12 30-day
months.
A whole or partial prepayment on a mortgage loan may not
be accompanied by the amount of one full month's
interest on the prepayment. As and to the extent
described in this prospectus supplement, these
shortfalls may be allocated to reduce the amount of
accrued interest otherwise payable to the holders of the
respective classes of interest-bearing certificates,
including the offered certificates, on a PRO RATA basis
in accordance with the respective amounts of interest
otherwise payable on those classes for the corresponding
interest accrual period.
On each payment date, subject to available funds and the
payment priorities described above, you will be entitled
to receive your proportionate share of all unpaid
distributable interest accrued in respect of your class
of offered certificates through the end of the related
interest accrual period.
See "Description of the Offered Certificates--Payments--
Payments of Interest" and "--Payments--Priority of
Payments" in this prospectus supplement.
C. PAYMENTS OF PRINCIPAL.......... The class "X" certificates do not have principal
balances and do not entitle their holders to payments of
principal. Subject to available funds and the payment
priorities described above, however, the holders of each
other class of offered certificates will be entitled to
receive a total amount of principal over time equal to
the aggregate principal balance of their particular
class. The trustee must make payments of principal in a
specified sequential order to ensure that--
- no payments of principal will be made to the holders
of any class of non-offered certificates until the
aggregate principal balance of the offered
certificates is reduced to zero,
- no payments of principal will be made to the holders
of the class "B", "C", "D", "E" or "F" certificates
until, in the case of each of those classes, the
aggregate principal balance of all more senior classes
of offered certificates is reduced to zero, and
- except as described below, no payments of principal
will be made to the holders of the class "A-2"
certificates until the aggregate principal balance of
the class "A-1" certificates is reduced to zero.
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Because of losses on the pooled mortgage loans and/or
default-related or other unanticipated expenses of the
trust, the aggregate principal balance of the class "B",
"C", "D", "E", "F", "G, "H", "J", "K", "L", "M" and "N"
certificates could be reduced to zero at a time when the
class "A-1" and "A-2" certificates remain outstanding.
Under those circumstances, any payments of principal on
the class "A-1" and "A-2" certificates will be made on a
PRO RATA basis in accordance with their respective
principal balances.
The total payments of principal to be made on the
respective classes of the certificates entitled thereto
on any payment date will be a function of--
- the amount of scheduled payments of principal due or,
in some cases, deemed due on the mortgage loans during
the related collection period, which payments are
either received as of the end of that collection
period or advanced by the master servicer, and
- the amount of any prepayments and other unscheduled
collections of previously unadvanced principal in
respect of the mortgage loans that are received during
the related collection period.
See "Description of the Offered Certificates--Payments--
Payments of Principal" and "--Payments--Priority of
Payments" in this prospectus supplement.
D. PAYMENTS OF PREPAYMENT PREMIUMS
AND YIELD MAINTENANCE CHARGES... If any prepayment premium or yield maintenance charge is
collected on a mortgage loan, then the trustee will pay
that amount in the proportions described in this
prospectus supplement, to--
- the holders of the class "X" certificates, and/or
- the holders of any other class or classes of
certificates senior to the class " " certificates,
that are then entitled to receive payments of
principal.
See "Description of the Offered Certificates--Payments--
Payments of Prepayment Premiums and Yield Maintenance
Charges" in this prospectus supplement.
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REDUCTIONS OF CERTIFICATE BALANCES
IN CONNECTION WITH LOSSES AND
CERTAIN EXPENSES................ Realized losses on the mortgage loans, together with
default-related and other unanticipated expenses of the
trust, may cause the aggregate principal balance of the
mortgage pool, net of advances of principal, to be less
than the aggregate principal balance of the
certificates. If and to the extent that those losses and
expenses cause such a deficit to exist following the
payments made on the certificates on any payment date,
then the aggregate principal balances of those classes
of certificates of that series with principal balances,
will be successively reduced in the following order,
until that deficit is eliminated:
</TABLE>
<TABLE>
<CAPTION>
REDUCTION ORDER CLASS
--------------- -------------
<S> <C>
1.......... N
2.......... M
3.......... L
4.......... K
5.......... J
6.......... H
7.......... G
8.......... F
9.......... E
10......... D
11......... C
12......... B
13......... A-1 and A-2*
</TABLE>
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* PRO RATA by outstanding principal balance.
See "Description of the Offered Certificates--Reductions
of Certificate Principal Balances in Connection With
Realized Losses and Additional Trust Fund Expenses" in
this prospectus supplement.
ADVANCES OF DELINQUENT MONTHLY
DEBT SERVICE PAYMENTS........... Except as described below, the master servicer will be
required to make advances with respect to any delinquent
monthly payments, other than balloon payments, of
principal and/or interest due on the mortgage loans. In
addition, if (i) the master servicer fails to make any
advance that it is required to make and (ii) the trustee
is aware of the failure, the trustee will be required to
make the advance. Neither of the master servicer nor the
trustee, however, will be required to make any advance
that it determines, in its good faith and reasonable
judgment, will not be recoverable from proceeds of the
related mortgage loan. As described in this prospectus
supplement, any party that makes an advance will be
entitled to be reimbursed for the advance, together with
interest thereon at the prime rate described in this
prospectus supplement.
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If certain adverse events or circumstances, which we
will describe later in this prospectus supplement, occur
or exist with respect to any mortgage loan or the
underlying real property for that loan, the special
servicer will be obligated to obtain a new appraisal of
or, in limited cases, conduct a valuation of that real
property. If, based on that appraisal or other
valuation, it is determined that (i) the principal
balance of, and other delinquent amounts due under, that
mortgage loan exceed (ii) 90% of the new estimated value
of that real property, then the amount otherwise
required to be advanced in respect of interest on that
mortgage loan will be reduced, generally in the same
proportion that such excess bears to the principal
balance of the mortgage loan, net of related advances of
principal. Due to the payment priorities, this reduction
in advances will reduce the funds available to pay
interest on the most subordinate class of
interest-bearing certificates then outstanding.
See "Description of the Offered Certificates--Advances
of Delinquent Monthly Debt Service Payments" and
"Servicing of the Mortgage Loans--Required Appraisals"
in this prospectus supplement. See also "Description of
the Certificates--Advances" in the accompanying
prospectus.
REPORTS TO CERTIFICATEHOLDERS..... On each payment date, the following reports will be
available to you and will contain the information
described under "Description of the Offered
Certificates--Reports to Certificateholders; Certain
Available Information" in this prospectus supplement:
- Delinquent Loan Status Report
- Historical Loan Modification Report
- Historical Loss Estimate Report
- REO Status Report
- Watch List Report
- Loan Payoff Notification Report
- Comparative Financial Status Report
- Operating Statement Analysis
Upon reasonable prior notice, you may also review at the
trustee's offices during normal business hours a variety
of information and documents that pertain to the
mortgage loans and the underlying real properties,
including loan documents, borrower operating statements,
rent rolls and property inspection reports, to the
extent the trustee receives the information and docu-
ments.
See "Description of the Offered Certificates--Reports to
Certificateholders; Certain Available Information" in
this prospectus supplement.
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<TABLE>
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OPTIONAL TERMINATION.............. Specified parties to the transaction may terminate the
trust when the aggregate principal balance of the
mortgage pool, net of advances of principal, is less
than approximately % of the initial mortgage pool
balance. See "Description of the Offered
Certificates--Termination" in this prospectus
supplement.
THE MORTGAGE LOANS AND THE UNDERLYING REAL PROPERTIES
GENERAL........................... Each of the mortgage loans is the obligation of a
borrower to repay a specified sum with interest. Each of
the mortgage loans will be secured by a mortgage lien on
the ownership and/or leasehold interest of the related
borrower in one or more commercial or multifamily real
properties. Except for limited permitted encumbrances,
which we will describe later in this prospectus
supplement, that mortgage lien will be a first priority
lien.
All of the mortgage loans are or should be considered
nonrecourse. None of the mortgage loans are insured or
guaranteed by any governmental agency or instrumentality
or by any private mortgage insurer.
We include in this prospectus supplement a variety of
information regarding the mortgage loans and the
underlying real properties. In reviewing this
information, you should be aware that--
- All numerical information provided with respect to the
mortgage loans is provided on an approximate basis.
- All weighted average information provided with respect
to the mortgage loans or any sub-group of mortgage loans
reflects the weighting of those mortgage loans by
their respective cut-off date principal balances. The
"cut-off date principal balance" of any mortgage loan,
will equal its unpaid principal balance as of the
cut-off date, after application of all payments of
principal due with respect to the mortgage loan on or
before that date, whether or not those payments are
received.
- When information with respect to the underlying real
properties is expressed as a percentage of the initial
mortgage pool balance, the percentages are based upon
the cut-off date principal balances of the related
mortgage loans.
- In certain cases involving a mortgage loan that is
secured by multiple real properties located in more than
one state, a portion of that mortgage loan has been
allocated to each of those properties.
- Statistical information regarding the mortgage loans
may change prior to the date of initial issuance of the
certificates due to changes in the composition of the
mortgage pool prior to that date.
For more detailed information on the mortgage loans than
is provided in this "Summary of Prospectus Supplement"
section, see the following sections in this prospectus
supplement:
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- "Description of the Mortgage Pool"
- "Risk Factors--Risks Related to the Mortgage Loans"
- Annex A-1-Certain Characteristics of the Mortgage
Loans
- Annex A-2-Certain Monetary Terms of the Mortgage Loans
PAYMENT TERMS..................... Each mortgage loan currently accrues interest at the
annual rate specified with respect to that loan on Annex
A-1 to this prospectus supplement. Except as otherwise
described below, the mortgage interest rate for each
mortgage loan is, in the absence of default, fixed for
the entire term of the loan. [IF ANY OF THE MORTGAGE
LOANS HAVE FLOATING OR ADJUSTABLE MORTGAGE INTEREST
RATES, PROVIDE SUMMARY DESCRIPTION OF HOW TO CALCULATE
THOSE RATES.]
Each mortgage loan provides for scheduled payments of
principal and/or interest to be due on the first day of
each month. We refer to these scheduled payments as
"monthly debt service payments". [PROVIDE SUMMARY
DESCRIPTION REGARDING ANY ADJUSTMENTS TO THE MONTHLY
DEBT SERVICE PAYMENTS AND ANY POTENTIAL NEGATIVE
AMORTIZATION OF INTEREST.]
of the mortgage loans, representing % of the initial
mortgage pool balance, provide for:
- an amortization schedule that is significantly longer
than its remaining term to stated maturity; and
- a substantial payment of principal on its maturity
date.
We refer to these mortgage loans as the "balloon
loans".
of the mortgage loans, representing % of the initial
mortgage pool balance, provide material incentives to
the related borrower to pay the mortgage loan in full by
a specified date, which we refer to as an "anticipated
repayment date". There can be no assurance, however,
that these incentives will result in any of these
mortgage loans being paid in full on or before its
anticipated repayment date. The incentives, which in
each case will become effective as of the related
anticipated repayment date, include:
- The calculation of interest in excess of the initial
mortgage interest rate. The additional interest will be
deferred and will be payable only after the
outstanding principal balance of the mortgage loan is
paid in full.
- The application of excess cash flow from the
underlying real property to pay the principal amount of
the mortgage loan. The payment of principal will be in
addition to the principal portion of the normal
monthly debt service payment.
We refer to these mortgage loans as the "ARD
loans".
The remaining mortgage loans, representing % of
the initial mortgage pool balance, have payment
schedules that provide for the payment of these mortgage
loans in full or substantially in full by their
respective maturity dates. We refer to these
mortgage loans as the "fully amortizing loans".
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DELINQUENCY STATUS................ None of the mortgage loans was days or more
delinquent in respect of any monthly debt service
payment as of or at any time during the
-month period preceding that date.
PREPAYMENT LOCK-OUT PERIODS....... A prepayment lock-out period is currently in effect for
of the mortgage loans. Set forth below is
information regarding the remaining terms of those
lock-out periods:
Maximum remaining lock-out period: months
Minimum remaining lock-out period: months
Weighted average remaining lock-out period: months
DEFEASANCE........................ of the mortgage loans, representing % of the initial
mortgage pool balance, permit the related borrower to
obtain a release of the underlying real property (or,
where applicable, one or more of the underlying real
properties) from the lien of the related mortgage by
delivering U.S. Treasury obligations as substitute
collateral. None of the mortgage loans permits
defeasance prior to the second anniversary of the date
of initial issuance of the certificates.
ADDITIONAL STATISTICAL INFORMATION
A. GENERAL CHARACTERISTICS........ The mortgage pool will have the following general
characteristics as of the cut-off date:
</TABLE>
<TABLE>
<S> <C>
Initial mortgage pool balance(1)............ $
Number of mortgage loans....................
Number of underlying real properties........
Maximum cut-off date principal balance...... $
Minimum cut-off date principal balance...... $
Average cut-off date principal balance...... $
Maximum mortgage interest rate.............. %
Minimum mortgage interest rate.............. %
Weighted average mortgage interest rate..... %
Maximum original term to maturity or
anticipated repayment date................ months
Minimum original term to maturity or
anticipated repayment date................ months
Weighted average original term to maturity
or anticipated repayment date............. months
Maximum remaining term to maturity or
anticipated repayment date................ months
Minimum remaining term to maturity or
anticipated repayment date................ months
Weighted average remaining term to maturity
or anticipated repayment date............. months
Maximum cut-off date debt service coverage
ratio(1).................................. x
Minimum cut-off date debt service coverage
ratio(1).................................. x
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
Weighted average cut-off date debt service
coverage ratio(1)......................... x
Maximum cut-off date loan-to-value
ratio(2).................................. %
Minimum cut-off date loan-to-value
ratio(2).................................. %
Weighted average cut-off date loan-to-value
ratio(2).................................. %
</TABLE>
<TABLE>
<S> <C>
(1) The "initial mortgage pool balance" is equal to the
aggregate cut-off date principal balance of the mortgage
loans and is subject to a permitted variance of plus
or minus %.
(2) The "cut-off date debt service coverage ratio" or
"cut-off date DSCR" for any mortgage loan that is to be
included in the trust is equal to .
(3) The "cut-off date loan-to-value ratio" or "cut-off
date LTV ratio" for any mortgage loan to be included in
the trust is equal to .
B. STATE CONCENTRATION............ The table below shows the number of, and percentage of
the initial mortgage pool balance secured by, underlying
real properties located in the indicated states:
</TABLE>
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
STATE PROPERTIES POOL BALANCE
----- ---------- ----------------
<S> <C> <C>
%
%
%
%
</TABLE>
<TABLE>
<S> <C>
The remaining underlying real properties are located
throughout other states and . No more
than % of the initial mortgage pool balance is
secured by real properties located in any of these other
jurisdictions.
C. PROPERTY TYPES................. The table below shows the number of, and percentage of
the initial mortgage pool balance secured by, underlying
real properties operated for each indicated purpose:
</TABLE>
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
PROPERTY TYPE PROPERTIES POOL BALANCE
------------- ---------- ----------------
<S> <C> <C>
%
%
%
%
%
%
%
%
</TABLE>
<TABLE>
<S> <C>
D. ENCUMBERED INTERESTS........... The table below shows the number of, and percentage of
the initial mortgage pool balance secured by, underlying
real properties for which the encumbered interest is as
indicated:
</TABLE>
S-18
<PAGE>
<TABLE>
<CAPTION>
NUMBER % OF INITIAL
ENCUMBERED INTEREST IN THE OF MORTGAGE
UNDERLYING REAL PROPERTY PROPERTIES POOL BALANCE
----------------------------------- ---------- ------------
<S> <C> <C>
Ownership*......................... %
Ownership in part, Leasehold in
part............................... %
Leasehold.......................... %
Other.............................. %
</TABLE>
<TABLE>
<S> <C>
* "Ownership" also includes cases where the ownership
and leasehold interests in the same property are both
encumbered.
LEGAL AND INVESTMENT CONSIDERATIONS
FEDERAL INCOME
TAX CONSEQUENCES.................. The trustee or its agent will make elections to treat
designated portions of the assets of the trust as three
separate "real estate mortgage investment conduits"
under Sections 860A through 860G of the Internal Revenue
Code of 1986. The designations for each REMIC are as
follows:
- "REMIC I", the lowest tier REMIC, will consist
generally of the mortgage loans, as well as any of the
underlying real properties that may have been acquired
by the trust following a borrower default, but will
exclude collections of additional interest accrued and
deferred as to payment in respect of each ARD loan
with an anticipated repayment date that remains
outstanding past that date.
- "REMIC II" will hold the "regular interests" in REMIC
I.
- "REMIC III" will hold the "regular interests" in REMIC
II.
[Any assets not included in a REMIC will constitute a
grantor trust for federal income tax purposes.]
The offered certificates will be treated as "regular
interests" in REMIC III. This means that they will be
treated as newly issued debt instruments for federal
income tax purposes. You will have to report income on
your offered certificates in accordance with the accrual
method of accounting even if you are otherwise a cash
method taxpayer. The offered certificates will not
represent any interest in the grantor trust referred to
above.
The class " " and " " certificates will be
issued with more than a DE MINIMIS amount of original
issue discount. The class " " certificates will be
issued with a DE MINIMIS amount of original issue
discount. The other offered certificates will not be
issued with any original issue discount. If you own an
offered certificate issued with original issue discount,
you may have to report original issue discount income
and be subject to a tax on this income before you
receive a corresponding cash payment.
</TABLE>
S-19
<PAGE>
<TABLE>
<S> <C>
For a more detailed discussion of the federal income tax
aspects of investing in the offered certificates, see
"Federal Income Tax Consequences" in this prospectus
supplement and "Federal Income Tax Consequences" in the
accompanying prospectus.
ERISA............................. We anticipate that certain retirement plans and other
employee benefit plans and arrangements subject to Title
I of the Employee Retirement Income Security Act of
1974, commonly referred to as "ERISA", or Section 4975
of the Internal Revenue Code of 1986 will be able to
invest in the class "A-1", "A-2" and "X" certificates,
without giving rise to a prohibited transaction. This is
based upon an individual prohibited transaction
exemption granted to the underwriter by the U.S.
Department of Labor. However, investments in the other
offered certificates by, on behalf of or with assets of
these entities, will be restricted as described under
"Certain ERISA Considerations" in this prospectus
supplement.
If you are a fiduciary of any retirement plan or other
employee benefit plan or arrangement subject to Title I
of ERISA or section 4975 of the Internal Revenue Code of
1986, you should review carefully with your legal
advisors whether the purchase or holding of the offered
certificates could give rise to a transaction that is
prohibited under ERISA or Section 4975 of the Internal
Revenue Code of 1986. See "Certain ERISA Considerations"
in this prospectus supplement and "ERISA Considerations"
in the accompanying prospectus.
LEGAL INVESTMENT.................. The following classes of offered certificates, upon
initial issuance, will constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, commonly referred to as
"SMMEA":
- class "A-1",
- class "A-2",
- class "B", and
- class "X".
The other offered certificates will NOT be "mortgage
related securities" within the meaning of SMMEA.
You should consult your own legal advisors to determine
whether and to what extent the offered certificates will
be legal investments for you. See "Legal Investment" in
this prospectus supplement and in the accompanying
prospectus.
</TABLE>
S-20
<PAGE>
<TABLE>
<S> <C>
CERTAIN INVESTMENT
CONSIDERATIONS.................... The rate and timing of payments and other collections of
principal on or in respect of the mortgage loans will
affect the yield to maturity on each offered
certificate. In the case of offered certificates
purchased at a discount, a slower than anticipated rate
of payments and other collections of principal on the
mortgage loans could result in a lower than anticipated
yield. In the case of class "X" certificates or any
other offered certificates purchased at a premium, a
faster than anticipated rate of payments and other
collections of principal on the mortgage loans could
result in a lower than anticipated yield. If you are
contemplating the purchase of class "X" certificates,
you should be aware that--
- the yield to maturity on those certificates will be
highly sensitive to the rate and timing of principal
prepayments and other liquidations on or in respect of
the mortgage loans, and
- that an extremely rapid rate of prepayments and/or
other liquidations on or in respect of the mortgage
loans could result in a substantial loss of your
initial investment.
See "Yield and Maturity Considerations" in this
prospectus supplement and in the accompanying
prospectus.
RATINGS........................... It is a condition to their issuance that the respective
classes of the offered certificates receive the credit
ratings shown in the table entitled "Series
Commercial Mortgage Pass-Through Certificates" on page
S- .
The ratings of the offered certificates address the
timely payment of interest and, except in the case of
the class "X "certificates, the ultimate payment of
principal on or before the rated final payment date. A
security rating is not a recommendation to buy, sell or
hold securities and the assigning rating agency may
revise or withdraw its rating at any time.
For a description of the limitations of the ratings of
the offered certificates, see "Ratings" in this
prospectus supplement.
</TABLE>
S-21
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all investors. In
particular, you should not purchase any class of offered certificates unless you
understand and are able to bear the risks associated with that class.
The offered certificates are complex securities and it is important that you
possess, either alone or together with an investment advisor, the expertise
necessary to evaluate the information contained in this prospectus supplement
and the accompanying prospectus in the context of your financial situation.
You should consider the following factors, as well as those set forth under
"Risk Factors" in the accompanying prospectus, in deciding whether to purchase
any offered certificates. The "Risk Factors" section in the accompanying
prospectus includes a number of general risks associated with making an
investment in the offered certificates.
RISKS RELATED TO THE OFFERED CERTIFICATES
MANY FACTORS, INCLUDING LACK OF LIQUIDITY, CAN ADVERSELY AFFECT THE MARKET
VALUE OF YOUR CERTIFICATES. There is currently no secondary market for the
offered certificates. The underwriter has informed us that it intends to make a
secondary market in the offered certificates. However, it has no obligation to
do so, and there can be no assurance that a secondary market for the offered
certificates will develop. Even if a secondary market does develop for the
offered certificates, there is no assurance that it will provide you with
liquidity of investment or that the market will continue for the life of the
offered certificates. We will not list the offered certificates on any
securities exchange or on any automated quotation system, such as NASDAQ. Lack
of liquidity could result in a significant reduction in the market value of your
certificates. In addition, the market value of your certificates at any time may
be affected by many factors, including then prevailing interest rates and the
then perceived riskiness of commercial mortgage-backed securities relative to
other investments. You may be forced to hold your certificates indefinitely.
Alternatively, you may only be able to sell your certificates at less than 100%
of their principal balance and/or the unamortized portion of your purchase price
for reasons unrelated to the performance of your certificates or the mortgage
loans. See "Risk Factors--Lack of Liquidity Will Impair Your Ability to Sell
Your Certificates and May Have an Adverse Effect on the Market Value of Your
Certificates" and "--The Market Value of Your Certificates Will be Sensitive to
Factors Unrelated to the Performance of Your Certificates and the Underlying
Mortgage Assets" in the accompanying prospectus.
YOUR TIMELY RECEIPT OF ALL AMOUNTS PAYABLE WITH RESPECT TO YOUR CERTIFICATES
WILL COMPLETELY DEPEND ON THE PERFORMANCE OF THE MORTGAGE LOANS. The mortgage
loans are subject to delinquencies, defaults and losses. The rate and timing of
delinquencies and defaults on the mortgage loans will affect the rate, timing
and amount of payments on your certificates, the yield to maturity of your
certificates and the weighted average life of your certificates. Delinquencies
on the mortgage loans, unless covered by an advance by the master servicer or
the trustee, may result in shortfalls in payments of interest and/or principal
on your certificates for the current month. In addition, even if an advance is
made to cover a delinquency, the party making that advance will have a right to
receive interest on that advance that is prior to the rights of the
certificateholders to receive payments on their certificates. The accrual of
interest on advances may result in shortfalls in payments of interest and/or
principal on the certificates. In addition, with respect to each mortgage loan
that is serviced by the special servicer, the special servicer will receive
compensation out of amounts that would otherwise have been applied to pay
interest and/or principal on the certificates.
The non-offered certificates, as well as any other class or classes of
offered certificates that are subordinate to your certificates, are intended to
provide credit support for your certificates. However, that credit support is
limited. There can be no assurance that it will protect you from shortfalls and
delays in payments on your certificates. As a holder of offered certificates,
you will bear the effects of any losses and other default-related shortfalls on
the mortgage loans in excess of the credit support provided to your
certificates. Even if shortfalls in payments on your certificates are made up on
a future payment date, no
S-22
<PAGE>
interest will accrue on those shortfalls. Thus, those shortfalls would adversely
affect the yield on your certificates.
If you purchase class "B", "C", "D", "E" or "F" certificates, then your
certificates will provide credit support to other classes of offered
certificates. As a result, you will receive payments after, and must bear the
effects of losses on the mortgage loans before, the holders of those other
classes of offered certificates.
If the assets of the trust are insufficient to make payments on your
certificates, no other assets will be available to you for payment of the
deficiency. Neither we nor any of our affiliates have guaranteed or will
otherwise be obligated to make payments on your certificates. No governmental
agency or instrumentality or private insurer has guaranteed or insured the
payments on your certificates.
When making an investment decision, you should consider, among other
things--
- the payment priorities of the respective classes of the certificates,
- the order in which the principal balances of the respective classes of the
certificates with balances will be reduced in connection with losses and
default-related shortfalls, and
- the characteristics and quality of the mortgage loans.
See "Description of the Mortgage Pool" and "Description of the Offered
Certificates--Payments" and "--Reductions of Certificate Principal Balances in
Connection With Realized Losses and Additional Trust Fund Expenses" in this
prospectus supplement. See also "Risk Factors--The Investment Performance of
Your Certificates Will Depend Upon Payments, Defaults and Losses on the
Underlying Mortgage Loans", "--Any Credit Support for Your Certificates may be
Insufficient to Protect you Against all Potential Losses" and "--Payments on the
Offered Certificates Will be Made Solely from the Limited Assets of the Related
Trust" in the accompanying prospectus.
THE OFFERED CERTIFICATES HAVE UNCERTAIN YIELDS TO MATURITY. The yield on
your certificates will depend on (a) the price you paid for your certificates
and (b) the rate, timing and amount of payments on your certificates. The rate,
timing and amount of payments on your certificates will, in turn, depend on:
- the pass-through rate for your certificates;
- the rate and timing of payments and other collections of principal on the
mortgage loans;
- the rate and timing of defaults, and the severity of losses, if any, on
the mortgage loans;
- the rate, timing, severity and allocation of other shortfalls and expenses
that reduce amounts available for payment on your certificates;
- the collection and payment of prepayment premiums and yield maintenance
charges with respect to the mortgage loans; and
- servicing decisions with respect to the mortgage loans.
These factors cannot be predicted with any certainty. Accordingly, you may
find it difficult to analyze the effect that these factors might have on the
yield to maturity of your certificates.
In particular, the investment performance of your certificates may vary
materially and adversely from your expectations due to the rate of prepayments
and other unscheduled collections of principal on the mortgage loans being
faster or slower than you anticipated. In deciding whether to purchase any
offered certificates, you should make an independent decision as to the
appropriate prepayment assumptions to be used.
If you purchase your certificates at a premium, and if payments and other
collections of principal on the mortgage loans occur at a rate faster than you
anticipated at the time of your purchase, then your actual yield to maturity may
be lower than you had assumed at the time of your purchase. Conversely, if
S-23
<PAGE>
you purchase your certificates at a discount, and if payments and other
collections of principal on the mortgage loans occur at a rate slower than you
anticipated at the time of your purchase, then your actual yield to maturity may
be lower than you had assumed at the time of your purchase. You should consider
that prepayment premiums and yield maintenance charges may not be collected in
all circumstances. Furthermore, even if a prepayment premium or yield
maintenance charge is available and payable on your certificates, it may not be
sufficient to offset fully any loss in yield on your certificates.
If you purchase class "X" certificates, your yield to maturity will be
particularly sensitive to the rate and timing of principal payments and losses
on the mortgage loans. Prior to investing in those certificates, you should
fully consider the associated risks, including the risk that an extremely rapid
rate of amortization, prepayment or other liquidation of the mortgage loans
could result in your failure to recover fully your initial investment. The
ratings on the class "X" certificates do not address whether a purchaser of
those certificates would be able to recover its initial investment in them.
The yield on the offered certificates with variable pass-through rates could
also be adversely affected if the mortgage loans with higher mortgage interest
rates pay principal faster than the mortgage loans with lower mortgage interest
rates. This is because those classes bear interest at pass-through rates equal
to, based upon or limited by, as applicable, a weighted average of net interest
rates derived from the mortgage loans.
See "Description of the Mortgage Pool", "Servicing of the Mortgage Loans",
"Description of the Offered Certificates--Payments" and "--Reductions of
Certificate Principal Balances in Connection With Realized Losses and Additional
Trust Fund Expenses" and "Yield and Maturity Considerations" in this prospectus
supplement. See also "Risk Factors--The Investment Performance of Your
Certificates Will Depend Upon Payments, Defaults and Losses on the Underlying
Mortgage Loans" and "Yield and Maturity Considerations" in the accompanying
prospectus.
POTENTIAL CONFLICTS OF INTEREST. The master servicer, the special servicer
or any of their respective affiliates may acquire certificates. In addition, the
holders of certificates representing a majority interest in the controlling
class of the certificates may replace the special servicer. See "Servicing of
the Mortgage Loans--Replacement of the Special Servicer" in this prospectus
supplement.
The master servicer and the special servicer each will be obligated to
observe the terms of the pooling and servicing agreement and will be governed by
the servicing standard described in this prospectus supplement. However, either
of those parties may, especially if it or an affiliate holds non-offered
certificates, or has financial interests in or other financial dealings with a
borrower under any of the mortgage loans, have interests when dealing with the
mortgage loans that are in conflict with those of holders of the offered
certificates. For instance, a special servicer that holds non-offered
certificates could seek to mitigate the potential for loss to its class from a
troubled mortgage loan by deferring enforcement in the hope of maximizing future
proceeds. However, that action could result in less proceeds to the trust than
would have been realized if earlier action had been taken. In general, neither
the master servicer nor the special servicer is required to act in a manner more
favorable to the offered certificates or any particular class thereof than to
the non-offered certificates.
In addition, the master servicer and the special servicer each services and
will, in the future, service, in the ordinary course of its business, existing
and new loans for third parties, including portfolios of loans similar to the
loans that will be included in the trust. The real properties securing these
other loans may be in the same markets as, and compete with, certain of the real
properties securing the loans that will be included in the trust. Consequently,
personnel of the master servicer and special servicer may perform services, on
behalf of the trust, with respect to the mortgage loans at the same time as they
are performing services, on behalf of other persons, with respect to other loans
secured by properties that compete with the real properties securing the
mortgage loans. This may pose inherent conflicts for the master servicer or
special servicer.
S-24
<PAGE>
Certain of the mortgage loans included in the trust may have been
refinancings of debt previously held by an affiliate of one of the mortgage loan
sellers.
ERISA CONSIDERATIONS. The regulations that govern pension and other
employee benefit plans subject to ERISA and plans and other retirement
arrangements subject to Section 4975(c) of the Internal Revenue Code of 1986 are
complex. Accordingly, if you are using the assets of a plan or arrangement to
acquire offered certificates, you are urged to consult legal counsel regarding
consequences under ERISA and the Internal Revenue Code of 1986 of the
acquisition, ownership and disposition of offered certificates. In particular,
the purchase or holding of class "B", "C", "D", "E" and "F" certificates by any
plan or arrangement may result in a prohibited transaction or the imposition of
excise taxes or civil penalties. As a result, these offered certificates should
not be acquired by, on behalf of, or with assets of any plan or arrangement,
unless the purchase and continued holding of the certificate or an interest in
the certificate is exempt from the prohibited transaction provisions of
Section 406 of ERISA and Section 4975 of the Internal Revenue Code of 1986 under
Sections I and III of Prohibited Transaction Class Exemption 95-60. Sections I
and III of Prohibited Transaction Class Exemption 95-60 provide an exemption
from the prohibited transaction rules for certain transactions involving an
insurance company general account.
See "Certain ERISA Considerations" in this prospectus supplement and "ERISA
Considerations" in the accompanying prospectus.
RISKS RELATED TO THE MORTGAGE LOANS
REPAYMENT OF THE MORTGAGE LOANS DEPENDS ON THE OPERATION OF THE UNDERLYING
REAL PROPERTIES. The mortgage loans are secured by mortgage liens on ownership
and/or leasehold interests in the following types of real property:
[SPECIFY PROPERTY TYPES.]
The risks associated with lending on these types of real properties are
inherently different from those associated with lending on the security of
single-family residential properties. This is because, among other reasons,
repayment of each of the mortgage loans is dependent on--
- the successful operation and value of the underlying real property, and
- the related borrower's ability to sell or refinance the underlying real
property.
See "Risk Factors--Repayment of a Commercial or Multifamily Mortgage Loan
Depends Upon the Performance and Value of the Underlying Real Property and the
Related Borrower's Ability to Refinance the Property" and "Description of the
Trust Assets--Mortgage Loans--A Discussion of Various Types of Multifamily and
Commercial Properties That May Secure Mortgage Loans Underlying a Series of
Offered Certificates" in the accompanying prospectus.
THE MORTGAGE LOANS HAVE A VARIETY OF CHARACTERISTICS WHICH MAY EXPOSE
INVESTORS TO GREATER RISK OF DEFAULT AND LOSS. When making an investment
decision, you should consider, among other things, the following characteristics
of the mortgage loans and/or the underlying real properties. Any or all of these
characteristics can affect, perhaps materially and adversely, the investment
performance of your certificates. Each of the respective items below includes a
cross-reference to where the associated risks are further discussed in this
prospectus supplement or in the accompanying prospectus. In addition, each of
those items may include a cross reference to where further information about the
particular characteristic may be found in this prospectus supplement.
- THE UNDERLYING REAL PROPERTY WILL BE THE SOLE ASSET AVAILABLE TO SATISFY
THE AMOUNTS OWING UNDER A MORTGAGE LOAN IN THE EVENT OF DEFAULT. All of
the mortgage loans are or should be considered nonrecourse loans. If the
related borrower defaults on any of the mortgage loans, only the
underlying real property, and not the other assets of the borrower, is
available to satisfy the debt. Even if the related loan documents permit
recourse to the borrower or a guarantor, the trust may
S-25
<PAGE>
not be able to ultimately collect the amount due under a defaulted
mortgage loan. None of the mortgage loans are insured or guaranteed by any
governmental agency or instrumentality or by any private mortgage insurer.
See "Risk Factors--Repayment of a Commercial or Multifamily Mortgage Loan
Depends Upon the Performance and Value of the Underlying Real Property and
the Related Borrower's Ability to Refinance the Property--Most of the
Mortgage Loans Underlying Your Certificates Will be Nonrecourse" in the
accompanying prospectus.
- IN SOME CASES, AN UNDERLYING REAL PROPERTY IS DEPENDENT ON A SINGLE TENANT
OR ON ONE OR A FEW MAJOR TENANTS. In the case of underlying real
properties, securing % of the initial mortgage pool balance, the
related borrower has leased the property to at least one tenant that
occupies % or more of the particular property. In the case of
of those mortgage loans, representing % of the initial mortgage pool
balance, the related borrower has leased the underlying real property to a
single tenant that occupies all or substantially all of the particular
property. Accordingly, the full and timely payment of each of those
mortgage loans is highly dependent on the continued operation of the major
tenant or tenants, which, in some cases, is the sole tenant, at the
underlying real property. See "Risk Factors--Repayment of a Commercial or
Multifamily Mortgage Loan Depends Upon the Performance and Value of the
Underlying Real Property and the Related Borrower's Ability to Refinance
the Property--The Successful Operation of a Multifamily or Commercial
Property Depends on Tenants", "--Repayment of a Commercial or Multifamily
Mortgage Loan Depends Upon the Performance and Value of the Underlying
Real Property and the Related Borrower's Ability to Refinance the
Property--Dependence on a Single Tenant or a Small Number of Tenants Makes
a Property Riskier Collateral" and "Repayment of a Commercial or
Multifamily Mortgage Loan Depends Upon the Performance and Value of the
Underlying Real Property and the Related Borrower's Ability to Refinance
the Property--Tenant Bankruptcy Adversely Affects Property Performance" in
the accompanying prospectus.
- % OR MORE OF THE INITIAL MORTGAGE POOL BALANCE WILL BE SECURED BY
MORTGAGE LIENS ON EACH OF THE FOLLOWING PROPERTY TYPES--[SPECIFY PROPERTY
TYPES.]
[ADD DISCLOSURE RELATING TO EACH PROPERTY TYPE AS TO WHICH THERE EXISTS A
MATERIAL CONCENTRATION BASED ON CUT-OFF DATE PRINCIPAL BALANCES OF THE
MORTGAGE LOANS.]
The inclusion in the trust of a significant concentration of mortgage loans
that are secured by mortgage liens on a particular type of income-producing
property makes the overall performance of the mortgage pool materially more
dependent on the factors that affect the operations at and value of that
property type. See "Description of the Trust Assets--Mortgage Loans--A
Discussion of Various Types of Multifamily and Commercial Properties That
May Secure Mortgage Loans Underlying a Series of Offered Certificates" in
the accompanying prospectus.
- % OR MORE OF THE INITIAL MORTGAGE POOL BALANCE WILL BE SECURED BY
MORTGAGE LIENS ON REAL PROPERTY LOCATED IN EACH OF THE FOLLOWING
STATES--[SPECIFY STATES]. The underlying real properties located in each
of the following states secure mortgage loans or allocated portions of
mortgage loans that represent % or more of the initial mortgage pool
balance:
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
STATE PROPERTIES POOL BALANCE
- ----- ---------- ----------------
<S> <C> <C>
</TABLE>
S-26
<PAGE>
The inclusion of a significant concentration of mortgage loans that are
secured by mortgage liens on real properties located in a particular state
makes the overall performance of the mortgage pool materially more
depending on economic and other conditions or events in that state. See
"Risk Factors--Geographic Concentration Within a Trust Exposes Investors to
Greater Risk of Default and Loss" in the accompanying prospectus.
- THE MORTGAGE POOL WILL INCLUDE ADJUSTABLE RATE MORTGAGE LOANS. of
the mortgage loans, representing % of the initial mortgage pool
balance, provide for adjustments to their respective interest rates and
corresponding adjustments to their respective monthly debt service
payments. See "Risk Factors--Adjustable Rate Mortgage Loans Entail Greater
Risks of Default to Lenders than Fixed Rate Mortgage Loans" in the
accompanying prospectus.
- THE MORTGAGE POOL WILL INCLUDE MATERIAL CONCENTRATIONS OF BALLOON LOANS
AND ARD LOANS. of the mortgage loans, representing % of the
initial mortgage pool balance, are balloon loans, and of the
mortgage loans, representing % of the initial mortgage pool balance,
are ARD loans. The ability of a borrower to make the required balloon
payment on a balloon loan at maturity, and the ability of a borrower to
repay an ARD loan on or before the related anticipated repayment date, in
each case depends upon its ability either to refinance the loan or to sell
the underlying real property. Although an ARD loan may provide the related
borrower with incentives to repay the loan by the related anticipated
repayment date, the failure of that borrower to do so will not be a
default under that loan. See "Description of the Mortgage Pool--Certain
Terms and Conditions of the Mortgage Loans" in this prospectus supplement
and "Risk Factors--The Investment Performance of Your Certificates Will
Depend Upon Payments, Defaults and Losses on the Underlying Mortgage
Loans--There is an Increased Risk of Default Associated with Balloon
Payments" in the accompanying prospectus.
- THE MORTGAGE POOL WILL INCLUDE SOME DISPROPORTIONATELY LARGE MORTGAGE
LOANS AND GROUPS OF CROSS-COLLATERALIZED MORTGAGE LOANS. The inclusion in
the mortgage pool of one or more loans that have outstanding principal
balances that are substantially larger than the other mortgage loans can
result in losses that are more severe, relative to the size of the
mortgage pool, than would be the case if the aggregate balance of the
mortgage pool were distributed more evenly. The largest mortgage
loans and groups of cross-collateralized mortgage loans represent %
of the initial mortgage pool balance. See "Description of the Mortgage
Pool--General", "--Cross-Collateralized Mortgage Loans, Multi-Property
Mortgage Loans and Mortgage Loans With Affiliated Borrowers" and
"--Significant Mortgage Loans" in this prospectus supplement and "Risk
Factors--Loan Concentration Within a Trust Exposes Investors to Greater
Risk of Default and Loss" in the accompanying prospectus.
- THE MORTGAGE POOL WILL INCLUDE LEASEHOLD MORTGAGE LOANS. of the
underlying real properties, securing % of the initial mortgage pool
balance, are secured by mortgage liens on the related
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<PAGE>
borrower's leasehold interest in all or a portion of the underlying real
property, but not by the corresponding ownership interest in the property
that is subject to the ground lease. Because of possible termination of
the related ground lease, lending on a leasehold interest in a real
property is riskier than lending on an actual ownership interest in that
property. See "Description of the Mortgage Pool--Additional Loan and
Property Information--Leaseholds" in this prospectus supplement. See also
"Risk Factors--Ground Leases Create Risks for Lenders that are not Present
When Lending on an Actual Ownership Interest in a Real Property" and
"Certain Legal Aspects of Mortgage Loans--Foreclosure--Leasehold
Considerations" in the accompanying prospectus.
- SOME OF THE UNDERLYING REAL PROPERTIES ARE "LEGAL NONCONFORMING USES" OR
"LEGAL NONCONFORMING STRUCTURES". Certain of the mortgage loans are
secured by a mortgage lien on a real property that is a "legal
nonconforming use" or a "legal nonconforming structure". This may impair
the ability of the borrower to restore the improvements on an underlying
real property to its current form or use following a major casualty. See
"Description of the Mortgage Pool--Certain Underwriting Matters--Zoning
and Building Code Compliance" in this prospectus supplement and "Risk
Factors--Changes in Zoning may Adversely Affect the Use or Value of a Real
Property" in the accompanying prospectus.
- SOME OF THE UNDERLYING REAL PROPERTIES ARE ENCUMBERED BY SUBORDINATE DEBT.
of the mortgage loans, representing % of the initial mortgage
pool balance, have underlying real properties which are known to us to be
encumbered by secured subordinate debt that is not part of the mortgage
pool. The existence of secured subordinate indebtedness may adversely
affect the borrower's financial viability and/or the trust's security
interest in the underlying real property. Any or all of the following may
result from the existence of secured subordinate indebtedness on an
underlying real property.
(i) refinancing the mortgage loan at maturity for the purpose of making
any balloon payments may be more difficult;
(ii) reduced cash flow could result in deferred maintenance at the
particular real property;
(iii) if the holder of the subordinated debt files for bankruptcy or is
placed in involuntary receivership, foreclosing on the particular
real property could be delayed; and
(iv) if the underlying real property depreciates for whatever reason,
the related borrower's equity is more likely to be wiped out,
thereby eliminating the related borrower's incentive to continue
making payments on its mortgage loan.
[The lender of any material subordinate debt on the underlying real
properties known to us has agreed not to foreclose or take other legal
action against the underlying real property or the related borrower, for so
long as the related mortgage loan is outstanding and the trust has not done
so.]
See "Description of the Mortgage Pool--Additional Loan and Property
Information--Additional and Other Financing" in this prospectus supplement
and "Risk Factors--Subordinate Debt Increases the Likelihood That a
Borrower Will Default on a Mortgage Loan Underlying Your Certificates" in
the accompanying prospectus.
- SOME OF THE UNDERLYING REAL PROPERTIES DO NOT COMPLY WITH THE AMERICANS
WITH DISABILITIES ACT OF 1990. Not all of the underlying real properties
securing the mortgage loans comply with the Americans with Disabilities
Act of 1990. Compliance can be expensive. See "Risk Factors-- Compliance
with the Americans with Disabilities Act of 1990 May be Expensive" in the
accompanying prospectus.
- MULTIPLE UNDERLYING REAL PROPERTIES ARE OWNED BY THE SAME BORROWER OR
AFFILIATED BORROWERS OR ARE OCCUPIED, IN WHOLE OR IN PART, BY THE SAME
TENANT OR AFFILIATED TENANTS. Some groups of the mortgage loans have
borrowers that, in the case of each of those groups, are the same or under
common
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control. See "Description of the Mortgage Pool--Cross-Collateralized
Mortgage Loans, Multi-Property Mortgage Loans and Mortgage Loans With
Affiliated Borrowers" in this prospectus supplement.
In addition, there may be tenants which lease space at more than one
underlying real property, and there may be tenants that are related to or
affiliated with a borrower. See Annex A-1 to this prospectus supplement for
a list of the three most significant tenants at each of the underlying real
properties used for [SPECIFY USE OF PROPERTIES].
The bankruptcy or insolvency of, or other financial problems with respect
to, any borrower or tenant that is (directly or through affiliation)
associated with two or more of the underlying real properties could have an
adverse effect on all of those properties and on the ability of those
properties to produce sufficient cash flow to make required payments on the
related mortgage loans in the trust. See "Risk Factors-- Repayment of a
Commercial or Multifamily Mortgage Loan Depends upon the Performance and
Value of the Underlying Real Property and the Related Borrower's Ability to
Refinance the Property--Tenant Bankruptcy Adversely Affects Property
Performance", "--Borrower Concentration Within a Trust Exposes Investors to
Greater Risk of Default and Loss" and "--Borrower Bankruptcy Proceedings
Can Delay and Impair Recovery on a Mortgage Loan Underlying Your
Certificates" in the accompanying prospectus.
- SOME BORROWERS UNDER THE MORTGAGE LOANS WILL NOT BE SPECIAL PURPOSE
ENTITIES. The business activities of certain of the borrowers under the
mortgage loans are not limited to owning their respective underlying real
properties. Accordingly, the financial success of each of those borrowers
may be affected by the performance of its other business activities,
including other real estate interests. Those other business activities
increase the possibility that the borrower may become bankrupt or
insolvent.
CHANGES IN MORTGAGE POOL COMPOSITION CAN CHANGE THE NATURE OF YOUR
INVESTMENT. If you purchase any offered certificates other than the class
" " certificates, you will be more exposed to risks associated with changes
in concentrations of borrower, loan or property characteristics than are persons
who own offered certificates that have an earlier assumed final payment date
than your certificates. See "Risk Factors--Changes in Pool Composition Will
Change the Nature of Your Investment" in the accompanying prospectus.
LENDING ON INCOME-PRODUCING REAL PROPERTIES ENTAILS ENVIRONMENTAL
RISKS. The trust could become liable for a material adverse environmental
condition at an underlying real property. Any such potential liability could
reduce or delay payments on the offered certificates.
A third-party consultant conducted an environmental site assessment, or
updated a previously conducted assessment, with respect to of the
underlying real properties, securing % of the initial mortgage pool
balance, during the -month period ending on . Each of those
environmental site assessments or updates, as the case may be, complied with
industry-wide standards. Not all of those environmental site assessments,
however, satisfied all the requirements necessary to be considered a "Phase I"
environmental site assessment. In certain cases, a third-party consultant also
conducted a "Phase II" environmental site assessment of the underlying real
property. If any assessment or update revealed a material adverse environmental
condition or circumstance at any underlying real property and the consultant
recommended action, then, depending on the nature of the condition or
circumstance, the borrower has--
- implemented or agreed to implement an operations and maintenance plan, in
the manner and within the time frames specified in the related loan
documents;
- agreed to monitor periodically nearby properties, in the manner and within
the time frames specified in the related loan documents; or
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<PAGE>
- established a reserve account with the lender to cover the estimated cost
of addressing the condition or circumstances.
In many cases, the identified condition related to the presence of
asbestos-containing materials, lead-based paint and/or radon. Where these
substances were present, the environmental consultant generally recommended, and
the related loan documents required, the establishment of an operation and
maintenance plan to address the issue or, in the case of asbestos-containing
materials and lead-based paint, an abatement or removal program. In a few cases,
the particular asbestos-containing materials or lead-based paint was in poor
condition. This could result in a claim for damages by any party injured by such
condition.
In some cases, the cost to remediate, prevent or otherwise deal with an
adverse environmental condition at a particular underlying real property was
estimated to be more than [$50,000].
[In some cases, the environmental consultant did not recommend that any
action be taken with respect to a potential adverse environmental condition at
an underlying real property or a nearby property because a responsible party
with respect to that condition had already been identified.]
[In the case of of the underlying real properties, securing % of
the initial mortgage pool balance, either--
- no environmental site assessment was conducted in connection with the
origination of the related mortgage loan, or
- a "Phase II" environmental site assessment was recommended but not
performed.]
[In general, the related originator's election not to take the foregoing actions
with respect to any of those underlying real properties was based upon the
delivery of a secured creditor impaired property policy covering certain
environmental matters with respect to the property. Some of those
underlying real properties are, in each case, are covered by individual
secured creditor impaired property policies. In addition, we will obtain a
separate secured creditor impaired property policy covering certain
environmental matters with respect to all of the underlying real properties that
are not covered by individual policies. All of the policies referred to in the
prior two sentences provide for certain coverage limits. In addition, those
policies do not provide coverage for adverse environmental conditions at levels
below legal limits or for conditions involving asbestos and lead-based paint. In
some cases, the originator of the related mortgage loan agreed to release a
principal of the related borrower from its obligations under an environmental or
hazardous substances indemnity with respect to the particular underlying real
property in connection with the delivery of a secured creditor impaired property
policy covering that property. See "Description of the Mortgage Pool--Certain
Underwriting Matters--Environmental Insurance" in this prospectus supplement.]
See "Risk Factors--Environmental Liabilities Will Adversely Affect the Value
and Operation of the Contaminated Property and May Deter a Lender from
Foreclosing" and "Certain Legal Aspects of Mortgage Loans--Environmental
Considerations" in the accompanying prospectus.
LENDING ON INCOME-PRODUCING PROPERTIES ENTAILS RISKS RELATED TO PROPERTY
CONDITION. Licensed engineers inspected all of the underlying real properties
during the -month period preceding to assess the structure,
exterior walls, roofing, interior construction, mechanical and electrical
systems and general condition of the site, buildings and other improvements
located at each underlying real property. At certain of the underlying real
properties, the inspections identified conditions requiring escrows to be
established for repairs or replacements estimated to cost in excess of
[$100,000]. In most of these cases, the originator required the related borrower
to fund reserves, or deliver letters of credit or other instruments, to cover
these costs.
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<PAGE>
LIMITATIONS ON ENFORCEABILITY OF CROSS-COLLATERALIZATION. The mortgage pool
will include mortgage loans that are secured, including through
cross-collateralization with other mortgage loans, by multiple underlying real
properties. These mortgage loans are identified in the tables contained in Annex
A-1. The purpose of securing any particular mortgage loan or group of
cross-collateralized mortgage loans with multiple real properties is to reduce
the risk of default or ultimate loss as a result of an inability of any
particular property to generate sufficient net operating income to pay debt
service. [However, of these mortgage loans permit--
- the release of one or more of the underlying real properties from the
related mortgage lien, and/or
- a full or partial termination of the applicable cross-collateralization,
in each case, upon the satisfaction of the conditions described under
"Description of the Mortgage Pool--Certain Terms and Conditions of the
Mortgage Loans" in this prospectus supplement.]
In addition, when multiple real properties secure a mortgage loan or group
of cross-collateralized mortgage loans, the amount of the mortgage encumbering
any particular one of those properties may be less than the full amount of the
related mortgage loan or group of cross-collateralized mortgage loans (in
general, to avoid recording tax). This mortgage amount may equal the appraised
value or allocated loan amount for the underlying real property and will limit
the extent to which proceeds from the property will be available to offset
declines in value of the other properties securing the same mortgage loan or
group of cross-collateralized mortgage loans.
mortgage loans are, in each case, secured by real properties located
in two or more states. These mortgage loans represent % of the initial
mortgage pool balance. Foreclosure actions are brought in state court and the
courts of one state cannot exercise jurisdiction over property in another state.
Upon a default under any of these mortgage loans, it may not be possible to
foreclose on the related underlying real properties simultaneously.
LIMITED INFORMATION CAUSES UNCERTAINTY. Some of the mortgage loans are
acquisition financing. Accordingly, limited or no operating information is
available with respect to the underlying real properties for those mortgage
loans. As a result, you may find it difficult to analyze the performance of
those properties.
[PRIOR BANKRUPTCIES. Some of the borrowers under the mortgage loans or their
affiliates have been parties to, and/or some of the underlying real properties
have been the subject of, prior bankruptcy proceedings.]
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<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
We are establishing a trust, to be designated as "LB Commercial Mortgage
Trust ". The assets of the trust will primarily consist of the mortgage
loans, which have the characteristics described in this prospectus supplement.
The mortgage pool will have an initial mortgage pool balance of $ ,
subject to a variance of plus or minus 5%. The "initial mortgage pool balance"
will equal the aggregate cut-off date principal balance of the mortgage loans.
The "cut-off date principal balance" of any mortgage loan is equal to its unpaid
principal balance as of the cut-off date, after application of all monthly debt
service payments due in respect of the mortgage loan on or before that date,
whether or not those payments were received. The cut-off date principal balances
of the mortgage loans will range from $ to $ , and the
average cut-off date principal balance of the mortgage loans will be
$ .
Each of the mortgage loans is an obligation of the related borrower to repay
a specified sum with interest. Each of the mortgage loans is evidenced by a
promissory note and secured by a mortgage, deed of trust, deed to secure debt or
other similar security instrument (each, for purposes of this prospectus
supplement, a "mortgage") that creates a [first] mortgage lien on the ownership
and/or leasehold interest of the related borrower or another party in one or
more commercial or multifamily real properties, subject only to the following
(collectively, the "Permitted Encumbrances")--
- the lien of current real property taxes, ground rents, water charges,
sewer rents and assessments not yet due and payable,
- covenants, conditions and restrictions, rights of way, easements and other
matters that are of public record and/or are referred to in the related
lender's title insurance policy (or, if not yet issued, referred to in a
pro forma title policy or a "marked-up" commitment), none of which
materially interferes with the security intended to be provided by the
mortgage, the current use of the related underlying real property or the
current ability of the related underlying real property to generate income
sufficient to service the related mortgage loan,
- exceptions and exclusions specifically referred to in such lender's title
insurance policy (or such pro forma title policy or "marked-up"
commitment), none of which materially interferes with the security
intended to be provided by the mortgage, the current use of the related
underlying real property or the current ability of the related underlying
real property to generate income sufficient to service the related
mortgage loan,
- other matters to which like properties are commonly subject, none of which
materially interferes with the security intended to be provided by the
mortgage, the use of the related underlying real property or the current
ability of the related underlying real property to generate income
sufficient to service the related mortgage loan,
- the rights of tenants to remain, whether under ground leases or space
leases, at the underlying real property following a foreclosure or similar
proceeding, provided that those tenants are performing under such leases,
and
- if the mortgage loan is a cross-collateralized mortgage loan, the lien of
the mortgage for another mortgage loan contained in the same group of
cross-collateralized mortgage loans.
You should consider each of the mortgage loans a nonrecourse obligation of
the related borrower. In the event of a payment default by the related borrower,
recourse will be limited to the underlying real property or properties for
satisfaction of that borrower's obligations. In those cases where recourse to a
borrower or guarantor is permitted under the related mortgage loan documents, we
have not undertaken an evaluation of the financial condition of any of these
persons. None of the mortgage loans is insured or guaranteed by any governmental
entity or by any other person.
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<PAGE>
We include in this prospectus supplement a variety of information regarding
the mortgage loans and the underlying real properties. In reviewing this
information, you should be aware that--
- All numerical information provided with respect to the mortgage loans is
provided on an approximate basis.
- All weighted average information provided with respect to the mortgage
loans or any sub-group of mortgage loans reflects the weighting of those
mortgage loans by their respective cut-off date principal balances.
- When information with respect to the underlying real properties is
expressed as a percentage of the initial mortgage pool balance, the
percentages are based upon the cut-off date principal balances of the
related mortgage loans.
- In certain cases involving a mortgage loan that is secured by multiple
underlying real properties located in more than one state, a portion of
such mortgage loan has been allocated to each such underlying real
property.
- Statistical information regarding the mortgage loans may change prior to
the date of initial issuance of the certificates due to changes in the
composition of the mortgage pool prior to that date.
CROSS-COLLATERALIZED MORTGAGE LOANS, MULTI-PROPERTY MORTGAGE LOANS AND MORTGAGE
LOANS WITH AFFILIATED BORROWERS
The mortgage pool includes mortgage loans that are, in each case,
individually or through cross-collateralization with other mortgage loans,
secured by two or more real properties. [However, the amount of the mortgage
encumbering any particular one of those properties may be less than the full
amount of the related mortgage loan or group of cross-collateralized mortgage
loans in the trust, generally to avoid recording tax. The mortgage amount may
equal the appraised value or allocated loan amount for the particular real
property, thereby limiting the extent to which proceeds from that property would
be available to offset declines in value of the other underlying real properties
securing the same mortgage loan or group of cross-collateralized mortgage loans
in the trust.]
of the mortgage loans referred to in the prior paragraph entitle the
related borrower(s) to obtain a release of one or more of the underlying real
properties and/or a termination of any applicable cross-collateralization,
subject, in each case, to the fulfillment of one or more of the following
conditions--
- the pay down of the mortgage loan(s) in an amount equal to a specified
percentage, which is usually %, of the portion of the total loan
amount allocated to the property or properties to be released;
- the satisfaction of certain debt service coverage and loan-to-value tests
for the property or properties that will remain as collateral; and/or
- receipt by the lender of confirmation from each applicable rating agency
that the action will not result in a qualification, downgrade or
withdrawal of any of the then-current ratings of the certificates.
In addition, certain of the mortgage loans referred to in the prior
paragraph also entitle the related borrower to a release of one or more of the
underlying real properties through defeasance. See "--Certain Terms and
Conditions of the Mortgage Loans--Defeasance Loans" below.
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<PAGE>
The table below identifies the underlying real properties that secure the
individual multi-property mortgage loans ("Multi") and groups of
cross-collateralized mortgage loans ("Cross") that will, in each case, represent
at least % of the initial mortgage pool balance.
<TABLE>
<CAPTION>
NUMBER OF STATES % OF
WHERE THE INITIAL MORTGAGE
PROPERTY NAMES MULTI/CROSS PROPERTIES ARE LOCATED POOL BALANCE
- -------------- ----------- ---------------------- ----------------
<S> <C> <C> <C> <C> <C>
</TABLE>
The table below shows the underlying real properties that secure the groups
of non-cross-collateralized mortgage loans that, in the case of each of those
groups, represent % or more of the initial mortgage pool balance and
generally are secured by underlying real properties with the same managing
entity and/or have the same or affiliated borrowers.
<TABLE>
<CAPTION>
NUMBER OF STATES % OF
WHERE THE INITIAL MORTGAGE
PROPERTY NAMES PROPERTIES ARE LOCATED POOL BALANCE
- -------------- ---------------------- ----------------
<S> <C> <C> <C> <C> <C>
</TABLE>
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<PAGE>
CERTAIN TERMS AND CONDITIONS OF THE MORTGAGE LOANS
DUE DATES. All of the mortgage loans provide for monthly debt service
payments to be due on the [first day] of each month.
MORTGAGE RATES; CALCULATIONS OF INTEREST. In general, each of the mortgage
loans bears interest at a mortgage interest rate that, in the absence of
default, is fixed until maturity. However, as described below, each of the
mortgage loans that has an anticipated repayment date will accrue interest after
that date at a rate that is in excess of its mortgage interest rate prior to
that date. [IF ANY OF THE MORTGAGE LOANS HAVE FLOATING OR ADJUSTABLE MORTGAGE
INTEREST RATES, DISCUSS CALCULATION OF THOSE RATES, INCLUDING INDICES, GROSS
MARGINS, ADJUSTMENT DATES, FLOORS AND CAPS.]
As of , the mortgage interest rates for the mortgage loans
ranged from % per annum to % per annum, and the weighted average
mortgage interest rate for the mortgage loans was %.
None of the mortgage loans provides for negative amortization or, except as
described below with respect to the ARD loans, which have anticipated repayment
dates, for the deferral of interest. [DESCRIBE ANY POTENTIAL NEGATIVE
AMORTIZATION.]
Each of the mortgage loans will accrue interest on the basis of one of the
following conventions:
- the actual number of days elapsed during each one-month accrual period in
a year of 360 days (an "actual/360 basis"); or
- a 360-day year consisting of twelve 30-day months (a "30/360 basis"); or
- [SPECIFY ANY OTHER BASIS].
The table below shows the number of, and percentage of initial mortgage pool
balance represented by, mortgage loans that accrue interest based on each of the
foregoing conventions.
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
INTEREST ACCRUAL BASIS MORTGAGE LOANS POOL BALANCE
- ---------------------- -------------- ----------------
<S> <C> <C>
Actual/360 Basis.................................. %
30/360 Basis...................................... %
[OTHER]........................................... %
</TABLE>
BALLOON LOANS. of the mortgage loans, representing % of the
initial mortgage pool balance, are balloon loans.
A "balloon loan" is characterized by--
- an amortization schedule that is significantly longer than the actual term
of the mortgage loan, and
- a substantial payment being due in respect of the mortgage loan on its
stated maturity date.
ARD LOANS. of the mortgage loans, representing % of the initial
mortgage pool balance, are ARD loans.
An "ARD loan" is characterized by the following features:
- A maturity date that is more than years following origination.
- The designation of an "anticipated repayment date" that is generally
years following origination. The anticipated repayment date for each
of the ARD loans is listed on Annex A-1 to this prospectus supplement.
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<PAGE>
- The ability of the related borrower to prepay the mortgage loan, without
restriction, including without any obligation to pay a prepayment premium
or a yield maintenance charge, at any time on or after a date that is
generally to months] prior to the related anticipated
repayment date.
- Until its anticipated repayment date, the calculation of interest at its
initial mortgage interest rate.
- From and after its anticipated repayment date, the accrual of interest at
a revised annual rate that is, in most cases, equal to the sum of (i) its
initial mortgage interest rate, plus (ii) a specified margin that is, in
some cases, not more than percentage points.
- The deferral of any additional interest, which we refer to as "Post-ARD
Additional Interest", accrued in respect of the mortgage loan from and
after the related anticipated repayment date at the difference between its
revised mortgage interest rate and its initial mortgage interest rate.
Post-ARD Additional Interest may, in some cases, compound at the new
revised mortgage interest rate. Any Post-ARD Additional Interest accrued
in respect of an ARD loan following its anticipated repayment date will
not be payable until the entire principal balance of the mortgage loan has
been paid in full.
- From and after its anticipated repayment date, the accelerated
amortization of the mortgage loan out of any and all monthly cash flow
from the underlying real property which remains after payment of the
applicable monthly debt service payments and permitted operating expenses
and capital expenditures. These accelerated amortization payments and the
Post-ARD Additional Interest are considered separate from the monthly debt
service payments due in respect of an ARD loan.
In the case of each of the ARD loans, the related borrower has agreed to
enter into a cash management agreement not less than months prior to the
related anticipated repayment date if it has not already done so. The related
borrower or the manager of the underlying real property will be required under
the terms of that cash management agreement to deposit or cause the deposit of
all revenue from that property received after the related anticipated repayment
date into a designated account controlled by the lender under the ARD loan.
FULLY AMORTIZING LOANS. of the mortgage loans, representing %
of the initial mortgage pool balance, are fully amortizing loans.
A "fully amortizing loan" is generally characterized by--
- constant monthly debt service payments throughout the substantial term of
the mortgage loan, and
- an amortization schedule that is approximately equal to the actual term of
the mortgage loan.
However, a "fully amortizing loan" does not have either--
- an anticipated repayment date, or
- the associated repayment incentives.
AMORTIZATION OF PRINCIPAL. The table below shows, in months, the original
and, as of , the remaining amortization schedules and terms to
maturity for the mortgage loans [or the specified sub-groups of mortgage loans].
For purposes of the following table, ARD loans are assumed to "mature" on their
respective anticipated repayment dates.
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<PAGE>
<TABLE>
<CAPTION>
FULLY AMORTIZING
BALLOON LOANS ARD LOANS LOANS ALL MORTGAGE LOANS
------------- --------- ---------------- ------------------
<S> <C> <C> <C> <C>
Original Term to Maturity (mos.)......
Maximum...........................
Minimum...........................
Weighted Average..................
Remaining Term to Maturity (mos.).....
Maximum...........................
Minimum...........................
Weighted Average..................
Original Amortization Term (mos.).....
Maximum...........................
Minimum...........................
Weighted Average..................
Remaining Amortization Term (mos.)....
Maximum...........................
Minimum...........................
Weighted Average..................
</TABLE>
Some of the mortgage loans provide for a recast of the amortization schedule
and an adjustment of the monthly debt service payments on the mortgage loan upon
application of specified amounts of condemnation proceeds or insurance proceeds
to pay the unpaid principal balance of the mortgage loan.
[DISCUSS ANY ADJUSTMENTS TO THE MONTHLY DEBT SERVICE PAYMENTS FOR THE
MORTGAGE LOANS.]
VOLUNTARY PREPAYMENT PROVISIONS. In general, at origination, the mortgage
loans provided for:
- a period (a "prepayment lock-out period") during which voluntary principal
prepayments are prohibited, followed by
- a period (a "prepayment consideration period") during which voluntary
prepayments are permitted, subject to the payment of an additional
consideration for the prepayment, followed by
- a period (an "open prepayment period") during which voluntary principal
prepayments may be made without any prepayment consideration.
Notwithstanding otherwise applicable lock-out periods, partial prepayments
of some of the mortgage loans are required under the circumstances described
under "--Certain Terms and Conditions of the Mortgage Loans--Other Prepayment
Provisions" below.
The prepayment terms of each of the mortgage loans are more particularly
described in Annex A-1 to this prospectus supplement.
As described below under "--Defeasance Loans", [substantially all] of the
mortgage loans permit the borrower to obtain a release of the underlying real
property (or, where applicable, one or more of the underlying real properties)
from the lien of the related mortgage by delivering U.S. government securities
as substitute collateral. None of the mortgage loans permit defeasance prior to
the anniversary of the date of initial issuance of the certificates.
PREPAYMENT LOCK-OUT PERIODS. mortgage loans, representing % of
the initial mortgage pool balance, provide for prepayment lock-out periods as of
and--
- the maximum remaining prepayment lock-out period of those mortgage loans
as of that date is months,
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<PAGE>
- the minimum remaining prepayment lock-out period of those mortgage loans
as of that date is months, and
- the weighted average remaining prepayment lock-out period of those
mortgage loans as of that date is months.
Notwithstanding otherwise applicable lock-out periods, partial prepayments
of some mortgage loans are required under the circumstances described under
"--Certain Terms and Conditions of the Mortgage Loans--Other Prepayment
Provisions" below.
PREPAYMENT CONSIDERATION. Following an initial prepayment lock-out period,
mortgage loans, representing % of the initial mortgage pool balance,
provide for the payment of prepayment consideration in connection with a
voluntary prepayment during part of the loan term. That prepayment consideration
will equal [SPECIFY CALCULATION OF PREPAYMENT CONSIDERATION].
Prepayment premiums and yield maintenance charges received on the mortgage
loans, whether in connection with voluntary or involuntary prepayments, will be
allocated and paid to the persons, in the amounts and in accordance with the
priorities described under "Description of the Offered Certificates--
Payments--Payments of Prepayment Premiums and Yield Maintenance Charges" in this
prospectus supplement. Limitations may exist under applicable state law on the
enforceability of the provisions of the mortgage loans that require payment of
prepayment premiums or yield maintenance charges, and neither we nor the
underwriter makes any representation or warranty as to the collectability of any
prepayment premium or yield maintenance charge in respect of any of the those
mortgage loans. See "Risk Factors--Some Provisions in the Mortgage Loans
Underlying Your Certificates May be Challenged as Being
Unenforceable--Prepayment Premiums, Fees and Charges" and "Certain Legal Aspects
of Mortgage Loans--Default Interest and Limitations on Prepayments" in the
accompanying prospectus.
OPEN PREPAYMENT PERIODS. Where a mortgage loan provides for an open
prepayment period, the open prepayment period generally begins to
months prior to stated maturity [(or, in the case of an ARD loan, prior to
the related anticipated repayment date)].
OTHER PREPAYMENT PROVISIONS. Certain of the mortgage loans provide for
mandatory partial prepayments, notwithstanding any lock-out period that may
otherwise be in effect. In some cases, the related borrower has established
reserves or delivered a letter of credit that will be applied to a partial
prepayment of the mortgage loan if one or more property performance conditions
do not occur.
Investors should not expect any prepayment consideration to be paid in
connection with any mandatory partial prepayment described above.
"DUE-ON-SALE" AND "DUE-ON-ENCUMBRANCE" PROVISIONS. of the mortgage
loans, representing % of the initial mortgage pool balance, contain both a
"due-on-sale" clause and a "due-on-encumbrance" clause. In general, except for
the permitted transfers discussed below, these clauses either permit the holder
of the related mortgage to accelerate the maturity of the mortgage loan if the
borrower sells or otherwise transfers or encumbers the underlying real property
or prohibit the borrower from doing so without the consent of the holder of the
mortgage. See, however, "Risk Factors--The Investment Performance of Your
Certificates Will Depend upon Payments, Defaults and Losses on the Underlying
Mortgage Loans--Delinquencies, Defaults and Losses on the Underlying Mortgage
Loans May Affect the Amount and Timing of Payments on Your Certificates" and
"--Some Provisions in the Mortgage Loans Underlying Your Certificates may be
Challenged as Being Unenforceable--Due-on-Sale and Debt Acceleration Clauses"
and "Certain Legal Aspects of Mortgage Loans--Due on Sale and Due-on-Encumbrance
Provisions" in the accompanying prospectus.
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Many of the mortgage loans permit one or more of the following types of
transfers:
- transfers of the underlying real property if specified conditions are
satisfied, which conditions normally include--
(i) confirmation by each applicable rating agency that the transfer will
not result in a qualification, downgrade or withdrawal of any of its
then current ratings of the certificates, or
(ii) the reasonable acceptability of the transferee to the lender;
- a transfer of the underlying real property to a person that is affiliated
with or otherwise related to the borrower;
- certain specified transfers by the borrower of the underlying real
property in accordance with the provisions of the mortgage loan; or
- a transfer of certain ownership interests in the borrower.
DEFEASANCE LOANS. of the mortgage loans, representing % of the
initial mortgage pool balance, permit the borrower to deliver U.S. government
securities as substitute collateral.
Each of these mortgage loans permits the related borrower, during specified
periods and subject to certain conditions, to pledge to the holder of the
mortgage loan the requisite amount of direct, non-callable U.S. government
securities (the "defeasance collateral") and obtain a release of the underlying
real property (or, in the case of a mortgage loan secured by multiple real
properties, one or more of the underlying real properties). In general, the
defeasance collateral to be delivered in connection with the defeasance of any
mortgage loan must provide for a series of payments that--
- will be made prior, but as closely as possible, to all successive due
dates through and including the maturity date, and
- will, in the case of each due date, be in a total amount equal to or
greater than the monthly debt service payment (including, if applicable,
any balloon payment) scheduled to be due on that date (with any excess to
be returned to the related borrower).
[For purposes of determining the defeasance collateral for an ARD loan,
however, that mortgage loan will be treated as if a balloon payment is due on
its anticipated repayment date.]
If fewer than all of the real properties securing any particular mortgage
loan or group of cross-collateralized mortgage loans are to be released in
connection with any defeasance, the requisite defeasance collateral will be
calculated based on the allocated loan amount for the properties to be released
and the portion of the monthly debt service payments attributable to that
allocated loan amount.
In connection with any delivery of defeasance collateral, the related
borrower will be required to deliver a security agreement granting the trust a
first priority security interest in the collateral, together with an opinion of
counsel confirming the first priority status of the security interest.
None of the mortgage loans may be defeased prior to the anniversary of
the date of initial issuance of the certificates.
CERTAIN MORTGAGE POOL CHARACTERISTICS
GENERAL. A detailed presentation of certain characteristics of the mortgage
loans and the underlying real properties, on an individual basis and in tabular
format, is shown on Annex A-1 and Annex A-2 to this prospectus supplement.
Certain terms that appear in those exhibits, as well as elsewhere in this
prospectus supplement, are defined or otherwise discussed below. The statistics
in the tables and schedules on Annex A-1 and Annex A-2 to this prospectus
supplement were derived, in many cases, from information and operating
statements furnished by or on behalf of the respective borrowers. The
information and the
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operating statements were generally unaudited and have not been independently
verified by us or the underwriter.
1. "Net cash flow" is, with respect to each of the underlying real properties,
.
2. "Cut-off date debt service coverage ratio", "cut-off date DSC ratio" or
"cut-off date DSCR" means .
3. "Cut-off date loan-to-value ratio", "cut-off date LTV ratio" or "cut-off
date LTV" means .
4. "Maturity loan-to-value ratio", maturity date loan-to-value ratio",
"maturity LTV ratio" or "maturity date LTV ratio" means .
5. "Loan per unit", "loan per pad" or "loan per room" means .
6. "Loan per sq/ft." means .
7. "Year built/renovated" means .
8. "Weighted average" or "wtd. avg." means .
9. "Underwriting reserves" means .
10. "Administrative cost rate" means .
11. "Original amortization term" means .
12. "Remaining amortization term" means .
13. The following abbreviations relating to any prepayment provisions have the
indicated meanings:
14. "D" means .
15. "Occupancy percentage" or "occupancy rate" means .
16. "Remaining term to maturity" means .
17. "Original term to maturity" means .
18. "Capital improvement reserve" means .
19. "Replacement reserve" means .
20. "TI/LC reserve" means .
21. "Original interest-only period" means .
22. "Remaining interest-only period" means .
23. "Shadow" means .
24. "NAP" means .
25. "NAV" means .
SIGNIFICANT MORTGAGE LOANS
[INSERT DESCRIPTION OF SIGNIFICANT MORTGAGE LOANS.]
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ADDITIONAL LOAN AND PROPERTY INFORMATION
DELINQUENCIES. None of the mortgage loans was as of , or has
been at any time during the -month period preceding that date, days
or more delinquent in respect of any monthly debt service payment.
TENANT MATTERS. Described below are special considerations regarding
tenants at the underlying real properties--
- of the underlying real properties, securing % of the initial
mortgage pool balance, are, in each case, a [SPECIFY PROPERTY TYPES] that
is leased to one or more major tenants that each occupy % or more of
the net rentable area of the particular property.
- A number of companies are major tenants at more than one of the underlying
real properties.
- There are several cases in which a particular entity is a tenant at
multiple underlying real properties, and although it may not be a major
tenant at any of those properties, it may be significant to the success of
the properties.
[- of the mortgage loans, representing % of the initial
mortgage pool balance, are secured by multifamily rental properties that
have material concentrations of student tenants.]
[GROUND LEASES. of the mortgage loans, representing % of the
initial mortgage pool balance, are secured, in whole or in material part, by a
mortgage on the borrower's leasehold interest in the underlying real property.
In each case, the related ground lease (giving effect to all extension options)
expires more than ten years after the stated maturity of the related mortgage
loan and either:
- the ground lessor has subordinated its interest in the underlying real
property to the interest of the holder of that mortgage loan; or
- the ground lessor has agreed to give the holder of that mortgage loan
notice of, and the right to cure, any default or breach by the lessee.]
[SPECIFY EXCEPTIONS.]
See "Risk Factors--Ground Leases Create Risks for Lenders That Are Not
Present When Lending on an Actual Ownership Interest in a Real Property" and
"Certain Legal Aspects of Mortgage Loans--Foreclosure--Leasehold Considerations"
in the accompanying prospectus.
[ADDITIONAL AND OTHER FINANCING. of the underlying real properties,
securing % of the initial mortgage pool balance, are known to us to be
encumbered by secured subordinate debt that is not part of the mortgage pool.
The following table identifies those properties, indicates the initial principal
amount of the secured subordinate debt and sets forth the cut-off date principal
balances of the related mortgage loans. The table also shows, in the case of
each of those properties, whether the subordinate lender has entered into a
"subordination and standstill agreement" with the holder of the related mortgage
loan whereby that subordinate lender--
- expressly subordinated its right to receive collections and proceeds from,
and otherwise deal with, that property, and
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- agrees not to take any enforcement or other legal action against that
property or the related borrower as long as the related mortgage loan is
outstanding and the mortgagee under that mortgage loan has not taken any
such enforcement or other legal action.]
<TABLE>
<CAPTION>
% OF INITIAL INITIAL PRINCIPAL
CUT-OFF DATE MORTGAGE POOL AMOUNT OF
PRINCIPAL BALANCE BALANCE REPRESENTED SECURED
OF RELATED BY RELATED SUBORDINATE
NAMES MORTGAGE LOANS MORTGAGE LOANS DEBT
- ----- ----------------- ------------------- -----------------
<S> <C> <C> <C>
</TABLE>
- ------------------------
* In these cases, the subordinate lender has entered into a subordination and
standstill agreement in favor of the mortgagee under the related mortgage
loan.
[In addition, borrowers under of the mortgage loans, representing
% of the initial mortgage pool balance, have unsecured debt of which we
are aware. In some cases, the lender on the debt is an affiliate of the
borrower. In each case, the lender on the unsecured debt has executed and
delivered a subordination and standstill agreement in favor of the mortgagee
under the related mortgage loan. In addition, some of the mortgage loans permit
the related borrower to incur unsecured subordinated debt in the future, subject
to conditions such as limiting the use of proceeds to refurbishing or renovating
the underlying real property and/or acquiring furniture, fixtures and equipment
for the underlying real property. Borrowers that do not meet special purpose
entity, bankruptcy-remote criteria, generally do not have any restriction on the
incurrence of unsecured debt. Additional debt, in any form, may cause a
diversion of funds from property maintenance and increase the likelihood that
the borrower will become the subject of a bankruptcy proceeding.] See "Risk
Factors--Subordinate Debt Increases the Likelihood That a Borrower Will Default
on a Mortgage Loan Underlying Your Certificates" and "Certain Legal Aspects of
Mortgage Loans--Subordinate Financing" in the accompanying prospectus.
Except as described above, we have not been able to confirm whether the
respective borrowers under the mortgage loans have any other debt outstanding.
ZONING AND BUILDING CODE COMPLIANCE. In connection with the origination of
each mortgage loan, the related originator examined whether the use and
operation of the underlying real property were in material compliance with
zoning, land-use, building, fire and health ordinances, rules, regulations and
orders then-applicable to the underlying real property. Evidence of this
compliance may have been in the form of legal opinions, certifications from
government officials, title insurance endorsements, engineering or consulting
reports and/or representations by the related borrower. In certain instances, a
certificate of occupancy was not available. Where the property as currently
operated is a permitted nonconforming use and/or structure, an analysis was
generally conducted as to--
- the likelihood that a material casualty would occur that would prevent the
property from being rebuilt in its current form, and
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- whether existing replacement cost hazard insurance or, if necessary,
supplemental "law or ordinance coverage" would, in the event of a material
casualty, be sufficient to satisfy the entire mortgage loan or, taking
into account the cost of repair, be sufficient to pay down that mortgage
loan to a level that the remaining collateral would be adequate security
for the remaining loan amount.
HAZARD, LIABILITY AND OTHER INSURANCE. [Although exceptions exist, the
related loan documents generally require the related borrower to maintain with
respect to each of the underlying real properties the following insurance
coverage--
- Hazard insurance in an amount that is subject to a customary deductible,
at least equal to the lesser of the outstanding principal balance of the
related mortgage loan and 100% of the full insurable replacement cost of
the improvements located on the insured property. In general, the standard
form of hazard insurance policy covers physical damage to, or destruction
of, the improvements on the insured property by fire, lightning,
explosion, smoke, windstorm and hail, riot or strike and civil commotion,
subject to the conditions and exclusions set forth in each policy. In some
cases, however, a borrower or tenant is permitted to self-insure the
subject property, provided that the insuring party or an affiliate
maintains a specified net worth.
- If any portion of the property was in an area identified in the federal
register by the Flood Emergency Management Agency as having special flood
hazards, flood insurance meeting the requirements of the Federal Insurance
Administration guidelines was required. Such insurance is required to be
in an amount that is equal to the lesser of: (i) the outstanding principal
balance of the related mortgage loan; (ii) except in certain cases, the
full insurable value of the insured property; and (iii) the maximum amount
of insurance available under the National Flood Insurance Act of 1968.
- Comprehensive general liability insurance against claims for personal and
bodily injury, death or property damage occurring on, in or about the
insured property, in an amount at least equal to $ per occurrence.
- Business interruption or rent loss insurance either in an amount not less
than 100% of the projected rental income or revenue from the insured
property for at least six months or, alternatively, in a specified dollar
amount.]
[In general, the underlying real properties, including those located in
California, are not insured against earthquake risks. In the case of properties
(other than those that are manufactured housing communities or self storage
facilities) located in California, a third party consultant conducted seismic
studies to assess the "probable maximum loss" for the property. In general, when
the resulting reports concluded that an underlying real property was likely to
experience a "probable maximum loss" in excess of 20% of the estimated
replacement cost of the improvements, the related originator required the
borrower to obtain earthquake insurance or establish reserves to cover the
estimated costs of completing seismic retrofitting recommended by the
consultant, unless the original loan-to-value ratio was relatively low.]
[With respect to each of the underlying real properties, the master servicer
is required to cause the maintenance of all insurance coverage as is required
under the related mortgage to the extent (i) the trust has an insurable interest
and (ii) the master servicer can require maintenance of insurance under
applicable law.]
[Under the terms of several of the mortgage loans, the related borrower is
required to keep its property insured against loss by fire, hazards, rent loss
and other hazards, casualties, liabilities and contingencies as the lender
determines to require and in the amounts and for the periods as the lender
determines to require. The master servicer will be required to use reasonable
efforts to cause the related
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borrowers under those mortgage loans to maintain insurance generally in the
amounts, type and scopes of coverage required under the other mortgage loans.]
[Various forms of insurance maintained with respect to any of the underlying
real properties, including casualty insurance, environmental insurance,
earthquake insurance or other insurance, may be provided under a blanket policy
that also covers other underlying real properties and/or other properties that
will not secure loans in the trust. As a result of total limits under any
blanket policy, losses at other properties covered by the blanket insurance
policy may reduce the amount of insurance coverage with respect to a property
securing one of the loans in the trust. See "Risk Factors--Lack of Insurance
Coverage Exposes a Trust to Risk for Certain Special Hazard Losses" in the
accompanying prospectus.]
[With limited exception, the mortgage loans generally provide that insurance
and condemnation proceeds are to be applied either--
- to restore the underlying real property; or
- towards payment of the related mortgage loan.]
[If any underlying real property is acquired by the trust through
foreclosure, deed in lieu of foreclosure or otherwise following a default on the
related mortgage loan, the special servicer will be required to maintain for
that property generally the same types of insurance policies providing coverages
in the same amounts as were previously required under the mortgage that had
covered the property.]
[The master servicer and the special servicer may each satisfy its
obligations regarding maintenance of the hazard insurance policies referred to
in this prospectus supplement by maintaining a blanket policy or master force
placed insurance policy insuring against hazard losses on all of the related
mortgage loans. If any blanket or master policy contains a deductible clause,
however, the master servicer or the special servicer, as the case may be, will
be required, in the event of a casualty covered by the blanket or master policy,
to pay out of its own funds all sums that--
- are not paid because of the deductible clause, and
- would have been paid if an individual hazard insurance policy referred to
above had been in place.]
[The applicable originator and its successors and assigns are the
beneficiaries under separate title insurance policies with respect to each
mortgage loan. Each title insurer will enter into co-insurance and reinsurance
arrangements with respect to the title insurance policy as are customary in the
title insurance industry. Subject to certain exceptions, including standard
exceptions regarding claims made in the context of insolvency proceedings, each
title insurance policy will provide coverage to the trustee for the benefit of
the certificateholders for claims made against the trustee regarding the
priority and validity of the borrowers' title to the subject underlying real
property.]
ASSESSMENTS OF PROPERTY CONDITION
PROPERTY INSPECTIONS. [ of the underlying real properties were
inspected in connection with the origination or acquisition of the related
mortgage loans to assess their general condition.][DISCUSS RESULTS AND
CORRESPONDING ACTIONS.]
APPRAISALS. [The underlying real properties securing of the mortgage
loans were appraised by a state certified appraiser or an appraiser belonging to
the Appraisal Institute, and such appraisals were conducted in accordance with
the Uniform Standards of Professional Appraisal Practices.] [In general, the
appraisal for each such underlying real property or a separate letter contains a
statement by the appraiser stating that the guidelines in Title XI of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
were followed in preparing such appraisal.] We have not independently verified
the accuracy of such statement. The primary purpose of each of those appraisals
was to provide an opinion of the fair market value of the related underlying
real property. There can be no assurance that another appraiser would have
arrived at the same opinion of value. The resulting "Appraised Values" are shown
on Annex A-1 to this prospectus supplement.
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ENVIRONMENTAL ASSESSMENTS. [A "Phase I" environmental site assessment was
performed with respect to of the underlying real properties in connection
with the origination of the related mortgage loans. In certain cases, additional
environmental testing, as recommended by that "Phase I" assessment, was
performed.] [DISCUSS RESULTS AND CORRESPONDING ACTIONS.]
ENGINEERING ASSESSMENTS. [In connection with the origination of the related
mortgage loans, a licensed engineer inspected of the underlying real
properties to assess the structure, exterior walls, roofing, interior structure
and mechanical and electrical systems.][DISCUSS RESULTS AND CORRESPONDING
ACTIONS.]
THE MORTGAGE LOAN SELLERS
[INSERT DESCRIPTION OF MORTGAGE LOAN SELLERS.]
The information set forth in this prospectus supplement concerning each of
the mortgage loan sellers has been provided by the respective mortgage loan
sellers, and neither we nor the underwriter makes any representation or warranty
as to the accuracy or completeness of this information.
ASSIGNMENT OF THE MORTGAGE LOANS
On or before the date of initial issuance of the certificates, the following
transfers of the mortgage loans will occur. In each case, the transferor will
assign the subject mortgage loans, without recourse, to the transferee.
[CHART]
In connection with the foregoing transfers, we will be required to deliver
the following documents, among others, to the trustee with respect to each of
its mortgage loans--
[SPECIFY SELECT DOCUMENTS.]
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The trustee, either directly or through a custodian, is required to hold all
of the documents delivered to it with respect to the mortgage loans in trust for
the benefit of the certificateholders and, within a specified period of time
following the delivery, to conduct a review of those documents. All of the
above-described documents actually delivered to the trustee in respect of any of
the mortgage loans will collectively be the "mortgage file" for that mortgage
loan. The scope of the trustee's review of each mortgage file is, in general,
limited solely to confirming that the documents listed above have been received.
None of the trustee, the master servicer, the special servicer or any custodian
is under any duty or obligation to inspect, review or examine any of the
documents relating to the mortgage loans to determine whether the document is
valid, effective, enforceable, in recordable form or otherwise appropriate for
the represented purpose.
If any of the above-described documents required to be delivered by us to
the trustee is not delivered or is otherwise defective, and that omission or
defect materially and adversely affects the value of the subject loan or the
interests of the certificateholders therein, then the omission or defect will
constitute a "material document defect" with respect to the subject mortgage
loan. The rights of the certificateholders against us with respect to any
material document defect are described under "--Cures and Repurchases" below.
Within a specified period following the later of (i) the date on which the
offered certificates are initially issued and (ii) the date on which all
recording information necessary to complete the subject document is received by
the trustee, the trustee must submit for recording in the real property records
of the applicable jurisdiction each of the assignments of recorded loan
documents in its favor described above. Because most of the mortgage loans are
newly originated, many of those assignments cannot be completed and recorded
until the related mortgage and/or assignment of leases and rents, reflecting the
necessary recording information, is returned from the applicable recording
office.
REPRESENTATIONS AND WARRANTIES
As of the date of initial issuance of the certificates, we will make with
respect to each mortgage loan, certain representations and warranties generally
to the effect listed below, together with such other representations and
warranties as may be required by the rating agencies.
The representations and warranties to be made by us in respect of each
mortgage loan will include:
[SPECIFY SELECT REPRESENTATIONS AND WARRANTIES.]
If there exists a breach of any of the above-described representations and
warranties made by us that materially and adversely affects the value of the
subject mortgage loan or the interests of the certificateholders therein, then
that breach will be a "material breach" of the representation and warranty. The
rights of the certificateholders against us with respect to any material breach
are described under "--Cures and Repurchases" below.
CURES AND REPURCHASES
If there exists a material breach of any of the representations and
warranties made by us with respect to any of the mortgage loans, as discussed
under "--Representations and Warranties" above or a material document defect
with respect to any mortgage loan, as discussed under "--Assignment of the
Mortgage Loans" above, then we will be required either:
- to remedy the material breach or the material document defect in all
material respects, or
- repurchase the affected mortgage loan at a price generally equal to the
sum of (i) the unpaid principal balance of that mortgage loan at the time
of purchase, plus (ii) all unpaid interest (other than additional interest
and default interest) due in respect of that mortgage loan through the due
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date in the collection period of purchase, plus (iii) all unreimbursed
advances to cover certain costs and expenses relating to the servicing and
administration of that mortgage loan.
The time period within which we must complete such remedy or repurchase will
generally be limited to 90 days (or, if we are diligently attempting to correct
the problem and certain other conditions are satisfied, 180 days) following the
earlier of our discovery or receipt of notice of the subject material breach or
material document defect, as the case may be. However, if any material document
defect arises solely out of the failure of the applicable recording office to
return a recorded mortgage loan document, and if we are diligently attempting to
retrieve that document, then the time period may be extended for up to two years
following the date of initial issuance of the offered certificates.
Our cure/repurchase obligations described above will constitute the sole
remedy available to the certificateholders in connection with a material breach
of any of our representations or warranties or a material document defect, with
respect to any mortgage loan. No other person will be obligated to repurchase
any affected mortgage loan in connection with a material breach of any of the
representations and warranties or a material document defect, if we default on
our obligation to do so.
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The description in this prospectus supplement of the mortgage pool and the
underlying real properties is based upon the mortgage pool as it is expected to
be constituted at the time the offered certificates are issued, with adjustments
for the monthly debt service payments due on the mortgage loans on or before
. Prior to the issuance of the offered certificates, one or more
mortgage loans may be removed from the mortgage pool if we consider the removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the mortgage pool prior to the issuance of the offered certificates,
unless including those mortgage loans would materially alter the characteristics
of the mortgage pool as described in this prospectus supplement. We believe that
the information in this prospectus supplement will be generally representative
of the characteristics of the mortgage pool as it will be constituted at the
time the offered certificates are issued; however, the range of mortgage rates
and maturities, as well as the other characteristics of the mortgage loans
described in this prospectus supplement, may vary, and the actual initial
mortgage pool balance may be as much as 5% larger or smaller than the initial
mortgage pool balance specified in this prospectus supplement.
A current report on Form 8-K will be available to purchasers of the offered
certificates on or shortly after the date of initial issuance of the
certificates. That current report on Form 8-K will be filed, together with the
pooling and servicing agreement, with the SEC within 15 days after the initial
issuance of the offered certificates. In the event mortgage loans are removed
from or added to the mortgage pool, such removal or addition will be noted in
that current report on Form 8-K.
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SERVICING OF THE MORTGAGE LOANS
GENERAL
The servicing of the mortgage loans will be governed by the pooling and
servicing agreement. The following summaries describe certain provisions of the
pooling and servicing agreement relating to the servicing and administration of
the mortgage loans and any real estate owned by the trust. You should also refer
to the accompanying prospectus, in particular the section captioned "Description
of the Governing Documents" for additional important information regarding
provisions of the pooling and servicing agreement that relate to the rights and
obligations of the master servicer and the special servicer. See "Description of
the Governing Documents--Collection and Other Servicing Procedures with Respect
to Mortgage Loans" in the accompanying prospectus.
The pooling and servicing agreement provides that the master servicer and
the special servicer must each service and administer the mortgage loans and any
real estate owned by the trust for which it is responsible, directly or through
sub-servicers, in accordance with--
- any and all applicable laws, and
- the express terms of the pooling and servicing agreement and the
respective mortgage loans.
Furthermore, to the extent consistent with the foregoing, the master
servicer and the special servicer must each service and administer the mortgage
loans and any real estate owned by the trust for which it is responsible in
accordance with the following standard (the "Servicing Standard"), which is set
forth in further detail in the pooling and servicing agreement:
- with the same care, skill and diligence as is normal and usual in its
general mortgage servicing and asset management activities with respect to
comparable loans and real properties that either are part of other third
party portfolios (giving due consideration to customary and usual
standards of practice of prudent institutional commercial lenders) or are
held as part of its own portfolio, whichever servicing procedures are of a
higher standard;
- with a view to the timely collection of all monthly debt service payments
under the mortgage loans, the full collection of all prepayment premiums
and yield maintenance charges that may become payable under the mortgage
loans and, in the case of the special servicer, if a mortgage loan comes
into and continues in default and, in the judgment of the special
servicer, no satisfactory arrangements can be made for the collection of
the delinquent payments, including payments of prepayment premiums and
yield maintenance charges, the maximization of the recovery on that
defaulted mortgage loan to the series certificateholders (as a
collective whole) on a present value basis; and
- without regard to:
(i) any known relationship that the master servicer or the special servicer, as
the case may be, or any of its affiliates may have with any of the
underlying borrowers or any other party to the pooling and servicing
agreement;
(ii) the ownership of any series certificate by the master servicer or the
special servicer, as the case may be, or by any of its affiliates;
(iii) the obligation of the master servicer or the special servicer, as the case
may be, to make advances;
(iv) the right of the master servicer or the special servicer, as the case may
be, or any of its affiliates to receive reimbursement of costs, or the
sufficiency of any compensation payable to it under the pooling and
servicing agreement or with respect to any particular transaction; and
(v) the ownership, servicing or management by the master servicer or the special
servicer, as the case may be, or any of its affiliates of any other loans or
real properties not included in or securing, as the case
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may be, the mortgage pool, or the right to service or manage for others any
such other loans or real properties.
In general, the master servicer will be responsible for the servicing and
administration of--
- all mortgage loans as to which no Servicing Transfer Event (as defined
below) has occurred, and
- all worked-out mortgage loans as to which no new Servicing Transfer Event
has occurred.
The special servicer, on the other hand, will be responsible for the
servicing and administration of each mortgage loan as to which a Servicing
Transfer Event has occurred and which has not yet become a worked-out mortgage
loan with respect to that Servicing Transfer Event. The special servicer will
also be responsible for the administration of each underlying real property that
has been acquired by the trust in respect of a defaulted mortgage loan through
foreclosure, deed-in-lieu of foreclosure or otherwise (each such property, for
so long as it is real estate owned by the trust, an "REO property").
Mortgage loans as to which no Servicing Transfer Event has ever occurred,
and worked-out mortgage loans as to which no new Servicing Transfer Event has
occurred, are collectively referred to in this prospectus supplement as
"performing mortgage loans". Specially serviced mortgage loans and REO
properties are collectively referred to in this prospectus supplement as
"specially serviced assets". Performing mortgage loans will include mortgage
loans which may be delinquent, but not to the point of resulting in a Servicing
Transfer Event.
Despite the foregoing, the pooling and servicing agreement will require the
master servicer to continue to collect information and prepare all reports to
the trustee required to be collected or prepared with respect to any specially
serviced assets and, otherwise, to render certain incidental services with
respect to any specially serviced assets. Neither the master servicer nor the
special servicer will have responsibility for the performance by the other of
its respective obligations and duties under the pooling and servicing agreement.
A mortgage loan will become a specially serviced mortgage loan, if it has
not already done so, upon the occurrence of a Servicing Transfer Event. A
"Servicing Transfer Event" will be considered to have occurred with respect to
any mortgage loan if--
(1) the related borrower fails to make when due any monthly debt service
payment, including a balloon payment, or any other payment required under
the related promissory note or the related mortgage, and either the
failure actually continues, or the master servicer believes it will
continue, unremedied for days;
(2) the master servicer determines that a default in the making of a monthly
debt service payment, including a balloon payment, or any other material
payment required to be made under the related promissory note or the
related mortgage, is likely to occur within days and either
(a) the default is likely to remain unremedied for at least days or
(b) the related borrower has requested a material modification of the
related mortgage loan;
(3) the master servicer determines that a non-payment default has occurred
under the mortgage loan that may materially impair the value of the
related underlying real property as security for the mortgage loan and
the default continues unremedied for the applicable cure period under the
terms of the mortgage loan or, if no cure period is specified, for
days;
(4) certain events of bankruptcy, insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings occur with
respect to the related borrower or the related underlying real property,
or the related borrower takes certain actions indicating its bankruptcy,
insolvency or inability to pay its obligations; or
(5) the master servicer receives notice of the commencement of foreclosure
or similar proceedings with respect to the related underlying real
property.
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So long as no other Servicing Transfer Event then exists, a mortgage loan
will cease to be a specially serviced mortgage loan and will become a
"worked-out mortgage loan" as to which the master servicer will re-assume
servicing responsibilities, if and when:
(a) with respect to the circumstances described in clause (1) of the
preceding paragraph, the related borrower makes three consecutive full
and timely monthly debt service payments under the terms of the mortgage
loan, as those terms may be changed or modified in connection with a
bankruptcy or similar proceeding involving the related borrower or by
reason of a modification, waiver or amendment granted or agreed to by the
master servicer or the special servicer;
(b) with respect to the circumstances described in clauses (2) and
(4) above, those circumstances cease to exist in the good faith,
reasonable judgment of the special servicer, but, with respect to any
bankruptcy or insolvency proceedings contemplated by clause (4), no later
than the entry of an order or decree dismissing such proceeding;
(c) with respect to the circumstances described in clause (3) above, the
default is cured in the judgment of the special servicer; and
(d) with respect to the circumstances described in clause (5) above, the
proceedings are terminated.
THE INITIAL MASTER SERVICER AND THE INITIAL SPECIAL SERVICER
THE MASTER SERVICER.
[INSERT INFORMATION RE MASTER SERVICER.]
The information set forth in this prospectus supplement concerning
has been provided by it. Neither we nor the underwriter makes any
representation or warranty as to the accuracy or completeness of this
information.
THE SPECIAL SERVICER.
[INSERT INFORMATION RE SPECIAL SERVICER.]
The information set forth in this prospectus supplement concerning
has been provided by it. Neither we nor the underwriter makes any
representation or warranty as to the accuracy of this information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
THE MASTER SERVICING FEE. The principal compensation to be paid to the
master servicer with respect to its master servicing activities will be the
master servicing fee.
The "master servicing fee":
- will be earned in respect of each and every mortgage loan, including each
specially serviced mortgage loan, if any, and each mortgage loan, if any,
as to which the related underlying real property has become an REO
property; and
- in the case of each such mortgage loan, will--
(i) be calculated on a 30/360 basis,
(ii) accrue at the related master servicing fee rate,
(iii) accrue on the same principal amount as interest accrues or is
deemed to accrue from time to time with respect to that
mortgage loan, and
(iv) be payable monthly from amounts received in respect of interest
on that mortgage loan.
The "master servicing fee" will be % per annum.
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ADDITIONAL MASTER SERVICING COMPENSATION. As additional master servicing
compensation, the master servicer will be entitled to receive--
- All prepayment interest excesses, if any, collected in respect of the
entire mortgage pool. If a borrower prepays its mortgage loan, in whole or
in part, after the borrower has made its monthly debt service payment on
the related due date during any collection period, the amount of any
interest collected on the subject prepayment for the period following that
due date, less the amount of related master servicing fees payable
therefrom and exclusive of any Default Interest and Post-ARD Additional
Interest included therein, will be a "Prepayment Interest Excess".
"Default Interest" is any interest that (i) accrues on a defaulted
mortgage loan solely by reason of the subject default and (ii) is in
excess of all interest at the related mortgage rate and any Post-ARD
Additional Interest accrued on the mortgage loan.
- All late payment charges and Default Interest, if any, that were collected
in respect of any mortgage loan and that accrued while such mortgage loan
was a performing mortgage loan (but only to the extent that any such late
payment charges and default interest have not otherwise been applied to
pay the master servicer, the special servicer or the trustee, as
applicable, interest on advances made thereby with respect to the related
mortgage loan as described in this prospectus supplement).
In addition, all modification fees, assumption fees, assumption application
fees, consent/waiver fees and other comparable transaction fees and charges, if
any, collected in respect of the mortgage loans will be allocated between the
master servicer and the special servicer, as additional compensation, or
otherwise applied to cover related expenses, as provided in the pooling and
servicing agreement.
The master servicer will be authorized to invest or direct the investment of
funds held in its custodial account (see "--Custodial Account" below), or in any
and all accounts maintained by it that are escrow and/or reserve accounts, in
certain government securities and other investment grade obligations specified
in the pooling and servicing agreement ("Permitted Investments"). The master
servicer will be entitled to retain any interest or other income earned on those
funds and will be required to cover any losses of principal from its own funds.
The master servicer will not be obligated, however, to cover any losses
resulting from the bankruptcy or insolvency of any depository institution or
trust company holding any of those accounts.
PREPAYMENT INTEREST SHORTFALLS. If a borrower prepays a mortgage loan, in
whole or in part, prior to the related due date during any collection period and
does not pay interest on the prepayment through that due date, then the
shortfall in a full month's interest, less the amount of related master
servicing fees that would have been payable therefrom and exclusive of any
Default Interest and Post-ARD Additional Interest that would have been included
therein, will be a "prepayment interest shortfall".
The pooling and servicing agreement provides that, if any prepayment
interest shortfalls are incurred with respect to the mortgage pool during any
collection period, the master servicer must make a non-reimbursable payment (a
"Compensating Interest Payment") with respect to the related payment date in an
amount equal to the lesser of:
(a) the total amount of those prepayment interest shortfalls, and
(b) the sum of the following components of the master servicer's aggregate
servicing compensation for that same collection period--
-
-
-
No other master servicing compensation will be available to cover prepayment
interest shortfalls.
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Any Compensating Interest Payment made by the master servicer with respect
to any payment date will be included among the amounts payable as principal and
interest on the certificates on that payment date as described under
"Description of the Offered Certificates--Payments" in this prospectus
supplement. If the amount of the Compensating Interest Payment made by the
master servicer with respect to any payment date is less than the total of all
prepayment interest shortfalls incurred with respect to the mortgage pool during
the related collection period, then that shortfall (a "Net Aggregate Prepayment
Interest Shortfall") will be allocated among the respective classes of
interest-bearing certificates, in reduction of the interest payable on those
certificates, as and to the extent described under "Description of the Offered
Certificates--Payments--Payments of Interest" in this prospectus supplement.
PRINCIPAL SPECIAL SERVICING COMPENSATION. The principal compensation to be
paid to the special servicer with respect to its special servicing activities
will be--
- the special servicing fee,
- the workout fee, and
- the liquidation fee.
The "special servicing fee":
- will be earned with respect to each specially serviced mortgage loan, and
each mortgage loan as to which the related underlying real property has
become an REO property,
- with respect to each such mortgage loan, will--
(i) be calculated on a 30/360 basis,
(ii) accrue at a "special servicing fee rate" of % per annum,
and
(iii) accrue on the same principal amount as interest accrues or is
deemed to accrue from time to time on that mortgage loan, and
- will be payable monthly from general collections on all the mortgage loans
and any REO properties on deposit in the master servicer's custodial
account from time to time.
THE WORKOUT FEE. The special servicer will, in general, be entitled to
receive a workout fee with respect to each worked-out mortgage loan. The
"workout fee" will be payable out of, and will be calculated by application of a
"workout fee rate" of % to, each collection of interest and principal
received on the mortgage loan for so long as it remains a worked-out mortgage
loan, exclusive of any portion of that collection that represents a recovery of
Default Interest or Post-ARD Additional Interest. The workout fee with respect
to any worked-out mortgage loan will cease to be payable if a new Servicing
Transfer Event occurs with respect to the loan. However, a new workout fee would
become payable if the mortgage loan again became a worked-out mortgage loan with
respect to that new Servicing Transfer Event. If the special servicer is
terminated other than for cause or resigns, it will retain the right to receive
any and all workout fees payable with respect to mortgage loans that became
worked-out mortgage loans during the period that it acted as special servicer
and remained worked-out mortgage loans at the time of its termination or
resignation. The successor special servicer will not be entitled to any portion
of those workout fees. Although workout fees are intended to provide the special
servicer with an incentive to better perform its duties, the payment of any
workout fee will reduce amounts payable to the certificateholders.
THE LIQUIDATION FEE. The special servicer will be entitled to receive a
liquidation fee with respect to each specially serviced mortgage loan for which
it obtains a full or discounted payoff from the related borrower. The special
servicer will also be entitled to receive a liquidation fee with respect to any
specially serviced mortgage loan or REO property as to which it receives any
liquidation proceeds, condemnation proceeds or insurance proceeds, except as
described below. As to each specially serviced mortgage loan and REO property,
the "liquidation fee" will be payable from, and will be calculated by
application of a
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"liquidation fee rate" of % to, the related payment or proceeds, exclusive
of any portion of that payment or proceeds that represents a recovery of Default
Interest or Post-ARD Additional Interest.
Despite anything to the contrary described above, no liquidation fee will be
payable based on, or out of, proceeds received in connection with:
- the repurchase or replacement of any mortgage loan by us for a breach of
representation or warranty or for defective or deficient mortgage loan
documentation so long as such repurchase occurs within the 180-day cure
period (see "Description of the Mortgage Pool--Cures and Repurchases" in
this prospectus supplement);
- the purchase of any defaulted mortgage loan or REO property by the master
servicer, the special servicer or any holder or holders of certificates
evidencing a majority interest in the "controlling class" of the series
certificates (see "--Sale of Defaulted Mortgage Loans" below); or
- the purchase of all of the mortgage loans and REO properties by the master
servicer, the special servicer or any holder or holders of certificates
evidencing a majority interest in the "controlling class" of the
certificates in connection with the termination of the trust (see
"Description of the Offered Certificates--Termination" in this prospectus
supplement).
Although liquidation fees are intended to provide the special servicer with
an incentive to better perform its duties, the payment of any liquidation fee
will reduce amounts payable to the certificateholders.
ADDITIONAL SPECIAL SERVICING COMPENSATION. As additional special servicing
compensation, the special servicer will be entitled to receive all late payment
charges and Default Interest, if any, collected in respect of any mortgage loan
that accrued while the mortgage loan was a specially serviced mortgage loan, but
only to the extent that those late payment charges and Default Interest have not
otherwise been applied to pay the master servicer, the special servicer or the
trustee, as applicable, interest on advances made the master servicer, the
special servicer or the trustee, as the case may be, with respect to the related
mortgage loan as described in this prospectus supplement.
All modification fees, assumption fees, assumption application fees and
other comparable transaction fees and charges, if any, collected in respect of
the specially serviced mortgage loans, will be allocated between the master
servicer and the special servicer, as additional compensation, or otherwise
applied to cover related expenses, as provided in the pooling and servicing
agreement.
In addition, the special servicer will be authorized to invest or direct the
investment of funds held in its REO account (see "--REO Properties" below) in
Permitted Investments. The special servicer will be entitled to retain any
interest or other income earned on those funds and will be required to cover any
losses of principal from its own funds without any right to reimbursement. The
special servicer will not be obligated, however, to cover any losses resulting
from the bankruptcy or insolvency of any depository institution or trust company
holding the special servicer's REO account.
PAYMENT OF EXPENSES; SERVICING ADVANCES. Each of the master servicer and
the special servicer will be required to pay its overhead and any general and
administrative expenses incurred by it in connection with its servicing
activities under the pooling and servicing agreement. The master servicer and
the special servicer will not be entitled to reimbursement for these expenses
except as expressly provided in the pooling and servicing agreement.
Any and all customary, reasonable and necessary "out of pocket" costs and
expenses incurred by the master servicer or the special servicer in connection
with the servicing of a mortgage loan after a default, delinquency or other
unanticipated event, or in connection with the administration of any REO
property, will be "servicing advances". Servicing advances will be reimbursable
from future payments and other collections, including insurance proceeds,
condemnation proceeds and liquidation proceeds, in connection with the related
mortgage loan or REO property. In addition, the special servicer may
periodically require
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the master servicer to reimburse the special servicer for any servicing advances
made by it. Upon reimbursing the special servicer for any servicing advance, the
master servicer will be deemed to have made the advance.
The special servicer may request the master servicer to make servicing
advances with respect to a specially serviced mortgage loan or REO property, in
lieu of the special servicer's making that advance itself. The special servicer
must make the request in writing, in a timely manner that does not adversely
affect the interests of any certificateholder. The master servicer must make the
requested servicing advance within a specified number of days following the
master servicer's receipt of the request. If the request is timely and properly
made, the special servicer will be relieved of any obligations with respect to a
servicing advance that it requests the master servicer to make, regardless of
whether or not the master servicer actually makes that advance.
If the master servicer or the special servicer is required under the pooling
and servicing agreement to make a servicing advance, but neither does so within
days after the servicing advance is required to be made, then the trustee
will be required: (a) if it has actual knowledge of the failure, to give the
defaulting party notice of its failure; and (b) if the failure continues for
more business days, to make the servicing advance. The fiscal agent will
be required under the pooling and servicing agreement to make any servicing
advance that the trustee is obligated (but failed) to make.
Despite the foregoing discussion or anything else to the contrary in this
prospectus supplement, none of the master servicer, the special servicer, the
trustee or the fiscal agent will be obligated to make servicing advances that,
in the reasonable and good faith judgment of any such party, would not be
ultimately recoverable from expected collections on the related mortgage loan or
REO property. If the master servicer, the special servicer, the trustee or the
fiscal agent makes any servicing advance that it subsequently determines, in its
judgment, is not recoverable from expected collections on the related mortgage
loan or REO property, it may obtain reimbursement for that advance, together
with interest thereon, out of general collections on the mortgage loans and any
REO properties on deposit in the master servicer's custodial account from time
to time.
The master servicer will be permitted to pay, and the special servicer may
direct the payment of, certain servicing expenses directly out of the master
servicer's custodial account and at times without regard to the relationship
between the expense and the funds from which it is being paid, including in
connection with the remediation of any adverse environmental circumstance or
condition at any of the underlying real properties. In addition, the pooling and
servicing agreement will require the master servicer, at the direction of the
special servicer if a specially serviced asset is involved, to pay directly out
of the master servicer's custodial account any servicing expense that, if
advanced by the master servicer or the special servicer, would not be
recoverable from expected collections on the related mortgage loan or REO
property, provided that the master servicer, or the special servicer if a
specially serviced asset is involved, has determined in accordance with the
Servicing Standard that making the payment is in the best interests of the
certificateholders (as a collective whole).
The master servicer, the special servicer, the trustee and the fiscal agent
will be entitled to receive interest on servicing advances made by them. The
interest will accrue on the amount of each servicing advance, and compound
monthly, for so long as the servicing advance is outstanding, at a rate per
annum equal to the "prime rate" as published in the "Money Rates" section of THE
WALL STREET JOURNAL, as that "prime rate" may change from time to time. Interest
accrued with respect to any servicing advance will be payable in the collection
period in which that advance is reimbursed--
- FIRST, out of Default Interest and late payment charges collected on the
related mortgage loan during that collection period, and
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- THEN, if and to the extent that the Default Interest and late charges
referred to in clause FIRST above are insufficient to cover the advance
interest, out of any amounts then on deposit in the master servicer's
custodial account.
SUB-SERVICERS
The master servicer and, subject to certain restrictions, the special
servicer may each delegate any of its servicing obligations under the pooling
and servicing agreement to any one or more third-party servicers. The master
servicer or the special servicer, as the case may be, will remain obligated
under the pooling and servicing agreement for any duties delegated to a
sub-servicer. Some of the mortgage loans are currently being serviced by
third-party servicers that are entitled to and will become sub-servicers of
these loans on behalf of the master servicer (those sub-servicers, the
"Designated Sub-Servicers"). Each sub-servicing agreement between the master
servicer or special servicer, as the case may be, and a sub-servicer must
provide that, if for any reason the master servicer or special servicer, as the
case may be, is no longer acting in that capacity, the trustee or any other
successor to the master servicer or special servicer, as applicable, may:
- assume the party's rights and obligations under the sub-servicing
agreement;
- enter into a new sub-servicing agreement with the sub-servicer on terms
which are acceptable to the trustee or successor master servicer or
special servicer, as the case may be, and that sub-servicer; or
- terminate the sub-servicing agreement without cause.
Notwithstanding the foregoing, neither the trustee nor any other successor
master servicer may terminate the sub-servicing agreement for a Designated
Sub-Servicer without cause, unless it pays that Designated Sub-Servicer a
termination fee.
The master servicer and special servicer will each be required to monitor
the performance of sub-servicers retained by it. The master servicer and special
servicer will each be solely liable for all fees owed by it to any sub-servicer
retained by it, irrespective of whether its compensation pursuant to the pooling
and servicing agreement is sufficient to pay those fees. Each sub-servicer will
be reimbursed by the master servicer or special servicer, as the case may be,
for certain expenditures which it makes, generally to the same extent the master
servicer or special servicer, as the case may be, would be reimbursed under the
pooling and servicing agreement.
THE CONTROLLING CLASS REPRESENTATIVE
CONTROLLING CLASS. As of any date of determination, the controlling class
of the certificates (the "Controlling Class") will be the most subordinate class
of certificates then outstanding that is eligible to be the Controlling Class
and that has an aggregate principal balance that is not less than % of
that class' original aggregate principal balance. However, if no class of
certificates that is eligible to be the Controlling Class has an aggregate
principal balance that satisfies this requirement, then the Controlling Class
will be the most subordinate eligible class of certificates. The classes of
certificates eligible to be the Controlling Class are the "A-1", "A-2", "B",
"C", "D", "E", "F", "G, "H", "J", "K", "L", "M" and "N" classes.
ELECTION, RESIGNATION AND REMOVAL. The holders (or, in the case of
certificates held in book-entry form, the beneficial owners) of certificates
representing greater than [50%] of the aggregate principal balance of the
Controlling Class will be entitled to select a representative (the "Controlling
Class Representative") having certain rights and powers described below or
replace an existing Controlling Class Representative.
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The trustee will be required to promptly notify all the holders (and, in the
case of certificates held in book-entry form, to the extent actually known to
certain designated officers of the trustee, all the beneficial owners) of
certificates of the Controlling Class that they may select a Controlling Class
Representative upon:
(i) the receipt by the trustee of written requests for the selection of a
Controlling Class Representative from the holders (or, in the case of
certificates held in book-entry form, the beneficial owners) of
certificates representing greater than [50%] of the aggregate principal
balance of the Controlling Class;
(ii) the resignation or removal of the person acting as Controlling Class
Representative; or
(iii) a determination by the trustee that the Controlling Class has changed.
The notice will explain the process for selecting a Controlling Class
Representative. The process may include the designation of the Controlling Class
Representative by any holder of certificates representing a majority interest in
the Controlling Class by written instructions delivered to the trustee. The
appointment of any person as a Controlling Class Representative will not be
effective until the person provides the trustee with written confirmation of its
acceptance of its appointment, an address and telecopy number for the delivery
of notices and other correspondence and a list of officers or employees of the
person with whom the parties to the pooling and servicing agreement may deal,
including their names, titles, work addresses and telecopy numbers.
RESIGNATION AND REMOVAL OF THE CONTROLLING CLASS REPRESENTATIVE. The
Controlling Class Representative may at any time resign by giving written notice
to the trustee and to each holder (or, in the case of certificates held in
book-entry form, each beneficial owner) of certificates of the Controlling
Class. The holders (or, in the case of certificates held in book-entry form, the
beneficial owners) of certificates representing greater than [50%] of the
aggregate principal balance of the Controlling Class will be entitled to remove
any existing Controlling Class Representative by giving written notice to the
trustee and to the existing Controlling Class Representative.
CERTAIN RIGHTS AND POWERS OF THE CONTROLLING CLASS REPRESENTATIVE. The
Controlling Class Representative will be entitled to advise the special servicer
with respect to the following actions. In addition, except as otherwise
described below, the special servicer will not be permitted to take any of the
following actions as to which the Controlling Class Representative has objected
in writing within [ten business days] of having been notified in writing thereof
and having been provided with all reasonably requested information with respect
thereto--
- any foreclosure upon or comparable conversion, which may include
acquisitions of an REO property, of the ownership of properties securing
those specially serviced mortgage loans as come into and continue in
default;
- any modification, amendment or waiver of a monetary term, including the
timing of payments, or any material non-monetary term of a mortgage loan;
- any proposed sale of a defaulted mortgage loan or any related REO
property, other than in connection with the termination of the trust as
described under "Description of the Offered Certificates--Termination" in
this prospectus supplement, for less than par;
- any acceptance of a discounted payoff;
- any determination to bring an REO property into compliance with applicable
environmental laws or to otherwise address hazardous material located at
an REO property;
- any release of collateral for a mortgage loan, other than in accordance
with the terms of, or upon satisfaction of, that mortgage loan;
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- any acceptance of substitute or additional collateral for a mortgage loan,
other than in accordance with the terms of that mortgage loan;
- any waiver of a "due-on-sale" or "due-on-encumbrance" clause; and
- any acceptance of an assumption agreement releasing a borrower from
liability under a mortgage loan.
In addition, except as otherwise described below, the Controlling Class
Representative may direct the special servicer to take, or to refrain from
taking, such actions as the Controlling Class Representative may consider
advisable or as to which provision is otherwise made in the pooling and
servicing agreement.
Notwithstanding the foregoing, no advice, direction or objection given or
made by the Controlling Class Representative, as contemplated by either of the
two preceding paragraphs, may--
- require or cause the special servicer to violate applicable law, the terms
of any mortgage loan or any other provision of the pooling and servicing
agreement described in this prospectus supplement or the accompanying
prospectus, including the special servicer's obligation to act in
accordance with the Servicing Standard;
- result in certain adverse tax consequences for the trust;
- expose the trust, the depositor, the master servicer, the special
servicer, the trustee or any of their respective affiliates, directors,
officers, employees or agents, to any material claim, suit or liability;
or
- materially expand the scope of the master servicer's or special servicer's
responsibilities under the pooling and servicing agreement.
The special servicer is to disregard any such advice, direction or objection
that does so. Furthermore, the special servicer will not be obligated to seek
approval from the Controlling Class Representative for any actions to be taken
by the special servicer with respect to any particular specially serviced
mortgage loan if--
- the special servicer has, as described above, notified the Controlling
Class Representative in writing of various actions that the special
servicer proposes to take with respect to the work-out or liquidation of
that mortgage loan, and
- for 60 days following the first such notice, the Controlling Class
Representative has objected to all of those proposed actions and has
failed to suggest any alternative actions that the special servicer
considers to be consistent with the Servicing Standard.
When reviewing the rest of this "Servicing of the Mortgage Loans" section,
it is important that you consider the effects that the rights and powers of the
Controlling Class Representative discussed above could have on the actions of
the special servicer.
LIABILITY TO BORROWERS. In general, any and all expenses of the Controlling
Class Representative are to be borne by the holders (or, if applicable, the
beneficial owners) of the Controlling Class, in proportion to their respective
percentage interests in that class, and not by the trust. However, if a claim is
made against the Controlling Class Representative by a borrower with respect to
the pooling and servicing agreement or any particular mortgage loan, the
Controlling Class Representative is to immediately notify the trustee, the
master servicer and the special servicer. If (a) the special servicer or the
trust are also named parties to the same action, and (b) in the sole judgment of
the special servicer, (i) the Controlling Class Representative acted in good
faith, without negligence or willful misfeasance, with regard to the particular
matter at issue, and (ii) there is no potential for the special servicer or the
trust to be an adverse party in the action as regards the Controlling Class
Representative, then the special servicer on behalf of the trust will, subject
to the discussion under "Description of the Governing Documents--Certain Matters
Regarding the Master
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Servicer, the Special Servicer, the Manager and Us" in the accompanying
prospectus, assume the defense of the claim against the Controlling Class
Representative.
LIABILITY TO THE TRUST AND CERTIFICATEHOLDERS. The Controlling Class
Representative may have special relationships and interests that conflict with
those of the holders of one or more classes of the offered certificates. In
addition, the Controlling Class Representative does not have any duties to the
holders of any class of certificates other than the Controlling Class. It may
act solely in the interests of the certificateholders of the Controlling Class
and will have no liability to any other certificateholders for having done so.
No certificateholder may take any action against the Controlling Class
Representative for its having acted solely in the interests of the
certificateholders of the Controlling Class.
REPLACEMENT OF THE SPECIAL SERVICER
The holders (or, in the case of certificates held in book-entry form, the
beneficial owners) of certificates representing more than [50%] of the aggregate
principal balance of the Controlling Class may terminate an existing special
servicer and appoint a successor. In addition, if the special servicer is
terminated in connection with an event of default (see "--Events of Default" and
"--Rights Upon Event of Default" below), the holders (or, in the case of
certificates held in book-entry form, the beneficial owners) of certificates
representing more than [50%] of the aggregate principal balance of the
Controlling Class may appoint a successor. In either case, any appointment of a
successor special servicer will be subject to, among other things, receipt by
the trustee of--
(i) written confirmation from each of and that the
appointment will not result in a qualification, downgrade or withdrawal
of any of the ratings then assigned thereby to the certificates, and
(ii) the written agreement of the proposed special servicer to be bound by
the terms and conditions of the pooling and servicing agreement,
together with an opinion of counsel regarding, among other things, the
enforceability of the pooling and servicing agreement against the
proposed special servicer.
Subject to the foregoing, any holder (or, in the case of certificates held
in book-entry form, any beneficial owner) of a certificate or any of their
affiliates may be appointed as special servicer.
If the certificateholders of the Controlling Class terminate an existing
special servicer without cause, then the reasonable "out-of-pocket" costs and
expenses of any related transfer of servicing duties are to be paid by the
successor special servicer or the holders (or, if applicable, the beneficial
owners) of certificates of the Controlling Class that voted to remove the
terminated special servicer, as the parties may agree. The terminated special
servicer will be entitled to:
- payment out of the master servicer's custodial account for all accrued and
unpaid special servicing fees; and
- reimbursement by the successor special servicer for any outstanding
servicing advances made by the terminated special servicer, together with
interest.
Upon reimbursement, any advance will be treated as if it were made by the
successor special servicer.
ENFORCEMENT OF "DUE-ON-SALE" AND "DUE-ON-ENCUMBRANCE" PROVISIONS
Subject to the discussion under "--The Controlling Class Representative"
above, the master servicer or the special servicer, as applicable, will be
required to determine, in a manner consistent with the Servicing Standard,
whether to exercise any right the lender under any mortgage loan may have under
either a "due-on-sale" or "due-on-encumbrance clause" to accelerate payment of
that mortgage loan. However, under the circumstances described below, neither
the master servicer nor the special servicer may waive its rights or grant its
consent under any "due-on-sale" or "due-on-encumbrance" clause unless it
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has received written confirmation from each applicable rating agency that this
action would not result in the qualification, downgrade or withdrawal of any of
the then-current ratings then assigned by the rating agency to the certificates.
With respect to "due-on-sale" clauses, this requirement will apply only if the
outstanding principal balance of the subject mortgage loan, together with the
total outstanding principal balance of all other mortgage loans that are
cross-collateralized with the subject mortgage loan or have been made to the
same borrower or affiliated borrowers, is equal to or greater than a specified
percentage of the then total principal balance of the mortgage pool. In the case
of "due-on-encumbrance" provisions, this requirement will always apply. In
addition, the master servicer may not waive its rights or grant its consent
under any "due-on-sale" or "due-on-encumbrance" clause without the consent of
the special servicer.
MODIFICATIONS, WAIVERS, AMENDMENTS AND CONSENTS
Subject to the discussion under "--The Controlling Class Representative"
above, the special servicer, with respect to specially serviced mortgage loans,
and the master servicer, with respect to performing mortgage loans, each may,
consistent with the Servicing Standard, agree to:
- any modification, waiver or amendment of any term of any mortgage loan;
- extend the maturity of any mortgage loan;
- defer or forgive the payment of interest on and principal of any mortgage
loan;
- defer or forgive the payment of prepayment premiums, yield maintenance
charges and late payment charges on any mortgage loan;
- permit the release, addition or substitution of collateral securing any
mortgage loan; or
- permit the release, addition or substitution of the borrower or any
guarantor of any mortgage loan.
The ability of the special servicer, in the case of specially serviced
mortgage loans, and the master servicer, in the case of performing mortgage
loans, to agree to any of the foregoing, however, is subject to each of the
following limitations, conditions and restrictions:
- With limited exception, including with respect to certain routine matters,
the master servicer may not agree to any modification, waiver or amendment
of any term of, or take any of the other above-referenced actions with
respect to, any mortgage loans without the consent of the special
servicer, provided that such consent--
(i) is to be withheld or granted by the special servicer in
accordance with the Servicing Standard, and
(ii) will be deemed to have been granted if not expressly denied
within ten business days following the special servicer's receipt
from the master servicer of all information reasonably requested
by it in order to make an informed decision.
- With limited exception, including with respect to Post-ARD Additional
Interest as described below, the special servicer may not agree to or
consent to the master servicer's agreeing to any modification, waiver or
amendment of any term of any mortgage loan, or take or consent to the
master servicer's taking any of the other above-referenced actions with
respect to any mortgage loan, if doing so would--
(i) affect the amount or timing of any related payment of principal,
interest or other amount payable under the mortgage loans, or
(ii) in the special servicer's judgment, materially impair the
security for the mortgage loan or reduce the likelihood of timely
payment of amounts due thereon,
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unless a material default on the mortgage loan has occurred or, in the special
servicer's judgment, a default in respect of payment on the mortgage loan is
reasonably foreseeable, and the modification, waiver, amendment or other action
is reasonably likely to produce a greater recovery to the certificateholders, as
a collective whole, on a present value basis than would liquidation.
- The special servicer may not extend or consent to the master servicer's
extending the date on which any balloon payment is scheduled to be due on
any mortgage loan to a date beyond the earliest of--
(i) the anniversary of the mortgage loan's original stated
maturity date,
(ii) years prior to the rated final payment date, and
(iii) if the mortgage loan is secured by a mortgage solely or
primarily on the related borrower's leasehold interest in the
related underlying real property, ten years prior to the end of
the then current term of the related ground lease, plus any
unilateral options to extend.
- Neither the master servicer nor the special servicer may make or permit
any modification, waiver or amendment of any term of, or take any of the
other above-referenced actions with respect to, any mortgage loan that
would--
(i) cause any of REMIC I, REMIC II or REMIC III to fail to qualify as
a REMIC under the Internal Revenue Code of 1986,
(ii) result in the imposition of any tax on "prohibited transactions"
or "contributions" after the startup date of any of REMIC I,
REMIC II or REMIC III under the Internal Revenue Code of 1986, or
(iii) adversely affect the status of either grantor trust created
under the pooling and servicing agreement as a grantor trust
under the Internal Revenue Code of 1986;
- The special servicer may not permit or consent to the master servicer's
permitting any borrower to add or substitute any real estate collateral
for its mortgage loans, unless the special servicer has first--
(i) determined, based upon an environmental assessment prepared by an
independent person who regularly conducts environmental
assessments, at the expense of the borrower, that:
(a) the additional or substitute collateral is in compliance with
applicable environmental laws and regulations, and
(b) that there are no circumstances or conditions present with
respect to the new collateral relating to the use, management
or disposal of any hazardous materials for which
investigation, testing, monitoring, containment, clean-up or
remediation would be required under any then applicable
environmental laws or regulations, and
(ii) received confirmation from each of and
that the addition or substitution of collateral will not result
in a qualification, downgrade or withdrawal of any rating then
assigned by the rating agency to a class of certificates.
- Subject to limited exceptions, the special servicer may not release or
consent to the master servicer's releasing any material collateral
securing an outstanding mortgage loan other than in accordance with the
terms of, or upon satisfaction of, the mortgage loan.
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The limitations, conditions and restrictions described above will not apply
to any of the acts referenced in this "--Modifications, Waivers, Amendments and
Consents" section that is required under the terms of the subject mortgage loan
in effect on the date of initial issuance of the certificates or that is solely
within the control of the related borrower. Also, neither the master servicer
nor the special servicer will be required to oppose the confirmation of a plan
in any bankruptcy or similar proceeding involving a borrower if, in its
judgment, opposition would not ultimately prevent the confirmation of the plan
or one substantially similar, despite the discussion above.
Notwithstanding the foregoing, the master servicer will be permitted, in the
case of certain ARD loans, in its discretion, after the related anticipated
repayment date, to waive any or all of the Post-ARD Additional Interest accrued
on that mortgage loan, if, prior to the related maturity date, the related
borrower has requested the right to prepay the mortgage loan in full, together
with all payments required by the related loan documents in connection with the
prepayment except for that Post-ARD Additional Interest. However, the master
servicer's determination to waive the trust's right to receive that Post-ARD
Additional Interest--
- must be in accordance with the Servicing Standard, and
- will be subject to approval by the special servicer.
The master servicer will not have any liability to the trust, the
certificateholders or any other person for any such determination that is made
in accordance with the Servicing Standard. [The pooling and servicing agreement
will also limit the master servicer's and the special servicer's ability to
institute an enforcement action solely for the collection of Post-ARD Additional
Interest.
All modifications, waivers and amendments entered into in respect of the
mortgage loans are to be in writing. Each of the master servicer and the special
servicer must deliver to the trustee for deposit in the related mortgage file,
an original counterpart of the agreement relating to each modification, waiver
or amendment agreed to by it, promptly following its execution.
REQUIRED APPRAISALS
Promptly following the occurrence of any of the following events (each, an
"Appraisal Trigger Event") with respect to any of the mortgage loans, the
special servicer must obtain, and deliver to the trustee and master servicer a
copy of, an appraisal of the related underlying real property from an
independent appraiser meeting certain specified qualifications (a "Required
Appraisal"), unless such an appraisal had previously been obtained within the
prior months--
- the mortgage loan becomes a Modified Mortgage Loan (as defined below);
- the related borrower fails to make any monthly debt service payment with
respect to the mortgage loan and the failure continues for days;
- a receiver is appointed and continues in that capacity in respect of the
underlying real property securing the mortgage loan;
- the related borrower becomes the subject of bankruptcy, insolvency or
similar proceedings; or
- the underlying real property securing the mortgage loan becomes an REO
property.
Notwithstanding the foregoing, if the unpaid principal balance of the
subject mortgage loan, net of related unreimbursed advances of principal, is
less than $ , the special servicer may perform an internal valuation
of the underlying real property.
As a result of any such appraisal or other valuation, it may be determined
that an Appraisal Reduction Amount exists with respect to the subject mortgage
loan. The "Appraisal Reduction Amount" for any mortgage loan as to which an
Appraisal Trigger Event has occurred--
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- will be determined shortly following the later of the date on which the
relevant appraisal or other valuation is obtained or performed and the
date on which the first relevant Appraisal Trigger Event occurred, and
- will equal the excess, if any, of "x" over "y" where--
(a) "x" is equal to the sum of:
(i) the unpaid principal balance of the mortgage loan, net of any related
unreimbursed advances of principal;
(ii) to the extent not previously advanced by or on behalf of the master
servicer or the trustee, all unpaid interest, other than any Default
Interest and Post-ARD Additional Interest, accrued on the mortgage
loan through the most recent due date prior to the date of
determination;
(iii) all accrued but unpaid special servicing fees in respect of the
mortgage loan;
(iv) all related unreimbursed advances made by or on behalf of the master
servicer, the special servicer or the trustee with respect to the
required appraisal loan, together with interest thereon; and
(v) all currently due and unpaid real estate taxes and assessments,
insurance premiums and, if applicable, ground rents in respect of the
related underlying real property, net of any escrow reserves held by
the master servicer or the special servicer which covers the
particular item and certain other related reserves; and
(b) "y" is equal to 90% of the resulting appraised or estimated value of the
related underlying real property or REO property, as such appraised or
estimated value may be reduced, to not less than zero, by the amount of
any obligations secured by liens on the property that are prior to the
lien of the mortgage loan.
If, however, any Required Appraisal or other valuation is not obtained or
performed within [60 days] of an Appraisal Trigger Event, and no comparable
appraisal or other valuation had been obtained or performed during the
-month period prior to that Appraisal Trigger Event, then until the
Required Appraisal or other valuation is obtained or performed, the "Appraisal
Reduction Amount" for the subject mortgage loan will equal approximately %
of the unpaid principal balance of that mortgage loan, net of any related
unreimbursed advances of principal. After receipt of the Required Appraisal or
other valuation, the special servicer will determine the Appraisal Reduction
Amount, if any, for the subject mortgage loan as described in the prior
paragraph.
An Appraisal Reduction Amount is relevant to the determination of the amount
of any advances of delinquent interest required to be made with respect to the
affected mortgage loan. See "Description of the Offered Certificates--Advances
of Delinquent Monthly Debt Service Payments" in this prospectus supplement.
If an Appraisal Trigger Event occurs with respect to any mortgage loan, then
the special servicer will have an ongoing obligation to obtain or perform, as
the case may be, within days of each anniversary of the occurrence of that
Appraisal Trigger Event, an update of the prior Required Appraisal or other
valuation. Based upon that update, the special servicer is to redetermine and
report to the trustee and the master servicer the new Appraisal Reduction
Amount, if any, with respect to the mortgage loan. This ongoing obligation will
cease if and when--
- the subject mortgage loan has become a worked-out mortgage loan as
contemplated under "--General" above,
- the subject mortgage loan has remained current for at least
consecutive monthly debt service payments, and
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- no other Servicing Transfer Event has occurred with respect to the subject
mortgage loan during the preceding months.
The cost of each required appraisal (and any update thereof) will be
advanced by the master servicer and will be reimbursable to the master servicer
as a servicing advance.
At any time that an Appraisal Reduction Amount exists with respect to any
mortgage loan, the Controlling Class Representative will be entitled, at its own
expense, to obtain and deliver to the master servicer, the special servicer and
the trustee an appraisal that satisfies the criteria for a Required Appraisal.
Upon request of the Controlling Class Representative, the special servicer will
be required to recalculate the Appraisal Reduction Amount with respect to the
subject mortgage loan based on that appraisal.
A "Modified Mortgage Loan" is any mortgage loan as to which any Servicing
Transfer Event has occurred and which has been modified by the special servicer
in a manner that:
(A) affects the amount or timing of any monthly debt service payment due
thereon, other than, or in addition to, bringing current monthly debt
service payments with respect to the mortgage loan;
(B) except as expressly contemplated by the related loan documents, results
in a release of the lien of the mortgage on any material portion of the
related underlying real property without a corresponding principal
prepayment in an amount not less than the fair market value (as is) of
the property to be released; or
(C) in the judgment of the special servicer, otherwise materially impairs
the security for the mortgage loan or reduces the likelihood of timely
payment of amounts due thereon.
CUSTODIAL ACCOUNT
GENERAL. The master servicer will be required to establish and maintain an
account for purposes of holding payments and other collections that it receives
with respect to the mortgage loans. That "custodial account" must be maintained
in a manner and with a depository institution that satisfies rating agency
standards for securitizations similar to the one involving the certificates.
The funds held in the master servicer's custodial account may be held as
cash or invested in Permitted Investments. Any interest or other income earned
on funds in the master servicer's custodial account will be paid to the master
servicer as additional compensation subject to the limitations set forth in the
pooling and servicing agreement.
DEPOSITS. Under the pooling and servicing agreement, the master servicer
must deposit or cause to be deposited in its custodial account within one
business day following receipt, in the case of payments and other collections on
the mortgage loans, or as otherwise required under the pooling and servicing
agreement, the following payments and collections received or made by or on
behalf of the master servicer with respect to the mortgage pool subsequent to
the date of initial issuance of the certificates, other than monthly debt
service payments due on or before , which monthly debt service
payments belong to the related mortgage loan seller:
(i) all payments on account of principal on the mortgage loans, including
principal prepayments;
(ii) all payments on account of interest on the mortgage loans, including
Default Interest and Post-ARD Additional Interest;
(iii) all prepayment premiums, yield maintenance charges and late payment
charges collected with respect to the mortgage loans;
(iv) all proceeds received under any hazard, flood, title or other insurance
policy that provides coverage with respect to an underlying real
property or the related mortgage loan, and all proceeds received in
connection with the condemnation or the taking by right of eminent
domain
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of an underlying real property, in each case to the extent not
otherwise required to be applied to the restoration of the underlying
real property or released to the related borrower;
(v) all amounts received and retained in connection with the liquidation of
defaulted mortgage loans by foreclosure or as otherwise contemplated
under "--Realization Upon Defaulted Mortgage Loans" below;
(vi) any amounts paid by us in connection with the repurchase or replacement
of a mortgage loan as described under "Description of the Mortgage
Pool--Cures and Repurchases" in this prospectus supplement;
(vii) any amounts paid to purchase all the mortgage loans and any REO
properties in connection with the termination of the trust as
contemplated under "Description of the Offered Certificates--
Termination" in this prospectus supplement;
(viii) any amounts required to be deposited by the master servicer in
connection with losses incurred with respect to Permitted Investments
of funds held in the custodial account;
(ix) all payments required to be paid by the master servicer or the special
servicer with respect to any deductible clause in any blanket insurance
policy as described under "Description of the Mortgage Pool--Certain
Underwriting Matters--Hazard, Liability and Other Insurance" in this
prospectus supplement;
(x) any amount required to be transferred from the special servicer's REO
account (see "--REO Properties" below); and
(xi) any amounts required to be transferred from any debt service reserve
accounts with respect to the mortgage loans.
Upon receipt of any of the amounts described in clauses (i) through
(v) above with respect to any specially serviced mortgage loan, the special
servicer is required to promptly remit these amounts to the master servicer for
deposit in the master servicer's custodial account.
WITHDRAWALS. The master servicer may make withdrawals from its custodial
account for any of the following purposes, which are not listed in any order of
priority:
(i) to remit to the trustee for deposit in the trustee's payment account
(see "Description of the Offered Certificates--Payment Account" in this
prospectus supplement) on the business day preceding each payment date,
all payments and other collections on the mortgage loans and any REO
properties that are then on deposit in the custodial account, exclusive
of any portion of those payments and other collections that represents
one or more of the following--
- monthly debt service payments due on a due date subsequent to the end of
the related collection period,
- payments and other collections received after the end of the related
collection period, and
- amounts that are payable or reimbursable from the custodial account to any
person other than the certificateholders in accordance with any of clauses
(ii) through (xvii) below;
(ii) to reimburse itself, the special servicer or the trustee, as
applicable, for any unreimbursed advances made by that party, such
reimbursement to be made out of collections on the mortgage loan or REO
property as to which the advance was made;
(iii) to pay itself earned and unpaid master servicing fees in respect of
each mortgage loan, such payment to be made out of collections on that
mortgage loan that are allocable as interest;
(iv) to pay the special servicer, out of general collections on the mortgage
loans and any REO properties, earned and unpaid special servicing fees
in respect of each specially serviced mortgage loan and each mortgage
loan as to which the related underlying property has become an REO
property;
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(v) to pay the special servicer (or, if applicable, any predecessor special
servicer) earned and unpaid workout fees and liquidation fees to which
it is entitled, such payment to be made from the sources described under
"--Servicing and Other Compensation and Payment of Expenses" above;
(vi) to reimburse itself, the special servicer or the trustee, as
applicable, out of general collections on the mortgage loans and any
REO properties, for any unreimbursed advance made by that party that
has been determined not to be ultimately recoverable pursuant to
clause (ii) above;
(vii) to pay itself, the special servicer or the trustee, as applicable,
unpaid interest on any advance made by that party, such payment to be
made out of Default Interest and late payment charges received
(A) with respect to the mortgage loan as to which the advance was made
and (B) during the collection period in which that advance is
reimbursed;
(viii) in connection with the reimbursement of advances as described in
clause (ii) or (vi) above, to pay itself, the special servicer or the
trustee, as the case may be, out of general collections on the mortgage
loans and any REO properties, any interest accrued and payable on that
advance and not otherwise payable pursuant to clause (vii) above;
(ix) to pay itself any items of additional master servicing compensation on
deposit in the custodial account as discussed under "--Servicing and
Other Compensation and Payment of Expenses--Additional Master Servicing
Compensation" above;
(x) to pay the special servicer any items of additional special servicing
compensation on deposit in the custodial account as discussed under
"--Servicing and Other Compensation and Payment of Expenses--Additional
Special Servicing Compensation" above;
(xi) to pay any unpaid liquidation expenses incurred with respect to any
liquidated mortgage loan or REO property, such payments to be made out
of collections on that mortgage loan or REO property, as the case may
be;
(xii) to pay, out of general collections on the mortgage loans and any REO
properties, any servicing expenses that would, if advanced, be
nonrecoverable pursuant to clause (ii) above;
(xiii) to pay, out of general collections on the mortgage loans and any REO
properties, for certain costs and expenses incurred by the trust in
connection with the remediation of adverse environmental conditions at
any underlying real property that secures a defaulted mortgage loan;
(xiv) to pay itself, the special servicer, the trustee, us or any of their or
our respective directors, officers, employees and agents, as the case
may be, out of general collections on the mortgage loans and any REO
properties, any of the reimbursements or indemnities to which we or any
of those other persons or entities are entitled as described under
"Description of the Governing Documents--Certain Matters Regarding the
Master Servicer, the Special Servicer, the Manager and Us" and
"--Certain Matters Regarding the Trustee" in the accompanying
prospectus;
(xv) to pay, out of general collections on the mortgage loans and any REO
properties, for the costs of certain opinions of counsel, the cost of
recording the pooling and servicing agreement and certain expenses
incurred by the tax administrator in connection with providing advice to
the special servicer;
(xvi) to pay any other items described in this prospectus supplement as being
payable from the custodial account;
(xvii) to withdraw amounts deposited in the custodial account in error,
including amounts received on any mortgage loan or REO property that
has been purchased or otherwise removed from the trust; and
(xviii) to clear and terminate the custodial account upon the termination of
the pooling and servicing agreement.
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REALIZATION UPON DEFAULTED MORTGAGE LOANS
The pooling and servicing agreement grants to the master servicer, the
special servicer and any single certificateholder or group of certificateholders
of the Controlling Class, a right to purchase from the trust certain defaulted
mortgage loans in the priority described below.
If the special servicer has determined, in its judgment, that the sale of
any defaulted mortgage loan under the circumstances described below is in
accordance with the Servicing Standard, the special servicer must give prompt
written notice of its determination to the trustee and the master servicer. The
trustee will then be required, within five days after receipt of that notice, to
provide a similar notice to all certificateholders of the Controlling Class. Any
single certificateholder or group of certificateholders of the Controlling Class
may, at its or their option, within ten days after receiving the notice from the
trustee, purchase that defaulted mortgage loan from the trust, at a cash price
generally equal to the outstanding principal balance of, all accrued and unpaid
interest on and all unreimbursed servicing advances with respect to, the subject
mortgage loan. If two or more separate certificateholders or groups of
certificateholders of the Controlling Class want to purchase the defaulted
mortgage loan, preference will be given to the certificateholder or group of
certificateholders with the largest interest in the Controlling Class. If
certificateholders of the Controlling Class have not purchased that defaulted
mortgage loan within days of their having received the relevant notice,
then for a limited period, either the special servicer or the master servicer,
in that order of priority, may at its option purchase the defaulted mortgage
loan from the trust at the same cash price as was applicable for the
certificateholders of the Controlling Class. Each of the master servicer and the
special servicer may designate an affiliate to complete the purchase.
The special servicer may offer to sell any defaulted mortgage loan not
otherwise purchased as described in the preceding paragraph, if and when the
special servicer determines, consistent with the Servicing Standard, that a sale
would be in the best economic interests of the certificateholders (as a
collective whole). Any offer must be made in a commercially reasonable manner
for a period of not less than ten days. Subject to the discussion in the next
paragraph and under "--The Controlling Class Representative" above, the special
servicer will be required to accept the highest cash bid received from any
person that is a "fair price", determined in accordance with the pooling and
servicing agreement, for the mortgage loan.
The special servicer will not be obligated to accept the highest cash bid if
the special servicer determines, in accordance with the Servicing Standard, that
rejection of the highest cash bid would be in the best interests of the
certificateholders, as a collective whole. Furthermore, subject to the
discussion under "--The Controlling Class Representative" above, the special
servicer may accept a lower cash bid from any person or entity other than itself
or an affiliate if it determines, in accordance with the Servicing Standard,
that acceptance of the bid would be in the best interests of the
certificateholders, as a collective whole. For example, the prospective buyer
making the lower bid may be more likely to perform its obligations or the terms,
other than the price, offered by the prospective buyer making the lower bid may
be more favorable.
Neither the trustee, in its individual capacity, nor any of its affiliates
may bid for or purchase any defaulted mortgage loan or any REO property.
In connection with the sale of any defaulted mortgage loan, the special
servicer may charge prospective bidders, and retain, fees that approximate the
special servicer's actual costs in the preparation and delivery of information
pertaining to the sales or evaluating bids without obligation to deposit the
amounts into its collection account.
If a default on a mortgage loan has occurred or, in the special servicer's
judgment, a payment default is imminent, then, subject to the discussion under
"--The Controlling Class Representative" above, the special servicer may, on
behalf of the trust, take any of the following actions:
- institute foreclosure proceedings;
- exercise any power of sale contained in the related mortgage;
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- obtain a deed in lieu of foreclosure; or
- otherwise acquire title to the related underlying real property, by
operation of law or otherwise.
The special servicer may not, however, acquire title to any underlying real
property, have a receiver of rents appointed with respect to any underlying real
property or take any other action with respect to any underlying real property
that would cause the trustee, for the benefit of the certificateholders, or any
other specified person to be considered to hold title to, to be a
"mortgagee-in-possession" of, or to be an "owner" or an "operator" of the
particular real property within the meaning of certain federal environmental
laws, unless--
- the special servicer has previously received a report prepared by a person
who regularly conducts environmental audits, which report will be an
expense of the trust, and
- either:
(a) the report indicates that (i) the particular real property is in
compliance with applicable environmental laws and regulations and
(ii) there are no circumstances or conditions present at the real
property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations; or
(b) the special servicer, based solely as to environmental matters and
related costs on the information set forth in the report, determines
that taking the actions necessary to bring the particular real
property into compliance with applicable environmental laws and
regulations and/or taking the actions contemplated by
clause (a)(ii) above, is reasonably likely to produce a greater
recovery, taking into account the time value of money, than not
taking those actions.
If the trust acquires title to any underlying real property, the special
servicer, on behalf of the trust, has to sell the particular real property prior
to the close of the third taxable year following the taxable year in which that
acquisition occurred, subject to limited exceptions as described under "--REO
Properties" below.
If liquidation proceeds collected with respect to a defaulted mortgage loan
are less than the outstanding principal balance of the defaulted mortgage loan,
together with accrued interest on and reimbursable expenses incurred by the
special servicer and/or the master servicer in connection with the defaulted
mortgage loan, then the trust will realize a loss in the amount of the
shortfall. The special servicer and/or the master servicer will be entitled to
reimbursement out of the liquidation proceeds recovered on any defaulted
mortgage loan, prior to the payment of the liquidation proceeds to the
certificateholders, for any and all amounts that represent unpaid servicing
compensation in respect of the mortgage loan, unreimbursed servicing expenses
incurred with respect to the mortgage loan and any unreimbursed advances,
including interest thereon, of delinquent payments made with respect to the
mortgage loan. In addition, amounts otherwise payable on the certificates may be
further reduced by interest payable to the master servicer and/or special
servicer on the servicing expenses and advances.
If any underlying real property suffers sufficient damage that the proceeds,
if any, of the related hazard insurance policy are insufficient to restore fully
the damaged property, neither the special servicer nor the master servicer will
be required to expend its own funds to complete the restoration unless it
determines that--
- the restoration would be in accordance with the Servicing Standard; and
- the expenses will be recoverable by it from related insurance proceeds,
condemnation proceeds and/or liquidation proceeds.
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REO PROPERTIES
If title to any underlying real property is acquired by the special servicer
on behalf of the trust, the special servicer will be required to sell that
property not later than the end of the third calendar year following the year of
acquisition, unless--
- the IRS grants an extension of time to sell the property, or
- the special servicer obtains an opinion of independent counsel generally
to the effect that the holding of the property subsequent to the end of
the third calendar year following the year in which the acquisition
occurred will not result in the imposition of a tax on the trust assets or
cause any of REMIC I, REMIC II or REMIC III to fail to qualify as a REMIC
under the Internal Revenue Code of 1986.
Subject to the foregoing, the special servicer will generally be required to
solicit cash offers for any REO property in a manner that will be reasonably
likely to realize a fair price for the property. The special servicer may retain
an independent contractor to operate and manage any REO property. The retention
of an independent contractor will not relieve the special servicer of its
obligations with respect to the REO property. Regardless of whether the special
servicer applies for or is granted an extension of time to sell the property,
the special servicer shall act in accordance with the Servicing Standard to
liquidate an REO property on a timely basis. If an extension is granted or
opinion given, the special servicer must sell the REO property within the period
specified in the extension or opinion.
In general, the special servicer or an independent contractor employed by
the special servicer at the expense of the trust will be obligated to operate
and manage any underlying real property acquired as REO property in a manner
that:
(i) maintains its status as "foreclosure property" under the REMIC
provisions of the Internal Revenue Code of 1986, and
(ii) is in accordance with the Servicing Standard.
The special servicer must review the operation of each REO property and
consult with the trustee, or any person appointed by the trustee to act as tax
administrator, to determine the trust's federal income tax reporting position
with respect to the income it is anticipated that the trust would derive from
the property. The special servicer could determine that it would not be
consistent with the Servicing Standard to manage and operate the property in a
manner that would avoid the imposition of a tax on "net income from foreclosure
property", within the meaning of Section 857(b)(4)(B) of the Internal Revenue
Code of 1986, or a tax on "prohibited transactions" under Section 860F of the
Internal Revenue Code of 1986. This determination is most likely to occur in the
case of an REO property that is a hotel or residential health care facility. To
the extent that income the trust receives from an REO property is subject to--
- a tax on "net income from foreclosure property", that income would be
subject to federal tax at the highest marginal corporate tax rate, which
is currently 35%,
- a tax on "prohibited transactions", that income would be subject to
federal tax at a 100% rate.
The determination as to whether income from an REO property would be subject
to a tax will depend on the specific facts and circumstances relating to the
management and operation of each REO property. Generally, income from an REO
property that is directly operated by the special servicer would be apportioned
and classified as "service" or "non-service" income. The "service" portion of
the income could be subject to federal tax either at the highest marginal
corporate tax rate or at the 100% rate. The "non-service" portion of the income
could be subject to federal tax at the highest marginal corporate tax rate or,
although it appears unlikely, at the 100% rate. Any tax imposed on the trust's
income from an REO property would reduce the amount available for payment to the
certificateholders. See "Federal Income Tax Consequences" in this prospectus
supplement and in the accompanying prospectus. The
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reasonable "out-of-pocket" costs and expenses of obtaining professional tax
advice in connection with the foregoing will be payable out of the master
servicer's custodial account.
The special servicer will be required to segregate and hold all funds
collected and received in connection with any REO property separate and apart
from its own funds and general assets. If an REO property is acquired, the
special servicer will be required to establish and maintain an account for the
retention of revenues and other proceeds derived from the REO property. That
"REO account" must be maintained in a manner and with a depository institution
that satisfies rating agency standards for securitizations similar to the one
involving the certificates. The special servicer will be required to deposit, or
cause to be deposited, in its REO account, upon receipt, all net income,
insurance proceeds, condemnation proceeds and liquidation proceeds received with
respect to an REO property. The funds held in this REO account may be held as
cash or invested in Permitted Investments. Any interest or other income earned
on funds in the special servicer's REO account will be payable to the special
servicer, subject to the limitations described in the pooling and servicing
agreement.
The special servicer will be required to withdraw from its REO account funds
necessary for the proper operation, management, leasing, maintenance and
disposition of any REO property, but only to the extent of amounts on deposit in
the account relating to that particular REO property. Promptly following the end
of each collection period, the special servicer will be required to withdraw
from the REO account and deposit, or deliver to the master servicer for deposit,
into the master servicer's custodial account the total of all amounts received
in respect of each REO property during that collection period, net of (i) any
withdrawals made out of those amounts as described in the preceding sentence and
(ii) any portion of those amounts that may be retained as reserves as described
in the next sentence. The special servicer may, subject to certain limitations
described in the pooling and servicing agreement, retain in its REO account the
portion of the proceeds and collections as may be necessary to maintain a
reserve of sufficient funds for the proper operation, management, leasing,
maintenance and disposition of the related REO property, including the creation
of a reasonable reserve for repairs, replacements, necessary capital
improvements and other related expenses.
The special servicer shall keep and maintain separate records, on a
property-by-property basis, for the purpose of accounting for all deposits to,
and withdrawals from, its REO account.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The special servicer will be required, at the expense of the trust, to
inspect or cause an inspection of the related underlying real property as soon
as practicable after any mortgage loan becomes a specially serviced mortgage
loan. The master servicer also will be required, at its own expense, to inspect
or cause an inspection of each underlying real property at least once per
(or, in the case of each mortgage loan with an unpaid principal
balance of under $ , once every years), if the special servicer has
not already undertaken an inspection in that period as described in the
preceding sentence. The master servicer and the special servicer will each be
required to prepare or cause to be prepared a written report of each inspection
performed by it that generally describes the condition of the particular real
property and that specifies--
- any sale, transfer or abandonment of the property of which the master
servicer or the special servicer, as applicable, is aware, or
- any change in the property's condition, occupancy or value that the master
servicer or the special servicer, as applicable, in accordance with the
Servicing Standard, considers to be material.
The special servicer, in the case of each specially serviced mortgage loan,
and the master servicer, in the case of each performing mortgage loan, will each
be required to use reasonable efforts to collect from
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the related borrower and review the following items, to the extent that those
items are required to be delivered pursuant to the related loan documents:
(i) the quarterly and annual operating statements, budgets and rent rolls of
the underlying real property; and
(ii) the quarterly and annual financial statements of the borrower.
The special servicer will also be required to cause quarterly and annual
operating statements, budgets and rent rolls to be prepared for each REO
property. However, there can be no assurance that any operating statements
required to be delivered by a borrower will in fact be delivered, nor is the
master servicer or the special servicer likely to have any practical means of
compelling delivery.
EVIDENCE AS TO COMPLIANCE
On or before of each year, beginning , each of the
master servicer and the special servicer must--
- at its expense, cause a firm of independent public accountants, that is a
member of the American Institute of Certified Public Accountants to
furnish a statement to the trustee, among others, to the effect that the
firm has examined the servicing operations of the master servicer or the
special servicer, as the case may be, for the previous year and, on the
basis of that examination, conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers established by the
Mortgage Bankers of America ("USAP"), the firm confirms that the master
servicer or the special servicer, as applicable, has complied with the
minimum servicing standards identified in USAP, in all material respects,
except for the significant exceptions or errors in records that, in the
opinion of the firm, USAP requires it to report. In rendering its report
the firm may rely, as to matters relating to the direct servicing of
commercial and multifamily mortgage loans by sub-servicers, upon
comparable reports of firms of independent certified public accountants
rendered on the basis of examinations conducted in accordance with the
same standards, within one year of the report, with respect to those
sub-servicers.
- deliver to the trustee, among others, a statement signed by an officer of
the master servicer or the special servicer, as the case may be, to the
effect that, to the best knowledge of that officer, the master servicer or
special servicer, as the case may be, has fulfilled its obligations under
the pooling and servicing agreement in all material respects throughout
the preceding calendar year or portion thereof during which the series
certificates were outstanding.
EVENTS OF DEFAULT
Each of the following events, circumstances and conditions will be
considered "events of default" under the pooling and servicing agreement:
- the master servicer or the special servicer fails to deposit, or to remit
to the appropriate party for deposit, into the master servicer's custodial
account or the special servicer's REO account, as applicable, any amount
required to be so deposited, and that failure continues unremedied for
business days following the date on which the deposit or remittance
was required to be made;
- the master servicer fails to remit to the trustee for deposit in the
trustee's payment account any amount required to be so remitted, and that
failure continues unremedied for business days following the date on
which the remittance was required to be made;
- the master servicer or the special servicer fails to timely make any
servicing advance required to be made by it under the pooling and
servicing agreement, and that failure continues unremedied for
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business days following the date on which notice has been given to
the master servicer or the special servicer, as the case may be, by the
trustee;
- the master servicer or the special servicer fails to observe or perform in
any material respect any of its other covenants or agreements under the
pooling and servicing agreement, and that failure continues unremedied for
days after written notice of it has been given to the master
servicer or the special servicer, as the case may be, by any other party
to the pooling and servicing agreement or by series
certificateholders entitled to not less than % of the voting rights
for the series;
- it is determined that there is a breach by the master servicer or the
special servicer of any of its representations or warranties contained in
the pooling and servicing agreement that materially and adversely affects
the interests of any class of series certificateholders, and that
breach continues unremedied for days after written notice of it has
been given to the master servicer or the special servicer, as the case may
be, by any other party to the pooling and servicing agreement or by the
series certificateholders entitled to not less than % of the
voting rights for the series;
- a decree or order of a court having jurisdiction in an involuntary case
for the appointment of a receiver, liquidator, trustee or similar official
in any bankruptcy, insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings is entered against the master
servicer or the special servicer and the decree or order remains in force
for a period of days;
- the master servicer or special servicer consents to the appointment of a
receiver, liquidator, trustee or similar official relating to it or of or
relating to all or substantially all of its property;
- the master servicer or special servicer admits in writing its inability to
pay its debts or take certain other actions indicating its insolvency or
inability to pay its obligations;
- one or more ratings assigned by either or to the
series certificates are qualified, downgraded or withdrawn as a
result of the master servicer or special servicer acting in that capacity;
and
- the trustee receives written notice from either or
that the continuation of the master servicer or the special
servicer, as the case may be, in that capacity would result in a
qualification, downgrade or withdrawal of any rating then assigned by that
rating agency to any class of the series certificates.
When a single entity acts as master servicer and special servicer, an event
of default in one capacity will be an event of default in the other capacity.
RIGHTS UPON EVENT OF DEFAULT
If an event of default described above under "--Events of Default" occurs
with respect to the master servicer or the special servicer and remains
unremedied, the trustee will be authorized, and at the direction of the series
certificateholders entitled to not less than % of the voting rights
for the series, the trustee will be required, to terminate all of the rights and
obligations of the defaulting party under the pooling and servicing agreement
and in and to the trust assets other than any rights the defaulting party may
have as a certificateholder. Upon any termination, the trustee must either:
- succeed to all of the responsibilities, duties and liabilities of the
master servicer or special servicer, as the case may be, under the pooling
and servicing agreement; or
- appoint an established mortgage loan servicing institution to act as
successor master servicer or special servicer, as the case may be.
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The holders of series certificates entitled to a majority of the
voting rights for the series may require the trustee to appoint an established
mortgage loan servicing institution to act as successor master servicer or
special servicer, as the case may be, rather than have the trustee act as that
successor. The appointment of a successor special servicer by the trustee is
subject to the rights of the holders of series certificates evidencing a
majority interest in the Controlling Class to designate a successor special
servicer as described under "--Replacement of the Special Servicer" above.
In general, the series certificateholders entitled to at least %
of the voting rights allocated to each class of certificates affected by any
event of default may waive the event of default. However, certain of the events
of default described under "--Events of Default" above may only be waived by all
of the holders of the affected classes of the certificates. Furthermore, if the
trustee is required to spend any monies in connection with any event of default,
then that event of default may not be waived unless and until the trustee has
been reimbursed, with interest, by the defaulting party. Upon any waiver of an
event of default, the event of default will cease to exist and will be deemed to
have been remedied for every purpose under the pooling and servicing agreement.
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DESCRIPTION OF THE OFFERED CERTIFICATES
GENERAL
The certificates will be issued, on or about , pursuant to the
pooling and servicing agreement. They will represent the entire beneficial
ownership interest of the trust. The assets of the trust will include:
- the mortgage loans;
- any and all payments under and proceeds of the mortgage loans received
after the cut-off date, exclusive of payments of principal, interest and
other amounts due on or before that date;
- the loan documents for the mortgage loans;
- any REO properties acquired in respect of defaulted mortgage loans;
- those funds or assets as from time to time are deposited in the master
servicer's custodial account, the special servicer's REO account, the
trustee's collection account (see "--Collection Account" below) or the
trustee's interest reserve account (see "--Payments--Interest Reserve
Account" below); and
- various rights incidental to the representations and warranties made by us
as described under "Description of the Mortgage Pool--Representations and
Warranties" and "--Cures and Repurchases" in this prospectus supplement.
The certificates will include the following classes:
- the "A-1", "A-2", "B", "C", "D", "E", "F" and "X" classes, which are the
classes of certificates that are offered by this prospectus supplement,
and
- the "G", "H", "J", "K", "L", "M", "N", "R-I", "R-II" and "R-III" classes,
which are the classes of certificates that--
(i) will be retained or privately placed by us, and
(ii) are not offered by this prospectus supplement.
The tables below set forth the approximate initial aggregate principal
balance or notional amount and the pass-through rate for each class of series
certificates.
OFFERED CERTIFICATES
<TABLE>
<CAPTION>
INITIAL
AGGREGATE PRINCIPAL % OF THE APPROXIMATE
BALANCE OR INITIAL MORTGAGE INITIAL
CLASS DESIGNATION NOTIONAL AMOUNT(1) POOL BALANCE CREDIT SUPPORT(2) PASS-THROUGH RATE
- ----------------- ------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Class A-1.................... $ % % %
Class A-2.................... $ % % %
Class B...................... $ % % %
Class C...................... $ % % %
Class D...................... $ % % %
Class E...................... $ % % %
Class F...................... $ % % %
Class X...................... $(3) N/A N/A %(4)
</TABLE>
- ------------------------
(1) The actual initial aggregate principal balance or notional amount of any
class of offered certificates at the date of issuance may be larger or
smaller than the amount shown above, depending on the actual size of the
initial mortgage pool balance. The actual size of the initial mortgage pool
balance may be as much as 5% larger or smaller than the amount presented in
this prospectus supplement.
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<PAGE>
(2) Represents the initial aggregate principal balance, expressed as a
percentage of the initial mortgage pool balance, of all classes of series
certificates that are subordinate to the indicated class.
(3) Notional amount. The class "X" certificates will not have a principal
balance.
(4) The pass-through rate shown above for the class " " certificates is the
approximate rate applicable for the payment date in . The
pass-through rate for the class " " certificates is variable and will
be calculated pursuant to a formula described under
"--Distributions--Calculations of Pass-Through Rates" below.
PRIVATE CERTIFICATES(1)
<TABLE>
<CAPTION>
INITIAL % OF THE
AGGREGATE PRINCIPAL INITIAL MORTGAGE
CLASS DESIGNATION BALANCE(2) POOL BALANCE PASS-THROUGH RATE
- ----------------- ------------------- ---------------- -----------------
<S> <C> <C> <C>
Class G....................................... $ % %
Class H....................................... $ % %
Class J....................................... $ % %
Class K....................................... $ % %
Class L....................................... $ % %
Class M....................................... $ % %
Class N....................................... $ % %
</TABLE>
- ------------------------
(1) The private certificates will also include the class "R-I", class "R-II" and
class "R-III" certificates. However, the class "R-I", class "R-II" and class
"R-III" certificates do not have principal balances, notional amounts or
pass-through rates.
(2) The actual initial aggregate principal balance of any class of private
certificates at the date of issuance may be larger or smaller than the
amount shown above, depending on the actual size of the initial mortgage
pool balance. The actual size of the initial mortgage pool balance may be as
much as 5% larger or smaller than the amount presented in this prospectus
supplement.
The class "A-1", "A-2", "B", "C", "D", "E", "F", "G", "H", "J", "K", "L",
"M" and "N" certificates are the only certificates that will have principal
balances. We refer to these certificates as the "principal balance
certificates". The principal balance of any of these certificates will represent
the total payments of principal to which the holder of the certificate is
entitled over time out of payments, or advances in lieu thereof, and other
collections on the assets of the trust. Accordingly, on each payment date, the
principal balance of each of these certificates will be permanently reduced by
any payments of principal actually made with respect to the certificate on that
payment date. See "--Payments" below. On any particular payment date, the
principal balance of each of these certificates may also be permanently reduced,
without any corresponding payment, in connection with losses on the mortgage
loans and default-related and otherwise unanticipated expenses. See
"--Reductions in Certificate Principal Balances in Connection with Realized
Losses and Additional Trust Fund Expenses" below.
The class "X" certificates will not have principal balances, and the holders
of the class "X" certificates will not be entitled to receive payments of
principal. However, each class "X" certificate will have a notional amount for
purposes of calculating the accrual of interest with respect to that
certificate. The aggregate notional amount of all the class "X" certificates
will equal the aggregate principal balance of all the principal balance
certificates outstanding from time to time.
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In general, principal balances and notional amounts will be reported on a
class-by-class basis. In order to determine the principal balance or notional
amount of any of your certificates from time to time, you may multiply the
original principal balance or notional amount of that certificate as of the date
of initial issuance of the certificates, as specified on the face of that
certificate, by the then-applicable certificate factor for the relevant class.
The "certificate factor" for any class of offered certificates, as of any date
of determination, will equal a fraction, expressed as a percentage, the
numerator of which will be the then outstanding aggregate principal balance or
notional amount, as applicable, of that class, and the denominator of which will
be the original aggregate principal balance or notional amount, as applicable,
of that class. Certificate factors will be reported monthly in the trustee's
payment date statement.
REGISTRATION AND DENOMINATIONS
GENERAL. The offered certificates will be issued in book-entry form in
original denominations of:
- in the case of the class "X" certificates, $ initial notional amount
and in any whole dollar denomination in excess of $ ; and
- in the case of the other offered certificates, $ initial principal
balance and in any whole dollar denomination in excess of $ .
Each class of offered certificates will initially be represented by one or
more certificates registered in the name of Cede & Co., as nominee of The
Depository Trust Company. You will not be entitled to receive an offered
certificate issued in fully registered, certificated form, except under the
limited circumstances described in the accompanying prospectus under
"Description of the Certificates--Book-Entry Registration". For so long as any
class of offered certificates is held in book-entry form--
- all references to actions by holders of those certificates will refer to
actions taken by DTC upon instructions received from beneficial owners of
those certificates through its participating organizations, and
- all references in this prospectus supplement to payments, notices,
reports, statements and other information to holders of those certificates
will refer to payments, notices, reports and statements to DTC or Cede &
Co., as the registered holder of those certificates, for payment to
beneficial owners of offered certificates through its participating
organizations in accordance with DTC's procedures.
The trustee will initially serve as registrar for purposes of providing for
the registration of the offered certificates and, if and to the extent physical
certificates are issued to the actual beneficial owners of any of the offered
certificates, the registration of transfers and exchanges of those certificates.
For a discussion of DTC, see "Description of the Certificates--Book-Entry
Registration" in the accompanying prospectus.
COLLECTION ACCOUNT
GENERAL. The trustee must establish and maintain an account in which it
will hold funds pending their payment on the certificates and from which it will
make those payments. That "collection account" must be maintained in a manner
and with a depository institution that satisfies rating agency standards for
securitizations similar to the one involving the certificates. Funds held in the
trustee's collection account will remain uninvested.
DEPOSITS. On the business day prior to each payment date, the master
servicer will be required to remit to the trustee for deposit in the collection
account the following funds:
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- All payments and other collections on the mortgage loans and any REO
properties that are then on deposit in the master servicer's custodial
account, exclusive of any portion of those payments and other collections
that represents one or more of the following:
(a) monthly debt service payments due on a due date subsequent to the
end of the related collection period;
(b) payments and other collections received after the end of the related
collection period;
(c) amounts that are payable or reimbursable from the master servicer's
custodial account to any person other than the certificateholders,
including
(i) amounts payable to the master servicer or the special servicer
as compensation, including master servicing fees, special
servicing fees, workout fees, liquidation fees, assumption fees,
modification fees and, to the extent not otherwise applied to
cover interest on advances, Default Interest and late payment
charges,
(ii) amounts payable in reimbursement of outstanding advances,
together with interest thereon, and
(iii) amounts payable in respect of other expenses of the trust; and
(d) amounts deposited in the master servicer's custodial account in
error.
- Any advances of delinquent monthly debt service payments and Compensating
Interest Payments made with respect to that payment date.
See "--Advances of Delinquent Monthly Debt Service Payments" below and
"Servicing of the Mortgage Loans--Custodial Account" and "Servicing and Other
Compensation and Payment of Expenses" in this prospectus supplement.
With respect to each payment date that occurs during March, commencing in
March , the trustee will be required to transfer from its interest reserve
account, which we describe under "--Interest Reserve Account" below, to its
collection account the interest reserve amounts that are then being held in that
interest reserve account with respect to those mortgage loans that accrue
interest on an actual/360 basis.
WITHDRAWALS. The trustee may from time to time make withdrawals from its
collection account for any of the following purposes:
- to pay itself a monthly fee which is described under "--The Trustee"
below;
- to indemnify itself and certain related persons as described under
"Description of the Governing Documents--Certain Matters Regarding the
Trustee" in the accompanying prospectus;
- to pay for any opinions of counsel required to be obtained in connection
with any amendments to the pooling and servicing agreement;
- to pay any federal, state and local taxes imposed on the trust, its assets
and/or transactions, together with all incidental costs and expenses, that
are required to be borne by the trust as described under "Federal Income
Tax Consequences--REMICs--Prohibited Transactions Tax and Other Taxes" in
the accompanying prospectus and "Servicing of the Mortgage Loans--REO
Properties" in this prospectus supplement;
- with respect to each payment date during February of any year or during
January of any year that is not a leap year, commencing in , to
transfer to the trustee's interest reserve account the interest reserve
amounts required to be so transferred in that month with respect to those
mortgage loans that accrue interest on an actual/360 basis; and
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- to pay to the person entitled thereto any amounts deposited in the
collection account in error.
On each payment date, all amounts on deposit in the trustee's collection
account, exclusive of any portion of those amounts that are to be withdrawn for
the purposes contemplated in the foregoing paragraph, will be withdrawn and
applied to make payments on the certificates. We refer to those funds that are
available to make payments on the certificates on any payment date as the
"Available Funds" for that date. The Available Funds for any payment date will
reflect the deposits to be made to the trustee's collection account in
connection with that payment date as described under "--Collection Account--
Deposits" above.
The Available Funds for any payment date will consist of two separate
components
- the portion of those funds that represent prepayment consideration
collected on the mortgage loans as a result of voluntary or involuntary
prepayments that occurred during the related collection period, which will
be paid to the holders of the offered certificates as described under
"--Payments--Payments of Prepayment Premiums and Yield Maintenance
Charges" below, and
- the remaining portion of those funds, which we refer to as the "Available
P&I Funds" and which will be paid to the holders of all the certificates,
other than the class " " certificates, as described under
"--Payments--Priority of Payments" below.
INTEREST RESERVE ACCOUNT
The trustee must maintain an account in which it will hold certain "interest
reserve amounts" described below with respect to those mortgage loans that
accrue interest on an actual/360 basis. That "interest reserve account" must be
maintained in a manner and with a depository that satisfies rating agency
standards for similar securitizations as the one involving the certificates.
Funds held in the trustee's interest reserve account will remain uninvested.
During January, except in a leap year, and February of each calendar year,
beginning in , the trustee will, on or before the payment date in that
month, withdraw from its collection account and deposit in its interest reserve
account the interest reserve amount with respect to each mortgage loan that
accrues interest on an actual/360 basis and for which the monthly debt service
payment due in that month was either received or advanced. That "interest
reserve amount" for each such mortgage loan will equal one day's interest
accrued at the related mortgage interest rate on the unpaid principal balance of
that loan as of the end of the related collection period, net of all
unreimbursed advances of principal then outstanding with respect to that loan.
During March of each calendar year, beginning in , the trustee will,
on or before the payment date in that month, withdraw from its interest reserve
account and deposit in its collection account any and all interest reserve
amounts then on deposit in the interest reserve account with respect to those
mortgage loans that accrue interest on an actual/360 basis. All interest reserve
amounts that are so transferred from the interest reserve account to the
collection account will be included in the Available P&I Funds for the payment
date during the month of transfer.
PAYMENTS
GENERAL. On each payment date, the trustee will, subject to the Available
Funds, make all payments required to be made on the series certificates on
that date to the holders of record as of the close of business on the last
business day of the calendar month preceding the month in which those payments
are to occur. The final payment of principal and/or interest on any offered
certificate, however, will be made only upon presentation and surrender of that
certificate at the location to be specified in a notice of the pendency of that
final payment.
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In order for a series certificateholder to receive payments by wire
transfer on and after any particular payment date, that certificateholder must
provide the trustee with written wiring instructions no later than the last day
of the calendar month preceding the month in which that payment date occurs.
Otherwise, that certificateholder will receive its payments by check mailed to
it.
Cede & Co. will be the registered holder of your certificates, and you will
receive payments on your certificates through DTC and its participating
organizations, until physical certificates are issued to the actual beneficial
owners. See "--Registration and Denominations" above.
PAYMENTS OF INTEREST. All of the classes of the series certificates
will bear interest, except for the "R-I", "R-II" and "R-III" classes.
With respect to each class of interest-bearing certificates, that interest
will accrue during each interest accrual period based upon--
- the pass-through rate for that class and the related payment date,
- the aggregate principal balance or notional amount, as the case may be, of
that class outstanding immediately prior to the related payment date, and
- the assumption that each year consists of twelve 30-day months.
On each payment date, subject to the Available P&I Funds for that date and
the priorities of payment described under "--Payments--Priority of Payments"
below, the holders of each class of interest-bearing certificates will be
entitled to receive--
- the total amount of interest accrued during the related interest accrual
period with respect to that class of certificates, reduced by
- the portion of any Net Aggregate Prepayment Interest Shortfall for that
payment date that is allocable to that class of certificates.
If the holders of any class of interest-bearing certificates do not receive
all of the interest to which they are entitled on any payment date, then they
will continue to be entitled to receive the unpaid portion of that interest on
future payment dates, subject to the Available P&I Funds for those future
payment dates and the priorities of payment described under
"--Payments--Priority of Payments" below.
The portion of any Net Aggregate Prepayment Interest Shortfall for any
payment date that is allocable to any particular class of interest-bearing
certificates will equal the product of--
- the total amount of interest accrued during the related interest accrual
period with respect to that class of certificates, multiplied by
- a fraction, the numerator of which is the total amount of interest accrued
during the related interest accrual period with respect to that class of
certificates, and the denominator of which is the total amount of interest
accrued during the related interest accrual period with respect to all of
the interest-bearing classes.
CALCULATION OF PASS-THROUGH RATES.
GENERAL. The pass-through rates each class of principal balance
certificates will be [fixed] at the rate per annum set forth with respect to
each such class in the tables on pages S- and S- .
The pass-through rate applicable to the class "X" certificates for each
payment date will equal the excess, if any, of--
- the Weighted Average Pool Pass-Through Rate for that payment date, over
S-78
<PAGE>
- the weighted average of the pass-through rates for each of the respective
classes of the principal balance certificates for that payment date,
weighted on the basis of the relative aggregate principal balances of
those classes of principal balance certificates outstanding immediately
prior to that payment date.
The class "R-I", "R-II" and "R-III" certificates will not be
interest-bearing and, therefore, will not have pass-through rates.
WEIGHTED AVERAGE POOL PASS-THROUGH RATE. The "Weighted Average Pool
Pass-Through Rate" for each payment date will equal the weighted average of the
following annual rates with respect to all of the mortgage loans, weighted on
the basis of the mortgage loans' respective stated principal balances
immediately prior to that payment date:
- in the case of each mortgage loan that accrues interest on a 30/360 basis,
an annual rate equal to--
(a) the mortgage interest rate in effect for that mortgage loan as of
, minus
(b) the sum of (i) the related master servicing fee rate and
(ii) % per annum; and
- in the case of each mortgage loan that accrues interest on an actual/360
basis, an annual rate generally equal to--
(x) a fraction, expressed as a percentage, the numerator of which is,
subject to adjustment as described below, the product of (i) 12,
multiplied by (ii) the amount of interest that accrued or would have
accrued with respect to that mortgage loan on an actual/360 basis
during the related interest accrual period, based on its stated
principal balance immediately preceding that payment date and its
mortgage interest rate in effect as of , and the
denominator of which is the stated principal balance of the mortgage
loan immediately prior to that payment date, minus
(y) the sum of (i) the related master servicing fee rate and
(ii) % per annum.
Notwithstanding the foregoing, if the subject payment date occurs during
January (except during a leap year) or February, then, in the case of any
particular mortgage loan that accrues interest on an actual/360 basis, the
amount of interest referred to in subclause (ii) of the numerator of the
fraction described in clause (x) of the second bullet point above will be
decreased by any interest reserve amount with respect to that mortgage loan that
is transferred from the trustee's collection account to the trustee's interest
reserve account during that month. Furthermore, if the subject payment date
occurs during March, then, in the case of any particular mortgage loan that
accrues interest on an actual/360 basis, the amount of interest referred to in
subclause (ii) of the numerator of the fraction described in clause (x) of the
second bullet point above will be increased by any interest reserve amounts with
respect to that mortgage loan that are transferred from the trustee's interest
reserve account to the trustee's collection account during that month.
The calculation of the Weighted Average Pool Pass-Through Rate will be
unaffected by any change in the mortgage interest rate for any mortgage loan,
including in connection with any bankruptcy or insolvency of the related
borrower or any modification of that mortgage loan agreed to by the master
servicer or the special servicer.
STATED PRINCIPAL BALANCE. The "stated principal balance" of each mortgage
loan:
- will initially equal its outstanding principal balance as of ;
and
- will be permanently reduced on each subsequent payment date, to not less
than zero, by--
(i) that portion, if any, of the Total Principal Payment Amount for that
payment date that is attributable to that mortgage loan (see
"--Payments--Payments of Principal" below), and
S-79
<PAGE>
(ii) the principal portion of any Realized Loss incurred in respect of
that mortgage loan during the related collection period (see
"--Reductions to Certificate Principal Balances in Connection with
Realized Losses and Additional Trust Fund Expenses" below).
However, the stated principal balance of a mortgage loan will, in all cases,
be zero as of the payment date following the collection period in which it is
determined that all amounts ultimately collectible with respect to the mortgage
loan or any related REO property have been received.
PAYMENTS OF PRINCIPAL. Subject to the Available P&I Funds and the priority
of payments described under "--Payments--Priority of Payments" below, the total
amount of principal payable with respect to each class of the principal balance
certificates on each payment date will equal that class' allocable share of the
Total Principal Payment Amount for that payment date.
The "Total Principal Payment Amount" for any payment date will, in general,
equal the total, without duplication, of the following:
- all payments of principal (other than voluntary principal prepayments)
received on the mortgage loans during the related collection period,
exclusive of any of those payments that represents a late collection of
principal for which an advance was previously made for a prior payment
date or that represents a monthly payment of principal due on or before
or on a due date subsequent to the end of the related
collection period;
- all monthly payments of principal received on the mortgage loans prior to,
but that are due during, the related collection period;
- all voluntary principal prepayments received on the mortgage loans during
the related collection period;
- all other collections, including liquidation proceeds, condemnation
proceeds, insurance proceeds and repurchase proceeds, that were received
on or in respect of any of the mortgage loans during the related
collection period and that were identified and applied by the master
servicer as recoveries of principal thereof, in each case net of any
portion of the particular collection that represents a late collection of
principal due on or before or for which an advance of
principal was previously made for a prior payment date; and
- all advances of principal made in respect of the mortgage loans for that
payment date.
In general, the aggregate portion of the Total Principal Payment Amount that
will be allocated to the class "A-1" and "A-2" certificates on each payment date
will equal:
- in the case of the class "A-1" certificates, the lesser of (i) the entire
Total Principal Payment Amount for that payment date and (ii) the
aggregate principal balance of the class "A-1" certificates immediately
prior to that payment date; and
- in the case of the class "A-2" certificates, the lesser of (i) the entire
Total Principal Payment Amount for that payment date, reduced by any
portion thereof allocable to the class "A-1" certificates as described in
the preceding bullet point, and (ii) the aggregate principal balance of
the class "A-2" certificates immediately prior to that payment date.
However, if both of those classes are outstanding as of the occurrence of
any Class A Principal Payment Cross-Over Date, then the Total Principal Payment
Amount for each payment date on and after that Class A Principal Payment
Cross-Over Date will be allocable between those two classes on a PRO RATA basis
in accordance with their respective aggregate principal balances immediately
prior to that payment date, in each case up to that aggregate principal balance.
The "Class A Principal Payment Cross-Over
S-80
<PAGE>
Date" will be the first payment date, if any, as of which the aggregate
principal balance of the class "A-1" and "A-2" certificates outstanding
immediately prior to that payment date, equals or exceeds the sum of:
(a) the aggregate stated principal balance of the mortgage pool that will be
outstanding immediately following that payment date, plus
(b) the lesser of--
(i) the Total Principal Payment Amount for that payment date, and
(ii) the portion of the Available P&I Funds for that payment date that
will remain after all required payments of interest on the class
"X", "A-1" and "A-2" certificates have been made on that payment
date.
While the class "A-1" and "A-2" certificates are outstanding, no portion of
the Total Principal Payment Amount for any payment date will be allocated to any
other class of principal balance certificates. Following the retirement of the
class "A-1" and "A-2" certificates, the Total Principal Payment Amount for each
payment date will be allocated to the remaining classes of the principal balance
certificates in the order of priority set forth below, in each such case up to
the lesser of (i) the portion of that Total Principal Payment Amount that
remains unallocated and (ii) the principal balance of the particular class
immediately prior to that payment date. In general, this means that, following
the retirement of the class "A-1" and "A-2" certificates, the holders of the
outstanding class of principal balance certificates that is ranked the highest
in the following table will be entitled to receive payments of principal in an
amount equal to the entire Total Principal Payment Amount for each payment date
until the aggregate principal balance of that class is reduced to zero. In no
event will the holders of any class of principal balance certificates listed in
the following table be entitled to receive any payments of principal until the
aggregate principal balance of the class "A-1" and "A-2" certificates is reduced
to zero. Furthermore, in no event will the holders of any class of principal
balance certificates listed in the following table be entitled to receive any
payments of principal until the aggregate principal balance of all other
classes, if any, of principal balance certificates listed above it in the
following table is reduced to zero.
<TABLE>
<CAPTION>
ORDER OF
ALLOCATION CLASS
- ---------- --------
<S> <C>
1.......................................................... B
2.......................................................... C
3.......................................................... D
4.......................................................... E
5.......................................................... F
6.......................................................... G
7.......................................................... H
8.......................................................... J
9.......................................................... K
10.......................................................... L
11.......................................................... M
12.......................................................... N
</TABLE>
REIMBURSEMENT AMOUNTS. As discussed under "--Reductions of Certificate
Principal Balances in Connection with Realized Losses and Additional Trust Fund
Expenses" below, the aggregate principal balance of any class of the principal
balance certificates may be reduced without a corresponding payment of
principal. If that occurs with respect to any such class of principal balance
certificates, then, subject to Available P&I Funds and the priority of payment
described under "--Payments--Priority of Payments" below, the holders of that
class will be entitled to be reimbursed for the amount of that reduction,
WITHOUT INTEREST. References in this prospectus supplement to the "reimbursement
amount" mean, in the case of any class of the principal balance certificates for
any payment date, the total amount to which the holders
S-81
<PAGE>
of that class are entitled as reimbursement for all reductions, if any, made in
the aggregate principal balance of that class on all prior payment dates as
discussed under "--Reductions of Certificate Principal Balances in Connection
with Realized Losses and Additional Trust Fund Expenses" below.
PRIORITY OF PAYMENTS. On each payment date, the trustee will apply the
Available P&I Funds for that date to make the following payments in the
following order of priority, in each case to the extent of the remaining
Available P&I Funds:
<TABLE>
<CAPTION>
ORDER OF RECIPIENT
PAYMENT CLASS OR CLASSES TYPE AND AMOUNT OF PAYMENT
- --------------------- ---------------- ------------------------------------------------------------
<C> <S> <C>
1 A-1, A-2 and Interest up to the total interest payable on those
X............... classes(1)
2 A-1............. Principal up to the total principal payable on that class
3 A-1............. Reimbursement up to the reimbursement amounts for those
classes
4 A-2............. Interest up to the total interest payable on that class
5 A-2............. Principal up to the total principal payable on that class(2)
6 A-2............. Reimbursement up to the reimbursement amount for that class
7 B............... Interest up to the total interest payable on that class
8 B............... Principal up to the total principal payable on that class(2)
9 B............... Reimbursement up to the reimbursement amount for that class
10 C............... Interest up to the total interest payable on that class
11 C............... Principal up to the total principal payable on that class(2)
12 C............... Reimbursement up to the reimbursement amount for that class
13 D............... Interest up to the total interest payable on that class
14 D............... Principal up to the total principal payable on that class(2)
15 D............... Reimbursement up to the reimbursement amount for that class
16 E............... Interest up to the total interest payable on that class
17 E............... Principal up to the total principal payable on that class(2)
18 E............... Reimbursement up to the reimbursement amount for that class
19 F............... Interest up to the total interest payable on that class
20 F............... Principal up to the total principal payable on that class(2)
21 F............... Reimbursement up to the reimbursement amount for that class
22 G............... Interest up to the total interest payable on that class
23 G............... Principal up to the total principal payable on that class(2)
24 G............... Reimbursement up to the reimbursement amount for that class
25 H............... Interest up to the total interest payable on that class
</TABLE>
S-82
<PAGE>
<TABLE>
<CAPTION>
ORDER OF RECIPIENT
PAYMENT CLASS OR CLASSES TYPE AND AMOUNT OF PAYMENT
- --------------------- ---------------- ------------------------------------------------------------
<C> <S> <C>
26 H............... Principal up to the total principal payable on that class(2)
27 H............... Reimbursement up to the reimbursement amount for that class
28 J............... Interest up to the total interest payable on that class
29 J............... Principal up to the total principal payable on that class(2)
30 J............... Reimbursement up to the reimbursement amount for that class
31 K............... Interest up to the total interest payable on that class
32 K............... Principal up to the total principal payable on that class(2)
33 K............... Reimbursement up to the reimbursement amount for that class
34 L............... Interest up to the total interest payable on that class
35 L............... Principal up to the total principal payable on that class(2)
36 L............... Reimbursement up to the reimbursement amount for that class
37 M............... Interest up to the total interest payable on that class
38 M............... Principal up to the total principal payable on that class(2)
39 M............... Reimbursement up to the reimbursement amount for that class
40 N............... Interest up to the total interest payable on that class
41 N............... Principal up to the total principal payable on that class(2)
42 N............... Reimbursement up to the reimbursement amount for that class
43 R-I, R-II and Any remaining Available P&I Funds
R-III...........
</TABLE>
- ------------------------
(1) PRO RATA among the recipient classes based on the respective amounts of
interest payable thereon.
(2) No principal will be payable on the recipient class unless and until the
aggregate principal balance of all classes of the principal balance
certificates listed above the recipient class in the foregoing table has
been reduced to zero.
PAYMENTS OF PREPAYMENT PREMIUMS AND YIELD MAINTENANCE CHARGES. If any
prepayment consideration is collected during any particular collection period
with respect to any mortgage loan, regardless of whether that prepayment
consideration is calculated as a percentage of the amount prepaid or pursuant to
a yield maintenance formula, then the amount of that prepayment consideration
will be paid as additional interest on the payment date corresponding to that
collection period to the holders of the class of principal balance certificates
senior to the class " " certificates that is then entitled to payments of
principal on that payment date, up to its prepayment consideration entitlement
in connection with the particular prepayment consideration or specified portion
thereof.
If there are two or more classes of principal balance certificates senior to
the class " " certificates that are entitled to payments of principal on
any particular payment date on which any prepayment consideration is payable,
the aggregate amount of that prepayment consideration will be allocated among
all of those classes up to, and on a PRO RATA basis in accordance with, their
respective prepayment consideration entitlements.
S-83
<PAGE>
The "prepayment consideration entitlement" of the holders of any class of
principal balance certificates senior to the class " " certificates with
respect to any prepayment consideration, or specified portion thereof, net of
workout fees and liquidation fees payable therefrom, for any payment date on
which that class of certificates is entitled to payments of principal, will be
an amount equal to (a) that prepayment consideration, multiplied by (b) a
fraction, which in no event may be greater than 1.0, the numerator of which is
equal to the excess, if any, of the pass-through rate for that class of
principal balance certificates over the relevant discount rate, and the
denominator of which is equal to the excess, if any, of the mortgage rate of the
prepaid mortgage loan over the relevant discount rate, and further multiplied by
(c) a fraction, the numerator of which is equal to the amount of principal
payable to such class of principal balance certificates on that payment date,
and the denominator of which is the amount of principal to be paid on that
payment date.
The "discount rate" applicable to any class of principal balance
certificates with respect to any prepaid mortgage loan will equal the yield
(when compounded monthly) on the U.S. Treasury issue (primary issue) with a
maturity date closest to the maturity date for the prepaid mortgage loan. In the
event that there are two U.S. Treasury issues (a) with the same coupon, the
issue with the lower yield will be utilized, and (b) with maturity dates equally
close to the maturity date for the prepaid mortgage loan, the issue with the
earliest maturity date will be utilized.
The portion of any prepayment premium and/or yield maintenance charge
remaining after payment of the amounts calculated as described above to the
holders of the respective classes of principal balance certificates senior to
the class " " certificates will be paid to the holders of the class "X"
certificates. After the payment date on which the principal balances of all
classes of principal balance certificates senior to the class " "
certificates have been reduced to zero, any prepayment premium and/or yield
maintenance charge collected on the mortgage loans will be paid entirely to the
holders of the class "X" certificates.
Neither we nor the underwriter makes any representation as to the
enforceability of the provision of any promissory note evidencing one of the
mortgage loans requiring the payment of a prepayment premium or yield
maintenance charge or as to the collectability of any prepayment premium or
yield maintenance charge. See "Description of the Mortgage Pool--Certain Terms
and Conditions of the Mortgage Loans--Prepayment Provisions" in this prospectus
supplement.
PAYMENTS OF ADDITIONAL INTEREST. The class " " certificates will
entitle the holders to all amounts, if any, applied as Post-ARD Additional
Interest collected on the ARD loans.
TREATMENT OF REO PROPERTIES. Notwithstanding that any underlying real
property may be acquired as part of the trust assets through foreclosure, deed
in lieu of foreclosure or otherwise, the related mortgage loan will be treated
as having remained outstanding, until the REO property is liquidated, for
purposes of determining--
- payments on the certificates,
- allocations of Realized Losses and Additional Trust Fund Expenses to the
certificates, and
- the amount of all fees payable to the master servicer, the special
servicer and the trustee under the pooling and servicing agreement.
In connection with the foregoing, that mortgage loan will be taken into
account when determining the Weighted Average Pool Pass-Through Rate and the
Total Principal Payment Amount for each payment date.
S-84
<PAGE>
Operating revenues and other proceeds derived from an REO property will be
applied--
- FIRST, to pay, or to reimburse the master servicer, the special servicer
and/or the trustee for the payment of, certain costs and expenses incurred
in connection with the operation and disposition of the REO property, and
- THEREAFTER, as collections of principal, interest and other amounts "due"
on the related mortgage loan.
To the extent described under "--Advances of Delinquent Monthly Debt Service
Payments" below, the master servicer and the trustee will be required to make
advances of principal and/or interest in respect of each mortgage loan as to
which the related underlying real property has become an REO property, in all
cases as if the mortgage loan had remained outstanding.
REDUCTIONS TO CERTIFICATE PRINCIPAL BALANCES IN CONNECTION WITH REALIZED LOSSES
AND ADDITIONAL TRUST FUND EXPENSES
As a result of Realized Losses and Additional Trust Fund Expenses, the
aggregate stated principal balance of the mortgage pool may decline below the
aggregate principal balance of the principal balance certificates. If this
occurs following the payments made to the certificateholders on any payment
date, then the respective aggregate principal balances of the various classes of
the principal balance certificates are to be successively reduced in the
following order, until the aggregate principal balance of the principal balance
certificates equals the aggregate stated principal balance of the mortgage pool
that will be outstanding immediately following that payment date.
<TABLE>
<CAPTION>
ORDER OF
ALLOCATION CLASS
- ---------- ------------
<S> <C>
1.......................................................... N
2.......................................................... M
3.......................................................... L
4.......................................................... K
5.......................................................... J
6.......................................................... H
7.......................................................... G
8.......................................................... F
9.......................................................... E
10.......................................................... D
11.......................................................... C
12.......................................................... B
13.......................................................... A-1 and A-2*
</TABLE>
- ------------------------
* PRO RATA based on aggregate principal balances.
The reductions in the aggregate principal balances of the respective classes
of the principal balance certificates, as described in the previous paragraph,
will represent an allocation of the Realized Losses and/or Additional Trust Fund
Expenses that caused the particular mismatch in balances between the mortgage
loans and the principal balance certificates. A reduction of this type in the
aggregate principal balance of a class of the principal balance certificates
will result in a corresponding reduction in the aggregate notional amount of the
class "X" certificates.
S-85
<PAGE>
Any "Realized Losses" are losses on or in respect of the mortgage loans
arising from the inability of the master servicer and/or the special servicer to
collect all amounts due and owing under the mortgage loans, including by reason
of the fraud or bankruptcy of a borrower or, to the extent not covered by
insurance, a casualty of any nature at an underlying real property. The Realized
Loss in respect of a liquidated mortgage loan (or related REO property) is an
amount generally equal to the excess, if any, of:
- the outstanding principal balance of the mortgage loan as of the date of
liquidation, together with (i) all accrued and unpaid interest on the
mortgage loan to but not including the due date in the collection period
in which the liquidation occurred, exclusive, however, of any portion of
that interest that represents Default Interest or Post-ARD Additional
Interest, and (ii) all related unreimbursed servicing advances and unpaid
liquidation expenses, over
- the total amount of liquidation proceeds, if any, recovered in connection
with the liquidation.
If any portion of the debt due under a mortgage loan is forgiven, whether in
connection with a modification, waiver or amendment granted or agreed to by the
master servicer or the special servicer or in connection with the bankruptcy,
insolvency or similar proceeding involving the related borrower, the amount
forgiven, other than Default Interest and Post-ARD Additional Interest, also
will be treated as a Realized Loss.
An "Additional Trust Fund Expense" is, in general, an expense of the trust
that (i) arises out of a default on a mortgage loan or an otherwise
unanticipated event and (ii) is not covered by a servicing advance or a
corresponding collection from the related borrower. Some examples of Additional
Trust Fund Expenses are:
- any special servicing fees, workout fees and liquidation fees paid to the
special servicer;
- any interest paid to the master servicer, the special servicer and/or the
trustee in respect of unreimbursed advances, which interest payment is not
covered out of late payment charges and Default Interest actually
collected on the related mortgage loan;
- the cost of various opinions of counsel required or permitted to be
obtained in connection with the servicing of the mortgage loans and the
administration of the other trust assets;
- certain unanticipated, non-mortgage loan specific expenses of the trust,
including--
(i) certain reimbursements and indemnifications to the trustee as
described under "Description of the Governing Documents--Certain
Matters Regarding the Trustee" in the accompanying prospectus,
(ii) certain reimbursements to the master servicer, the special servicer
and us as described under "Description of the Governing
Documents--Certain Matters Regarding the Master Servicer, the
Special Servicer, the Manager and Us" in the accompanying
prospectus, and
(iii) certain federal, state and local taxes, and certain tax-related
expenses, payable out of the trust assets as described under
"Federal Income Tax Consequences--REMICs--Prohibited Transactions
Tax and Other Taxes" in the accompanying prospectus;
- rating agency fees, other than on-going surveillance fees, that cannot be
recovered from the borrower; and
- any amounts expended on behalf of the trust to remediate an adverse
environmental condition at any underlying real property securing a
defaulted mortgage loan as described under "Servicing of the Mortgage
Loans--Realization Upon Defaulted Mortgage Loans" in this prospectus
supplement.
S-86
<PAGE>
ADVANCES OF DELINQUENT MONTHLY DEBT SERVICE PAYMENTS
The master servicer will be required to make, for each payment date, an
aggregate amount of advances of principal and/or interest ("P&I advances")
generally equal to all monthly debt service payments (other than balloon
payments) and assumed monthly debt service payments, in each case net of related
master servicing fees, that (a) were due or deemed due, as the case may be, in
respect of the mortgage loans during the related collection period and (b) were
not paid by or on behalf of the respective borrowers or otherwise collected as
of the close of business on the last day of the related collection period.
Notwithstanding the foregoing, if it is determined that an Appraisal Reduction
Amount exists with respect to any mortgage loan, then the master servicer will
reduce the interest portion, but not the principal portion, of each P&I advance
that it must make with respect to that mortgage loan during the period that the
Appraisal Reduction Amount exists. The interest portion of any P&I advance
required to be made with respect to any mortgage loan as to which there exists
an Appraisal Reduction Amount, will equal the product of:
- the amount of the interest portion of that P&I advance that would
otherwise be required to be made for the subject payment date without
regard to this sentence and the prior sentence, multiplied by
- a fraction, the numerator of which is equal to the stated principal
balance of the mortgage loan, net of the Appraisal Reduction Amount, and
the denominator of which is equal to the stated principal balance of the
mortgage loan. See "Servicing of the Mortgage Loans--Required Appraisals"
in this prospectus supplement.
With respect to any payment date, the master servicer will be required to
make P&I advances either out of its own funds or, subject to the replacement
thereof as and to the extent provided in the pooling and servicing agreement,
funds held in the master servicer's custodial account that are not required to
be part of the Available Funds for that payment date.
If the master servicer fails to make a required P&I advance and the trustee
is aware of that failure, the trustee will be obligated to make the advance. See
"--The Trustee" below.
The master servicer and the trustee will each be entitled to recover any P&I
advance made by it, out of its own funds, from collections on the mortgage loan
as to which the advance was made. Neither the master servicer nor the trustee
will be obligated to make any P&I advance that, in its judgment, would not
ultimately be recoverable out of collections on the related mortgage loan. If
the master servicer or the trustee makes any P&I advance that it subsequently
determines, in its judgment, will not be recoverable out of collections on the
related mortgage loan, it may obtain reimbursement for that advance, together
with interest accrued thereon as described below, out of general collections on
the mortgage loans and any REO properties on deposit in the master servicer's
custodial account from time to time. See "Description of the
Certificates--Advances" in the accompanying prospectus and "Servicing of the
Mortgage Loans--Custodial Account" in this prospectus supplement.
The master servicer and the trustee will each be entitled to receive
interest on P&I advances made thereby out of its own funds. That interest will
accrue on the amount of each P&I advance, and compound monthly, for so long as
that advance is outstanding at an annual rate equal to the "prime rate" as
published in the "Money Rates" section of THE WALL STREET JOURNAL,as that "prime
rate" may change from time to time. Interest accrued with respect to any P&I
advance will be payable in the collection period in which that advance is
reimbursed--
- FIRST, out of Default Interest and late payment charges collected on the
related mortgage loan during that collection period, and
S-87
<PAGE>
- THEN, if and to the extent that the Default Interest and late charges
referred to in clause FIRST are insufficient to cover the advance
interest, out of any amounts then on deposit in the master servicer's
custodial account.
Any delay between a sub-servicer's receipt of a late collection of a monthly
debt service payment as to which a P&I advance was made and the forwarding of
that late collection to the master servicer, will increase the amount of
interest accrued and payable to the master servicer or the trustee, as the case
may be, on that P&I advance. To the extent not offset by Default Interest and/or
late payment charges accrued and actually collected, interest accrued on
outstanding P&I advances will result in a reduction in amounts payable on the
certificates.
An "assumed monthly debt service payment" will be an amount of principal
and/or interest deemed due with respect to:
- each mortgage loan that is delinquent in respect of its balloon payment
beyond the end of the collection period in which its maturity date occurs
and as to which no arrangements have been agreed to for the collection of
the delinquent amounts, including an extension of maturity; and
- each mortgage loan as to which the related underlying real property has
become an REO property.
The assumed monthly debt service payment deemed due on any mortgage loan
described in the prior sentence that is delinquent as to its balloon payment,
will equal, for its stated maturity date and for each successive due date that
it remains outstanding and part of the trust, the monthly debt service payment
that would have been due on the mortgage loan on the relevant date if the
related balloon payment had not come due and the mortgage loan had, instead,
continued to amortize and accrue interest according to its terms in effect prior
to that stated maturity date. The assumed monthly debt service payment deemed
due on any mortgage loan described in the second preceding sentence as to which
the related underlying real property has become an REO property, will equal, for
each due date that the REO property remains part of the trust, the monthly debt
service payment (or, in the case of a mortgage loan delinquent in respect of its
balloon payment, the assumed monthly debt service payment) due (or deemed due)
on the last due date prior to the acquisition of that REO property. [Assumed
monthly debt service payments for ARD loans do not include Post-ARD Additional
Interest or accelerated amortization payments.]
REPORTS TO CERTIFICATEHOLDERS; CERTAIN AVAILABLE INFORMATION
CERTIFICATEHOLDER REPORTS. Based solely on information provided in monthly
reports prepared by the master servicer and the special servicer and delivered
to the trustee, the trustee will be required to prepare and deliver (or, if not
prepared by the trustee, to forward) on each payment date to the holders of each
class of series certificates and to each beneficial owner of an offered
certificate held in book-entry form that is identified to the reasonable
satisfaction of the trustee, or make available as described below under
"--Information Available Electronically":
(1) A "Payment Date Statement" setting forth, among other things: [List
information to be disclosed]
(2) A "CMSA Loan Periodic Update File" and a "CMSA Property File" setting forth
certain information with respect to the mortgage loans and the underlying
real properties, respectively.
(3) A "Mortgage Pool Data Update Report", which may be included as part of the
Payment Date Statement, containing information regarding the mortgage loans
as of the end of the related collection period.
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The master servicer or the special servicer, as specified in the pooling and
servicing agreement, is required to deliver to the trustee monthly, and the
trustee is required to make available as described below under "--Information
Available Electronically," a copy of each of the following reports:
(a) A "Delinquent Loan Status Report" containing substantially the
information set forth in Annex D to this prospectus supplement.
(b) An "Historical Loan Modification Report" containing substantially the
information set forth in Annex E to this prospectus supplement.
(c) An "Historical Liquidation Report" containing substantially the
information set forth in Annex F to this prospectus supplement.
(d) An "REO Status Report" containing substantially the information set
forth in Annex G to this prospectus supplement.
(e) A "Servicer Watch List" containing substantially the content set forth
in Annex H to this prospectus supplement.
(f) A "Loan Payoff Notification Report" setting forth, among other things,
for each mortgage loan where written notice of anticipated payoff has
been received as of the determination date at least two business days
prior to the preparation of the report, the control number, the property
name, the amount of principal expected to be paid, the expected date of
payment and the estimated amount of the yield maintenance charge or
prepayment premium due.
(g) A "Comparative Financial Status Report" containing substantially the
information set forth in Annex K to this prospectus supplement.
In this prospectus supplement, we refer to these reports, together with the
Payment Date Statement, as the "certificateholder reports".
In addition, upon the request of any holder of a series certificate
or, to the extent identified to the reasonable satisfaction of the trustee,
beneficial owner of an offered certificate, the trustee will be required to
request from the master servicer, and, upon receipt, make available to the
requesting party, during normal business hours at the offices of the trustee,
copies of the following reports required to be prepared and maintained by the
master servicer and/or special servicer:
(x) with respect to any underlying real property or REO property, an
"Operating Statement Analysis Report" containing substantially the
information set forth in Annex I to this prospectus supplement; and
(y) with respect to any underlying real property or REO property, an "NOI
Adjustment Worksheet" containing substantially the content set forth in
Annex J to this prospectus supplement.
In this prospectus supplement, we refer to the reports identified in clauses
(a), (b), (c), (d) and (f) above as the "unrestricted servicer reports", and the
reports identified in clauses (e), (g), (x) and (y) above as the "restricted
servicer reports".
BOOK-ENTRY CERTIFICATES. If you hold your certificates in book-entry from
through DTC, you may obtain direct access to the monthly reports of the trustee
as if you were a certificateholder, provided that you deliver a written
certification to the trustee confirming your beneficial ownership in the offered
certificates. Otherwise, until definitive certificates are issued in respect of
your certificates, the information contained in the certificateholder reports
will be available to you only to the extent that it is made available through
DTC and the DTC participants or is available on the trustee's internet website.
Conveyance of notices and other communications by DTC to the DTC participants,
and by the DTC participants to beneficial owners of the offered certificates,
will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time. We, the master
servicer, the
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special servicer, the trustee and the certificate registrar are required to
recognize as certificateholders only those persons in whose names the
certificates are registered on the books and records of the certificate
registrar.
INFORMATION AVAILABLE ELECTRONICALLY. The trustee will make available each
month, to any interested party, the Payment Date Statement, any Mortgage Pool
Data Update Report, the Unrestricted Servicer Reports, the CMSA Loan Periodic
Update Files and the CMSA Loan Setup Files via the trustee's internet website,
electronic bulletin board and fax-on-demand service. The trustee's internet
website will initially be located at " ".
The trustee's electronic bulletin board may be accessed by calling ( )
- , and its fax-on- demand service may be accessed by calling ( )
- . For assistance with regard to the services described above, investors
may call ( ) - .
The trustee will make no representations or warranties as to the accuracy or
completeness of, and may disclaim responsibility for, any information made
available by the trustee for which it is not the original source.
The trustee may require registration and the acceptance of a disclaimer in
connection with providing access to its electronic bulletin board and internet
website. The trustee shall not be liable for the dissemination of information
made in accordance with the pooling and servicing agreement.
OTHER INFORMATION. The pooling and servicing agreement will obligate the
trustee to make available at its offices, during normal business hours, upon
reasonable advance written notice, for review by any holder or beneficial owner
of an offered certificate or any person identified to the trustee by any such
holder or beneficial owner as a prospective transferee of an offered certificate
or any interest therein, subject to the discussion in the following paragraph,
originals or copies of, among other things, the following items:
- the pooling and servicing agreement, including exhibits, and any
amendments to the pooling and servicing agreement;
- all monthly reports of the trustee delivered to certificateholders since
the date of initial issuance of the certificates;
- all officer's certificates delivered to the trustee by the master servicer
and/or the special servicer since the date of initial issuance of the
certificates, as described under "Servicing of the Mortgage
Loans--Evidence as to Compliance" in this prospectus supplement;
- all accountant's reports delivered to the trustee in respect of the master
servicer and/or the special servicer since the date of initial issuance of
the certificates, as described under "Servicing of the Mortgage
Loans--Evidence as to Compliance" in this prospectus supplement;
- the most recent inspection report in respect of each underlying real
property prepared by the master servicer or the special servicer and
delivered to the trustee as described under "Servicing of the Mortgage
Loans--Inspections; Collection of Operating Information" in this
prospectus supplement;
- the most recent appraisal, if any, with respect to each underlying real
property obtained by the master servicer or the special servicer and
delivered to the trustee (see "Servicing of the Mortgage Loans--Required
Appraisals" in this prospectus supplement);
- the most recent quarterly and annual operating statement and rent roll for
each underlying real property and financial statements of the related
borrower collected by the master servicer or the special servicer and
delivered to the trustee as described under "Servicing of the Mortgage
Loans--Inspections; Collection of Operating Information" in this
prospectus supplement; and
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- the mortgage files, including all documents, such as modifications,
waivers and amendments of the mortgage loans, that are to be added to the
mortgage files from time to time.
Copies of any and all of the foregoing items will be available from the
trustee upon request. However, the trustee will be permitted to require payment
of a sum sufficient to cover the reasonable costs and expenses of providing the
copies.
In connection with providing access to or copies of the items described
above, the trustee may require:
- in the case of a beneficial owner of a certificate held in book-entry
form, a written confirmation executed by the requesting person or entity,
in a form reasonably acceptable to the trustee, generally to the effect
that the person or entity is a beneficial owner of offered certificates
and will keep the information confidential; and
- in the case of a prospective purchaser of certificates or interests
therein, confirmation executed by the requesting person or entity, in a
form reasonably acceptable to the trustee, generally to the effect that
the person or entity is a prospective purchaser of certificates or an
interest therein, is requesting the information for use in evaluating a
possible investment in the certificates and will otherwise keep the
information confidential.
Certificateholders will be deemed to have agreed to keep the information
described above confidential by the acceptance of their certificates. However,
no holder, beneficial owner or prospective transferee of any certificate or
interest therein will be required to keep confidential any information that has
previously been filed with the SEC, and the trustee will not be required to
obtain either of the confirmations referred to in the second preceding sentence
in connection with providing any information that has previously been filed with
the SEC.
VOTING RIGHTS
% of the voting rights for the certificates will be allocated among the
respective classes of principal balance certificates in proportion to the
respective aggregate principal balances thereof at all times during the term of
the pooling and servicing agreement. % of the voting rights will be allocated
to the class "X" certificates. Voting rights allocated to a class of
certificates will be allocated among those certificates in proportion to the
percentage interests in that class evidenced by each such certificate.
TERMINATION
The obligations created by the pooling and servicing agreement will
terminate following the earliest of--
(i) the final payment, or advance in respect thereof, or other liquidation
of the last mortgage loan or related REO property remaining in the
trust, and
(ii) the purchase of all of the mortgage loans and REO properties remaining
in the trust assets by us, the master servicer, the special servicer or
any single certificateholder or group of certificateholders in the
Controlling Class (in that order of preference).
Written notice of termination of the pooling and servicing agreement will be
given to each certificateholder. The final payment with respect to each
certificate will be made only upon surrender and cancellation of that
certificate at the office of the certificate registrar or at any other location
specified in the notice of termination.
Any purchase by us, the master servicer, the special servicer or any single
holder or group of holders of the Controlling Class of all the mortgage loans
and REO properties remaining in the trust is required to be made at a price
equal to (a) the sum of (i) the aggregate principal balance of all the mortgage
loans then included in the trust (other than any mortgage loans as to which the
related underlying real properties
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have become REO properties), together with interest (other than Default Interest
and Post-ARD Additional Interest) on and unreimbursed servicing advances for
those mortgage loans and (ii) the appraised value of all REO properties then
included in the trust, as determined by an appraiser mutually agreed upon by the
master servicer, the special servicer and the trustee, minus (b) solely in the
case of a purchase by the master servicer or the special servicer, the total of
all amounts payable or reimbursable to the purchaser under the pooling and
servicing agreement. The purchase will effect early retirement of the
outstanding certificates, but the right of us, the master servicer, the special
servicer or any single holder or group of holders of the Controlling Class to
effect the termination is subject to the requirement that the aggregate stated
principal balance of the mortgage pool be less than % of the initial
mortgage pool balance. The termination price, exclusive of any portion of the
termination price payable or reimbursable to any person other than the
certificateholders, will constitute part of the available distribution amount
for the final payment date. Any person or entity effecting a purchase will be
responsible for reimbursing the parties to the pooling and servicing agreement
(other than itself, if applicable) for all reasonable out-of-pocket costs and
expenses incurred by the parties in connection with the purchase.
THE TRUSTEE
[INSERT DESCRIPTION OF TRUSTEE.]
The trustee is at all times required to be a corporation, bank, trust
company or association organized and doing business under the laws of the U.S.
or any State of the U.S. or the District of Columbia. In addition, the trustee
must at all times--
- be authorized under those laws to exercise trust powers,
- have a combined capital and surplus of at least $50,000,000, and
- be subject to supervision or examination by federal or state authority.
If the corporation, bank, trust company or association publishes reports of
condition at least annually, pursuant to law or to the requirements of the
supervising or examining authority, then the combined capital and surplus of the
corporation, bank, trust company or association will be deemed to be its
combined capital and surplus as described in its most recent published report of
condition.
We, the master servicer, the special servicer and our and their respective
affiliates, may from time to time enter into normal banking and trustee
relationships with the trustee and its affiliates. The trustee and any of its
respective affiliates may hold certificates in their own names. In addition, for
purposes of meeting the legal requirements of certain local jurisdictions, the
master servicer and the trustee acting jointly will have the power to appoint a
co-trustee or separate trustee of all or any part of the trust assets. All
rights, powers, duties and obligations conferred or imposed upon the trustee
will be conferred or imposed upon the trustee and the separate trustee or
co-trustee jointly (or, in any jurisdiction in which the trustee shall be
incompetent or unqualified to perform certain acts, singly upon the separate
trustee or co-trustee who shall exercise and perform its rights, powers, duties
and obligations solely at the direction of the trustee).
The trustee will be entitled to a monthly fee for its services, which fee
will accrue on a 30/360 basis at % per annum on the stated principal
balance outstanding from time to time of each mortgage loan. The trustee fee is
payable out of general collections on the mortgage loans and any REO properties.
See also "Description of the Governing Documents--The Trustee", "--Duties of
the Trustee", "--Certain Matters Regarding the Trustee" and "--Resignation and
Removal of the Trustee" in the accompanying prospectus.
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YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
GENERAL. The yield on any offered certificate will depend on:
(a) the price at which the certificate is purchased by an investor, and
(b) the rate, timing and amount of payments on the certificate.
The rate, timing and amount of payments on any offered certificate will in
turn depend on, among other things,
- the pass-through rate for the certificate,
- the rate and timing of principal payments, including principal
prepayments, and other principal collections on the mortgage loans and the
extent to which those amounts are to be applied or otherwise result in
reduction of the principal balance or notional amount of the certificate,
- the rate, timing and severity of Realized Losses and Additional Trust Fund
Expenses and the extent to which those losses and expenses result in the
reduction of the principal balance or notional amount of the certificate,
and
- the timing and severity of any Net Aggregate Prepayment Interest
Shortfalls and the extent to which those shortfalls result in the
reduction of the interest payments on the certificate.
PASS-THROUGH RATES. The pass-through rates for the respective classes of
the principal balance certificates are, in each case, fixed. However, the
pass-through rate applicable to the class "X" certificates will be variable and
will be calculated based in part on the weighted average mortgage pass-through
rate from time to time. Accordingly, the yield on the class "X" certificates
will be sensitive to changes in the relative composition of the mortgage pool as
a result of scheduled amortization, voluntary prepayments and liquidations of
mortgage loans following default. In addition, the pass-through rate for the
class "X" certificates will vary with changes in the relative sizes of the
aggregate principal balances of the respective classes of principal balance
certificates. The weighted average mortgage pass-through rate and the
pass-through rate for the class "X" certificates will not be affected by
modifications, waivers and amendments in respect of the mortgage loans.
See "Description of the Offered Certificates--Payments--Calculation of
Pass-Through Rates" and "Description of the Mortgage Pool" in this prospectus
supplement and "--Rate and Timing of Principal Payments" below.
RATE AND TIMING OF PRINCIPAL PAYMENTS. The yield to maturity on the class
"X" certificates will be extremely sensitive to, and the yield to maturity on
any other offered certificates purchased at a discount or a premium will be
affected by, the rate and timing of principal payments made in reduction of the
certificate principal balances or certified notional amounts of the
certificates. In turn, the rate and timing of principal payments that are paid
or otherwise result in reduction of the aggregate principal balance or notional
amount, as the case may be, of each class of offered certificates will be
directly related to the rate and timing of principal payments on or in respect
of the mortgage loans. Finally, the rate and timing of principal payments on or
in respect of the mortgage loans will be affected by their amortization
schedules, the dates on which balloon payments are due and the rate and timing
of principal prepayments and other unscheduled collections thereon, including
for this purpose, collections made in connection with liquidations of mortgage
loans due to defaults, casualties or condemnations affecting the underlying real
properties, or purchases or other removals of mortgage loans from the trust.
Prepayments and other early liquidations of the mortgage loans will result
in payments on the principal balance certificates of amounts that would
otherwise be paid over the remaining terms of the mortgage loans. This will tend
to shorten the weighted average lives of those certificates. Defaults on the
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mortgage loans, particularly at or near their maturity dates, may result in
significant delays in payments of principal on the mortgage loans and,
accordingly, on the principal balance certificates, while work-outs are
negotiated or foreclosures are completed. These delays will tend to lengthen the
weighted average lives of those certificates. See "Servicing of The Mortgage
Loans--Modifications, Waivers, Amendment and Consent" in this prospectus
supplement. In addition, the ability of a borrower under an ARD loan, to repay
that loan on the related anticipated repayment date will generally depend on its
ability to either refinance the mortgage loan or sell the related underlying
real property. Also, a borrower may have little incentive to repay its mortgage
loan on the related anticipated repayment date if then prevailing interest rates
are relatively high. Accordingly, there can be no assurance that any ARD loan
will be paid in full on its anticipated repayment date.
The extent to which the yield to maturity on any offered certificate may
vary from the anticipated yield will depend upon the degree to which the
certificate is purchased at a discount or premium and when, and to what degree,
payments of principal on the mortgage loans are in turn paid or otherwise result
in a reduction of the principal balance or notional amount of the certificate.
If you purchase your certificates at a discount, you should consider the risk
that a slower than anticipated rate of principal payments on the mortgage loans
could result in an actual yield to you that is lower than your anticipated
yield. If you purchase class "X" certificates, or if you purchase any other
offered certificates at a premium, you should consider the risk that a faster
than anticipated rate of principal payments on the mortgage loans could result
in an actual yield to you that is lower than your anticipated yield.
If you are contemplating an investment in the class "X" certificates, you
should fully consider the risk that an extremely rapid rate of principal
payments on the mortgage loans could result in your failure to recoup fully your
initial investment.
Because the rate of principal payments on or in respect of the mortgage
loans will depend on future events and a variety of factors, as described more
fully below, no assurance can be given as to the rate or the rate of principal
prepayments in particular. We are not aware of any relevant publicly available
or authoritative statistics with respect to the historical prepayment experience
of a large group of real estate loans comparable to those in the mortgage pool.
Even if they are available and payable on your certificates, prepayment
premiums and yield maintenance charges may not be sufficient to offset fully any
loss in yield on your certificates attributable to the related prepayments of
the mortgage loans.
DELINQUENCIES AND DEFAULTS ON THE MORTGAGE LOANS. The rate and timing of
delinquencies and defaults on the mortgage loans will affect the amount of
payments on your certificates, the yield to maturity of your certificates, the
rate of principal payments on your certificates and the weighted average life of
your certificates. Delinquencies on the mortgage loans, unless covered by P&I
advances, may result in shortfalls in payments of interest and/or principal on
your certificates for the current month. Although any shortfalls in payments of
interest may be made up on future payment dates, no interest would accrue on
those shortfalls. Thus, any shortfalls in payments of interest would adversely
affect the yield to maturity of your certificates.
If
- you calculate the anticipated yield to maturity for your certificates
based on an assumed rate of default and amount of losses on the mortgage
loans that is lower than the default rate and amount of losses actually
experienced, and
- the additional losses result in a reduction of the total payments on or
the aggregate principal balance or notional amount of your certificates,
then your actual yield to maturity will be lower than you calculated and could,
under certain scenarios, be negative.
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The timing of any loss on a liquidated mortgage loans that results in a
reduction of the total payments on or the aggregate principal balance or
notional amount of your certificates will also affect your actual yield to
maturity, even if the rate of defaults and severity of losses are consistent
with your expectations. In general, the earlier your loss occurs, the greater
the effect on your yield to maturity.
Even if losses on the mortgage loans do not result in a reduction of the
total payments on or the aggregate principal balance or certificate notional
amount of your certificates, the losses may still affect the timing of payments
on (and, accordingly, the weighted average life and yield to maturity of) your
certificates.
CERTAIN RELEVANT FACTORS. The following factors, among others, will affect
the rate and timing of principal payments and defaults and the severity of
losses on or in respect of the mortgage loans:
- prevailing interest rates;
- the terms of the mortgage loans, including provisions that require the
payment of prepayment premiums and yield maintenance charges, provisions
that impose prepayment lock-out periods and amortization terms that
require balloon payments;
- the demographics and relative economic vitality of the areas in which the
underlying real properties are located;
- the general supply and demand for commercial and multifamily rental space
of the type available at the underlying real properties in the areas in
which the underlying real properties are located;
- the quality of management of the underlying real properties;
- the servicing of the mortgage loans;
- possible changes in tax laws; and
- other opportunities for investment.
See "Risk Factors--Risks Related to the Mortgage Loans", "Description of the
Mortgage Pool" and "Servicing of the Mortgage Loans" in this prospectus
supplement and "Description of the Governing Documents" and "Yield and Maturity
Considerations--Yield and Prepayment Considerations" in the accompanying
prospectus.
The rate of prepayment on the mortgage loans is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below the annual
rate at which a mortgage loan accrues interest, the related borrower may have an
increased incentive to refinance the mortgage loan. Conversely, to the extent
prevailing market interest rates exceed the annual rate at which a mortgage loan
accrues interest, the related borrower may be less likely to voluntarily prepay
the mortgage loan. Assuming prevailing market interest rates exceed the revised
mortgage interest rate at which an ARD loan accrues interest following its
anticipated repayment date, the primary incentive for the related borrower to
prepay the mortgage loan on or before its anticipated repayment date is to give
the borrower access to excess cash flow, all of which, net of the minimum
required debt service, approved property expenses and any required reserves,
must be applied to pay down principal of the mortgage loan. Accordingly, there
can be no assurance that any ARD loan will be prepaid on or before its
anticipated repayment date or on any other date prior to maturity.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
underlying real properties in order to realize their equity therein, to meet
cash flow needs or to make other investments. In addition, some underlying
borrowers may be motivated by federal and state tax laws, which are subject to
change, to sell their underlying real properties prior to the exhaustion of tax
depreciation benefits.
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A number of the underlying borrowers are limited or general partnerships.
Under certain circumstances, the bankruptcy of the general partner in a
partnership may result in the dissolution of the partnership. The dissolution of
a borrower partnership, the winding-up of its affairs and the distribution of
its assets could result in an acceleration of its payment obligations under the
related mortgage loan.
We make no representation or warranty regarding:
- the particular factors that will affect the rate and timing of prepayments
and defaults on the mortgage loans;
- the relative importance of those factors;
- the percentage of the aggregate principal balance of the mortgage loans
that will be prepaid or as to which a default will have occurred as of any
particular date; or
- the overall rate of prepayment or default on the mortgage loans.
UNPAID INTEREST. If the portion of the Available P&I Funds payable in
respect of interest on any class of offered certificates on any payment date is
less than the total amount of interest then payable for the class, the shortfall
will be payable to the holders of those certificates on subsequent payment
dates, subject to the Available P&I Funds on those subsequent payment dates and
the priority of payments described under "Description of the Offered
Certificates--Payments--Priority of Payments" in this prospectus supplement.
That shortfall will not bear interest, however, and will therefore negatively
affect the yield to maturity of that class of offered certificates for so long
as it is outstanding.
DELAY IN PAYMENTS. Because monthly payments will not be made on the
certificates until several days after the due dates for the mortgage loans
during the related collection period, your effective yield will be lower than
the yield that would otherwise be produced by your pass-through rate and
purchase price, assuming such price did not account for such delay.
YIELD SENSITIVITY
The tables on Annex C-1 hereto (the "yield tables") show the pre-tax
corporate bond equivalent ("CBE") yield to maturity, modified duration (except
in the case of the class "X" certificates), weighted average life, first payment
date on which principal is to be paid and final payment date on which principal
is to be paid with respect to each class of offered certificates, prepared using
the Modeling Assumptions (as described below). Where applicable, they also show
the specified assumed purchase prices, which prices do not include accrued
interest. Assumed purchase prices are expressed in 32nds (E.G., means
%) as a percentage of the initial aggregate principal balance or notional
amount of each class of offered certificates. For purposes of the yield tables
relating to the class "X" certificates, the information therein relating to
weighted average life, first principal payment date and last principal payment
date is being calculated in respect of the notional amount of class "X"
certificates as if it were a principal balance.
The yields set forth in the yield tables were calculated by--
- determining the monthly discount rates which, when applied to the assumed
stream of cash flows to be paid on each class of offered certificates,
would cause the discounted present value of such assumed stream of cash
flows to equal the assumed purchase prices, plus accrued interest from and
including to but excluding the assumed settlement date (as
described below), and
- converting such monthly rates to semi-annual corporate bond equivalent
rates.
That calculation does not take into account variations that may occur in the
interest rates at which investors may be able to reinvest funds received by them
as payments on the offered certificates and, consequently, does not purport to
reflect the return on any investment in the offered certificates when such
reinvestment rates are considered.
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For purposes of the yield tables, "modified duration" has been calculated
using the modified Macaulay Duration as specified in the "PSA Standard
Formulas". The Macaulay Duration is calculated as the present value weighted
average time to receive future payments of principal and interest, and the PSA
Standard Formula modified duration is calculated by dividing the Macaulay
Duration by the appropriate semi-annual compounding factor. The duration of a
security may be calculated according to various methodologies. Accordingly, no
representation is made by us or any other person that the "modified duration"
approach used in this prospectus supplement is appropriate. Duration, like
yield, will be affected by the prepayment rate of the mortgage loans and
extensions in respect of balloon payments that actually occur during the life of
the class "A-1", class "A-2", class "B", class "C", class "D", class "E" and
class "F" certificates and by the actual performance of the mortgage loans, all
of which may differ, and may differ significantly, from the assumptions used in
preparing the yield tables.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this prospectus supplement is the "Constant Prepayment
Rate" or "CPR" model. The CPR model represents an assumed constant annual rate
of prepayment each month, expressed as a per annum percentage of the then
outstanding principal balance of one or more mortgage loans.
The yield tables were derived from calculations based on the following
assumptions (collectively, the "Modeling Assumptions"):
- the mortgage loans have the characteristics set forth on Annex A-1 and the
initial mortgage pool balance is approximately $ ;
- the initial aggregate principal balance or notional amount, as the case
may be, of each class of principal balance certificates is as described in
this prospectus supplement;
- the pass-through rate for each class of principal balance certificates is
as described in this prospectus supplement.
- there are no delinquencies or losses in respect of the mortgage loans,
there are no modifications, extensions, waivers or amendments affecting
the monthly debt service payments by borrowers on the mortgage loans,
there are no Appraisal Reduction Amounts with respect to the mortgage
loans and there are no casualties or condemnations affecting the
underlying real properties;
- all mortgage loans have due dates on the first day of each month the
monthly debt service payments are due and accrue interest on the
respective basis described in this prospectus supplement (I.E., a 30/360
basis or an actual/360 basis);
- all prepayments are assumed to be accompanied by a full month's interest;
- there are no breaches of our representations and warranties regarding the
mortgage loans;
- monthly debt service payments on the mortgage loans are timely received on
the first day of each month;
- no voluntary or involuntary prepayments are received as to any mortgage
loan during that mortgage loan's lockout period ("LOP"), yield maintenance
period ("YMP") or declining premium period ("Declining Premium"), in each
case if any; each ARD loan is paid in full on its anticipated repayment
date; and, otherwise, prepayments are made on each of the mortgage loans
at the indicated CPRs set forth in the tables (without regard to any
limitations in such mortgage loans on partial voluntary principal
prepayments);
- no person or entity entitled thereto exercises its right of optional
termination described in this prospectus supplement under "Description of
the Offered Certificates--Termination";
- no mortgage loan is required to be repurchased by us;
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- no prepayment interest shortfalls are incurred and no prepayment premiums
or yield maintenance charges are collected;
- there are no Additional Trust Fund Expenses;
- payments on the offered certificates are made on the day of each
month, commencing in ; and
- the offered certificates are settled on (the "assumed
settlement date").
The characteristics of the mortgage loans will differ in certain respects
from those assumed in preparing the yield tables, and the yield tables are
presented for illustrative purposes only. Thus, neither the mortgage pool nor
any mortgage loan will prepay at any constant rate, and it is unlikely that the
mortgage loans will prepay in a manner consistent with any designated scenario
for the yield tables. In addition, there can be no assurance that--
- the mortgage loans will prepay at any particular rate,
- the mortgage loans will not prepay, involuntarily or otherwise, during
lockout periods, yield maintenance periods and/or declining premium
periods,
- the ARD loans will be paid in full on their respective anticipated
repayment dates,
- the actual pre-tax yields on, or any other payment characteristics of, any
class of offered certificates will correspond to any of the information
shown in the yield tables, or
- the aggregate purchase prices of the offered certificates will be as
assumed.
You must make your own decision as to the appropriate assumptions, including
prepayment assumptions, to be used in deciding whether to purchase the offered
certificates.
For purposes of the modeling assumptions, a "yield maintenance period" is
any period during which a mortgage loan provides that voluntary prepayments be
accompanied by a yield maintenance charge, or a "declining premium period" is
any period during which a mortgage loan provides that voluntary prepayments be
accompanied by a prepayment premium calculated as a declining percentage of the
principal amount prepaid.
WEIGHTED AVERAGE LIVES OF CERTAIN CLASSES OF OFFERED CERTIFICATES
The weighted average life of any offered certificate, other than a class "X"
certificate, refers to the average amount of time that will elapse from the date
of its issuance until each dollar to be applied in reduction of the principal
balance of that certificate is distributed to the investor. For purposes of this
prospectus supplement, the weighted average life of any offered certificate,
other than a class "X" certificate, is determined as follows:
- multiply the amount of each principal payment on the certificate by the
number of years from the assumed settlement date to the related payment
date;
- sum the results; and
- divide the sum by the aggregate amount of the reductions in the principal
balance of the certificate.
Accordingly, the weighted average life of any offered certificate, other
than a class "X" certificate, will be influenced by, among other things, the
rate at which principal of the mortgage loans is paid or otherwise collected or
advanced and the extent to which such payments, collections and/or advances of
principal are in turn applied in reduction of the principal balance of the class
of principal to which the certificate belongs.
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As described in this prospectus supplement, the principal payment amount for
each payment date will be payable first in respect of the class "A-1" and/or
class "A-2" certificates until the principal balances of those classes are
reduced to zero, and will thereafter be distributable entirely in respect of the
other classes of principal balance certificates, sequentially based upon their
relative seniority, in each such case until the related principal balance is
reduced to zero. As a consequence of the foregoing, the weighted average lives
of the class "A-1" and class "A-2" certificates may be shorter, and the weighted
average lives of the other classes of principal balance certificates may be
longer, than would otherwise be the case if the principal payment amount for
each payment date was being paid on a PRO RATA basis among the respective
classes of principal balance certificates.
The tables (the "decrement tables") set forth in Annex C-2 show with respect
to each class of offered certificates (other than the class "X" certificates)
the weighted average life thereof, and the percentage of the related initial
aggregate principal balance that would be outstanding after each of the
specified dates, based upon each of the indicated levels of CPR and the modeling
assumptions.
As used in each of the decrement tables, the column headed "0%" assumes that
none of the mortgage loans is prepaid before maturity, except that each ARD loan
is paid in full on its anticipated repayment date. The columns headed "25%",
"50%", "75%" and "100%" assume that no prepayments are made on any mortgage loan
during such mortgage loan's lockout period, yield maintenance period or
declining premium period, in each case if any, and are otherwise made on each of
the mortgage loans at the indicated CPRs, except that each ARD loan is paid in
full on its anticipated repayment date. There is no assurance, however, that
prepayments of the mortgage loans, whether or not in a lockout period, a yield
maintenance period or a declining premium period, will conform to any particular
CPR. We make no representation that--
- the mortgage loans will prepay in accordance with the assumptions set
forth in this prospectus supplement at any of the CPRs shown or at any
other particular prepayment rate,
- all the mortgage loans will prepay in accordance with the assumptions set
forth in this prospectus supplement at the same rate, or
- mortgage loans that are in a lockout period, a yield maintenance period or
declining premium period will not prepay as a result of involuntary
liquidations upon default or otherwise.
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the offered certificates
will be used by us to purchase the mortgage loans and to pay certain expenses in
connection with the issuance of the certificates.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
Upon the issuance of the certificates, , our counsel, will
deliver its opinion generally to the effect that, assuming compliance with the
pooling and servicing agreement, and subject to certain other assumptions set
forth in the opinion, REMIC I, REMIC II and REMIC III, respectively, will each
qualify as a REMIC under the Internal Revenue Code of 1986 (for purposes of this
"Federal Income Tax Consequences" section, the "Code"). The assets of REMIC I
will generally include the mortgage loans, any REO properties acquired on behalf
of the certificateholders, the master servicer's custodial account, the special
servicer's REO account and the trustee's collection account and interest reserve
account, but will exclude any collections of Post-ARD Additional Interest on the
ARD loans. For federal income tax purposes,
- the separate non-certificated regular interests in REMIC I will be the
"regular interests" in REMIC I and will be the assets of REMIC II,
- the class "R-I" certificates will evidence the sole class of "residual
interests" in REMIC I and in each of the "single mortgage loan REMICs",
- the separate non-certificated regular interests in REMIC II will be the
"regular interests" in REMIC II and will be the assets of REMIC III,
- the class "R-II" certificates will evidence the sole class of "residual
interests" in REMIC II,
- the class "A-1", "A-2", "X", "B", "C", "D", "E", "F", "G", "H", "J", "K",
"L", "M" and "N" certificates will evidence the "regular interests" in,
and will generally be treated as debt obligations of, REMIC III, and
- the class "R-III" certificates will evidence the sole class of "residual
interests" in REMIC III.
DISCOUNT AND PREMIUM; PREPAYMENT CONSIDERATION
For federal income tax reporting purposes, it is anticipated that the class
" " and class " " certificates will be issued with more than a DE
MINIMIS amount of original issue discount. The class " " certificates will
be issued with a DE MINIMIS amount of original issue discount. The other classes
of offered certificates will not be issued with original issue discount. When
determining the rate of accrual of market discount and premium, if any, for
federal income tax purposes the prepayment assumption used will be that
subsequent to the date of any determination:
[- the ARD loans will be paid in full on their respective anticipated
repayment dates,]
- no mortgage loan will otherwise be prepaid prior to maturity, and
- there will be no extension of maturity for any mortgage loan.
However, no representation is made as to the actual rate at which the
mortgage loans will prepay, if at all. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" in the
accompanying prospectus.
The IRS has issued regulations under Sections 1271 to 1275 of the Code
generally addressing the treatment of debt instruments issued with original
issue discount. You should be aware, however, that those regulations and
Section 1272(a)(6) of the Code do not adequately address certain issues relevant
to, or are not applicable to, prepayable securities such as the offered
certificates. We recommend that you consult with your own tax advisor concerning
the tax treatment of your certificates.
If the method for computing original issue discount described in the
accompanying prospectus results in a negative amount for any period with respect
to any holder of offered certificates, the amount of
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original issue discount allocable to that period would be zero. This is a
possibility of particular relevance to a holder of a class "X" certificate. The
holder would be permitted to offset the negative amount only against future
original issue discount, if any, attributable to the certificates. Although the
matter is not free from doubt, a holder of a class "X" certificate may be
permitted to deduct a loss to the extent that his or her respective remaining
basis in the certificate exceeds the maximum amount of future payments to which
the holder is entitled, assuming no further prepayments of the mortgage loans.
Any loss might be treated as a capital loss.
Certain classes of the offered certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
these classes of offered certificates will be treated as holding a certificate
with amortizable bond premium will depend on the certificateholder's purchase
price and the payments remaining to be made on the certificate at the time of
its acquisition by the certificateholder. If you acquire an interest in any
class of offered certificates issued at a premium, you should consider
consulting your own tax advisor regarding the possibility of making an election
to amortize the premium. See "Federal Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Regular Certificates--Premium" in the accompanying
prospectus.
Prepayment premiums and yield maintenance charges actually collected on the
mortgage loans will be paid on the offered certificates as and to the extent
described in this prospectus supplement. It is not entirely clear under the Code
when the amount of a prepayment premium or yield maintenance charge should be
taxed to the holder of a class of offered certificates entitled to that amount.
For federal income tax reporting purposes, the tax administrator will report
prepayment premiums or yield maintenance charges as income to the holders of a
class of offered certificates entitled thereto only after the master servicer's
actual receipt thereof. The IRS may nevertheless seek to require that an assumed
amount of prepayment premiums and yield maintenance charges be included in
payments projected to be made on the offered certificates and that taxable
income be reported based on the projected constant yield to maturity of the
offered certificates. Therefore, the projected prepayment premiums and yield
maintenance charges would be included prior to their actual receipt by holders
of the offered certificates. If the projected prepayment premiums and yield
maintenance charges were not actually received, presumably the holder of an
offered certificate would be allowed to claim a deduction or reduction in gross
income at the time the unpaid prepayment premiums and yield maintenance charges
had been projected to be received. Moreover, it appears that prepayment premiums
and yield maintenance charges are to be treated as ordinary income rather than
capital gain. The correct characterization of the income is not entirely clear.
We recommend you consult your own tax advisors concerning the treatment of
prepayment premiums and yield maintenance charges.
CONSTRUCTIVE SALES OF CLASS X CERTIFICATES
The Taxpayer Relief Act of 1997 added a provision to the Code that requires
the recognition of gain upon the "constructive sale of an appreciated financial
position". A constructive sale of a financial position occurs if a taxpayer
enters into certain transactions or series of transactions that have the effect
of substantially eliminating the taxpayer's risk of loss and opportunity for
gain with respect to the financial instrument. Debt instruments that:
- entitle the holder to a specified principal amount,
- pay interest at a fixed or variable rate, and
- are not convertible into the stock of the issuer or a related party,
cannot be the subject of a constructive sale for this purpose. Accordingly, only
class "X" certificates, which do not have principal balances, could be subject
to this provision and only if a holder of those certificates engages in a
constructive sale transaction.
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CHARACTERIZATION OF INVESTMENTS IN OFFERED CERTIFICATES
Except to the extent noted below, the offered certificates will be "real
estate assets" within the meaning of Section 856(c)(5)(B) of the Code in the
same proportion that the assets of the trust would be so treated. In addition,
interest, including original issue discount, if any, on the offered certificates
will be interest described in Section 856(c)(3)(B) of the Code to the extent
that the certificates are treated as "real estate assets" within the meaning of
Section 856(c)(5)(B) of the Code.
Most of the mortgage loans are not secured by real estate used for
residential or certain other purposes prescribed in Section 7701(a)(19)(C) of
the Code. Consequently, the offered certificates will be treated as assets
qualifying under that section to only a limited extent. Accordingly, investment
in the offered certificates may not be suitable for a thrift institution seeking
to be treated as a "domestic building and loan association" under
Section 7701(a)(19)(C) of the Code. The offered certificates will be treated as
"qualified mortgages" for another REMIC under Section 860G(a)(3)(C) of the Code
and "permitted assets" for a "financial asset securitization investment trust"
under Section 860L(c) of the Code.
To the extent an offered certificate represents ownership of an interest in
a mortgage loan that is secured in part by the related borrower's interest in a
bank account, that mortgage loan is not secured solely by real estate.
Therefore:
- a portion of that certificate may not represent ownership of "loans
secured by an interest in real property" or other assets described in
Section 7701(a)(19)(C) of the Code;
- a portion of that certificate may not represent ownership of "real estate
assets" under Section 856(c)(5)(B) of the Code; and
- the interest on that certificate may not constitute "interest on
obligations secured by mortgages on real property" within the meaning of
Section 856(c)(3)(B) of the Code.
See "Description of the Mortgage Pool" in this prospectus supplement and
"Federal Income Tax Consequences--REMICs--Characterization of Investments in
REMIC Certificates" in the accompanying prospectus.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax
Consequences--REMICs" in the accompanying prospectus.
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CERTAIN ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Internal Revenue Code of 1986 impose various requirements on--
- employee benefit plans, and on certain other retirement plans,
arrangements and accounts, that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the Internal
Revenue Code of 1986 (each, an "ERISA Plan"), and
- persons that are fiduciaries with respect to ERISA Plans,
in connection with the investment of the assets of an ERISA Plan ("Plan
Assets"). For purposes of this discussion, ERISA Plans may include individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts, including as applicable, insurance company general
accounts, in which other ERISA Plans are invested.
A fiduciary of any ERISA Plan should carefully review with its legal
advisors whether the purchase or holding of offered certificates could be or
give rise to a transaction that is prohibited or is not otherwise permitted
either under ERISA or Section 4975 of the Internal Revenue Code of 1986 or
whether there exists any statutory or administrative exemption applicable
thereto. Certain fiduciary and prohibited transaction issues arise only if the
assets of the trust are "plan assets" for purposes of Part 4 of Title I of ERISA
and Section 4975 of the Internal Revenue Code of 1986. Whether the assets of the
trust will be plan assets at any time will depend on a number of factors,
including the portion of any class of certificates that is held by "benefit plan
investors" (as defined in U.S. Department of Labor Regulation
Section 2510.3-101).
The U.S. Department of Labor has issued an individual prohibited transaction
exemption to the underwriter, identified as Prohibited Transaction Exemption
91-14 (the "Exemption"). Subject to the satisfaction of certain conditions set
forth therein, the Exemption generally exempts from the application of the
prohibited transaction provisions of Sections 406(a) and (b) and 407(a) of
ERISA, and the excise taxes imposed on these prohibited transactions pursuant to
Sections 4975(a) and (b) of the U.S. tax code, certain transactions relating to,
among other things, the servicing and operation of pools of real estate loans,
such as the mortgage pool, and the purchase, sale and holding of mortgage
pass-through certificates, such as the class "A-1", "A-2" and "X" certificates,
that are underwritten by one of the following parties (each, an
"Exemption-Favored Party")--
(a) the underwriter,
(b) any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the underwriter,
and
(c) any member of the underwriting syndicate or selling group of which a
person described in (a) or (b) is a manager or co-manager with respect to
those mortgage pass-through certificates.
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of a class "A-1", "A-2"
or "X" certificate to be eligible for exemptive relief thereunder. The
conditions are as follows:
- FIRST, the acquisition of the certificate by a plan must be on terms that
are at least as favorable to the ERISA Plan as they would be in an
arm's-length transaction with an unrelated party;
- SECOND, the rights and interests evidenced by that certificate must not be
subordinated to the rights and interests evidenced by the other
certificates;
- THIRD, at the time of its acquisition by the plan, that certificate must
be rated in one of the three highest generic rating categories by Moody's,
Fitch, Standard & Poor's or Duff & Phelps;
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- FOURTH, the trustee cannot be an affiliate of any other member of the
"restricted group", which (in addition to the trustee) consists of the
Exemption-Favored Parties, us, the master servicer, the special servicer,
any sub-servicers, the mortgage loan sellers, each borrower, if any, with
respect to mortgage loans constituting more than 5.0% of the aggregate
unamortized principal balance of the mortgage pool as of the date of
initial issuance of the certificates and any and all affiliates of any of
the aforementioned persons;
- FIFTH, the sum of all payments made to and retained by the
Exemption-Favored Parties must represent not more than reasonable
compensation for underwriting the relevant class of certificates; the sum
of all payments made to and retained by us pursuant to the assignment of
the mortgage loans to the trust must represent not more than the fair
market value of the obligations; and the sum of all payments made to and
retained by the master servicer, the special servicer and any sub-servicer
must represent not more than reasonable compensation for that person's
services under the pooling and servicing agreement and reimbursement of
that person's reasonable expenses in connection therewith; and
- SIXTH, the investing ERISA Plan must be an accredited investor as defined
in Rule 501(a)(1) of Regulation D under the Securities Act of 1933, as
amended.
Because the class "A-1", "A-2" and "X" certificates are not subordinated to
any other class of certificates, the second general condition set forth above is
satisfied with respect to the class "A-1", "A-2" and "X" certificates. It is a
condition of their issuance that the class "A-1", "A-2" and "X" certificates be
rated not lower than " " by and " " by . In
addition, the initial trustee is not an affiliate of any other member of the
restricted group. Accordingly, as of the date of initial issuance of the
certificates, the third and fourth general conditions set forth above will be
satisfied with respect to the class "A-1", "A-2" and "X" certificates. A
fiduciary of an ERISA Plan contemplating the purchase of a class "A-1", "A-2" or
"X" certificate in the secondary market must make its own determination that, at
the time of the purchase, the certificate continues to satisfy the third and
fourth general conditions set forth above. A fiduciary of an ERISA Plan
contemplating the purchase of a class "A-1", "A-2" or "X" certificate, whether
in the initial issuance of the certificate or in the secondary market, must make
its own determination that the first and fifth general conditions set forth
above will be satisfied with respect to the certificate as of the date of the
purchase. An ERISA Plan's authorizing fiduciary will be deemed to make a
representation regarding satisfaction of the sixth general condition set forth
above in connection with the purchase of a class "A-1", "A-2" or "X"
certificate.
The Exemption also requires that the trust meet the following requirements:
- the trust assets must consist solely of assets of the type that have been
included in other investment pools;
- certificates evidencing interests in those other investment pools must
have been rated in one of the three highest generic categories of Moody's,
Fitch, Standard & Poor's or Duff & Phelps for at least one year prior to
the ERISA Plan's acquisition of a class "A-1", "A-2" or "X" certificate;
and
- certificates evidencing interests in those other investment pools must
have been purchased by investors other than ERISA Plans for at least one
year prior to any ERISA Plan's acquisition of a class "A-1", "A-2" or "X"
certificate.
We believe that these requirements have been satisfied as of the date of
this prospectus supplement.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Internal Revenue Code of 1986 by reason of Sections 4975(c)(1)(A) through
(D) of the Internal Revenue Code of 1986, in connection with--
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- the direct or indirect sale, exchange or transfer of class "A-1", "A-2" or
"X" certificates acquired by an ERISA Plan upon initial issuance from us
or an Exemption-Favored Party when we are, or either mortgage loan seller,
the trustee, the master servicer, the special servicer or any
sub-servicer, provider of credit support, Exemption-Favored Party or
mortgagor is, a Party in Interest (as defined in the accompanying
prospectus) with respect to the investing ERISA Plan,
- the direct or indirect acquisition or disposition in the secondary market
of class "A-1", "A-2" or "X" certificates by an ERISA Plan, and
- the continued holding of class "A-1", "A-2" or "X" certificates by an
ERISA Plan.
However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
class "A-1", "A-2" or "X" certificate on behalf of an Excluded ERISA Plan by any
person who has discretionary authority or renders investment advice with respect
to the assets of that ERISA Plan. For purposes of this prospectus supplement, an
"Excluded ERISA Plan" is an ERISA Plan sponsored by any member of the restricted
group referred to above.
Moreover, if the general conditions of the Exemption, as well as certain
other conditions set forth in the Exemption, are satisfied, the Exemption may
also provide an exemption from the restrictions imposed by Sections 406(b)(1)
and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of the
Internal Revenue Code of 1986 in connection with--
- the direct or indirect sale, exchange or transfer of class "A-1", "A-2" or
"X" certificates in the initial issuance of those certificates between us
or an Exemption-Favored Party and an ERISA Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of the assets of the ERISA Plan in those certificates is (i) a
borrower with respect to 5.0% or less of the fair market value of the
mortgage loans or (ii) an affiliate of this person,
- the direct or indirect acquisition or disposition in the secondary market
of class "A-1", "A-2" or "X" certificates by an ERISA Plan, and
- the continued holding of class "A-1", "A-2" or "X" certificates by an
ERISA Plan.
Further, if the general conditions of the Exemption, as well as certain
other conditions set forth in the Exemption, are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a), 406(b)
and 407(a) of ERISA, and the taxes imposed by Sections 4975(a) and (b) of the
Internal Revenue Code of 1986 by reason of Section 4975(c) of the Internal
Revenue Code of 1986, for transactions in connection with the servicing,
management and operation of the trust assets.
Lastly, if the general conditions of the Exemption are satisfied, the
Exemption also may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Internal Revenue Code of 1986 by reason of Sections 4975(c)(1)(A)
through (D) of the Internal Revenue Code of 1986 if the restrictions are deemed
to otherwise apply merely because a person is deemed to be a Party in Interest
with respect to an investing plan by virtue of providing services to the ERISA
Plan (or by virtue of having certain specified relationships to this person)
solely as a result of the ERISA Plan's ownership of class "A-1", "A-2" or "X"
certificates.
Before purchasing a class "A-1", "A-2" or "X" certificate, a fiduciary of an
ERISA Plan should itself confirm that:
- the class "A-1", "A-2" and "X" certificates are "certificates" for
purposes of the Exemption, and
- the general and other conditions set forth in the Exemption and the other
requirements set forth in the Exemption would be satisfied at the time of
the purchase.
In addition to determining the availability of the exemptive relief provided
in the Exemption, a fiduciary of an ERISA Plan considering an investment in
class "A-1", "A-2" or "X" certificates should
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consider the availability of any other prohibited transaction class exemptions.
See "ERISA Considerations" in the accompanying prospectus. There can be no
assurance that any such exemption will apply with respect to any particular
investment by an ERISA Plan in class "A-1", "A-2" or "X" certificates or, even
if it were deemed to apply, that it would apply to all prohibited transactions
that may occur in connection with the investment. A purchaser of class "A-1",
"A-2" or "X" certificates should be aware, however, that even if the conditions
specified in one or more class exemptions are satisfied, the scope of relief
provided by a class exemption may not cover all acts which might be construed as
prohibited transactions.
The characteristics of the class "B", "C", "D", "E" and "F" certificates do
not meet the requirements of the Exemption. Accordingly, those offered
certificates may not be acquired by, on behalf of or with the assets of an ERISA
Plan, except in the case of an insurance company using funds in its general
account, which may be able to rely on Section III of Prohibited Transaction
Class Exemption 95-60 ("PTCE 95-60"), which we discuss below.
So long as certain conditions are satisfied, Section III of PTCE 95-60
exempts from the application of the prohibited transaction provisions of
Sections 406(a), 406(b) and 407(a) of ERISA and Section 4975 of the Internal
Revenue Code of 1986 transactions in connection with the servicing, management
and operation of the trust under circumstances where an insurance company
general account has an interest in the trust as a result of its acquisition of
certificates. If these conditions are met, insurance company general accounts
would be allowed to purchase certain classes of the certificates, such as the
class "B", "C", "D", "E" and "F" certificates, that do not meet the requirements
of the Exemption solely because they (a) are subordinated to other classes of
the certificates or (b) have not received a rating at the time of the purchase
in one of the three highest rating categories from [Moody's, Fitch, Standard &
Poor's or Duff & Phelps]. All other conditions of the Exemption would have to be
satisfied in order for PTCE 95-60 to be available. Before purchasing any class
"B", "C", "D", "E" or "F" certificates, an insurance company general account
seeking to rely on Section III of PTCE 95-60 should itself confirm that all
applicable conditions and other requirements have been satisfied.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
Title I of ERISA or Section 4975 of the Internal Revenue Code of 1986. However,
a governmental plan may be subject to a federal, state or local law which is, to
a material extent, similar to the foregoing provisions of ERISA or the Internal
Revenue Code of 1986. A fiduciary of a governmental plan should make its own
determination as to the need for and the availability of any exemptive relief
under any such similar law.
Any fiduciary of an ERISA Plan considering whether to purchase an offered
certificate on behalf of that ERISA Plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Internal Revenue Code of 1986 to the
investment.
The sale of offered certificates to an ERISA Plan is in no way a
representation or warranty by us or the underwriter that the investment meets
all relevant legal requirements with respect to investments by ERISA Plans
generally or by any particular ERISA Plan, or that the investment is appropriate
for ERISA Plans generally or for any particular ERISA Plan.
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LEGAL INVESTMENT
[Upon issuance, the class "A-1", "A-2" and "X" Certificates (collectively,
the "SMMEA certificates") will constitute "mortgage related securities" for
purposes of SMMEA. However, in order to remain "mortgage related securities",
the SMMEA certificates must, among other things, continue to be rated in one of
the two highest rating categories by at least one nationally recognized
statistical rating organization. In addition, the SMMEA certificates will
constitute "mortgage related securities" in part because they evidence interest
in notes secured by first mortgage liens on one or more real properties upon
which is located a residential, commercial or mixed residential and commercial
structure.
The remaining offered certificates will NOT be "mortgage related securities"
for purposes of SMMEA. As a result, the appropriate characterization of such
certificates under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase such certificates, is
subject to significant interpretive uncertainties.]
Neither we nor the underwriter makes any representation as to the ability of
particular investors to purchase the offered certificates under applicable legal
investment or other restrictions. All institutions whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the offered
certificates--
- are legal investments for them, or
- are subject to investment, capital or other restrictions.
All depository institutions considering an investment in the offered
certificates should review the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on the Selection of Securities Dealers
and Unsuitable Investment Practices (to the extent adopted by their respective
regulatory authorities), setting forth, in relevant part, certain investment
practices deemed to be unsuitable for an institution's investment portfolio, as
well as guidelines for investing in certain types of mortgage related
securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase offered certificates or to
purchase offered certificates representing more than a specified percentage of
the investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the offered certificates are legal
investments for the investors.
See "Legal Investment" in the accompanying prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement dated
between us and the underwriter, the underwriter has agreed to
purchase from us and we have agreed to sell to the underwriter % of each
class of the offered certificates. It is expected that delivery of the offered
certificates will be made to the underwriter in book-entry form through the same
day funds settlement system of DTC on or about against payment
therefor in immediately available funds.
The underwriting agreement provides that the obligation of the underwriter
to pay for and accept delivery of the offered certificates is subject to, among
other things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of our registration
S-107
<PAGE>
statement shall be in effect, and that no proceedings for the purpose of
obtaining a stop order shall be pending before or threatened by the SEC.
The distribution of the offered certificates by the underwriter may be
accomplished from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
us from the sale of the offered certificates, before deducting expenses payable
by us, will be approximately % of the aggregate principal balance of the
offered certificates, plus accrued interest on all the offered certificates from
. The underwriter may accomplish the transactions by selling the
offered certificates to or through dealers, and the dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the underwriter. The underwriter may be deemed to have received
compensation from us, in connection with the sale of the offered certificates,
in the form of underwriting compensation. The underwriter and any dealers that
participate with the underwriter in the distribution of the offered certificates
may be deemed to be statutory underwriters and any profit on the resale of the
offered certificates positioned by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended.
The underwriting agreement provides that we will indemnify the underwriter,
and that under limited circumstances the underwriter will indemnify us, against
certain civil liabilities under the Securities Act of 1933, as amended, or
contribute to payments required to be made in respect of any such liabilities.
We have also been advised by the underwriter that it presently intends to
make a market in the offered certificates. The underwriter has no obligation to
do so, however, and any market making may be discontinued at any time. There can
be no assurance that an active public market for the offered certificates will
develop. See "Risk Factors--Risks Related to the Offered Certificates--Many
Factors, Including Lack of Liquidity, Can Adversely Affect the Market Value of
Your Certificates" in this prospectus supplement and "Risk Factors--Lack of
Liquidity Will Impair Your Ability to Sell Your Certificates and May Have an
Adverse Effect on the Market Value of Your Certificates" in the accompanying
prospectus.
LEGAL MATTERS
Certain legal matters relating to the certificates will be passed upon for
us and the underwriter by , New York, New York.
S-108
<PAGE>
RATINGS
It is a condition to their issuance that the respective classes of offered
certificates be rated as follows:
<TABLE>
<CAPTION>
CLASS [RATING AGENCY] [RATING AGENCY]
- ----- --------------- ---------------
<S> <C> <C>
Class A-1...................................................
Class A-2...................................................
Class B.....................................................
Class C.....................................................
Class D.....................................................
Class E.....................................................
Class F.....................................................
Class X.....................................................
</TABLE>
The ratings on the offered certificates address the likelihood of the timely
receipt by their holders of all payments of interest to which they are entitled
on each payment date and, except in the case of the class "X" certificates, the
ultimate receipt by their holders of all payments of principal to which they are
entitled on or before the rated final payment date. The ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the offered certificates, and the extent to which the
payment stream from the mortgage pool is adequate to make payments of interest
and/or principal required under the offered certificates.
The ratings on the respective classes of offered certificates do not
represent any assessment of--
- the tax attributes of the offered certificates or of the trust,
- whether or to what extent prepayments of principal may be received on the
mortgage loans,
- the likelihood or frequency of prepayments of principal on the mortgage
loans,
- the degree to which the amount or frequency of prepayments of principal on
the mortgage loans might differ from those originally anticipated,
- whether or to what extent the interest payable on any class of offered
certificates may be reduced in connection with Net Aggregate Prepayment
Interest Shortfalls, and
- whether and to what extent prepayment premiums, yield maintenance charges,
Default Interest or Post-ARD Additional Interest will be received.
Also, a security rating does not represent any assessment of the yield to
maturity that investors may experience or the possibility that the class "X"
certificateholders might not fully recover their investment in the event of
rapid prepayments and/or other liquidations of the mortgage loans.
In general, the ratings address credit risk and not prepayment risk. As
described in this prospectus supplement, the amounts payable with respect to the
class "X" certificates consist primarily of interest. Even if the entire
mortgage pool were to prepay in the initial month, with the result that the
class "X" certificateholders receive only a single month's interest payment and,
accordingly, suffer a nearly complete loss of their investment, all amounts
"due" to those certificateholders will nevertheless have been paid. This result
would be consistent with the respective ratings received on the class "X"
certificates. The aggregate notional amount of the class "X" certificates is
subject to reduction in connection with each reduction in the aggregate
principal balance of a class of principal balance certificates, whether as a
result of payments of principal or in connection with Realized Losses and
Additional Trust Fund Expenses. The ratings of the class "X" certificates do not
address the timing or magnitude of reduction of the aggregate notional amount of
those certificates, but only the obligation to pay interest timely on that
aggregate notional amount as so reduced from time to time.
S-109
<PAGE>
There can be no assurance as to whether any rating agency not requested to
rate the offered certificates will nonetheless issue a rating to any class of
offered certificates and, if so, what the rating would be. A rating assigned to
any class of offered certificates by a rating agency that has not been requested
by us to do so may be lower than the rating assigned thereto by or
.
The ratings on the offered certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating organization. Each security
rating should be evaluated independently of any other security rating. See
"Rating" in the accompanying prospectus.
The attached diskette contains one spreadsheet file (the "spreadsheet file")
that can be put on a user-specified hard drive or network drive. This file is
" ". The file " " is a Microsoft Excel(1), Version 5.0
spreadsheet. The file provides, in electronic format, certain statistical
information that appears under the caption "Description of the Mortgage Pool"
in, and on Annexes A-1 and A-2 to, as well as certain information on the
mortgage loans and underlying real properties shown in, this prospectus
supplement. Defined terms used, but not otherwise defined, in the spreadsheet
file will have the respective meanings assigned to them in this prospectus
supplement. All the information contained in the spreadsheet file is subject to
the same limitations and qualifications contained in this prospectus supplement.
Prospective investors are strongly urged to read this prospectus supplement and
accompanying prospectus in its entirety prior to accessing the spreadsheet file.
- ------------------------
(1) Microsoft Excel is a registered trademark of Microsoft Corporation.
S-110
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Important Notice about the Information Contained
in this Prospectus Supplement, the
Accompanying Prospectus and the Related
Registration Statement........................ S-2
Forward-Looking Statements...................... S-3
Summary of Prospectus Supplement................ S-5
Risk Factors.................................... S-26
Description of the Mortgage Pool................ S-38
Servicing of the Mortgage Loans................. S-57
Description of the Offered Certificates......... S-87
Yield and Maturity Considerations............... S-114
Use of Proceeds................................. S-122
Federal Income Tax Consequences................. S-122
Certain ERISA Considerations.................... S-125
Legal Investment................................ S-130
Method of Distribution.......................... S-131
Legal Matters................................... S-132
Ratings......................................... S-132
ANNEX A-1--Certain Characteristics of the
Mortgage Loans................................ A-1-1
ANNEX A-2--Certain Monetary Terms of the
Mortgage Loans................................ A-2-1
ANNEX B--Term Sheet............................. B-1
ANNEX C-1--Price/Yield Tables................... C-1-1
ANNEX C-2--Decrement Tables..................... C-2-1
ANNEX D--Form of Delinquent Loan Status
Report........................................ D-1
ANNEX E--Form of Historical Loan Modification
Report........................................ E-1
ANNEX F--Form of Historical Liquidation
Report........................................ F-1
ANNEX G--Form of REO Status Report.............. G-1
ANNEX H--Form of Watch List Report.............. H-1
ANNEX I--Form of Operating Statement Analysis... I-1
ANNEX J--Form of NOI Adjustment Worksheet....... J-1
ANNEX K--Form of Comparative Financial Status
Report........................................ K-1
PROSPECTUS
Important Notice about the Information Presented
in this Prospectus............................ 3
Available Information; Incorporation by
Reference..................................... 3
Summary of Prospectus........................... 4
Risk Factors.................................... 13
Description of the Trust Assets................. 33
Yield and Maturity Considerations............... 56
Structured Asset Securities Corporation......... 62
Description of the Certificates................. 63
Description of the Governing Documents.......... 73
Description of Credit Support................... 82
Certain Legal Aspects of Mortgage Loans......... 85
Federal Income Tax Consequences................. 99
State and Other Tax Consequences................ 141
ERISA Considerations............................ 141
Legal Investment................................ 146
Use of Proceeds................................. 148
Method of Distribution.......................... 148
Legal Matters................................... 150
Financial Information........................... 150
Rating.......................................... 150
</TABLE>
------------------------------
UNTIL , ALL DEALERS THAT EFFECT TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$
(APPROXIMATE)
LB COMMERCIAL MORTGAGE
TRUST
(DEPOSITOR)
CLASS A-1, CLASS A-2,
CLASS B, CLASS C, CLASS D,
CLASS E, CLASS F AND CLASS X
SERIES
COMMERCIAL MORTGAGE
PASS-THROUGH CERTIFICATES
- ---------------------------------
PROSPECTUS SUPPLEMENT
- ---------------------------------
- ---------------------------------
LEHMAN BROTHERS
- ---------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
STRUCTURED ASSET SECURITIES CORPORATION, THE DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES (ISSUABLE IN SERIES)
Our name is Structured Asset Securities Corporation. We intend to offer from
time to time mortgage pass-through certificates. These offers may be made
through one or more different methods, including offerings through underwriters.
We do not currently intend to list the offered certificates of any series on any
national securities exchange or the NASDAQ stock market. See "Method of
Distribution."
THE OFFERED CERTIFICATES: THE TRUST ASSETS:
The offered certificates will be The assets of each of our trusts
issuable in series. Each series of will include--
offered certificates will-- - mortgage loans secured by first
- - have its own series designation, and junior liens on, or
- - consist of one or more classes with interests in, various interests
various payment characteristics, in commercial and multifamily
- - evidence beneficial ownership real properties,
interests in a trust established by - mortgage-backed securities that
us, and directly or indirectly evidence
- - be payable solely out of the related interests in, or are directly
trust assets. or indirectly secured by, such
types of mortgage loans, or
No governmental agency or instrumentality - some combination of such types
will insure or guarantee payment on the of mortgage loans and
offered certificates. Neither we nor any mortgage-backed securities.
of our affiliates are responsible for
making payments on the offered certificates Trust assets may also include
if collections on the on the are letters of credit, surety bonds,
insufficient. insurance policies, guarantees,
credit derivatives, reserve
funds, guaranteed investment
contracts, interest rate exchange
agreements, interest rate cap or
floor agreements, on the assets
currency exchange agreements, or
other similar instruments and
agreements.
In connection with each offering, we will prepare a supplement to this
prospectus in order to describe in more detail the particular certificates being
offered and the related trust assets. In that document, we will also state the
price to public for each class of offered certificates or explain the method for
determining that price. In addition, in that document, we will identify the
applicable lead or managing underwriter(s), if any, and the relevant
underwriting arrangements. You may not purchase the offered certificates of any
series unless you have also received the prospectus supplement for that series.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 15 IN THIS
PROSPECTUS, AS WELL AS THOSE SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT,
PRIOR TO INVESTING.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
The date of this prospectus is_____________________, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Important Notice about the Information Presented in this Prospectus.......................................................3
Available Information; Incorporation by Reference.........................................................................3
Summary of Prospectus.....................................................................................................4
Risk Factors.............................................................................................................15
Description of the Trust Assets..........................................................................................36
Yield and Maturity Considerations........................................................................................60
Structured Asset Securities Corporation..................................................................................67
Description of the Certificates..........................................................................................67
Description of the Governing Documents...................................................................................78
Description of Credit Support............................................................................................88
Certain Legal Aspects of Mortgage Loans..................................................................................90
Federal Income Tax Consequences.........................................................................................104
State and Other Tax Consequences........................................................................................154
ERISA Considerations....................................................................................................154
Legal Investment........................................................................................................158
Use of Proceeds.........................................................................................................160
Method of Distribution..................................................................................................161
Legal Matters...........................................................................................................162
Financial Information...................................................................................................162
Rating..................................................................................................................163
</TABLE>
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<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS
When deciding whether to invest in any of the offered certificates, you
should only rely on the information contained in this prospectus and the related
prospectus supplement. We have not authorized any dealer, salesman or other
person to give any information or to make any representation that is different.
In addition, information in this prospectus or any related prospectus supplement
is current only as of the date on its cover. By delivery of this prospectus and
any related prospectus supplement, we are not offering to sell any securities,
and are not soliciting an offer to buy any securities, in any state where the
offer and sale is not permitted.
AVAILABLE INFORMATION; INCORPORATION BY REFERENCE
We have filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the certificates offered by
this prospectus. This prospectus forms a part of the registration statement.
This prospectus and the related prospectus supplement do not contain all of the
information with respect to an offering that is contained in the registration
statement. For further information regarding the documents referred to in this
prospectus and the related prospectus supplement, you should refer to the
registration statement and its exhibits. You can inspect the registration
statement and its exhibits, and make copies of these documents at prescribed
rates, at the public reference facilities maintained by the SEC at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: Chicago Regional Office, 500 West Madison,
14th Floor, Chicago, Illinois 60661; and New York Regional Office, Seven World
Trade Center, New York, New York 10048. You can also obtain copies of such
materials electronically through the SEC's Web site (http://www.sec.gov).
In connection with each series of offered certificates, we will file or
arrange to have filed with the SEC with respect to the related trust any
periodic reports that are required under the Securities Exchange Act of 1934, as
amended. All documents and reports that are so filed for the related trust prior
to the termination of an offering of certificates are incorporated by reference
into, and should be considered a part of, this prospectus. Upon request, we will
provide without charge to each person receiving this prospectus in connection
with an offering, a copy of any or all documents or reports that are so
incorporated by reference. All requests should be directed to us in writing at
200 Vesey Street, New York, New York 10285, attention: Secretary, or by
telephone at (212) 526-7000.
-3-
<PAGE>
SUMMARY OF PROSPECTUS
This summary contains selected information from this prospectus. It
does not contain all of the information you need to consider in making your
investment decision. TO UNDERSTAND ALL OF THE TERMS OF A PARTICULAR OFFERING OF
CERTIFICATES, YOU SHOULD READ CAREFULLY THIS PROSPECTUS AND THE RELATED
PROSPECTUS SUPPLEMENT IN FULL.
<TABLE>
<S> <C>
WHO WE ARE........................................... Structured Asset Securities Corporation is a Delaware
corporation. Our principal offices are located at 200
Vesey Street, New York, New York 10285. Our main
telephone number is (212) 526-7000. See "Structured
Asset Securities Corporation."
THE SECURITIES BEING OFFERED......................... The securities that will be offered pursuant to this
prospectus and the related prospectus supplements consist
of mortgage pass-through certificates. These certificates
will be issued in series, and each series will, in turn,
consist of one or more classes. Each class of offered
certificates must, at the time of issuance, be assigned an
investment grade rating by at least one nationally
recognized statistical rating organization. Typically, the
four highest rating categories, within which there may be
sub-categories or gradations to indicate relative standing,
signify investment grade. See "Rating."
Each series of offered certificates will evidence beneficial
ownership interests in a trust established by us and
containing the assets described in this prospectus and
the related prospectus supplement.
THE OFFERED CERTIFICATES MAY BE
ISSUED WITH OTHER CERTIFICATES.................. We may not publicly offer all the mortgage pass-through
certificates evidencing interests in one of our trusts. We
may elect to retain some of those certificates, to place
some privately with institutional investors or to deliver
some to the applicable seller as partial consideration for
the related mortgage assets. In addition, some of those
certificates may not satisfy the rating requirement
described above for offered certificates.
THE GOVERNING DOCUMENTS.............................. In general, a pooling and servicing agreement or other
similar agreement or collection of agreements will
govern, among other things--
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
- the issuance of each series of offered certificates,
- the creation of and transfer of assets to the related
trust, and
- the servicing and administration of those assets.
The parties to the governing document(s) for a series of
offered certificates will always include us and a trustee.
We will be responsible for establishing the trust relating
to each series of offered certificates. In addition, we will
transfer or arrange for the transfer of the initial trust
assets to that trust. In general, the trustee for a series
of offered certificates will be responsible for, among other
things, making payments and preparing and disseminating certain
reports to the holders of those offered certificates.
If the trust assets for a series of offered certificates include
mortgage loans, the parties to the governing document(s) will
also include--
- a master servicer that will generally be responsible for
performing customary servicing duties with respect to
those mortgage loans that are not defaulted, nonperforming
or otherwise problematic in any material respect, and
- a special servicer that will generally be responsible for
servicing and administering such of those mortgage loans
that are defaulted, nonperforming or otherwise problematic
in any material respect and real estate assets acquired as
part of the related trust in respect of defaulted mortgage
loans.
The same person or entity, or affiliated entities, may act as both
master servicer and special servicer for any trust.
If the trust assets for a series of offered certificates include
mortgage-backed securities, the parties to the governing document(s)
may also include a manager that will be responsible for performing
various administrative duties with respect to those mortgage-backed
securities. If the related trustee assumes those duties, however,
there will be no manager.
In the related prospectus supplement, we will identify the trustee
and any master servicer, special servicer or manager for each series
of offered certificates and will
</TABLE>
-5-
<PAGE>
<TABLE>
<S> <C>
describe their respective duties in further detail. See
"Description of the Governing Documents."
CERTAIN CHARACTERISTICS OF
THE MORTGAGE ASSETS............................. The trust assets with respect to any series of offered
certificates will, in general, include mortgage loans. Each
of those mortgage loans will constitute the obligation of
one or more persons to repay a debt, and the performance
of that obligation will be secured by a first or junior lien
on, or security interest in, the ownership, leasehold or
other interest(s) of the related borrower or another person
in or with respect to one or more commercial or
multifamily real properties. In particular, the those
properties may include:
- rental or cooperatively-owned buildings with
multiple dwelling units;
- retail properties related to the sale of consumer
goods and other products, or related to providing
entertainment, recreational or personal services, to
the general public;
- office buildings;
- hospitality properties;
- casino properties;
- health care-related facilities;
- industrial facilities;
- warehouse facilities, mini-warehouse facilities and
self-storage facilities;
- restaurants, taverns and other establishments
involved in the food and beverage industry;
- manufactured housing communities, mobile home
parks and recreational vehicle parks;
- recreational and resort properties;
- arenas and stadiums;
- churches and other religious facilities;
- parking lots and garages;
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C>
- mixed use properties;
- other income-producing properties; and
- unimproved land.
The mortgage loans underlying a series of offered
certificates may have a variety of payment terms. For
example, any of those mortgage loans--
- may provide for the accrual of interest at a
mortgage interest rate that is fixed over its term,
that resets on one or more specified dates or that
otherwise adjusts from time to time;
- may provide for the accrual of interest at a
mortgage interest rate that may be converted at the
borrower's election from an adjustable to a fixed
interest rate or from a fixed to an adjustable
interest rate;
- may provide for no accrual of interest;
- may provide for level payments to stated maturity,
for payments that reset in amount on one or more
specified dates or for payments that otherwise
adjust from time to time to accommodate changes in
the mortgage interest rate or to reflect the
occurrence of certain events;
- may be fully amortizing or, alternatively, may be
partially amortizing or nonamortizing, with a
substantial payment of principal due on its stated
maturity date;
- may permit the negative amortization or deferral
of accrued interest;
- may prohibit some or all voluntary prepayments
or require payment of a premium, fee or charge in
connection with those prepayments;
- may permit defeasance and the release of real
property collateral in connection with that
defeasance;
- may provide for payments of principal, interest or
both, on due dates that occur monthly, bi-monthly,
quarterly, semi-annually, annually or at some other
interval; and/or
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
- may have two or more component parts, each having
characteristics that are otherwise described in this
prospectus as being attributable to separate and
distinct mortgage loans.
Most, if not all, of the mortgage loans underlying a series
of offered certificates will be secured by liens on real
properties located in the United States, its territories and
possessions. However, some of those mortgage loans may be
secured by liens on real properties located outside the
United States, its territories and possessions, provided
that "foreign mortgage loans" do not represent more than 10%
of the related mortgage asset pool, by balance.
We do not originate mortgage loans. However, some or all of
the mortgage loans included in one of our trusts may be
originated by our affiliates.
Neither we nor any of our affiliates will guarantee or
insure repayment of any of the mortgage loans underlying a
series of offered certificates. Unless we expressly state
otherwise in the related prospectus supplement, no
governmental agency or instrumentality will guarantee or
insure repayment of any of the mortgage loans underlying a
series of offered certificates. See "Description of the
Trust Assets--Mortgage Loans."
The trust assets with respect to any series of offered
certificates may also include mortgage participations,
mortgage pass-through certificates, collateralized mortgage
obligations and other mortgage-backed securities, that
evidence an interest in, or are secured by a pledge of, one
or more mortgage loans of the type described above. We will
not include a mortgage-backed security among the trust
assets with respect to any series of offered certificates
unless--
- the security has been registered under the
Securities Act of 1933, as amended, or
- we would be free to publicly resell the security
without registration.
See "Description of the Trust Assets--Mortgage-Backed
Securities."
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
We will describe the specific characteristics of the
mortgage assets underlying a series of offered certificates
in the related prospectus supplement.
In general, the aggregate outstanding principal balance of
the mortgage assets transferred by us to any particular
trust will equal or exceed the initial aggregate outstanding
principal balance of the related series of certificates. In
the event that the aggregate outstanding principal balance
of the related mortgage assets initially delivered by us to
the related trustee is less than the initial aggregate
outstanding principal balance of any series of certificates,
we may deposit or arrange for the deposit of cash or liquid
investments on an interim basis with the related trustee to
cover the shortfall. For 90 days following the date of
initial issuance of that series of certificates, we will be
entitled to obtain a release of the deposited cash or
investments if we deliver or arrange for delivery of a
corresponding amount of mortgage assets. If we fail,
however, to deliver mortgage assets sufficient to make up
the entire shortfall, any of the cash or, following
liquidation, investments remaining on deposit with the
related trustee will be used by the related trustee to pay
down the aggregate principal balance of the related series
of certificates, as described in the related prospectus
supplement.
SUBSTITUTION, ACQUISITION AND
REMOVAL OF MORTGAGE ASSETS...................... If so specified in the related prospectus supplement, we or
another specified person or entity may be permitted, at
our or its option, but subject to the conditions specified in
that prospectus supplement, to acquire from the related
trust particular mortgage assets underlying a series of
certificates in exchange for--
- cash that would be applied to pay down the
principal balances of certificates of that series,
and/or
- other mortgage loans or mortgage-backed securities
that (i) conform to the description of mortgage
assets in this prospectus and (ii) satisfy the
criteria set forth in the related prospectus
supplement.
In addition, if so specified in the related prospectus
supplement, the related trustee may be authorized or
required, to apply collections on the mortgage assets
underlying a series of offered certificates to acquire new
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mortgage loans or mortgage-backed securities that (i)
conform to the description of mortgage assets in this
prospectus and (ii) satisfy the criteria set forth in the
related prospectus supplement.
No such replacement of mortgage assets or acquisition of new
mortgage assets will be permitted if it would result in a
qualification, downgrade or withdrawal of the then-current
rating assigned by any rating agency to any class of
affected offered certificates.
CERTAIN CHARACTERISTICS OF
THE OFFERED CERTIFICATES........................ An offered certificate may entitle the holder to receive:
- a stated principal amount;
- interest on a principal balance or notional amount,
at a fixed, variable or adjustable pass-through rate;
- specified, fixed or variable portions of the interest,
principal or other amounts received on the related
mortgage assets;
- payments of principal, with disproportionate,
nominal or no payments of interest;
- payments of interest, with disproportionate,
nominal or no payments of principal;
- payments of interest or principal that commence only
as of a specified date or only after the occurrence
of certain events, such as the payment in full of
the interest and principal outstanding on one or
more other classes of certificates of the same
series;
- payments of principal to be made, from time to time
or for designated periods, at a rate that is faster
(and, in some cases, substantially faster) or slower
(and, in some cases, substantially slower) than the
rate at which payments or other collections of
principal are received on the related mortgage
assets;
- payments of principal to be made, subject to
available funds, based on a specified principal
payment schedule or other methodology; or
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- payments of all or part of the prepayment or
repayment premiums, fees and charges, equity
participations payments or other similar items
received on the related mortgage assets.
Any class of offered certificates may be senior or
subordinate to one or more other classes of certificates of
the same series, including a non-offered class of
certificates of that series, for purposes of some or all
payments and/or allocations of losses.
A class of offered certificates may have two or more
component parts, each having characteristics that are
otherwise described in this prospectus as being attributable
to separate and distinct classes.
We will describe the specific characteristics of each class
of offered certificates in the related prospectus
supplement. See "Description of the Certificates."
CREDIT SUPPORT AND REINVESTMENT,
INTEREST RATE AND CURRENCY
RELATED PROTECTION FOR
THE OFFERED CERTIFICATES........................ Some classes of offered certificates may be protected in
full or in part against certain defaults and losses on the
related mortgage assets through the subordination of one
or more other classes of certificates of the same series or
by other types of credit support. The other types of credit
support may include a letter of credit, a surety bond, an
insurance policy, a guarantee, a credit derivative or a
reserve fund. We will describe the credit support, if any,
for each class of offered certificates in the related
prospectus supplement.
The trust assets with respect to any series of offered
certificates may also include any of the following
agreements:
- guaranteed investment contracts pursuant to which
moneys held in the funds and accounts established
with respect to those offered certificates will be
invested at a specified rate;
- interest rate exchange agreements, interest rate cap
or floor agreements, or other agreements and
arrangements designed to reduce the effects of
interest rate fluctuations on the related mortgage
assets or on one or more classes of those offered
certificates; or
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- currency exchange agreements or other agreements and
arrangements designed to reduce the effects of
currency exchange rate fluctuations with respect to
the related mortgage assets and one or more classes
of those offered certificates.
We will describe the types of reinvestment, interest rate
and currency related protection, if any, for each class of
offered certificates in the related prospectus supplement.
See "Risk Factors," "Description of the Trust Assets" and
"Description of Credit Support."
ADVANCES WITH RESPECT
TO THE MORTGAGE ASSETS.......................... If the trust assets for a series of offered certificates include
mortgage loans, then, as and to the extent described in the
related prospectus supplement, the related master servicer,
the related special servicer, the related trustee, any related
provider of credit support and/or any other specified
person may be obligated to make, or may have the option
of making, certain advances with respect to those
mortgage loans to cover--
- delinquent scheduled payments of principal and/or
interest, other than balloon payments,
- property protection expenses,
- other servicing expenses, or
- any other items specified in the related prospectus
supplement.
Any party making advances will be entitled to reimbursement
from subsequent recoveries on the related mortgage loan and
as otherwise described in this prospectus or the related
prospectus supplement. That party may also be entitled to
receive interest on its advances for a specified period. See
"Description of the Certificates--Advances."
If the trust assets for a series of offered certificates
include mortgage-backed securities, we will describe in the
related prospectus supplement any comparable advancing
obligations in respect of those mortgage-backed securities
or the underlying mortgage loans.
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OPTIONAL TERMINATION................................. We will describe in the related prospectus supplement any
circumstances in which a specified party is permitted or
obligated to purchase or sell any of the mortgage assets
underlying a series of offered certificates. In particular,
a master servicer, special servicer or other designated
party may be permitted or obligated to purchase or sell--
- all the mortgage assets in any particular trust,
thereby resulting in a termination of the trust, or
- that portion of the mortgage assets in any
particular trust as is necessary or sufficient to
retire one or more classes of offered certificates
of the related series.
See "Description of the Certificates--Termination."
FEDERAL INCOME TAX CONSEQUENCES...................... Any class of offered certificates will constitute or
evidence ownership of:
- "regular interests" or "residual interests" in a
"real estate mortgage investment conduit" under
Sections 860A through 860G of the Internal Revenue
Code of 1986; or
- "regular interests" in a "financial asset
securitization investment trust" within the
meaning of Section 860L(a) of the Internal
Revenue Code of 1986; or
- interests in a grantor trust under Subpart E of Part
I of Subchapter J of the Internal Revenue Code of
1986.
See "Federal Income Tax Consequences."
ERISA CONSIDERATIONS................................. If you are a fiduciary of an employee benefit plan or other
retirement plan or arrangement, you should review with
your legal advisor whether the purchase or holding of
offered certificates could give rise to a transaction that is
prohibited or is not otherwise permissible under
applicable law. See "ERISA Considerations."
LEGAL INVESTMENT..................................... If your investment authority is subject to legal
restrictions, you should consult your legal advisor to
determine whether and to what extent the offered
certificates constitute a legal investment for you. We will
specify in the related prospectus supplement which
classes of the offered certificates will constitute
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"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984,
as amended. See "Legal Investment."
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RISK FACTORS
You should consider the following factors (as well as the factors set
forth under "Risk Factors" in the related prospectus supplement) in deciding
whether to purchase offered certificates.
LACK OF LIQUIDITY WILL IMPAIR YOUR ABILITY TO SELL YOUR CERTIFICATES AND MAY
HAVE AN ADVERSE EFFECT ON THE MARKET VALUE OF YOUR CERTIFICATES
The offered certificates may have limited or no liquidity. We cannot
assure you that a secondary market for your certificates will develop. There
will be no obligation on the part of anyone to establish a secondary market.
Even if a secondary market does develop for your certificates, it may provide
you with less liquidity than you anticipated and it may not continue for the
life of your certificates.
We will describe in the related prospectus supplement the information
that will be available to you with respect to your certificates. The limited
nature of such information may adversely affect the liquidity of your
certificates.
We do not currently intend to list the offered certificates on any
national securities exchange or the NASDAQ stock market.
Lack of liquidity will impair your ability to sell your certificates
and may prevent you from doing so at a time when you may want or need to. Lack
of liquidity could adversely affect the market value of your certificates. We do
not expect that you will have any redemption rights with respect to your
certificates.
If you decide to sell your certificates, you may have to sell them at a
discount from the price you paid for reasons unrelated to the performance of
your certificates or the related mortgage assets. Pricing information regarding
your certificates may not be generally available on an ongoing basis.
THE MARKET VALUE OF YOUR CERTIFICATES WILL BE SENSITIVE TO FACTORS UNRELATED TO
THE PERFORMANCE OF YOUR CERTIFICATES AND THE UNDERLYING MORTGAGE ASSETS
The market value of your certificates can decline even if those
certificates and the underlying mortgage assets are performing at or above your
expectations.
The market value of your certificates will be sensitive to fluctuations
in current interest rates. However, a change in the market value of your
certificates as a result of an upward or downward movement in current interest
rates may not equal the change in the market value of your certificates as a
result of an equal but opposite movement in interest rates.
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The market value of your certificates will also be influenced by the
supply of and demand for commercial mortgage-backed securities generally. The
supply of commercial mortgage-backed securities will depend on, among other
things, the amount of commercial and multifamily mortgage loans, whether newly
originated or held in portfolio, that are available for securitization. A number
of factors will affect investors' demand for commercial mortgage-backed
securities, including--
- the availability of alternative investments that offer higher
yields or are perceived as being a better credit risk, having
a less volatile market value or being more liquid,
- legal and other restrictions that prohibit a particular entity
from investing in commercial mortgage-backed securities or
limit the amount or types of commercial mortgage-backed
securities that it may acquire,
- investors' perceptions regarding the commercial and
multifamily real estate markets, which may be adversely
affected by, among other things, a decline in real estate
values or an increase in defaults and foreclosures on mortgage
loans secured by income-producing properties, and
- investors' perceptions regarding the capital markets in
general, which may be adversely affected by political, social
and economic events completely unrelated to the commercial and
multifamily real estate markets.
If you decide to sell your certificates, you may have to sell at
discount from the price you paid for reasons unrelated to the performance of
your certificates or the related mortgage assets. Pricing information regarding
your certificates may not be generally available on an ongoing basis.
PAYMENTS ON THE OFFERED CERTIFICATES WILL BE MADE SOLELY FROM THE LIMITED ASSETS
OF THE RELATED TRUST
The offered certificates do not represent obligations of any person or
entity and do not represent a claim against any assets other than those of the
related trust. No governmental agency or instrumentality will guarantee or
insure payment on the offered certificates. In addition, neither we nor our
affiliates are responsible for making payments on the offered certificates if
collections on the related trust assets are insufficient. If the related trust
assets are insufficient to make payments on your certificates, no other assets
will be available to you for payment of the deficiency, and you will bear the
resulting loss. Any advances made by a master servicer or other party with
respect to the mortgage assets underlying your certificates are intended solely
to provide liquidity and not credit support. The party making those advances
will have a right to reimbursement, probably with interest, which is senior to
your right to receive payment on your certificates.
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ANY CREDIT SUPPORT FOR YOUR CERTIFICATES MAY BE INSUFFICIENT TO PROTECT YOU
AGAINST ALL POTENTIAL LOSSES
THE AMOUNT OF CREDIT SUPPORT WILL BE LIMITED. The rating agencies that
assign ratings to your certificates will establish the amount of credit support,
if any, for your certificates based on, among other things, an assumed level of
defaults, delinquencies and losses with respect to the related mortgage assets.
Actual losses may, however, exceed the assumed levels. See "Description of the
Certificates--Allocation of Losses and Shortfalls" and "Description of Credit
Support." If actual losses on the related mortgage assets exceed the assumed
levels, you may be required to bear the additional losses.
CREDIT SUPPORT MAY NOT COVER ALL TYPES OF LOSSES. The credit support,
if any, for your certificates may not cover all of your potential losses. For
example, certain forms of credit support may not cover or may provide limited
protection against losses that you may suffer by reason of fraud or negligence
or as a result of certain uninsured casualties at the real properties securing
the underlying mortgage loans. You may be required to bear any losses which are
not covered by the credit support.
DISPROPORTIONATE BENEFITS TO CERTAIN CLASSES AND SERIES. If a form of
credit support covers multiple classes or series and losses exceed the amount of
such credit support, it is possible that the holders of offered certificates of
another series or class will be disproportionately benefited by such credit
support to your detriment.
THE INVESTMENT PERFORMANCE OF YOUR CERTIFICATES WILL DEPEND UPON PAYMENTS,
DEFAULTS AND LOSSES ON THE UNDERLYING MORTGAGE LOANS
THE TERMS OF THE UNDERLYING MORTGAGE LOANS WILL AFFECT PAYMENTS ON YOUR
CERTIFICATES. Each of the mortgage loans underlying the offered certificates
will specify the terms on which the related borrower must repay the outstanding
principal amount of the loan. The rate, timing and amount of scheduled payments
of principal may vary, and may vary significantly, from mortgage loan to
mortgage loan. The rate at which the underlying mortgage loans amortize will
directly affect the rate at which the principal balance or notional amount of
your certificates is paid down or otherwise reduced.
In addition, any mortgage loan underlying the offered certificates may
permit the related borrower during some or all of the loan term to prepay the
loan. In general, a borrower will be more likely to prepay its mortgage loan
when it has an economic incentive to do so, such as obtaining a larger loan on
the same underlying real property or a lower or otherwise more advantageous
interest rate through refinancing. If a mortgage loan includes some form of
prepayment restriction, the likelihood of prepayment should decline.
These restrictions may include--
- an absolute or partial prohibition against voluntary
prepayments during some or all of the loan term, or
- a requirement that voluntary prepayments be accompanied by
some form of prepayment premium, fee or charge during some or
all of the loan term.
In many cases, there will be no restriction associated with the application of
insurance proceeds or condemnation proceeds as a prepayment of principal.
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Notwithstanding the terms of the mortgage loans backing your
certificates, the amount, rate and timing of payments and other collections
thereon will, to some degree, be unpredictable because of borrower defaults and
because of casualties and condemnations with respect to the underlying real
properties.
The investment performance of your certificates may vary materially and
adversely from your expectations due to--
- the rate of prepayments and other unscheduled collections of
principal on the underlying mortgage loans being faster or
slower than you anticipated, or
- the rate of defaults on the underlying mortgage loans being
faster, or the severity of losses on the underlying mortgage
loans being greater, than you anticipated.
The actual yield to you, as a holder of an offered certificate, may not
equal the yield you anticipated at the time of your purchase, and the total
return on investment that you expected may not be realized. In deciding whether
to purchase any offered certificates, you should make an independent decision as
to the appropriate prepayment, default and loss assumptions to be used. If the
trust assets underlying your certificates include mortgage-backed securities,
the terms of those securities may soften or enhance the effects to you that may
result from prepayments, defaults and losses on the mortgage loans that
ultimately back those securities.
PREPAYMENTS ON THE UNDERLYING MORTGAGE LOANS WILL AFFECT THE AVERAGE
LIFE OF YOUR CERTIFICATES. Payments of principal and/or interest on your
certificates will depend upon, among other things, the rate and timing of
payments on the related mortgage assets. Prepayments on the underlying mortgage
loans may result in a faster rate of principal payments on your certificates,
thereby resulting in a shorter average life for your certificates than if those
prepayments had not occurred. The rate and timing of principal prepayments on
pools of mortgage loans varies among pools and is influenced by a variety of
economic, demographic, geographic, social, tax and legal factors. Accordingly,
neither you nor we can predict the rate and timing of principal prepayments on
the mortgage loans underlying your certificates. As a result, repayment of your
certificates could occur significantly earlier or later, and the average life of
your certificates could be significantly shorter or longer, than you expected.
The extent to which prepayments on the underlying mortgage loans
ultimately affect the average life of your certificates depends on the terms and
provisions of your certificates. A class of offered certificates may entitle the
holders to a PRO RATA share of any prepayments on the underlying mortgage loans,
to all or a disproportionately large share of those prepayments, or to none or a
disproportionately small share of those prepayments. If you are entitled to a
disproportionately large share of any prepayments on the underlying mortgage
loans, your certificates may be retired at an earlier date. If, however, you are
only entitled to a small share of the prepayments on the underlying mortgage
loans, the average life of your certificates may be extended. Your entitlement
to receive payments, including prepayments, of principal of the underlying
mortgage loans may--
- vary based on the occurrence of certain events, such as the
retirement of one or more other classes of certificates of the
same series, or
- be subject to certain contingencies, such as prepayment and
default rates with respect to the underlying mortgage loans.
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We will describe the terms and provisions of your certificates more
fully in the related prospectus supplement.
PREPAYMENTS ON THE UNDERLYING MORTGAGE LOANS WILL AFFECT THE YIELD ON
YOUR CERTIFICATES. If you purchase your certificates at a discount or premium,
the yield on your certificates will be sensitive to prepayments on the
underlying mortgage loans. If you purchase your certificates at a discount, you
should consider the risk that a slower than anticipated rate of principal
payments on the underlying mortgage loans could result in your actual yield
being lower than your anticipated yield. Alternatively, if you purchase your
certificates at a premium, you should consider the risk that a faster than
anticipated rate of principal payments on the underlying mortgage loans could
result in your actual yield being lower than your anticipated yield. The
potential effect that prepayments may have on the yield of your certificates
will increase as the discount deepens or the premium increases. If the amount of
interest payable on your certificates is disproportionately large, as compared
to the amount of principal payable on your certificates, you may fail to recover
your original investment under some prepayment scenarios.
DELINQUENCIES, DEFAULTS AND LOSSES ON THE UNDERLYING MORTGAGE LOANS MAY
AFFECT THE AMOUNT AND TIMING OF PAYMENTS ON YOUR CERTIFICATES. The rate and
timing of delinquencies and defaults, and the severity of losses, on the
underlying mortgage loans will impact the amount and timing of payments on a
series of offered certificates to the extent that their effects are not offset
by delinquency advances or some form of credit support.
Unless otherwise covered by delinquency advances or some form of credit
support, defaults on the underlying mortgage loans may delay payments on a
series of offered certificates while the defaulted mortgage loans are worked-out
or liquidated. However, liquidations of defaulted mortgage loans prior to
maturity could affect the yield and average life of an offered certificate in a
manner similar to a voluntary prepayment.
If you calculate your anticipated yield to maturity based on an assumed
rate of default and amount of losses on the underlying mortgage loans that is
lower than the default rate and amount of losses actually experienced, then, to
the extent that you are required to bear the additional losses, your actual
yield to maturity will be lower than you calculated and could, under certain
scenarios, be negative. Furthermore, the timing of losses on the underlying
mortgage loans can affect your yield. In general, the earlier you bear any loss
on an underlying mortgage loan, the greater the negative effect on your yield.
See "--Repayment of a Commercial or Multifamily Mortgage Loan Depends
Upon the Performance and Value of the Underlying Real Property and the Related
Borrower's Ability to Refinance the Property" below.
THERE IS AN INCREASED RISK OF DEFAULT ASSOCIATED WITH BALLOON PAYMENTS.
Any of the mortgage loans underlying your certificates may be nonamortizing or
only partially amortizing. The borrower under a mortgage loan of that type is
required to make substantial payments of principal and interest (that is,
balloon payments) on the maturity date of the loan. The ability of the borrower
to make a balloon payment depends upon the borrower's ability to refinance or
sell the real property securing the loan. The ability of the borrower to
refinance or sell the property will be affected by a number of factors,
including:
- the fair market value and condition of the underlying real
property;
- the level of interest rates;
- the borrower's equity in the underlying real property;
- the borrower's financial condition;
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- the operating history of the underlying real property;
- changes in zoning and tax laws;
- changes in competition in the relevant area;
- changes in rental rates in the relevant area;
- changes in governmental regulation and fiscal policy;
- prevailing general and regional economic conditions;
- the state of the fixed income and mortgage markets; and
- the availability of credit for multifamily rental or
commercial properties.
See "--Repayment of a Commercial or Multifamily Mortgage Loan Depends
Upon the Performance and Value of the Underlying Real Property and the Related
Borrower's Ability to Refinance the Property" below.
Neither we nor any of our affiliates will be obligated to refinance any
mortgage loan underlying your certificates.
The related master servicer or special servicer may (within prescribed
limits) extend and modify mortgage loans underlying your certificates that are
in default or as to which a payment default is imminent in order to maximize
recoveries on the defaulted loans. The related master servicer or special
servicer is only required to determine that any such extension or modification
is reasonably likely to produce a greater recovery than a liquidation of the
real property securing the defaulted loan. There is a risk that the decision of
the master servicer or special servicer to extend or modify a mortgage loan may
not in fact produce a greater recovery.
REPAYMENT OF A COMMERCIAL OR MULTIFAMILY MORTGAGE LOAN DEPENDS UPON THE
PERFORMANCE AND VALUE OF THE UNDERLYING REAL PROPERTY AND THE RELATED BORROWER'S
ABILITY TO REFINANCE THE PROPERTY
MOST OF THE MORTGAGE LOANS UNDERLYING YOUR CERTIFICATES WILL BE
NONRECOURSE. You should consider all of the mortgage loans underlying your
certificates to be nonrecourse loans. This means that, in the event of a
default, recourse will be limited to the related real property or properties
securing the defaulted mortgage loan. In those cases where recourse to a
borrower or guarantor is permitted by the loan documents, we generally will not
undertake any evaluation of the financial condition of such borrower or
guarantor. Consequently, full and timely payment on each mortgage loan
underlying your certificates will depend on one or more of the following:
- the sufficiency of the net operating income of the applicable
real property;
- the market value of the applicable real property at or prior
to maturity; and
- the ability of the related borrower to refinance or sell the
applicable real property.
In general, the value of a multifamily or commercial property will depend on its
ability to generate net operating income. The ability of an owner to finance a
multifamily or commercial property will depend, in large part, on the property's
value and ability to generate net operating income.
Unless we state otherwise in the related prospectus supplement, none of
the mortgage loans underlying your certificates will be insured or guaranteed by
any governmental entity or private mortgage insurer.
The risks associated with lending on multifamily and commercial
properties are inherently different from those associated with lending on the
security of single-family residential properties. This is because
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multifamily rental and commercial real estate lending involves larger loans and,
as described above, repayment is dependent upon the successful operation and
value of the related real estate project.
MANY RISK FACTORS ARE COMMON TO MOST OR ALL MULTIFAMILY AND COMMERCIAL
PROPERTIES. The following factors, among others, will affect the ability of a
multifamily or commercial property to generate net operating income and,
accordingly, its value:
- the age, design and construction quality of the property;
- perceptions regarding the safety, convenience and
attractiveness of the property;
- the characteristics of the neighborhood where the property is
located;
- the proximity and attractiveness of competing properties;
- the existence and construction of competing properties;
- the adequacy of the property's management and maintenance;
- national, regional or local economic conditions, including
plant closings, industry slowdowns and unemployment rates;
- local real estate conditions, including an increase in or
oversupply of comparable commercial or residential space;
- demographic factors;
- customer tastes and preferences;
- retroactive changes in building codes; and
- changes in governmental rules, regulations and fiscal
policies, including environmental
legislation.
Particular factors that may adversely affect the ability of a
multifamily or commercial property to generate net operating income include:
- an increase in interest rates, real estate taxes and other
operating expenses;
- an increase in the capital expenditures needed to maintain the
property or make improvements;
- a decline in the financial condition of a major tenant and, in
particular, a sole tenant or anchor tenant;
- an increase in vacancy rates;
- a decline in rental rates as leases are renewed or replaced;
and
- natural disasters and civil disturbances such as earthquakes,
hurricanes, floods, eruptions or riots.
The volatility of net operating income generated by a multifamily or
commercial property over time will be influenced by many of the foregoing
factors, as well as by:
- the length of tenant leases;
- the creditworthiness of tenants;
- the rental rates at which leases are renewed or replaced;
- the percentage of total property expenses in relation to
revenue;
- the ratio of fixed operating expenses to those that vary with
revenues; and
- the level of capital expenditures required to maintain the
property and to maintain or replace tenants.
Therefore, commercial and multifamily properties with short-term or less
creditworthy sources of revenue and/or relatively high operating costs, such as
those operated as hospitality and self-storage properties, can
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be expected to have more volatile cash flows than commercial and multifamily
properties with medium- to long-term leases from creditworthy tenants and/or
relatively low operating costs. A decline in the real estate market will tend to
have a more immediate effect on the net operating income of commercial and
multifamily properties with short-term revenue sources and may lead to higher
rates of delinquency or defaults on the mortgage loans secured by those
properties.
THE SUCCESSFUL OPERATION OF A MULTIFAMILY OR COMMERCIAL PROPERTY
DEPENDS ON TENANTS. Generally, multifamily and commercial properties are subject
to leases. The owner of a multifamily or commercial property typically uses
lease or rental payments for the following purposes:
- to pay for maintenance and other operating expenses associated
with the property;
- to fund repairs, replacements and capital improvements at the
property; and
- to service mortgage loans secured by, and any other debt
obligations associated with operating, the property.
Factors that may adversely affect the ability of a multifamily or
commercial property to generate net operating income from lease and rental
payments include:
- an increase in vacancy rates, which may result from tenants
deciding not to renew an existing lease or discontinuing
operations;
- an increase in tenant payment defaults;
- a decline in rental rates as leases are entered into, renewed
or extended at lower rates;
- an increase in the capital expenditures needed to maintain the
property or to make improvements; and
- a decline in the financial condition of a major or sole
tenant.
Various factors that will affect the operation and value of a
commercial property include:
- the business operated by the tenants;
- the creditworthiness of the tenants; and
- the number of tenants.
DEPENDENCE ON A SINGLE TENANT OR A SMALL NUMBER OF TENANTS MAKES A
PROPERTY RISKIER COLLATERAL. In those cases where an income-producing property
is leased to a single tenant or is primarily leased to one or a small number of
major tenants, a deterioration in the financial condition or a change in the
plan of operations of any such tenant can have particularly significant effects
on the net operating income generated by the property. If any such tenant
defaults under or fails to renew its lease, the resulting adverse financial
effect on the operation of the property will be substantially more severe than
would be the case with respect to a property occupied by a large number of less
significant tenants.
An income-producing property operated for retail, office or industrial
purposes also may be adversely affected by a decline in a particular business or
industry if a concentration of tenants at the property is engaged in that
business or industry.
TENANT BANKRUPTCY ADVERSELY AFFECTS PROPERTY PERFORMANCE. The
bankruptcy or insolvency of a major tenant, or a number of smaller tenants, at a
commercial property may adversely affect the income produced by the property.
Under the U.S. Bankruptcy Code, a tenant has the option of assuming or rejecting
any unexpired lease. If the tenant rejects the lease, the landlord's claim for
breach of the lease would be a
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general unsecured claim against the tenant unless there is collateral securing
the claim. The claim would be limited to:
(i) the unpaid rent reserved under the lease for the periods prior
to the bankruptcy petition or any earlier surrender of the
leased premises, plus
(ii) an amount, not to exceed three years' rent, equal to the
greater of one year's rent and 15% of the remaining reserved
rent.
THE SUCCESS OF AN INCOME-PRODUCING PROPERTY DEPENDS ON RELETTING VACANT
SPACES. The operations at an income-producing property will be adversely
affected if the owner or property manager is unable to renew leases or relet
space on comparable terms when existing leases expire and/or become defaulted.
Even if vacated space is successfully relet, the costs associated with
reletting, including tenant improvements and leasing commissions in the case of
income-producing properties operated for retail, office or industrial purposes,
can be substantial and could reduce cash flow from the income-producing
properties. Moreover, if a tenant at a income-producing property defaults in its
lease obligations, the landlord may incur substantial costs and experience
significant delays associated with enforcing its rights and protecting its
investment, including costs incurred in renovating and reletting the property.
If an income-producing property has multiple tenants, re-leasing
expenditures may be more frequent than in the case of a property with fewer
tenants, thereby reducing the cash flow generated by the multi-tenanted
property. Multi-tenanted properties may also experience higher continuing
vacancy rates and greater volatility in rental income and expenses.
PROPERTY VALUE MAY BE ADVERSELY AFFECTED EVEN WHEN CURRENT OPERATING
INCOME IS NOT. Various factors may affect the value of multifamily and
commercial properties without affecting their current net operating income,
including:
- changes in interest rates;
- the availability of refinancing sources;
- changes in governmental regulations, licensing or fiscal
policy;
- changes in zoning or tax laws; and
- potential environmental or other legal liabilities.
PROPERTY MANAGEMENT MAY AFFECT PROPERTY OPERATIONS AND VALUE. The
operation of an income-producing property will depend upon the property
manager's performance and viability. The property manager generally is
responsible for:
- responding to changes in the local market;
- planning and implementing the rental structure, including
staggering durations of leases and establishing levels of rent
payments;
- operating the property and providing building services;
- managing operating expenses; and
- ensuring that maintenance and capital improvements are carried
out in a timely fashion.
Income-producing properties that derive revenues primarily from
short-term rental commitments, such as hospitality or self-storage properties,
generally require more intensive management than properties leased to tenants
under long-term leases.
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By controlling costs, providing appropriate and efficient services to
tenants and maintaining improvements in good condition, a property manager can
maintain or improve occupancy rates, business and cash flow, reduce operating
and repair costs and preserve building value. On the other hand, management
errors can, in some cases, impair the long term viability of an income-producing
property.
MAINTAINING A PROPERTY IN GOOD CONDITION IS EXPENSIVE. The owner may be
required to expend a substantial amount to maintain, renovate or refurbish a
commercial or multifamily property. Failure to do so may materially impair the
property's ability to generate cash flow. The effects of poor construction
quality will increase over time in the form of increased maintenance and capital
improvements. Even superior construction will deteriorate over time if
management does not schedule and perform adequate maintenance in a timely
fashion. There can be no assurance that an income-producing property will
generate sufficient cash flow to cover the increased costs of maintenance and
capital improvements in addition to paying debt service on the mortgage loan(s)
that may encumber that property.
COMPETITION WILL ADVERSELY AFFECT THE PROFITABILITY AND VALUE OF AN
INCOME-PRODUCING PROPERTY. Some income-producing properties are located in
highly competitive areas. Comparable income-producing properties located in the
same area compete on the basis of a number of factors including:
- rental rates;
- location;
- type of business or services and amenities offered; and
- nature and condition of the particular property.
The profitability and value of an income-producing property may be
adversely affected by a comparable property that:
- offers lower rents;
- has lower operating costs;
- offers a more favorable location; or
- offers better facilities.
Costs of renovating, refurbishing or expanding an income-producing
property in order to remain competitive can be substantial.
VARIOUS TYPES OF INCOME-PRODUCING PROPERTIES MAY PRESENT SPECIAL RISKS.
The relative importance of any factor affecting the value or operation of an
income-producing property will depend on the type and use of the property. In
addition, the type and use of a particular income-producing property may present
special risks. For example--
- Health care-related facilities and casinos are subject to
significant governmental regulation of the ownership,
operation, maintenance and/or financing of such properties.
- Multifamily rental properties, manufactured housing
communities and mobile home parks may be subject to rent
control or rent stabilization laws and laws governing
landlord/tenant relationships.
- Hospitality and restaurant properties are often operated
pursuant to franchise, management or operating agreements,
which may be terminable by the franchisor or operator.
Moreover, the transferability of a hotel's or restaurant's
operating, liquor and other licenses upon a transfer of the
hotel or restaurant is subject to local law requirements.
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- Recreational and resort properties, properties that provide
entertainment services, hospitality properties, restaurants
and taverns, mini-warehouses and self-storage facilities tend
to be adversely affected more quickly by a general economic
downturn than other types of commercial properties.
- Marinas will be affected by various statutes and government
regulations that govern the use of, and construction on,
rivers, lakes and other waterways.
- Certain recreational and hospitality properties may have
seasonal fluctuations and/or may be adversely affected by
prolonged unfavorable weather conditions.
- Churches and other religious facilities may be highly
dependent on donations which are likely to decline as economic
conditions decline.
- Properties used as gas stations, automotive sales and service
centers, dry cleaners, warehouses and industrial facilities
may be more likely to have environmental issues.
Additionally, many types of commercial properties are not readily
convertible to alternative uses if the original use is not successful or may
require significant capital expenditures to effect any conversion to an
alternative use. As a result, the liquidation value of any of those types of
property would be substantially less than would otherwise be the case. See
"Description of the Trust Assets--Mortgage Loans--A Discussion of the Various
Types of Multifamily and Commercial Properties that may Secure Mortgage Loans
Underlying a Series of Offered Certificates."
BORROWER CONCENTRATION WITHIN A TRUST EXPOSES INVESTORS TO GREATER RISK OF
DEFAULT AND LOSS
A particular borrower or group of related borrowers may be associated
with multiple real properties securing the mortgage loans underlying a series of
offered certificates. The bankruptcy or insolvency of, or other financial
problems with respect to, that borrower or group of borrowers could have an
adverse effect on the operation of all of the related real properties and on the
ability of those properties to produce sufficient cash flow to make required
payments on the related mortgage loans. For example, if a borrower or group of
related borrowers that owns or controls several real properties experiences
financial difficulty at one of those properties, it could defer maintenance at
another of those properties in order to satisfy current expenses with respect to
the first property. That borrower or group of related borrowers could also
attempt to avert foreclosure by filing a bankruptcy petition that might have the
effect of interrupting debt service payments on all the related mortgage loans
for an indefinite period. In addition, multiple real properties owned by the
same borrower or related borrowers are likely to have common management. This
would increase the risk that financial or other difficulties experienced by the
property manager could have a greater impact on the owner of the related loans.
LOAN CONCENTRATION WITHIN A TRUST EXPOSES INVESTORS TO GREATER RISK OF DEFAULT
AND LOSS
Any of the mortgage assets in one of our trusts may be substantially
larger than the other assets in that trust. In general, the inclusion in a trust
of one or more mortgage assets that have outstanding principal balances that are
substantially larger than the other mortgage assets in the trust can result in
losses that are more severe, relative to the size of the related mortgage asset
pool, than would be the case if the aggregate balance of that pool were
distributed more evenly.
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GEOGRAPHIC CONCENTRATION WITHIN A TRUST EXPOSES INVESTORS TO GREATER RISK OF
DEFAULT AND LOSS
If a material concentration of mortgage loans underlying a series of
offered certificates is secured by real properties in a particular locale, state
or region, then the holders of those certificates will have a greater exposure
to:
- any adverse economic developments that occur in the locale,
state or region where the properties are located;
- changes in the real estate market where the properties are
located;
- changes in governmental rules and fiscal policies in the
governmental jurisdiction where the properties are located;
and
- acts of nature, including floods, tornadoes and earthquakes,
in the areas where properties are located.
CHANGES IN POOL COMPOSITION WILL CHANGE THE NATURE OF YOUR INVESTMENT
The mortgage loans underlying any series of offered certificates will
amortize at different rates and mature on different dates. In addition, some of
those mortgage loans may be prepaid or liquidated. As a result, the relative
composition of the related mortgage asset pool will change over time.
If you purchase certificates with a pass-through rate that is equal to
or calculated based upon a weighted average of interest rates on the underlying
mortgage loans, your pass-through rate will be affected, and may decline, as the
relative composition of the mortgage pool changes.
In addition, as payments and other collections of principal are
received with respect to the underlying mortgage loans, the remaining mortgage
pool backing your certificates may exhibit an increased concentration with
respect to property type, number and affiliation of borrowers and geographic
location.
ADJUSTABLE RATE MORTGAGE LOANS MAY ENTAIL GREATER RISKS OF DEFAULT TO LENDERS
THAN FIXED RATE MORTGAGE LOANS
Some or all of the mortgage loans underlying a series of offered
certificates may provide for adjustments to their respective mortgage interest
rates and corresponding adjustments to their respective periodic debt service
payments. As the periodic debt service payment for any of those mortgage loans
increases, the likelihood that cash flow from the underlying real property will
be insufficient to make that periodic debt service payment and pay operating
expenses also increases.
SUBORDINATE DEBT INCREASES THE LIKELIHOOD THAT A BORROWER WILL DEFAULT ON A
MORTGAGE LOAN UNDERLYING YOUR CERTIFICATES
Certain mortgage loans included in one of our trusts may either (i)
prohibit the related borrower from encumbering the related real property with
additional secured debt or (ii) require the consent of the holder of the
mortgage loan prior to so encumbering such property. However, a violation of
this prohibition may not become evident until the affected mortgage loan
otherwise defaults, and a lender, such as one of our trusts, may not
realistically be able to prevent a borrower from incurring subordinate debt.
The existence of any secured subordinated indebtedness increases the
difficulty of refinancing a mortgage loan at the loan's maturity. In addition,
the related borrower may have difficulty repaying multiple loans. Moreover, the
filing of a petition in bankruptcy by, or on behalf of, a junior lienholder may
stay the
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senior lienholder from taking action to foreclose out the junior lien. See
"Certain Legal Aspects of Mortgage Loans--Subordinate Financing."
BORROWER BANKRUPTCY PROCEEDINGS CAN DELAY AND IMPAIR RECOVERY ON A MORTGAGE LOAN
UNDERLYING YOUR CERTIFICATES
Under the U.S. Bankruptcy Code, the filing of a petition in bankruptcy
by or against a borrower will stay the sale of a real property owned by that
borrower, as well as the commencement or continuation of a foreclosure action.
In addition, if a court determines that the value of a real property is less
than the principal balance of the mortgage loan it secures, the court may reduce
the amount of secured indebtedness to the then-value of the property. Such an
action would make the lender a general unsecured creditor for the difference
between the then-value of the property and the amount of its outstanding
mortgage indebtedness. A bankruptcy court also may:
- grant a debtor a reasonable time to cure a payment default on
a mortgage loan;
- reduce monthly payments due under a mortgage loan;
- change the rate of interest due on a mortgage loan; or
- otherwise alter a mortgage loan's repayment schedule.
Additionally, the borrower, as debtor-in-possession, or its bankruptcy
trustee has certain special powers to avoid, subordinate or disallow debts. In
certain circumstances, the claims of a secured lender, such as one of our
trusts, may be subordinated to financing obtained by a debtor-in-possession
subsequent to its bankruptcy.
Under the U.S. Bankruptcy Code, a lender will be stayed from enforcing
a borrower's assignment of rents and leases. The U.S. Bankruptcy Code also may
interfere with a lender's ability to enforce lockbox requirements. The legal
proceedings necessary to resolve these issues can be time consuming and may
significantly delay the receipt of rents. Rents also may escape an assignment to
the extent they are used by borrower to maintain its property or for other court
authorized expenses.
As a result of the foregoing, the related trust's recovery with respect
to borrowers in bankruptcy proceedings may be significantly delayed, and the
aggregate amount ultimately collected may be substantially less than the amount
owed.
TAXES ON FORECLOSURE PROPERTY WILL REDUCE AMOUNTS AVAILABLE TO MAKE PAYMENTS ON
THE OFFERED CERTIFICATES
If one of our trusts is designated, in whole or in part, as a "real
estate mortgage investment conduit," and if that trust acquires a real property
pursuant to a foreclosure or deed in lieu of foreclosure, then the related
special servicer may be required to retain an independent contractor to operate
and manage the property. Any net income from that operation and management,
other than qualifying "rents from real property" within the meaning of Section
856(d) of the Internal Revenue Code of 1986, as well as any rental income based
on the net profits of a tenant or sub-tenant or allocable to a service that is
non-customary in the area and for the type of building involved, will subject
the trust to federal, and possibly state or local, tax on that income at the
highest marginal corporate tax rate. This would reduce the net proceeds
available for payment with respect to the related offered certificates.
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ENVIRONMENTAL LIABILITIES WILL ADVERSELY AFFECT THE VALUE AND OPERATION OF THE
CONTAMINATED PROPERTY AND MAY DETER A LENDER FROM FORECLOSING
There can be no assurance--
- as to the degree of environmental testing conducted at any of
the real properties securing the mortgage loans that back your
certificates;
- that the environmental testing conducted by or on behalf of
the applicable originators or any other parties in connection
with the origination of those mortgage loans or otherwise
identified all adverse environmental conditions and risks at
the related real properties;
- that the results of the environmental testing were accurately
evaluated in all cases;
- that the related borrowers have implemented or will implement
all operations and maintenance plans and other remedial
actions recommended by any environmental consultant that may
have conducted testing at the related real properties; or
- that the recommended action will fully remediate or otherwise
address all the identified adverse environmental conditions
and risks.
Environmental site assessments vary considerably in their content,
quality and cost. Even when adhering to good professional practices,
environmental consultants will sometimes not detect significant environmental
problems because to do an exhaustive environmental assessment would be far too
costly and time-consuming to be practical.
In addition, the current environmental condition of a real property
securing a mortgage loan underlying your certificates could be adversely
affected by tenants, such as gasoline stations or dry cleaners, or by the
conditions or operations in the vicinity of the properties, such as leaking
underground storage tanks at another property nearby.
Various environmental laws may make a current or previous owner or
operator of real property liable for the costs of removal or remediation of
hazardous or toxic substances on, under or adjacent to the property. Those laws
often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic substances. For example,
certain laws impose liability for release of asbestos containing materials into
the air or require the removal or containment of the materials. The owner's
liability for any required remediation generally is unlimited and could exceed
the value of the property and/or the aggregate assets of the owner. In addition,
the presence of hazardous or toxic substances, or the failure to remediate the
adverse environmental condition, may adversely affect the owner's or operator's
ability to use the affected property. In certain states, contamination of a
property may give rise to a lien on the property to ensure the costs of cleanup.
In some of those states, this lien has priority over the lien of an existing
mortgage, deed of trust or other security instrument. In addition, third parties
may seek recovery from owners or operators of real property for personal injury
associated with exposure to hazardous substances, including asbestos and
lead-based paint. Persons who arrange for the disposal or treatment of hazardous
or toxic substances may be liable for the costs of removal or remediation of the
substances at the disposal or treatment facility.
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The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, commonly referred to as "CERCLA," together
with certain other federal and state laws, provide that a secured lender, such
as one of our trusts, may be liable as an "owner" or "operator" of the real
property, regardless of whether the borrower or a previous owner caused the
environmental damage, if--
- agents or employees of the lender are deemed to have
participated in the management of the borrower, or
- under certain conditions, the lender actually takes possession
of a borrower's property or control of its day-to-day
operations, including through the appointment of a receiver or
foreclosure.
Although recently enacted legislation clarifies the activities in which a lender
may engage without becoming subject to liability under CERCLA and similar
federal laws, that legislation has no applicability to state environmental laws.
Moreover, future laws, ordinances or regulations could impose material
environmental liability.
Federal law requires owners of residential housing constructed prior to
1978 to disclose to potential residents or purchasers--
- any condition on the property that causes exposure to
lead-based paint, and
- the potential hazards to pregnant women and young children,
including that the ingestion of lead-based paint chips and/or
the inhalation of dust particles from lead-based paint by
children can cause permanent injury, even at low levels of
exposure.
Property owners may be liable for injuries to their tenants resulting from
exposure under various laws that impose affirmative obligations on property
owners of residential housing containing lead-based paint.
SOME PROVISIONS IN THE MORTGAGE LOANS UNDERLYING YOUR CERTIFICATES MAY BE
CHALLENGED AS BEING UNENFORCEABLE
CROSS-COLLATERALIZATION ARRANGEMENTS. It may be possible to challenge
cross-collateralization arrangements involving more than one borrower as a
fraudulent conveyance, even if the borrowers are related. If one of those
borrowers were to become a debtor in a bankruptcy case, creditors of the
bankrupt party or the representative of the bankruptcy estate of the bankrupt
party could seek to have the bankruptcy court avoid any lien granted by the
bankrupt party to secure repayment of another borrower's loan. In order to do
so, the court would have to determine that--
- the bankrupt party was insolvent at the time of granting the
lien, was rendered insolvent by the granting of the lien, was
left with inadequate capital, or was not able to pay its debts
as they matured; and
- the bankrupt party did not, when it allowed its property to be
encumbered by a lien securing the other borrower's loan,
receive fair consideration or reasonably equivalent value for
pledging its property for the equal benefit of the other
borrower.
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If the court were to conclude that the granting of the lien was an avoidable
fraudulent conveyance, it could nullify the lien or security instrument
effecting the cross-collateralization. The court could also allow the bankrupt
party to recover payments it made pursuant to the avoided
cross-collateralization.
PREPAYMENT PREMIUMS, FEES AND CHARGES. Under the laws of a number of
states, the enforceability of any mortgage loan provisions that require payment
of a prepayment premium, fee or charge upon an involuntary prepayment, is
unclear. If those provisions were unenforceable, borrowers would have an
incentive to default in order to prepay their loans.
DUE-ON-SALE AND DEBT ACCELERATION CLAUSES. Some or all of the mortgage
loans included in one of our trusts may contain a due-on-sale clause, which
permits the lender, with some exceptions, to accelerate the maturity of the
mortgage loan upon the sale, transfer or conveyance of (i) the related real
property or (ii) a majority ownership interest in the related borrower. We
anticipate that all of the mortgage loans included in one of our trusts will
contain some form of debt-acceleration clause, which permits the lender to
accelerate the debt upon specified monetary or non-monetary defaults by the
related borrower. The courts of all states will enforce acceleration clauses in
the event of a material payment default. The equity courts of any state,
however, may refuse to allow the foreclosure of a mortgage, deed of trust or
other security instrument or to permit the acceleration of the indebtedness if:
- the default is deemed to be immaterial,
- the exercise of such remedies would be inequitable or unjust,
or
- the circumstances would render the acceleration
unconscionable.
ASSIGNMENTS OF LEASES. Some or all of the mortgage loans included in
one of our trusts may be secured by, among other things, an assignment of leases
and rents. Pursuant to that document, the related borrower will assign its
right, title and interest as landlord under the leases on the related real
property and the income derived therefrom to the lender as further security for
the related mortgage loan, while retaining a license to collect rents for so
long as there is no default. In the event the borrower defaults, the license
terminates and the lender is entitled to collect rents. In some cases, those
assignments may not be perfected as security interests prior to actual
possession of the cash flow. Accordingly, state law may require that the lender
take possession of the property and obtain a judicial appointment of a receiver
before becoming entitled to collect the rents. In addition, the commencement of
bankruptcy or similar proceedings by or in respect of the borrower will
adversely affect the lender's ability to collect the rents. See "Certain Legal
Aspects of Mortgage Loans--Bankruptcy Laws."
DEFEASANCE. A mortgage loan underlying a series of offered certificates
may permit the related borrower, during specified periods and subject to certain
conditions, to pledge to the holder of the mortgage loan a specified amount of
direct, non-callable United States government securities and thereby obtain a
release of the related mortgaged property. The cash amount which a Borrower must
expend to purchase, or must deliver to a master servicer in order for the master
servicer to purchase, the required United States government securities may be in
excess of the principal balance of the mortgage loan. There can be no assurance
that a court would not interpret that excess amount as a form of prepayment
premium or would not take it into account for usury purposes. In some states,
some forms of prepayment premiums are unenforceable. If the payment of that
excess amount were held to be unenforceable, the remaining portion of the cash
amount to be delivered may be insufficient to purchase the requisite amount of
United States government securities.
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LACK OF INSURANCE COVERAGE EXPOSES A TRUST TO RISK FOR CERTAIN SPECIAL HAZARD
LOSSES
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of a property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in the
related policy. Most insurance policies typically do not cover any physical
damage resulting from:
- war,
- revolution,
- governmental actions,
- floods and other water-related causes,
- earth movement, including earthquakes, landslides and
mudflows,
- wet or dry rot,
- vermin,
- domestic animals, and
- certain other kinds of risks.
Unless the related mortgage loan documents specifically require the
borrower to insure against physical damage arising from such causes, then the
resulting losses may be borne by you as a holder of offered certificates.
GROUND LEASES CREATE RISKS FOR LENDERS THAT ARE NOT PRESENT WHEN LENDING ON AN
ACTUAL OWNERSHIP INTEREST IN A REAL PROPERTY
In order to secure a mortgage loan, a borrower may grant a lien on its
leasehold interest in a real property as tenant under a ground lease. If the
ground base does not provide for notice to a lender of a default thereunder on
the part of the borrower, together with a reasonable opportunity for the lender
to cure the default, the lender may be unable to prevent termination of the
lease and may lose its collateral.
In addition, upon the bankruptcy of a landlord or a tenant under a
ground lease, the debtor entity has the right to assume or reject the ground
lease. If a debtor landlord rejects the lease, the tenant has the right to
remain in possession of its leased premises at the rent reserved in the lease
for the term, including renewals. If a debtor tenant rejects any or all of its
leases, the tenant's lender may not be able to succeed to the tenant's position
under the lease unless the landlord has specifically granted the lender that
right. If both the landlord and the tenant are involved in bankruptcy
proceedings, the trustee for your certificates may be unable to enforce the
bankrupt tenant's obligation to refuse to treat as terminated a ground lease
rejected by a bankrupt landlord. In those circumstances, it is possible that the
trustee could be deprived of its security interest in the leasehold estate,
notwithstanding lender protection provisions contained in the lease or mortgage
loan documents.
CHANGES IN ZONING LAWS MAY ADVERSELY AFFECT THE USE OR VALUE OF A REAL PROPERTY
Due to changes in zoning requirements since the construction thereof,
an income-producing property may not comply with current zoning laws, including
density, use, parking and set back requirements. Accordingly, the property may
be a "permitted non-conforming structure" or the operation of the property may
be a "permitted non-conforming use." This means that the owner is not required
to alter the property's structure or use to comply with the new law, but the
owner may be limited in its ability to rebuild the premises "as is" in the event
of a substantial casualty loss. This may adversely affect the cash flow
available following the casualty. If a substantial casualty were to occur,
insurance proceeds may not be sufficient to
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pay a mortgage loan secured by the property in full. In addition, if the
property were repaired or restored in conformity with the current law, its value
or revenue-producing potential may be less than that which existed before the
casualty.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT OF 1990 MAY BE EXPENSIVE
Under the Americans with Disabilities Act of 1990, all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. If a property does not currently comply with
that Act, the owner thereof may be required to incur significant costs in order
to effect such compliance. This will reduce the amount of cash flow available to
cover other required maintenance and capital improvements and to pay debt
service on the mortgage loan(s) that may encumber that property. There can be no
assurance that the owner will have sufficient funds to cover the costs necessary
to comply with that Act. In addition, noncompliance could result in the
imposition of fines by the federal government or an award or damages to private
litigants.
LITIGATION MAY ADVERSELY AFFECT A BORROWER'S ABILITY TO REPAY ITS MORTGAGE LOAN
The owner of a multifamily or commercial property may be a defendant in
a litigation arising out of, among other things, the following:
- breach of contract involving a tenant, a supplier or other
party;
- negligence resulting in a personal injury, or
- responsibility for an environmental problem.
Litigation will divert the owner's attention from operating its
property. If the litigation were decided adversely to the owner, the award to
the plaintiff may adversely affect the owner's ability to repay a mortgage loan
secured by the property.
"RESIDUAL INTERESTS" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" HAVE ADVERSE
TAX CONSEQUENCES
INCLUSION OF TAXABLE INCOME IN EXCESS OF CASH RECEIVED. If you own a
certificate that is a "residual interest" in a "real estate mortgage investment
conduit," or "REMIC," you will have to report on your income tax return as
ordinary income your PRO RATA share of the taxable income of the REMIC,
regardless of the amount or timing of your possible receipt of any cash on the
certificate. As a result, your certificate may have "phantom income" early in
the term of the REMIC because the taxable income from the certificate may exceed
the amount of economic income, if any, attributable to the certificate. While
you will have a corresponding amount of tax losses later in the term of the
REMIC, the present value of the "phantom income" may significantly exceed the
present value of the tax losses. Therefore, the after-tax yield on any "residual
interest" certificate may be significantly less than that of a corporate bond or
other instrument having similar cash flow characteristics. In fact, certain
offered certificates which are "residual interests" may have a negative value.
You have to report your share of the taxable income and net loss of
the REMIC until all the certificates in the related series have a principal
balance of zero. See "Federal Income Tax Consequences--REMICs."
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SOME TAXABLE INCOME OF A "RESIDUAL INTEREST" CAN NOT BE OFFSET UNDER
THE INTERNAL REVENUE CODE OF 1986. A portion of the taxable income from a
"residual interest" certificate may be treated as "excess inclusions" under the
Internal Revenue Code of 1986. You will have to pay tax on the "excess
inclusions" regardless of whether you have other credits, deductions or losses.
In particular, the tax on "excess inclusion":
- generally will not be reduced by losses from other activities,
- for a tax-exempt holder, will be treated as unrelated business
taxable income, and
- for a foreign holder, will not qualify for any
exemption from withholding tax.
CERTAIN ENTITIES SHOULD NOT INVEST IN CERTIFICATES WHICH ARE "RESIDUAL
INTERESTS." The fees and non-interest expenses of a REMIC will be allocated PRO
RATA to certificates that are "residual interests" in the REMIC. However,
individuals will only be able to deduct these expenses as miscellaneous itemized
deductions, which are subject to numerous restrictions and limitations under the
Internal Revenue Code of 1986. Therefore, the certificates that are "residual
interests" generally are not appropriate investments for:
- individuals,
- estates,
- trusts beneficially owned by any individual or estate, and
- pass-through entities having any individual, estate or trust
as a shareholder, member or partner.
In addition, the "residual interest" certificates are subject to
numerous transfer restrictions. These restrictions reduce your ability to
liquidate a "residual interest" certificate. For example, unless we indicate
otherwise in the related prospectus supplement, you will not be able to transfer
a "residual interest" certificate to a foreign person under the Internal Revenue
Code of 1986.
See "Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Residual Certificates."
PROBLEMS WITH BOOK-ENTRY REGISTRATION
Your certificates may be issued in book-entry form through the
facilities of the Depository Trust Company. As a result--
- you will be able to exercise your rights as a
certificateholder only indirectly through the Depository Trust
Company and its participating organizations;
- you may have only limited access to information regarding your
certificates;
- you may suffer delays in the receipt of payments on your
certificates; and
- your ability to pledge or otherwise take action with respect
to your certificates may be limited due to the lack of a
physical certificate evidencing your ownership of those
certificates.
See "Description of the Certificates--Book-Entry Registration and
Definitive Certificates."
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POTENTIAL CONFLICTS OF INTEREST CAN AFFECT A PERSON'S PERFORMANCE
The master servicer or special servicer for one of our trusts, or any
of their respective affiliates, may purchase certificates evidencing interests
in that trust.
In addition, the master servicer or special servicer for one of our
trusts, or any of their respective affiliates, may have interests in, or other
financial relationships with, borrowers under the related mortgage loans.
In servicing the mortgage loans in any of our trusts, the related
master servicer and special servicer will each be required to observe the terms
of the governing document(s) for the related series of offered certificates and,
in particular, to act in accordance with the servicing standard described in the
related prospectus supplement. You should consider, however, that either of
these parties, if it or an affiliate owns certificates, or has financial
interests in or other financial dealings with any of the related borrowers, may
have interests when dealing with the mortgage loans underlying your certificates
that are in conflict with your interests. For example, if the related special
servicer owns any certificates, it could seek to mitigate the potential loss on
its certificates from a troubled mortgage loan by delaying enforcement in the
hope of realizing greater proceeds in the future. However, this action by a
special servicer could result a lower recovery to the related trust than would
have been the case if the special servicer had not delayed in taking enforcement
action.
Furthermore, the master servicer or special servicer for any of our
trusts may service existing and new loans for third parties, including
portfolios of loans similar to the mortgage loans included in that trust. The
properties securing these other loans may be in the same markets as and compete
with the properties securing mortgage loans in our trust. Accordingly, that
master servicer or special servicer may be acting on behalf of parties with
conflicting interests.
THE TRANSITION FROM THE YEAR 1999 TO THE YEAR 2000 MAY DISRUPT THE ABILITY OF
COMPUTERIZED SYSTEMS TO PROCESS INFORMATION.
The collection of payments on the mortgage assets backing your
certificates, the servicing and administration of those mortgage assets and the
payments on your certificates are highly dependent upon computer systems of the
related master servicer, manager, special servicer, trustee, borrowers and other
third parties.
We will inquire from each of the parties to the governing document(s)
for a series of offered certificates whether and how the transition from 1999 to
2000 has affected their computer systems. We also will obtain assurances from
these parties that they are taking the necessary steps to cure any problems
their computer systems may have with the manipulation or calculation of dates
after December 31, 1999. Notwithstanding those inquiries and assurances,
unforeseen problems in this regard could still occur.
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DESCRIPTION OF THE TRUST ASSETS
GENERAL
We will be responsible for establishing the trust underlying each
series of offered certificates. The assets of the trust will primarily consist
of:
- various types of multifamily and/or commercial mortgage loans;
- mortgage participations, pass-through certificates,
collateralized mortgage obligations or other mortgage-backed
securities that directly or indirectly evidence interests in,
or are secured by pledges of, one or more of various types of
multifamily and/or commercial mortgage loans; or
- a combination of mortgage loans and mortgage-backed securities
of the types described above.
We do not originate mortgage loans. Accordingly, we must acquire each
of the mortgage loans to be included in one of our trusts from the originator or
a subsequent assignee. In some cases, that originator or subsequent assignee
will be one of our affiliates.
Unless we indicate otherwise in the related prospectus supplement, we
will acquire, directly or through one of our affiliates, in the secondary
market, any mortgage-backed security to be included in one of our trusts.
Neither we nor any of our affiliates will guarantee any of the mortgage
assets included in one of our trusts. Furthermore, unless we indicate otherwise
in the related prospectus supplement, no governmental agency or instrumentality
will guarantee or insure any of those mortgage assets.
MORTGAGE LOANS
GENERAL. Each mortgage loan underlying the offered certificates will
constitute the obligation of one or more persons to repay a debt. That
obligation will be evidenced by a promissory note or bond. In addition, that
obligation will be secured by a mortgage, deed of trust or other security
instrument that creates a first or junior lien on, or security interest in, an
interest in one or more of the following types of real property:
- rental or cooperatively-owned buildings with multiple dwelling
units;
- retail properties related to the sale of consumer goods and
other products to the general public, such as shopping
centers, malls, factory outlet centers, automotive sales
centers, department stores and other retail stores, grocery
stores, specialty shops, convenience stores and gas stations;
- retail properties related to providing entertainment,
recreational and personal services to the general public, such
as movie theaters, fitness centers, bowling alleys, salons,
dry cleaners and automotive service centers;
- office properties;
- hospitality properties, such as hotels, motels and other
lodging facilities;
- casino properties;
- health care related properties, such as hospitals, skilled
nursing facilities, nursing homes, congregate care
facilities and, in some cases, assisted living centers and
senior housing;
- industrial properties;
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- warehouse facilities, mini-warehouse facilities and
self-storage facilities;
- restaurants, taverns and other establishments involved in the
food and beverage industry;
- manufactured housing communities, mobile home parks and
recreational vehicle parks;
- recreational and resort properties, such as recreational
vehicle parks, golf courses, marinas, ski resorts and
amusement parks;
- arenas and stadiums;
- churches and other religious facilities;
- parking lots and garages;
- mixed use properties;
- other income-producing properties; and
- unimproved land.
The real property interests that may be encumbered in order to secure a
mortgage loan underlying your certificates, include--
- a fee interest or estate, which consists of ownership of the
property for an indefinite period,
- an estate for years, which consists of ownership of the
property for a specified period of years,
- a leasehold interest or estate, which consists of a right to
occupy and use the property for a specified period of years,
subject to the terms and conditions of a lease,
- shares in a cooperative corporation which owns the property,
or
- any other real estate interest under applicable local law.
Any of these real property interests may be subject to deed restrictions,
easements, rights of way and other matters of public record with respect to the
related property. In addition, the use of, and improvements that may be
constructed on, any particular real property will, in most cases, be subject to
zoning laws and other legal restrictions.
Most, if not all, of the mortgage loans underlying a series of offered
certificates will be secured by liens on real properties located in the United
States, its territories and possessions. However, some of those mortgage loans
may be secured by liens on real properties located outside the United States,
its territories and possessions, provided that "foreign mortgage loans" do not
represent more than 10% of the related mortgage asset pool, by balance.
If we so indicate in the related prospectus supplement, one or more of
the mortgage loans underlying a series of offered certificates may be secured by
a junior lien on the related real property. However, the loan or loans secured
by the more senior liens on that property may not be included in the related
trust. The primary risk to the holder of a mortgage loan secured by a junior
lien on a real property is the possibility that the foreclosure proceeds
remaining after payment of the loans secured by more senior liens on that
property will be insufficient to pay the junior loan in full. In a foreclosure
proceeding, the sale proceeds are applied first to the payment of court costs
and fees in connection with the foreclosure, second to the payment of real
estate taxes, and third to the payment of all principal, interest, prepayment or
acceleration penalties, if any, and all other amounts owing to the holder of the
senior loans. The claims of the holders of the senior loans must be satisfied in
full before the holder of the junior loan receives any payments in respect of
the junior loan. If a lender forecloses on a junior loan, it does so subject to
any related senior loans.
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If we so indicate in the related prospectus supplement, the mortgage
loans underlying a series of offered certificates may be delinquent as of the
date the certificates are initially issued. In those cases, we will describe in
the related prospectus supplement the period of the delinquency, any forbearance
arrangement then in effect, the condition of the related real property and the
ability of the related real property to generate income to service the mortgage
debt. We will not, however, transfer any mortgage loan to a trust if we know
that the mortgage loan is, at the time of transfer, more than 90 days delinquent
in respect of any scheduled payment of principal or interest or in foreclosure.
A DISCUSSION OF THE VARIOUS TYPES OF MULTIFAMILY AND COMMERCIAL
PROPERTIES THAT MAY SECURE MORTGAGE LOANS UNDERLYING A SERIES OF OFFERED
CERTIFICATES. The mortgage loans underlying a series of offered certificates may
be secured by numerous types of multifamily and commercial properties. As we
discuss below under "--Mortgage Loans--Default and Loss Considerations with
Respect to Commercial and Multifamily Mortgage Loans," the adequacy of an
income-producing property as security for a mortgage loan depends in large part
on its value and ability to generate net operating income. Set forth below is a
discussion of some of the various factors that may affect the value and
operations of the indicated types of multifamily and commercial properties.
MULTIFAMILY RENTAL PROPERTIES. Factors affecting the value and
operation of a multifamily rental property include:
- the physical attributes of the property, such as its age,
appearance, amenities and construction quality;
- the types of services offered at the property;
- the location of the property;
- the characteristics of the surrounding neighborhood, which may
change over time;
- the rents charged for dwelling units at the property relative
to the rents charged for comparable units at competing
properties;
- the ability of management to provide adequate maintenance and
insurance;
- the property's reputation;
- the level of mortgage interest rates, which may encourage
tenants to purchase rather than lease housing;
- the existence or construction of competing or alternative
residential properties, including other apartment buildings
and complexes, manufactured housing communities, mobile home
parks and single-family housing;
- the ability of management to respond to competition;
- the tenant mix and whether the property is primarily occupied
by workers from a particular company or type of business,
personnel from a local military base or students;
- adverse local, regional or national economic conditions, which
may limit the amount that may be charged for rents and may
result in a reduction in timely rent payments or a reduction
in occupancy levels;
- state and local regulations, which may affect the property
owner's ability to increase rent to the market rent for an
equivalent apartment;
- the extent to which the property is subject to land use
restrictive covenants or contractual covenants that require
that units be rented to low income tenants;
- the extent to which the cost of operating the property,
including the cost of utilities and the cost of required
capital expenditures, may increase; and
- the extent to which increases in operating costs may be passed
through to tenants.
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Because units in a multifamily rental property are leased to
individuals, usually for no more than a year, the property is likely to respond
relatively quickly to a downturn in the local economy or to the closing of a
major employer in the area.
Certain states regulate the relationship of an owner and its tenants at
a multifamily rental property. Among other things, these states may--
- require written leases;
- require good cause for eviction;
- require disclosure of fees;
- prohibit unreasonable rules;
- prohibit retaliatory evictions;
- prohibit restrictions on a resident's choice of unit vendors;
- limit the bases on which a landlord may increase rent; or
- prohibit a landlord from terminating a tenancy solely by
reason of the sale of the owner's building.
Apartment building owners have been the subject of suits under state
"Unfair and Deceptive Practices Acts" and other general consumer protection
statutes for coercive, abusive or unconscionable leasing and sales practices.
Some counties and municipalities also impose rent control regulations
on apartment buildings. These regulations may limit rent increases to--
- fixed percentages,
- percentages of increases in the consumer price index,
- increases set or approved by a governmental agency, or
- increases determined through mediation or binding arbitration.
In many cases, the rent control laws do not provide for decontrol of
rental rates upon vacancy of individual units. Any limitations on a landlord's
ability to raise rents at a multifamily rental property may impair the
landlord's ability to repay a mortgage loan secured by the property or to meet
operating costs.
Some multifamily rental properties are subject to land use restrictive
covenants or contractual covenants in favor of federal or state housing
agencies. These covenants generally require that a minimum number or percentage
of units be rented to tenants who have incomes that are substantially lower than
median incomes in the area or region. These covenants may limit the potential
rental rates that may be charged at a multifamily rental property, the potential
tenant base for the property or both. An owner may subject a multifamily rental
property to these covenants in exchange for tax credits or rent subsidies. When
the credits or subsidies cease, net operating income will decline.
Some mortgage loans underlying the offered certificates will be secured
by the related borrower's interest in multiple units in a residential
condominium project and the related voting rights in the owners' association for
such project. Due to the nature of condominiums, a default on any of those
mortgage loans will not allow the related special servicer the same flexibility
in realizing on the real property collateral as is generally available with
respect to multifamily rental properties that are not condominiums. The rights
of other unit owners, the governing documents of the owners' association and the
state and local laws applicable to condominiums must be considered and
respected. Consequently, servicing and realizing upon
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the collateral for those mortgage loans could subject the related trust to
greater delay, expense and risk than a loan secured by a multifamily rental
property that is not a condominium.
COOPERATIVELY-OWNED APARTMENT BUILDINGS. Some multifamily properties
are owned or leased by cooperative corporations. In general, each shareholder in
the corporation is entitled to occupy a particular apartment unit pursuant to a
long-term proprietary lease or occupancy agreement.
A tenant/shareholder of a cooperative corporation must make a monthly
maintenance payment to the corporation. The monthly maintenance payment
represents a tenant/shareholder's PRO RATA share of the corporation's mortgage
loan payments, real property taxes, maintenance expenses and other capital and
ordinary expenses of the property. These monthly maintenance payments are in
addition to any payments of principal and interest the tenant/shareholder must
make on any loans of the tenant/shareholder secured by its shares in the
corporation.
A cooperative corporation is directly responsible for building
maintenance and payment of real estate taxes and hazard and liability insurance
premiums. A cooperative corporation's ability to meet debt service obligations
on a mortgage loan secured by, and to pay all other operating expenses of, the
cooperatively owned property depends primarily upon the receipt of--
- maintenance payments from the tenant/shareholders, and
- any rental income from units or commercial space that the
cooperative corporation might control.
A cooperative corporation may have to impose special assessments on the
tenant/shareholders in order to pay unanticipated expenditures. Accordingly, a
cooperative corporation is highly dependent on the financial well being of its
tenant/shareholders. A cooperative corporation's ability to pay the amount of
any balloon payment due at the maturity of a mortgage loan secured by the
cooperatively owned property depends primarily on its ability to refinance the
property.
In a typical cooperative conversion plan, the owner of a rental
apartment building contracts to sell the building to a newly formed cooperative
corporation. Shares are allocated to each apartment unit by the owner or
sponsor, and the current tenants have a certain period to subscribe at prices
discounted from the prices to be offered to the public after such period. As
part of the consideration for the sale, the owner or sponsor receives all the
unsold shares of the cooperative corporation. In general the sponsor controls
the corporation's board of directors and management for a limited period of
time. If the sponsor holds the shares allocated to a large number of apartment
units, the lender on a mortgage loan secured by a cooperatively owned property
may be adversely affected by a decline in the creditworthiness of the sponsor.
Many cooperative conversion plans are "non-eviction" plans. Under a
non-eviction plan, a tenant at the time of conversion who chooses not to
purchase shares is entitled to reside in the unit as a subtenant from the owner
of the shares allocated to such apartment unit. Any applicable rent control or
rent stabilization laws would continue to be applicable to such subtenancy. In
addition, the subtenant may be entitled to renew its lease for an indefinite
number of years with continued protection from rent increases above those
permitted by any applicable rent control and rent stabilization laws. The
owner/shareholder is responsible for the maintenance payments to the cooperative
corporation without regard to whether it receives rent from the subtenant or
whether the rent payments are lower than maintenance payments on the unit.
Newly-formed cooperative corporations typically have the greatest concentration
of non-tenant/shareholders.
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RETAIL PROPERTIES. The term "retail property" encompasses a broad range
of properties at which businesses sell consumer goods and other products and
provide various entertainment, recreational or personal services to the general
public. Some examples of retail properties include:
- shopping centers
- factory outlet centers
- malls
- automotive sales and service centers
- consumer oriented businesses
- department stores
- grocery stores
- convenience stores
- specialty shops
- gas stations
- movie theaters
- fitness centers
- bowling alleys
- salons
- dry cleaners
Unless owner occupied, retail properties generally derive all or a
substantial percentage of their income from lease payments from commercial
tenants. Therefore, it is important for the owner of a retail property to
attract and keep tenants, particularly significant tenants, that are able to
meet their lease obligations. In order to attract tenants, the owner of a retail
property may be required--
- to lower rents;
- to grant a potential tenant a "free rent" or reduced rent
period;
- to improve the condition of the property generally; or
- to make at its own expense, or grant a rent abatement to
cover, tenant improvements for a potential tenant.
A prospective tenant will also be interested in the number and type of
customers that it will be able to attract at a particular retail property. The
ability of a tenant at a particular retail property to attract customers will be
affected by a number of factors related to the property and the surrounding
area, including--
- competition from other retail properties;
- perceptions regarding the safety, convenience and
attractiveness of the property;
- perceptions regarding the safety of the surrounding area;
- demographics of the surrounding area;
- the strength and stability of the local, regional and
national economies;
- traffic patterns and access to major thoroughfares;
- the visibility of the property;
- availability of parking;
- the particular mixture of the goods and services offered at
the property;
- customer tastes, preferences and spending patterns; and
- the drawing power of other tenants.
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The success of a retail property is often dependent on the success of
its tenants' businesses. A significant component of the total rent paid by
tenants of retail properties is often tied to a percentage of gross sales or
revenues. Declines in sales or revenues of the tenants will likely cause a
corresponding decline in percentage rents and/or impair the tenants' ability to
pay their rent or other occupancy costs. A default by a tenant under its lease
could result in delays and costs in enforcing the landlord's rights. Retail
properties would be directly and adversely affected by a decline in the local
economy and reduced consumer spending.
Repayment of a mortgage loan secured by a retail property will be
affected by the expiration of space leases at the property and the ability of
the borrower to renew or relet the space on comparable terms. Even if vacant
space is successfully relet, the costs associated with reletting, including
tenant improvements, leasing commissions and free rent, may be substantial and
could reduce cash flow from a retail property.
The presence or absence of an anchor tenant in a multi-tenanted retail
property can be important. Anchor tenants play a key role in generating customer
traffic and making the center desirable for other tenants. An "anchor tenant"
is, in general, a retail tenant whose space is substantially larger in size than
that of other tenants at the same retail property and whose operation is vital
in attracting customers to the property. At some retail properties, the anchor
tenant owns the space it occupies. In those cases where the property owner does
not control the space occupied by the anchor tenant, the property owner may not
be able to take actions with respect to the space that it otherwise typically
would, such as granting concessions to retain an anchor tenant or removing an
ineffective anchor tenant. In some cases, an anchor tenant may cease to operate
at the property, thereby leaving its space unoccupied even though it continues
to own or pay rent on the vacant space. If an anchor tenant ceases operations at
a retail property, other tenants at the property may be entitled to terminate
their leases prior to the scheduled termination date or to pay rent at a reduced
rate for the remaining term of the lease.
Various factors will adversely affect the economic performance of an
"anchored" retail property, including:
- an anchor tenant's failure to renew its lease;
- termination of an anchor tenant's lease;
- the bankruptcy or economic decline of an anchor tenant or a
self-owned anchor;
- the cessation of the business of a self-owned anchor or of an
anchor tenant, notwithstanding its continued ownership of the
previously occupied space or its continued payment of rent,
as the case may be; or
- a loss of an anchor tenant's ability to attract shoppers.
Retail properties may also face competition from sources outside a
given real estate market or with lower operating costs. For example, all of the
following compete with more traditional department stores and specialty shops
for consumer dollars:
- factory outlet centers;
- discount shopping centers and clubs;
- catalogue retailers;
- television shopping networks and programs;
- internet web sites; and
- telemarketing.
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Similarly, home movie rentals and pay-per-view movies provide alternate sources
of entertainment to movie theaters. Continued growth of these alternative retail
outlets (which are often characterized by lower operating costs) and
entertainment sources could adversely affect the rents collectible at retail
properties.
Gas stations, automotive sales and service centers and dry cleaners
also pose unique environmental risks because of the nature of their businesses.
OFFICE PROPERTIES. Factors affecting the value and operation of an
office property include:
- the number and quality of the tenants, particularly
significant tenants, at the property;
- the physical attributes of the building in relation to
competing buildings;
- the location of the property with respect to the central
business district or population centers;
- demographic trends within the metropolitan area to move away
from or towards the central
business district;
- social trends combined with space management trends, which may
change towards options such as telecommuting or hoteling to
satisfy space needs;
- tax incentives offered to businesses or property owners by
cities or suburbs adjacent to or near where the building is
located;
- local competitive conditions, such as the supply of office
space or the existence or construction of new competitive
office buildings;
- the quality and philosophy of building management;
- access to mass transportation; and
- changes in zoning laws.
Office properties may be adversely affected by an economic decline in
the business operated by their tenants. The risk of such an economic decline is
increased if revenue is dependent on a single tenant or if there is a
significant concentration of tenants in a particular business or industry.
Office properties are also subject to competition with other office
properties in the same market. Competitive factors affecting an office property
include:
- rental rates;
- the building's age, condition and design, including floor
sizes and layout;
- access to public transportation and availability of parking;
and
- amenities offered to its tenants, including sophisticated
building systems, such as fiber optic
cables, satellite communications or other base building
technological features.
The cost of refitting office space for a new tenant is often higher
than for other property types.
The success of an office property also depends on the local economy.
Factors influencing a company's decision to locate in a given area include:
- the cost and quality of labor;
- tax incentives; and
- quality of life matters, such as schools and cultural
amenities.
The strength and stability of the local or regional economy will affect
an office property's ability to attract stable tenants on a consistent basis. A
central business district may have a substantially different economy from that
of a suburb.
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HOSPITALITY PROPERTIES. Hospitality properties may involve different
types of hotels and motels, including:
- full service hotels;
- resort hotels with many amenities;
- limited service hotels;
- hotels and motels associated with national or regional
franchise chains;
- hotels that are not affiliated with any franchise chain but
may have their own brand identity;
and
- other lodging facilities.
Factors affecting the economic performance of a hospitality property
include:
- the location of the property and its proximity to major
population centers or attractions;
- the seasonal nature of business at the property;
- the level of room rates relative to those charged by
competitors;
- quality and perception of the franchise affiliation;
- economic conditions, either local, regional or national,
which may limit the amount that can be charged for a room and
may result in a reduction in occupancy levels;
- the existence or construction of competing hospitality \
properties;
- nature and quality of the services and facilities;
- financial strength and capabilities of the owner and
operator;
- the need for continuing expenditures for modernizing,
refurbishing and maintaining existing facilities;
- increases in operating costs, which may not be offset by
increased room rates;
- the property's dependence on business and commercial
travelers and tourism; and
- changes in travel patterns caused by changes in access,
energy prices, labor strikes, relocation
of highways, the reconstruction of additional highways or
other factors.
Because limited service hotels and motels are relatively quick and
inexpensive to construct and may quickly reflect a positive value, an
over-building of these hotels and motels could occur in any given region, which
would likely adversely affect occupancy and daily room rates. Further, because
rooms at hospitality properties are generally rented for short periods of time,
hospitality properties tend to be more sensitive to adverse economic conditions
and competition than many other types of commercial properties. Additionally,
the revenues of certain hospitality properties, particularly those located in
regions whose economies depend upon tourism, may be highly seasonal in nature.
Hospitality properties may be operated pursuant to franchise
agreements. The continuation of a franchise is typically subject to specified
operating standards and other terms and conditions. The franchisor periodically
inspects its licensed properties to confirm adherence to its operating
standards. The failure of the hospitality property to maintain those standards
or adhere to those other terms and conditions could result in the loss or
cancellation of the franchise license. It is possible that the franchisor could
condition the continuation of a franchise license on the completion of capital
improvements or the making of certain capital expenditures that the owner of the
hospitality property determines are too expensive or are otherwise unwarranted
in light of the operating results or prospects of the property. In that event,
the owner of the hospitality property may elect to allow the franchise license
to lapse. In any case, if the franchise is terminated, the owner of the
hospitality property may seek to obtain a suitable replacement franchise or to
operate property independently of a franchise license. The loss of a franchise
license could have a material
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adverse effect upon the operations or value of the hospitality property because
of the loss of associated name recognition, marketing support and centralized
reservation systems provided by the franchisor.
The viability of any hospitality property that is a franchise of a
national or a regional hotel or motel chain is dependent upon:
- the continued existence and financial strength of the
franchisor;
- the public perception of the franchise service mark; and
- the duration of the franchise licensing agreement.
The transferability of franchise license agreements may be restricted.
The consent of the franchisor would be required for the continued use of the
franchise license by the hospitality property following a foreclosure.
Conversely, a lender may be unable to remove a franchisor that it desires to
replace following a foreclosure. Further, in the event of a foreclosure on a
hospitality property, the lender or other purchaser of the hospitality property
may not be entitled to the rights under any associated liquor license. That
party would be required to apply in its own right for a new liquor license.
There can be no assurance that a new license could be obtained or that it could
be obtained promptly.
CASINO PROPERTIES. Factors affecting the economic performance of a
casino property include:
- location, including proximity to or easy access from major
population centers;
- appearance;
- economic conditions, either local, regional or national,
which may limit the amount of disposable income that
potential patrons may have for gambling;
- the existence or construction of competing casinos;
- dependence on tourism; and
- local or state governmental regulation.
Competition among major casinos may involve attracting patrons by
providing alternate forms of entertainment, such as performers and sporting
events, and offering low-priced or free food and lodging. In addition, casino
owners may expend substantial sums to modernize, refurbish and maintain existing
facilities.
Because of their dependence on disposable income of patrons, casino
properties are likely to respond quickly to a downturn in the economy.
To avoid criminal influence, the ownership and operation of casino
properties is often subject to local or state governmental regulation. A
government agency or authority may have jurisdiction over or influence with
respect to the foreclosure of a casino property and/or the bankruptcy of its
owner or operator. In some jurisdictions, it may be necessary to receive
governmental approval before foreclosing, thereby resulting in substantial
delays to a lender. Gaming licenses are not transferable, including in
connection with a foreclosure. There can be no assurance that a lender or
another purchaser in foreclosure or otherwise will be able to obtain the
requisite approvals to continue operating the foreclosed property as a casino.
Any given state or municipality that currently allows legalized
gambling could pass legislation banning it.
The loss of a gaming license for any reason would have a material
adverse effect on the value of a casino property.
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HEALTH CARE-RELATED PROPERTIES. Health-care related properties include
- hospitals;
- skilled nursing facilities;
- nursing homes;
- congregate care facilities; and
- in some cases, assisted living centers and housing for
seniors.
Health care-related facilities, particularly nursing homes, may receive
a substantial portion of their revenues from government reimbursement programs,
primarily Medicaid and Medicare. Medicaid and Medicare are subject to
- statutory and regulatory changes;
- retroactive rate adjustments;
- administrative rulings;
- policy interpretations;
- delays by fiscal intermediaries; and
- government funding restrictions.
All of the foregoing can adversely affect revenues from the operation a health
care-related facility. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers. In
addition, there are currently under consideration various proposals for national
health care relief that could further limit these payments.
Providers of long-term nursing care and other medical services are
highly regulated by federal, state and local law. They are subject to numerous
factors which can increase the cost of operation, limit growth and, in extreme
cases, require or result in suspension or cessation of operations, including:
- federal and state licensing requirements;
- facility inspections;
- rate setting;
- reimbursement policies; and
- laws relating to the adequacy of medical care, distribution of
pharmaceuticals, use of equipment, personnel operating
policies and maintenance of and additions to facilities and
services.
Under applicable federal and state laws and regulations, Medicare and
Medicaid reimbursements generally may not be made to any person other than the
provider who actually furnished the related material goods and services.
Accordingly, in the event of foreclosure on a health care-related facility,
neither a lender nor other subsequent lessee or operator of the property would
generally be entitled to obtain from federal or state governments any
outstanding reimbursement payments relating to services furnished at the
property prior to such foreclosure. Furthermore, in the event of foreclosure,
there can be no assurance that a lender or other purchaser in a foreclosure sale
would be entitled to the rights under any required licenses and regulatory
approvals. The lender or other purchaser may have to apply in its own right for
such licenses and approvals. There can be no assurance that a new license could
be obtained or that a new approval would be granted.
Health care-related facilities are generally "special purpose"
properties that could not be readily converted to general residential, retail or
office use. This will adversely affect their liquidation value.
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Furthermore, transfers of health care-related facilities are subject to
regulatory approvals under state, and in some cases federal, law not required
for transfers of most other types of commercial properties.
INDUSTRIAL PROPERTIES. Industrial properties may be adversely affected
by reduced demand for industrial space occasioned by a decline in a particular
industry segment and/or by a general slowdown in the economy. In addition, an
industrial property that suited the particular needs of its original tenant may
be difficult to relet to another tenant or may become functionally obsolete
relative to newer properties.
The value and operation of an industrial property depends on:
- location of the property, the desirability of which in a
particular instance may depend on--
(i) availability of labor services,
(ii) proximity to supply sources and customers, and
(iii) accessability to various modes of transportation and
shipping, including railways, roadways, airline
terminals and ports;
- building design of the property, the desirability of which in
a particular instance may depend on--
(i) ceiling heights,
(ii) column spacing,
(iii) number and depth of loading bays,
(iv) divisibility,
(v) floor loading capacities,
(vi) truck turning radius,
(vii) overall functionality, and
(viii) adaptability of the property, because industrial
tenants often need space that is acceptable for
highly specialized activities; and
- the quality and creditworthiness of individual tenants,
because industrial properties frequently have higher tenant
concentrations.
Industrial properties are generally "special purpose" properties that
could not be readily converted to general residential, retail or office use.
This will adversely affect their liquidation value.
WAREHOUSE, MINI-WAREHOUSE AND SELF-STORAGE FACILITIES. Warehouse,
mini-warehouse and self-storage properties are considered vulnerable to
competition because both acquisition costs and break-even occupancy are
relatively low. In addition, it would require substantial capital expenditures
to convert a warehouse, mini-warehouse or self-storage property to an
alternative use. This will materially impair the liquidation value of the
property if its operation for storage purposes becomes unprofitable due to
decreased demand, competition, age of improvements or other factors.
Successful operation of a warehouse, mini-warehouse or self-store
property depends on--
- building design;
- location and visibility;
- tenant privacy;
- efficient access to the property;
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- proximity to potential users, including apartment complexes
or commercial users;
- services provided at the property, such as security;
- age and appearance of the improvements; and
- quality of management.
RESTAURANTS AND TAVERNS. Factors affecting the economic viability of
individual restaurants, taverns and other establishments that are part of the
food and beverage service industry include:
- competition from facilities having businesses similar to a
particular restaurant or tavern;
- perceptions by prospective customers of safety, convenience,
services and attractiveness;
- the cost, quality and availability of food and beverage
products;
- negative publicity, resulting from instances of food
contamination, food-borne illness and similar events;
- changes in demographics, consumer habits and traffic
patterns;
- the ability to provide or contract for capable management;
and
- retroactive changes to building codes, similar ordinances and
other legal requirements.
Adverse economic conditions, whether local, regional or national, may
limit the amount that may be charged for food and beverages and the extent to
which potential customers dine out. Because of the nature of the business,
restaurants and taverns tend to respond to adverse economic conditions more
quickly than do many other types of commercial properties. Furthermore, the
transferability of any operating, liquor and other licenses to an entity
acquiring a bar or restaurant, either through purchase or foreclosure, is
subject to local law requirements.
The food and beverage service industry is highly competitive. The
principal means of competition are--
- segment,
- product,
- price,
- value,
- quality,
- service,
- convenience,
- location, and
- the nature and condition of the restaurant facility.
A restaurant or tavern operator competes with the operators of
comparable establishments in the area in which its restaurant or tavern is
located. Other restaurants could have--
- lower operating costs,
- more favorable locations,
- more effective marketing,
- more efficient operations, or
- better facilities.
The location and condition of a particular restaurant or tavern will
affect the number of customers and, to a certain extent, the prices that may be
charged. The characteristics of an area or neighborhood in which a restaurant or
tavern is located may change over time or in relation to competing facilities.
Also, the cleanliness and maintenance at a restaurant or tavern will affect its
appeal to customers. In the case of
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a regionally- or nationally-known chain restaurant, there may be costly
expenditures for renovation, refurbishment or expansion, regardless of its
condition.
Factors affecting the success of a regionally- or nationally-known
chain restaurant include:
- actions and omissions of any franchisor, including management
practices that adversely affect the nature of the business or
that require renovation, refurbishment, expansion or other
expenditures;
- the degree of support provided or arranged by the franchisor,
including its franchisee organizations and third-party
providers of products or services; and
- the bankruptcy or business discontinuation of the franchisor
or any of its franchisee organizations or third-party
providers.
Chain restaurants may be operated under franchise agreements, and such
agreements typically do not contain provisions protective of lenders. A
borrower's rights as franchisee typically may be terminated without informing
the lender, and the borrower may be precluded from competing with the franchisor
upon such termination. In addition, a lender that acquires title to a restaurant
site through foreclosure or similar proceedings may be restricted in the use of
such site or may be unable to succeed to the rights of the franchisee under the
related franchise agreement. The transferability of a franchise may be subject
to other restrictions. Also, federal and state franchise regulations may impose
additional risk, including the risk that the transfer of a franchise acquired
through foreclosure or similar proceedings may require registration with
governmental authorities or disclosure to prospective transferees.
MANUFACTURED HOUSING COMMUNITIES, MOBILE HOME PARKS AND RECREATIONAL
VEHICLE PARKS. Manufactured housing communities and mobile home parks consist of
land that is divided into "spaces" or "home sites" that are primarily leased to
owners of the individual mobile homes or other housing units. The home owner
often invests in site-specific improvements such as carports, steps, fencing,
skirts around the base of the home, and landscaping. The land owner typically
provides private roads within the park, common facilities and, in many cases,
utilities. Due to relocation costs and, in some cases, demand for homesites, the
value of a mobile home or other housing unit in place in a manufactured housing
community or mobile home park is generally higher, and can be significantly
higher, than the value of the same unit not placed in a manufactured housing
community or mobile home park. As a result, a well-operated manufactured housing
community or mobile home park that has achieved stabilized occupancy is
typically able to maintain occupancy at or near that level. For the same reason,
a lender that provided financing for the home of a tenant who defaulted in his
or her space rent generally has an incentive to keep rental payments current
until the home can be resold in place, rather than to allow the unit to be
removed from the park. In general, the individual mobile homes and other housing
units will not constitute collateral for a mortgage loan underlying a series of
offered certificates.
Recreational vehicle parks lease spaces primarily or exclusively for
motor homes, travel trailers and portable truck campers, primarily designed for
recreational, camping or travel use. In general, parks that lease recreational
vehicle spaces can be viewed as having a less stable tenant population than
parks occupied predominantly by mobile homes. However, it is not unusual for the
owner of a recreational vehicle to leave the vehicle at the park on a year-round
basis or to use the vehicle as low cost housing and reside in the park
indefinitely.
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Factors affecting the successful operation of a manufactured housing
community, mobile home park or recreational vehicle park include:
- the number of comparable competing properties in the local
market;
- the age, appearance and reputation of the property;
- the quality of management; and
- the types of facilities and services it provides.
Manufactured housing communities and mobile home parks also compete
against alternative forms of residential housing, including multifamily rental
properties, cooperatively-owned apartment buildings, condominium complexes and
single-family residential developments. Recreational vehicle parks also compete
against alternative forms of recreation and short-term lodging, such as staying
at a hotel at the beach.
Manufactured housing communities, mobile home parks and recreational
vehicle parks are "special purpose" properties that could not be readily
converted to general residential, retail or office use. This will adversely
affect the liquidation value of the property if its operation as a manufactured
housing community, mobile home park or recreational vehicle park, as the case
may be, becomes unprofitable due to competition, age of the improvements or
other factors.
Certain states regulate the relationship of an owner of a manufactured
housing community or mobile home park and its tenants in a manner similar to the
way they regulate the relationship between a landlord and tenant at a
multifamily rental property. In addition, some states also regulate changes in
the use of a manufactured housing community or mobile home park and require that
the owner give written notice to its tenants a substantial period of time prior
to the projected change.
In addition to state regulation of the landlord-tenant relationship,
numerous counties and municipalities impose rent control on manufactured housing
communities and mobile home parks. These ordinances may limit rent increases to:
- fixed percentages,
- percentages of increases in the consumer price index,
- increases set or approved by a governmental agency, or
- increases determined through mediation or binding
arbitration.
In many cases, the rent control laws either do not permit vacancy decontrol or
permit vacancy decontrol only in the relatively rare event that the mobile home
or manufactured housing unit is removed from the homesite. Local authority to
impose rent control on manufactured housing communities and mobile home parks is
pre-empted by state law in certain states and rent control is not imposed at the
state level in those states. In some states, however, local rent control
ordinances are not pre-empted for tenants having short-term or month-to-month
leases, and properties there may be subject to various forms of rent control
with respect to those tenants.
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RECREATIONAL AND RESORT PROPERTIES. Any mortgage loan underlying a
series of offered certificates may be secured by a golf course, marina, ski
resort, amusement park or other property used for recreational purposes or as a
resort. Factors affecting the economic performance of a property of this type
include:
- the location and appearance of the property;
- the appeal of the recreational activities offered;
- the existence or construction of competing properties,
whether are not they offer the same activities;
- the need to make capital expenditures to maintain, refurbish,
improve and/or expand facilities in order to attract
potential patrons;
- geographic location and dependence on tourism;
- changes in travel patterns caused by changes in energy
prices, strikes, location of highways, construction of
additional highways and similar factors;
- seasonality of the business, which may cause periodic
fluctuations in operating revenues and
expenses;
- sensitivity to weather and climate changes; and
- local, regional and national economic conditions.
A marina or other recreational or resort property located next to water
will also be affected by various statutes and government regulations that govern
the use of, and construction on, rivers, lakes and other waterways.
Because of the nature of the business, recreational and resort
properties tend to respond to adverse economic conditions more quickly than do
many other types of commercial properties.
Recreational and resort properties are generally "special purpose"
properties that are not readily convertible to alternative uses. This will
adversely affect their liquidation value.
ARENAS AND STADIUMS. The success of an arena or stadium generally
depends on its ability to attract patrons to a variety of events, including:
- sporting events;
- musical events;
- theatrical events;
- animal shows; and/or
- circuses.
The ability to attract patrons is dependent on such factors as:
- the appeal of the particular event;
- the cost of admission;
- perceptions by prospective patrons of the safety,
convenience, services and attractiveness of the arena or
stadium;
- perceptions by prospective patrons of the safety of the
surrounding area; and
- the alternative forms of entertainment available in the
particular locale.
In some cases, an arena's or stadium's success will depend on its
ability to attract and keep a sporting team as a tenant. An arena or stadium may
become unprofitable, or unacceptable to such a tenant, due to
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decreased attendance, competition and age of improvements. Often, substantial
expenditures must be made to modernize, refurbish and/or maintain existing
facilities.
Arenas and stadiums are "special purpose" properties which cannot be
readily convertible to alternative uses. This will adversely affect their
liquidation value.
CHURCHES AND OTHER RELIGIOUS FACILITIES. Churches and other religious
facilities generally depend on charitable donations to meet expenses and pay for
maintenance and capital expenditures. The extent of such donations is dependent
on the attendance at any particular religious facility and the extent to which
attendees are prepared to make donations, which is influenced by a variety of
social, political and economic factors. Donations may be adversely affected by
economic conditions, whether local, regional or national. Religious facilities
are "special purpose" properties that are not readily convertible to alternative
uses. This will adversely affect their liquidation value.
PARKING LOTS AND GARAGES. The primary source of income for parking lots
and garages is the rental fees charged for parking spaces. Factors affecting the
success of a parking lot or garage include:
- the number of rentable parking spaces and rates charged;
- the location of the lot or garage and, in particular, its
proximity to places where large numbers of people work, shop
or live;
- the amount of alternative parking spaces in the area;
- the availability of mass transit; and
- the perceptions of the safety, convenience and services of
the lot or garage.
UNIMPROVED LAND. The value of unimproved land is largely a function of
its potential use. This may depend on--
- its location,
- its size,
- the surrounding neighborhood, and
- local zoning laws.
DEFAULT AND LOSS CONSIDERATIONS WITH RESPECT TO COMMERCIAL AND
MULTIFAMILY MORTGAGE LOANS. Mortgage loans secured by liens on income-producing
properties are substantially different from mortgage loans made on the security
of owner-occupied single-family homes. The repayment of a loan secured by a lien
on an income-producing property is typically dependent upon the successful
operation of the property and its ability to generate income sufficient to make
payments on the loan. This is particularly true because most or all of the
mortgage loans underlying the offered certificates will be nonrecourse loans.
The debt service coverage ratio of a multifamily or commercial mortgage
loan is an important measure of the likelihood of default on the loan. In
general, the "debt service coverage ratio" of a multifamily or commercial
mortgage loan at any given time is the ratio of--
(a) the amount of income derived or expected to be derived from
the related real property for a twelve-month period that is
available to pay debt service, to
(b) the annualized scheduled payments of principal and/or interest
on the mortgage loan and any other senior loans that are
secured by the related real property.
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The amount described in clause (a) of the preceding sentence is often a highly
subjective number based on a variety of assumptions regarding, and adjustments
to, revenues and expenses in respect of the related real property. We will
provide a more detailed discussion of its calculation in the related prospectus
supplement.
The cash flow generated by a multifamily or commercial property will
generally fluctuate over time and may or may not be sufficient to make the loan
payments on the related mortgage loan, cover operating expenses and fund capital
improvements at any given time. Operating revenues of a nonowner occupied,
income- producing property may be affected by the condition of the applicable
real estate market and/or area economy. Properties leased, occupied or used on a
short-term basis (such as certain health care-related facilities, hotels and
motels, recreational vehicle parks, and mini-warehouse and self-storage
facilities) tend to be affected more rapidly by changes in market or business
conditions than do properties typically leased for longer periods (such as
warehouses, retail stores, office buildings and industrial facilities).
Some commercial properties may be owner-occupied or leased to a small
number of tenants. Accordingly, the operating revenues may depend substantially
on the financial condition of the borrower or one or a few tenants. Mortgage
loans secured by liens on owner-occupied and single tenant properties may pose a
greater likelihood of default and loss than loans secured by liens on
multifamily properties or on multi-tenant commercial properties.
Increases in property operating expenses can increase the likelihood of
a borrower default on a multifamily or commercial mortgage loan secured by the
property. Increases in property operating expenses may result from:
- increases in energy costs and labor costs;
- increases in interest rates and real estate tax rates; and
- changes in governmental rules, regulations and fiscal
policies.
Some "net leases" of commercial properties may provide that the lessee,
rather than the borrower/landlord, is responsible for payment of operating
expenses. However, a net lease will result in stable net operating income to the
borrower/landlord only if the lessee is able to pay the increased operating
expense while also continuing to make rent payments.
Lenders also look to the loan-to-value ratio of a mortgage loan as a
factor in evaluating the likelihood of loss if a property is liquidated
following a default. In general, the "loan-to-value ratio" of a multifamily or
commercial mortgage loan at any given time is the ratio, expressed as a
percentage, of--
(a) the then outstanding principal balance of the mortgage loan
and any other senior loans that are secured by the related
real property, to
(b) the estimated value of the related real property based on an
appraisal, a cash flow analysis, a recent sales price or
another method or benchmark of valuation.
A low loan-to-value ratio means the borrower has a large amount of its
own equity in the multifamily or commercial property that secures its loan. In
these circumstances--
(x) the borrower has a greater incentive to perform under the
terms of the related mortgage loan in order to protect that
equity, and
(y) the lender has greater protection against loss on liquidation
following a borrower default.
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Loan-to-value ratios are not necessarily an accurate measure of the
likelihood of liquidation loss in a pool of multifamily and commercial mortgage
loans. For example, the value of a multifamily or commercial property as of the
date of initial issuance of a series of offered certificates may be less than
the estimated value determined at loan origination. The value of any real
property, in particular a multifamily or commercial property, will likely
fluctuate from time to time. Moreover, even a current appraisal is not
necessarily a reliable estimate of value. Appraised values of income-producing
properties are generally based on--
- the market comparison method, which takes into account the
recent resale value of comparable properties at the date of
the appraisal;
- the cost replacement method, which takes into account the
cost of replacing the property at such date;
- the income capitalization method, which takes into account
the property's projected net cash flow; or
- a selection from the values derived from the foregoing
methods.
Each of these appraisal methods presents analytical difficulties. For
example,
- it is often difficult to find truly comparable properties
that have recently been sold;
- the replacement cost of a property may have little to do with
its current market value; and
- income capitalization is inherently based on inexact
projections of income and expense and the selection of an
appropriate capitalization rate and discount rate.
If more than one appraisal method is used and significantly different results
are produced, an accurate determination of value and, correspondingly, a
reliable analysis of the likelihood of default and loss, is even more difficult.
The value of a multifamily or commercial property will be affected by
property performance. As a result, if a multifamily or commercial mortgage loan
defaults because the income generated by the related property is insufficient to
pay operating costs and expenses as well as debt service, then the value of the
property will decline and a liquidation loss may occur.
We believe that the foregoing considerations are important factors that
generally distinguish mortgage loans secured by liens on income-producing real
estate from single-family mortgage loans. However, the originators of the
mortgage loans underlying your certificates may not have considered all of those
factors for all or any of those loans.
See "Risk Factors--Repayment of a Commercial or Multifamily Mortgage
Loan Depends Upon the Performance and Value of the Underlying Real Property and
the Related Borrower's Ability to Refinance the Property."
PAYMENT PROVISIONS OF THE MORTGAGE LOANS. Each of the mortgage loans
included in one of our trusts will have the following features:
- an original term to maturity of not more than approximately
40 years; and
- scheduled payments of principal, interest or both, to be made
on specified dates, that occur monthly, bi-monthly,
quarterly, semi-annually, annually or at some other interval.
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A mortgage loan included in one of our trusts may also include terms
that:
- provide for the accrual of interest at a mortgage interest
rate that is fixed over its term, that resets on one or more
specified dates or that otherwise adjusts from time to time;
- provide for the accrual of interest at a mortgage interest
rate that may be converted at the borrower's election from an
adjustable to a fixed interest rate or from a fixed to an
adjustable interest rate;
- provide for no accrual of interest;
- provide for level payments to stated maturity, for payments
that reset in amount on one or more specified dates or for
payments that otherwise adjust from time to time to
accommodate changes in the coupon rate or to reflect the
occurrence of certain events;
- be fully amortizing or, alternatively, may be partially
amortizing or nonamortizing, with a substantial payment of
principal due on its stated maturity date;
- permit the negative amortization or deferral of accrued
interest;
- permit defeasance and the release of the real property
collateral in connection with that defeasance; and/or
- prohibit some or all voluntary prepayments or require payment
of a premium, fee or charge in connection with those
prepayments.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS. We will describe
in the related prospectus supplement the characteristics of the mortgage loans
that we will include in any of our trusts. In general, we will provide in the
related prospectus supplement, among other items, the following information on
the particular mortgage loans in one of our trusts:
- the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the
mortgage loans;
- the type or types of property that provide security for
repayment of the mortgage loans;
- the earliest and latest origination date and maturity date of
the mortgage loans;
- the original and remaining terms to maturity of the mortgage
loans, or the range thereof, and the weighted average original
and remaining terms to maturity of the mortgage loans;
- loan-to-value ratios of the mortgage loans either at
origination or as of a more recent date, or the range thereof,
and the weighted average of those loan-to-value ratios;
- the mortgage interest rates of the mortgage loans, or the
range thereof, and the weighted average mortgage interest rate
of the mortgage loans;
- if any mortgage loans have adjustable mortgage interest rates,
the index or indices upon which the adjustments are based, the
adjustment dates, the range of gross margins and the weighted
average gross margin, and any limits on mortgage interest rate
adjustments at the time of any adjustment and over the life of
the loan;
- information on the payment characteristics of the mortgage
loans, including applicable prepayment restrictions;
- debt service coverage ratios of the mortgage loans either at
origination or as of a more recent date, or the range thereof,
and the weighted average of those debt service coverage
ratios; and
- the geographic distribution of the properties securing the
mortgage loans on a state-by-state basis.
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If we are unable to provide the specific information described above at
the time a series of offered certificates is initially offered, we will
provide--
- more general information in the related prospectus supplement,
and
- specific information in a report which will be filed with the
SEC as part of a Current Report on Form 8-K within 15 days
following the issuance of the certificates.
If any mortgage loan, or group of related mortgage loans, included in
one of our trusts represents a material concentration of credit risk, we will
include in the related prospectus supplement financial statements or other
financial information on the related real property or properties.
MORTGAGE-BACKED SECURITIES
The mortgage backed-securities underlying a series of offered
certificates may include:
- mortgage participations, mortgage pass-through certificates,
collateralized mortgage obligations or other mortgage-backed
securities that are not insured or guaranteed by any
governmental agency or instrumentality, or
- certificates issued and/or insured or guaranteed by the
Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA"), the Governmental
National Mortgage Association ("GNMA"), the Federal
Agricultural Mortgage Corporation ("FAMC") or another federal
or state governmental agency or instrumentality.
In addition, each of those mortgage-backed securities will directly or
indirectly evidence an interest in, or be secured by a pledge of, multifamily
and/or commercial mortgage loans.
Each mortgage-backed security included in one of our trusts--
- will have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), or
- will be exempt from the registration requirements of the
Securities Act, or
- will have been held for at least the holding period specified
in Rule 144(k) under the
Securities Act, or
- may otherwise be resold by us publicly without registration
under the Securities Act.
We will describe in the related prospectus supplement the
characteristics of the mortgage-backed securities that we will include in any of
our trusts. In general, we will provide in the related prospectus supplement,
among other items, the following information on the particular mortgage-backed
securities included in one of our trusts:
- the initial and outstanding principal amount(s) and type of
the securities;
- the original and remaining term(s) to stated maturity of the
securities;
- the pass-through or bond rate(s) of the securities or the
formula for determining such rate(s);
- the payment characteristics of the securities;
- the identity of the issuer(s), servicer(s) and trustee(s) for
the securities;
- a description of the related credit support (if any);
- the type of mortgage loans underlying the securities;
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- the circumstances under which the related underlying mortgage
loans, or the securities themselves, may be purchased prior to
maturity;
- the terms and conditions for substituting mortgage loans
backing the securities; and
- the characteristics of any agreements or instruments providing
interest rate protection to the
securities.
With respect to any mortgage-backed security included in one of our
trusts, we will provide in our reports filed under the Exchange Act of 1934, as
amended (the "Exchange Act") the same information regarding the security as is
provided by the issuer of the security in its own reports filed under the
Exchange Act, if the security was publicly offered, or in the reports the issuer
of the security provides to the related trustee, if the security was privately
issued.
SUBSTITUTION, ACQUISITION AND REMOVAL OF MORTGAGE ASSETS
If so specified in the related prospectus supplement, we or another
specified person or entity may be permitted, at our or its option, but subject
to the conditions specified in that prospectus supplement, to acquire from the
related trust particular mortgage assets underlying a series of offered
certificates in exchange for--
- cash that would be applied to pay down the principal balances
of the certificates of that series, and/or
- other mortgage loans or mortgage-backed securities that (i)
conform to the description of mortgage assets in this
prospectus and (ii) satisfy the criteria set forth in the
related prospectus supplement.
In addition, if so specified in the related prospectus supplement, the
trustee may be authorized or required to apply collections on the related
mortgage assets to acquire new mortgage loans or mortgage-backed securities that
(i) conform to the description of mortgage assets in this prospectus, and (ii)
satisfy the criteria set forth in the related prospectus supplement.
No such replacement of mortgage assets or acquisition of new mortgage
assets will be permitted if it would result in a qualification, downgrade or
withdrawal of the then-current rating assigned by any rating agency to any class
of affected offered certificates.
UNDELIVERED MORTGAGE ASSETS
In general, the aggregate outstanding principal balance of the mortgage
assets transferred by us to any particular trust will equal or exceed the
initial aggregate outstanding principal balance of the related series of
certificates. In the event that the aggregate outstanding principal balance of
the related mortgage assets initially delivered by us to the related trustee is
less than the initial aggregate outstanding principal balance of any series of
certificates, we may deposit or arrange for the deposit of cash or liquid
investments on an interim basis with the related trustee to cover the shortfall.
For 90 days following the date of initial issuance of that series of
certificates, we will be entitled to obtain a release of the deposited cash or
investments if we deliver or arrange for delivery of a corresponding amount of
mortgage assets. If we fail, however, to deliver mortgage assets sufficient to
make up the entire shortfall, any of the cash or, following liquidation,
investments remaining on deposit with the related trustee will be used by the
related trustee to pay down the aggregate principal balance of the related
series of certificates, as described in the related prospectus supplement.
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ACCOUNTS
The trust assets underlying a series of offered certificates will
include one or more accounts established and maintained on behalf of the
holders. All payments and collections received or advanced on the mortgage
assets and other trust assets will be deposited and held in those accounts. We
will identify and describe those accounts, and will further describe the
deposits to and withdrawals from those accounts, in the related prospectus
supplement.
CREDIT SUPPORT
GENERAL. The holders of any class of offered certificates may be the
beneficiaries of credit support designed to protect them partially or fully
against all or particular defaults and losses on the related mortgage assets.
The types of credit support that may benefit the holders of a class of offered
certificates include:
- the subordination or one or more other classes of certificates
of the same series;
- a letter of credit;
- a surety bond;
- an insurance policy;
- a guarantee;
- a credit derivative; and/or
- a reserve fund.
In the related prospectus supplement, we will describe the amount and
types of any credit support benefiting the holders of a class of offered
certificates.
ARRANGEMENTS PROVIDING REINVESTMENT, INTEREST RATE AND CURRENCY RELATED
PROTECTION
The trust assets for a series of offered certificates may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for that series will be invested at a specified rate. Those
trust assets may also include:
- interest rate exchange agreements;
- interest rate cap agreements;
- interest rate floor agreements;
- currency exchange agreements; or
- other agreements or arrangements designed to reduce the
effects of interest rate or currency exchange rate
fluctuations with respect to the related mortgage assets a one
or more classes of offered certificates.
In the related prospectus supplement, we will describe any agreements
or other arrangements designed to protect the holders of a class of offered
certificates against shortfalls resulting from movements or fluctuations in
interest rates or currency exchange rates. If applicable, we will also identify
any obligor under the agreement or other arrangement.
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YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on your certificates will depend on--
- the price you paid for your certificates,
- the pass-through rate on your certificates,
- the amount and timing of payments on your certificates.
The following discussion contemplates a trust established by us that
consists only of mortgage loans. If one of our trusts also includes a
mortgage-backed security, the payment terms of that security will soften or
enhance the effects that the characteristics and behavior of mortgage loans
backing that security can have on the yield to maturity and/or weighted average
life of a class of offered certificates. If one of our trusts includes a
mortgage-backed security, we will discuss in the related prospectus supplement
the effect, if any, that the security may have on the yield to maturity and
weighted average lives of the related offered certificates.
PASS-THROUGH RATE
A class of interest-bearing offered certificates may have a fixed,
variable or adjustable pass-through rate. We will specify in the related
prospectus supplement the pass-through rate for each class of interest-bearing
offered certificates or, if the pass-through rate is variable or adjustable, the
method of determining the pass-through rate.
PAYMENT DELAYS
There will be a delay between the date on which payments on the
underlying mortgage loans are due and the date on which those payments are
passed through to you and other investors. That delay will reduce the yield that
would otherwise be produced if those payments were passed through on your
certificates on the same date that they were due.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity on your certificates will be affected by the rate
of principal payments on the underlying mortgage loans and the allocation of
those principal payments to reduce the principal balance or notional amount of
your certificates. The rate of principal payments on those mortgage loans will
be affected by the following:
- the amortization schedules of the mortgage loans, which may
change from time to time to reflect, among other things,
changes in mortgage interest rates or partial prepayments of
principal;
- the dates on which any balloon payments are due; and
- the rate of principal prepayments on the mortgage loans,
including voluntary prepayments by borrowers and involuntary
prepayments resulting from liquidations, casualties or
purchases of mortgage loans.
Because the rate of principal prepayments on the mortgage loans
underlying your certificates will depend on future events and a variety of
factors, we cannot give you any assurance as to that rate.
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The extent to which the yield to maturity of your certificates may vary
from your anticipated yield will depend upon--
- whether you purchased your certificates at a discount or
premium and, if so, the extent of that discount or premium,
and
- when, and to what degree, payments of principal on the
underlying mortgage loans are applied or otherwise result in
the reduction of the principal balance or notional amount of
your certificates.
If you purchase your certificates at a discount, you should consider
the risk that a slower than anticipated rate of principal payments on the
underlying mortgage loans could result in an actual yield to you that is lower
than your anticipated yield. If you purchase your certificates at a premium, you
should consider the risk that a faster than anticipated rate of principal
payments on the underlying mortgage loans could result in an actual yield to you
that is lower than your anticipated yield.
If your certificates entitle you to payments of interest, with
disproportionate, nominal or no payments of principal, you should consider that
your yield will be extremely sensitive to prepayments on the underlying mortgage
loans and, under some prepayment scenarios, may be negative.
If a class of offered certificates accrues interest on a notional
amount, that notional amount will, in general, either--
(a) be based on the principal balances of some or all of the
mortgage assets in the related trust, or
(b) equal the aggregate principal balance of one or more of the
other classes of certificates of the same series.
Accordingly, the yield on that class of certificates will be inversely
related to, as applicable, the rate at which payments and other collections of
principal are received on the mortgage assets referred to in clause (a) above or
payments are made in reduction of the aggregate principal balance of the class
or classes of certificates referred to in clause (b) above.
The extent of prepayments of principal of the mortgage loans underlying
your certificates may be affected by a number of factors, including:
- the availability of mortgage credit;
- the relative economic vitality of the area in which the
related real properties are located;
- the quality of management of the related real properties;
- the servicing of the mortgage loans;
- possible changes in tax laws; and
- other opportunities for investment.
In general, those factors that increase the attractiveness of selling or
refinancing a commercial or multifamily property, as well as those factors that
increase the likelihood of default under a commercial or multifamily mortgage
loan, would be expected to cause the rate of prepayment to accelerate. In
contrast, those factors having an opposite effect would be expected to cause the
rate of prepayment to slow.
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The rate of principal payments on the mortgage loans underlying your
certificates may also be affected by the existence and enforceability of
prepayment restrictions, such as prepayment lock-out periods and requirements
that voluntary principal prepayments be accompanied by prepayment premiums, fees
or charges. If enforceable, those provisions could constitute either an absolute
prohibition, in the case of a prepayment lock-out period, or a disincentive, in
the case of a prepayment premium, fee or charge, to a borrower's voluntarily
prepaying its mortgage loan, thereby slowing the rate of prepayments.
The rate of prepayment on a pool of mortgage loans is likely to be
affected by prevailing market interest rates for mortgage loans of a comparable
type, term and risk level. As prevailing market interest rates decline, a
borrower may have an increased incentive to refinance its mortgage loan. Even in
the case of adjustable rate mortgage loans, as prevailing market interest rates
decline, the related borrowers may have an increased incentive to refinance for
the following purposes:
- to convert to a fixed rate loan and thereby "lock in" that
rate, or
- to take advantage of a different index, margin or rate cap or
floor on another adjustable rate mortgage loan.
Subject to prevailing market interest rates and economic conditions
generally, a borrower may sell a real property in order to--
- realize its equity in the property,
- meet cash flow needs or
- make other investments.
Additionally, some borrowers may be motivated by federal and state tax laws,
which are subject to change, to sell their properties prior to the exhaustion of
tax depreciation benefits. We make no representation as to--
- the particular factors that will affect the prepayment of the
mortgage loans underlying any series of offered certificates,
- the relative importance of those factors
- the percentage of the principal balance of those mortgage
loans that will be paid as of any date, or
- the overall rate of prepayment on those mortgage loans.
WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the mortgage loans
underlying any series of offered certificates will affect the ultimate maturity
and the weighted average life of one or more classes of those certificates. In
general, weighted average life refers to the average amount of time that will
elapse from the date of issuance of an instrument until each dollar allocable as
principal of such instrument is repaid to the investor.
The weighted average life and maturity of a class of offered
certificates will be influenced by the rate at which principal on the underlying
mortgage loans is paid to that class, whether in the form of scheduled
amortization or prepayments, including voluntary prepayments by borrowers and
involuntary prepayments resulting from liquidations, casualties or condemnations
and purchases of mortgage loans out of the related trust.
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Prepayment rates on loans are commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model.
CPR represents an assumed constant rate of prepayment each month, expressed as
an annual percentage, relative to the then outstanding principal balance of a
pool of mortgage loans for the life of such loans. SPA represents an assumed
variable rate of prepayment each month, expressed as an annual percentage,
relative to the then outstanding principal balance of a pool of mortgage loans,
with different prepayment assumptions often expressed as percentages of SPA. For
example, a prepayment assumption of 100% of SPA assumes prepayment rates of 0.2%
per annum of the then outstanding principal balance of those loans in the first
month of the life of the loans and an additional 0.2% per annum in each month
thereafter until the 30th month. Beginning in the 30th month, and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption is a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical prepayment
experience for single-family mortgage loans. It is unlikely that the prepayment
experience of the mortgage loans underlying your certificates will conform to
any particular level of CPR or SPA.
In the prospectus supplement for a series of offered certificates, we
will include tables, if applicable, setting forth the projected weighted average
life of each class of those offered certificates with an aggregate principal
balance, and the percentage of the initial aggregate principal balance of each
such class that would be outstanding on specified dates, based on the
assumptions stated in that prospectus supplement, including assumptions
regarding prepayments on the underlying mortgage loans. Those tables and
assumptions illustrate the sensitivity of the weighted average lives of the
certificates to various assumed prepayment rates and are not intended to
predict, or to provide information that will enable you to predict, the actual
weighted average lives of your certificates.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITy
BALLOON PAYMENTS; EXTENSIONS OF MATURITY. Some or all of the mortgage
loans underlying a series of offered certificates may require that balloon
payments be made at maturity. The ability of a borrower to make a balloon
payment typically will depend upon its ability either (a) to refinance the loan,
or (b) to sell the related real property. If a borrower is unable to refinance
or sell the related real property, there is a possibility that the borrower may
default on the mortgage loan or that the maturity of the mortgage loan may be
extended in connection with a workout. If a borrower defaults, recovery of
proceeds may be delayed by (a) the bankruptcy of the borrower, or (b) adverse
economic conditions in the market where the related real property is located.
In order to minimize losses on defaulted mortgage loans, the related
master servicer or special servicer may be authorized within prescribed limits
to modify mortgage loans that are in default or as to which a payment default is
reasonably foreseeable. Any defaulted balloon payment or modification that
extends the maturity of a mortgage loan may delay payments of principal on your
certificates and extend the weighted average life of your certificates.
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NEGATIVE AMORTIZATION. The weighted average life of a class of offered
certificates can be affected by mortgage loans that permit negative amortization
to occur. Those are the mortgage loans that provide for the current payment of
interest calculated at a rate lower than the rate at which interest accrues on
the mortgage loan, with the unpaid portion of that interest being added to the
related principal balance. Negative amortization most commonly occurs in respect
of an adjustable rate mortgage loan that:
- limits the amount by which its scheduled payment may adjust in
response to a change in its mortgage interest rate;
- provides that its scheduled payment will adjust less
frequently than its mortgage interest rate; or
- provides for constant scheduled payments regardless of
adjustments to its mortgage interest rate.
Negative amortization on one or more mortgage loans in any of our
trusts may result in negative amortization on a related class of offered
certificates. We will describe in the related prospectus supplement, if
applicable, the manner in which negative amortization in respect of the
underlying mortgage loans is allocated among the respective classes of a series
of offered certificates.
The portion of any mortgage loan negative amortization allocated to a
class of offered certificates may result in a deferral of some or all of the
interest payable on those certificates. Deferred interest may be added to the
aggregate principal balance of a class of offered certificates. In addition, an
adjustable rate mortgage loan that permits negative amortization would be
expected during a period of increasing interest rates to amortize, if at all, at
a slower rate than if interest rates were declining or were remaining constant.
This slower rate of mortgage loan amortization would be reflected in a slower
rate of amortization for one or more classes of certificates of the related
series. Accordingly, there may be an increase in the weighted average lives of
those classes of certificates to which any mortgage loan negative amortization
would be allocated or that would bear the effects of a slower rate of
amortization of the underlying mortgage loans.
The extent to which the yield on your certificates may be affected by
any negative amortization on the underlying mortgage loans will depend, in part,
upon whether you purchase your certificates at a premium or a discount.
During a period of declining interest rates, the scheduled payment on
an adjustable rate mortgage loan may exceed the amount necessary to amortize the
loan fully over its remaining amortization schedule and pay interest at the then
applicable mortgage interest rate. The result is the accelerated amortization of
the mortgage loan. The acceleration in amortization of a mortgage loan will
shorten the weighted average lives of those classes of certificates that entitle
their holders to a portion of the principal payments on the mortgage loan.
FORECLOSURES AND PAYMENT PLANS. The weighted average life of and yield
on your certificates will be affected by--
- the number of foreclosures with respect to the underlying
mortgage loans; and
- the principal amount of the foreclosed mortgage loans in
relation to the principal amount of those mortgage loans that
are repaid in accordance with their terms.
Servicing decisions made with respect to the underlying mortgage loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of mortgage loans in bankruptcy
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proceedings or otherwise, may also affect the payment patterns of particular
mortgage loans and, as a result, the weighted average life of and yield on your
certificates.
LOSSES AND SHORTFALLS ON THE MORTGAGE ASSETS. The yield on your
certificates will directly depend on the extent to which you are required to
bear the effects of any losses or shortfalls in collections on the underlying
mortgage loans and the timing of those losses and shortfalls. In general, the
earlier that you bear any loss or shortfall, the greater will be the negative
effect on the yield of your certificates.
The amount of any losses or shortfalls in collections on the mortgage
assets in any of our trusts will, to the extent not covered or offset by draws
on any reserve fund or under any instrument of credit support, be allocated
among the various classes of certificates of the related series in the priority
and manner, and subject to the limitations, that we specify in the related
prospectus supplement. As described in the related prospectus supplement, those
allocations may be effected by the following:
- a reduction in the entitlements to interest and/or the
aggregate principal balances of one or more classes of
certificates; and/or
- the establishment of a priority of payments among classes of
certificates.
If you purchase subordinated certificates, the yield to maturity on
those certificates may be extremely sensitive to losses and shortfalls in
collections on the underlying mortgage loans.
ADDITIONAL CERTIFICATE AMORTIZATION. If your certificates have a
principal balance, then they entitle you to a specified portion of the principal
payments received on the underlying mortgage loans. They may also entitle you to
payments of principal from the following sources:
- amounts attributable to interest accrued but not currently
payable on one or more other classes of certificates of the
applicable series;
- interest received or advanced on the underlying mortgage
assets that is in excess of the interest currently accrued on
the certificates of the applicable series;
- prepayment premiums, fees and charges, payments from equity
participations or any other amounts received on the underlying
mortgage assets that do not constitute interest or principal;
or
- any other amounts described in the related prospectus
supplement.
The amortization of your certificates out of the sources described in
the prior paragraph would shorten their weighted average life and, if your
certificates were purchased at a premium, reduce their yield to maturity.
STRUCTURED ASSET SECURITIES CORPORATION
We were incorporated in Delaware on January 2, 1987. We were organized,
among other things, for the purposes of--
- acquiring mortgage loans, or interests therein, secured by
first or junior liens on commercial and multifamily real
properties;
- acquiring mortgage-backed securities that evidence interests
in mortgage loans that are secured by commercial and
multifamily real properties;
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- forming pools of mortgage loans and mortgage-backed
securities; and
- acting as depositor of one or more trusts formed to issue
bonds, certificates of interest or other evidences of
indebtedness that are secured by or represent interests in,
pools of mortgage loans and mortgage-backed securities.
Our principal executive offices are located at 200 Vesey Street, New York, New
York 10285. Our telephone number is (212) 526-7000. There can be no assurance
that at any particular time we will have any significant assets.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each series of offered certificates, together with any non-offered
certificates of the same series, will represent the entire beneficial ownership
interest in a trust established by us. Each series of offered certificates will
consist of one or more classes. Any non-offered certificates of that series will
likewise consist of one or more classes.
A "series" of certificates are all those certificates that--
- have the same series designation;
- were issued pursuant to the same governing documents; and
- represent beneficial ownership interests in the same trust.
A "class" of certificates are all those certificates of a particular
series that--
- have the same class designation; and
- have the same payment terms.
The respective classes of offered and non-offered certificates of any
series may have a variety of payment terms. An offered certificate may entitle
the holder to receive:
- a stated principal amount, which will be represented by its
principal balance;
- interest on a principal balance or notional amount, at a
fixed, variable or adjustable pass- through rate;
- specified, fixed or variable portions of the interest,
principal or other amounts received on the related mortgage
assets;
- payments of principal, with disproportionate, nominal or no
payments of interest;
- payments of interest, with disproportionate, nominal or no
payments of principal;
- payments of interest or principal that commence only as of a
specified date or only after the occurrence of certain events,
such as the payment in full of the interest and principal
outstanding on one or more other classes of certificates of
the same series;
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- payments of principal to be made, from time to time or for
designated periods, at a rate that is faster (and, in some
cases, substantially faster) or slower (and, in some cases,
substantially slower) than the rate at which payments or other
collections of principal are received on the related mortgage
assets;
- payments of principal to be made, subject to available funds,
based on a specified principal payment schedule or other
methodology; or
- payments of all or part of the prepayment or repayment
premiums, fees and charges, equity participations payments or
other similar items received on the related mortgage assets.
Any class of offered certificates may be senior or subordinate to one
or more other classes of certificates of the same series, including a
non-offered class of certificates of that series, for purposes of some or all
payments and/or allocations of losses or other shortfalls.
A class of offered certificates may have two or more component parts,
each having characteristics that are described in this prospectus as being
attributable to separate and distinct classes. For example, a class of offered
certificates may have an aggregate principal balance on which it accrues
interest at a fixed, variable or adjustable rate. That class of offered
certificates may also accrue interest on an aggregate notional amount at a
different fixed, variable or adjustable rate. In addition, a class of offered
certificates may accrue interest on one portion of its aggregate principal
balance or notional amount at one fixed, variable or adjustable rate and on
another portion of its aggregate principal balance or notional amount at a
different fixed, variable or adjustable rate.
Each class of offered certificates will be issued in minimum
denominations corresponding to specified principal balances, notional amounts or
percentage interests, as described in the related prospectus supplement. A class
of offered certificates may be issued in fully registered, definitive form and
evidenced by physical certificates or may be issued in book-entry form through
the facilities of The Depository Trust Company. Offered certificates held in
fully registered, definitive form may be transferred or exchanged, subject to
any restrictions on transfer described in the related prospectus supplement, at
the location specified in the related prospectus supplement, without the payment
of any service charges, except for any tax or other governmental charge payable
in connection with the transfer or exchange. Interests in offered certificates
held in book-entry form will be transferred on the book-entry records of DTC and
its participating organizations. If we so specify in the related prospectus
supplement, we will arrange for clearance and settlement through Clearstream
Banking, societe anonyme or the Euroclear System, for so long as they are
participants in DTC.
PAYMENTS ON THE CERTIFICATES
GENERAL. Payments on a series of offered certificates may occur
monthly, bi-monthly, quarterly, semi-annually, annually or at any other
specified interval. In the prospectus supplement for each series of offered
certificates, we will identify:
- the periodic payment date for that series, and
- the record date as of which certificateholders entitled to
payments on any particular payment date will be established.
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All payments with respect to a class of offered certificates on any
payment date will be allocated PRO RATA among the outstanding certificates of
that class in proportion to the respective principal balances, notional amounts
or percentage interests, as the case may be, of those certificates. Payments on
an offered certificate will be made to the holder entitled thereto either--
- by wire transfer of immediately available funds to the account
of that holder at a bank or similar entity, provided that the
holder has furnished the party making the payments with wiring
instructions no later than the applicable record date and has
satisfied any other conditions specified in the related
prospectus supplement, or
- by check mailed to the address of that holder as it appears in
the certificate register, in all other cases.
In general, the final payment on any offered certificate will be made
only upon presentation and surrender of that certificate at the location
specified to the holder in notice of final payment.
PAYMENTS OF INTEREST. In the case of each class of interest-bearing
offered certificates, interest will accrue from time to time, at the applicable
pass-through rate and in accordance with the applicable interest accrual method,
on the aggregate outstanding principal balance or notional amount of that class.
The pass-through rate for a class of interest-bearing offered
certificates may be fixed, variable or adjustable. We will specify in the
related prospectus supplement the pass-through rate for each class of
interest-bearing offered certificates or, in the case of a variable or
adjustable pass-through rate, the method for determining that pass-through rate.
Interest may accrue with respect to any offered certificate on the
basis of:
- a 360-day year consisting of 12 30-day months,
- the actual number of days elapsed during each relevant period
in a year assumed to consist of 360 days,
- the actual number of days elapsed during each relevant period
in a normal calendar year, or
- such other method identified in the related prospectus
supplement.
We will identify the interest accrual method for each class of offered
certificates in the related prospectus supplement.
Subject to available funds and any adjustments to interest entitlements
described in the related prospectus supplement, accrued interest in respect of
each class of interest-bearing offered certificates will normally be payable on
each payment date. However, in the case of some classes of interest-bearing
offered certificates, which we will refer to as "compound interest
certificates," payments of accrued interest will only begin on a particular
payment date or under the circumstances described in the related prospectus
supplement. Prior to that time, the amount of accrued interest otherwise payable
on that class will be added to its aggregate principal balance on each date or
otherwise deferred as described in the related prospectus supplement.
If a class of offered certificates accrues interest on an aggregate
notional amount, that aggregate notional amount, in general, will be either:
(a) based on the principal balances of some or all of the related
mortgage assets; or
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(b) equal to the aggregate principal balances of one or more other
classes of certificates of the same series.
Reference to the notional amount of any certificate is solely for convenience in
making certain calculations of interest and does not represent the right to
receive any payments of principal.
We will describe in the related prospectus supplement the extent to
which the amount of accrued interest that is payable on, or that may be added to
the aggregate principal balance of, a class of interest-bearing offered
certificates may be reduced as a result of any contingencies, including
shortfalls in interest collections due to prepayments, delinquencies, losses and
deferred interest on the related mortgage assets.
PAYMENTS OF PRINCIPAL. A class of offered certificates may or may not
have an aggregate principal balance. If it does, that aggregate principal
balance outstanding from time to time will represent the maximum amount that the
holders of that class will be entitled to receive as principal out of the future
cash flow on the related mortgage assets and the other related trust assets. The
aggregate outstanding principal balance of any class of offered certificates
will be reduced by--
- payments of principal actually made to the holders of that
class, and
- if and to the extent that we so specify in the related
prospectus supplement, losses of principal on the related
mortgage assets that are allocated to or are required to be
borne by that class.
If a class of offered certificates are compound interest certificates, then the
aggregate outstanding principal balance of that class may be increased by the
amount of any interest accrued, but not currently payable, on that class. We
will describe in the related prospectus supplement any other adjustments to the
aggregate outstanding principal balance of a class of offered certificates.
Unless we so state in the related prospectus supplement, the initial
aggregate principal balance of all classes of a series will not be greater than
the aggregate outstanding principal balance of the related mortgage assets
transferred by us to the related trust. We will specify the expected initial
aggregate principal balance of each class of offered certificates in the related
prospectus supplement.
The payments of principal to be made on a series of offered
certificates from time to time will, in general, be a function of the payments,
other collections and advances received or made with respect to the related
prospectus supplement. Payments of principal on a series of offered certificates
may also be made from the following sources:
- amounts attributable to interest accrued but not currently
payable on one or more other classes of certificates of the
applicable series;
- interest received or advanced on the underlying mortgage
assets that is in excess of the interest currently accrued on
the certificates of the applicable series;
- prepayment premiums, fees and charges, payments from equity
participations or any other amounts received on the underlying
mortgage assets that do not constitute interest or principal;
or
- any other amounts described in the related prospectus
supplement.
We will describe in the related prospectus supplement the principal
entitlement of each class of offered certificates on each payment date.
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ALLOCATION OF LOSSES AND SHORTFALLS
If and to the extent that any losses or shortfalls in collections on
the mortgage assets in any of our trusts are not covered or offset by
delinquency advances or draws on any reserve fund or under any instrument of
credit support, they will be allocated among the various classes of certificates
of the related series in the priority and manner, and subject to the
limitations, specified in the related prospectus supplement. As described in the
related prospectus supplement, the allocations may be effected as follows:
(i) by reducing the entitlements to interest and/or the aggregate
principal balances of one or more of those classes; and/or
(ii) by establishing a priority of payments among those classes.
See "Description of Credit Support."
ADVANCES
If any trust established by us includes mortgage loans, then as and to
the extent described in the related prospectus supplement, then, as and to the
extent described in the related prospectus supplement, the related master
servicer, the related special servicer, the related trustee, any related
provider of credit support and/or any other specified person may be obligated to
make, or may have the option of making, certain advances with respect to those
mortgage loans to cover--
- delinquent payments of principal and/or interest, other than
balloon payments,
- property protection expenses,
- other servicing expenses, or
- any other items specified in the related prospectus
supplement.
If there are any limitations with respect to a party's advancing
obligations, we will discuss those limitations in the related prospectus
supplement.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to certificateholders. Advances are not a guarantee
against losses. The advancing party will be entitled to recover all of its
advances out of subsequent recoveries on the related mortgage loans, including
amounts drawn under any fund or instrument constituting credit support, and out
of any other specific sources identified in the related prospectus supplement.
If and to the extent that we so specify in the related prospectus
supplement, any entity making advances will be entitled to receive interest on
some or all of those advances for a specified period during which they are
outstanding at the rate specified in that prospectus supplement. That entity may
be entitled to payment of interest on its outstanding advances periodically from
general collections on the mortgage assets in the related trust, prior to any
payment to the related series of certificateholders, or at such other times and
from such sources as we may describe in the related prospectus supplement.
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If any trust established by us includes mortgage-backed securities, we
will discuss in the related prospectus supplement any comparable advancing
obligations in respect of those securities or the mortgage loans that back them.
REPORTS TO CERTIFICATEHOLDERS
On or about each payment date, the related master servicer, manager or
trustee will forward to each offered certificateholder a statement substantially
in the form, or specifying the information, set forth in the related prospectus
supplement. In general, that statement will include information regarding
(i) the payments made on that payment date with respect to the applicable class
of offered certificates and (ii) the recent performance of the mortgage assets.
Within a reasonable period of time after the end of each calendar year,
the related master servicer, manager or trustee, as the case may be, will be
required to furnish to each person who at any time during the calendar year was
a holder of an offered certificate a statement containing information regarding
the principal, interest and other amounts paid on the applicable class of
offered certificates, aggregated for that calendar year or the applicable
portion thereof during which the person was a certificateholder. The obligation
to provide that annual statement will be deemed to have been satisfied by the
related master servicer, manager or trustee, as the case may be, to the extent
that substantially comparable information is provided pursuant to any
requirements of the Internal Revenue Code of 1986.
If one of our trusts includes mortgage-backed securities, the ability
of the related master servicer, manager or trustee, as the case may be, to
include in any payment date statement information regarding the mortgage loans
that back those securities will depend on comparable reports being received with
respect to them.
VOTING RIGHTS
Voting rights will be allocated among the respective classes of offered
and non-offered certificates of each series in the manner described in the
related prospectus supplement. Certificateholders will generally not have a
right to vote, except with respect to certain amendments to the governing
documents or as otherwise specified in this prospectus or in the related
prospectus supplement. See "Description of the Governing Documents--Amendment."
As and to the extent described in the related prospectus supplement,
the certificateholders entitled to a specified amount of the voting rights for a
particular series will have the right to act as a group to remove or replace the
related trustee, master servicer, special servicer or manager. In general, any
such removal or replacement must be for cause. We will identify exceptions in
the related prospectus supplement.
TERMINATION
The trust for each series of offered certificates will terminate and
cease to exist following:
- the final payment or other liquidation of the last mortgage
asset in that trust; and
- the payment, or provision for payment, to the
certificateholders of that series of all amounts required to
be paid to them.
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Written notice of termination of a trust will be given to each affected
certificateholder, and the final payment will be made only upon presentation and
surrender of the certificates of the related series at the location to be
specified in the notice of termination.
If we so specify in the related prospectus supplement, one or more
designated parties will be entitled to purchase all of the mortgage assets
underlying a series of offered certificates, thereby effecting early retirement
of the certificates and early termination of the related trust. We will describe
in the related prospectus supplement the circumstances under which that purchase
may occur.
In addition, if we so specify in the related prospectus supplement, on
a specified date or upon the reduction of the aggregate principal balance of a
specified class or classes of certificates by a specified percentage or amount,
a party designated in the related prospectus supplement may be authorized or
required to solicit bids for the purchase of all the mortgage assets of the
related trust or of a sufficient portion of the mortgage assets to retire that
class or those classes of certificates. The solicitation of bids must be
conducted in a commercially reasonable manner, and assets will, in general, be
sold at their fair market value. If the fair market value of the mortgage assets
being sold is less than their unpaid balance, then the certificateholders of one
or more classes of certificates may receive an amount less than the aggregate
certificate principal balance of, and accrued and unpaid interest on, their
certificates.
BOOK-ENTRY REGISTRATION
GENERAL. Any class of offered certificates may be issued in book-entry
form through the facilities of DTC. If so, that class will be represented by one
or more global certificates registered in the name of DTC or its nominee. If we
so specify in the related prospectus supplement, we will arrange for clearance
and settlement through the Euroclear System or Clearstream Banking, societe
anonyme, for so long they are participants in DTC.
DTC, EUROCLEAR AND CLEARSTREAM. DTC is:
- a limited-purpose trust company organized under the New York
Banking Law,
- a "banking corporation" within the meaning of the New York
Banking Law,
- a member of the Federal Reserve System,
- a "clearing corporation" within the meaning of the New York
Uniform Commercial Code,
and
- a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act.
DTC was created to hold securities for participants in the DTC system
and to facilitate the clearance and settlement of securities transactions
between those participants through electronic computerized book-entry changes in
their accounts, thereby eliminating the need for physical movement of securities
certificates. Organizations that maintain accounts with DTC include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include other organizations. DTC is owned by a number of its participating
organizations and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as banks, brokers, dealers
and trust companies that directly or indirectly clear through or maintain a
custodial relationship with one of the organizations that maintains an account
with DTC. The rules applicable to DTC and its participating organizations are on
file with the SEC.
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It is our understanding that Clearstream was incorporated in 1970 as
"Cedel S.A.," a company with limited liability under the laws of Luxembourg.
Cedel S.A. subsequently changed its name to Cedelbank. On January 10, 2000,
Cedelbank's parent company, Cedel International, societe anonyme merged its
clearing, settlement and custody business with that of Deutsche Borse Clearing
AG. The merger involved the transfer by Cedel International of substantially all
of its assets and liabilities, including its shares in Cedelbank, to a new
Luxembourg company, New Cedel International, societe anonyme. New Cedel
International is 50% owned by Cedel International and 50% by Deutsche Borse AG,
the parent of Deutsche Borse Clearing AG. The shareholders of these two entities
are recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. On January 18, 2000, Cedelbank was renamed
Clearstream Banking, societe anonyme. Clearstream holds securities for its
member organizations and facilitates the clearance and settlement of securities
transactions between its member organizations through electronic book-entry
changes in accounts of those organizations, thereby eliminating the need for
physical movement of certificates. Transactions may be settled in Clearstream in
any of 36 currencies, including United States dollars. Clearstream provides to
its member organizations, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream interfaces with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream is registered as a bank in Luxembourg, and
as such is subject to regulation by the Commission de Surveillance du Secteur
Financier, which supervises Luxembourg banks. Clearstream's customers are
world-wide financial institutions including underwriters, securities brokers and
dealers, banks, trust companies and clearing corporations. Clearstream's U.S.
customers are limited to securities brokers and dealers, and banks. Currently,
Clearstream has approximately 2,000 customers located in over 80 countries,
including all major European countries, Canada and the United States. Indirect
access to Clearstream is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream.
Clearstream and Euroclear have established an electronic bridge between their
two systems across which their respective participants may settle trades with
each other.
It is our understanding that Euroclear was founded in December 1968 to
hold securities for its member organizations and to clear and settle
transactions between its member organizations through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Over 100,000 different securities are accepted for
settlement through Euroclear, the majority of which are domestic securities from
over 30 markets. Transactions may be settled in Euroclear in any of over 35
currencies, including United States dollars. The Euroclear system includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described below. Euroclear is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium office
(the "Euroclear Operator"), under contract with Euroclear Clearance System,
S.C., a Belgian cooperative corporation ("ECS"). All operations are conducted by
the Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not ECS. ECS
establishes policy for the Euroclear system on behalf of the more than 120
member organizations of Euroclear. Those member organizations include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to the Euroclear system is also
available to other firms that clear through or maintain a custodial relationship
with a member organization of Euroclear, either directly or indirectly.
Euroclear and Clearstream have established an electronic bridge between their
two systems across which their respective participants may settle trades with
each other.
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The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Euroclear Terms and Conditions"). The Euroclear Terms
and Conditions govern transfers of securities and cash within the Euroclear
system, withdrawal of securities and cash from the Euroclear system, and
receipts of payments with respect to securities in the Euroclear system. All
securities in the Euroclear system are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Euroclear Terms and Conditions only on
behalf of member organizations of Euroclear and has no record of or relationship
with persons holding through those member organizations.
The information in this prospectus concerning DTC, Euroclear and
Clearstream, and their book-entry systems, has been obtained from sources
believed to be reliable, but we do not take any responsibility for the accuracy
or completeness thereof.
HOLDING AND TRANSFERRING BOOK-ENTRY CERTIFICATES. Purchases of
book-entry certificates under the DTC system must be made by or through, and
will be recorded on the records of, the brokerage firm, bank, thrift institution
or other financial intermediary (each, a "Financial Intermediary") that
maintains the beneficial owner's account for that purpose. In turn, the
Financial Intermediary's ownership of those certificates will be recorded on the
records of DTC or, alternatively, if the Financial Intermediary does not
maintain an account with DTC, on the records of a participating firm that acts
as agent for the Financial Intermediary, whose interest will in turn be recorded
on the records of DTC. A beneficial owner of book-entry certificates must rely
on the foregoing procedures to evidence its beneficial ownership of those
certificates. DTC has no knowledge of the actual beneficial owners of the
book-entry certificates. DTC's records reflect only the identity of the direct
participants to whose accounts those certificates are credited, which may or may
not be the actual beneficial owners. The participants in the DTC system will
remain responsible for keeping account of their holdings on behalf of their
customers.
Transfers between participants in the DTC system will be effected in
the ordinary manner in accordance with DTC's rules and will be settled in
same-day funds. Transfers between direct account holders at Euroclear and
Clearstream, or between persons or entities participating indirectly in
Euroclear or Clearstream, will be effected in the ordinary manner in accordance
with their respective procedures and in accordance with DTC's rules.
Cross-market transfers between direct participants in DTC, on the one
hand, and member organizations at Euroclear or Clearstream, on the other, will
be effected through DTC in accordance with DTC's rules and the rules of
Euroclear or Clearstream, as applicable. Such cross-market transactions will
require, among other things, delivery of instructions by the applicable member
organization to Euroclear or Clearstream, as the case may be, in accordance with
the rules and procedures and within deadlines (Brussels time) established in
Euroclear or Clearstream, as the case may be. If the transaction complies with
all relevant requirements, Euroclear or Clearstream, as the case may be, will
then deliver instructions to its depositary to take action to effect final
settlement on its behalf.
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Because of time-zone differences, the securities account of a member
organization of Euroclear or Clearstream purchasing an interest in a global
certificate from a DTC participant that is not such a member organization, will
be credited during the securities settlement processing day (which must be a
business day for Euroclear or Clearstream, as the case may be) immediately
following the DTC settlement date. Transactions in interests in a book-entry
certificate settled during any securities settlement processing day will be
reported to the relevant member organization of Euroclear or Clearstream on the
same day. Cash received in Euroclear or Clearstream as a result of sales of
interests in a book-entry certificate by or through a member organization
thereof to a DTC participant that is not such a member organization will be
received with value on the DTC settlement date, but will not be available in the
relevant Euroclear or Clearstream cash account until the business day following
settlement in DTC. The related prospectus supplement will contain additional
information regarding clearance and settlement procedures for the book-entry
certificates and with respect to tax documentation procedures relating to the
book-entry certificates.
Conveyance of notices and other communications by DTC to DTC
participants, and by DTC participants to Financial Intermediaries and beneficial
owners, will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Payments on the book-entry certificates will be made to DTC. DTC's
practice is to credit DTC participants' accounts on the related payment date in
accordance with their respective holdings shown on DTC's records, unless DTC has
reason to believe that it will not receive payment on that date. Disbursement of
such payments by DTC participants to Financial Intermediaries and beneficial
owners will be--
- governed by standing instructions and customary practices, as
is the case with securities held for the accounts of customers
in bearer form or registered in "street name," and
- the sole responsibility of each such DTC participant, subject
to any statutory or regulatory requirements in effect from
time to time.
Under a book-entry system, beneficial owners may receive payments after the
related payment date.
The only "certificateholder" of book-entry certificates will be DTC or
its nominee. Parties to the governing documents for any series of offered
certificates need not recognize beneficial owners of book-entry certificates as
"certificateholders." The beneficial owners of book-entry certificates will be
permitted to exercise the rights of "certificateholders" only indirectly through
the DTC participants, who in turn will exercise their rights through DTC. We
have been informed that DTC will take action permitted to be taken by a
"certificateholder" only at the direction of one or more DTC participants. DTC
may take conflicting actions with respect to the book-entry certificates to the
extent that those actions are taken on behalf of Financial Intermediaries whose
holdings include those certificates.
Because DTC can act only on behalf of DTC participants, who in turn act
on behalf of Financial Intermediaries and certain beneficial owners, the ability
of a beneficial owner to pledge its interest in a class of book-entry
certificates to persons or entities that do not participate in the DTC system,
or otherwise to take actions in respect of its interest in a class of book-entry
certificates, may be limited due to the lack of a physical certificate
evidencing that interest.
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ISSUANCE OF DEFINITIVE CERTIFICATES. Unless we specify otherwise in the
related prospectus supplement, beneficial owners of affected offered
certificates initially issued in book-entry form will not be able to obtain
physical certificates that represent those offered certificates, unless:
- we advise the related trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as
depository with respect to those offered certificates and we
are unable to locate a qualified successor; or
- we elect, at our option, to terminate the book-entry system
through DTC with respect to those offered certificates.
Upon the occurrence of either of the two events described above, DTC
will be required to notify all DTC participants of the availability through DTC
of physical certificates with respect to the affected offered certificates. Upon
surrender by DTC of the certificate or certificates representing a class of
book-entry offered certificates, together with instructions for registration,
the related trustee or other designated party will be required to issue to the
beneficial owners identified in those instructions physical certificates
representing those offered certificates.
DESCRIPTION OF THE GOVERNING DOCUMENTS
GENERAL
The offered certificates of each series will be issued pursuant to a
pooling and servicing agreement or other similar agreement or collection of
agreements (individually and collectively, as to that series, the "Governing
Document"). In general, the parties to the Governing Document for a series of
offered certificates will include us, a trustee, a master servicer and a special
servicer. However, if the related trust assets include mortgage-backed
securities, the Governing Document may include a manager as a party, but may not
include a master servicer, special servicer or other servicer as a party. We
will identify in the related prospectus supplement the parties to the Governing
Document for a series of offered certificates.
If we so specify in the related prospectus supplement, a party from
whom we acquire mortgage assets or one of its affiliates may perform the
functions of master servicer, special servicer or manager for the trust to which
we transfer those assets. If we so specify in the related prospectus supplement,
the same person or entity may act as both master servicer and special servicer
for one of our trusts.
Any party to the Governing Document for a series of offered
certificates, or any of its affiliate, may own certificates issued thereunder.
However, except in limited circumstances, including with respect to required
consents to certain amendments to the Governing Document for a series of offered
certificates, certificates that are held by the related master servicer, special
servicer or manager will not be allocated voting rights.
A form of a pooling and servicing agreement has been filed as an
exhibit to the registration statement of which this prospectus is a part.
However, the provisions of the Governing Document for each series of offered
certificates will vary depending upon the nature of the certificates to be
issued thereunder and the nature of the related trust assets. The following
summaries describe certain provisions that may appear in the Governing Document
for each series of offered certificates. The prospectus supplement for each
series of offered certificates will provide material additional information
regarding the Governing Document for that series. The summaries in this
prospectus do not purport to be complete, and you should refer to the
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provisions of the Governing Document for your certificates and, further, to the
description of those provisions in the related prospectus supplement. We will
provide a copy of the Governing Document, exclusive of exhibits, that relates to
your certificates, without charge, upon written request addressed to our
principal executive offices specified under "Structured Asset Securities
Corporation."
ASSIGNMENT OF MORTGAGE ASSETS
At the time of initial issuance of any series of offered certificates,
we will assign or cause to be assigned to the designated trustee the mortgage
assets to be included in the related trust, together with certain related
assets. We will specify in the related prospectus all material documents to be
delivered, and all other material actions to be taken, by us or any prior holder
of the related mortgage assets in connection with that assignment. We will also
specify in the related prospectus supplement any remedies available to the
related certificateholders, or the related trustee on their behalf, in the event
that any of those material documents are not delivered or any of those other
material actions are not taken as required. Concurrently with that assignment,
the related trustee will deliver to us or our designee the certificates of that
series in exchange for the mortgage assets and the other assets to be included
in the related trust.
Each mortgage asset included in one of our trusts will be identified in
a schedule appearing as an exhibit to the related Governing Document. That
schedule generally will include detailed information about each mortgage asset
transferred to the related trust, including:
- in the case of a mortgage loan, the address of the related
real property and the type of that property; the mortgage
interest rate and, if applicable, the applicable index, gross
margin, adjustment date and any rate cap information; the
remaining term to maturity; the remaining amortization term;
and the outstanding principal balance; and
- in the case of a mortgage-backed security, the outstanding
principal balance and the pass-through rate or coupon rate.
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO MORTGAGE ASSETS
Unless we state otherwise in the prospectus supplement for any series
of offered certificates, we will, with respect to each mortgage asset in the
related trust, make or assign, or cause to be made or assigned, certain
representations and warranties (the person making such representations and
warranties, the "Warranting Party") covering, by way of example:
- the accuracy of the information set forth for each mortgage
asset on the schedule of mortgage assets appearing as an
exhibit to the Governing Document for that series;
- the Warranting Party's title to each mortgage asset and the
authority of the Warranting Party to sell that mortgage asset;
and
- in the case of a mortgage loan, the enforceability of the
related mortgage note and mortgage, the existence of title
insurance insuring the lien priority of the related mortgage
and the payment status of the mortgage loan.
We will identify the Warranting Party, and give a more complete
sampling of the representations and warranties made thereby, in the related
prospectus supplement. We will also specify in the related prospectus supplement
any remedies against the warranting party available to the related
certificateholders,
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or the related trustee on their behalf, in the event of a breach of any of those
representations and warranties. In most cases, the Warranting Party will be a
prior holder of the particular mortgage assets.
COLLECTION AND OTHER SERVICING PROCEDURES WITH RESPECT TO MORTGAGE LOANS
The Governing Document for each series of offered certificates will
govern the servicing and administration of any mortgage loans included in the
related trust.
In general, the related master servicer and special servicer, directly
or through sub-servicers, will be obligated to service and administer for the
benefit of the related certificateholders the mortgage loans in any of our
trusts. The master servicer and the special servicer will be required to service
and administer those mortgage loans in accordance with applicable law and,
further, in accordance with the terms of the related Governing Document, the
mortgage loans themselves and any instrument of credit support included in that
trust. Subject to the foregoing, the master servicer and the special servicer
will each have full power and authority to do any and all things in connection
with that servicing and administration that it may deem necessary and desirable.
As part of its servicing duties, each of the master servicer and the
special servicer for one of our trusts will be required to make reasonable
efforts to collect all payments called for under the terms and provisions of the
related mortgage loans that it services and, in general, will be obligated to
follow the same collection procedures as it would follow for comparable mortgage
loans held for its own account, provided that:
(i) those procedures are consistent with the terms of the related
Governing Document; and
(ii) they do not impair recovery under any instrument of credit
support included in the related trust.
Consistent with the foregoing, the master servicer and the special servicer will
each be permitted, in its discretion, to waive any default charge in connection
with collecting a late payment on any defaulted mortgage loan.
The master servicer and/or the special servicer for one or our trusts,
directly or through sub-servicers, will also be required to perform various
other customary functions of a servicer of comparable loans, including:
- maintaining escrow or impound accounts for the payment of
taxes, insurance premiums, ground rents and similar items, or
otherwise monitoring the timely payment of those items;
- ensuring that the related properties are properly insured;
- attempting to collect delinquent payments;
- supervising foreclosures;
- negotiating modifications;
- responding to borrower requests for partial releases of the
encumbered property, easements, consents to alteration or
demolition and similar matters;
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- protecting the interests of certificateholders with respect to
senior lienholders;
- conducting inspections of the related real properties on a
periodic or other basis;
- collecting and evaluating financial statements for the related
real properties;
- managing or overseeing the management of real properties
acquired on behalf of the trust through foreclosure,
deed-in-lieu of foreclosure or otherwise; and
- maintaining servicing records relating to mortgage loans in
the trust.
We will specify in the related prospectus supplement when, and the
extent to which, servicing of a mortgage loan is to be transferred from a master
servicer to a special servicer. In general, a special servicer for any of our
trusts will be responsible for the servicing and administration of:
- mortgage loans that are delinquent in respect of a specified
number of scheduled payments;
- mortgage loans as to which there is a material non-monetary
default;
- mortgage loans as to which the related borrower has entered
into or consented to bankruptcy, appointment of a receiver or
conservator or similar insolvency proceeding, or the related
borrower has become the subject of a decree or order for such
a proceeding which shall have remained in force undischarged
or unstayed for a specified number of days; and
- real properties acquired as part of the trust in respect of
defaulted mortgage loans.
The related Governing Document may also may provide that if a default on a
mortgage loan in the related trust has occurred or, in the judgment of the
related master servicer, a payment default is reasonably foreseeable, the
related master servicer may elect to transfer the servicing of that mortgage
loan, in whole or in part, to the related special servicer. When the
circumstances no longer warrant a special servicer's continuing to service a
particular mortgage loan, such as when the related borrower is paying in
accordance with the forbearance arrangement entered into between the special
servicer and that borrower, the master servicer will generally resume the
servicing duties with respect to the particular mortgage loan.
A borrower's failure to make required mortgage loan payments may mean
that operating income from the related real property is insufficient to service
the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a borrower that is unable to make
mortgage loan payments may also be unable to make timely payment of taxes and
otherwise to maintain and insure the related real property. In general, with
respect to each series of offered certificates, the related special servicer
will be required to monitor any mortgage loan in the related trust that is in
default, evaluate whether the causes of the default can be corrected over a
reasonable period without significant impairment of the value of the related
real property, initiate corrective action in cooperation with the mortgagor if
cure is likely, inspect the related real property and take such other actions as
it deems necessary and appropriate. A significant period of time may elapse
before a special servicer is able to assess the success of any such corrective
action or the need for additional initiatives. The time within which a special
servicer can make the initial determination of appropriate action, evaluate the
success of corrective action, develop additional initiatives, institute
foreclosure proceedings and actually foreclose, or accept a deed to a real
property in lieu of foreclosure, on behalf of the certificateholders of the
related series may vary considerably depending on the particular mortgage loan,
the related real property, the borrower, the presence of an acceptable party to
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assume the mortgage loan and the laws of the jurisdiction in which the related
real property is located. If a borrower files a bankruptcy petition, the special
servicer may not be permitted to accelerate the maturity of the defaulted loan
or to foreclose on the related real property for a considerable period of time.
See "Certain Legal Aspects of Mortgage Loans--Bankruptcy Laws."
A special servicer for one of our trusts may also perform certain
limited duties in respect of mortgage loans in that trust for which the related
master servicer is primarily responsible, such as performing property
inspections and collecting and evaluating financial statements. A master
servicer for one of our trusts may perform certain limited duties in respect of
any mortgage loan in that trust for which the related special servicer is
primarily responsible, such as continuing to receive payments on the mortgage
loan, making certain calculations with respect to the mortgage loan and making
remittances and preparing certain reports to the related trustee and/or
certificateholders with respect to the mortgage loan. The duties of the master
servicer and special servicer for your series will be more fully described in
the related prospectus supplement.
Unless we state otherwise in the related prospectus supplement, the
master servicer for your series will be responsible for filing and settling
claims in respect of particular mortgage loans for your series under any
applicable instrument of credit support. See "Description of Credit Support" in
this prospectus.
SUB-SERVICERS
A master servicer or special servicer may delegate its servicing
obligations to one or more third-party servicers or sub-servicers. However,
unless we specify otherwise in the related prospectus supplement, the master
servicer or special servicer will remain obligated under the related Governing
Document. Each sub-servicing agreement between a master servicer or special
servicer, as applicable, and a sub-servicer must provide for servicing of the
applicable mortgage loans consistent with the related Governing Document. Any
master servicer and special servicer for one of our trusts will each be required
to monitor the performance of sub-servicers retained by it.
Unless we specify otherwise in the related prospectus supplement, any
master servicer or special servicer for one of our trusts will be solely liable
for all fees owed by it to any sub-servicer, regardless of whether the master
servicer's or special servicer's compensation pursuant to the related Governing
Document is sufficient to pay those fees. Each sub-servicer will be entitled to
reimbursement from the master servicer or special servicer, as the case may be,
that retained it, for certain expenditures which it makes, generally to the same
extent the master servicer or special servicer would be reimbursed under the
related Governing Document.
COLLECTION OF PAYMENTS ON MORTGAGE-BACKED SECURITIES
Unless we specify otherwise in the related prospectus supplement, if a
mortgage-backed security is included among the trust assets underlying any
series of offered certificates, then--
- that mortgage-backed security will be registered in the name
of the related trustee or its designee;
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- the related trustee will receive payments on that
mortgage-backed security; and
- subject to any conditions described in the related prospectus
supplement, the related trustee or a designated manager will,
on behalf and at the expense of the trust, exercise all rights
and remedies in respect of that mortgaged-backed security,
including the prosecution of any legal action necessary in
connection with any payment default.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE SPECIAL SERVICER, THE MANAGER
AND US
Unless we specify otherwise in the related prospectus supplement, no
master servicer, special servicer or manager for any of our trusts may resign
from its obligations in that capacity, except upon--
- the appointment of, and the acceptance of that appointment by,
a successor to the resigning party and receipt by the related
trustee of written confirmation from each applicable rating
agency that the resignation and appointment will not result in
a withdrawal or downgrade of any rating assigned by that
rating agency to any class of certificates of the related
series, or
- a determination that those obligations are no longer
permissible under applicable law or are in material conflict
by reason of applicable law with any other activities carried
on by the resigning party.
In general, no resignation will become effective until the related
trustee or other successor has assumed the obligations and duties of the
resigning master servicer, special servicer or manager, as the case may be.
In no event will we, any master servicer, special servicer or manager
for one of our trusts, or any of our or their respective directors, officers,
employees or agents, be under any liability to that trust or the related
certificateholders for any action taken, or not taken, in good faith pursuant to
the related Governing Document or for errors in judgment. Neither we nor any of
those other persons or entities will be protected, however, against any
liability that would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of obligations or duties under the
Governing Document for any series of offered certificates or by reason of
reckless disregard of those obligations and duties.
Furthermore, the Governing Document for each series of offered
certificates will entitle us, the master servicer, special servicer and/or
manager for the related trust, and our and their respective directors, officers,
employees and agents, to indemnification out of the related trust assets for any
loss, liability or expense incurred in connection with any legal action that
relates to that Governing Document or series of offered certificates or to the
related trust. The indemnification will not extend, however, to any loss,
liability or expense--
- specifically required to be borne by the relevant party,
without right of reimbursement, pursuant to the terms of that
Governing Document,
- incurred in connection with any legal action against the
relevant party resulting from any breach of a representation
or warranty made in that Governing Document, or
- incurred in connection with any legal action against the
relevant party resulting from any willful misfeasance, bad
faith or gross negligence in the performance of obligations or
duties under that Governing Document.
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Neither we nor any master servicer, special servicer or manager for the
related trust will be under any obligation to appear in, prosecute or defend any
legal action unless--
- the action is related to the respective responsibilities of
that party under the Governing Document for the affected
series of offered certificates, and
- either (i) that party is specifically required to bear the
expense of the action, or (ii) the action will not, in its
opinion, involve that party in any ultimate expense or
liability for which it would not be reimbursed under the
Governing Document for the affected series of offered
certificates.
However, we and each of those other parties may undertake any legal action that
may be necessary or desirable with respect to the enforcement or protection of
the rights and duties of the parties to the Governing Document for any series of
offered certificates and the interests of the certificateholders of that series
under that Government Document. In that event, the legal expenses and costs of
the action, and any liability resulting therefrom, will be expenses, costs and
liabilities of the related trust and payable out of related trust assets.
With limited exception, any person or entity--
- into which we or any related master servicer, special servicer
or manager may be merged or consolidated, or
- resulting from any merger or consolidation to which we or any
related master servicer, special servicer or manager is a
party, or
- succeeding to our business or the business of any related
master servicer, special servicer or manager,
will be the successor of us or that master servicer, special servicer or
manager, as the case may be, under the Governing Document for a series of
offered certificates.
The compensation arrangements with respect to any master servicer,
special servicer or manager for any of our trusts will be set forth in the
related prospectus supplement. In general, that compensation will be payable out
of the related trust assets.
EVENTS OF DEFAULT
We will identify in related prospectus supplement the various events of
default under the Governing Document for each series of offered certificates for
which any related master servicer, special servicer or manager may be terminated
in that capacity.
AMENDMENT
The Governing Document for each series of offered certificates may be
amended by the parties thereto, without the consent of any of the holders of
those certificates, or of any non-offered certificates of the same series, for
the following reasons:
(i) to cure any ambiguity;
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(ii) to correct, modify or supplement any provision in the
Governing Document which may be inconsistent with any other
provision in that document or with the description of that
document set forth in the related prospectus supplement;
(iii) to add any other provisions with respect to matters or
questions arising under the Governing Document that are not
inconsistent with the existing provisions of that document;
(iv) to the extent applicable, to relax or eliminate any
requirement under the Governing Document imposed by the
provisions of the Internal Revenue Code of 1986 relating to
REMICs if the provisions of that Code are amended or clarified
so as to allow for the relaxation or elimination of that
requirement;
(v) to relax or eliminate any requirement under the Governing
Document imposed by the Securities Act of 1933, as amended, or
the rules under that Act if that Act or those rules are
amended or clarified so as to allow for the relaxation or
elimination of that requirement;
(vi) to comply with any requirements imposed by the Internal
Revenue Code of 1986 or any final, temporary or, in some
cases, proposed regulation, revenue ruling, revenue procedure
or other written official announcement or interpretation
relating to federal income tax laws, or to avoid a prohibited
transaction or reduce the incidence of any tax that would
arise from any actions taken with respect to the operation of
any REMIC created under the Governing Document;
(vii) to the extent applicable, to modify, add to or eliminate
certain transfer restrictions relating to the certificates
which are "residual interests" in a REMIC; or
(viii) to otherwise modify or delete existing provisions of the
Governing Document.
However, no amendment of the Governing Document for any series of
offered certificates, covered solely by clauses (iii) or (viii) above, may
adversely affect in any material respect the interests of any holders of offered
or non-offered certificates of that series.
In general, the Governing Document for a series of offered certificates
may also be amended by the parties to that document, with the consent of the
holders of offered and non-offered certificates representing, in the aggregate,
not less than 66-2/3%, or such other percentage specified in the related
prospectus supplement, of all the voting rights allocated to those classes of
that series that are affected by the amendment. However, the Governing Document
for a series of offered certificates may not be amended to--
- reduce in any manner the amount of, or delay the timing of,
payments received on the related mortgage assets which are
required to be distributed on any offered or non-offered
certificate of that series without the consent of the holder
of that certificate; or
- adversely affect in any material respect the interests of the
holders of any class of offered or non-offered certificates of
that series in any other manner without the consent of the
holders of all certificates of that class; or
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- modify the provisions of the Governing Document relating to
amendments thereof without the consent of the holders of all
offered and non-offered certificates of that series then
outstanding.
LIST OF CERTIFICATEHOLDERS
Upon written request of three or more certificateholders of record of
any series made for purposes of communicating with other holders of certificates
of the same series with respect to their rights under the related Governing
Document, the related trustee or other certificate registrar of that series will
afford the requesting certificateholders access during normal business hours to
the most recent list of certificateholders of that series. However, the trustee
may first require a copy of the communication that the requesting
certificateholders proposed to send.
THE TRUSTEE
The trustee for each series of offered certificates will be named in
the related prospectus supplement. The commercial bank, national banking
association, banking corporation or trust company that serves as trustee for any
series of offered certificates may have typical banking relationships with the
us and our affiliates and with any of the other parties to the related Governing
Document and its affiliates.
DUTIES OF THE TRUSTEE
The trustee for each series of offered certificates will make no
representation as to the validity or sufficiency of those certificates, the
related Governing Document or any underlying mortgage asset or related document
and will not be accountable for the use or application by or on behalf of any
other party to the related Governing Document of any funds paid to that party in
respect of those certificates or the underlying mortgage assets. If no event of
default has occurred and is continuing under the related Governing Document, the
trustee for each series of offered certificates will be required to perform only
those duties specifically required under the related Governing Document.
However, upon receipt of any of the various certificates, reports or other
instruments required to be furnished to it pursuant to the related Governing
Document, the trustee must examine those documents and determine whether they
conform to the requirements of that Governing Document.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related prospectus supplement,
the fees and normal disbursements of the trustee for any series of offered
certificates may be the expense of the related master servicer or other
specified person or may be required to be paid by the related trust assets.
The trustee for each series of offered certificates will be entitled to
indemnification, out of related trust assets, for any loss, liability or expense
incurred by that trustee in connection with its acceptance or administration of
its trusts under the related Governing Document. However, the indemnification of
a trustee will not extend to any loss, liability or expense incurred by reason
of willful misfeasance, bad faith or gross negligence on the part of the trustee
in the performance of its obligations and duties under the related Governing
Document.
No trustee for any series of offered certificates will be required to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties under the related Governing
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Document, or in the exercise of any of its rights or powers, if it has
reasonable grounds for believing that repayment of those funds or adequate
indemnity against that risk or liability is not reasonably assured to it.
The trustee for each series of offered certificates will be entitled to
execute any of its trusts or powers and perform any of its duties under the
related Governing Document, either directly or by or through agents or
attorneys. The trustee will not be responsible for any willful misconduct or
gross negligence on the part of any such agent or attorney appointed by it with
due care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee for any series of offered certificates may resign at any
time. We will be obligated to appoint a successor to a resigning trustee. We may
also remove the trustee for any series of offered certificates if that trustee
ceases to be eligible to continue as such under the related Governing Document
or if that trustee becomes insolvent. Unless we indicate otherwise in the
related prospectus supplement, the trustee for any series of offered
certificates may also be removed at any time by the holders of the offered and
non-offered certificates of that series evidencing not less than 51%, or such
other percentage specified in the related prospectus supplement, of the voting
rights for that series. However, if the removal was without cause, the
certificateholders effecting the removal may be responsible for any costs and
expenses incurred by the terminated trustee in connection with its removal. Any
resignation or removal of a trustee and appointment of a successor trustee will
not become effective until acceptance of the appointment by the successor
trustee.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit support may be provided with respect to one or more classes of
the offered certificates of any series or with respect to the related mortgage
assets. That credit support may be in the form of any of the following:
- the subordination of one or more other classes of certificates
of the same series;
- the use of a letter of credit, a surety bond, an insurance
policy, a guarantee or a credit derivative;
- the establishment of one or more reserve funds; or
- any combination of the foregoing.
If and to the extent described in the related prospectus supplement,
any of the above forms of credit support may provide credit enhancement for
non-offered certificates, as well as offered certificates, or for more than one
series of certificates.
If you are the beneficiary of any particular form of credit support,
that credit support may not protect you against all risks of loss and will not
guarantee payment to you of all amounts to which you are entitled under your
certificates. If losses or shortfalls occur that exceed the amount covered by
that credit support or that are of a type not covered by that credit support,
you will bear your allocable share of deficiencies. Moreover, if that credit
support covers the offered certificates of more than one class or series and
total losses on the related mortgage assets exceed the amount of that credit
support, it is possible that the holders of offered certificates of other
classes and/or series will be disproportionately benefited by that credit
support to your detriment.
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If you are the beneficiary of any particular form of credit support, we
will include in the related prospectus supplement a description of the
following:
- the nature and amount of coverage under that credit support;
- any conditions to payment not otherwise described in this
prospectus;
- any conditions under which the amount of coverage under that
credit support may be reduced and under which that credit
support may be terminated or replaced; and
- the material provisions relating to that credit support.
Additionally, we will set forth in the related prospectus supplement certain
information with respect to the obligor, if any, under any instrument of credit
support.
SUBORDINATE CERTIFICATES
If and to the extent described in the related prospectus supplement,
one or more classes of certificates of any series may be subordinate to one or
more other classes of certificates of that series. If you purchase subordinate
certificates, your right to receive payments out of collections and advances on
the related trust assets on any payment date will be subordinated to the
corresponding rights of the holders of the more senior classes of certificates.
If and to the extent described in the related prospectus supplement, the
subordination of a class of certificates may apply only in the event of certain
types of losses or shortfalls. In the related prospectus supplement, we will set
forth information concerning the method and amount of subordination provided by
a class or classes of subordinate certificates in a series and the circumstances
under which that subordination will be available.
If the mortgage assets in any trust established us are divided into
separate groups, each supporting a separate class or classes of certificates of
the related series, credit support may be provided by crosssupport provisions
requiring that payments be made on senior certificates evidencing interests in
one group of those mortgage assets prior to payments on subordinate certificates
evidencing interests in a different group of those mortgage assets. We will
describe in the related prospectus supplement the manner and conditions for
applying any cross-support provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
The mortgage loans included in any trust established by us may be
covered for certain default risks by insurance policies or guarantees. If so, we
will describe in the related prospectus supplement the nature of such default
risks and the extent of such coverage.
LETTER OF CREDIT
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
certain classes of those certificates will be covered by one or more letters of
credit, issued by a bank or other financial institution specified in the related
prospectus supplement (the "Letter of Credit Bank"). Under a letter of credit,
the Letter of Credit Bank will be obligated to honor draws under the letter of
credit in an aggregate fixed dollar amount, net of unreimbursed payments under
the letter of credit, generally equal to a percentage specified in the related
prospectus supplement of the aggregate principal balance of some or all of the
related mortgage assets as of the date the related trust was formed or of the
initial aggregate principal balance of one or more classes of certificates of
the applicable series. The letter of credit may permit draws only in the event
of certain types of losses and shortfalls. The amount available under the letter
of credit will, in all cases, be reduced to the extent of
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the unreimbursed payments thereunder and may otherwise be reduced as described
in the related prospectus supplement. The obligations of the Letter of Credit
Bank under the letter of credit for any series of offered certificates will
expire at the earlier of the date specified in the related prospectus supplement
or the termination of the related trust.
CERTIFICATE INSURANCE AND SURETY BONDS
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
certain classes of those certificates will be covered by insurance policies or
surety bonds provided by one or more insurance companies or sureties. Those
instruments may cover, with respect to one or more classes of the offered
certificates of the related series, timely payments of interest and principal or
timely payments of interest and payments of principal on the basis of a schedule
of principal payments set forth in or determined in the manner specified in the
related prospectus supplement. We will describe in the related prospectus
supplement any limitations on the draws that may be made under any such
instrument.
CREDIT DERIVATIVE
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
certain classes of those certificates will be covered by credit derivatives,
such as credit default swaps and total return swaps. A credit derivative is a
financial instrument designed to offset losses and shortfalls derived from the
credit risk of an underlying or reference asset or the credit risk of an
underlying or reference credit. We will describe in the related prospectus
supplement when and how payments are made under any such instrument and the
specific credit risk that is being covered.
RESERVE FUNDS
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
certain classes of those certificates will be covered, to the extent of
available funds, by one or more reserve funds in which cash, a letter of credit,
permitted investments, a demand note or a combination of the foregoing, will be
deposited, in the amounts specified in the related prospectus supplement. If and
to the extent described in the related prospectus supplement, the reserve fund
for the related series of offered certificates may also be funded over time.
Amounts on deposit in any reserve fund for a series of offered
certificates will be applied for the purposes, in the manner, and to the extent
specified in the related prospectus supplement. If and to the extent described
in the related prospectus supplement, reserve funds may be established to
provide protection only against certain types of losses and shortfalls.
Following each payment date for the related series of offered certificates,
amounts in a reserve fund in excess of any required balance may be released from
the reserve fund under the conditions and to the extent specified in the related
prospectus supplement.
CREDIT SUPPORT WITH RESPECT TO MBS
If and to the extent described in the related prospectus supplement,
any mortgage-backed security included in one of our trusts and/or the mortgage
loans that back that security may be covered by one or more of the types of
credit support described in this prospectus. We will specify in the related
prospectus supplement, as to each such form of credit support, the information
indicated above with respect to that mortgage-backed security, to the extent
that the information is material and available.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
Most, if not all, of the mortgage loans underlying a series of offered
certificates will be secured by multifamily and commercial properties in the
United States, its territories and possessions. However, some of those mortgage
loans may be secured by multifamily and commercial properties outside the United
States, its territories and possessions.
The following discussion contains general summaries of certain legal
aspects of mortgage loans secured by multifamily and commercial properties in
the United States. Because these legal aspects are governed by applicable state
law, which may differ substantially from state to state, the summaries do not
purport to be complete, to reflect the laws of any particular state, or to
encompass the laws of all jurisdictions in which the security for the mortgage
loans underlying the offered certificates is situated. Accordingly, you should
be aware that the summaries are qualified in their entirety by reference to the
applicable laws of those states. See "Description of the Trust Assets--Mortgage
Loans."
If a significant percentage of mortgage loans underlying a series of
offered certificates, are secured by properties in a particular state, we will
discuss the relevant state laws, to the extent they vary materially from this
discussion, in the related prospectus supplement.
GENERAL
Each mortgage loan underlying a series of offered certificates will be
evidenced by a note or bond and secured by an instrument granting a security
interest in real property. The instrument granting a security interest in real
property may be a mortgage, deed of trust or a deed to secure debt, depending
upon the prevailing practice and law in the state in which that real property is
located. Mortgages, deeds of trust and deeds to secure debt are often herein
collectively referred to as "mortgages." A mortgage creates a lien upon, or
grants a title interest in, the real property covered by the mortgage, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on--
- the terms of the mortgage,
- the terms of separate subordination agreements or
intercreditor agreements with others that hold interests in
the real property,
- the knowledge of the parties to the mortgage, and
- in general, the order of recordation of the mortgage in the
appropriate public recording office.
However, the lien of a recorded mortgage will generally be subordinate to
later-arising liens for real estate taxes and assessments and other charges
imposed under governmental police powers.
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TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage--
- a mortgagor, who is the owner of the encumbered interest in
the real property, and
- a mortgagee, who is the lender.
In general, the mortgagor is also the borrower.
In contrast, a deed of trust is a three-party instrument. The parties
to a deed of trust are--
- the trustor, who is the equivalent of a mortgagor,
- the trustee to whom the real property is conveyed, and
- the beneficiary for whose benefit the conveyance is made, who
is the lender.
Under a deed of trust, the trustor grants the property, irrevocably until the
debt is paid, in trust and generally with a power of sale, to the trustee to
secure repayment of the indebtedness evidenced by the related note.
A deed to secure debt typically has two parties. Pursuant to a deed to
secure debt, the grantor, who is the equivalent of a mortgagor, conveys title to
the real property to the grantee, who is the lender, generally with a power of
sale, until the debt is repaid.
Where the borrower is a land trust, there would be an additional party
because legal title to the property is held by a land trustee under a land trust
agreement for the benefit of the borrower. At origination of a mortgage loan
involving a land trust, the borrower may execute a separate undertaking to make
payments on the mortgage note. In no event is the land trustee personally liable
for the mortgage note obligation.
The mortgagee's authority under a mortgage, the trustee's authority
under a deed of trust and the grantee's authority under a deed to secure debt
are governed by:
- the express provisions of the related instrument,
- the law of the state in which the real property is located,
- certain federal laws, and
- in some deed of trust transactions, the directions of the
beneficiary.
LEASES AND RENTS
A mortgage that encumbers an income-producing property often contains
an assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases. Under an assignment of rents and leases, the
borrower assigns to the lender the borrower's right, title and interest as
landlord under each lease and the income derived from each lease. However, the
borrower retains a revocable license to collect the rents, provided there is no
default and the rents are not directly paid to the lender. If the borrower
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect the
rents.
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In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code (the "UCC"). Room rates are
generally pledged by the borrower as additional security for the loan when a
mortgage loan is secured by a hotel or motel. In general, the lender must file
financing statements in order to perfect its security interest in the room rates
and must file continuation statements, generally every five years, to maintain
that perfection. Mortgage loans secured by hotels or motels may be included in
one of our trusts even if the security interest in the room rates was not
perfected or the requisite UCC filings were allowed to lapse. A lender will
generally be required to commence a foreclosure action or otherwise take
possession of the property in order to enforce its rights to collect the room
rates following a default, even if the lender's security interest in room rates
is perfected under applicable nonbankruptcy law.
In the bankruptcy setting, the lender will be stayed from enforcing its
rights to collect hotel and motel room rates. However, the room rates will
constitute "cash collateral" and cannot be used by the bankrupt borrower--
- without a hearing or the lender's consent, or
- unless the lender's interest in the room rates is given
adequate protection.
Such "adequate protection" may include a cash payment for otherwise encumbered
funds or a replacement lien on unencumbered property, in either case equal in
value to the amount of room rates that the bankrupt borrower proposes to use.
See "--Bankruptcy Laws" below.
PERSONALTY
Certain types of income-producing real properties, such as hotels,
motels and nursing homes, may include personal property, which may, to the
extent it is owned by the borrower and not previously pledged, constitute a
significant portion of the property's value as security. The creation and
enforcement of liens on personal property are governed by the UCC. Accordingly,
if a borrower pledges personal property as security for a mortgage loan, the
lender generally must file UCC financing statements in order to perfect its
security interest in the personal property and must file continuation
statements, generally every five years, to maintain that perfection. In certain
cases, mortgage loans secured in part by personal property may be included in
one of our trusts even if the security interest in the personal property was not
perfected or the requisite UCC filings were allowed to lapse.
FORECLOSURE
GENERAL. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property security at public auction to
satisfy the indebtedness.
FORECLOSURE PROCEDURES VARY FROM STATE TO STATE. The two primary
methods of foreclosing a mortgage are--
- judicial foreclosure, involving court proceedings, and
- nonjudicial foreclosure pursuant to a power of sale granted in
the mortgage instrument.
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Other foreclosure procedures are available in some states, but they are
either infrequently used or available only in limited circumstances.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed. A
foreclosure action sometimes requires several years to complete.
JUDICIAL FORECLOSURE. A judicial foreclosure proceeding is conducted
in a court having jurisdiction over the mortgaged property. Generally, a lender
initiates the action by the service of legal pleadings upon--
- all parties having a subordinate interest of record in the
real property, and
- all parties in possession of the property, under leases or
otherwise, whose interests are subordinate to the mortgage.
Delays in completion of the foreclosure may occasionally result from
difficulties in locating defendants. When the lender's right to foreclose is
contested, the legal proceedings can be time-consuming. The court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property upon successful completion of a
judicial foreclosure proceeding. The proceeds of that public sale are used to
satisfy the judgment. The procedures that govern these public sales vary from
state to state.
EQUITABLE AND OTHER LIMITATIONS ON ENFORCEABILITY OF CERTAIN
PROVISIONS. United States courts have traditionally imposed general equitable
principles to limit the remedies available to lenders in foreclosure actions.
These principles are generally designed to relieve borrowers from the effects of
mortgage defaults perceived as harsh or unfair. Relying on such principles, a
court may:
- alter the specific terms of a loan to the extent it considers
necessary to prevent or remedy an injustice, undue oppression
or overreaching;
- require the lender to undertake affirmative actions to
determine the cause of the borrower's default and the
likelihood that the borrower will be able to reinstate the
loan;
- require the lender to reinstate a loan or recast a payment
schedule in order to accommodate a borrower that is suffering
from a temporary financial disability; or
- limit the right of the lender to foreclose in the case of a
nonmonetary default, such as a failure to adequately maintain
the mortgaged property or an impermissible further encumbrance
of the mortgaged property.
Some courts have addressed the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have--
- upheld the reasonableness of the notice provisions, or
- found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to
trigger constitutional protections.
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In addition, some states may have statutory protection such as the
right of the borrower to reinstate its mortgage loan after commencement of
foreclosure proceedings but prior to a foreclosure sale.
NONJUDICIAL FORECLOSURE/POWER OF SALE. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale pursuant to a power of sale
typically granted in the deed of trust. A power of sale may also be contained in
any other type of mortgage instrument if applicable law so permits. A power of
sale under a deed of trust allows a nonjudicial public sale to be conducted
generally following--
- a request from the beneficiary/lender to the trustee to sell
the property upon default by the borrower, and
- notice of sale is given in accordance with the terms of the
deed of trust and applicable state law.
In some states, prior to a nonjudicial public sale, the trustee under
the deed of trust must--
- record a notice of default and notice of sale, and
- send a copy of those notices to the borrower and to any other
party who has recorded a request for a copy of them.
In addition, in some states, the trustee must provide notice to any other party
having an interest of record in the real property, including junior lienholders.
A notice of sale must be posted in a public place and, in most states, published
for a specified period of time in one or more newspapers. Some states require a
reinstatement period during which the borrower or junior lienholder may have the
right to cure the default by paying the entire actual amount in arrears, without
regard to the acceleration of the indebtedness, plus the lender's expenses
incurred in enforcing the obligation. In other states, the borrower or the
junior lienholder has only the right to pay off the entire debt to prevent the
foreclosure sale. Generally, state law governs the procedure for public sale,
the parties entitled to notice, the method of giving notice and the applicable
time periods.
PUBLIC SALE. A third party may be unwilling to purchase a mortgaged
property at a public sale because of--
- the difficulty in determining the exact status of title to the
property due to, among other things, redemption rights that
may exist, and
- the possibility that physical deterioration of the property
may have occurred during the foreclosure proceedings.
As a result of the foregoing, it is common for the lender to purchase
the mortgaged property and become the owner thereof, subject to the borrower's
right in some states to remain in possession during a redemption period. In that
case, the lender will have both the benefits and burdens of ownership, including
the obligation to pay debt service on any senior mortgages, to pay taxes, to
obtain casualty insurance and to make repairs necessary to render the property
suitable for sale. The costs of operating and maintaining a commercial or
multifamily residential property may be significant and may be greater than the
income derived from that property. The lender also will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale or lease of the property. Whether, the ultimate
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proceeds of the sale of the property equal the lender's investment in the
property depends upon market conditions. Moreover, because of the expenses
associated with acquiring, owning and selling a mortgaged property, a lender
could realize an overall loss on the related mortgage loan even if the mortgaged
property is sold at foreclosure, or resold after it is acquired through
foreclosure, for an amount equal to the full outstanding principal amount of the
loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens. In addition, it
may be obliged to keep senior mortgage loans current in order to avoid
foreclosure of its interest in the property. Furthermore, if the foreclosure of
a junior mortgage triggers the enforcement of a "due-on-sale" clause contained
in a senior mortgage, the junior mortgagee could be required to pay the full
amount of the senior mortgage indebtedness or face foreclosure.
RIGHTS OF REDEMPTION. The purposes of a foreclosure action are--
- to enable the lender to realize upon its security, and
- to bar the borrower, and all persons who have interests in the
property that are subordinate to that of the foreclosing
lender, from exercising their "equity of redemption."
The doctrine of equity of redemption provides that, until the property
encumbered by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having interests that are subordinate to
that of the foreclosing lender have an equity of redemption and may redeem the
property by paying the entire debt with interest. Those having an equity of
redemption must generally be made parties to the foreclosure proceeding in order
for their equity of redemption to be terminated.
The equity of redemption is a common-law, nonstatutory right which
should be distinguished from post-sale statutory rights of redemption. In some
states, the borrower and foreclosed junior lienors are given a statutory period
in which to redeem the property after sale pursuant to a deed of trust or
foreclosure of a mortgage. In some states, statutory redemption may occur only
upon payment of the foreclosure sale price. In other states, redemption may be
permitted if the former borrower pays only a portion of the sums due. A
statutory right of redemption will diminish the ability of the lender to sell
the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
ANTI-DEFICIENCY LEGISLATION. Some or all of the mortgage loans
underlying a series of offered certificates may be nonrecourse loans. Therefore,
recourse in the case of default on such a mortgage loan will be limited to the
mortgaged property and such other assets, if any, that were pledged to secure
the mortgage loan. However, even if a mortgage loan by its terms provides for
recourse to the borrower's other assets, a lender's ability to realize upon
those assets may be limited by state law. For example, in some states, a lender
cannot obtain a deficiency judgment against the borrower following foreclosure
or sale under a deed of trust. A deficiency judgment is a personal judgment
against the former borrower equal to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes may require the lender to exhaust the security afforded
under a mortgage before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting the security, but in
doing so, the lender may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the
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security. Consequently, lenders will usually proceed first against the security
in states where an election of remedy provision exists. Finally, other statutory
provisions limit any deficiency judgment to the excess of the outstanding debt
over the fair market value of the property at the time of the sale. These other
statutory provisions are intended to protect borrowers from exposure to large
deficiency judgments that might result from bidding at below-market values at
the foreclosure sale.
LEASEHOLD CONSIDERATIONS. Some or all of the mortgage loans underlying
a series of offered certificates may be secured by a mortgage on the borrower's
leasehold interest under a ground lease. Leasehold mortgage loans are subject to
certain risks not associated with mortgage loans secured by a lien on the fee
estate of the borrower. The most significant of these risks is that if the
borrower's leasehold were to be terminated upon a lease default, the leasehold
mortgagee would lose its security. This risk may be lessened if the ground
lease:
- requires the lessor to give the leasehold mortgagee notices of
lessee defaults and an opportunity to cure them,
- permits the leasehold estate to be assigned to and by the
leasehold mortgagee or the purchaser at a foreclosure sale,
and
- contains certain other protective provisions typically
included in a "mortgageable" ground lease.
Certain mortgage loans underlying a series of offered certificates,
however, may be secured by ground leases which do not contain these provisions.
COOPERATIVE SHARES. Some or all of the mortgage loans underlying a
series of offered certificates may be secured by a security interest on the
borrower's ownership interest in shares, and the proprietary leases belonging to
those shares, allocable to cooperative dwelling units that may be vacant or
occupied by nonowner tenants. Loans secured in this manner are subject to
certain risks not associated with mortgage loans secured by a lien on the fee
estate of a borrower in real property. Loans secured in this manner typically
are subordinate to the mortgage, if any, on the cooperative's building. That
mortgage, if foreclosed, could extinguish the equity in the building and the
proprietary leases of the dwelling units derived from ownership of the shares of
the cooperative. Further, transfer of shares in a cooperative is subject to
various regulations as well as to restrictions under the governing documents of
the cooperative. The shares may be canceled in the event that associated
maintenance charges due under the related proprietary leases are not paid.
Typically, a recognition agreement between the lender and the cooperative
provides, among other things, that the lender may cure a default under a
proprietary lease.
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner,
which may be dependent upon, among other things, the notice given the debtor and
the method, manner, time, place and terms of the sale. Article 9 of the UCC
provides that the proceeds of the sale will be applied first to pay the costs
and expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. A recognition agreement, however, generally provides
that the lender's right to reimbursement is subject to the right of the
cooperative corporation to receive sums due under the proprietary leases.
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BANKRUPTCY LAWS
Operation of the U.S. Bankruptcy Code and related state laws may
interfere with or affect the ability of a lender to realize upon collateral or
to enforce a deficiency judgment. For example, under the U.S. Bankruptcy Code,
virtually all actions, including foreclosure actions and deficiency judgment
proceedings, to collect a debt are automatically stayed upon the filing of the
bankruptcy petition. Often, no interest or principal payments are made during
the course of the bankruptcy case. The delay caused by an automatic stay and its
consequences can be significant. Also, under the U.S. Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out the junior lien.
Under the U.S. Bankruptcy Code, the amount and terms of a mortgage loan
secured by a lien on property of the debtor may be modified provided that
substantive and procedural safeguards protective of the lender are met. A
bankruptcy court may, among other things--
- reduce the secured portion of the outstanding amount of the
loan to the then-current value of the property, thereby
leaving the lender a general unsecured creditor for the
difference between the then-current value of the property and
the outstanding balance of the loan;
- reduce the amount of each scheduled payment, by means of a
reduction in the rate of interest and/or an alteration of the
repayment schedule, with or without affecting the unpaid
principal balance of the loan;
- extend or shorten the term to maturity of the loan;
- permit the bankrupt borrower to cure of the subject loan
default by paying the arrearage over a number of years; or
- permit the bankrupt borrower, through its rehabilitative plan,
to reinstate the loan payment schedule even if the lender has
obtained a final judgment of foreclosure prior to the filing
of the debtor's petition.
Federal bankruptcy law may also interfere with or affect the ability of
a secured lender to enforce the borrower's assignment of rents and leases
related to the mortgaged property. A lender may be stayed from enforcing the
assignment under the U.S. Bankruptcy Code. In addition, the legal proceedings
necessary to resolve the issue could be time-consuming, and result in delays in
the lender's receipt of the rents. However, recent amendments to the U.S.
Bankruptcy Code may minimize the impairment of the lender's ability to enforce
the borrower's assignment of rents and leases. In addition to the inclusion of
hotel revenues within the definition of "cash collateral" as noted above, the
amendments provide that a pre-petition security interest in rents or hotel
revenues is designed to overcome those cases holding that a security interest in
rents is unperfected under the laws of certain states until the lender has taken
some further action, such as commencing foreclosure or obtaining a receiver
prior to activation of the assignment of rents.
A borrower's ability to make payment on a mortgage loan may be impaired
by the commencement of a bankruptcy case relating to the tenant under a lease of
the related property. Under the U.S. Bankruptcy Code, the filing of a petition
in bankruptcy by or on behalf of a tenant results in a stay in bankruptcy
against the commencement or continuation of any state court proceeding for--
- past due rent,
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- accelerated rent,
- damages, or
- a summary eviction order with respect to a default under the
lease that occurred prior to the filing of the tenant's
bankruptcy petition.
In addition, the U.S. Bankruptcy Code generally provides that a trustee
or debtor-in-possession may, subject to approval of the court:
- assume the lease and either retain it or assign it to a third
party, or
- reject the lease.
If the lease is assumed, the trustee, debtor-in-possession or assignee,
if applicable, must cure any defaults under the lease, compensate the lessor for
its losses and provide the lessor with "adequate assurance" of future
performance. These remedies may be insufficient, and any assurances provided to
the lessor may be inadequate. If the lease is rejected, the lessor will be
treated, except potentially to the extent of any security deposit, as an
unsecured creditor with respect to its claim for damages for termination of the
lease. The U.S. Bankruptcy Code also limits a lessor's damages for lease
rejection to:
- the rent reserved by the lease without regard to acceleration
for the greater of one year, or 15%, not to exceed three
years, of the remaining term of the lease, plus
- unpaid rent to the earlier of the surrender of the property or
the lessee's bankruptcy filing.
ENVIRONMENTAL CONSIDERATIONS
GENERAL. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties that
are or have been used for industrial, manufacturing, military or disposal
activity. Those environmental risks include the possible diminution of the value
of a contaminated property or, as discussed below, potential liability for
clean-up costs or other remedial actions that could exceed the value of the
property or the amount of the lender's loan. In certain circumstances, a lender
may decide to abandon a contaminated real property as collateral for its loan
rather than foreclose and risk liability for clean-up costs.
SUPERLIEN LAWS. Under the laws of many states, contamination on a
property may give rise to a lien on the property for clean-up costs. In several
states, that lien has priority over all existing liens, including those of
existing mortgages. In these states, the lien of a mortgage may lose its
priority to such a "superlien."
CERCLA. The federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
participated in the management of the property or the operations of the
borrower. Liability may exist even if the lender did not cause or contribute to
the contamination and regardless of whether the lender has actually taken
possession of the contaminated mortgaged property through foreclosure, deed in
lieu of foreclosure or otherwise. Moreover, liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Excluded from CERCLA's definition of "owner" or
"operator," however, is a person who, without participating in the management of
the facility, holds indicia of ownership primarily to protect his security
interest. This is the so called "secured creditor exemption."
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The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Lender Liability Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Lender Liability Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Lender Liability Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if--
- it exercises decision-making control over a borrower's
environmental compliance and hazardous substance handling and
disposal practices, or
- assumes day-to-day management of operational functions of a
mortgaged property.
The Lender Liability Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure, provided that the lender seeks to sell that property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
CERTAIN OTHER FEDERAL AND STATE LAWS. Many states have statutes similar
to CERCLA, and not all those statutes provide for a secured creditor exemption.
In addition, under federal law, there is potential liability relating to
hazardous wastes and underground storage tanks under the federal Resource
Conservation and Recovery Act.
Certain federal, state and local laws, regulations and ordinances
govern the management, removal, encapsulation or disturbance of
asbestos-containing materials. These laws, as well as common law standards, may
impose liability for releases of or exposure to asbestos-containing materials
and may provide for third parties to seek recovery from owners or operators of
real properties for personal injuries associated with such releases.
Recent federal legislation will require owners of residential housing
constructed prior to 1978 to disclose to potential residents or purchasers any
known lead-based paint hazards and will impose treble damages for any failure to
disclose. In addition, the ingestion of lead-based paint chips or dust particles
by children can result in lead poisoning. If lead-based paint hazards exist at a
property, then the owner of that property may be held liable for injuries and
for the costs of removal or encapsulation of the lead-based paint.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action related to hazardous environmental conditions on a property,
such as actions based on nuisance or on toxic tort resulting in death, personal
injury or damage to property. While it may be more difficult to hold a lender
liable under common law causes of action, unanticipated or uninsured liabilities
of the borrower may jeopardize the borrower's ability to meet its loan
obligations.
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Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. These costs may jeopardize
the borrower's ability to meet its loan obligations.
ADDITIONAL CONSIDERATIONS. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard. However, that individual or entity may be without
substantial assets. Accordingly, it is possible that the costs could become a
liability of the related trust and occasion a loss to the related
certificateholders.
If the operations on a foreclosed property are subject to environmental
laws and regulations, the lender will be required to operate the property in
accordance with those laws and regulations. This compliance may entail
substantial expense, especially in the case of industrial or manufacturing
properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers,
including prospective buyers at a foreclosure sale or following foreclosure.
This disclosure may decrease the amount that prospective buyers are willing to
pay for the affected property, sometimes substantially.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the mortgage loans underlying a series of offered
certificates may contain "due-on-sale" and "due-on-encumbrance" clauses that
purport to permit the lender to accelerate the maturity of the loan if the
borrower transfers or encumbers the a mortgaged property. In recent years, court
decisions and legislative actions placed substantial restrictions on the right
of lenders to enforce these clauses in many states. However, the Garn-St Germain
Depository Institutions Act of 1982 generally preempts state laws that prohibit
the enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to the limitations prescribed in
that Act and the regulations promulgated thereunder.
JUNIOR LIENS; RIGHTS OF HOLDERS OF SENIOR LIENS
Any of our trusts may include mortgage loans secured by junior liens,
while the loans secured by the related senior liens may not be included in that
trust. The primary risk to holders of mortgage loans secured by junior liens is
the possibility that adequate funds will not be received in connection with a
foreclosure of the related senior liens to satisfy fully both the senior loans
and the junior loan.
In the event that a holder of a senior lien forecloses on a mortgaged
property, the proceeds of the foreclosure or similar sale will be applied as
follows:
- FIRST, to the payment of court costs and fees in connection
with the foreclosure;
- SECOND, to real estate taxes;
- THIRD, in satisfaction of all principal, interest, prepayment
or acceleration penalties, if any, and any other sums due and
owing to the holder of the senior liens; and
- LAST, in satisfaction of all principal, interest, prepayment
and acceleration penalties, if any, and any other sums due and
owing to the holder of the junior mortgage loan.
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SUBORDINATE FINANCING
The terms of certain mortgage loans underlying a series of offered
certificates may not restrict the ability of the borrower to use the mortgaged
property as security for one or more additional loans, or the restrictions may
be unenforceable. Where a borrower encumbers a mortgaged property with one or
more junior liens, the senior lender is subjected to the following additional
risks:
- the borrower may have difficulty servicing and repaying
multiple loans;
- if the subordinate financing permits recourse to the borrower,
as is frequently the case, and the senior loan does not, a
borrower may have more incentive to repay sums due on the
subordinate loan;
- acts of the senior lender that prejudice the junior lender or
impair the junior lender's security, such as the senior
lender's agreeing to an increase in the principal amount of or
the interest rate payable on the senior loan, may create a
superior equity in favor of the junior lender;
- if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of
action by the senior lender; and
- the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made.
They may also contain provisions that prohibit prepayments for a specified
period and/or condition prepayments upon the borrower's payment of prepayment
premium, fee or charge. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment premiums,
fees and charges upon an involuntary prepayment is unclear under the laws of
many states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 ("Title V") provides that state usury limitations shall not
apply to certain types of residential, including multifamily, first mortgage
loans originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a law
or constitutional provision that expressly rejects application of the federal
law. In addition, even where Title V is not rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
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AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and
rules promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, owners of public accommodations, such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments, must remove architectural and communication barriers which are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, the altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected property
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, because the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender that is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a borrower who enters military service after the
origination of the borrower's mortgage loan, including a borrower who was in
reserve status and is called to active duty after origination of the mortgage
loan, may not be charged interest, including fees and charges, above an annual
rate of 6% during the period of the borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
individuals who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service, including reservists who are called to
active duty, after origination of the related mortgage loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of a master servicer or special
servicer to collect full amounts of interest on an affected mortgage loan. Any
shortfalls in interest collections resulting from the application of the Relief
Act would result in a reduction of the amounts payable to the holders of
certificates of the related series, and would not be covered by advances or,
unless otherwise specified in the related prospectus supplement, any form of
credit support provided in connection with the certificates. In addition, the
Relief Act imposes limitations that would impair the ability of a master
servicer or special servicer to foreclose on an affected mortgage loan during
the borrower's period of active duty status and, under certain circumstances,
during an additional three month period after the active duty status ceases.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
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A lender may avoid forfeiture of its interest in the property if it
establishes that--
- its mortgage was executed and recorded before commission of
the crime upon which the forfeiture is based, or
- the lender was, at the time of execution of the mortgage,
"reasonably without cause to believe" that the property was
used in, or purchased with the proceeds of, illegal drug or
RICO activities.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This is a general discussion of the material federal income tax
consequences of owning the offered certificates. This discussion is directed to
certificateholders that hold the offered certificates as "capital assets" within
the meaning of Section 1221 of the Internal Revenue Code of 1986, which we will
refer to throughout this "Federal Income Tax Consequences" section as the
"Code." It does not discuss all federal income tax consequences that may be
relevant to owners of offered certificates, particularly as to investors subject
to special treatment under the Code, including:
- banks,
- insurance companies, and
- foreign investors.
Further, this discussion and any legal opinions referred to in this
discussion are based on authorities that can change, or be differently
interpreted, with possible retroactive effect. No rulings have been or will be
sought from the IRS with respect to any of the federal income tax consequences
discussed below. Accordingly, the IRS may take contrary positions.
Investors and preparers of tax returns should be aware that under
applicable Treasury regulations a provider of advice on specific issues of law
is not considered an income tax return preparer unless the advice is--
- given with respect to events that have occurred at the time
the advice is rendered, and
- is directly relevant to the determination of an entry on a tax
return.
Accordingly, even if this discussion addresses an issue regarding the tax
treatment of the owner of the offered certificates, investors should consult
their own tax advisors regarding that issue. Investors should do so not only as
to federal taxes, but also state and local taxes. See "State and Other Tax
Consequences."
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The following discussion addresses securities of three general types:
- "REMIC certificates" representing interests in a trust, or a
portion thereof, as to which a specified person or entity will
make a "real estate mortgage investment conduit," or "REMIC,"
election under Sections 860A through 860G of the Code;
- "FASIT certificates" representing interests in a trust, or a
portion thereof, as to which a specified person or entity will
make a "financial asset securitization investment trust," or
"FASIT," election within the meaning of Section 860L(a) of
the Code; and
- "grantor trust certificates" representing interests in a trust
or a portion thereof, as to which no REMIC or FASIT election
will be made.
We will indicate in the prospectus supplement for each series
whether the related trustee, another party to the related Governing Document
or an agent appointed by that trustee or other party (in any event, a "tax
administrator") will make a REMIC or FASIT election for the related trust. If
the related tax administrator is required to make a REMIC or FASIT election,
we also will identify in the related prospectus supplement all "regular
interests," "residual interests" and/or "ownership interests," as applicable,
in the resulting REMIC or FASIT.
The following discussion is limited to certificates offered under this
prospectus. In addition, this discussion applies only to the extent that the
related trust holds only mortgage loans. If a trust holds assets other than
mortgage loans, such as mortgage-backed securities, we will disclose in the
related prospectus supplement the tax consequences associated with those other
assets being included. In addition, if agreements other than guaranteed
investment contracts are included in a trust to provide interest rate protection
for the related offered certificates, the anticipated material tax consequences
associated with those agreements also will be discussed in the related
prospectus supplement. See "Description of the Trust Assets--Arrangements
Providing Reinvestment, Interest Rate and Currency Related Protection."
The following discussion is based in part on the rules governing
original issue discount in Sections 1271-1273 and 1275 of the Code and in the
Treasury regulations issued under those sections. It is also based in part on
the rules governing REMICs in Sections 860A-860G of the Code and in the Treasury
regulations issued under those sections. The regulations relating to original
issue discount do not adequately address certain issues relevant to, and in some
instances provide that they are not applicable to, securities such as the
offered certificates.
REMICS
GENERAL. With respect to each series of offered certificates as to
which the related tax administrator will make a REMIC election, our counsel
will deliver its opinion generally to the effect that, assuming compliance
with all provisions of the related Governing Document, and subject to certain
assumptions set forth in the opinion:
- the related trust, or the relevant designated portion of the
trust, will qualify as a REMIC, and
- those offered certificates will be considered to evidence
ownership of--
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(i) REMIC "regular interests," or
(ii) REMIC "residual interests."
We refer in this discussion to--
- certificates that evidence REMIC "regular interests" as the
"REMIC regular certificates," and
- certificates that represent REMIC "residual interests" as the
"REMIC residual certificates."
If an entity electing to be treated as a REMIC fails to comply with the
ongoing requirements of the Code for REMIC status, it may lose its REMIC status.
If so, the entity may become taxable as a corporation. Therefore, the related
certificates may not be given the tax treatment summarized below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, the Treasury Department
has not done so. Any relief mentioned above, moreover, may be accompanied by
sanctions. These sanctions could include the imposition of a corporate tax on
all or a portion of a trust's income for the period in which the requirements
for REMIC status are not satisfied. The Governing Document with respect to each
REMIC will include provisions designed to maintain its status as a REMIC under
the Code.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. Unless we state
otherwise in the related prospectus supplement, the offered certificates that
are REMIC certificates will be treated as--
- "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code in the hands of a real estate
investment trust, and
- "loans secured by an interest in real property" or other
assets described in Section 7701(a)(19)(C) of the Code in the
hands of a thrift institution,
in the same proportion that the assets of the related REMIC are so treated.
However, to the extent that the REMIC assets constitute mortgage loans
on property not used for residential or certain other prescribed purposes, the
related offered certificates will not be treated as assets qualifying under
Section 7701(a)(19)(C). If 95% or more of the assets of the REMIC qualify for
any of the foregoing characterizations at all times during a calendar year, the
related offered certificates will qualify for the corresponding status in their
entirety for that calendar year.
In addition, offered certificates that are REMIC regular certificates
will be:
- "qualified mortgages" within the meaning of Section 860G(a)(3)
of the Code in the hands of another REMIC; and
- "permitted assets" under Section 860L(c)(1)(G) for a financial
asset securitization investment trust or "FASIT."
Finally, interest, including original issue discount, on offered
certificates that are REMIC regular certificates, and income allocated to
offered certificates that are REMIC residual certificates, will be interest
described in Section 856(c)(3)(B) of the Code if received by a real estate
investment trust, to the extent that these certificates are treated as "real
estate assets" within the meaning of Section 856(c)(5)(B) of the Code.
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The related tax administrator will determine the percentage of the
REMIC's assets that constitute assets described in the above-referenced sections
of the Code with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC during that calendar
quarter. The related tax administrator will report those determinations to
certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to mortgage loans,
collections on mortgage loans held pending payment on the related offered
certificates and any property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale, and amounts in reserve accounts, would be
considered to be part of the mortgage loans, or whether these assets otherwise
would receive the same treatment as the mortgage loans for purposes of the
above-referenced sections of the Code. In addition, in some instances, the
mortgage loans may not be treated entirely as assets described in those sections
of the Code. If so, we will describe in the related prospectus supplement those
mortgage loans that are characterized differently. The Treasury regulations do
provide, however, that cash received from collections on mortgage loans held
pending payment is considered part of the mortgage loans for purposes of Section
856(c)(5)(B) of the Code, relating to real estate investment trusts.
To the extent a REMIC certificate represents ownership of an interest
in a mortgage loan that is secured in part by the related borrower's interest in
a bank account, that mortgage loan is not secured solely by real estate and
therefore:
- a portion of that certificate may not represent ownership of
"loans secured by an interest in real property" or other
assets described in Section 7701(a)(19)(C) of the Code;
- a portion of that certificate may not represent ownership of
"real estate assets" under Section 856(c)(5)(B) of the Code;
and
- the interest on that certificate may not constitute "interest
on obligations secured by mortgages on real property" within
the meaning of Section 856(c)(3)(B) of the Code.
TIERED REMIC STRUCTURES. For certain series of REMIC certificates, the
related tax administrator may make two or more REMIC elections as to the related
trust for federal income tax purposes. As to each of these series of REMIC
certificates, our counsel will opine that each portion of the related trust as
to which a REMIC election is to be made will qualify as a REMIC. Each of these
series will be treated as one REMIC solely for purposes of determining:
- whether the related REMIC certificates will be "real estate
assets" within the meaning of Section 856(c)(5)(B) of the
Code,
- whether the related REMIC certificates will be "loans secured
by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and
- whether the interest/income on the related REMIC certificates
is interest described in Section 856(c)(3)(B) of the Code.
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TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES.
GENERAL. Except as otherwise stated in this discussion, the Code treats
REMIC regular certificates as debt instruments issued by the REMIC and not as
ownership interests in the REMIC or its assets. Holders of REMIC regular
certificates that otherwise report income under the cash method of accounting
must nevertheless report income with respect to REMIC regular certificates under
the accrual method.
ORIGINAL ISSUE DISCOUNT. Certain REMIC regular certificates may be
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. Any holders of REMIC regular certificates issued with original issue
discount generally will have to include original issue discount in income as it
accrues, in accordance with the "constant yield" method described below, prior
to the receipt of the cash attributable to that income. The IRS has issued
regulations under Section 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Section
1272(a)(6) of the Code provides special rules applicable to the accrual of
original issue discount on, among other things, REMIC regular certificates. The
Treasury Department has not issued regulations under that section. You should be
aware, however, that Section 1272(a)(6) and the regulations under Sections 1271
to 1275 of the Code do not adequately address certain issues relevant to, or are
not applicable to, prepayable securities such as the offered certificates. We
recommend that you consult with your own tax advisor concerning the tax
treatment of your certificates.
The Code requires, in computing the accrual of original issue discount
on REMIC regular certificates, that a reasonable assumption be used concerning
the rate at which borrowers will prepay the mortgage loans held by the related
REMIC. Further, adjustments must be made in the accrual of that original issue
discount to reflect differences between the prepayment rate actually experienced
and the assumed prepayment rate. The prepayment assumption is to be determined
in a manner prescribed in Treasury regulations that the Treasury Department has
not yet issued. The Conference Committee Report accompanying the Tax Reform Act
of 1986 (the "Committee Report") indicates that the regulations should provide
that the prepayment assumption used with respect to a REMIC regular certificate
is determined once, at initial issuance, and must be the same as that used in
pricing. The prepayment assumption used in reporting original issue discount for
each series of REMIC regular certificates will be consistent with this standard
and will be disclosed in the related prospectus supplement. However, neither we
nor any other person will make any representation that the mortgage loans
underlying any series of REMIC regular certificates will in fact prepay at a
rate conforming to the prepayment assumption or at any other rate or that the
IRS will not challenge on audit the prepayment assumption used.
The original issue discount, if any, on a REMIC regular certificate
will be the excess of its stated redemption price at maturity over its issue
price.
The issue price of a particular class of REMIC regular certificates
will be the first cash price at which a substantial amount of those certificates
are sold, excluding sales to bond houses, brokers and underwriters. If less than
a substantial amount of a particular class of REMIC regular certificates is sold
for cash on or prior to the related date of initial issuance of those
certificates, the issue price for that class will be the fair market value of
that class on the date of initial issuance.
Under the Treasury regulations, the stated redemption price of a REMIC
regular certificate is equal to the total of all payments to be made on that
certificate other than "qualified stated interest." "Qualified stated interest"
is interest that is unconditionally payable at least annually, during the entire
term of the instrument, at:
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- a single fixed rate,
- a "qualified floating rate,"
- an "objective rate,"
- a combination of a single fixed rate and one or more
"qualified floating rates,"
- a combination of a single fixed rate and one "qualified
inverse floating rate," or
- a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest
payments on the REMIC regular certificate.
In the case of REMIC regular certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
those certificates. If the original issue discount rules apply to those
certificates, we will describe in the related prospectus supplement the manner
in which those rules will be applied with respect to those certificates in
preparing information returns to the certificateholders and the IRS.
Certain classes of REMIC regular certificates may provide that the
first interest payment with respect to those certificates be made more than one
month after the date of initial issuance, a period that is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" for original issue discount is the monthly period that ends on each
payment date, then, as a result of this "long first accrual period," some or all
interest payments may be required to be included in the stated redemption price
of the REMIC regular certificate and accounted for as original issue discount.
Because interest on REMIC regular certificates must in any event be accounted
for under an accrual method, applying this analysis would result in only a
slight difference in the timing of the inclusion in income of the yield on the
REMIC regular certificates.
In addition, if the accrued interest to be paid on the first payment
date is computed with respect to a period that begins prior to the date of
initial issuance, a portion of the purchase price paid for a REMIC regular
certificate will reflect that accrued interest. In those cases, information
returns provided to the certificateholders and the IRS will be based on the
position that the portion of the purchase price paid for the interest accrued
prior to the date of initial issuance is treated as part of the overall cost of
the REMIC regular certificate. Therefore, the portion of the interest paid on
the first payment date in excess of interest accrued from the date of initial
issuance to the first payment date is included in the stated redemption price of
the REMIC regular certificate. However, the Treasury regulations state that all
or some portion of this accrued interest may be treated as a separate asset, the
cost of which is recovered entirely out of interest paid on the first payment
date. It is unclear how an election to do so would be made under these
regulations and whether this election could be made unilaterally by a
certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC regular certificate will be considered to be
DE MINIMIS if it is less than 0.25% of the stated redemption price of the
certificate multiplied by its weighted average maturity. For this purpose, the
weighted average maturity of a REMIC regular certificate is computed as the sum
of the amounts determined, as to each payment included in the stated redemption
price of the certificate, by multiplying:
- the number of complete years, rounding down for partial years,
from the date of initial issuance, until that payment is
expected to be made, presumably taking into account the
prepayment assumption, by
- a fraction--
(i) the numerator of which is the amount of the payment, and
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(ii) the denominator of which is the stated redemption price
at maturity of the certificate.
Under the Treasury regulations, original issue discount of only a DE
MINIMIS amount, other than DE MINIMIS original issue discount attributable to a
so-called "teaser" interest rate or an initial interest holiday, will be
included in income as each payment of stated principal is made, based on the
product of:
- the total amount of the DE MINIMIs original issue discount,
and
- a fraction--
(i) the numerator of which is the amount of the principal
payment, and
(ii) the denominator of which is the outstanding stated
principal amount of the subject REMIC regular
certificate.
The Treasury regulations also would permit you to elect to accrue DE
MINIMIS original issue discount into income currently based on a constant yield
method. See "--REMICs--Taxation of Owners of REMIC Regular Certificates--Market
Discount" below for a description of that election under the applicable Treasury
regulations.
If original issue discount on a REMIC regular certificate is in excess
of a DE MINIMIS amount, the holder of the certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held the certificate, including the
purchase date but excluding the disposition date. In the case of an original
holder of a REMIC regular certificate, the daily portions of original issue
discount will be determined as described below.
As to each accrual period, the related tax administrator will calculate
the original issue discount that accrued during that accrual period. For these
purposes, an accrual period is, unless we otherwise state in the related
prospectus supplement, the period that begins on a date that corresponds to a
payment date, or in the case of the first accrual period, begins on the date of
initial issuance, and ends on the day preceding the immediately following
payment date. The portion of original issue discount that accrues in any accrual
period will equal the excess, if any, of:
- the sum of:
(i) the present value, as of the end of the accrual
period, of all of the payments remaining to be made
on the subject REMIC regular certificate, if any, in
future periods, presumably taking into account the
prepayment assumption, and
(ii) the payments made on that certificate during the
accrual period of amounts included in the stated
redemption price, over
- the adjusted issue price of the subject REMIC regular
certificate at the beginning of the accrual period.
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The adjusted issue price of a REMIC regular certificate is:
- the issue price of the certificate, increased by
- the aggregate amount of original issue discount previously
accrued on the certificate, reduced by
- the amount of all prior payments of amounts included in its
stated redemption price.
The present value of the remaining payments referred to in item (i) of the
second preceding sentence will be calculated:
- assuming that payments on the REMIC regular certificate will
be received in future periods based on the related mortgage
loans being prepaid at a rate equal to the prepayment
assumption;
- using a discount rate equal to the original yield to maturity
of the certificate, based on its issue price and the
assumption that the related mortgage loans will be prepaid at
a rate equal to the prepayment assumption; and
- taking into account events, including actual prepayments, that
have occurred before the close of the accrual period.
The original issue discount accruing during any accrual period,
computed as described above, will be allocated ratably to each day during the
accrual period to determine the daily portion of original issue discount for
that day.
A subsequent purchaser of a REMIC regular certificate that purchases
the certificate at a cost, excluding any portion of that cost attributable to
accrued qualified stated interest, that is less than its remaining stated
redemption price, will also be required to include in gross income the daily
portions of any original issue discount with respect to the certificate.
However, the daily portion will be reduced, if the cost is in excess of its
"adjusted issue price," in proportion to the ratio that such excess bears to the
aggregate original issue discount remaining to be accrued on the certificate.
The adjusted issue price of a REMIC regular certificate, as of any date of
determination, equals the sum of:
(i) the adjusted issue price or, in the case of the first accrual
period, the issue price, of the certificate at the beginning
of the accrual period which includes that date of
determination, and
(ii) the daily portions of original issue discount for all days
during such accrual period prior to that date of
determination.
If the foregoing method for computing original issue discount results
in a negative amount of original issue discount as to any accrual period with
respect to a REMIC regular certificate held by you, the amount of original issue
discount accrued for that accrual period will be zero. You may not deduct the
negative amount currently. Instead, you will only be permitted to offset it
against future positive original issue discount, if any, attributable to the
certificate. Although not free from doubt, it is possible that you may be
permitted to recognize a loss to the extent your basis in the certificate
exceeds the maximum amount of payments that you could ever receive with respect
to the certificate. However, any such loss may be a
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capital loss, which is limited in its deductibility. The foregoing
considerations are particularly relevant to certificates that have no, or a
disproportionately small, amount of principal because they can have negative
yields if the mortgage loans held by the related REMIC prepay more quickly than
anticipated. See "Risk Factors--The Investment Performance of Your Certificate
Will Depend Upon Payments, Defaults and Losses on the Underlying Mortgage
Loans."
The Treasury regulations in some circumstances permit the holder of a
debt instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, it is possible that you may be able
to select a method for recognizing original issue discount that differs from
that used by the trust in preparing reports to you and the IRS. Prospective
purchasers of the REMIC regular certificates should consult their tax advisors
concerning the tax treatment of these certificates in this regard.
MARKET DISCOUNT. You will be considered to have purchased a REMIC
regular certificate at a market discount if--
- in the case of a certificate issued without original issue
discount, you purchased the certificate at a price less than
its remaining stated principal amount, or
- in the case of a certificate issued with original issue
discount, you purchased the certificate at a price less than
its adjusted issue price.
If you purchase a REMIC regular certificate with more than a DE MINIMIS
amount of market discount, you will recognize gain upon receipt of each payment
representing stated redemption price. Under Section 1276 of the Code, you
generally will be required to allocate the portion of each payment representing
some or all of the stated redemption price first to accrued market discount not
previously included in income. You must recognize ordinary income to that
extent. You may elect to include market discount in income currently as it
accrues rather than including it on a deferred basis in accordance with the
foregoing. If made, this election will apply to all market discount bonds
acquired by you on or after the first day of the first taxable year to which
this election applies.
The Treasury regulations also permit you to elect to accrue all
interest and discount, including DE MINIMIS market or original issue discount,
in income as interest, and to amortize premium, based on a constant yield
method. Your making this election with respect to a REMIC regular certificate
with market discount would be deemed to be an election to include currently
market discount in income with respect to all other debt instruments with market
discount that you acquire during the taxable year of the election or thereafter,
and possibly previously acquired instruments. Similarly, your making this
election as to a certificate acquired at a premium would be deemed to be an
election to amortize bond premium, with respect to all debt instruments having
amortizable bond premium that you own or acquire. See "--REMICs --Taxation of
Owners of REMIC Regular Certificates--Premium" below.
Each of the elections described above to accrue interest and discount,
and to amortize premium, with respect to a certificate on a constant yield
method or as interest would be irrevocable except with the approval of the IRS.
However, market discount with respect to a REMIC regular certificate
will be considered to be DE MINIMIS for purposes of Section 1276 of the Code if
the market discount is less than 0.25% of the remaining stated redemption price
of the certificate multiplied by the number of complete years to maturity
remaining after the date of its purchase. In interpreting a similar rule with
respect to original issue discount on obligations payable in installments, the
Treasury regulations refer to the weighted average maturity of
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obligations. It is likely that the same rule will be applied with respect to
market discount, presumably taking into account the prepayment assumption. If
market discount is treated as DE MINIMIS under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a DE MINIMIS amount. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. This treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period, you may accrue market discount on a REMIC regular
certificate held by you, at your option:
- on the basis of a constant yield method,
- in the case of a certificate issued without original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the stated interest paid in the
accrual period bears to the total amount of stated interest
remaining to be paid on the certificate as of the beginning of
the accrual period, or
- in the case of a certificate issued with original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount
accrued in the accrual period bears to the total amount of
original issue discount remaining on the certificate at the
beginning of the accrual period.
The prepayment assumption used in calculating the accrual of original
issue discount is also used in calculating the accrual of market discount.
To the extent that REMIC regular certificates provide for monthly or
other periodic payments throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which the discount would accrue if it were
original issue discount. Moreover, in any event a holder of a REMIC regular
certificate generally will be required to treat a portion of any gain on the
sale or exchange of the certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, Section 1277 of the Code may require you to defer a portion of
your interest deductions for the taxable year attributable to any indebtedness
incurred or continued to purchase or carry a REMIC regular certificate purchased
with market discount. For these purposes, the DE MINIMIS rule referred to above
applies. Any deferred interest expense would not exceed the market discount that
accrues during the related taxable year and is, in general, allowed as a
deduction not later than the year in which the related market discount is
includible in income. If you have elected, however, to include market discount
in income currently as it accrues, the interest deferral rule described above
would not apply.
PREMIUM. A REMIC regular certificate purchased at a cost, excluding any
portion of the cost attributable to accrued qualified stated interest, that is
greater than its remaining stated redemption price will be considered to be
purchased at a premium. You may elect under Section 171 of the Code to amortize
the premium under the constant yield method over the life of the certificate. If
you elect to amortize bond premium, bond premium would be amortized on a
constant yield method and would be applied as an offset
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against qualified stated interest. If made, this election will apply to all debt
instruments having amortizable bond premium that you own or subsequently
acquire. The IRS has issued regulations on the amortization of bond premium, but
they specifically do not apply to holders of REMIC regular certificates.
The Treasury regulations also permit you to elect to include all
interest, discount and premium in income based on a constant yield method,
further treating you as having made the election to amortize premium generally.
See "--Taxation of Owners of REMIC Regular Certificates--Market Discount" above.
The Committee Report states that the same rules that apply to accrual of market
discount and require the use of a prepayment assumption in accruing market
discount with respect to REMIC regular certificates without regard to whether
those certificates have original issue discount, will also apply in amortizing
bond premium under Section 171 of the Code.
Whether you will be treated as holding a REMIC regular certificate with
amortizable bond premium will depend on--
- the purchase price paid for your certificate, and
- the payments remaining to be made on your certificate at the
time of its acquisition by you.
If you acquire an interest in any class of REMIC regular certificates issued at
a premium, you should consider consulting your own tax advisor regarding the
possibility of making an election to amortize the premium.
REALIZED LOSSES. Under Section 166 of the Code, if you are either a
corporate holder of a REMIC regular certificate and or a noncorporate holder of
a REMIC regular certificate that acquires the certificate in connection with a
trade or business, you should be allowed to deduct, as ordinary losses, any
losses sustained during a taxable year in which your certificate becomes wholly
or partially worthless as the result of one or more realized losses on the
related mortgage loans. However, if you are a noncorporate holder that does not
acquire a REMIC regular certificate in connection with a trade or business, it
appears that--
- you will not be entitled to deduct a loss under Section 166 of
the Code until your certificate becomes wholly worthless,
which is when its principal balance has been reduced to zero,
and
- the loss will be characterized as a short-term capital loss.
You will also have to accrue interest and original issue discount with
respect to your REMIC regular certificate, without giving effect to any
reductions in payments attributable to defaults or delinquencies on the related
mortgage loans, until it can be established that those payment reductions are
not recoverable. As a result, your taxable income in a period could exceed your
economic income in that period. If any such amounts previously included in
taxable income are not ultimately received due to a loss on the related mortgage
loans, you should be able to recognize a loss or reduction in income. However,
the law is unclear with respect to the timing and character of this loss or
reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES.
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, the Code does not subject a REMIC to entity-level taxation, except
with regard to prohibited transactions and certain other transactions. See
"--REMICs--Prohibited Transactions Tax and Other Taxes" below. Rather, a holder
of REMIC residual certificates must generally take in income the taxable income
or net loss of the related
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REMIC. Accordingly, the Code treats the REMIC residual certificates much
differently than it would if they were direct ownership interests in the related
mortgage loans or as debt instruments issued by the related REMIC.
Holders of REMIC residual certificates generally will be required to
report their daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the related REMIC for each day during
a calendar quarter that they own those certificates. For this purpose, the
taxable income or net loss of the REMIC will be allocated to each day in the
calendar quarter ratably using a "30 days per month/90 days per quarter/360 days
per year" convention unless we otherwise disclose in the related prospectus
supplement. These daily amounts then will be allocated among the holders of the
REMIC residual certificates in proportion to their respective ownership
interests on that day. Any amount included in the certificateholders' gross
income or allowed as a loss to them by virtue of this paragraph will be treated
as ordinary income or loss. The taxable income of the REMIC will be determined
under the rules described below in "--REMICs--Taxation of Owners of REMIC
Residual Certificates--Taxable Income of the REMIC." Holders of REMIC residual
certificates must report the taxable income of the related REMIC without regard
to the timing or amount of cash payments by the REMIC until the REMIC's
termination. Income derived from the REMIC residual certificates will be
"portfolio income" for the purposes of the limitations under Section 469 of the
Code on the deducibility of "passive losses."
A holder of a REMIC residual certificate that purchased the certificate
from a prior holder also will be required to report on its federal income tax
return amounts representing its daily share of the taxable income, or net loss,
of the related REMIC for each day that it holds the REMIC residual certificate.
These daily amounts generally will equal the amounts of taxable income or net
loss determined as described above. The Committee Report indicates that certain
modifications of the general rules may be made, by regulations, legislation or
otherwise to reduce, or increase, the income of a holder of a REMIC residual
certificate. These modifications would occur when a holder purchases the REMIC
residual certificate from a prior holder at a price other than the adjusted
basis that the REMIC residual certificate would have had in the hands of an
original holder of that certificate. The Treasury regulations, however, do not
provide for these modifications.
Any payments that you receive from the seller of a REMIC residual
certificate in connection with the acquisition of that certificate will be
income to you. Although it is possible that these payments would be includible
in income immediately upon receipt, the IRS might assert that you should include
these payments in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of these payments, we recommend that you consult your tax advisor
concerning the treatment of these payments for income tax purposes.
Tax liability with respect to the amount of income that holders of
REMIC residual certificates will be required to report, will often exceed the
amount of cash payments received from the related REMIC for the corresponding
period. Consequently, you should have (i) other sources of funds sufficient to
pay any federal income taxes due as a result of your ownership of REMIC residual
certificates or (ii) unrelated deductions against which income may be offset.
See, however, the rules discussed below relating to:
- "excess inclusions,"
- residual interests without "significant value," and
- "noneconomic" residual interests.
The fact that the tax liability associated with this income allocated to you may
exceed the cash payments received by you for the corresponding period may
significantly and adversely affect their after-tax rate of
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return. This disparity between income and payments may not be offset by
corresponding losses or reductions of income attributable to your REMIC residual
certificates until subsequent tax years. Even then, the extra income may not be
completely offset due to changes in the Code, tax rates or character of the
income or loss. Therefore, REMIC residual certificates will ordinarily have a
negative "value" at the time of issuance. See "Risk Factors--'Residual
Interests' in a 'Real Estate Mortgage Investment Conduit' Have Adverse Tax
Consequences."
TAXABLE INCOME OF THE REMIC. The taxable income of a REMIC will equal:
- the income from the mortgage loans and other assets of the
REMIC; plus
- any cancellation of indebtedness income due to the allocation
of realized losses to those REMIC certificates constituting
"regular interests" in the REMIC; less
- the following items--
(i) the deductions allowed to the REMIC for interest,
including original issue discount but reduced by any
premium on issuance, on any class of REMIC
certificates constituting "regular interests" in the
REMIC, whether offered or not,
(ii) amortization of any premium on the mortgage loans
held by the REMIC,
(iii) bad debt losses with respect to the mortgage loans
held by the REMIC, and
(iv) except as described below, servicing, administrative
and other expenses.
For purposes of determining its taxable income, a REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC certificates, or in the case of REMIC certificates not sold initially,
their fair market values. The aggregate basis will be allocated among the
mortgage loans and the other assets of the REMIC in proportion to their
respective fair market values. The issue price of any REMIC certificates offered
hereby will be determined in the manner described above under
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." The issue price of a REMIC certificate received in exchange for an
interest in mortgage loans or other property will equal the fair market value of
the interests in the mortgage loans or other property. Accordingly, if one or
more classes of REMIC certificates are retained initially rather than sold, the
related tax administrator may be required to estimate the fair market value of
these interests in order to determine the basis of the REMIC in the mortgage
loans and other property held by the REMIC.
Subject to possible application of the DE MINIMIS rules, the method of
accrual by a REMIC of original issue discount income and market discount income
with respect to mortgage loans that it holds will be equivalent to the method
for accruing original issue discount income for holders of REMIC regular
certificates. That method is a constant yield method taking into account the
prepayment assumption. However, a REMIC that acquires loans at a market discount
must include that market discount in income currently, as it accrues, on a
constant yield basis. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing the discount income
that is analogous to that required to be used by a REMIC as to mortgage loans
with market discount that it holds.
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A REMIC will acquire a mortgage loan with discount, or premium, to the
extent that the REMIC's basis, determined as described in the preceding
paragraph, is different from its stated redemption price. Discount will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to that income, under a method similar to the method
described above for accruing original issue discount on the REMIC regular
certificates. A REMIC probably will elect under Section 171 of the Code to
amortize any premium on the mortgage loans that it holds. Premium on any
mortgage loan to which this election applies may be amortized under a constant
yield method, presumably taking into account the prepayment assumption.
A REMIC will be allowed deductions for interest, including original
issue discount, on all of the certificates that constitute "regular interests"
in the REMIC, whether or not offered hereby, as if those certificates were
indebtedness of the REMIC. Original issue discount will be considered to accrue
for this purpose as described above under "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount." However, the DE MINIMIs rule
described in that section will not apply in determining deductions.
If a class of REMIC regular certificates is issued at a price in excess
of the stated redemption price of that class, the net amount of interest
deductions that are allowed to the REMIC in each taxable year with respect to
those certificates will be reduced by an amount equal to the portion of that
excess that is considered to be amortized in that year. It appears that this
excess should be amortized under a constant yield method in a manner analogous
to the method of accruing original issue discount described above under
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount."
As a general rule, the taxable income of a REMIC will be determined as
if the REMIC were an individual having the calendar year as its taxable year and
using the accrual method of accounting. However, no item of income, gain, loss
or deduction allocable to a prohibited transaction will be taken into account.
See "--REMICs--Prohibited Transactions Tax and Other Taxes" below. Further, the
limitation on miscellaneous itemized deductions imposed on individuals by
Section 67 of the Code will not be applied at the REMIC level so that the REMIC
will be allowed full deductions for servicing, administrative and other
noninterest expenses in determining its taxable income. All such expenses will
be allocated as a separate item to the holders of the related REMIC
certificates, subject to the limitation of Section 67 of the Code. See
"--REMICs--Taxation of Owners of REMIC Residual Certificates--Possible
Pass-Through of Miscellaneous Itemized Deductions" below. If the deductions
allowed to the REMIC exceed its gross income for a calendar quarter, the excess
will be the net loss for the REMIC for that calendar quarter.
BASIS RULES, NET LOSSES AND PAYMENTS. The adjusted basis of a REMIC
residual certificate will be equal to:
(i) the amount paid for that REMIC residual certificate,
(ii) increased by, amounts included in the income of the holder of
that REMIC residual certificate, and
(iii) decreased, but not below zero, by payments made, and by net
losses allocated, to the holder of that REMIC residual
certificate.
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A holder of a REMIC residual certificate is not allowed to take into
account any net loss for any calendar quarter to the extent that the net loss
exceeds the adjusted basis to that holder as of the close of that calendar
quarter, determined without regard to that net loss. Any loss that is not
currently deductible by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same limitation,
may be used only to offset income from the REMIC residual certificate.
Any payment on a REMIC residual certificate will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC residual certificate. To the extent a payment on a
REMIC residual certificate exceeds the holder's adjusted basis, it will be
treated as gain from the sale of that REMIC residual certificate.
A holder's basis in a REMIC residual certificate will initially equal
the amount paid for the certificate and will be increased by that holder's
allocable share of taxable income of the related REMIC. However, these increases
in basis may not occur until the end of the calendar quarter, or perhaps the end
of the calendar year, with respect to which the related REMIC's taxable income
is allocated to that holder. To the extent the initial basis of the holder of a
REMIC residual certificate is less than the payments to that holder, and
increases in the initial basis either occur after these payments or, together
with the initial basis, are less than the amount of these payments, gain will be
recognized to that holder on these payments. This gain will be treated as gain
from the sale of its REMIC residual certificate.
The effect of these rules is that a holder of a REMIC residual
certificate may not amortize its basis in a REMIC residual certificate, but may
only recover its basis:
- through payments,
- through the deduction of any net losses of the REMIC, or
- upon the sale of its REMIC residual certificate. See
"--REMICs--Sales of REMIC Certificates" below.
For a discussion of possible modifications of these rules that may
require adjustments to income of a holder of a REMIC residual certificate other
than an original holder see "--REMICs--Taxation of Owners of REMIC Residual
Certificates--General" above. These adjustments could require a holder of a
REMIC residual certificate to account for any difference between the cost of the
certificate to the holder and the adjusted basis of the certificate would have
been in the hands of an original holder.
EXCESS INCLUSIONS. Any "excess inclusions" with respect to a REMIC
residual certificate will be subject to federal income tax in all events. In
general, the "excess inclusions" with respect to a REMIC residual certificate
for any calendar quarter will be the excess, if any, of:
(i) the daily portions of REMIC taxable income allocable to that
certificate, over
(ii) the sum of the "daily accruals" for each day during the
quarter that the certificate was held by that holder.
The "daily accruals" of a holder of a REMIC residual certificate will
be determined by allocating to each day during a calendar quarter its ratable
portion of a numerical calculation. That calculation is the product of the
"adjusted issue price" of the REMIC residual certificate at the beginning of the
calendar quarter and 120% of the "long-term Federal rate" in effect on the date
of initial issuance. For this purpose, the "adjusted issue price" of a REMIC
residual certificate as of the beginning of any calendar quarter will be equal
to:
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(i) the issue price of the certificate, increased by
(ii) the sum of the daily accruals for all prior quarters, and
decreased, but not below zero, by
(iii) any payments made with respect to the certificate before the
beginning of that quarter.
The issue price of a REMIC residual certificate is the initial offering
price to the public at which a substantial amount of the REMIC residual
certificates were sold, but excluding sales to bond houses, brokers and
underwriters or, if no sales have been made, their initial value. The "long-term
Federal rate" is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.
Although it has not done so, the Treasury Department has authority to
issue regulations that would treat the entire amount of income accruing on a
REMIC residual certificate as excess inclusions if the REMIC residual interest
evidenced by that certificate is considered not to have "significant value."
For holders of REMIC residual certificates, excess inclusions:
- will not be permitted to be offset by deductions, losses or
loss carryovers from other activities,
- will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization, and
- will not be eligible for any rate reduction or exemption under
any applicable tax treaty with respect to the 30% United
States withholding tax imposed on payments to holders of REMIC
residual certificates that are foreign investors. See,
however, "--REMICs--Foreign Investors in REMIC Certificates"
below.
Furthermore, for purposes of the alternative minimum tax:
- excess inclusions will not be permitted to be offset by the
alternative tax net operating loss deduction, and
- alternative minimum taxable income may not be less than the
taxpayer's excess inclusions.
This last rule has the effect of preventing non-refundable tax credits from
reducing the taxpayer's income tax to an amount lower than the alternative
minimum tax on excess inclusions.
In the case of any REMIC residual certificates held by a real estate
investment trust, or REIT, the aggregate excess inclusions with respect to these
REMIC residual certificates will be allocated among the shareholders of the REIT
in proportion to the dividends received by the shareholders from the REIT. Any
amount so allocated will be treated as an excess inclusion with respect to a
REMIC residual certificate as if held directly by the shareholder. The aggregate
excess inclusions referred to in the previous sentence will be reduced, but not
below zero, by any REIT taxable income, within the meaning of Section 857(b)(2)
of the Code, other than any net capital gain. Treasury regulations yet to be
issued could apply a similar rule to:
- regulated investment companies,
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- common trusts, and
- certain cooperatives.
The Treasury regulations, however, currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. Under the Treasury
regulations, transfers of "noneconomic" REMIC residual certificates will be
disregarded for all federal income tax purposes if "a significant purpose of the
transfer was to enable the transferor to impede the assessment or collection of
tax." If a transfer is disregarded, the purported transferor will continue to
remain liable for any taxes due with respect to the income on the "noneconomic"
REMIC residual certificate. The Treasury regulations provide that a REMIC
residual certificate is noneconomic unless, based on the prepayment assumption
and on any required or permitted clean up calls, or required liquidation
provided for in the related Governing Document:
- the present value of the expected future payments on the REMIC
residual certificate equals at least the present value of the
expected tax on the anticipated excess inclusions, and
- the transferor reasonably expects that the transferee will
receive payments with respect to the REMIC residual
certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes.
The present value calculation referred to above is calculated using the
"applicable Federal rate" for obligations whose term ends on the close of the
last quarter in which excess inclusions are expected to accrue with respect to
the REMIC residual certificate. This rate is computed and published monthly by
the IRS.
Accordingly, all transfers of REMIC residual certificates that may
constitute noneconomic residual interests will be subject to certain
restrictions under the terms of the related Governing Document that are intended
to reduce the possibility of any transfer being disregarded. These restrictions
will require an affidavit:
- from each party to the transfer, stating that no purpose of
the transfer is to impede the assessment or collection of tax,
- from the prospective transferee, providing certain
representations as to its financial condition, and
- from the prospective transferor, stating that it has made a
reasonable investigation to determine the transferee's
historic payment of its debts and ability to continue to pay
its debts as they come due in the future.
The Treasury recently issued proposed regulations that would revise
this safe harbor. The proposed regulations would make the safe harbor
unavailable unless the present value of the anticipated tax liabilities
associated with holding the residual interest did not exceed the sum of:
- the present value of any consideration given to the transferee
to acquire the interest,
- the present value of the expected future distributions on the
interest, and
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- the present value of the anticipated tax savings associated
with the holding of the interest as the REMIC generates
losses.
Present values would be computed using a discount rate equal to an "applicable
Federal rate," except that if a transferee could demonstrate that it borrowed
regularly in the course of its trade or business substantial funds at a lower
rate from unrelated third parties, that lower rate could be used as the discount
rate.
It is not clear when those regulations would be effective. Although
the text of the proposed regulations states that they would be effective on
February 4, 2000, the preamble to the proposed regulations says that these
regulations will apply to transfers of REMIC residual interests made after
the date the final regulations are published in the Federal Register. The
Treasury Department is anticipated to issue clarification with regard to
these conflicting statements regarding the effective date of the proposed
regulations shortly.
Prior to purchasing a REMIC residual certificate, prospective
purchasers should consider the possibility that a purported transfer of a REMIC
residual certificate to another party at some future date may be disregarded in
accordance with the above-described rules. This would result in the retention of
tax liability by the transferor in respect of that purported transfer.
We will disclose in the related prospectus supplement whether the
offered REMIC residual certificates may be considered "noneconomic" residual
interests under the Treasury regulations. However, we will base any disclosure
that a REMIC residual certificate will not be considered "noneconomic" upon
certain assumptions. Further, we will make no representation that a REMIC
residual certificate will not be considered "noneconomic" for purposes of the
above-described rules.
See "--REMICs--Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of certain REMIC residual
certificates to foreign persons.
MARK-TO-MARKET RULES. Regulations under Section 475 of the Code require
that a securities dealer mark to market securities held for sale to customers.
This mark-to-market requirement applies to all securities owned by a dealer,
except to the extent that the dealer has specifically identified a security as
held for investment. These regulations provide that for purposes of this
mark-to-market requirement, a REMIC residual certificate is not treated as a
security for purposes of Section 475 of the Code. Thus, a REMIC residual
certificate is not subject to the mark-to-market rules. We recommend that
prospective purchasers of a REMIC residual certificate consult their tax
advisors regarding these regulations.
FOREIGNERS MAY NOT HOLD REMIC RESIDUAL CERTIFICATES. Unless we
otherwise state in the related prospectus supplement, transfers of REMIC
residual certificates to investors that are foreign persons under the Code will
be prohibited under the related Governing Document. If transfers of REMIC
residual certificates to investors that are foreign persons are permitted
pursuant to the related Governing Document, we will describe in the related
prospectus supplement additional restrictions applicable to transfers of certain
REMIC residual certificates to these persons.
PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. Fees and expenses of
a REMIC generally will be allocated to the holders of the related REMIC residual
certificates. The applicable Treasury regulations indicate, however, that in the
case of a REMIC that is similar to a single class grantor trust, all or a
portion of these fees and expenses should be allocated to the holders of the
related REMIC regular certificates. Unless we state otherwise in the related
prospectus supplement, however, these fees and expenses will be allocated to
holders of the related REMIC residual certificates in their entirety and not to
the holders of the related REMIC regular certificates.
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If the holder of a REMIC certificate receives an allocation of fees and
expenses in accordance with the preceding discussion, and if that holder is:
- an individual,
- an estate or trust, or
- a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, then--
- an amount equal to this individual's, estate's or trust's
share of these fees and expenses will be added to the gross
income of this holder, and
- the individual's, estate's or trust's share of these fees and
expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code,
which permits the deduction of these fees and expenses only to
the extent they exceed in the aggregate 2% of a taxpayer's
adjusted gross income.
In addition, Section 68 of the Code provides that the amount of
itemized deductions otherwise allowable for an individual whose adjusted gross
income exceeds a specified amount will be reduced by the lesser of:
- 3% of the excess of the individual's adjusted gross income
over the specified amount, or
- 80% of the amount of itemized deductions otherwise allowable
for the taxable year.
Furthermore, in determining the alternative minimum taxable income of a
holder of a REMIC certificate that is--
- an individual,
- an estate or trust, or
- a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts,
no deduction will be allowed for the holder's allocable portion of servicing
fees and other miscellaneous itemized deductions of the REMIC, even though an
amount equal to the amount of these fees and other deductions will be included
in the holder's gross income.
The amount of additional taxable income reportable by holders of REMIC
certificates that are subject to the limitations of either Section 67 or Section
68 of the Code, or the complete disallowance of the related expenses for
alternative minimum tax purposes, may be substantial.
Accordingly, REMIC certificates to which these expenses are allocated
will generally not be appropriate investments for:
- an individual,
- an estate or trust, or
- a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts.
We recommend that such prospective investors consult with their tax
advisors prior to making an investment in a REMIC certificate to which these
expenses are allocated.
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SALES OF REMIC CERTIFICATES. If a REMIC certificate is sold, the
selling certificateholder will recognize gain or loss equal to the difference
between the amount realized on the sale and its adjusted basis in the REMIC
certificate. The adjusted basis of a REMIC regular certificate generally will
equal:
- the cost of the certificate to that certificateholder,
increased by
- income reported by that certificateholder with respect to the
certificate, including original issue discount and market
discount income, and reduced, but not below zero, by
- payments on the certificate received by that certificateholder
and by that amortized premium.
The adjusted basis of a REMIC residual certificate will be determined
as described above under "--REMICs--Taxation of Owners of REMIC Residual
Certificates--Basis Rules, Net Losses and Distributions." Except as described
below, any gain or loss from your sale of a REMIC certificate will be capital
gain or loss, provided that you hold the certificate as a capital asset within
the meaning of Section 1221 of the Code, which is generally property held for
investment.
In addition to the recognition of gain or loss on actual sales, the
Code requires the recognition of gain (but not loss) upon the "constructive sale
of an appreciated financial position." A constructive sale of an appreciated
financial position occurs if a taxpayer enters into certain transactions or
series of such transactions that have the effect of substantially eliminating
the taxpayer's risk of loss and opportunity for gain with respect to the
financial instrument. Debt instruments that--
- entitle the holder to a specified principal amount,
- pay interest at a fixed or variable rate, and
- are not convertible into the stock of the issuer or a related
party,
cannot be the subject of a constructive sale for this purpose. Because most
REMIC regular certificates meet this exception, Section 1259 will not apply to
most REMIC regular certificates. However, REMIC regular certificates that have
no, or a disproportionately small, amount of principal, can be the subject of a
constructive sale.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for the taxable year. A taxpayer
would do so because of the rule that limits the deduction of interest on
indebtedness incurred to purchase or carry property held for investment to a
taxpayer's net investment income.
As of the date of this prospectus, the Code provides for lower rates as
to long-term capital gains than those applicable to the short-term capital gains
and ordinary income recognized or received by individuals. No such rate
differential exists for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss is relevant for other purposes
to both individuals and corporations.
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Gain from the sale of a REMIC regular certificate that might otherwise
be a capital gain will be treated as ordinary income to the extent that the gain
does not exceed the excess, if any, of:
- the amount that would have been includible in the seller's
income with respect to that REMIC regular certificate assuming
that income had accrued thereon at a rate equal to 110% of the
"applicable Federal rate" determined as of the date of
purchase of the certificate, which is a rate based on an
average of current yields on Treasury securities having a
maturity comparable to that of the certificate based on the
application of the prepayment assumption to the certificate,
over
- the amount of ordinary income actually includible in the
seller's income prior to that sale.
In addition, gain recognized on the sale of a REMIC regular certificate
by a seller who purchased the certificate at a market discount will be taxable
as ordinary income in an amount not exceeding the portion of that discount that
accrued during the period the certificate was held by the seller, reduced by any
market discount included in income under the rules described above under
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Market Discount"
and "--Premium."
REMIC certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
the sale of a REMIC certificate by a bank or thrift institution to which that
section of the Code applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC regular certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that a holder holds the certificate as part of a "conversion transaction" within
the meaning of Section 1258 of the Code. A conversion transaction generally is
one in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in that transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction.
Except as may be provided in Treasury regulations yet to be issued, a
loss realized on the sale of a REMIC residual certificate will be subject to the
"wash sale" rules of Section 1091 of the Code, if during the period beginning
six months before, and ending six months after, the date of that sale the seller
of that certificate:
- reacquires that same REMIC residual certificate,
- acquires any other residual interest in a REMIC, or
- acquires any similar interest in a "taxable mortgage pool," as
defined in Section 7701(i) of the Code.
In that event, any loss realized by the holder of a REMIC residual certificate
on the sale will not be recognized or deductible currently, but instead will be
added to that holder's adjusted basis in the newly-acquired asset.
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PROHIBITED TRANSACTIONS TAX AND OTHER TAXES. The Code imposes a tax on
REMICs equal to 100% of the net income derived from "prohibited transactions."
In general, subject to certain specified exceptions, a prohibited transaction
includes:
- the disposition of a non-defaulted mortgage loan,
- the receipt of income from a source other than a mortgage loan
or certain other permitted investments,
- the receipt of compensation for services, or
- the gain from the disposition of an asset purchased with
collections on the mortgage loans for temporary investment
pending payment on the REMIC certificates.
It is not anticipated that any REMIC will engage in any prohibited transactions
as to which it would be subject to this tax.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property. The
related Governing Document will include provisions designed to prevent the
acceptance of any contributions that would be subject to this tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to REITs. "Net income from foreclosure property" generally
means income from foreclosure property other than qualifying rents and other
qualifying income for a REIT. Under certain circumstances, the special servicer
may be authorized to conduct activities with respect to a mortgaged property
acquired by a trust that causes the trust to incur this tax if doing so would,
in the reasonable discretion of the special servicer, maximize the net after-tax
proceeds to certificateholders. However, under no circumstance will the special
servicer cause the acquired mortgaged property to cease to be a "permitted
investment" under Section 860G(a)(5) of the Code.
Unless we otherwise disclose in the related prospectus supplement, it
is not anticipated that any material state or local income or franchise tax will
be imposed on any REMIC.
Unless we state otherwise in the related prospectus supplement, and to
the extent permitted by then applicable laws, any tax on prohibited
transactions, certain contributions or "net income from foreclosure property,"
and any state or local income or franchise tax, that may be imposed on the REMIC
will be borne by the related trustee, tax administrator, master servicer,
special servicer or manager, in any case out of its own funds, provided that--
- the person has sufficient assets to do so, and
- the tax arises out of a breach of that person's obligations
under the related Governing Document.
Any tax not borne by one of these persons would be charged against the related
trust resulting in a reduction in amounts payable to holders of the related
REMIC certificates.
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TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO
CERTAIN ORGANIZATIONS. If a REMIC residual certificate is transferred to a
"disqualified organization," a tax will be imposed in an amount equal to the
product of:
(i) the present value of the total anticipated excess inclusions
with respect to the REMIC residual certificate for periods
after the transfer, and
(ii) the highest marginal federal income tax rate applicable to
corporations.
The value of the anticipated excess inclusions is discounted using the
"applicable Federal rate" for obligations whose term ends on the close of the
last quarter in which excess inclusions are expected to accrue with respect to
the REMIC residual certificate.
The anticipated excess inclusions must be determined as of the date
that the REMIC residual certificate is transferred and must be based on:
- events that have occurred up to the time of the transfer,
- the prepayment assumption, and
- any required or permitted clean up calls or required
liquidation provided for in the related Governing Document.
The tax on transfers to "disqualified organizations" generally would be
imposed on the transferor of the REMIC residual certificate, except when the
transfer is through an agent for a disqualified organization. In that case, the
tax would instead be imposed on the agent. However, a transferor of a REMIC
residual certificate would in no event be liable for the tax with respect to a
transfer if:
- the transferee furnishes to the transferor an affidavit that
the transferee is not a disqualified organization, and
- as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC residual certificate, and a disqualified
organization is the record holder of an interest in that entity, then a tax will
be imposed on that entity equal to the product of:
- the amount of excess inclusions on the certificate that are
allocable to the interest in the pass- through entity held by
the disqualified organization, and
- the highest marginal federal income tax rate imposed on
corporations.
A pass-through entity will not be subject to this tax for any period,
however, if each record holder of an interest in that pass-through entity
furnishes to that pass-through entity:
- the holder's social security number and a statement under
penalties of perjury that the social security number is that
of the record holder, or
- a statement under penalties of perjury that the record holder
is not a disqualified organization.
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For taxable years beginning on or after January 1, 1998, if an
"electing large partnership" holds a REMIC residual certificate, all interests
in the electing large partnership are treated as held by disqualified
organizations for purposes of the tax imposed on pass-through entities described
in the second preceding paragraph. This tax on electing large partnerships must
be paid even if each record holder of an interest in that partnership provides a
statement mentioned in the prior paragraph.
For these purposes, a "disqualified organization" means:
- the United States,
- any State or political subdivision thereof,
- any foreign government,
- any international organization,
- any agency or instrumentality of the foregoing, except for
instrumentalities described in Section 168(h)(2)(D) of the
Code or the FHLMC,
- any organization, other than a cooperative described in
Section 521 of the Code, that is exempt from federal income
tax, except if it is subject to the tax imposed by Section 511
of the Code, or
- any organization described in Section 1381(a)(2)(C) of the
Code.
For these purposes, a "pass-through entity" means any:
- regulated investment company,
- real estate investment trust,
- trust,
- partnership, or
- certain other entities described in Section 860E(e)(6) of the
Code.
For these purposes, an "electing large partnership" means any
partnership having more than 100 members during the preceding tax year which
elects to apply simplified reporting provisions under the Code, except for
certain service partnerships and commodity pools.
In addition, a person holding an interest in a pass-through entity as a
nominee for another person will, with respect to that interest, be treated as a
pass-through entity.
Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that:
- the residual interests in the entity are not held by
disqualified organizations, and
- the information necessary for the application of the tax
described herein will be made available.
We will include in the related Governing Document restrictions on the
transfer of REMIC residual certificates and certain other provisions that are
intended to meet this requirement, and we will discuss those restrictions and
provisions in any prospectus supplement relating to the offering of any REMIC
residual certificate.
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The Clinton Administration recently proposed in its budget certain
amendments to the REMIC provisions designed to ensure that income taxes imposed
on the holder of a REMIC residual interest are paid when due. Those provisions
would impose secondary liability on the REMIC itself for any tax required to be
paid with respect to the income allocated to a REMIC residual interest if the
holder does not pay its taxes on that income when they are due. If adopted, the
amendments would be effective for REMICs created after the date of enactment. It
is not possible to predict whether the legislation will be adopted or, if so, in
what form.
TERMINATION. A REMIC will terminate immediately after the payment date
following receipt by the REMIC of the final payment in respect of the related
mortgage loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last payment on a REMIC regular
certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC residual certificate, if the last payment on that
certificate is less than the REMIC residual certificateholder's adjusted basis
in the certificate, that holder should, but may not, be treated as realizing a
capital loss equal to the amount of that difference.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Code, a REMIC will be treated as a partnership
and holders of the related REMIC residual certificates will be treated as
partners. Unless we otherwise state in the related prospectus supplement, the
related tax administrator will file REMIC federal income tax returns on behalf
of the REMIC, and will be designated as and will act as or on behalf of the "tax
matters person" with respect to the REMIC in all respects. The related tax
administrator may hold at least a nominal amount of REMIC residual certificates.
As, or as agent for, the tax matters person, the related tax
administrator, subject to certain notice requirements and various restrictions
and limitations, generally will have the authority to act on behalf of the REMIC
and the holders of the REMIC residual certificates in connection with the
administrative and judicial review of the REMIC's--
- income,
- deductions
- gains,
- losses, and
- classification as a REMIC.
Holders of REMIC residual certificates generally will be required to
report these REMIC items consistently with their treatment on the related
REMIC's tax return. In addition, these holders may in some circumstances be
bound by a settlement agreement between the related tax administrator, as, or as
agent for, the tax matters person, and the IRS concerning any REMIC item.
Adjustments made to the REMIC's tax return may require these holders to make
corresponding adjustments on their returns. An audit of the REMIC's tax return,
or the adjustments resulting from that audit, could result in an audit of a
holder's return.
No REMIC will be registered as a tax shelter pursuant to Section 6111
of the Code. Any person that holds a REMIC residual certificate as a nominee for
another person may be required to furnish to the related REMIC, in a manner to
be provided in Treasury regulations, the name and address of that other person,
as well as other information.
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Reporting of interest income, including any original issue discount,
with respect to REMIC regular certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent or made readily available through electronic
means to individual holders of REMIC regular certificates and the IRS. Holders
of REMIC regular certificates that are--
- corporations,
- trusts,
- securities dealers, and
- certain other non-individuals,
will be provided interest and original issue discount income information and the
information set forth in the following paragraphs. This information will be
provided upon request in accordance with the requirements of the applicable
regulations. The information must be provided by the later of:
- 30 days after the end of the quarter for which the information
was requested, or
- two weeks after the receipt of the request.
The REMIC must also comply with rules requiring a REMIC regular
certificate issued with original issue discount to disclose on its face the
amount of original issue discount and the issue date, and requiring that
information to be reported to the IRS. Reporting with respect to REMIC residual
certificates, including--
- income,
- excess inclusions,
- investment expenses, and
- relevant information regarding qualification of the REMIC's
assets,
will be made as required under the Treasury regulations, generally on a
quarterly basis.
As applicable, the REMIC regular certificate information reports will
include a statement of the adjusted issue price of the REMIC regular certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, the regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
Unless we otherwise specify in the related prospectus supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the related tax administrator for the subject REMIC.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES. Payments of
interest and principal, as well as payments of proceeds from the sale of REMIC
certificates, may be subject to the "backup withholding tax" under Section 3406
of the Code at a rate of 31% if recipients of these payments:
- fail to furnish to the payor certain information, including
their taxpayer identification numbers, or
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- otherwise fail to establish an exemption from this tax.
Any amounts deducted and withheld from a payment to a recipient would
be allowed as a credit against the recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES. Unless we otherwise disclose
in the related prospectus supplement, a holder of a REMIC regular certificate
that is--
- a foreign person, and
- not subject to federal income tax as a result of any direct or
indirect connection to the United States in addition to its
ownership of that certificate,
will normally not be subject to United States federal income or withholding tax
in respect of a payment on a REMIC regular certificate. To avoid withholding or
tax, that holder must comply with certain identification requirements. These
requirements include delivery of a statement, signed by the certificateholder
under penalties of perjury, certifying that the certificateholder is a foreign
person and providing the name and address of the certificateholder.
On October 6, 1997, the Treasury Department issued new regulations that
modify the withholding, backup withholding and information reporting rules
described above. These regulations, as modified by Treasury Decision 8856, will
generally be effective for investments made after December 31, 2000, subject to
certain transition rules. Prospective investors are urged to consult their own
tax advisors regarding these regulations.
For these purposes, a foreign person is anyone other than a United
States person. A "United States person" is:
- a citizen or resident of the United States,
- a corporation, partnership or other entity created or
organized in, or under the laws of, the United States or any
political subdivision thereof,
- an estate whose income from sources without the United States
is includible in gross income for United States federal income
tax purposes regardless of its connection with the conduct of
a trade or business within the United States, or
- a trust as to which--
(i) a court in the United States is able to exercise
primary supervision over the administration of the
trust, and
(ii) one or more United States persons have the authority
to control all substantial decisions of the trust.
In addition, to the extent provided in the Treasury Regulations, a trust will be
a United States person if it was in existence on August 20, 1996 and it elected
to be treated as a United States person.
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It is possible that the IRS may assert that the foregoing tax exemption
should not apply with respect to a REMIC regular certificate held by a person or
entity that owns directly or indirectly a 10% or greater interest in the related
REMIC residual certificates. If the holder does not qualify for exemption,
payments of interest, including payments in respect of accrued original issue
discount, to that holder may be subject to a tax rate of 30%, subject to
reduction under any applicable tax treaty.
It is possible, under regulations promulgated under Section 881 of the
Code concerning conduit financing transactions, that the exemption from
withholding taxes described above may also not be available to a holder who is a
foreign person and either--
- owns 10% or more of one or more underlying mortgagors, or
- if the holder is a controlled foreign corporation, is related
to one or more mortgagors in the applicable trust.
Further, it appears that a REMIC regular certificate would not be
included in the estate of a nonresident alien individual and would not be
subject to United States estate taxes. However, it is recommended that
certificateholders who are nonresident alien individuals consult their tax
advisors concerning this question.
Unless we otherwise state in the related prospectus supplement, the
related Governing Document will prohibit transfers of REMIC residual
certificates to investors that are:
- foreign persons, or
- United States persons, if classified as a partnership under
the Code, unless all of their beneficial owners are United
States persons.
FASITs
GENERAL. An election may be made to treat the trust for a series of
offered certificates or specified assets thereof, as a financial asset
securitization investment trust, or "FASIT," within the meaning of Section
860L(a) of the Code. Such an election would be noted in the applicable
prospectus supplement. If such an election is made, the offered certificates
will be designated as classes of "regular interests" and there will be one class
of "ownership interest" in the FASIT. With respect to each series of offered
certificates as to which the related tax administrator makes a FASIT election
and assuming:
- the making of an appropriate election,
- compliance with the related Governing Document, and
- subject to certain assumptions set forth in the opinion,
our counsel will deliver its opinion generally to the effect that,
- the relevant assets will qualify as a FASIT,
- one class thereof, the "FASIT ownership certificate" or the
"class "O" certificate," will represent the sole class of
ownership interest in that FASIT, and
- the remaining classes thereof, the "FASIT regular
certificates," will represent "regular interests" in that
FASIT.
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Only the FASIT regular certificates are offered pursuant to this
prospectus. If so specified in the applicable prospectus supplement, a portion
of the trust for a series of certificates as to no FASIT election is made may be
treated as a grantor trust for federal income tax purposes. See "--Grantor
Trusts."
On February 4, 2000, the Treasury Department issued proposed
regulations relating to FASITs. References to the "FASIT proposed regulations"
in this discussion refer to those proposed regulations. The proposed regulations
have not been adopted as final and, in general, are not proposed to be effective
as of the date of this prospectus. They nevertheless are indicative of the rules
the Treasury Department currently views as appropriate with regard to the FASIT
provisions.
CHARACTERIZATION OF INVESTMENTS IN FASIT REGULAR CERTIFICATES. FASIT
regular certificates held by a real estate investment trust will constitute
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code
and interest on the FASIT regular certificates will be considered "interest
on obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code in the same
proportion, for both purposes, that the assets and income of the FASIT would
be so treated. FASIT regular certificates held by a domestic building and
loan association will be treated as "regular interest[s] in a FASIT" under
Section 7701(a)(19)(C)(xi) of the Code, but only in the proportion that the
FASIT holds "loans secured by an interest in real property which is . . .
residential real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code. For this purpose, mortgage loans secured by multifamily residential
housing should qualify. It is also likely that mortgage loans secured by
health care related facilities would qualify as "loans secured by an interest
in . . . health institutions or facilities, including structures designed or
used primarily for residential purposes for . . . persons under care" within
the meaning of Section 7701(a)(19)(C)(vii) of the Code. If at all times 95%
or more of the assets of the FASIT or the income thereon qualify for the
foregoing treatments, the FASIT regular certificates will qualify for the
corresponding status in their entirety. Mortgage loans which have been
defeased with Treasury obligations and the income therefrom will not qualify
for the foregoing treatments. Accordingly, the FASIT regular certificates may
not be a suitable investment for you if you require a specific amount or
percentage of assets or income meeting the foregoing treatments. For purposes
of Section 856(c)(4)(A) of the Code, payments of principal and interest on a
mortgage loan that are reinvested pending distribution to holders of FASIT
regular certificates should qualify for that treatment. FASIT regular
certificates held by a regulated investment company will not constitute
"government securities" within the meaning of Section 851(b)(4)(A)(i) of the
Code. FASIT regular certificates held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of Section
582(c)(1) of the Code.
QUALIFICATION AS A FASIT.
GENERAL. In order to qualify as a FASIT, the trust for a series of
offered certificates or specified assets thereof must comply with the
requirements set forth in the Code on an ongoing basis. The FASIT must fulfill
an asset test, which requires that substantially all of the assets of the FASIT,
as of the close of the third calendar month beginning after the "startup day"
(which for purposes of this discussion is the date of the initial issuance of
the FASIT regular certificates) and at all times thereafter, be "permitted
assets." "Permitted assets" include cash or cash equivalents, certain debt
instruments (other than debt instruments issued by the owner of the FASIT or a
related party) and hedges (and contracts to acquire the same), foreclosure
property and regular interests in another FASIT or in a REMIC. Certain
restrictions apply to each type of permitted asset, as discussed below. Under
the FASIT proposed regulations, the "substantially all" requirement would be met
if at all times the aggregate adjusted basis of the "permitted assets" is more
than 99 percent of the aggregate adjusted basis of all the assets held by the
FASIT, including assets deemed to be held by the FASIT under Section 860I(b)(2)
of the Code because they "support" a regular interest in the FASIT. The FASIT
provisions also require the FASIT ownership interest to be held only by certain
fully
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taxable domestic corporations and do not recognize transfers of certain
"high-yield" regular interests (described below) to taxpayers other than fully
taxable domestic corporations or other FASITs. The related Governing Document
will provide that no legal or beneficial interest in the ownership interest or
in any class or classes of certificates that we determine to be a high-yield
regular interests may be transferred or registered unless certain conditions,
designed to prevent violation of this requirement, are met.
PERMITTED ASSETS. The proposed regulations enumerate certain types of
debt that qualify as permitted assets for a FASIT. The FASIT provisions provide
that permitted debt instruments must bear interest, if any, at a fixed or
qualified variable rate. Under the FASIT proposed regulations, the definition of
permitted debt would include REMIC regular interests, regular interests of other
FASITs, inflation indexed debt instruments, credit card receivables and certain
stripped bonds and coupons. However, the FASIT proposed regulations except
equity linked debt instruments and defaulted debt instruments from "permitted
assets." In addition, debt of the owner of the FASIT ownership interest, debt
guaranteed by the owner of the FASIT ownership interest in circumstances such
that the owner is in substance the primary obligor on the debt instrument, or
debt issued by third-parties that is linked to the performance or payments of
debt instruments issued by the owner or a related person, are not "permitted
assets. Finally, debt that is traded on an established securities market and
subject to a foreign withholding tax is not a "permitted asset."
Permitted hedges include interest rate or foreign currency notional
principal contracts, letters of credit, insurance, guarantees of payment default
and similar instruments. Such hedges must be reasonably required to guarantee or
hedge against the FASIT's risks associated with being the obligor on interests
issued by the FASIT. The FASIT proposed regulations do not include a list of
specified permitted hedges or guarantees, but rather focus on the intended
function of a hedge and permit such a contract to offset the following risk
factors:
- fluctuations in market interest rates;
- fluctuations in currency exchange rates;
- the credit quality of, or default on, the FASIT's assets or
debt instruments underlying the FASIT's assets; and
- the receipt of payments on the FASIT's assets earlier or later
than originally anticipated.
The FASIT proposed regulations prohibit a hedge or guarantee from
referencing assets other than permitted assets, indices, economic indicators or
financial averages that are not both widely disseminated and designed to
correlate closely with the changes in one or more of the risk factors described
above. However, under the FASIT proposed regulations, FASIT owners will be able
to hold hedges or guarantees inside a FASIT that do not relate to the already
issued regular interests, or to assets the FASIT already holds, if the FASIT
expects to issue regular interests, or expects to hold assets, that are related
to the hedge or guarantee in question. The proposed regulations also place
certain restrictions on hedges and guarantees entered into with the holder of
the FASIT ownership interest or a related party.
Property acquired in connection with the default or imminent default of
a debt instrument held by a FASIT may qualify both as foreclosure property and
as a type of permitted asset under the FASIT provisions. It will in general
continue to qualify as foreclosure property during a grace period that runs
until the end of the third taxable year beginning after the taxable year in
which the FASIT acquires the foreclosure property. Under the FASIT proposed
regulations, if the foreclosure property also would qualify as another type of
permitted asset, it may be held beyond the close of that grace period. However,
at the close of the grace period, gain, if any, on the property must be
recognized as if the property had been contributed by the owner of the FASIT on
that date. In addition, the FASIT proposed regulations provide that, after the
close of the grace period, disposition of the foreclosure property is
potentially subject to a 100% prohibited
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transactions tax (described below) without the benefit of an exception to this
tax applicable to sales of foreclosure property.
PERMITTED INTERESTS. In addition to the foregoing, interests in a
FASIT also must meet certain requirements. All of the interests in a FASIT must
be either of the following:
- a single class of ownership interest, or
- one or more classes of regular interests.
An ownership interest is an interest in a FASIT other than a regular interest
that is issued on the startup day, is designated an ownership interest and is
held by a single, fully-taxable, domestic corporation. A regular interest is an
interest in a FASIT that is issued on or after the startup day with fixed terms,
is designated as a regular interest, and--
1. unconditionally entitles the holder to receive a specified
principal amount (or other similar amount),
2. provides that interest payments (or other similar amounts), if
any, at or before maturity either are payable based on a fixed
rate or a qualified variable rate,
3. has a stated maturity of not longer than 30 years,
4. has an issue price not greater than 125% of its stated
principal amount, and
5. has a yield to maturity not greater than 5 percentage points
higher than the applicable Federal rate (as defined in Section
1274(d) of the Code) for Treasury obligations of a similar
maturity.
A regular interest that is described in the preceding sentence except that it
fails to meet one or more of requirements 1, 4 or 5, is a "high-yield"
regular interest. Further, to be a high-yield regular interest, an interest
that fails requirement 2 must consist of a "specified portion" of the
interest payments on the permitted assets, determined by reference to the
rules related to permitted rates for REMIC regular interests that have no, or
a disproportionately small, amount of principal. An interest in a FASIT may
be treated as a regular interest even if payments of principal with respect
to that interest are subordinated to payments on other regular interests or
the ownership interest in the FASIT, and are contingent on--
- the absence of defaults or delinquencies on permitted assets,
- lower than reasonably expected returns on permitted assets,
- unanticipated expenses incurred by the FASIT, or
- prepayment interest shortfalls.
CESSATION OF FASIT. If an entity fails to comply with one or more of
the ongoing requirements of the Code for status as a FASIT during any taxable
year, the Code provides that the entity or applicable portion thereof will
not be treated as a FASIT thereafter. In this event, any entity that holds
mortgage loans and is the obligor with respect to debt obligations with two
or more maturities will be classified, presumably, as a taxable mortgage pool
under general federal income tax principles, and the FASIT regular
certificates may be treated as equity interests therein. Under the FASIT
proposed regulations, the underlying arrangement generally cannot reelect
FASIT status and any election a FASIT owner made (other than the FASIT
election) and any method of accounting adopted with respect to the FASIT
assets, binds the underlying arrangement
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as if the underlying arrangement itself had made those elections or adopted that
method. In the case of an inadvertent cessation of a FASIT, under the FASIT
proposed regulations, the Commissioner of the IRS may grant relief from the
adverse consequences of that cessation, subject to such adjustments as the
Commissioner may require the FASIT and all holders of interests in the FASIT to
accept with respect to the period in which the FASIT failed to qualify as such.
Under the proposed FASIT regulation, apart from failure to qualify as a
FASIT, a FASIT may not revoke its election or cease to be a FASIT without the
consent of the Commissioner of the IRS.
Regular interest holders, in the case of cessation of a FASIT, are
treated as exchanging their FASIT regular interests for new interests in the
underlying arrangement. The FASIT proposed regulations would classify the new
interests under general principles of Federal income tax law, for example, as
interests in debt instruments, as interest in a partnership or interests in an
entity subject to corporate taxation, depending on what the classification of
those interests would have been in the absence of a FASIT election. On the
deemed receipt of that new interest, under the FASIT proposed regulations, you
would be required to mark the new interests to market and to recognize gain, but
would not be permitted to recognize loss, as though the old interest had been
sold for an amount equal to the fair market value of the new interest. Your
basis in the new interest deemed received in the underlying arrangement would
equal your basis in the FASIT regular interest exchanged for it, increased by
any gain you recognized on the deemed exchange.
TAXATION OF FASIT REGULAR CERTIFICATES. The FASIT regular certificates
generally will be treated for federal income tax purposes as newly-originated
debt instruments. In general, subject to the discussion below concerning
"high-yield interests," interest, original issue discount ("OID") and market
discount on a FASIT regular certificate will be treated as ordinary income to
the holder of that certificate, and principal payments (other than principal
payments that do not exceed accrued market discount) on a FASIT regular
certificate will be treated as a return of capital to the extent of the holder's
basis allocable thereto. You must use the accrual method of accounting with
respect to FASIT regular certificate, regardless of the method of accounting you
otherwise use.
Except as set forth in the applicable prospectus supplement and in
the immediately following discussion concerning "high-yield interests," the
discussions above under the headings "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount," "--Market Discount,"
"--Premium," and "--Realized Losses" will apply to the FASIT regular
certificates. The discussion under the headings "--REMICs--Sale of REMIC
regular certificates" will also apply to the FASIT regular certificates,
except that the treatment of a portion of the gain on a REMIC regular
interest as ordinary income to the extent the yield thereon did not exceed
110% of the applicable Federal rate will not apply.
HIGH YIELD INTERESTS; ANTI-AVOIDANCE EXCISE TAXES ON TIERED
ARRANGEMENTS. The taxable income, and the alternative minimum taxable income, of
any holder of a high-yield interest may not be less than the taxable income from
all high-yield interests and FASIT ownership interests that it holds, together
with any "excess inclusions" with respect to REMIC residual interests that it
owns.
High yield interests may only be held by fully taxable, domestic C
corporations or another FASIT. Any attempted transfer of a high-yield interest
to any other type of taxpayer will be disregarded, and the transferor will be
required to include in its gross income the amount of income attributable to the
high-yield interest notwithstanding its attempted transfer. The related
Governing Document will contain provisions and procedures designed to assure
that, in general, only domestic C corporations or other FASITs may acquire
high-yield interests. There is an exception allowing non-corporate taxpayers
that hold high-yield interest exclusively for sale to customers in the ordinary
course of business to do so, subject to an excise tax
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imposed at the corporate income tax rate if the holder ceases to be a dealer or
begins to hold the high-yield interest for investment. Unless otherwise
specified in the prospectus supplement, the related Governing Document will also
allow such holders to hold high-yield interests.
To prevent the avoidance of these rules through tiered arrangements, an
excise tax is imposed on any pass-through entity, such as a partnership, REIT,
regulated investment company, grantor trust or, under the FASIT proposed
regulations, REMIC, that holds any FASIT regular interest, whether or not that
FASIT regular interest is a high-yield interest, and issues a debt or equity
interest that is (i) supported by that FASIT regular interest and (ii) has a
yield, higher than the yield on that FASIT regular interest, that would cause
such debt or equity interest to be a high yield interest if it had been issued
by a FASIT. Under the statute, the amount of that tax, which is imposed on the
pass-through entity, is the highest corporate income tax rate applied to the
income of the holder of the debt or equity interest properly attributable to the
FASIT regular interest that supports it. The proposed FASIT regulations provide
that the tax is an excise tax that must be paid on or before the due date of the
pass-through entity's tax return for the taxable year in which it issues such a
debt or equity interest. This appears to contemplate a one-time payment on all
future income from the FASIT regular interest that is projected to be properly
attributable to the debt or equity interest it supports. It is not clear how
this amount is to be determined.
PROHIBITED TRANSACTIONS AND OTHER TAXES. Income or gain from certain
"prohibited transactions" by a FASIT are taxable to the holder of the ownership
interest in that FASIT at a 100% rate. Prohibited transactions generally
include, under the FASIT statutory provisions and proposed FASIT regulations:
- the receipt of income from other than permitted assets;
- the receipt of compensation for services;
- the receipt of any income derived from a loan originated by
the FASIT; or
- the disposition of a permitted asset (including disposition
pursuant to a cessation of FASIT status) other than for--
1. foreclosure, default, or imminent default of a
qualified mortgage,
2. bankruptcy or insolvency of the FASIT,
3. substitution for another permitted debt instrument or
distribution of the debt instrument to the holder of
the ownership interest to reduce
overcollateralization, but only if a principal
purpose of acquiring the debt instrument which is
disposed of was not the recognition of gain (or the
reduction of a loss) on the withdrawn asset as a
result of an increase in the market value of the
asset after its acquisition by the FASIT, or
4. the retirement of a class of FASIT regular interests.
The proposed regulations presume that certain transactions will be loan
originations, but also provide certain safe harbors for loans originated by the
FASIT. The proposed safe harbors apply in the following circumstances:
- if the FASIT acquires the loan from an established securities
market as described in Treasury regulation Sections
1.1273-2(f)(2) through (4),
- if the FASIT acquires the loan more than one year after the
loan was issued,
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- if the FASIT acquires the loan from a person that regularly
originates similar loans in the ordinary course of business,
- if the FASIT receives any new loan from the same obligor in
exchange for the obligor's original loan in the context of a
work out, and
- when the FASIT makes a loan pursuant to a contract or
agreement in the nature of a line of credit the FASIT is
permitted to hold.
The FASIT provisions generally exclude from prohibited transactions the
substitution of a debt instruments for another debt instrument which is a
permitted asset and the distribution of a debt instrument contributed by the
holder of the ownership interest to that holder in order to reduce
over-collateralization of the FASIT. In addition, the FASIT proposed regulations
also exclude transactions involving the disposition of hedges from the category
of prohibited transactions. However, the proposed regulations deem a
distribution of debt to be carried out principally to recognize gain, and to be
a prohibited transaction, if the owner (or related person) sells the substituted
or distributed debt instrument at a gain within 180 days of the substitution or
distribution. It is unclear the extent to which tax on those transactions could
be collected from the FASIT directly under the applicable statutes rather than
from the holder of the ownership interest. However, under the related Governing
Document, any such prohibited transactions tax that is not payable by a party
thereto as a result of its own actions will be paid by the FASIT. It is not
anticipated that the FASIT will engage in any prohibited transactions.
The Clinton Administration recently proposed in its budget certain
amendments to the FASIT provisions designed to ensure that income taxes imposed
on the holder of a FASIT ownership interest are paid when due. Such provisions
would impose secondary liability on the FASIT itself for any tax required to be
paid with respect to the income allocated to the FASIT ownership interest if
that holder does not pay its taxes on that income when they are due. If adopted,
the amendments would be effective for FASITs created after the date of
enactment. It is not possible to predict whether the legislation will be adopted
or, if so, in what form.
TAXATION OF CERTAIN FOREIGN INVESTORS. The federal income tax treatment
of non-U.S. persons who own FASIT regular certificates that are not "high-yield
interests" is the same as that described above under "--REMICs--Foreign
Investors in REMIC Regular Certificates." However, if you are a non-U.S. person,
you should note that under the FASIT proposed regulations certain interest paid
or accrued on a debt instrument held by the FASIT, if you hold a regular
interest (either directly or indirectly) in the FASIT, is treated as being
received by you directly from a conduit debtor for purposes of Subtitle A of the
Code and the regulations thereunder if:
- you are a 10% shareholder of an obligor on a debt instrument
held by the FASIT;
- you are a controlled foreign corporation to which an obligor
on a debt instrument held by the FASIT is a related person; or
- you are related to such an obligor that is a corporation or
partnership, in general, having common ownership to a greater
than 50% extent.
If you believe you may be in one of these categories, you should
consult with your tax advisors, in particular concerning the possible imposition
of United States withholding taxes at a 30% rate on interest paid with respect
to a FASIT regular interest under these circumstances.
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High-yield FASIT regular certificates may not be sold to or
beneficially owned by non-U.S. persons. Any such purported transfer will be null
and void and, upon the related trustee's discovery of any purported transfer in
violation of this requirement, the last preceding owner of those FASIT regular
certificates will be restored to ownership thereof as completely as possible.
The last preceding owner will, in any event, be taxable on all income with
respect to those FASIT regular certificates for federal income tax purposes. The
related Governing Document will provide that, as a condition to transfer of a
high-yield FASIT regular certificate, the proposed transferee must furnish an
affidavit as to its status as a U.S. person and otherwise as a permitted
transferee.
BACKUP WITHHOLDING. Payments made on the FASIT regular certificates,
and proceeds from the sale of the FASIT regular certificates to or through
certain brokers, may be subject to a "backup" withholding tax under Section
3406 of the Code in the same manner as described under "--REMICs--Backup
Withholding with Respect to REMIC Certificates" above.
REPORTING REQUIREMENTS. Reports of accrued interest, OID, if any,
and information necessary to compute the accrual of any market discount on
the FASIT regular certificates will be made annually to the IRS and to
investors in the same manner as described under "--REMICs--Reporting and
Other Administrative Matters" above.
GRANTOR TRUSTS
CLASSIFICATION OF GRANTOR TRUSTS. With respect to each series of
grantor trust certificates, our counsel will deliver its opinion to the effect
that, assuming compliance with all provisions of the related Governing Document,
the related trust, or relevant portion thereof, will be classified as a grantor
trust under subpart E, part I of subchapter J of the Code and not as a
partnership or an association taxable as a corporation.
For purposes of the following discussion:
- A grantor trust certificate representing an undivided
equitable ownership interest in the principal of the mortgage
loans constituting the related grantor trust, together with
interest thereon at a pass-through rate, will be referred to
as a "grantor trust fractional interest certificate."
- A grantor trust certificate representing ownership of all or a
portion of the difference between--
(i) interest paid on the mortgage loans constituting the
related grantor trust, minus
(ii) the sum of:
(a) normal administration fees, and
(b) interest paid to the holders of grantor
trust fractional interest certificates
issued with respect to that grantor trust
will be referred to as a "grantor trust strip certificate." A
grantor trust strip certificate may also evidence a nominal
ownership interest in the principal of the mortgage loans
constituting the related grantor trust.
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CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES.
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. Unless we otherwise
disclose in the related prospectus supplement, any offered certificates that are
grantor trust fractional interest certificates will generally represent
interests in:
- "loans . . . secured by an interest in real property" within
the meaning of Section 7701(a)(19)(C)(v) of the Code, but only
to the extent that the underlying mortgage loans have been
made with respect to property that is used for residential or
certain other prescribed purposes;
- "obligation[s] (including any participation or certificate of
beneficial ownership therein) which . . . [are] principally
secured by an interest in real property" within the meaning of
Section 860G(a)(3) of the Code;
- "permitted assets" within the meaning of Section 860L(a)(1)(C)
of the Code; and
- "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code.
In addition, interest on offered certificates that are grantor trust
fractional interest certificates will, to the same extent, be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Section 856(c)(3)(B) of the Code.
GRANTOR TRUST STRIP CERTIFICATES. Even if grantor trust strip
certificates evidence an interest in a grantor trust--
- consisting of mortgage loans that are "loans . . . secured by
an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code,
- consisting of mortgage loans that are "real estate assets"
within the meaning of Section 856(c)(5)(B) of the Code, and
- the interest on which is "interest on obligations secured by
mortgages on real property" within the meaning of Section
856(c)(3)(A) of the Code,
it is unclear whether the grantor trust strip certificates, and the income
therefrom, will be so characterized. We recommend that prospective purchasers to
which the characterization of an investment in grantor trust strip certificates
is material consult their tax advisors regarding whether the grantor trust strip
certificates, and the income therefrom, will be so characterized.
The grantor trust strip certificates will be:
- "obligation[s] (including any participation or certificate of
beneficial ownership therein) which . . . [are] principally
secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code, and
- in general, "permitted assets" within the meaning of Section
860L(a)(1)(C) of the Code.
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TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
GENERAL. Holders of a particular series of grantor trust fractional
interest certificates generally:
- will be required to report on their federal income tax returns
their shares of the entire income from the underlying mortgage
loans, including amounts used to pay reasonable servicing fees
and other expenses, and
- will be entitled to deduct their shares of any reasonable
servicing fees and other expenses.
Because of stripped interests, market or original issue discount, or
premium, the amount includible in income on account of a grantor trust
fractional interest certificate may differ significantly from interest paid or
accrued on the underlying mortgage loans.
Section 67 of the Code allows an individual, estate or trust holding a
grantor trust fractional interest certificate directly or through certain
pass-through entities a deduction for any reasonable servicing fees and expenses
only to the extent that the aggregate of the holder's miscellaneous itemized
deductions exceeds two percent of the holder's adjusted gross income.
Section 68 of the Code reduces the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount by the lesser of:
- 3% of the excess of the individual's adjusted gross income
over that amount, and
- 80% of the amount of itemized deductions otherwise allowable
for the taxable year.
The amount of additional taxable income reportable by holders of
grantor trust fractional interest certificates who are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Further, certificateholders, other than corporations, subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
their alternative minimum taxable income.
Although it is not entirely clear, it appears that in transactions in
which multiple classes of grantor trust certificates, including grantor trust
strip certificates, are issued, any fees and expenses should be allocated among
those classes of grantor trust certificates. The method of this allocation
should recognize that each class benefits from the related services. In the
absence of statutory or administrative clarification as to the method to be
used, we currently expect that information returns or reports to the IRS and
certificateholders will be based on a method that allocates these fees and
expenses among classes of grantor trust certificates with respect to each period
based on the payments made to each class during that period.
The federal income tax treatment of grantor trust fractional interest
certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor trust fractional
interest certificates may be subject to those rules if:
- a class of grantor trust strip certificates is issued as part
of the same series, or
- we or any of our affiliates retain, for our or its own account
or for purposes of resale, a right to receive a specified
portion of the interest payable on an underlying mortgage
loan.
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Further, the IRS has ruled that an unreasonably high servicing fee
retained by a seller or servicer will be treated as a retained ownership
interest in mortgage loans that constitutes a stripped coupon. We will include
in the related prospectus supplement information regarding servicing fees paid
out of the assets of the related trust to:
- a master servicer,
- a special servicer,
- any sub-servicer, or
- their respective affiliates.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
grantor trust fractional interest certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. This is subject, however, to the discussion below regarding:
- the treatment of certain stripped bonds as market discount
bonds, and
- DE MINIMIs market discount.
See "--Grantor Trust Funds--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--Market Discount" below.
Under the stripped bond rules, the holder of a grantor trust fractional
interest certificate, whether a cash or accrual method taxpayer, will be
required to report interest income from its grantor trust fractional interest
certificate for each month. The amount of reportable interest income must equal
the income that accrues on the certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a grantor trust fractional interest
certificate will be the excess of the certificate's stated redemption price
over its issue price. The issue price of a grantor trust fractional interest
certificate as to any purchaser will be equal to the price paid by that
purchaser of the grantor trust fractional interest certificate. The stated
redemption price of a grantor trust fractional interest certificate will be
the sum of all payments to be made on that certificate, other than "qualified
stated interest," if any, and the certificate's share of reasonable servicing
fees and other expenses.
See "--Grantor Trust Funds--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest." In general, the amount of such income that accrues
in any month would equal the product of:
(i) the holder's adjusted basis in the grantor trust fractional
interest certificate at the beginning of the related month, as
defined in "--Grantor Trust Funds--Sales of Grantor Trust
Certificates," and
(ii) the yield of that grantor trust fractional interest
certificate to holder.
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The yield would be computed as the rate, that, if used to discount the holder's
share of future payments on the related mortgage loans, would cause the present
value of those future payments to equal the price at which the holder purchased
the certificate. This rate is compounded based on the regular interval between
payment dates. In computing yield under the stripped bond rules, a
certificateholder's share of future payments on the related mortgage loans will
not include any payments made in respect of any ownership interest in those
mortgage loans retained by us, a master servicer, a special servicer, a
sub-servicer or our or their respective affiliates, but will include the
certificateholder's share of any reasonable servicing fees and other expenses.
With respect to certain categories of debt instruments, Section
1272(a)(6) of the Code requires the use of a reasonable prepayment assumption in
accruing original issue discount, and adjustments in the accrual of original
issue discount when prepayments do not conform to the prepayment assumption.
Legislation enacted in 1997 extended the scope of that section to any
pool of debt instruments the yield on which may be affected by reason of
prepayments, effective for taxable years beginning after enactment. The precise
application of this legislation is unclear in certain respects. For example, it
is uncertain whether a prepayment assumption will be applied collectively to all
a taxpayer's investments in pools of debt instruments, or on an
investment-by-investment basis. Similarly, it is not clear whether the assumed
prepayment rate as to investments in grantor trust fractional interest
certificates is to be determined based on conditions at the time of the first
sale of the certificate or, with respect to any holder, at the time of purchase
of the certificate by that holder.
We recommend that certificateholders consult their tax advisors
concerning reporting original issue discount with respect to grantor trust
fractional interest certificates.
In the case of a grantor trust fractional interest certificate acquired
at a price equal to the principal amount of the related mortgage loans allocable
to that certificate, the use of a prepayment assumption generally would not have
any significant effect on the yield used in calculating accruals of interest
income. In the case, however, of a grantor trust fractional interest certificate
acquired at a price less than or greater than the principal amount,
respectively, the use of a reasonable prepayment assumption would increase or
decrease the yield. Therefore, the use of this prepayment assumption would
accelerate or decelerate, respectively, the reporting of income.
In the absence of statutory or administrative clarification, we
currently expect that information reports or returns to the IRS and
certificateholders will be based on:
- a prepayment assumption determined when certificates are
offered and sold hereunder, which we will disclose in the
related prospectus supplement, and
- a constant yield computed using a representative initial
offering price for each class of certificates.
However, neither we nor any other person will make any representation
that--
- the mortgage loans in any of our trusts will in fact prepay at
a rate conforming to the prepayment assumption used or any
other rate, or
- the prepayment assumption will not be challenged by the IRS on
audit.
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Certificateholders also should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports that we send, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial certificateholders of each series
who bought at that price.
Under Treasury Regulation Section 1.1286-1, certain stripped bonds are
to be treated as market discount bonds. Accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon:
- there is no original issue discount or only a DE MINIMIs
amount of original issue discount, or
- the annual stated rate of interest payable on the original
bond is no more than one percentage point lower than the gross
interest rate payable on the related mortgage loans, before
subtracting any servicing fee or any stripped coupon.
If interest payable on a grantor trust fractional interest certificate
is more than one percentage point lower than the gross interest rate payable on
the related mortgage loans, we will disclose that fact in the related prospectus
supplement. If the original issue discount or market discount on a grantor trust
fractional interest certificate determined under the stripped bond rules is less
than the product of:
- 0.25% of the stated redemption price, and
- the weighted average maturity of the related mortgage loans,
then the original issue discount or market discount will be considered to be DE
MINIMIS. Original issue discount or market discount of only a DE MINIMIS amount
will be included in income in the same manner as DE MINIMIS original issue
discount and market discount described in "--Grantor Trust Funds--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Do Not Apply" and "--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a grantor
trust fractional interest certificate, the certificateholder will be required to
report its share of the interest income on the related mortgage loans in
accordance with the certificateholder's normal method of accounting. In that
case, the original issue discount rules will apply, even if the stripped bond
rules do not apply, to a grantor trust fractional interest certificate to the
extent it evidences an interest in mortgage loans issued with original issue
discount.
The original issue discount, if any, on mortgage loans will equal the
difference between:
(i) the stated redemption price of the mortgage loans, and
(ii) their issue price.
For a definition of "stated redemption price," see "--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" above. In
general, the issue price of a mortgage loan will be the amount received by the
borrower from the lender under the terms of the mortgage loan. If the borrower
separately pays points to the lender that are not paid for services provided by
the lender, such as commitment fees or loan processing costs, the amount of
points paid reduces the issue price.
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The stated redemption price of a mortgage loan will generally equal its
principal amount. The determination as to whether original issue discount will
be considered to be DE MINIMIS will be calculated using the same test as in the
REMIC discussion. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
In the case of mortgage loans bearing adjustable or variable interest
rates, we will describe in the related prospectus supplement the manner in which
these rules will be applied with respect to the mortgage loans by the related
trustee or master servicer, as applicable, in preparing information returns to
certificateholders and the IRS.
If original issue discount is in excess of a DE MINIMIS amount, all
original issue discount with respect to a mortgage loan will be required to be
accrued and reported in income each month, based on a constant yield. Under
legislation enacted in 1997, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing yield with respect to any pool of
debt instruments, the yield on which may be affected by prepayments. The precise
application of this legislation is unclear in certain respects. For example, it
is uncertain whether a prepayment assumption will be applied collectively to all
a taxpayer's investments in pools of debt instruments, or will be applied on an
investment-by-investment basis. Similarly, it is not clear whether the assumed
prepayment rate as to investments in grantor trust fractional interest
certificates is to be determined based on conditions at the time of the first
sale of the certificate or, with respect to any holder, at the time of purchase
of the certificate by that holder. We recommend that certificateholders consult
their own tax advisors concerning reporting original issue discount with respect
to grantor trust fractional interest certificates.
A purchaser of a grantor trust fractional interest certificate may
purchase the grantor trust fractional interest certificate at a cost less than
the certificate's allocable portion of the aggregate remaining stated redemption
price of the underlying mortgage loans. In that case, the purchaser will also be
required to include in gross income the certificate's daily portions of any
original issue discount with respect to those mortgage loans. However, each
daily portion will be reduced, if the cost of the grantor trust fractional
interest certificate to the purchaser is in excess of the certificate's
allocable portion of the aggregate "adjusted issue prices" of the underlying
mortgage loans. The reduction will be approximately in proportion to the ratio
that such excess bears to the certificate's allocable portion of the aggregate
original issue discount remaining to be accrued on those mortgage loans.
The adjusted issue price of a mortgage loan on any given day equals the
sum of:
(i) the adjusted issue price or the issue price, in the case of
the first accrual period, of the mortgage loan at the
beginning of the accrual period that includes that day, and
(ii) the daily portions of original issue discount for all days
during the accrual period prior to that day.
The adjusted issue price of a mortgage loan at the beginning of any
accrual period will equal:
(i) the issue price of the mortgage loan, increased by
(ii) the aggregate amount of original issue discount with respect
to the mortgage loan that accrued in prior accrual periods,
and reduced by
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(iii) the amount of any payments made on the mortgage loan in prior
accrual periods of amounts included in its stated redemption
price.
In the absence of statutory or administrative clarification, we
currently expect that information reports or returns to the IRS and
certificateholders will be based on:
- a prepayment assumption determined when the certificates are
offered and sold hereunder and disclosed in the related
prospectus supplement, and
- a constant yield computed using a representative initial
offering price for each class of certificates.
However, neither we nor any other person will make any representation
that--
- the mortgage loans will in fact prepay at a rate conforming to
the prepayment assumption or any other rate, or
- the prepayment assumption will not be challenged by the IRS on
audit.
Certificateholders also should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports, even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial certificateholders of each series who bought at
that price.
MARKET DISCOUNT. If the stripped bond rules do not apply to a grantor
trust fractional interest certificate, a certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a mortgage loan is considered to have been purchased at a "market
discount." A mortgage loan is considered to have been purchased at a "market
discount" if--
- in the case of a mortgage loan issued without original issue
discount, it is purchased at a price less than its remaining
stated redemption price, or
- in the case of a mortgage loan issued with original issue
discount, it is purchased at a price less than its adjusted
issue price.
If market discount is in excess of a DE MINIMIS amount, the holder
generally must include in income in each month the amount of the discount that
has accrued, under the rules described below, through that month that has not
previously been included in income. The inclusion will be limited, in the case
of the portion of the discount that is allocable to any mortgage loan, to the
payment of stated redemption price on the mortgage loan that is received by or,
for accrual method certificateholders, due to the trust in that month. A
certificateholder may elect to include market discount in income currently as it
accrues, under a constant yield method based on the yield of the certificate to
the holder, rather than including it on a deferred basis in accordance with the
foregoing under rules similar to those described in "--REMICs--Taxation of
Owners of REMIC Regular Interests--Market Discount" above.
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Section 1276(b)(3) of the Code authorizes the Treasury Department to
issue regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until the time that regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period, you may accrue market discount on the underlying mortgage loans,
at your option:
- on the basis of a constant yield method,
- in the case of a mortgage loan issued without original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the stated interest paid in the
accrual period bears to the total stated interest remaining to
be paid on the mortgage loan as of the beginning of the
accrual period, or
- in the case of a mortgage loan issued with original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount
accrued in the accrual period bears to the total original
issue discount remaining at the beginning of the accrual
period.
Under legislation enacted in 1997, Section 1272(a)(6) of the Code
requires that a prepayment assumption be used in computing the accrual of
original issue discount with respect to any pool of debt instruments, the yield
on which may be affected by prepayments. Because the mortgage loans will be a
pool described in that section, it appears that the prepayment assumption used,
or that would be used, in calculating the accrual of original issue discount, if
any, is also to be used in calculating the accrual of market discount. However,
the precise application of the new legislation is unclear in certain respects.
For example, it is uncertain whether a prepayment assumption will be applied
collectively to all of a taxpayer's investments in pools of debt instruments, or
on an investment-by-investment basis. Similarly, it is not clear whether the
assumed prepayment rate is to be determined at the time of the first sale of the
grantor trust fractional interest certificate, or with respect to any holder, at
the time of that holder's purchase of the grantor trust fractional interest
certificate.
We recommend that certificateholders consult their own tax advisors
concerning accrual of market discount with respect to grantor trust fractional
interest certificates. Certificateholders should also refer to the related
prospectus supplement to determine whether and in what manner the market
discount will apply to the underlying mortgage loans purchased at a market
discount.
To the extent that the underlying mortgage loans provide for periodic
payments of stated redemption price, you may be required to include market
discount in income at a rate that is not significantly slower than the rate at
which that discount would be included in income if it were original issue
discount.
Market discount with respect to mortgage loans may be considered to be
DE MINIMIS and, if so, will be includible in income under DE MINIMIS rules
similar to those described under "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
Further, under the rules described under "--REMICs--Taxation of Owners
of REMIC Regular Certificates--Market Discount" above, any discount that is not
original issue discount and exceeds a De MINIMIS amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the underlying mortgage loans.
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PREMIUM. If a certificateholder is treated as acquiring the underlying
mortgage loans at a premium, which is a price in excess of their remaining
stated redemption price, the certificateholder may elect under Section 171 of
the Code to amortize the portion of that premium allocable to mortgage loans
originated after September 27, 1985 using a constant yield method. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to mortgage loans originated before September 28, 1985 or to mortgage
loans for which an amortization election is not made, should:
- be allocated among the payments of stated redemption price on
the mortgage loan, and
- be allowed as a deduction as those payments are made or, for
an accrual method certificateholder, due.
It appears that a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code similar to that
described for calculating the accrual of market discount of grantor trust
fractional interest certificates. See "--Grantor Trust Funds--Taxation of Owners
of Grantor Trust Fractional Interest Certificates--Market Discount" above.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The "stripped
coupon" rules of Section 1286 of the Code will apply to the grantor trust strip
certificates. Except as described above under "--Grantor Trust Funds--Taxation
of Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond
Rules Apply," no regulations or published rulings under Section 1286 of the Code
have been issued and some uncertainty exists as to how it will be applied to
securities, such as the grantor trust strip certificates. Accordingly, we
recommend that you consult your tax advisors concerning the method to be used in
reporting income or loss with respect to those certificates.
The Treasury regulations promulgated under the original discount rules
do not apply to "stripped coupons," although they provide general guidance as to
how the original issue discount sections of the Code will be applied.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the grantor trust strip
certificates based on a constant yield method. In effect, you would include as
interest income in each month an amount equal to the product of your adjusted
basis in the grantor trust strip certificate at the beginning of that month and
the yield of the grantor trust strip certificate to you.
This yield would be calculated based on:
- the price paid for that grantor trust strip certificate by
you, and
- the projected payments remaining to be made thereon at the
time of the purchase, plus
- an allocable portion of the projected servicing fees and
expenses to be paid with respect to the underlying mortgage
loans.
See "--Grantor Trust Funds--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to certain categories of debt instruments. The Code also
requires adjustments be made in the amount and rate of accrual of that discount
when prepayments do not conform to the prepayment assumption. It appears that
those provisions would apply to grantor trust strip certificates. It is
uncertain whether the assumed prepayment rate would be determined based on:
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- conditions at the time of the first sale of the grantor trust
strip certificate or,
- with respect to any subsequent holder, at the time of purchase
of the grantor trust strip certificate by that holder.
If the method for computing original issue discount under Section
1272(a)(6) results in a negative amount of original issue discount as to any
accrual period with respect to a grantor trust strip certificate, the amount of
original issue discount allocable to that accrual period will be zero. That is,
no current deduction of the negative amount will be allowed to you. You will
instead only be permitted to offset that negative amount against future positive
original issue discount, if any, attributable to that certificate. Although not
free from doubt, it is possible that you may be permitted to deduct a loss to
the extent his or her basis in the certificate exceeds the maximum amount of
payments you could ever receive with respect to that certificate. However, any
such loss may be a capital loss, which is limited in its deductibility. The
foregoing considerations are particularly relevant to grantor trust certificates
with no, or disproportionately small, amounts of principal, which can have
negative yields under circumstances that are not default related. See "Risk
Factors--The Investment Performance of Your Certificates Depend Upon Payments,
Defaults and Losses on the Underlying Mortgage Loans" herein.
The accrual of income on the grantor trust strip certificates will be
significantly slower using a prepayment assumption than if yield is computed
assuming no prepayments. In the absence of statutory or administrative
clarification, we currently expect that information returns or reports to the
IRS and certificateholders will be based on:
- the prepayment assumption we will disclose in the related
prospectus supplement, and
- a constant yield computed using a representative initial
offering price for each class of certificates.
However, neither we nor any other person will make any representation
that--
- the mortgage loans in any of our trusts will in fact prepay at
a rate conforming to the prepayment assumption or at any other
rate or
- the prepayment assumption will not be challenged by the IRS on
audit.
We recommend that prospective purchasers of the grantor trust strip certificates
consult their tax advisors regarding the use of the prepayment assumption.
Certificateholders also should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports, even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial certificateholders of each series who bought at
that price.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss recognized on the
sale or exchange of a grantor trust certificate by an investor who holds that
certificate as a capital asset, will be capital gain or loss, except as
described below. The amount recognized equals the difference between:
- the amount realized on the sale or exchange of a grantor trust
certificate, and
- its adjusted basis.
The adjusted basis of a grantor trust certificate generally will equal:
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- its cost, increased by
- any income reported by the seller, including original issue
discount and market discount income, and reduced, but not
below zero, by
- any and all previously reported losses, amortized premium, and
payments with respect to that grantor trust certificate.
As of the date of this prospectus, the Code provides for lower rates as
to long-term capital gains, than those applicable to the short-term capital
gains and ordinary income realized or received by individuals. No such rate
differential exists for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain or loss from the sale of a grantor trust certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income. Gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code will be treated as ordinary
income.
Furthermore, a portion of any gain that might otherwise be capital gain
may be treated as ordinary income to the extent that the grantor trust
certificate is held as part of a "conversion transaction" within the meaning of
Section 1258 of the Code. A conversion transaction generally is one in which the
taxpayer has taken two or more positions in the same or similar property that
reduce or eliminate market risk, if substantially all of the taxpayer's return
is attributable to the time value of the taxpayer's net investment in the
transaction. The amount of gain realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable Federal rate" at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
The Code requires the recognition of gain upon the "constructive sale
of an appreciated financial position." A constructive sale of an appreciated
financial position occurs if a taxpayer enters into certain transactions or
series of such transactions that have the effect of substantially eliminating
the taxpayer's risk of loss and opportunity for gain with respect to the
financial instrument. Debt instruments that--
- entitle the holder to a specified principal amount,
- pay interest at a fixed or variable rate, and
- are not convertible into the stock of the issuer or a related
party,
cannot be the subject of a constructive sale for this purpose. Because most
grantor trust certificates meet this exception, this Section will not apply to
most grantor trust certificates. However, certain grantor trust certificates
have no, or a disproportionately small, amount of principal and these
certificates can be the subject of a constructive sale.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for the relevant taxable year.
This election would be done for purposes of the rule that limits the deduction
of interest on indebtedness incurred to purchase or carry property held for
investment to a taxpayer's net investment income.
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GRANTOR TRUST REPORTING. Unless otherwise provided in the related
prospectus supplement, the related tax administrator will furnish or make
readily available through electronic means to each holder of a grantor trust
certificate with each payment a statement setting forth the amount of the
payment allocable to principal on the underlying mortgage loans and to interest
thereon at the related pass-through rate. In addition, the related tax
administrator will furnish, within a reasonable time after the end of each
calendar year, to each person or entity that was the holder of a grantor trust
certificate at any time during that year, information regarding:
- the amount of servicing compensation received by a master
servicer or special servicer, and
- all other customary factual information the reporting party
deems necessary or desirable to enable holders of the related
grantor trust certificates to prepare their tax returns.
The reporting party will furnish comparable information to the IRS as and when
required by law to do so.
Because the rules for accruing discount and amortizing premium with
respect to grantor trust certificates are uncertain in various respects, there
is no assurance the IRS will agree with the information reports of those items
of income and expense. Moreover, those information reports, even if otherwise
accepted as accurate by the IRS, will in any event be accurate only as to the
initial certificateholders that bought their certificates at the representative
initial offering price used in preparing the reports.
On August 13, 1998, the Service published proposed regulations, which
will, when effective, establish a reporting framework for interests in "widely
held fixed investment trusts" similar to that for regular interests in REMICs. A
widely-held fixed investment trust is defined as any entity classified as a
"trust" under Treasury Regulation Section 301.7701-4(c) in which any interest is
held by a middleman, which includes, but is not limited to:
- a custodian of a person's account,
- a nominee, and
- a broker holding an interest for a customer in street name.
These regulations are proposed to be effective for calendar years beginning on
or after the date that the final regulations are published in the Federal
Register.
BACKUP WITHHOLDING. In general, the rules described under
"--REMICs--Backup Withholding with Respect to REMIC Certificates" above will
also apply to grantor trust certificates.
FOREIGN INVESTORS. In general, the discussion with respect to REMIC
regular certificates under "--REMICs--Foreign Investors in REMIC Certificates"
above applies to grantor trust certificates. However, unless we otherwise
specify in the related prospectus supplement, grantor trust certificates will be
eligible for exemption from U.S. withholding tax, subject to the conditions
described in the discussion above, only to the extent the related mortgage loans
were originated after July 18, 1984.
To the extent that interest on a grantor trust certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the certificate is not held in connection with a
certificateholder's trade or business in the United States, the certificate will
not be subject to United States estate taxes in the estate of a nonresident
alien individual.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences concerning the offered certificates. State tax law
may differ substantially from the corresponding federal law, and the discussion
above does not purport to describe any aspect of the tax laws of any state or
other jurisdiction. Therefore, we recommend that prospective investors consult
their tax advisors with respect to the various tax consequences of investments
in the offered certificates.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Internal Revenue Code of 1986 impose various requirements
on--
- employee benefit plans, and on certain other retirement plans,
arrangements and accounts, that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the
Internal Revenue Code of 1986 ("ERISA Plans"), and
- persons that are fiduciaries with respect to ERISA Plans
("Plan Fiduciaries"),
in connection with the investment of the assets of an ERISA Plan ("Plan
Assets"). For purposes of this discussion, ERISA Plans may include individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts, including as applicable, insurance company general
accounts, in which other ERISA Plans are invested.
Governmental plans and, if they have not made an election under Section
410(d) of the Internal Revenue Code of 1986, church plans are not subject to
ERISA requirements. Accordingly, assets of those plans may be invested in the
offered certificates without regard to the ERISA considerations described below,
subject to the provisions of other applicable federal and state law. Any such
plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Internal Revenue Code of 1986, however, is subject to the
prohibited transaction rules in Section 503 of that Code.
ERISA imposes certain general fiduciary requirements on Plan
Fiduciaries that are investing Plan Assets, including--
- investment prudence and diversification, and
- compliance with the investing ERISA Plan's governing the
documents.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code of
1986 also prohibit a broad range of transactions involving Plan Assets and a
Party in Interest, unless a statutory or administrative exemption exists. A
"Party in Interest" is any person that is a "party in interest" within the
meaning of ERISA or a "disqualified person" within the meaning of the Internal
Revenue Code of 1986.
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The types of transactions between ERISA Plans and Parties in Interest that are
prohibited include:
- sales, exchanges or leases of property;
- loans or other extensions of credit; and
- the furnishing of goods and services.
Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed under Section 4975 of the
Internal Revenue Code of 1986 or a penalty imposed under Section 502(i) of
ERISA, unless a statutory or administrative exemption is available. In addition,
the persons involved in the prohibited transaction may have to cancel the
transaction and pay an amount to the affected ERISA Plan for any losses realized
by that ERISA Plan or profits realized by those persons. In addition, individual
retirement accounts involved in the prohibited transaction may be disqualified
which would result in adverse tax consequences to the owner of the account.
PLAN ASSET REGULATIONS
An ERISA Plan's investment in offered certificates may cause the
underlying mortgage assets and other assets of the related trust to be deemed
assets of that ERISA Plan. Section 2510.3-101 of the regulations of the U.S.
Department of Labor (those regulations, the "Plan Asset Regulations") provides
that when an ERISA Plan acquires an equity interest in an entity, the assets
that ERISA Plan or arrangement include both that equity interest and an
undivided interest in each of the underlying assets of the entity, unless an
exception applies. One such exemption is that the equity participation in the
entity by "benefit plan investors," which include both ERISA Plans and certain
employee benefit plans not subject to ERISA, is not "significant." The equity
participation by benefit plan investors will be "significant" on any date if 25%
or more of the value of any class of equity interests in the entity is held by
benefit plan investors. The percentage owned by benefit plan investors is
determined by excluding the investments of the following persons:
(i) those with discretionary authority or control over the assets
of the entity,
(ii) those who provide investment advice directly or indirectly for
a fee with respect to the assets of the entity, and
(iii) those who are affiliates of the persons described in the
preceding clauses (i) and (ii).
In the case of one of our trusts, investments by us, by the related trustee, the
related master servicer, the related special servicer or any other party with
discretionary authority over the related trust assets, or by the affiliates of
these persons, will be excluded.
A fiduciary of an investing ERISA Plan is any person who--
- has discretionary authority or control over the management or
disposition of the assets of that ERISA Plan, or
- provides investment advice with respect to the assets of that
ERISA Plan for a fee.
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If the mortgage and other assets included in one of our trusts are Plan Assets,
then any party exercising management or discretionary control regarding those
assets, such as the related trustee, master servicer or special servicer, or
affiliates of any of these parties, may be deemed to be a "fiduciary" with
respect to the investing ERISA Plan and, therefore, subject to the fiduciary
responsibility provisions of ERISA. In addition, if the mortgage and other
assets included in one of our trusts are Plan Assets, then the operation of that
trust may involve prohibited transactions under ERISA or the Internal Revenue
Code of 1986. For example, if a borrower with respect to a mortgage loan in that
trust is a Party in Interest to an investing ERISA Plan, then the purchase by
that ERISA Plan of offered certificates evidencing interests in that trust,
could be a prohibited loan between that ERISA Plan and the Party in Interest.
The Plan Asset Regulations provide that where an ERISA Plan purchases a
"guaranteed governmental mortgage pool certificate," the assets of that ERISA
Plan include the certificate but do not include any of the mortgages underlying
the certificate. The Plan Asset Regulations include in the definition of a
"guaranteed governmental mortgage pool certificate" certain certificates issued
and/or guaranteed by FHLMC, GNMA and FNMA, but do not include certificates
issued or guaranteed by FAMC. Accordingly, even if these types of
mortgaged-backed securities, other than the FAMC certificates, were deemed to be
Plan Assets, the underlying mortgages would not be treated as Plan Assets.
Private label mortgage participations, mortgage pass-through certificates, FAMC
certificates or other mortgage-backed securities are not "guaranteed
governmental mortgage pool certificates" within the meaning of the Plan Asset
Regulations.
In addition, the acquisition or holding of offered certificates by or
on behalf of an ERISA Plan could give rise to a prohibited transaction if we or
the related trustee, master servicer or special servicer or any related
underwriter, sub-servicer, tax administrator, manager, borrower or obligor under
any credit enhancement mechanism, or certain of their affiliates, is or becomes
a Party in Interest with respect to an investing ERISA Plan.
If you are a Plan Fiduciary, you should consult your counsel and review
the ERISA discussion in the related prospectus supplement before purchasing any
offered certificates.
PROHIBITED TRANSACTION EXEMPTIONS
If you are a Plan Fiduciary, then, in connection with your deciding
whether to purchase any of the offered certificates on behalf of an ERISA Plan,
you should consider the availability of one of the following prohibited
transaction class exemptions issued by the U.S. Department of Labor:
- Prohibited Transaction Class Exemption ("PTCE") 75-1, which
exempts certain transactions involving ERISA Plans and certain
broker-dealers, reporting dealers and banks;
- PTCE 90-1, which exempts certain transactions between
insurance company separate accounts and Parties in Interest;
- PTCE 91-38, which exempts certain transactions between bank
collective investment funds and Parties in Interest;
- PTCE 84-14, which exempts certain transactions effected on
behalf of an ERISA Plan by a "qualified professional asset
manager;"
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- PTCE 95-60, which exempts certain transactions between
insurance company general accounts and Parties in Interest;
and
- PTCE 96-23, which exempts certain transactions effected on
behalf of an ERISA Plan by an "in-house asset manager."
We cannot provide any assurance that any of these class exemptions will
apply with respect to any particular investment by or on behalf of an ERISA Plan
in any class of offered certificates. Furthermore, even if any of them were
deemed to apply, that particular class exemption may not apply to all
transactions that could occur in connection with the investment. The prospectus
supplement with respect to the offered certificates of any series may contain
additional information regarding the availability of other exemptions, with
respect to those certificates.
UNDERWRITER'S EXEMPTION
It is expected that Lehman Brothers Inc. will be the sole, lead or
co-lead underwriter in each underwritten offering of certificates made pursuant
to this prospectus. The U.S. Department of Labor issued Prohibited Transaction
Exemption ("PTE") 91-14 to a predecessor in interest to Lehman Brothers Inc.
Subject to the satisfaction of certain exemptions set forth therein, PTE 91-14,
as amended (including by PTE 97-34), generally exempts from the application of
the prohibited transaction provisions of ERISA and the Internal Revenue Code of
1986 certain transactions relating to, among other things, the servicing and
operation of certain mortgage assets pools, such as the types of mortgage asset
pools that will be included in our trusts, and the purchase, sale and holding of
certain certificates evidencing interests in those pools that are underwritten
by Lehman Brothers Inc. or any person affiliated with Lehman Brothers Inc., such
as certain of the offered certificates.
The related prospectus supplement will state whether PTE 91-14 is or
may be available with respect to any offered certificates underwritten by Lehman
Brothers Inc.
INSURANCE COMPANY GENERAL ACCOUNTS
The Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides relief from the fiduciary and prohibited
transaction provisions of ERISA and the Internal Revenue Code of 1986 for
transactions involving an insurance company general account. This exemption is
in addition to any exemption that may be available under prohibited transaction
class exemption 95-60 for the purchase and holding of offered certificates by an
insurance company general account.
Pursuant to Section 401(c) of ERISA, the U.S. Department of Labor
issued a final regulation on January 5, 2000, providing guidance for
determining, in cases where insurance policies supported by an insurer's general
account are issued to or for the benefit of an ERISA Plan on or before December
31, 1998, which general account assets are Plan Assets. That regulation
generally provides that, if certain specified requirements are satisfied with
respect to insurance policies issued on or before December 31, 1998, the assets
of an insurance company general account will not be Plan Assets.
Any assets of an insurance company general account which support
insurance policies issued to an ERISA Plan after December 31, 1998, or issued to
an ERISA Plan on or before December 31, 1998 for which the insurance company
does not comply with the requirements set forth in the final regulation under
Section 401(c) of ERISA, may be treated as Plan Assets. In addition, because
Section 401(c) of ERISA and the regulation issued under Section 401(c) of ERISA
do not relate to insurance company separate accounts,
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separate account assets are still treated as Plan Assets, invested in the
separate account. If you are an insurance company are contemplating the
investment of general account assets in offered certificates, you should consult
your legal counsel as to the applicability of Section 401(c) of ERISA.
CONSULTATION WITH COUNSEL
If you are a Plan Fiduciary which proposes to purchase offered
certificates on behalf of or with assets of an ERISA Plan, account or
arrangement, you should consider your general fiduciary obligations under ERISA
and you should consult with your legal counsel as to the potential applicability
of ERISA and the Internal Revenue Code of 1986 to that investment and the
availability of any prohibited transaction exemption in connection with that
investment.
TAX EXEMPT INVESTORS
An ERISA Plan that is exempt from federal income taxation pursuant to
Section 501 of the Internal Revenue Code of 1986 will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" within the meaning of Section 512 of the Internal Revenue Code of 1986.
All "excess inclusions" of a REMIC allocated to a REMIC residual certificate
held by a tax-exempt ERISA Plan will be considered "unrelated business taxable
income" and will be subject to federal income tax.
See "Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions" in this prospectus.
LEGAL INVESTMENT
If and to the extent specified in the related prospectus supplement,
the offered certificates of any series may constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). "Mortgage related securities" are legal investments for
entities--
- that are created or existing under the laws of the United
States or any state, including the District of Columbia and
Puerto Rico, and
- whose authorized investments are subject to state regulations,
to the same extent that, under applicable law, obligations issued by or
guaranteed as to principal and interest by the United States or any of its
agencies or instrumentalities are legal investments for those entities.
Prior to December 31, 1996, classes of offered certificates would be
"mortgage related securities" for purposes of SMMEA only if they:
- were rated in one of the two highest rating categories by at
least one nationally recognized statistical rating
organization; and
- evidenced interests in a trust consisting of loans directly
secured by a first lien on a single parcel of real estate upon
which is located a dwelling or mixed residential and
commercial structure, which loans had been originated by the
types of originators specified in SMMEA.
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Further, under SMMEA as originally enacted, if a state enacted
legislation on or before October 3,1991 that specifically limited the legal
investment authority of any entities referred to in the preceding paragraph with
respect to "mortgage related securities" under that definition, offered
certificates would constitute legal investments for entities subject to the
legislation only to the extent provided in that legislation.
Effective December 31, 1996, the definition of "mortgage related
securities" was modified to include among the types of loans to which the
securities may relate, loans secured by "one or more parcels of real estate upon
which is located one or more commercial structures." In addition, the related
legislative history states that this expanded definition includes multifamily
loans secured by more than one parcel of real estate upon which is located more
than one structure. Until September 23, 2001, any state may enact legislation
limiting the extent to which "mortgage related securities" under this expanded
definition would constitute legal investments under that state's laws.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows:
- federal savings and loan associations and federal savings
banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of
their assets represented by those securities; and
- federal credit unions may invest in "mortgage related
securities" and national banks may purchase "mortgage related
securities" for their own account without regard to the
limitations generally applicable to investment securities
prescribed in 12 U.S.C. 24 (Seventh),
subject in each case to the regulations that the applicable federal regulatory
authority may prescribe.
Effective December 31, 1996, the Office of the Comptroller of the
Currency (the "OCC") amended 12 C.F.R. Part 1 to authorize national banks to
purchase and sell for their own account, without limitation as to a percentage
of the bank's capital and surplus, but subject to compliance with certain
general standards concerning "safety and soundness" and retention of credit
information in 12 C.F.R. Section 1.5, certain "Type IV securities," which are
defined in 12 C.F.R. Section 1.2(1) to include certain "commercial
mortgage-related securities" and "residential mortgage-related securities." As
defined, "commercial mortgage-related security" and "residential
mortgage-related security" mean, in relevant part, a "mortgage related security"
within the meaning of SMMEA, provided that, in the case of a "commercial
mortgage-related security," it "represents ownership of a promissory note or
certificate of interest or participation that is directly secured by a first
lien on one or more parcels of real estate upon which one or more commercial
structures are located and that is fully secured by interests in a pool of loans
to numerous obligors." In the absence of any rule or administrative
interpretation by the OCC defining the term "numerous obligors," we make no
representation as to whether any class of offered certificates will qualify as
"commercial mortgage-related securities," and thus as "Type IV securities," for
investment by national banks.
The National Credit Union Administration (the "NCUA") has adopted
rules, codified at 12 C.F.R. Part 703, which permit federal credit unions to
invest in "mortgage related securities" under certain limited circumstances,
other than stripped mortgage related securities, residual interests in mortgage
related securities and commercial mortgage related securities, unless the credit
union has obtained written approval from the NCUA to participate in the
"investment pilot program" described in 12 C.F.R. Section 703.140.
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The Office of Thrift Supervision (the "OTS") has issued Thrift Bulletin
13a (December 1, 1998), "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities," which thrift institutions subject to
the jurisdiction of the OTS should consider before investing in any of the
offered certificates.
All depository institutions considering an investment in the offered
certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement") of
the Federal Financial Institutions Examination Council, which has been adopted
by the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation (the "FDIC"), the OCC and the OTS effective May 26, 1998,
and by the NCUA effective October 1, 1998. The 1998 Policy Statement sets forth
general guidelines which depository institutions must follow in managing risks,
including market, credit, liquidity, operational (transaction), and legal risks,
applicable to all securities, including mortgage pass-through securities and
mortgage-derivative products used for investment purposes.
There may be other restrictions on your ability either to purchase
certain classes of offered certificates or to purchase offered certificates
representing more than a specified percentage of your assets. We make no
representations as to the proper characterization of any class of offered
certificates for legal investment or other purposes. Also, we make no
representations as to the ability of particular investors to purchase any class
of offered certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of offered
certificates. Accordingly, if your investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities, you should consult with your legal advisor in
determining whether and to what extent--
- the offered certificates of any class and series constitute
legal investments or are subject to investment, capital or
other restrictions; and
- if applicable, SMMEA has been overridden in your State.
USE OF PROCEEDS
Unless otherwise specified in the related prospectus supplement, the
net proceeds to be received from the sale of the offered certificates of any
series will be applied by us to the purchase of assets for the related trust or
will be used by us to cover expenses related to that purchase and the issuance
of those certificates. We expect to sell the offered certificates from time to
time, but the timing and amount of offerings of those certificates will depend
on a number of factors, including the volume of mortgage assets acquired by us,
prevailing interest rates, availability of funds and general market conditions.
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METHOD OF DISTRIBUTION
The certificates offered by this prospectus and the related prospectus
supplements will be offered in series through one or more of the methods
described below. The prospectus supplement prepared for the offered certificates
of each series will describe the method of offering being utilized for those
certificates and will state the net proceeds to us from the sale of those
certificates.
We intend that offered certificates will be offered through the
following methods from time to time. We further intend that offerings may be
made concurrently through more than one of these methods or that an offering of
the offered certificates of a particular series may be made through a
combination of two or more of these methods. The methods are as follows:
1. by negotiated firm commitment or best efforts underwriting and
public offering by one or more underwriters specified in the
related prospectus supplement;
2. by placements by us with institutional investors through
dealers; and
3. by direct placements by us with institutional investors.
In addition, if specified in the related prospectus supplement, the offered
certificates of a series may be offered in whole or in part to the seller of the
mortgage assets that would back those certificates. Furthermore, the related
trust assets for any series of offered certificates may include other
securities, the offering of which was registered pursuant to the registration
statement of which this prospectus is a part.
If underwriters are used in a sale of any offered certificates, other
than in connection with an underwriting on a best efforts basis, the offered
certificates will be acquired by the underwriters for their own account. These
certificates may be resold from time to time in one or more transactions,
including negotiated transactions, at fixed public offering prices or at varying
prices to be determined at the time of sale or at the time of commitment
therefor. The managing underwriter or underwriters with respect to the offer and
sale of offered certificates of a particular series will be described on the
cover of the prospectus supplement relating to the series and the members of the
underwriting syndicate, if any, will be named in the relevant prospectus
supplement.
Underwriters may receive compensation from us or from purchasers of the
offered certificates in the form of discounts, concessions or commissions.
Underwriters and dealers participating in the payment of the offered
certificates may be deemed to be underwriters in connection with those
certificates. In addition, any discounts or commissions received by them from us
and any profit on the resale of those offered certificates by them may be deemed
to be underwriting discounts and commissions under the Securities Act of 1933,
as amended.
It is anticipated that the underwriting agreement pertaining to the
sale of the offered certificates of any series will provide that--
- the obligations of the underwriters will be subject to certain
conditions precedent,
- the underwriters will be obligated to purchase all the
certificates if any are purchased, other than in connection
with an underwriting on a best efforts basis, and
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- in limited circumstances, we will indemnify the several
underwriters and the underwriters will indemnify us against
certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or will contribute to
payments required to be made in respect of any liabilities.
The prospectus supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of the
offering and any agreements to be entered into between us and purchasers of
offered certificates of that series.
We anticipate that the offered certificates will be sold primarily to
institutional investors. Purchasers of offered certificates, including dealers,
may, depending on the facts and circumstances of the purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended, in
connection with reoffers and sales by them of offered certificates. Holders of
offered certificates should consult with their legal advisors in this regard
prior to any reoffer or sale.
LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement,
certain legal matters in connection with the certificates of each series,
including certain federal income tax consequences, will be passed upon for us
by--
- Sidley & Austin;
- Cadwalader, Wickersham & Taft;
- Skadden, Arps, Slate, Meagher & Flom; or
- Thacher, Proffitt & Wood.
FINANCIAL INFORMATION
A new trust will be formed with respect to each series of offered
certificates. None of those trusts will engage in any business activities or
have any assets or obligations prior to the issuance of the related series of
offered certificates. Accordingly, no financial statements with respect to any
trust will be included in this prospectus or in the related prospectus
supplement. We have determined that our financial statements will not be
material to the offering of any offered certificates.
RATING
It is a condition to the issuance of any class of offered certificates
that, at the time of issuance, at least one nationally recognized statistical
rating organization has rated those certificates in one of its generic rating
categories which signifies investment grade. Typically, the four highest rating
categories, within which there may be sub-categories or gradations indicating
relative standing, signify investment grade.
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Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders of all payments of interest and/or principal to which
they are entitled. These ratings address the structural, legal and
issuer-related aspects associated with the certificates, the nature of the
underlying mortgage assets and the credit quality of any third-party credit
enhancer. The rating(s) on a class of offered certificates will not represent
any assessment of--
- whether the price paid for those certificates is fair;
- whether those certificates are a suitable investment for any
particular investor;
- the tax attributes of those certificates or of the related
trust;
- the yield to maturity or, if they have principal balances, the
average life of those certificates;
- the likelihood or frequency of prepayments of principal on the
underlying mortgage loans;
- the degree to which the amount or frequency of prepayments on
the underlying mortgage loans might differ from those
originally anticipated;
- whether or to what extent the interest payable on those
certificates may be reduced in connection with interest
shortfalls resulting from the timing of voluntary prepayments;
- the likelihood that any amounts other than interest at the
related mortgage interest rates and principal will be received
with respect to the underlying mortgage loans; or
- if those certificates provide solely or primarily for payments
of interest, whether the holders, despite receiving all
payments of interest to which they are entitled, would
ultimately recover their initial investments in those
certificates.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (ITEM 14 OF FORM S-3).
The expenses expected to be incurred in connection with the issuance
and distribution of the securities being registered, other than underwriting
compensation, are as set forth below.
<TABLE>
<S> <C>
Filing Fee for Registration Statement $1,056,000.00
Legal Fees and Expenses 1,400,000*
Accounting Fees and Expenses 460,000*
Trustee's Fees and Expenses
(including counsel fees) 135,000*
Blue Sky Fees and Expenses 32,000*
Printing and Engraving Fees 600,000*
Rating Agency Fees 6,000,000*
Miscellaneous 460,000*
--------------
Total $10,143,000.00
</TABLE>
* Based on four offerings.
INDEMNIFICATION OF DIRECTORS AND OFFICERS (ITEM 15 OF FORM S-3)
The governing document(s) for each series of the securities being
registered will provide that no director, officer, employee or agent of the
Registrant is liable to the related trust or the related security holders,
except for such person's own willful misfeasance, bad faith or gross negligence
in the performance of duties or reckless disregard of obligations and duties.
Such governing document(s) will further provide that, with the exceptions stated
above, a director, officer, employee or agent of the Registrant is entitled to
be indemnified against any loss, liability or expense incurred in connection
with legal actions relating to such document(s) and the related securities.
Any purchase agreement pursuant to which the Registrant acquires
mortgage assets for purposes of backing a series of the securities being
registered, may provide under certain circumstances that each director of the
Registrant, each officer of the Registrant that signed this Registration
Statement or any amendment hereof, and certain controlling persons of the
Registrant, are entitled to be indemnified by the seller of those mortgage
assets or an affiliate against certain liabilities, including liabilities under
the Securities Act of 1933, relating to those mortgage assets.
<PAGE>
Any underwriters who execute an underwriting agreement with respect to
any of the securities being registered will agree to indemnify the Registrant's
directors, its officers who signed this Registration Statement and its
controlling persons against certain liabilities which might arise under the
Securities Act of 1933 or the Securities Exchange Act of 1934 or other laws to
the extent those liabilities arise in connection with the issuance of securities
under this Registration Statement.
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification may be made in respect to any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
or suit was brought shall determine, upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper.
Section 145 further provides that to the extent a present or former
director or officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) or in the defense of any claim, issue or matter therein,
such person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith; that
indemnification or advancement of expenses provided for by Section 145 shall not
be deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled; and empowers the corporation to
purchase and maintain insurance on behalf of a director, officer, employee or
agent of the corporation against any liability asserted against such person or
incurred by such person in any such capacity or arising out of such person's
status as such whether or not the corporation would have the power to indemnify
such person against such liabilities under Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent
and under the circumstances permitted by subsections (a) and (b) of Section 145
of the General Corporation Law of the State of Delaware, the Registrant (i)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any action, suit or proceeding described in
subsections (a) and (b) by reason of the fact that he is or was a director or
officer, or his testator or intestate is or was a director or officer of the
Registrant, against expenses, judgments, fines and amounts paid in settlement,
and (ii) shall indemnify and hold harmless each person who was or is a party or
is threatened to be made a party to any such action,
<PAGE>
suit or proceeding if such person is or was serving at the request of the
Registrant as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise.
EXHIBITS (ITEM 16 OF FORM S-3)
<TABLE>
<CAPTION>
Exhibits--
<S> <C>
1.1 -- Form of Underwriting Agreement.*
4.1 -- Form of Pooling and Servicing Agreement.*
4.2 -- Form of Trust Indenture.*
5.1 -- Opinion of Sidley & Austin with respect to legality.
5.2 -- Opinion of Cadwalader, Wickersham & Taft with respect to legality.
5.3 -- Opinion of Skadden, Arps, Slate, Meagher & Flom with respect to legality.
5.4 -- Opinion of Thacher, Proffitt & Wood with respect to legality.
8.1 -- Opinion of Sidley & Austin with respect to certain tax matters.
8.2 -- Opinion of Cadwalader, Wickersham & Taft with respect to certain tax matters
(included as part of Exhibit 5.2).
8.3 -- Opinion of Skadden, Arps, Slate, Meagher & Flom with respect to certain tax matters
(included as part of Exhibit 5.3).
8.4 -- Opinion of Thacher, Proffitt & Wood with respect
to certain tax matters. (Included as part of
Exhibit 5.4)
23.1 -- Consent of Sidley & Austin (included as part of Exhibit 5.1 and Exhibit 8.1).
23.2 -- Consent of Cadwalader, Wickersham & Taft (included as part of Exhibit 5.2).
23.3 -- Consent of Skadden, Arps, Slate, Meagher & Flom (included as part of Exhibit 5.3).
23.4 -- Consent of Thacher, Proffitt & Wood (included as part of Exhibit 5.4 and Exhibit
8.4).
24.1 -- Power of Attorney (included in signature page to this Registration Statement).
25.1 -- Statement of Eligibility of Trustee.
99.1 -- Form of Servicing and Administration Agreement.*
99.2 -- Form of Deposit Trust Agreement.*
</TABLE>
-------------------------
<PAGE>
* Incorporated by reference to the Registration Statement on
Form S-3 (File No. 333-49129) and to the Amendment No. 2 to
the Registration Statement on Form S-3 (File No. 33-50210)
previously filed by the Registrant.
UNDERTAKINGS (ITEM 17 OF FORM S-3)
A. UNDERTAKINGS PURSUANT TO RULE 415
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration
Statement (i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, (ii) to reflect in the prospectus any facts
or events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement, and (iii) to
include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the Securities and Exchange Commission by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(f) To provide to the underwriter at the closing specified in
the underwriting agreements, certificates in such denominations and
registered in such names as required by the underwriter to permit
prompt delivery to each purchaser.
(g) To file an application for the purpose of determining the
eligibility of the trustee to act under subsection (a) of Section 310
of the Trust Indenture Act of 1939 in accordance with the rules and
regulations prescribed by the Securities and Exchange Commission under
Section 305(b)(2) of the Trust Indenture Act of 1939.
<PAGE>
B. UNDERTAKING IN RESPECT OF INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3, reasonably believes that the
security rating requirement contained in Transaction Requirement B.5. of Form
S-3 will be met by the time of the sale of the securities registered hereunder
and has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York on the 24 day of February 2000.
STRUCTURED ASSET SECURITIES CORPORATION
By: /s/ Mark L. Zusy
--------------------
Name: Mark L. Zusy
Title: Chairman
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael J. Mazzei, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents, and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE DATE TITLE
- --------- ---- -----
<S> <C> <C>
/s/ Mark L. Zusy FEBRUARY 24, 2000 Chairman and Director
- --------------------------------------------------- -----------------
Mark L. Zusy (principal executive officer)
/s/ Neal Leonard FEBRUARY 24, 2000 Director
- --------------------------------------------------- -----------------
Neal Leonard
Director
- --------------------------------------------------- -----------------
James Sullivan
/s/ Daniel O. Minerva FEBRUARY 24, 2000 Treasurer
- --------------------------------------------------- -----------------
Daniel O. Minerva (principal financial officer)
/s/ David Goldfarb FEBRUARY 24, 2000 Controller
- --------------------------------------------------- -----------------
David Goldfarb (principal accounting officer)
</TABLE>
<PAGE>
EXHIBIT INDEX
PAGE NUMBER
<TABLE>
<CAPTION>
<S> <C>
1.1 -- Form of Underwriting Agreement.*
4.1 -- Form of Pooling and Servicing Agreement.*
4.2 -- Form of Trust Indenture.*
5.1 -- Opinion of Sidley & Austin with respect to legality.
5.2 -- Opinion of Cadwalader, Wickersham & Taft with respect to legality.
5.3 -- Opinion of Skadden, Arps, Slate, Meagher & Flom with respect to legality.
5.4 -- Opinion of Thacher, Proffitt & Wood with respect to legality.
8.1 -- Opinion of Sidley & Austin with respect to certain tax matters.
8.2 -- Opinion of Cadwalader, Wickersham & Taft with respect to certain tax matters (included as
part of Exhibit 5.2).
8.3 -- Opinion of Skadden, Arps, Slate, Meagher & Flom with respect to certain tax matters (included as
part of Exhibit 5.3).
8.4 -- Opinion of Thacher, Proffitt & Wood with respect to certain tax matters.
(Included as part of Exhibit 5.4)
23.1 -- Consent of Sidley & Austin (included as part of Exhibit 5.1 and Exhibit 8.2).
23.2 -- Consent of Cadwalader, Wickersham & Taft (included as part of Exhibit 5.2).
23.3 -- Consent of Skadden, Arps, Slate, Meagher & Flom (included as part of Exhibit 5.3).
23.4 -- Consent of Thacher, Proffitt & Wood (included as part of Exhibit 5.4 and Exhibit 8.4).
24.1 -- Power of Attorney (included in signature page to this Registration Statement).
25.1 -- Statement of Eligibility of Trustee.
99.1 -- Form of Servicing and Administration Agreement.*
99.2 -- Form of Deposit Trust Agreement.*
</TABLE>
- -------------------------
* Incorporated by reference to the Registration Statement on Form S-3
(File No. 333-49129) and to the Amendment No. 2 to the Registration
Statement on form S-3 (File No. 33-50210) previously filed by the
Registrant.
<PAGE>
Exhibit 5.1
Sidley & Austin
875 Third Avenue
New York, New York 10022
Telephone: (212) 906-2000
Fax: (212) 906-2021
February 18, 2000
Structured Asset Securities Corporation
200 Vesey Street
New York, New York 10285
Re: Structured Asset Securities Corporation Mortgage-Backed
Securities Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for Structured Asset Securities Corporation, a
Delaware corporation (the "Registrant"), in connection with the registration
statement on Form S-3 (the "Registration Statement") being filed by the
Registrant on or about the date hereof with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933 (the "Act") with
respect to the Registrant's Mortgage-Backed Securities (the "Securities") to be
issued from time to time. The Registration Statement relates to the registration
under the Act of Securities consisting of either (i) collateralized mortgage
obligations ("Bonds") that will evidence the indebtedness of owner trusts
established by the Registrant (each, an "Owner Trust") or (ii) mortgage
pass-through certificates ("Certificates") that will evidence interests in trust
funds established by the Registrant, in each case as described in the
Registration Statement. The Securities are issuable in one or more series (each,
a "Series") under (i) with respect to each Series of Bonds, a separate trust
indenture (a "Trust Indenture", and together with any supplements thereto, an
"Indenture") between the Owner Trust identified therein (acting through the
owner trustee (the "Owner Trustee") named therein) and the trustee named
therein, and (ii) with respect to each series of Certificates, a separate
pooling and servicing agreement (a "Pooling and Servicing Agreement") among the
Registrant, the servicer or master servicer named therein, the special servicer
(if any) named therein, the fiscal agent (if any) named therein and the trustee
named therein. The Securities of each Series are to be sold as described in the
Registration Statement, in any amendment thereto and in the prospectus and
prospectus supplement relating to such Series (the "Prospectus" and "Prospectus
Supplement", respectively).
<PAGE>
In this connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate
records and other instruments as we deemed necessary for the purposes of this
opinion. In our examination, we have assumed the following: (a) the
genuineness of all signatures; (b) the legal capacity of natural persons; (c)
the authenticity of all documents submitted to us as originals; (d) the
conformity to original documents of all documents submitted to us as
certified or photostatic copies and the authenticity of the originals of such
documents; and (e) the truth, accuracy and completeness of the information,
representations and warranties contained in the records, documents,
instruments and certificates that we have reviewed. As to any facts material
to the opinions expressed herein which were not known to us, we have relied
upon certificates, statements and representations of officers and other
representatives of the Registrant and others.
In rendering this opinion, we have further assumed that: (i) the Pooling
and Servicing Agreement with respect to each Series of Certificates is executed
and delivered substantially in the form included as Exhibit 4.1 to the
Registration Statement; (ii) the Trust Indenture with respect to each Series of
Bonds is executed and delivered substantially in the form included as Exhibit
4.2 to the Registration Statement; (iii) each party to the Pooling and Servicing
Agreement or Indenture, as the case may be, with respect to each Series of
Securities has the power and authority to enter into and perform all of such
party's obligations thereunder; (iv) the Pooling and Servicing Agreement or
Indenture, as the case may be, constitutes the valid and binding obligation of
each party thereto, enforceable against such party in accordance with its terms;
and (v) the transactions contemplated to occur under the Registration Statement
and the Pooling and Servicing Agreement or Indenture, as the case may be, with
respect to each Series of Securities in fact occur in accordance with the terms
thereof.
Based upon and subject to the foregoing, we are of the opinion that when
(i) the Registration Statement becomes effective,
(ii) the issuance and principal terms of any Series of Securities have
been duly authorized by appropriate corporate action by the Registrant and,
in the case of Bonds issued by an Owner Trust, the applicable Owner Trustee
on behalf of such Owner Trust,
(iii) the Pooling and Servicing Agreement or Indenture, as the case
may be, relating to such Series has been duly authorized by all necessary
action and executed and delivered by or on behalf of each party thereto,
(iv) the Securities of such Series have been duly executed,
authenticated and delivered in accordance with the terms and conditions of
the Pooling and Servicing Agreement or Indenture, as the case may be,
relating to such Series and
2
<PAGE>
sold in the manner described in the Registration Statement, in any
amendment thereto and in the Prospectus and Prospectus Supplement relating
thereto,
the Securities of such Series will be legally and validly issued and
outstanding, fully paid and non-assessable and, in the case of Bonds, will be
binding obligations of the applicable Owner Trust, except as enforcement thereof
may be limited by applicable bankruptcy, insolvency, reorganization,
arrangement, fraudulent conveyance, moratorium or other laws relating to or
affecting the rights of creditors generally and general principles of equity,
including concepts of materiality, reasonableness, good faith and fair dealing,
and the possible unavailability of specific performance or injunctive relief,
regardless of whether such enforceability is considered in a proceeding in
equity or at law.
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" in each Prospectus included as part of the Registration Statement and
in the Prospectus Supplement relating to each Series of Securities with respect
to which we act as counsel to the Registrant. In giving such consent, we do not
consider that we are "experts", within the meaning of the term as used in the
Act or the rules and regulations of the Commission issued thereunder, with
respect to any part of the Registration Statement, including this opinion as an
exhibit or otherwise.
We express no opinion as to any laws other than the laws of the State of
New York and the federal laws of the United States of America, and do not
express any opinion, either implicitly or otherwise, on any issue not expressly
addressed above.
Very truly yours,
/s/ Sidley & Austin
-------------------
3
<PAGE>
February 18, 2000
Structured Asset Securities Corporation
200 Vesey Street
New York, New York 10285
Re: MORTGAGE PASS-THROUGH CERTIFICATES / COLLATERALIZED MORTGAGE
OBLIGATIONS
Ladies and Gentlemen:
We have acted as special counsel to Structured Asset Securities
Corporation (the "REGISTRANT") in connection with the Registration
Statement on Form S-3 (the "REGISTRATION STATEMENT"). The Registration
Statement is being filed with the Securities and Exchange Commission
(the "COMMISSION") pursuant to the Securities Act of 1933, as amended
(the "ACT"). The Registration Statement includes a Prospectus
describing Mortgage Pass-Through Certificates ("CERTIFICATES") to be
sold by the Registrant in one or more series of Certificates (each, a
"CERTIFICATE SERIES") and a Prospectus describing Collateralized
Mortgage Obligations ("BONDS") to be sold, in one or more Series of
Bonds (each, a "BOND SERIES"), each such Bond Series to be issued by
an owner trust (each a "BOND ISSUER") established by the Registrant.
Each Certificate Series will be issued under a separate pooling and
servicing agreement (each, a "POOLING AND SERVICING AGREEMENT") among
the Registrant, a master servicer (a "SERVICER"), a trustee (a
"TRUSTEE"), and, if applicable, such other parties to be identified in
the Prospectus Supplement for such Certificate Series. Each Bond
Series will be issued under a separate indenture (each, an
"INDENTURE") among the related Bond Issuer, a Trustee, and, if
applicable, such other parties to be identified in the Prospectus
Supplement for such Bond Series. The forms of Pooling and Servicing
Agreement and Indenture are being incorporated by reference as an
exhibit to the Registration Statement. Capitalized terms used and not
otherwise defined herein have the respective meanings given to such
terms in the Registration Statement.
In rendering the opinions set forth below, we have examined and
relied upon the following: (1) the Registration Statement, including
the Prospectuses and the forms of Prospectus Supplement constituting a
part thereof, in the form filed with the Commission; (2) the Pooling
and Servicing Agreement in the form previously filed with the
Commission, (3) the Indenture in the form previously filed with the
Commission, and (4) such other documents, materials and authorities as
we have deemed necessary in order to enable us to render our
<PAGE>
opinion set forth below. We express no opinion with respect to any Certificate
Series or Bond Series for which we do not act as counsel to the
Registrant.
Based on and subject to the foregoing, we are of the opinion
that:
(A) When a Pooling and Servicing Agreement for a Certificate
Series has been duly and validly authorized, executed and
delivered by the Registrant, a Servicer, a Trustee and any other
party thereto, such Pooling and Servicing Agreement will
constitute a legal, valid and binding agreement of the
Registrant, enforceable against the Registrant in accordance with
its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium, receivership
or other laws relating to or affecting creditor's rights
generally, and to general principles of equity (regardless of
whether enforcement is sought in a proceeding at law or in
equity), and except that the enforcement of rights with respect
to indemnification and contribution obligations and provisions
(a) purporting to waive or limit right to trial by jury, oral
amendments to written agreements or rights of set off or (b)
relating to submission to jurisdiction, venue or service of
process, may be limited by applicable law or considerations of
public policy;
(B) When an Indenture for a Bond Series has been duly and
validly authorized, executed and delivered by the related Bond
Issuer, a Trustee and any other party thereto, such Indenture
will constitute a legal, valid and binding agreement of the
Bond Issuer, enforceable against the Bond Issuer in accordance
with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium,
receivership or other laws relating to or affecting creditor's
rights generally, and to general principles of equity
(regardless of whether enforcement is sought in a proceeding
at law or in equity), and except that the enforcement of
rights with respect to indemnification and contribution
obligations and provisions (a) purporting to waive or limit
right to trial by jury, oral amendments to written agreements
or rights of set off or (b) relating to submission to
jurisdiction, venue or service of process, may be limited by
applicable law or considerations of public policy;
(C) When a Pooling and Servicing Agreement for a
Certificate Series has been duly and validly authorized,
executed and delivered by the Registrant, a Servicer, a
Trustee and any other party thereto, and the Certificates of
such Certificate Series have been duly executed,
authenticated, delivered and sold as contemplated in the
Registration Statement, such Certificates will be legally and
validly issued and outstanding, fully paid and nonassessable,
and entitled to the benefits provided by such Pooling and
Servicing Agreement;
(D) When an Indenture for a Bond Series has been duly and
validly authorized, executed and delivered by the related Bond
Issuer, a Trustee and any other party thereto, and the Bonds
of such Bond Series have been duly executed, authenticated,
delivered and sold as contemplated in the Registration
Statement, such Bonds will be legal, valid and binding
obligations of the Bond Issuer,
2
<PAGE>
enforceable against the Bond Issuer in accordance with their
terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium,
receivership or other laws relating to creditors' rights
generally, and to general principles of equity (regardless of
whether enforcement is sought in a proceeding at law or in
equity), and will be validly issued and outstanding, fully
paid and nonassessable, and entitled to the benefits provided
by the Indenture; and
(E) The description of federal income tax consequences
appearing under the heading "Federal Income Tax Consequences"
in the Prospectuses accurately describes the material federal
income tax consequences to holders of Certificates or Bonds,
under existing law and subject to the qualifications and
assumptions stated therein.
We hereby consent to the filing of this letter as an exhibit
to the Registration Statement and to the reference to this firm under the
heading "Legal Matters" in the Prospectuses, which are a part of the
Registration Statement. This consent is not to be construed as an admission that
we are a person whose consent is required to be filed with the Registration
Statement under the provisions of the Act.
Very truly yours,
/s/ Cadwalader, Wickersham & Taft
3
<PAGE>
[Letterhead of Skadden, Arps, Slate, Meagher & Flom LLP]
February 18, 2000
Structured Asset Securities Corporation
200 Vesey Street
New York, New York 10285
Re: Structured Asset Securities Corporation
Registration Statement on Form S-3
Ladies and Gentlemen:
We will act as special counsel for Structured Asset Securities Corpo
ration, a Delaware corporation (the "Company"), in connection with the offering,
from time to time, in one or more Series (each, a "Series") of the Company's Com
mercial Mortgage Pass-Through Certificates (the "Securities"). The Securities as
to which we so act as special counsel are being registered pursuant to the
Securities Act of 1933, as amended (the "Act"), by means of a Registration
Statement of the Company on Form S-3. The Securities will be offered pursuant to
the prospectus, as supplemented by a prospectus supplement (the "Base
Prospectus" and "Prospectus Supplement," respectively), which will be filed with
the Securities and Exchange Commission (the "Commission") pursuant to Rule 424
under the Act. As set forth in the Registration Statement, each such Series will
be issued under and pursuant to the conditions of a pooling and servicing
agreement (the "Agreement") among the Company, a trustee (the "Trustee"), a
master servicer (the "Master Servicer") and a special servicer (the "Special
Servicer"), each to be identified in the Prospectus Supplement for such Series
of Securities.
This opinion is being furnished in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Act.
<PAGE>
Structured Asset Securities Corporation
February 18, 2000
Page 2
In connection with this opinion, we have examined copies of the Company's
Amended and Restated Articles of Incorporation, Bylaws, the form of Agreement
(as incorporated by reference as an exhibit to the Registration Statement) and
the forms of Securities included in the Agreement. We also have examined
originals or copies, certified or otherwise identified to our satisfaction, of
such records of the Company and such agreements, certificates of public
officials, certifi cates of officers or other representatives of the Company and
others, and such other documents, certificates and records as we have deemed
necessary or appropriate as a basis for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submit ted to us as originals, the conformity to original documents of all
documents submit ted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of executed docu ments, we have assumed that the parties thereto,
other than the Company, had the power, corporate or other, to enter into and
perform all obligations thereunder and have also assumed the due authorization
by all requisite action, corporate or other, and execution and delivery by such
parties of such documents and the validity and binding effect thereof on such
parties. As to any facts material to the opinions expressed herein which we have
not independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and others.
Members of our firm are admitted to the bar in the State of New York and we
do not express any opinion as to the laws of any jurisdiction other than the
General Corporation Law of the State of Delaware and the federal laws of the
United States of America, and we do not express any opinion as to the effect of
any other laws on the opinion stated herein.
Based upon the foregoing, we are of the opinion that:
1. When the Agreement has been duly and validly authorized by all necessary
action on the part of the Company and has been duly executed and delivered by
the Company, the Master Servicer, the Special Servicer and the Trustee,
<PAGE>
Structured Asset Securities Corporation
February 18, 2000
Page 3
such Agreement will constitute a legal, valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, except as
enforcement thereof may be limited by bankruptcy, insolvency or other laws
relating to or affecting creditors' rights generally or by general equity
principles.
2. When a Series of Securities has been duly authorized by all necessary
action on the part of the Company (subject to the terms thereof being otherwise
in compliance with applicable law at such time), duly executed and authenticated
by the Trustee for such Series in accordance with the terms of the Agreement and
issued and delivered against payment therefor as described in the Registration
Statement, such Series of Securities will be legally and validly issued, fully
paid and nonassessable, and the holders thereof will be entitled to the benefits
of the Agreement.
3. Based on and subject to the foregoing, we hereby confirm that the
statements in the Base Prospectus under the caption "Certain Federal Income Tax
Considerations" accurately describe the material federal income tax consequences
to holders of Securities, under existing law and the assumptions stated therein.
You should be aware, however, that our opinion with respect to federal
income tax consequences represents our conclusions as to the application of
existing law. There can be no assurance that contrary positions may not be taken
by the Internal Revenue Service. We also note that the Base Prospectus does not
relate to a specific transaction. Accordingly, the above referenced description
of federal income tax consequences may, under certain circumstances, require
modification in the context of an actual transaction.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
us under the caption "Legal Matters" in the Base Prospectus and Prospectus
Supple ment. In giving this consent, we do not thereby admit that we are
included in the category of persons whose consent is required under Section 7 of
the Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
<PAGE>
February 18, 2000
Exhibit 5.4
Structured Asset Securities Corporation
200 Vesey Street
New York, New York 10285
Re: Structured Asset Securities Corporation
Collateralized Mortgage Obligations
and Mortgage-Backed Certificates;
REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We are counsel to Structured Asset Securities Corporation, a
Delaware corporation (the "Registrant"), in connection with the
registration under the Securities Act of 1933, as amended (the 1933
Act"), of Mortgage-Backed Certificates (the "Certificates") and
Collateralized Mortgage Obligations (the "Bonds"; and together with
the Certificates, the "Securities"), and the related preparation and
filing of a Registration Statement on Form S-3 (the "Registration
Statement"). The Certificates are issuable in series under separate
pooling and servicing agreements (each such agreement, a "Pooling and
Servicing Agreement"), among the Registrant, a master servicer to be
identified in the prospectus supplement for such series of
Certificates, a special servicer (if any) to be identified in the
prospectus supplement for such series of Certificates, a fiscal agent
(if any) to be identified in the prospectus supplement for such series
of Certificates, a REMIC administrator (if any) to be identified in
the prospectus supplement for such series of Certificates and a
trustee to be identified in the prospectus supplement for such series
of Certificates. Each Pooling and Servicing Agreement will be
substantially in the form filed as an Exhibit to the Registration
Statement. The Bonds are issuable in series pursuant to an indenture
and a related series supplement (together, an "Indenture"), between an
issuer, either the Registrant or an owner trust established by it (the
"Owner Trust"), and an indenture trustee, each to be identified in the
prospectus supplement for such series of Bonds. Each Indenture will be
substantially in the form filed as an Exhibit to the
Registration Statement.
<PAGE>
Structured Asset Securities Corporation Page 2
February 18, 2000
In rendering this opinion letter, as to relevant factual
matters we have examined the documents described above and such other
documents as we have deemed necessary including, where we have deemed
appropriate, representations or certifications of officers of parties thereto
or public officials. In rendering this opinion letter, except for the matters
that are specifically addressed in the opinions expressed below, we have
assumed (i) the authenticity of all documents submitted to us as originals or
as copies thereof, and the conformity to the originals of all documents
submitted to us as copies, (ii) the necessary entity formation and continuing
existence in the jurisdiction of formation, and the necessary licensing and
qualification in all jurisdictions, of all parties to all documents, (iii)
the necessary authorization, execution, delivery and enforceability of all
documents, and the necessary entity power with respect thereto, and (iv) that
there is not any other agreement that modifies or supplements the agreements
expressed in any document to which this opinion letter relates and that
renders any of the opinions expressed below inconsistent with such document
as so modified or supplemented. In rendering this opinion letter, we have
made no inquiry, have conducted no investigation and assume no responsibility
with respect to (a) the accuracy of and compliance by the parties thereto
with the representations, warranties and covenants as to factual matters
contained in any document or (b) the conformity of the underlying assets and
related documents to the requirements of any agreement to which this opinion
letter relates.
The opinions expressed below with respect to the
enforceability of any right or obligation under any agreement are subject to
(i) general principles of equity, including concepts of materiality,
reasonableness, good faith and fair dealing and the possible unavailability
of specific performance and injunctive relief, regardless of whether
considered in a proceeding in equity or at law, (ii) the effect of certain
laws, regulations and judicial and other decisions upon the availability and
enforceability of certain remedies including the remedies of specific
performance and self-help and provisions purporting to waive the obligation
of good faith, materiality, fair dealing, diligence, reasonableness or
objection to venue or forum, to confer subject matter jurisdiction on a
federal court located within the State of New York to adjudicate any
controversy in any situation in which such court would not otherwise have
subject matter jurisdiction, to waive the right to jury trial, to impose a
penalty or forfeiture, to release, exculpate or exempt a party from or
require indemnification of a party for liability for its own action or
inaction to the extent that the action or inaction includes negligence,
recklessness or willful or unlawful conduct, to sever any provision of any
agreement, to restrict access to legal or equitable remedies, to establish
evidentiary standards, to appoint any person or entity as the
attorney-in-fact of any other person or entity, to require that any agreement
may only be amended, modified or waived in writing, to provide that all
rights or remedies of any party are cumulative and may be enforced in
addition to any other right or remedy, to provide that the election of a
particular remedy does not preclude recourse to one or more remedies, to
provide that the failure to exercise or the delay in exercising rights or
remedies will not operate as a waiver of any such rights or remedies, to
waive rights or remedies which can not be waived as a matter of law, to
provide for set-off unless there is mutuality between the parties or to
provide that any agreement is to be governed by or construed in accordance
with the laws of any jurisdiction other than the State of New York, (iii)
bankruptcy, insolvency, receivership, reorganization, liquidation, voidable
preference, fraudulent conveyance and transfer, moratorium and other similar
laws affecting the rights of creditors or secured parties and (iv) public
policy considerations underlying the securities laws, to the extent that such
public policy considerations limit the enforceability of any provision of any
agreement which purports or is construed to provide
<PAGE>
Structured Asset Securities Corporation Page 3
February 18, 2000
indemnification with respect to securities law violations. We do not express
any opinion herein with respect to any law the violation of which would not
have any material adverse effect on the ability of any party to perform its
obligations under any agreement. However, the non-enforceability of any such
provisions will not, taken as a whole, materially interfere with the
practical realization of the benefits of the rights and remedies included in
any such agreement which is the subject of any opinion expressed below,
except for the considerations referred to in foregoing clause (iv) and the
consequences of any judicial, administrative, procedural or other delay which
may be imposed by, relate to or arise from applicable laws, equitable
principles and interpretations thereof. Wherever we indicate that our opinion
with respect to the existence or absence of facts is based on our knowledge,
our opinion is based solely on the actual present knowledge of the attorneys
in this firm who are directly involved in the representation of parties to
the transactions described herein in connection therewith. In that regard we
have conducted no special or independent investigation of factual matters in
connection with this opinion letter.
In rendering this opinion letter, we do not express any
opinion concerning any laws other than the federal laws of the United States
and the laws of the State of New York and the General Corporation Law of the
State of Delaware. We do not express any opinion with respect to the
securities laws of any jurisdiction or any other matter not specifically
addressed in the opinions expressed below.
Based upon and subject to the foregoing, it is our opinion that:
1. Each Pooling and Servicing Agreement, assuming the
authorization, execution and delivery thereof by the parties thereto, will be
a valid and legally binding agreement under the laws of the State of New
York, enforceable thereunder against the parties thereto in accordance with
its terms.
2. Each Indenture, assuming the authorization, execution and
delivery thereof by the parties thereto, will be a valid and legally binding
agreement under the laws of the State of New York, enforceable thereunder
against the parties thereto in accordance with its terms.
3. Each series of Certificates, assuming the authorization,
execution and delivery of the related Pooling and Servicing Agreement, the
execution and authentication of such Certificates in accordance with that
Pooling and Servicing Agreement and the delivery and payment therefor as
contemplated in the Registration Statement and the prospectus supplement and
prospectus contained therein and delivered in connection therewith, will be
legally and validly issued and outstanding, fully paid and non-assessable and
entitled to the benefits of that Pooling and Servicing Agreement.
4. Each series of Bonds, assuming the authorization, execution
and delivery of the related Indenture, the execution and authentication of
such Bonds in accordance with that Indenture and the delivery and payment
therefor as contemplated in the Registration Statement and the prospectus
supplement and prospectus contained therein and delivered in connection
therewith, will be legally and validly issued and outstanding, fully paid and
non-assessable and entitled to the benefits of that Indenture.
<PAGE>
Structured Asset Securities Corporation
February 18, 2000 Page 4
5. The description of federal income tax consequences
appearing under the heading "Federal Income Tax Considerations" in the
prospectus contained in the Registration Statement, while not purporting to
discuss all possible federal income tax consequences of an investment in
Securities, is accurate with respect to those tax consequences which are
discussed, and we hereby adopt and confirm that description as our opinion.
We hereby consent to the filing of this opinion letter as an
Exhibit to the Registration Statement, and to the use of our name in the
prospectus and the prospectus supplement included in the Registration
Statement under the headings "Federal Income Tax Considerations" and "Legal
Matters", without admitting that we are "persons" within the meaning of
Section 7(a) or 11(a)(4) of the 1933 Act, or "experts" within the meaning of
Section 11 thereof, with respect to any portion of the Registration Statement.
Very truly yours,
THACHER PROFFITT & WOOD
/s/ Thacher Proffitt & Wood
<PAGE>
Exhibit 8.1
Sidley & Austin
875 Third Avenue
New York, New York 10022
Telephone: (212) 906-2000
Fax: (212) 906-2021
February 18, 2000
Structured Asset Securities Corporation
200 Vesey Street
New York, New York 10285
Re: Structured Asset Securities Corporation
Mortgage-Backed Securities
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for Structured Asset Securities Corporation, a
Delaware corporation (the "Registrant"), in connection with the registration
statement on Form S-3 (the "Registration Statement") being filed by the
Registrant on or about the date hereof with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933 (the "Act") with
respect to the Registrant's Mortgage-Backed Securities (the "Securities") to be
issued from time to time. The Registration Statement relates to the registration
under the Act of Securities consisting of either (i) collateralized mortgage
obligations ("Bonds") that will evidence the indebtedness of owner trusts
established by the Registrant (each, an "Owner Trust") or (ii) mortgage
pass-through certificates ("Certificates") that will evidence interests in trust
funds established by the Registrant, in each case as described in the
Registration Statement. The Securities are issuable in one or more series (each,
a "Series") under (i) with respect to each Series of Bonds, a separate trust
indenture (a "Trust Indenture", and together with any supplements thereto, an
"Indenture") between the Owner Trust identified therein (acting through the
owner trustee named therein) and the trustee named therein, and (ii) with
respect to each series of Certificates, a separate pooling and servicing
agreement among the Registrant, the servicer or master servicer named therein,
the special servicer (if any) named therein, the fiscal agent (if any) named
therein and the trustee named therein. The Securities of each Series are to be
sold as described in the Registration Statement, in any amendment thereto and in
the prospectus and prospectus supplement relating to such Series (the
"Prospectus" and "Prospectus Supplement", respectively).
In this connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as we deemed necessary for the purposes of this opinion.
In our examination, we have assumed the following: (a) the genuineness of all
signatures; (b) the legal capacity of natural persons; (c) the
<PAGE>
Structured Asset Securities Corporation
February 18, 2000
Page 2
authenticity of all documents submitted to us as originals; (d) the conformity
to original documents of all documents submitted to us as certified or
photostatic copies and the authenticity of the originals of such documents; and
(e) the truth, accuracy and completeness of the information, representations and
warranties contained in the records, documents, instruments and certificates
that we have reviewed. As to any facts material to the opinions expressed herein
which were not known to us, we have relied upon certificates, statements and
representations of officers and other representatives of the Registrant and
others.
Based upon the foregoing, we are of the opinion that, although it does not
discuss all federal income tax consequences that may be applicable to the
individual circumstances of particular investors (some of which may be subject
to special treatment under the Internal Revenue Code of 1986), the description
set forth under the caption "Federal Income Tax Considerations" in each
Prospectus included as a part of the Registration Statement otherwise correctly
describes, as of the date hereof, the material aspects of the federal income tax
treatment of an investment in a Series of Securities commonly applicable to
investors that are United States persons (as defined in each such Prospectus)
and, where expressly indicated therein, to investors that are not United States
persons.
We know that we will be referred to under the heading "Certain Federal
Income Tax Consequences" in the Prospectus Supplement relating to each Series of
Securities with respect to which we act as counsel to the Registrant, and we
hereby consent to such use of our name therein and to the use of this opinion
for filing with the Registration Statement as Exhibit 8.1 thereto. In giving
such consent, we do not consider that we are "experts", within the meaning of
the term as used in the Act or the rules and regulations of the Commission
issued thereunder, with respect to any part of the Registration Statement,
including this opinion as an exhibit or otherwise.
We express no opinion as to any laws other than the federal laws of the
United States of America, and do not express any opinion, either implicitly or
otherwise, on any issue not expressly addressed above.
Very truly yours,
/s/ Sidley & Austin
-------------------
<PAGE>
Exhibit 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
--------------------
LASALLE BANK NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
36-1521370
(I.R.S. Employer Identification No.)
135 South LaSalle Street, Suite 1625 Chicago,
Illinois 60603
(Address, including zip code, of principal executive offices)
--------------------
Christine Edwards
Chief Legal Officer
LaSalle Bank National Association
135 South LaSalle Street
Chicago, Illinois 60603
Telephone: (312) 443-2010
(Name, address and telephone number of agent for service)
--------------------
One or more separate trusts to be
organized by
Structured Asset Securities Corporation
(Exact name of obligor as specified in its charter)
Delaware 74-2440850
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Structured Asset Securities Corporation
200 Vesey Street
New York, NY 10285
(Address, including zip code, of registrant's Principal Executive Offices)
--------------------
All Collateralized Mortgage Obligations registered under Registration
Statement No. 333-______
(Title of the indenture securities)
<PAGE>
ITEM 1. GENERAL INFORMATION
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority
to which it is subject.
1. Comptroller of the Currency, Washington D.C.
2. Federal Deposit Insurance Corporation, Washington, D.C.
3. The Board of Governors of the Federal Reserve Systems,
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.
If the obligor or any underwriter for the obligor is an
affiliate of the trustee, describe each such affiliation.
Neither the obligor nor any underwriter for the obligor is an
affiliate of the trustee.
ITEM 3. VOTING SECURITIES OF THE TRUSTEE.
Furnish the following information as to each class of voting
securities of the trustee:
Not applicable
<PAGE>
ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES.
If the trustee is a trustee under another indenture under
which any other securities, or certificates of interest or
participation in any other securities, of the obligor are
outstanding, furnish the following information:
(a) Title of the securities outstanding under each other
indenture.
Not applicable
(b) A brief statement of the facts relied upon as a basis
for the claim that no conflicting interest within the
meaning of Section 310(b)(1) of the Act arises as a
result of the trusteeship under such other indenture,
including a statement as to how the indenture
securities will rank as compared with the securities
issued under such other indenture.
Not applicable
<PAGE>
ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE
OBLIGOR OR UNDERWRITERS.
If the trustee or any of the directors or executive officers
of the trustee is a director, officer, partner, employee,
appointee, or representative of the obligor or of any
underwriter for the obligor, identify each such person having
any such connection and state the nature of each such
connection.
Not applicable
ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR
ITS OFFICIALS.
Furnish the following information as to the voting securities
of the trustee owned beneficially by the obligor and each
director, partner and executive officer of the obligor.
Not applicable
ITEM 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR
THEIR OFFICIALS.
Furnish the following information as to the voting securities
of the trustee owned beneficially by each underwriter for the
obligor and each director, partner, and executive officer of
each such underwriter.
Not applicable
ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
Furnish the following information as to securities of the
obligor owned beneficially or held as collateral security for
obligations in default by the trustee:
Not applicable
ITEM 9. SECURITIES OF THE UNDERWRITER OWNED OR HELD BY THE TRUSTEE.
If the trustee owns beneficially or holds as collateral
security for obligations in default any securities of an
underwriter for the obligor, furnish the following information
as to each class of securities of such underwriter any of
which are so owned or held by the trustee.
Not applicable
<PAGE>
ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES
OF CERTAIN AFFILIATES OR SECURITY
HOLDERS OF THE OBLIGOR.
If the trustee owns beneficially or holds as collateral
security for obligations in default voting securities of a
person who, to the knowledge of the trustee (1) owns 10
percent or more of the voting securities of the obligor or (2)
is an affiliate, other than a subsidiary, of the obligor,
furnish the following information as to the voting securities
of such person.
Not applicable
ITEM 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF
A PERSON OWNING 50 PERCENT OR MORE OF
THE VOTING SECURITIES OF THE OBLIGOR.
If the trustee owns beneficially or holds as collateral
security for obligations in default any securities of a person
who, to the knowledge of the trustee, owns 50 percent or more
of the voting securities of the obligor, furnish the following
information as to each class of securities of such person any
of which are so owned or held by the trustee.
Not applicable
ITEM 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
If the obligor is indebted to the trustee, furnish the
following information.
Not applicable
ITEM 13. DEFAULTS BY THE OBLIGOR.
a) State whether there is or has been a default with respect
to the securities under this indenture. Explain the nature of
any such default.
Not applicable
b) If the trustee is a trustee under another indenture under
which any other securities, or certificates of interest or
participation in any other securities, of the obligor are
outstanding, or is trustee for more than one outstanding
series of securities under the indenture, state whether there
has been a default under any such indenture or series,
identify the indenture or series affected, and explain the
nature of any such default.
Not applicable
<PAGE>
ITEM 14. AFFILIATIONS WITH THE UNDERWRITERS.
If any underwriter is an affiliate of the trustee, describe
each such affiliation.
Not applicable
ITEM 15. FOREIGN TRUSTEE.
Identify the order or rule pursuant to which the foreign
trustee is authorized to act as sole trustee under indentures
qualified or to be qualified.
Not applicable
<PAGE>
ITEM 16. LIST OF EXHIBITS.
List below all exhibits filed as part of this statement of
eligibility and qualification.
1. A copy of the Articles of Association of LaSalle Bank
N.A. now in effect.
2. A copy of the certificate of authority to commence
business.
3. A copy of the authorization to exercise corporate trust
powers.
4. A copy of the existing By-Laws of LaSalle Bank N.A.
5. Not applicable.
6. The consent of the trustee required by Section 321(b)
of the Trust Indenture Act of 1939.
7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority.
8. Not applicable.
9. Not applicable.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee,
LaSalle Bank National Association, a corporation organized and existing under
the laws of the United States of America, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Chicago, State of Illinois, on the
26th day of January 2000.
LaSalle Bank N.A.
By: /S/ RUSSELL M. GOLDENBERG
-------------------------------
Russell M. Goldenberg
Group Senior Vice President
<PAGE>
EXHIBIT 1
ARTICLES OF ASSOCIATION
<PAGE>
ARTICLES OF ASSOCIATION
FIRST. The title of this association shall be LaSalle Bank National Association.
SECOND. The main office of the association shall be in Chicago, County of Cook,
State of Illinois. The general business of the association shall be conducted at
its main office and its branches.
THIRD. The board of directors of this association shall consist of not less than
five nor more than twenty-five persons, the exact number to be fixed and
determined from time to time by resolution of a majority of the full board of
directors or by resolution of a majority of the shareholders at any annual or
special meeting thereof. Each director, during the full term of his or her
directorship, shall own a minimum of $1,000 aggregate par value of stock of this
association or a minimum par, market value or equity interest of $1,000 of stock
in the bank holding company controlling this association.
Any vacancy in the board of directors may be filled by action of the board of
directors provided, however, that a majority of the full board of directors may
not increase the number of directors to a number which: (1) exceeds by more than
two the number of directors last elected by shareholders where the number was 15
or less; and (2) exceeds by more than four the number of directors last elected
by shareholders where the number was 16 or more, but in no event shall the
number of directors exceed 25.
FOURTH. There shall be an annual meeting of the shareholders to elect directors
and transact whatever other business may be brought before the meeting. It shall
be held at the main office or any other convenient place the board of directors
may designate, on the day of each year specified therefor in the bylaws, or if
that day falls on a legal holiday in the state in which the association is
located, on the next following banking day. If no election is held on that day,
it may be held on any subsequent day according to such lawful rules as may be
prescribed by the board of directors.
Nominations for election to the board of directors may be made by the board of
directors or by any stockholder of any outstanding class of capital stock of the
bank entitled to vote for election of directors.
FIFTH The authorized amount of capital stock of this association shall be 8
million shares of common stock of the par value of ten dollars ($10.00) each;
but said capital stock may be increased or decreased from time to time,
according to the provisions of the laws of the United States.
No holder of shares of the capital stock of any class of the corporation shall
have any preemptive or preferential right of subscription to any shares of any
class of stock of the corporation, whether now or hereafter authorized, or to
any obligations convertible into stock of the corporation, issued, or sold, nor
any right of subscription to any thereof other than such, if any, as the board
of directors, in its discretion may from time to time determine and at such
price as the board of directors may from time to time fix.
The association, at any time and from time to time, may authorize and issue debt
obligations, whether or not subordinated, without the approval of the
shareholders.
SIXTH. The board of directors shall appoint one of its members president of this
association, who shall be chairperson of the board, unless the board appoints
another director to be the chairperson. The board of directors shall have the
power to appoint one or more vice presidents, a secretary who shall keep minutes
of the directors and shareholders meeting and be responsible for authenticating
the records of the association and such other officers and employees as may be
required to transact the business of this association. A duly appointed officer
may appoint one or more officers or assistant officers if authorized by the
board of directors in accordance with the bylaws.
<PAGE>
The board of directors shall have the power to define the duties of the officers
and employees of the association; dismiss officers and employees; require bonds
from officers and employees and to fix the penalty thereof, regulate the manner
in which any increase of the capital of the association shall be made; manage
and administer the business and affairs of the association; make all bylaws that
it may be lawful for the board to make; and generally to perform all acts that
are legal for a board of directors to perform.
SEVENTH. The board of directors shall have the power to change the location of
the main office to any other place within the limits of Chicago, without the
approval of the shareholders, and shall have the power to establish or chancre
the location of any branch or branches of the association to any other location
permitted under applicable law, without the approval of the shareholders.
EIGHTH. The corporate existence of this association shall continue until
terminated according to the laws of the United States.
NINTH. The board of directors of this association, or any one or more
shareholders owning, in the aggregate, not less than fifty percent of the stock
of this association, may call a special meeting of shareholders at any time.
Unless otherwise provided by the laws of the United States, a notice of the
time, place, and purpose of every annual and special meeting of the shareholders
shall be given by first-class mail, postage prepaid, mailed at least 10 days
prior to the date of the meeting, to each shareholder of record at his/her
address as shown upon the books of this association.
TENTH. To the full extent permitted by the General Corporation Law of the State
of Delaware or by any other applicable laws presently or hereafter in effect and
subject to the provisions of this article Tenth, the association may indemnify
any person who was or is a party or threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the association) by reason of the fact that he or she is or was a
director, officer, employee or agent of the association, or is or was serving at
the request of the association as a director, officer, employee or agent of
another company, partnership, joint venture, trust or other enterprise, against
expenses, including attorney fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the Association, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful, PROVIDED no
director, officer, employee or agent of the association shall be indemnified
against any expenses, penalties or other payments incurred in an administrative
proceeding or action instituted by an appropriate bank regulatory agency
resulting in a final order assessing civil money penalties or requiring
affirmative action by an individual or individuals in the form of payments to
this association. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of no contest or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the association, and with respect to any
criminal action or proceeding, did not have reasonable cause to believe that his
or her conduct was unlawful.
To the full extent permitted by the General Corporation Law of the State of
Delaware or by any other applicable laws presently or hereafter in effect and
subject to the provisions of this article Tenth, the association shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
association to procure a judgment in its favor by reason of the fact that he or
she is or was a director, officer, employee or agent of the association, or is
or was serving at the request of the association as a director, officer,
employee or
<PAGE>
agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
association and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of this duty to the
association unless and only to the extent that the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper, PROVIDED no director, officer, employee or agent of the association
shall be indemnified against any expenses, penalties or other payments incurred
in an administrative proceeding or action instituted by an appropriate bank
regulatory agency resulting in a final order assessing civil money penalties or
requiring affirmative action by an individual or individuals in the form of
payments to this association, and under circumstances in which he or she would
be entitled to indemnification under this article Tenth, no director of the
association shall be personally liable to the association or its stockholders
for or with respect to any acts or omissions in the performance of his or her
duties as a director of the association.
Any indemnification under this article Tenth unless ordered by a court shall be
made by the association only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he or she has met the applicable standard
of conduct set forth in this article Tenth. Such determination shall be made:
(a) by the board of directors by a majority vote of a quorum consisting of
Directors who were not parties to such action, suit or proceeding; (b) if such a
quorum is not obtainable, or even if obtainable, a quorum of disinterested
Directors so directs, by independent legal counsel in a written opinion; or (c)
by the shareholders.
Expenses, including attorneys' fees, incurred in defending a civil or criminal
action, suit or proceeding, shall be paid by the association in advance of the
final disposition of such action, suit or proceeding as authorized in the manner
provided in the third subparagraph of this article Tenth herein upon receipt of
an undertaking by or on behalf of the director, officer, employee or agent to
repay such amount unless it shall ultimately be determined that he or she is
entitled to be indemnified by the association as authorized in this article
Tenth.
The indemnification provided by this article Tenth shall not be deemed exclusive
of any other rights to which any person may be entitled under any bylaw,
agreement vote of shareholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The association shall have power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
association, or is or was serving at the request of the association as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity or arising out of his status as such,
whether or not the association would have the power to indemnify him against
such liability under the provisions of this article Tenth, PROVIDED, the power
of the association to purchase and maintain insurance as herein provided shall
not include insurance with respect to expenses, penalties or other payments of a
director, officer, employee or agent of the association incurred in an
administrative proceeding or action instituted by an appropriate bank regulatory
agency resulting in a final order assessing civil money penalties or requiring
affirmative action by such individual or individuals in the form of payments to
this association.
<PAGE>
For purposes of this article, references to "the association" shall include, in
addition to the surviving association or corporation, any merging or
consolidating association or corporation (including any association or
corporation having merged or consolidated with a merging or consolidating
association or corporation) absorbed in a merger or consolidation which, if its
separate existence had continued, would have had the power and authority to
indemnify its directors, officers, employees and agents, so that any person who
was a director, officer, employee or agent of such merging or consolidating
association or corporation, or was serving at the request of such merging or
consolidating association or corporation as a director, officer, employee or
agent of another association, corporation, partnership, joint venture, trust or
other enterprise, shall stand in the same position under the provisions of this
article with respect to the surviving association or corporation as such person
would have with respect to such merging association or corporation if its
separate existence had continued.
For purposes of this article, references to "other enterprises" shall include
employee benefit plans, references to "fines" shall include any excise taxes,
assessed on a person with respect to an employee benefit plan; and references to
"serving at the request of the association" shall include any service as a
director, officer, employee or agent of the association which imposes duties on,
or involves services by, such director, officer, employee, or agent with respect
to an employee benefit plan, its participants, or beneficiaries.
The invalidity or unenforceability of any provision of this article Tenth shall
not affect the validity or enforceability of the remaining provisions of this
article Tenth.
ELEVENTH. These articles of association may be amended at any regular or special
meeting of the shareholders by the affirmative vote of the holders of a majority
of the stock of this association, unless the vote of the holders of a greater
amount of stock is required by law, and in that case by the vote of the holders
of such greater amount.
<PAGE>
EXHIBIT 2
CERTIFICATE OF AUTHORITY
TO COMMENCE BUSINESS
<PAGE>
- -------------------------------------------------------------------------------
COMPTROLLER OF THE CURRENCY
ADMINISTRATOR OF NATIONAL BANKS
- -------------------------------------------------------------------------------
WASHINGTON, D.C. 20219
CERTIFICATE
I, John D. Hawke, Jr., Comptroller of the Currency, do hereby certify that:
1. The Comptroller of the Currency, pursuant to Revised Statutes 324, et seq.,
as amended, 12 U.S.C. 1, et seq., as amended, has possession, custody and
control of all records pertaining to the chartering of all National Banking
Associations.
2. "LaSalle Bank National Association," Chicago, Illinois, (Charter No. 14362)
is a National Banking Association formed under the laws of the United States and
is authorized thereunder to transact the business of banking on the date of this
Certificate.
IN TESTIMONY WHEREOF, I have hereunto subscribed my
name and caused my seal of office to be affixed to these
presents at the Treasury Department in the City of
Washington and District of Columbia, this 17th day of
December, 1999.
---------------------------
Comptroller of the Currency
<PAGE>
EXHIBIT 3
AUTHORIZATION TO EXERCISE
CORPORATE TRUST POWERS
<PAGE>
- -------------------------------------------------------------------------------
COMPTROLLER OF THE CURRENCY
ADMINISTRATOR OF NATIONAL BANKS
- -------------------------------------------------------------------------------
WASHINGTON, D.C. 20219
COMPTROLLER OF THE CURRENCY
TREASURY DEPARTMENT OF THE UNITED STATES
WASHINGTON, D.C.
WHEREAS, LaSalle Bank National Association, located in Chicago,
Illinois, being a national banking association, organized under the statutes
of the United States, has made application for authority to act as fiduciary;
AND WHEREAS, applicable provisions of the statutes of the United States
authorize the grant of such authority.
NOW THEREFORE, I hereby certify that the said association is authorized
to act in all fiduciary capacities permitted by such statutes.
IN TESTIMONY WHEREOF, witness my
signature and seal of the OCC this
30th day of April, 1999
--------------------------------------
David J. Rogers
National Bank Examiner
CHARTER NUMBER
14362
<PAGE>
EXHIBIT 4
BY-LAWS OF LASALLE BANK N.A.
<PAGE>
BYLAWS
of
LASALLE BANK NATIONAL ASSOCIATION
(a National Banking Association which association
is herein referred to as the "bank")
ARTICLE I
MEETINGS OF THE SHAREHOLDERS
SECTION 1.1. ANNUAL MEETING. The regular annual meeting of the shareholders
to elect directors and transact whatever other business may properly come before
the meeting, shall be held at the main office of the association, 135 South
LaSalle Street, Chicago, Illinois, at 8:30 A.M. on the third Wednesday of April
of each year, or at such other place or time as the board of directors may
designate. Notice of the meeting shall be mailed, postage prepaid, at least 10
days prior to the date thereof, addressed to each shareholder at the address
appearing on the books of the association. If, for any cause, an election of
directors is not made on that day, the board of directors shall order the
election to be held on some subsequent day, as soon thereafter as practicable,
according to the provisions of law; and notice shall be given in the manner
herein provided for the annual meeting.
SECTION 1.2. SPECIAL MEETINGS. Except as otherwise specifically provided by
statute, special meetings of the shareholders may be called for any purpose at
any time by the board of directors or by any three or more
shareholders owning, in the aggregate, not less than fifty percent of the stock
of the association. Every such special meeting, unless otherwise provided by
law, shall be called by mailing, postage prepaid, not less than 120 days prior
to the date fixed for the meeting, to each shareholder at the address appearing
on the books of the association, a notice stating the purpose of the meeting.
SECTION 1.3. JUDGES OF ELECTION. Every election of directors shall be
managed by three judges who shall be appointed by the board of directors. The
judges of election shall hold and conduct the election at which they are
appointed to serve. After the election, they shall file with the Secretary a
certificate signed by them, certifying the result thereof and the names of the
directors elected. The judges of election, at the request of the chairperson of
the meeting, shall act as tellers of any other vote by ballot taken at such
meeting, and shall certify the result thereof.
SECTION 1.4. PROXIES. Shareholders may vote at any meeting of the
shareholders by proxies duly authorized in writing, but no officer or employee
of this association shall act as proxy. Proxies shall be valid only for one
meeting, to be specified therein, and any adjournments of such meeting. Proxies
shall be dated and filed with the records of the meeting.
SECTION 1.5. QUORUM. A majority of the outstanding capital stock, presented
in person or by proxy, shall constitute a quorum at any meeting of shareholders,
unless otherwise provided by law; but less than a quorum may adjourn any
meeting, from time to time, and the meeting may be held, as adjourned, without
further notice. A majority of the votes cast shall decide every question or
matter submitted to the shareholders at any meeting, unless otherwise provided
by law or by the articles of association.
<PAGE>
ARTICLE II
DIRECTORS
SECTION 2.1. BOARD OF DIRECTORS. The board of directors (board) shall have
the power to manage and administrate the business and affairs of the
association. Except as expressly limited by law, all corporate powers of the
association shall be vested in and may be exercised by the board.
SECTION 2.2. NUMBER. The board shall consist of not less than five nor more
than twenty-five shareholders, the exact number within such minimum and maximum
limits to be fixed and determined from time to time by resolution of a majority
of the full board or by resolution of the shareholders at any meeting thereof,
or if such a resolution shall not be in effect, such number shall be five;
provided however, that a majority of the full board may not increase the number
of directors by more than two if the number of directors last elected by
shareholders was fifteen or less and by not more than four where the number of
directors last elected by shareholders was sixteen or more, provided that in no
event shall the number of directors exceed twenty-five.
SECTION 2.3. ORGANIZATION MEETING. The Secretary, upon receiving the
certificate of the judges, of the result of any election, shall notify the
directors-elect of their election, and of the time at which they are require to
meet, at the main office of the association or at such other place as the board
may designate to organize the new board and elect and appoint officers of the
association for the succeeding year, Such meeting shall be held on the day of
the election or as soon thereafter as practicable, and, in any event, within 30
days thereof. If, at the time fixed for such meeting, there shall not be a
quorum the directors present may adjourn the meeting, from time to time, until a
quorum is obtained.
SECTION 2.4. REGULAR MEETINGS. The regular meetings of the board shall be
held, without notice, on the third Wednesday of each month, other than August
and December, at the main office or at such other place as the board may
designate. When any regular meeting of the board falls upon a holiday, the
meeting shall be held on the next banking business day unless the board shall
designate another day.
SECTION 2.5. SPECIAL MEETINGS. Special meetings of the board may be called
by the chairman of the board, the president of the association, or at the
request of three or more directors. Each member of the board shall be given
notice stating the time and place by telegram, letter, telephonic
communications, or in person, of each special meeting.
SECTION 2.6. QUORUM. A majority of the directors shall constitute a quorum
at any meeting, except when otherwise provided by law; but a less number may
adjourn any meeting, from time to time, and the meeting may be held, as
adjourned, without further notice.
SECTION 2.7. VACANCIES. When any vacancy occurs among the directors, the
remaining members of the board, according to the laws of the United States, may
appoint a director to fill such vacancy at any regular meeting of the board or
at a special meeting called for that purpose in conformance with Section 2.5 of
this article.
SECTION 2.8. RETIREMENT POLICY. A retirement policy adopted by the board
shall be applicable to directors who are not active officers of the association.
<PAGE>
ARTICLE III
COMMITTEES OF THE BOARD
SECTION 3.1. EXECUTIVE COMMITTEE. There shall be an executive committee of
the board composed of not less than three directors, at least one of whom shall
not be an active officer of the association, appointed by the board annually or
more often. This committee shall also exercise such other powers and perform
such other duties as shall be specified by resolution of the board. When the
board is not in session, the executive committee shall have and may exercise all
the powers of the board that may lawfully be defeated. The executive committee
shall keep minutes of its meetings, and such minutes shall be submitted at the
next regular meeting of the board at which a quorum is present, and any action
taken by the board with respect thereto shall be entered in the minutes of the
board.
SECTION 3.2. AUDIT COMMITTEE. There shall be an audit committee of the
board composed of not less than three directors, exclusive of any active
officers of the association, appointed by the board annually or more often. The
duty of the audit committee shall be, at least once during each calendar year,
to examine or cause suitable examinations to be made by auditors responsible
only to the board of (1) the affairs of the association and, (2) the fiduciary
activities of the association. The results of such examination shall be reported
in writing to the board at the next regular meeting thereafter.
SECTION 3.3. COMMUNITY REINVESTMENT COMMITTEE. There shall be a community
reinvestment committee of the board composed of not less than three directors,
at least one of whom shall not be an active officer of the association,
appointed by the board annually or more often. It shall be the duty of this
committee to review the community reinvestment activities of the association.
The community reinvestment committee shall perform such other functions as may
be assigned by the full board. When the community reinvestment committee is not
in session the executive committee shall perform all of the duties of the
community reinvestment committee.
SECTION 3.4. OTHER COMMITTEE. The board may appoint, from time to time,
from its own members, other committees of one or more persons, for such purposes
and with such powers as the board may determine.
ARTICLE IV
OFFICERS AND EMPLOYEES
SECTION 4.1. CHAIRMAN OF THE BOARD. The board shall appoint one of its
members to be the chairman of the board. The chairman of the board shall preside
at all meetings of the board. The chairman of the board shall supervise the
carrying, out of the policies adopted or approved by the board, and shall have
general executive powers, as well as the specific powers conferred by these
bylaws. The chairman of the board shall also have and may exercise such further
powers and duties as from time to time may be conferred upon, or assigned by the
board. The chairman of the board shall be ex officio a member of all committees,
except the audit committee and the trust audit committee.
SECTION 4.2. VICE CHAIRMAN OF THE BOARD. The board may appoint one or more
of its members to be vice chairmen of the board. The vice chairmen shall perform
such duties as may from time to time be assigned by the Board.
<PAGE>
SECTION 4.3. PRESIDENT. The board shall appoint one of its members to be
the president of the association. The president shall be the chief executive
officer of the association and in the absence of the chairman, the president
shall preside at any meeting of the board. The president shall have general
executive powers, and shall have and may exercise any and all other powers and
duties pertaining by law, regulation, or practice, to the office of president,
or imposed by these bylaws. The president shall have general supervision of the
business, affairs and personnel of the association and in the absence of the
chairman, shall exercise the powers and perform the duties of the chairman of
the board. The president shall be ex officio a member of all committees, except
the audit committee and the trust audit committee. The president shall also have
and may exercise such further powers and duties as from time to time may be
conferred, or assigned by the board.
SECTION 4.4. CHIEF OPERATING OFFICER. The board may appoint a Chief
Operating Officer. The chief operating officer shall perform such duties as may
from time to time be assigned by the board, the chairman of the board or the
president.
SECTION 4.5. SENIOR OFFICERS. The board may appoint one or more executive
vice presidents and one or more senior vice presidents. Each such senior officer
shall have such powers and duties as may be assigned to such person by the
board, the chairman of the board, or the president.
SECTION 4.6. VICE PRESIDENT. The board may appoint one or more vice
presidents. Each vice president shall have such powers and duties as may be
assigned to such person by the board, the chairman of the board, or the
president.
SECTION 4.7. SECRETARY. The board shall appoint a secretary who shall be
secretary of the association, shall keep accurate minutes of all meetings, and
shall have such powers and perform such other duties as may be assigned to such
person from time to time, by the board, the chairman of the board, or the
president.
SECTION 4.8. CASHIER. The board may appoint a cashier who shall have such
powers and perform such duties as may be assigned to such person from time to
time by the board, the chairman of the board, or the president.
SECTION 4.9. OTHER OFFICERS. The board may appoint one or more assistant
vice presidents, one or more trust officers, one or more assistant secretaries,
one or more assistant cashiers, one or more managers and assistant managers of
branches and such other officers and attorneys in fact as from time to time may
appear to the board to be required or desirable to transact the business of the
association. Such officers, respectively, shall exercise such powers and perform
such duties as pertain to their several offices or as may be conferred upon, or
assigned to them by the board, the chairman of the board, or the president. The
board may authorize an officer to appoint one or more officers or assistant
officers.
SECTION 4.10. CLERKS AND AGENTS. The chairman of the board, the president,
or any other active officer of the association authorized by the chairman of the
board, or the president, may appoint and dismiss all or any paying tellers,
receiving tellers, note tellers, vault custodians, bookkeepers and other clerks,
agents and employees as they may deem advisable for the prompt and orderly
transaction of the business of the association, define their duties, fix the
salaries to be paid them and the conditions of their employment.
<PAGE>
SECTION 4.11. RESPONSIBILITY FOR MONEYS, ETC. Each of the active officers
and clerks of this association shall be responsible for all the moneys, funds,
valuables and property of every kind and description that may from time to time
be entrusted to his care or placed in such person's hands by the board or
others, or that otherwise may come into their possession as an active officer or
clerk of this association.
SECTION 4.12. SURETY BONDS. All the active officers and clerks of this
association may be covered by one of the blanket form bonds customarily written
by the surety companies, drawn for such an amount, and executed by such surety
company, as the board may from time to time require, and duly approve; or at the
discretion of the board, all such active officers and clerks shall,
respectively, give such bond, with such security, and in such denominations as
the board may from time to time require and direct. All bonds approved by the
board shall assure the faithful and honest discharge of the respective duties of
such active officer or clerk and shall provide that such active officer or clerk
shall faithfully apply and account for all moneys, funds, valuables and property
of every kind and description that may from time to time come into such person's
hands or be entrusted to such person's care, and pay over and deliver the same
to the order of the board or to such other person or persons as may be
authorized to demand and receive the same.
SECTION 4.13. TERM OF OFFICE - OFFICER DIRECTOR. The chairman of the board,
the vice chairmen of the board and the president, together with any other active
officers who may be duly elected members of the board, shall hold their
respective offices for the current year for which the board (of which they shall
be members) was elected and until their successors are appointed, unless they
shall resign, be disqualified, or be removed; and any vacancy occurring in the
office of the chairman of the board, the vice chairman of the board, the
president, or in the board, shall, if required by these bylaws, be filled by the
remaining members.
SECTION 4.14. TENURE OF OFFICE. The executive vice presidents, the senior
presidents, the secretary, the cashier and all other officers shall be appointed
to hold their offices during the pleasure of the board, unless they shall
resign, become disqualified, or be removed.
ARTICLE V
FIDUCIARY SERVICES
SECTION 5.1 TRUST OFFICER. There shall be a trust officer of this
association whose duties shall be to manage, supervise and direct all the
fiduciary activities of the association. Such person shall do or cause to be
done all things necessary or proper in carrying out the fiduciary business of
the association according to provisions of law and applicable regulations; and
shall act pursuant to opinion of counsel where such opinion is deemed necessary.
Opinions of counsel shall be retained on file in connection within all-important
matters pertaining to fiduciary activities. The trust officer shall be
responsible for all assets and documents held by the association in connections
with fiduciary matters.
SECTION 5.2. TRUST COMMITTEE. There shall be a trust committee of this
association composed of not less than three directors including active officers
of the association. The duty of the trust committee shall be to review the
fiduciary activities of the association. The trust committee shall perform such
other functions as may be assigned by the board.
<PAGE>
SECTION 5.3. TRUST AUDIT COMMITTEE. The board shall appoint a committee of
not less than two directors, including members ex officio provided for in other
sections of these bylaws, exclusive of any active officers of the association,
or cause suitable audits to be made, by auditors responsible only to the board,
and at such time shall ascertain whether the association has administered
fiduciary accounts in accordance with law, Regulation 9, and sound fiduciary
principles. Notwithstanding the provisions of this Section, the board at any
time may assign to the Audit Committee, in addition to the duties of the Audit
Committee set forth in Section 3.3 of these bylaws, all of the duties of the
Trust Audit Committee and during such time as the Audit Committee is performing
the duties of both committees, the Trust Audit Committee shall cease to function
as a committee of this board. The board at any time may reassign the duties
provided for in this Section to the Trust Audit Committee.
SECTION 5.4. FIDUCIARY FILES. There shall be maintained in the association
files all fiduciary records necessary to assure that its fiduciary
responsibilities have been properly undertaken and discharged.
SECTION 5.5. TRUST INVESTMENTS. Funds held in a fiduciary capacity shall be
invested according to the instrument establishing the fiduciary relationship and
local law. Where such instrument does not specify the character and class of
investments to be made and does not vest in the association a discretion in the
matter, funds held pursuant to such instrument shall be invested in investments
in which corporate fiduciaries may invest under local law.
ARTICLE VI
STOCK AND STOCK CERTIFICATES
SECTION 6.1. TRANSFERS. Shares of stock shall be transferable on the books
of the association, and a transfer book shall be kept in which all transfers of
stock shall be recorded. Every person becoming a shareholder by such transfer
shall in proportion to his shares, succeed to all rights of the prior holder of
such shares.
SECTION 6.2. STOCK CERTIFICATES. Certificates of stock shall bear the
signature of the president (which may be engraved, printed or impressed), and
shall be signed manually or by facsimile process by the secretary, assistant
secretary, cashier, or any other officer appointed by the board for that
purpose, to be known as an authorized officer, and the seal of the association
shall be engraved thereon. Each certificate shall recite on its face that the
stock represented thereby is transferable only upon the books of the association
properly endorsed.
ARTICLE VII
CORPORATE SEAL
The president, the cashier, the secretary or any assistant cashier or
assistant secretary, or other officer thereunto designated by the board,
shall have authority to affix the corporate seal to any document requiring
such seal, and to attest the same. Such seal shall be substantially in the
form set forth herein.
<PAGE>
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 8.1. INDEMNIFICATION OF ASSOCIATION'S OFFICERS, DIRECTORS, AGENTS
AND EMPLOYEES. To the full extent permitted by the General Corporation Law of
the State of Delaware or by any other applicable laws presently or hereafter in
effect and subject to the provisions of this Article VIII, the association may
indemnify any person who was or is a party or threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the association) by reason of the fact that he or she is or was a
director, officer, employee or agent of the association, or is or was serving at
the request of the association as a director, officer, employee or agent of
another company, partnership, joint venture, trust or other enterprise, against
expenses, including attorney fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding, if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the association, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful,
PROVIDED no director, officer, employee or agent of the association shall be
indemnified against any expenses, penalties or other payments incurred in an
administrative proceeding or action instituted by an appropriate bank regulatory
agency resulting in a final order assessing civil money penalties or requiring
affirmative action by an individual or individuals in the form of payments to
this association. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of no contest or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the association,. and with respect to any
criminal action or proceeding, did not have reasonable cause to believe that his
or her conduct was unlawful.
SECTION 8.2. INDEMNIFICATION OF ASSOCIATION'S OFFICERS, DIRECTORS, AGENTS
AND EMPLOYEES FOR SUIT BY OR IN RIGHT OF ASSOCIATION. To the full extent
permitted by the General Corporation Law of the State of Delaware or by any
other applicable laws presently or hereafter in effect and subject to the
provisions of this Article VIII, the association shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the association to procure a
judgment in its favor by reason of the fact that he or she is or was a director,
officer, employee or agent of the association, or is or was serving at the
request of the association as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, including, attorneys' fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the association and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of this duty to the association unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity, for such expenses which such court shall deem proper,
PROVIDED no director, officer, employee or agent of the association shall be
indemnified against any expenses, penalties or other payments incurred in an
administrative proceeding or action instituted by an appropriate bank regulatory
agency resulting in a final order assessing civil money penalties or requiring
affirmative action by an individual or individuals in the form of payments to
this association, and under
<PAGE>
circumstances in which he or she would be entitled to indemnification under
this Article VIII, no director of the association shall be personally liable
to the association or its stockholders for or with respect to any acts or
omissions in the performance of his or her duties as a director of the
association.
SECTION 8.3. DETERMINATION THAT INDEMNIFICATION IS PROPER. Any
indemnification under this Article VIII unless ordered by a court shall be made
by the association only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in this Article VIII. Such determination shall be made: (a) by the
board by a majority vote of a quorum consisting of Directors who were not
parties to such action, suit or proceeding; (b) if such a quorum is not
obtainable, or even if obtainable, a quorum of disinterested Directors so
directs, by independent legal counsel in a written opinion; or (c) by the
shareholders.
SECTION 8.4. REIMBURSEMENT OF EXPENSES. Expenses, including attorneys'
fees, incurred in defending a civil or criminal action, suit or proceeding,
shall be paid by the association in advance of the final disposition of such
action, suit or proceeding as authorized in the manner provided in SECTION 8.3
herein upon receipt of all undertakings by or on behalf of the director,
officer, employee or agent to repay such amount unless it shall ultimately be
determined that he or she is entitled to be indemnified by the association as
authorized in this Article VIII.
SECTION 8.5. BYLAWS NOT EXCLUSIVE. The indemnification provided by this
Article VIII shall not be deemed exclusive of any other rights to which any
person may be entitled under any bylaw, agreement vote of shareholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
SECTION 8.6. INSURANCE. The association shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the association, or is or was serving at the request of the
association as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or another enterprise against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the association would have the power to
indemnify him against such liability under the provisions of this Article VIII,
PROVIDED, the power of the association to purchase and maintain insurance
provided shall not include insurance with respect to expenses, penalties or
other payments of a director, officer, employee or agent of the association
incurred in an administrative proceeding or action instituted by an appropriate
bank regulatory agency resulting in a final order assessing civil money
penalties or requiring affirmative action by such individual or individuals in
the form of payments to this association.
SECTION 8.7. MERGED AND REORGANIZED ASSOCIATIONS. For purposes of this
Article, references to "the association" shall include, in addition to the
surviving association or corporation, any merging or consolidating association
or corporation (including any association or corporation having merged or
consolidated with a merging or consolidating association or corporation)
absorbed in a merger or consolidation which, if its separate existence had
continued, would have had the power and authority to indemnify its directors,
officers, employees and agents, so that any person who was a director, officer,
employee or agent of such merging or consolidating association or corporation as
a director, officer, employee or agent of another association, corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article with respect to
<PAGE>
the surviving association or corporation as such person would have with
respect to such merging association or corporation if its separate existence
had continued.
SECTION 8.8. EMPLOYEE BENEFIT PLANS. For purposes of this Article,
references to "other enterprises" shall include employee benefit plans,
references to "fines" shall include any excise taxes, assessed on a person with
respect to an employee benefit plan; and references to "serving at the request
of the association" shall include any service as a director, officer, employee
or agent of the association which imposes duties on, or involves services by,
such director, officer, employee, or agent with respect to an employee benefit
plan, its participants, or beneficiaries.
SECTION 8.9. SEVERABILITY. The invalidity or unenforceability of any
provision of this Article VIII shall not affect the validity or enforceability
of the remaining provisions of this Article VIII.
ARTICLE IX
MISCELLANEOUS PROVISIONS
SECTION 9.1. FISCAL YEAR. The fiscal year of the association shall be the
calendar year.
SECTION 9.2. EXECUTIVE EXECUTION OF INSTRUMENTS. All agreements,
indentures, mortgages, deeds, conveyances, transfers, certificates,
declarations, receipts, discharges, releases, satisfactions, settlements,
petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and
other instruments or documents may be signed, executed, acknowledged, verified,
delivered or accepted on behalf of the association by the chairman of the board,
or any vice chairman, or the president, or the chief operating officer, or any
executive vice president, or any first vice president or any vice president, or
the secretary, or the cashier, or, if in connection with the exercise of
fiduciary powers of the association, by any of those officers or by any trust
officer. Any such instruments many also be executed, acknowledged, verified,
delivered or accepted on behalf of the association in such manner and by such
other officers as the board, the chairman of the board or the president may from
time to time direct. The provisions of this article are supplementary to any
provision of these bylaws.
SECTION 9.3. RECORDS. The articles of association, the bylaws and the
proceedings of all meetings of the shareholders, the board, and standing
committees of the board 21 shall be recorded in appropriate minute books
provided for that purpose. The minutes of each meeting shall be signed by the
secretary or other officer appointed to act as secretary of the meeting.
ARTICLE X
EMERGENCIES
SECTION 10.1. CONTINUATION OF BUSINESS. In the event of a state of
emergency of sufficient severity to interfere with the conduct and management of
the affairs of this association, the officers and employees will continue to
conduct the affairs of the association under such guidance from the directors as
may be available except as to matters which by statute require specific approval
of the board and subject to conformance with any governmental directives during
the emergency.
<PAGE>
SECTION 10.2. DESIGNATION OF PLACE OF BUSINESS. The offices of the
association at which its business shall be conducted shall be the main office
thereof located at 135 South LaSalle Street, Chicago, Illinois, and any other
legally authorized location which may be leased or acquired by this association
to carry on its business. During an emergency resulting any authorized place of
business of this association being unable to function, the business ordinarily
conducted at such location shall be relocated elsewhere in suitable quarters, in
addition to or in lieu of the locations heretofore mentioned, as may be
designated by the board or by the executive committee or by such persons as are
then, in accordance with resolutions adopted from time to time by the board
dealing with the exercise of authority in the time of such emergency, conducting
the affairs of this association. Any temporarily relocated place of business of
this association shall be returned to its legally authorized location as soon as
practicable and such temporary place of business shall then be discontinued.
ARTICLE XI
BYLAWS
SECTION 11.1 INSPECTION. A copy of the bylaws, with all amendments, shall
at all times be kept in a convenient place at the main office of the
association, and shall be open for inspection to all shareholders during banking
hours.
SECTION 11.2. AMENDMENTS. The bylaws may be amended, altered or repealed,
at any regular meeting of the board, by a vote of a majority of the total number
of the directors except as provided below. The association's shareholders may
amend or repeal the bylaws even though the bylaws also may be amended or
repealed by its board.
* * *
I, ___________________________________, certify that I am the duly
constituted secretary of LaSalle Bank National Association and as such officer
am the official custodian of its records; the foregoing bylaws are
the bylaws of the association, and all of them are now lawfully in force
and effect.
I have hereunto affixed my official signature and the seal of the
association, in the City of Chicago, on this _________________ day of
_________________, 19___________.
------------------------------------------
Secretary
April, 1999
(SEAL)
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
<PAGE>
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COMPTROLLER OF THE CURRENCY
ADMINISTRATOR OF NATIONAL BANKS
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WASHINGTON, D.C. 20219
CERTIFICATION OF FIDUCIARY POWERS
I, Eugene A. Ludwig, Comptroller of the Currency, do hereby certify the records
in this office evidence "LaSalle National Bank", Chicago, Illinois, (Charter No.
14362), was granted, under the hand and seal of the Comptroller, the right to
act in all fiduciary capacities authorized under the provisions of The Act of
Congress approved September 28, 1962, 76 Stat. 668, 12 U.S.C. 92a. I further
certify the authority so granted remains in full force and effect.
IN TESTIMONY WHEREOF, I have hereunto subscribed my name and
caused my seal of Office of the Comptroller of the Currency to
be affixed to these presents at the Treasury Department, in
the City of Washington and District of Columbia, this 9th day
of November, 1993.
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Comptroller of the Currency
<PAGE>
EXHIBIT 7
REPORT OF CONDITION
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
LASALLE BANK NATIONAL ASSOCIATION Call Date: 09/30/1999 STATE #: 17-1520 FFIEC 031
135 SOUTH LASALLE STREET Vendor ID: D CERT #: 15407 RC-1
CHICAGO, IL 60603 Transit #: 71000506
Transmitted to EDS as 0044434 on 10/29/99 at 17:24:34 CST 11
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR SEPTEMBER 30, 1999
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC - BALANCE SHEET
DOLLAR AMOUNTS IN THOUSANDS
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ASSETS
1. Cash and balances due from depository institutions (from Schedule RC-A) RCFD
a. Noninterest-bearing balances and currency and coin (1) 0081 858,334 1.a
b. Interest-bearing balances (2) 0071 2,132 1.b
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A) 1754 582,059 2.a
b. Available-for-sale securities (from Schedule RC-B, column D) 1773 6,704,286 2.b
3. Federal funds sold and securities purchased under agreements to resell 1350 462,381 3
4. Loans and lease financing receivables: RCFD
a. Loans and leases, net of unearned income (from Schedule RC-C) 2122 19,033,636 4.a
b. LESS: Allowance for loan and lease losses 3123 348,915 4.b
c. LESS: Allocated transfer risk reserve 3128 0 4.c
d. Loans and leases, net of unearned income, RCFD
allowance, and reserve (item 4.a minus 4.b and 4.c) 2125 18,684,721 4.d
5. Trading assets (from Schedule RC-D) 3545 257,773 5.
6. Premises and fixed assets (including capitalized leases) 2145 181,686 6.
7. Other real estate owned (from Schedule RC-M) 2150 1,519 7.
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M) 2130 0 8.
9. Customers' liability to this bank on acceptances outstanding 2155 10,710 9.
10. Intangible assets (from Schedule RC-M) 2143 134,166 10.
11. Other assets (from Schedule RC-F) 2160 994,232 11.
12. Total assets (sum of items 1 through 11) 2170 28,873,999 12.
</TABLE>
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(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
LASALLE BANK NATIONAL ASSOCIATION Call Date: 09/30/1999 STATE #: 17-1520 FFIEC 031
135 SOUTH LASALLE STREET Vendor ID: D CERT #: 15407 RC-2
CHICAGO, IL 60603 Transit #: 71000505
Transmitted to EDS as 0044434 on 10/29/99 at 17:24:34 CST 12
SCHEDULE RC - CONTINUED
DOLLAR AMOUNTS IN THOUSANDS
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LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E, RCON
part I) CON 2200 16,132,803 13.a
(1) Noninterest-bearing (1) 6631 2,584,197 13.a.1
(2) Interest-bearing 6636 13,548,606 13.a.2
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule RC-E, RCFN
part II) RCFN 2200 2,401,564 13.b
(1) Noninterest-bearing 6631 0 13.b.1
(2) Interest-bearing 6636 2,401,564 RCFD 13.b.2
14. Federal funds purchased and securities sold under agreements to
repurchase 2800 2,057,620 14.
RCON
15. a. Demand Notes issued to the U.S. Treasury 2840 794,157 15.a
RCFD
b. Trading liabilities (from Schedule RC-D) 3548 91,996 15.b
16. Other orrowed money (includes mortgage indebtedness and obligations under
capitalized Leases):
a. With a remaining maturity of one year or less 2332 3,800,515 16.a
b. With a remaining maturity of more than one year through three years A547 12,896 16.b
c. With a remaining maturity of more than three years A548 49,514 16.c
17. Not applicable
18. Bank's liability on acceptances executed and outstanding 2920 10,710 18.
19. Subordinated notes and debentures (2) 3200 626,000 19.
20. Other liabilities (from Schedule RC-G) 2930 497,031 20.
21. Total liabilities (sum of items 13 through 20) 2948 26,474,806 21.
22. Not applicable
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus 3838 316,900 23.
24. Common stock 3230 41,234 24.
25. Surplus (exclude all surplus related to preferred stock) 3839 709,647 25.
26. a. Undivided profits and capital reserves 3632 1,311,934 26.a
b. Net unrealized holding gains (losses) on available-for-sale
securities 3434 19,478 26.b
c. Accumulated net gains (losses) on cash flow hedges 4338 0 26.c
27. Cumulative foreign currency translation adjustments 3284 0 27.
28. Total equity capital (sum of items 23 through 27) 3210 2,399,193 28.
29 Total liabilities and equity capital (sum of items 21 and 28) 3300 28,873,999 29.
Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best describes the
most comprehensive level of auditing work performed for the bank by independent external RCFD Number
auditors as of any date during 1998 6724 N/A M.1
</TABLE>
1 = Independent audit of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm which submits
a report on the bank.
2 = Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified public
accounting firm which submits a report on the consolidated holding company (but
not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority)
4 = Directors' examination of the bank preformed by other external auditors
(may be required by state chartering authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work
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(1) Includes total demand deposits and noninterest-bearing time and
savings deposits.
(2) Includes limited-life preferred stock and related surplus.
