<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
13-3411414
I.R.S. EMPLOYER IDENTIFICATION NUMBER
ONE NEW YORK PLAZA, 18TH FLOOR
NEW YORK, NEW YORK 10292-2018
(212) 214-1000
(Address, including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
FRED ROBUSTELLI, ESQ.
PRUDENTIAL SECURITIES SECURED FINANCING CORP.
ONE SEAPORT PLAZA, 30TH FLOOR
NEW YORK, NEW YORK 10292
(Name and address of agent for service)
Copy to:
HOWARD M. HEITNER, ESQ. WARREN R. LOUI, ESQ.
O'MELVENY & MYERS LLP O'MELVENY & MYERS LLP
Citicorp Center 400 SOUTH HOPE STREET
153 East 53rd Street LOS ANGELES, CALIFORNIA 90071
New York, New York 10022
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
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, please check the following box. [ X ]
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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.
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EXPLANATORY NOTE
Immediately following this explanatory note there are eight
separate sets of alternative pages labeled in the upper right corner as follows:
"Version 1: Multifamily Properties", "Version 2: Office Properties", "Version 3:
Retail Properties", "Version 4: Hotel and Motel Properties", "Version 5:
Health-Care Related Properties", "Version 6: Industrial Properties", "Version 7:
Warehouse, Mini-Warehouse and Self-Storage Facilities", "Version 8: Mobile Home
Parks". Each "version" contains inserts to the Prospectus and each Prospectus
Supplement showing the text specific to a material concentration in each of the
eight specified types of properties (that is, multifamily properties, office
properties, retail properties, hotel and motel properties, health care-related
facilities, industrial properties, warehouse, mini-warehouse and self-storage
facilities, and mobile home parks).
The above described eight "versions" of changes to the
Prospectus and each Prospectus Supplement are being filed with this Registration
Statement for purposes of identifying changes that will be made thereto as a
result of a material concentration in any of the eight specified types of
properties in any specific securitization transaction. Depending on the types of
properties that constitute a material concentration in any particular
transaction, the respective changes to the Prospectus and each Prospectus
Supplement outlined in the above described "versions" would be included in the
specific Prospectus and Prospectus Supplement for that transaction. When
multiple sets of inserts are to be included in the specific Prospectus and
Prospectus Supplement for any particular transaction, these inserts will be
included in each appropriate location in an order that goes from highest
material concentration to lowest material concentration (provided that
single-sentence inserts that simply identify properties that involve a material
concentration may be combined but will still present those properties in the
aforementioned order). The specific Prospectus and Prospectus Supplement for
each particular transaction reflecting these changes would be filed at the time
and in the manner provided by Rule 424 under the Securities Act of 1933.
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Version 1: Multifamily Properties
[The following is to be inserted, as indicated by starred
brackets ([** // **]) on the next page, on the cover of the Prospectus as a new
sentence in the paragraph captioned "The Trust Funds--".]
Multifamily properties consisting of multiple rental or
cooperatively owned dwellings will represent security for a material
concentration of the mortgage loans comprising each trust fund, based on
principal balances at the time each series of certificates issued.
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Version 1: Multifamily Properties
THE TRUST FUNDS-
A new trust fund will be established to issue each series of certificates. Each
trust fund will consist of:
(1) a pool of mortgage loans secured by liens on commercial and/or
multifamily residential properties; and
(2) other assets specified in the accompanying prospectus
supplement, including any credit enhancement, participation
interests in mortgage loans, installment contracts for the
sale of mortgaged properties or mortgage pass-through
certificates.
[**Multifamily properties consisting of multiple rental or cooperatively owned
dwellings will represent security for a material concentration of the mortgage
loans comprising each trust fund, based on principal balances at the time each
series of certificates is issued.**]
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Version 1: Multifamily Properties
[The following is to be inserted in the Prospectus immediately
following "Risk Factors -- Commercial and multifamily mortgage
loans are subject to special risks which may cause reduction
in payments on your certificates":]
MULTIFAMILY RENTAL PROPERTIES ARE PARTICULARLY SUSCEPTIBLE TO
LOCAL, REGIONAL OR NATIONAL ECONOMIC CONDITIONS WHICH MAY CAUSE REDUCED PAYMENTS
ON YOUR CERTIFICATES
In addition to risks generally associated with real estate,
adverse economic conditions, either local, regional or national, (1) may limit
the amount of rent that can be charged for rental units, (2) may adversely
affect tenants' ability to pay rent and (3) may result in a reduction in timely
rent payments or a reduction in occupancy levels without a corresponding
decrease in expenses. Construction of additional housing units, local military
base closings, company relocations and closings and national and local politics,
including current or future rent stabilization and rent control laws and
agreements may also affect occupancy and rent levels. Since multifamily rental
property is typically leased on a short-term basis, its occupancy rate may be
subject to rapid decline, including for some of the foregoing reasons. In
addition, reductions in the level of mortgage interest rates may encourage
tenants in multifamily rental properties to purchase single-family housing
rather than continue to lease housing. In addition, the characteristics of a
neighborhood may change over time or in relation to newer developments reducing
the mortgage property's value and the cash flow therefrom. Further, the cost of
operating a multifamily rental property may increase, including the cost of
utilities and the costs of required capital expenditures. Also, multifamily
rental properties may be subject to rent control laws which could impact the
future cash flows of those properties.
SPECIAL LOW-INCOME HOUSING TAX CREDITS MAY NOT ALWAYS BE
AVAILABLE TO THE BORROWER DUE TO RENT CONTROL LAWS AND LACK OF INTERESTED
TENANTS WHICH MAY RESULT IN REDUCED PAYMENTS ON YOUR CERTIFICATES
Some multifamily rental properties are eligible to receive
low-income housing tax credits pursuant to Section 42 of the Tax Code. However,
rent limitations associated therewith may adversely affect the ability of the
applicable borrowers to increase rents to maintain those mortgaged properties in
proper condition during periods of rapid inflation or declining market value of
the mortgaged properties. In addition, the income restrictions on tenants
imposed by Section 42 of the Tax Code may reduce the number of eligible tenants
in those mortgaged properties and result in a reduction in occupancy rates
applicable thereto. Furthermore, some eligible tenants may not find any
differences in rents between the rental properties eligible to receive tax
credits under Section 42 of the Tax Code and other multifamily rental properties
in the same area to be a sufficient economic incentive to reside at a Section 42
Property, which may have fewer amenities or otherwise be less attractive as a
residence. All of these conditions and events may increase the possibility that
a borrower may be unable to meet its obligations under its mortgage loan.
COOPERATIVELY-OWNED APARTMENT BUILDINGS ARE SUBJECT TO
ADDITIONAL RISKS WHICH MAY REDUCE PAYMENTS ON YOUR CERTIFICATES
Generally, a tenant-shareholder of a cooperative corporation
must make a monthly maintenance payment to the cooperative corporation that owns
the subject apartment building. That payment represents the tenant-shareholder's
proportional share of the corporation's payments in respect of the mortgage loan
secured by, and all real property taxes, maintenance expenses and other capital
and ordinary expenses with respect to, the property, less any other income that
the cooperative corporation may realize. In addition to risks generally
associated with real estate, adverse economic conditions, either local regional
or national, may impair the financial conditions of individual
tenant-shareholders or their ability to sub-let the subject apartments, reducing
the likelihood tenants can make required maintenance payments. The lender on any
mortgage loan secured by a cooperatively-owned apartment building will be
subject to all the risks that it would have in connection with lending on the
security of a multifamily rental property. See "Risk Factors--Multifamily rental
properties are particularly susceptible to local, regional or national economic
conditions which may cause reduced payments on your certificates" and "Risk
Factors-- Special low-income housing tax credits may not always be available to
the borrower due to rent control laws and lack of interested tenants which may
result in reduced payments on your certificates." In addition, if in connection
with any cooperative conversion of an apartment building, the sponsor holds the
shares allocated to a large number of the apartment units, any lender secured by
a mortgage on that building will be subject to a risk associated with that
sponsor's creditworthiness.
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Version 1: Multifamily Properties
[The following is to be inserted in the Prospectus immediately
following "The Mortgage Pools--General":]
MORTGAGE LOANS SECURED BY MULTIFAMILY RENTAL PROPERTIES.
Significant factors determining the value and successful
operation of a multifamily rental property are:
(1) the location of the property;
(2) the number of competing residential developments in
the local market (such as apartment buildings,
manufactured housing communities and single family
homes);
(3) the physical attributes of the multifamily building
(such as its age and appearance); and
(4) state and local regulations affecting the property.
In addition, the successful operation of an apartment building
will depend upon other factors such as its reputation, the ability of management
to provide adequate maintenance and insurance, and the types of services it
provides.
Some states regulate the relationship of an owner and its
tenants. Commonly, these laws require a written lease, good cause for eviction,
disclosure of fees, and notification to residents of changed land use, while
prohibiting unreasonable rules, retaliatory evictions, and restrictions on a
resident's choice of unit vendors. 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. A few states offer more significant protection. For
example, there are provisions that limit the basis on which a landlord may
terminate a tenancy or increase its rent or prohibit a landlord from terminating
a tenancy solely by reason of the sale of the owner's building.
In addition to state regulation of the landlord-tenant
relationship, numerous counties and municipalities impose rent control on
apartment buildings. These ordinances may limit rent increases to fixed
percentages, to percentages of increases in the consumer price index, to
increases set or approved by a governmental agency, or to 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 borrower's ability to raise property rents may impair that
borrower's ability to repay its mortgage loan from its net operating income or
the proceeds of a sale or refinancing of the related Mortgaged Property.
Adverse economic conditions, either local, regional or
national, may:
(1) limit the amount of rent that can be charged for
rental units;
(2) adversely affect tenants' ability to pay rent; and
(3) result in a reduction in timely rent payments or a
reduction in occupancy levels without a corresponding
decrease in expenses.
Construction of additional housing units, local military base
closings, company relocations and closings and national and local politics,
including current or future rent stabilization and rent control laws and
agreements may also affect occupancy and rent levels. Since multifamily rental
property is typically leased on a short-term basis, its occupancy rate may
subject to rapid decline, including for some of the foregoing reasons. In
addition, reductions in the level of mortgage interest rates may encourage
tenants in multifamily rental properties to purchase single-family housing
rather than continue to lease housing. In addition, the characteristics of a
neighborhood may change over time or in relation to newer developments reducing
the mortgage property's value and the cash flow therefrom.
MORTGAGE LOANS SECURED BY COOPERATIVELY-OWNED APARTMENT BUILDINGS.
A cooperative apartment building and the land under the
building are owned or leased by a non-profit cooperative corporation. The
cooperative corporation is in turn owned by tenant-shareholders who, through
ownership of stock, shares or membership certificates in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific apartments or units. Generally, a tenant-shareholder of a
cooperative corporation must make a monthly maintenance payment to the
corporation representing that tenant-shareholder's pro rata share of the
corporation's payments in respect of any mortgage loan secured by, and all real
property taxes, maintenance expenses and other capital and ordinary expenses
with respect to, the real property owned by the cooperative corporation, less
any other income that the cooperative corporation may realize. Those payments to
the cooperative corporation 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
management 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 the real property owned by the corporation, as
well as all other operating expenses of that property, depends primarily upon
receiving maintenance payments from the tenant-shareholders, together with any
rental income from units or commercial space that the cooperative corporation
might control. Unanticipated expenditures may, in some cases, have to be paid by
special assessments on the 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 real property owned by the cooperative corporation
depends primarily on its ability to refinance the mortgage loan. Neither the
depositor nor any other person will have any obligation to provide refinancing
for any of the mortgage loans.
In a typical cooperative conversion plan, the owner of a
rental apartment building contracts to sell the building to a newly formed
cooperative corporation. The owner or sponsor allocates shares to each apartment
unit, and the current tenants may subscribe during a specified period at
discounted prices relative to prices offered to the public after that period.
As part of the consideration for the sale, the owner or
sponsor receives all the unsold shares of the cooperative corporation. The
sponsor usually also controls the corporation's board of directors and
management for a limited period of time.
Each purchaser of shares in the cooperative corporation
generally enters into a long-term proprietary lease which provides the
shareholder with the right to occupy a particular apartment unit. However, 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 that apartment unit. Any applicable rent control or rent
stabilization laws would continue to be applicable to that subtenancy. The
subtenant may also be entitled to renew its lease for an indefinite number of
times, with continued protection from rent increases above those permitted by
any applicable rent control and rent stabilization laws. The shareholder is
responsible for the maintenance payments to the cooperative without regard to
its receipt or non-receipt of rent from the subtenant, which may be lower than
maintenance payments on the unit. Newly-formed cooperative corporations
typically have the greatest concentration of non-tenant shareholders.
5
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Version 1: Multifamily Properties
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors--Because the securities are in book-entry
form, your rights can only be exercised indirectly":]
MULTIFAMILY PROPERTIES ARE SUBJECT TO UNIQUE
RISKS WHICH MAY REDUCE PAYMENTS ON YOUR CERTIFICATES
_____ of the mortgage loans, which represent ___% of the
initial pool balance, are secured by mortgages on fee or leasehold interests in
multifamily properties. Mortgage loans that are secured by liens on those types
of properties are exposed to unique risks particular to those types of
properties. For more detailed information, you should refer to the following
sections in the accompanying prospectus
(1) "Risk Factors -- Multifamily rental properties are
particularly susceptible to local, regional or
national economic conditions which may cause reduced
payments on your certificates";
(2) "Risk Factors -- Special low-income housing tax
credits may not always be available to the borrower
due to rent control laws and lack of interested
tenants which may result in reduced payments on your
certificates";
(3) "Risk Factors -- Cooperatively-owned apartment
buildings are subject to additional risks which may
reduce payments on your certificates";
(4) "The Mortgage Pools -- Mortgage Loans Secured by
Multifamily Rental Properties" and
(5) "The Mortgage Pools -- Mortgage Loans Secured by
Cooperatively-Owned Apartment Buildings."
6
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Version 2: Office Properties
[The following is to be inserted, as indicated by starred
brackets ([** // **]) on the next page, on the cover of the Prospectus as a new
sentence in the paragraph captioned "The Trust Funds".]
Office properties will represent security for a material
concentration of the mortgage loans comprising each trust fund, based on
principal balances at the time each series of certificates is issued.
7
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Version 2: Office Properties
THE TRUST FUNDS-
A new trust fund will be established to issue each series of certificates. Each
trust fund will consist of:
(1) a pool of mortgage loans secured by liens on
commercial and/or multifamily residential properties;
and
(2) other assets specified in the accompanying prospectus
supplement, including any credit enhancement,
participation interests in mortgage loans,
installment contracts for the sale of mortgaged
properties or mortgage pass-through certificates.
[** Office properties will represent security for a material
concentration of the mortgage loans comprising each trust fund, based on
principal balances at the time each series of certificates is issued.**]
8
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Version 3: Retail Properties
[The following is to be inserted in the Prospectus immediately
following "Risk Factors -- Commercial and multifamily mortgage loans are subject
to special risks which may cause reduction in payments on your certificates":]
CHANGES IN POPULATION AND ECONOMIC GROWTH, LOCAL COMPETITIVE
CONDITIONS AND QUALITY OF MANAGEMENT, ATTRACTIVENESS AND PHYSICAL CONDITIONS OF
OFFICE PROPERTIES MAY ADVERSELY AFFECT THE CASH FLOWS AND LIQUIDATION VALUE OF
THOSE PROPERTIES WHICH MAY RESULT IN REDUCED PAYMENTS ON YOUR CERTIFICATES
In addition to risks generally associated with real estate,
cash flows from mortgage loans secured by office properties are also
significantly affected by the following factors:
(1) adverse changes in population and economic growth,
which generally create demand for office space;
(2) local competitive conditions, including the supply of
office space or construction of new competitive
office buildings;
(3) the quality and management philosophy of the
management;
(4) the attractiveness of the properties and the
surrounding neighborhood to tenants and their
customers or clients; and
(5) the necessity of major repairs or improvements to
satisfy the needs of tenants.
Office properties that are not equipped to accommodate the
needs of modern business may become functionally obsolete and thus
non-competitive. In addition, an economic decline in the businesses operated by
their tenants may reduce the office property's value and cash flows therefrom.
An economic decline may result in one or more significant tenants ceasing
operations at those locations (which may occur on account of a voluntary
decision not to renew a lease, bankruptcy or insolvency of those tenants, the
tenants' general cessation of business activities or for other reasons). The
risk of an economic decline increases if revenue is dependent on a single tenant
or if there is a significant concentration of tenants in a particular business
or industry.
9
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Version 3: Retail Properties
[The following is to be inserted in the Prospectus immediately
following "The Mortgage Pools -- General":]
MORTGAGE LOANS SECURED BY OFFICE PROPERTIES.
Significant factors affecting the value of office properties
include:
(1) the quality of the tenants in the building;
(2) the physical attributes of the building in relation
to competing buildings;
(3) the location of the building with respect to the
central business district or population centers;
(4) demographic trends within the metropolitan area to
move away from or towards the central business
district;
(5) social trends combined with space management trends
(which may change towards options such as
telecommuting );
(6) tax incentives offered to businesses by cities or
suburbs adjacent to or near the city where the
building is located; and
(7) the strength and stability of the market area as a
desirable business location.
An economic decline in the businesses operated by their
tenants may reduce the office property's value and cash flow therefrom. The risk
of 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.
The expiration of space leases and the ability of the
respective borrowers to renew or relet the space on comparable terms affect
repayment of the related mortgage loans. Even if vacated space is successfully
relet, the costs associated with reletting, including tenant improvements,
leasing commissions and free rent, could be substantial and could reduce cash
flow from the office properties. The correlation between the success of tenant
businesses and property value is increased when the property is a single tenant
property.
Office properties are also subject to competition with other
office properties in the same market. Competition is affected by a building's :
(1) age ;
(2) condition ;
(3) design (including floor sizes and layout) ;
(4) access to transportation ;
(5) availability of parking; and
(6) ability to offer amenities to its tenants (including
sophisticated building systems, such as fiberoptic
cables, satellite communications or other base
building technological features).
Office properties that are not equipped to accommodate the
needs of modern business may become functionally obsolete and thus
non-competitive.
The success of an office property also depends on the local
economy. A company's decision to locate office headquarters in a given area, for
example, may be affected by factors such as labor cost and quality, tax
environment and quality of life matters, such as schools and cultural amenities.
A central business district may have a substantially different economy from that
of a suburb. The local economy will affect an office property's ability to
attract stable tenants on a consistent basis. In addition, the cost of refitting
office space for a new tenant is often higher than for other property types.
10
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Version 3: Retail Properties
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors-- Because the securities are in book-entry
form, your rights can only be exercised indirectly":]
OFFICE PROPERTIES ARE SUBJECT TO UNIQUE RISKS WHICH
MAY REDUCE PAYMENTS ON YOUR CERTIFICATES
_______ of the mortgage loans, which present ___% of the
initial pool balance, are secured by mortgages on fee and/or leasehold interests
in office properties. Mortgage loans that are secured by liens on those types of
properties are exposed to unique risks particular to those types of properties.
For more detailed information, you should refer to the following sections in the
accompanying prospectus :
(1) "Risk Factors -- Changes in population and economic
growth, local competitive conditions and quality of
management, attractiveness and physical conditions of
office properties may adversely affect the cash flows
and liquidation value of those properties which may
result in reduced payments on your certificates"; and
(2) "The Mortgage Pools -- Mortgage Loans Secured by
Office Properties."
11
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[The following is to be inserted, as indicated by starred
brackets ([** // **]) on the next page, on the cover of the Prospectus as a new
sentence in the paragraph captioned "The Trust Funds ".]
Retail properties consisting of multiple rental or
cooperatively owned dwellings will represent security for a material
concentration of the mortgage loans comprising each trust fund, based on
principal balances at the time each series of certificates is issued.
12
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Version 3: Retail Properties
THE TRUST FUNDS-
(1) a new trust fund will be established to issue each
series of certificates. Each trust fund will consist
of: a pool of mortgage loans secured by liens on
commercial and/or multifamily residential properties;
and
(2) other assets specified in the accompanying prospectus
supplement, including any credit enhancement,
participation interests in mortgage loans,
installment contracts for the sale of mortgaged
properties or mortgage pass-through certificates.
Retail properties will represent security for a material concentration of the
mortgage loans comprising each trust fund, based on principal balances at the
time each series of certificates is issued.
13
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Version 3: Retail Properties
[The following is to be inserted in the Prospectus immediately
following "Risk Factors -- Commercial and multifamily mortgage loans are subject
to special risks which may cause reduction in payments on your certificates":]
CONSUMER SPENDING PATTERNS, LOCAL COMPETITIVE CONDITIONS,
ALTERNATIVE FORMS OF RETAILING, AND QUALITY, ATTRACTIVENESS, PERCEPTION OF
SAFETY AND PHYSICAL CONDITIONS OF RETAIL PROPERTIES MAY ADVERSELY AFFECT THE
CASH FLOWS FROM THOSE PROPERTIES WHICH MAY RESULT IN REDUCED PAYMENTS ON YOUR
CERTIFICATES
In addition to risks generally associated with real estate,
cash flows from mortgage loans secured by retail properties are also
significantly affected by the following factors:
(1) adverse changes in consumer spending patterns;
(2) local competitive conditions, including the supply of
retail space or the existence or construction of new
competitive shopping centers or shopping malls;
(3) alternative forms of retailing, such as direct mail,
video shopping networks and selling through the
Internet, which reduce demand for retail space by
retail companies;
(4) the quality and management philosophy of the
management;
(5) the attractiveness of the properties and surrounding
neighborhood to tenants and their customers;
(6) the public perception of the safety of customers (at
shopping malls and shopping centers, for example);
and
(7) the necessity of major repairs or improvements to
satisfy the needs of tenants.
Retail properties may be adversely affected if an anchor or
other significant tenant ceases operations at those locations (which may occur
on account of a decision not to renew a lease, bankruptcy or insolvency of the
tenant, the tenant's general cessation of business activities or for other
reasons). Significant tenants at a shopping center play an important part in
generating customer traffic and making the property a desirable location for
other tenants at the property. In addition, some tenants at retail properties
may be entitled to terminate their leases if an anchor tenant ceases operations
at the property.
14
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Version 3: Retail Properties
[The following is to be inserted in the Prospectus immediately
following "The Mortgage Pools -- General":]
MORTGAGE LOANS SECURED BY RETAIL PROPERTIES
Retail properties generally derive all or a substantial
percentage of their income from lease payments from commercial tenants. Income
from and the market value of retail properties depends on various factors
including, but not limited to, the following:
(1) the ability to lease space in those properties ;
(2) the ability of tenants to meet their lease
obligations ;
(3) the possibility of a significant tenant becoming
bankrupt or insolvent ; and
(4) other fundamental aspects of real estate such as
location and market demographics.
The correlation between the success of tenant businesses and
property value is more direct with respect to retail properties than other types
of commercial property because (a significant component) of the total rent paid
by retail tenants is often tied to a percentage of gross sales. Declines in
tenant sales will cause a corresponding decline in percentage rents, and may
also cause those tenants to become unable to pay their base rent or other
occupancy costs. The default by a tenant under its lease could result in delays
and costs in enforcing the lessor's rights. Repayment of the related mortgage
loans will be affected by the expiration of space leases and the ability of the
respective borrowers to renew or relet the space on comparable terms. Even if
vacated space is successfully relet, the costs associated with reletting,
including tenant improvements, leasing commissions and free rent, could be
substantial and could reduce cash flow from the retail properties. The
correlation between the success of tenant businesses and property value is
increased when the property is a single tenant property.
Whether a shopping center is "anchored" or "unanchored" is
also an important distinction. Anchor tenants in shopping centers traditionally
have been a major factor in the public's perception of a shopping center. The
anchor tenants at a shopping center play an important part in generating
customer traffic and making a center a desirable location for other tenants of
the center. An anchor tenant's failure to renew its lease, the termination of
its lease, its bankruptcy or economic decline, or its cessation of the business
(notwithstanding any continued payment of rent) can materially reduce the
economic performance of a shopping center. Furthermore, the correlation between
the success of tenant businesses and property value is increased when the
property is a single tenant property.
Unlike other types of commercial properties, retail properties
also face competition from sources outside a given real estate market. Catalogue
retailers, home shopping networks, telemarketing, selling through the Internet,
and outlet centers all compete with more traditional retail properties for
consumer dollars. Continued growth of these alternative retail outlets (which
are often characterized by lower operating costs) could adversely affect value
of and cash flow from related retail properties.
15
<PAGE>
Version 3: Retail Properties
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors -- Because the securities are in book-entry
form, your rights can only be exercised indirectly":]
RETAIL PROPERTIES ARE SUBJECT TO UNIQUE RISKS
WHICH MAY REDUCE PAYMENTS ON YOUR CERTIFICATES
_____ of the mortgage loans, which represent _____ % of the
initial pool balance, are secured by mortgages on fee and/or leasehold interests
in retail properties. Mortgage loans that are secured by liens on those types of
properties are exposed to unique risks particular to those types of properties.
For more detailed information, you should refer to the following sections in the
accompanying prospectus:
(1) "Risk Factors -- Consumer spending patterns, local
competitive conditions, alternative forms of
retailing, and quality, attractiveness, perception of
safety and physical conditions of retail properties
may adversely affect the cash flows from those
properties which may result in reduced payments on
your certificates"; and
(2) "The Mortgage Pools - Mortgage Loans Secured by
Retail Properties."
16
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Version 4: Hotel and Motel Properties
[The following is to be inserted, as indicated by starred
brackets ([** // **]) on the next page, on the cover of the Prospectus as a new
sentence in the paragraph captioned "The Trust Funds--".]
Hotel and motel properties will represent security for a
material concentration of the mortgage loans comprising each trust fund, based
on principal balances at the time each series of certificates is issued.
17
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Version 4: Hotel and Motel Properties
THE TRUST FUNDS-
A new trust fund will be established to issue each series of certificates. Each
trust fund will consist of:
(1) a pool of mortgage loans secured by liens on
commercial and/or multifamily residential properties;
and
(2) other assets specified in the accompanying prospectus
supplement, including any credit enhancement,
participation interests in mortgage loans,
installment contracts for the sale of mortgaged
properties or mortgage pass-through certificates.
[** Hotel and motel properties will represent security for a material
concentration of the mortgage loans comprising each trust fund, based on
principal balances at the time each series of certificates is issued.**]
18
<PAGE>
Version 4: Hotel and Motel Properties
[The following is to be inserted in the Prospectus immediately
following "Risk Factors -- Commercial and multifamily mortgage loans are subject
to special risks which may cause reduction in payments on your certificates":]
CASH FLOWS AND LIQUIDATION VALUE OF HOTELS AND MOTELS MAY BE
ADVERSELY AFFECTED BY FACTORS SUCH AS HIGH CAPITAL EXPENDITURE EXPENSES,
COMPETITION, INCREASED COSTS, DEPENDENCE ON TOURISM, ADVERSE ECONOMIC
CONDITIONS, SEASONALITY, NATURE OF FRANCHISE ARRANGEMENTS, TRANSFERABILITY OF
LICENSES AND NEGATIVE PERCEPTION, WHICH MAY RESULT IN REDUCED PAYMENTS ON YOUR
CERTIFICATES
In addition to risks generally associated with real estate,
hotel and motel properties are subject to operating risks common to the lodging
industry. These risks include, among other things,
(1) a high level of continuing capital expenditures to
keep necessary furniture, fixtures and equipment
updated ;
(2) competition from other hotels and motels ;
(3) increases in operating costs (which increases may not
necessarily in the future be offset by increased room
rates) ;
(4) dependence on business and commercial travelers and
tourism ;
(5) increases in energy costs and other expenses of
travel; and
(6) adverse effects of national, regional and local
economic conditions.
These factors could reduce the related borrower's ability to
make payments on the related Mortgage Loans. Since limited service hotels and
motels are relatively quick and inexpensive to construct and may quickly achieve
an initially positive value, an over-building of hotels and motels could occur
in any given region, which would likely reduce occupancy and daily room rates.
(The availability of construction capital is generally independent from the
primary drivers of room demand.) Further, because hotel and motel rooms are
generally rented for short periods of time, hotel and motel properties tend to
be more sensitive to adverse economic conditions and competition than many other
commercial properties. Additionally, the revenues of some hotels and motels,
particularly those located in regions whose economies depend upon tourism, may
be highly seasonal in nature.
A hotel or motel property may present additional risks as
compared to other commercial property types in that:
(1) hotels and motels may be operated pursuant to
franchise, management and operating agreements that
may be terminable by the franchiser, the manager or
the operator;
19
<PAGE>
(2) the transferability of any operating, liquor and
other licenses to the entity acquiring a hotel or
motel (either through purchase or foreclosure) is
subject to local law requirements;
(3) it may be difficult to terminate an ineffective
operator of a hotel or motel property subsequent to a
foreclosure of that property; and
(4) future occupancy rates may be adversely affected by,
among other factors, any negative perception of a
hotel or motel based upon its historical reputation.
Hotel and motel properties may be operated pursuant to
franchise agreements. The continuation of franchises is typically subject to
specified operating standards and other terms and conditions. The franchiser
periodically inspects its licensed properties to confirm adherence to its
operating standards. The failure of the hotel or motel property to maintain
operating standards or adhere to other terms and conditions could result in the
loss or cancellation of the franchise agreement. The franchiser could possibly
condition the continuation of a franchise agreement on the completion of capital
improvements or making specified capital expenditures that the related borrower
determines are too expensive or are otherwise unwarranted in light of general
economic conditions or the operating results or prospects of the affected
hotels. In that event, the related borrower may elect to allow the franchise
agreement to lapse. In any case, if the franchise is terminated, the related
borrower may seek to obtain a suitable replacement franchise or to operate the
hotel or motel property independently of a franchise license. The loss of a
franchise agreement could have a material adverse effect upon the operations or
the underlying value of the hotel or motel covered by the franchise because of
the loss of associated name recognition, marketing support and centralized
reservation systems provided by the franchiser.
19
<PAGE>
Version 4: Hotel and Motel Properties
[The following is to be inserted in the Prospectus immediately
following "The Mortgage Pools -- General":]
MORTGAGE LOANS SECURED BY HOTEL AND MOTEL PROPERTIES.
Hotel and motel properties may include full service hotels,
resort hotels with many amenities, limited service hotels, hotels and motels
associated with national franchise chains, hotels and motels associated with
regional franchise chains and hotels that are not affiliated with any franchise
chain but may have their own brand identity. Various factors, including
location, quality and franchise affiliation affect the economic performance of a
hotel or motel. Adverse economic conditions, either local, regional or national,
may limit the amount that can be charged for a room and may result in a
reduction in occupancy levels. The construction of competing hotels and motels
can have similar effects. To meet competition in the industry and to maintain
economic values, continuing expenditures must be made for modernizing,
refurbishing, and maintaining existing facilities prior to the expiration of
their anticipated useful lives. Because hotel and motel rooms generally are
rented for short periods of time, hotels and motels tend to respond more quickly
to adverse economic conditions and competition than do other commercial
properties. Furthermore, the financial strength and capabilities of the owner
and operator of a hotel or motel may have an impact on quality of service and
economic performance. Additionally, the lodging industry, in some locations, is
seasonal in nature and this seasonality can be expected to cause periodic
fluctuations in room and other revenues, occupancy levels, room rates and
operating expenses. The demand for particular accommodations may also be
affected by changes in travel patterns caused by changes in energy prices,
strikes, relocation of highways, the construction of additional highways and
other factors.
The viability of any hotel or motel property that is part of a
national or regional hotel or motel chain depends in part on the continued
existence and financial strength of the franchiser, the public perception of the
franchise service mark and the duration of the franchise agreement. The
transferability of franchise agreements may be restricted and, in the event of a
foreclosure on a hotel or motel property, the consent of the franchiser for the
continued use of the franchise by the hotel or motel property would be required.
Conversely, a lender may be unable to remove a franchiser that it desires to
replace following a foreclosure. Further, in the event of a foreclosure on a
hotel or motel property, it is unlikely that the purchaser of that hotel or
motel property would be entitled to the rights under any associated liquor
license, and the purchaser would be required to apply in its own right for a
liquor license. There can be no assurance that a new license could be obtained
or that it could be obtained promptly.
20
<PAGE>
Version 4: Hotel and Motel Properties
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors -- Because the securities are in book-entry
form, your rights can only be exercised indirectly":]
HOTEL AND MOTEL PROPERTIES ARE SUBJECT TO UNIQUE RISKS WHICH
MAY REDUCE PAYMENTS ON YOUR CERTIFICATES
_____ of the mortgage loans, which represent _____ % of the
initial poll balance, are secured by mortgages on fee and/or leasehold interests
in hotels and motels. Mortgage loans that are secured by liens on those types of
properties are exposed to unique risks particular to those types of properties.
For more detailed information, you should refer to the following sections in the
accompanying prospectus:
(1) "Risk Factors -- Cash flows and liquidation value of
hotels and motels may be adversely affected by
factors such as high capital expenditure expenses,
competition, increased costs, dependence on tourism,
adverse economic conditions, seasonality, nature of
franchise arrangements, transferability of licenses
and negative perception, which may result in reduced
payments on your certificates"; and
(2) "The Mortgage Pools -- Mortgage Loans Secured by
Hotel and Motel Properties."
21
<PAGE>
Version 5: Health-Care Related Properties
[The following is to be inserted, as indicated by starred
brackets ([** // **]) on the next page, on the cover of the Prospectus as a new
sentence in the paragraph captioned "The Trust Funds--".]
Health-care related properties will represent security for a
material concentration of the mortgage loans comprising each trust fund, based
on principal balances at the time each series of certificates is issued.
22
<PAGE>
Version 5: Health-Care Related Properties
THE TRUST FUNDS-
A new trust fund will be established to issue each series of certificates. Each
trust fund will consist of:
(1) a pool of mortgage loans secured by liens on
commercial and/or multifamily residential properties;
and
(2) other assets specified in the accompanying prospectus
supplement, including any credit enhancement,
participation interests in mortgage loans,
installment contracts for the sale of mortgaged
properties or mortgage pass-through certificates.
[** Health-care related properties will represent security for a material
concentration of the mortgage loans comprising each trust fund, based on
principal balances at the time each series of certificates is issued.**]
23
<PAGE>
Version 5: Health-Care Related Properties
[The following is to be inserted in the Prospectus immediately
following "Risk Factors -- Commercial and multifamily mortgage loans are subject
to special risks which may cause reduction in payments on your certificates":]
NATURE OF MEDICAID AND MEDICARE PROGRAMS AND HIGH LEVEL OF
FEDERAL, STATE AND LOCAL REGULATIONS MAKE SOME TYPES OF HEALTH CARE-RELATED
FACILITIES SUBJECT TO ADDITIONAL LIMITATIONS WHICH MAY ADVERSELY AFFECT THE CASH
FLOWS AND LIQUIDATION VALUE OF THOSE PROPERTIES WHICH MAY REDUCE PAYMENTS ON
YOUR CERTIFICATES
In addition to risks generally associated with real estate,
some types of health care-related facilities (including nursing homes) typically
receive a substantial portion of their revenues from government reimbursement
programs, primarily Medicaid and Medicare. Medicaid and Medicare are subject to
the following:
(1) statutory and regulatory changes;
(2) retroactive rate adjustments;
(3) administrative rulings;
(4) policy interpretations;
(5) delays by fiscal intermediaries; and
(6) government funding restrictions, all of which can
reduce revenues from operation.
Moreover, governmental payors have employed cost-containment
measures that limit payments to health care providers and various proposals for
national health care relief could, if enacted, further limit these payments.
In addition, providers of long-term nursing care and other
medical services are highly regulated by federal, state and local law and are
subject to, among other things, the following:
(1) federal and state licensing requirements;
(2) facility inspections;
(3) the setting of rates and charges;
(4) governmental reimbursement policies and laws relating
to the adequacy of medical care;
(5) distribution of pharmaceuticals and equipment;
(6) personnel operating policies; and
(7) maintenance of and additions to facilities and
services, any or all of which factors can increase
the cost of operation and limit growth.
In extreme cases, violations of applicable laws can result in
suspension or cessation of operations.
Under federal and state laws and regulations, Medicare and
Medicaid reimbursements are generally not permitted to be made to any person
other than the provider who actually furnished the related medical goods and
services. Accordingly, in the event of foreclosure on a mortgaged property that
is operated as a health care-related facility, neither the trustee nor a
subsequent lessee or operator of the mortgaged property would generally be
entitled to obtain any outstanding reimbursement payments relating to services
furnished prior to the foreclosure. Furthermore, in the event of foreclosure,
there can be no assurance that the trustee or purchaser in a foreclosure sale
would be entitled to the rights under any required licenses and regulatory
approvals, that a new license could be obtained or that a new approval would be
granted. In addition, health care-related properties are generally "special
purpose" properties that are not readily converted to general residential,
retail or office use, and transfers of health care-related properties are
subject to regulatory approvals under state, and in some cases federal, law not
required for transfers of most other types of commercial operations and other
types of real estate. Any of the foregoing circumstances may adversely affect a
property's liquidation value.
24
<PAGE>
Version 5: Health-Care Related Properties
[The following is to be inserted in the Prospectus immediately
following "The Mortgage Pools--General":]
MORTGAGE LOANS SECURED BY HEALTH CARE-RELATED PROPERTIES.
The mortgaged properties may include senior housing, assisted
living facilities, skilled nursing facilities and acute care facilities. "Senior
Housing" generally consists of apartment-style facilities, the residents of
which are ambulatory and handle their own affairs. "Assisted Living Facilities"
are typically single or double room occupancy, dormitory-style housing
facilities which provide food service, cleaning and some personal care and
assistance with daily routines. " Skilled Nursing Facilities" provide services
to post trauma and frail residents with limited mobility who require sub-acute
medical treatment. "Acute Care Facilities" generally consist of hospital and
other facilities providing short-term, acute medical care services.
Some types of health care-related properties, particularly
Acute Care Facilities and Skilled Nursing Facilities, typically receive a
substantial portion of their revenues from government reimbursement programs,
primarily Medicaid and Medicare. Medicaid and Medicare reimbursements are
subject to the following factors:
(1) statutory and regulatory changes ;
(2) retroactive rate adjustments ;
(3) administrative rulings ;
(4) policy interpretations ;
(5) delays by fiscal intermediaries; and
(6) government funding restrictions.
Moreover, governmental payors have employed cost-containment
measures that limit payments to health care providers, and there exist various
proposals for national health care reform that could further limit those
payments. Accordingly, there can be no assurance that payments under government
reimbursement programs will, in the future, be sufficient to fully reimburse the
cost of caring for program beneficiaries. If the payments are insufficient, net
operating income of those health care-related properties that receive revenues
from those sources, and consequently the ability of the related borrowers to
meet their obligations under any mortgage loans secured by those properties,
could be adversely affected.
Moreover, health care-related properties that provide medical
care are generally subject to federal and state laws that relate to :
(1) adequacy of medical care;
(2) distribution of pharmaceuticals;
(3) rates and charges;
(4) equipment;
(5) personnel;
(6) operating policies; and
(7) additions to facilities and services.
In addition, those facilities are subject to periodic
inspection by governmental authorities to determine compliance with various
standards necessary to continued licensing under state law and continued
participation in the Medicaid and Medicare reimbursement programs. Providers of
assisted living services are also subject to state licensing requirements in
some states. The failure of an operator to maintain or renew any required
license or regulatory approval could prevent it from continuing operations at a
health care-related property or, if applicable, prohibit it from participating
in government reimbursement programs. Furthermore, under applicable federal and
state laws, Medicare and Medicaid reimbursements are generally not permitted to
be made to any person other than the provider who actually furnished the related
medical goods and services. Accordingly, in the event of foreclosure, neither
the Trustee nor a subsequent lessee or operator of any health care-related
property securing a defaulted mortgage loan would generally be entitled to
obtain from federal or state governments any outstanding reimbursement payments
relating to services furnished prior to the foreclosure. Any of the
aforementioned circumstances may adversely affect the ability of the related
borrowers to meet their mortgage loan obligations.
Government regulation applying specifically to Acute Care
Facilities, Skilled Nursing Facilities and Assisted Living Facilities includes
health planning legislation, enacted by most states, intended, at least in part,
to regulate the supply of nursing beds. The most common method of control is the
requirement that a state authority first make a determination of need, evidenced
by its issuance of a Certificate of Need, before a long-term care provider can
establish a new facility, add beds to an existing facility or, in some states,
take other specified actions such as acquiring major medical equipment, making
major capital expenditures, adding services, refinancing long-term debt, or
transferring ownership of a facility. States also regulate nursing bed supply in
other ways. For example, some states have imposed moratoria on the licensing of
new beds, or on the certification of new Medicaid beds, or have discouraged the
construction of new nursing facilities by limiting Medicaid reimbursements
allocable to the cost of new construction and equipment. In general, a
Certificate of Need is site specific and operator specific; it cannot be
transferred from one site to another, or to another operator, without the
approval of the appropriate state agency. Accordingly, upon a foreclosure of a
mortgage loan secured by a lien on a health care-related property, the purchaser
at foreclosure might be required to obtain a new Certificate of Need or an
appropriate exemption. In addition, compliance by a purchaser with applicable
regulations may in any case require the engagement of a new operator and the
issuance of a new operating license. Upon a foreclosure, a state regulatory
agency may be willing to expedite any necessary review and approval process to
avoid interruption of care to a facility's residents, but there can be no
assurance that any will do so or that any necessary licenses or approvals will
be issued.
25
<PAGE>
Further government regulation applicable to health
care-related properties exists in the form of federal and state "fraud and
abuse" laws that generally prohibit payment or fee-splitting arrangements
between health care providers that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products or services. Violation of these restrictions can result in
license revocation, civil and criminal penalties, and exclusion from
participation in Medicare or Medicaid programs. The state law restrictions in
this area vary considerably from state to state. Moreover, the federal
anti-kickback law includes broad language that potentially could be applied to a
wide range of referral arrangements, and regulations designed to create "safe
harbors" under the law provide only limited guidance. Accordingly, there can be
no assurance that those laws will be interpreted in a manner consistent with the
practices of the owners or operators of the health care-related properties that
are subject to the laws.
The operators of health care-related properties are likely to
compete on a local and regional basis with others that operate similar
facilities, and those competitors may be better capitalized or may offer
services not offered by the operators. Other potential competitors may be owned
by non-profit organizations or government agencies supported by endowments,
charitable contributions, tax revenues and other sources not available to the
operators. The successful operation of a health care-related property will
generally depend upon the number of competing facilities in the local market, as
well as upon other factors such as
(1) its age;
(2) appearance;
(3) reputation and management;
(4) the types of services it provides and, where
applicable;
(5) the quality of care; and
(6) the cost of that care.
25
<PAGE>
Version 5: Health-Care Related Properties
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors-- Because the securities are in book-entry
form, your rights can only be exercised indirectly":]
HEALTH CARE-RELATED PROPERTIES ARE SUBJECT TO UNIQUE RISKS
WHICH MAY REDUCE PAYMENTS ON YOUR CERTIFICATES
_____ of the mortgage loans, which represent _____ % of the
initial pool balance, are secured by mortgages on fee and/or leasehold interests
in health care-related properties. Mortgage loans that are secured by liens on
those types of properties are exposed to unique risks particular to those types
of properties. For more detailed information, you should refer to the following
sections in the accompanying prospectus :
(1) "Risk Factors -- Nature of Medicaid and Medicare
programs and high level of federal, state and local
regulations make some types of health care-related
facilities subject to additional limitations which
may adversely affect the cash flows and liquidation
value of those properties which may reduce payments
on your certificates"; and
(2) "The Mortgage Pools -- Mortgage Loans Secured by
Health Care-Related Properties."
26
<PAGE>
Version 6: Industrial Properties
[The following is to be inserted, as indicated by starred
brackets ([** // **]) on the next page, on the cover of the Prospectus as a new
sentence in the paragraph captioned "The Trust Funds--".]
Industrial properties will represent security for a material
concentration of the mortgage loans comprising each trust fund, based on
principal balances at the time each series of certificates is issued.
27
<PAGE>
Version 6: Industrial Properties
THE TRUST FUNDS-
A new trust fund will be established to issue each series of certificates. Each
trust fund will consist of:
(1) a pool of mortgage loans secured by liens on
commercial and/or multifamily residential properties;
and
(2) other assets specified in the accompanying prospectus
supplement, including any credit enhancement,
participation interests in mortgage loans,
installment contracts for the sale of mortgaged
properties or mortgage pass-through certificates.
[** Industrial properties will represent security for a material concentration
of the mortgage loans comprising each trust fund, based on principal balances at
the time each series of certificates is issued.**]
28
<PAGE>
Version 6: Industrial Properties
[The following is to be inserted in the Prospectus immediately
following "Risk Factors -- Commercial and multifamily mortgage loans are subject
to special risks which may cause reduction in payments on your certificates":]
CHANGES IN A PARTICULAR INDUSTRY SEGMENT OR GENERAL CONDITION
OF THE ECONOMY, ALONG WITH OTHER FACTORS, MAY ADVERSELY AFFECT THE ABILITY OF
THE OWNER OF AN INDUSTRIAL PROPERTY TO MAKE REQUIRED LOAN PAYMENTS WHICH MAY
REDUCE PAYMENTS ON YOUR CERTIFICATES
In addition to risks generally associated with real estate,
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 slow-down 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.
Furthermore, industrial properties may be adversely affected by the availability
of labor sources or a change in the proximity of supply sources. Because
industrial properties frequently have a single tenant, any industrial property
is heavily dependent on the success of the tenant's business.
29
<PAGE>
Version 6: Industrial Properties
[The following is to be inserted in the Prospectus immediately
following "The Mortgage Pools - General":]
MORTGAGE LOANS SECURED BY INDUSTRIAL PROPERTIES.
Significant factors that affect the value of industrial
properties are :
(1) the quality of tenants;
(2) building design; and
(3) adaptability and the location of the property.
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 slow-down 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. Furthermore, industrial properties may be
adversely affected by the availability of labor sources or a change in the
proximity of supply sources. Because industrial properties frequently have a
single tenant, any industrial property is heavily dependent on the success of
the tenant's business.
Aspects of building site, design and adaptability affect the
value of an industrial property. Site characteristics which are valuable to an
industrial property include the following:
(1) clear heights ;
(2) column spacing ;
(3) number of bays and bay depths ;
(4) divisibility ;
(5) floor loading capacities ;
(6) truck turning radius; and
(7) overall functionality and accessibility.
Nevertheless, site characteristics of an industrial property
suitable for one tenant may not be appropriate for other potential tenants,
which may make it difficult to relet the property.
Location is also important because an industrial property
requires the availability of labor sources, proximity to supply sources and
customers and accessibility to rail lines, major roadways and other distribution
channels. Further, industrial properties may be adversely affected by economic
declines in the industry segment of their tenants.
30
<PAGE>
Version 6: Industrial Properties
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors-- Because the securities are in book-entry
form, your rights can only be exercised indirectly":]
INDUSTRIAL PROPERTIES ARE SUBJECT TO UNIQUE RISKS WHICH MAY
REDUCE PAYMENTS ON YOUR CERTIFICATES
_____ of the mortgage loans, which represent _____ % of the
initial pool balance, are secured by mortgages on fee and/or leasehold interests
in industrial properties. Mortgage loans that are secured by liens on those
types of properties are exposed to unique risks particular to those types of
properties. For more detailed information, you should refer to the following
sections in the accompanying prospectus
(1) "Risk Factors -- Changes in a particular industry
segment or general condition of the economy, along
with other factors, may adversely affect the ability
of the owner of an industrial property to make
required loan payments which may reduce payments on
your certificates"; and
(2) "The Mortgage Pools -- Mortgage Loans Secured by
Industrial Properties."
31
<PAGE>
Version 7: Self-Storage Facilities
[The following is to be inserted, as indicated by starred
brackets ([** // **]) on the next page, on the cover of the Prospectus as a new
sentence in the paragraph captioned "The Trust Funds--".]
Warehouse, mini-warehouse and self-storage facilities will
represent security for a material concentration of the mortgage loans comprising
each trust fund, based on principal balances at the time each series of
certificates is issued.
32
<PAGE>
Version 7: Self-Storage Facilities
THE TRUST FUNDS-
A new trust fund will be established to issue each series of certificates. Each
trust fund will consist of:
(1) a pool of mortgage loans secured by liens on
commercial and/or multifamily residential properties;
and
(2) other assets specified in the accompanying prospectus
supplement, including any credit enhancement,
participation interests in mortgage loans,
installment contracts for the sale of mortgaged
properties or mortgage pass-through certificates.
[** Warehouse, mini-warehouse and self-storage facilities properties will
represent security for a material concentration of the mortgage loans comprising
each trust fund, based on principal balances at the time each series of
certificates is issued.**]
33
<PAGE>
Version 7: Self-Storage Facilities
[The following is to be inserted in the Prospectus immediately
following "Risk Factors -- Commercial and multifamily mortgage loans are subject
to special risks which may cause reduction in payments on your certificates":]
LOW COSTS ASSOCIATED WITH SELF-STORAGE FACILITIES MAKE THEM
PARTICULARLY VULNERABLE TO COMPETITION; CONVERSION OF THOSE FACILITIES TO OTHER
USE REQUIRE SUBSTANTIAL CAPITAL EXPENDITURES WHICH MAY ADVERSELY AFFECT THEIR
LIQUIDATION VALUE, RESULTING IN REDUCED PAYMENTS ON YOUR CERTIFICATES
In addition to risks generally associated with real estate,
warehouse, mini-warehouse and self-storage properties are considered vulnerable
to competition because both acquisition costs and break-even occupancy are
relatively low. The conversion of these types of properties to alternative uses
would generally require substantial capital expenditures. Thus, if the operation
of any of the these types of properties becomes unprofitable due to decreased
demand, competition, age of improvements or other factors, and the borrower
becomes unable to meet its obligation on the related mortgage loan, the
liquidation value of the property may be substantially less, relative to the
amount owing on the mortgage loan, than would be the case if the property were
readily adaptable to other uses. Tenant privacy, anonymity and efficient access
are important to the success of these types of properties, as is building design
and location.
34
<PAGE>
Version 7: Self-Storage Facilities
[The following is to be inserted in the Prospectus immediately
following "The Mortgage Pools -- General":]
MORTGAGE LOANS SECURED BY WAREHOUSE, MINI-WAREHOUSE AND SELF-STORAGE FACILITIES.
Because of relatively low acquisition costs and break-even
occupancy rates, warehouse, mini-warehouse and self-storage properties are
considered vulnerable to competition. Despite their relatively low acquisition
costs, and because of their particular building characteristics, these types of
properties require substantial capital investments in order to adapt them to
alternative uses. Limited adaptability to other uses may substantially reduce
the liquidation value of a these types of properties. In addition to
competition, factors that affect the success of a these types of properties
include :
(1) the location and visibility of the facility;
(2) the facility's proximity to apartment complexes or
commercial users;
(3) the trends of apartment tenants in the area moving to
single-family homes;
(4) the services provided (such as security and
accessibility);
(5) the age of improvements;
(6) the appearance of the improvements; and
(7) the quality of management.
35
<PAGE>
Version 7: Self-Storage Facilities
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors-- Because the securities are in book-entry
form, your rights can only be exercised indirectly":]
SELF-STORAGE FACILITIES ARE SUBJECT TO UNIQUE RISKS WHICH MAY
REDUCE PAYMENTS ON YOUR CERTIFICATES
______ of the mortgage loans, which represent _____% of the
initial pool balance, are secured by mortgages on fee and/or leasehold interests
in warehouse, mini-warehouse and self-storage facilities. Mortgage loans that
are secured by liens on those types of properties are exposed to unique risks
particular to those types of properties. For more detailed information, you
should refer to the following sections in the accompanying prospectus
(1) "Risk Factors -- Low costs associated with
self-storage facilities make them particularly
vulnerable to competition; conversion of those
facilities to other use require substantial capital
expenditures which may adversely affect their
liquidation value, resulting in reduced payments on
your certificates; and
(2) "The Mortgage Pools -- Mortgage Loans Secured by
Warehouse, Mini-Warehouse and Self-Storage
Facilities."
36
<PAGE>
Version 8: Mobile Home Parks
[The following is to be inserted, as indicated by starred
brackets ([** // **]) on the next page, on the cover of the Prospectus as a new
sentence in the paragraph captioned "The Trust Funds--".]
Mobile home parks consisting of multiple rental or
cooperatively owned dwellings will represent security for a material
concentration of the mortgage loans comprising each trust fund, based on
principal balances at the time each series of certificates is issued.
37
<PAGE>
Version 8: Mobile Home Parks
THE TRUST FUNDS-
A new trust fund will be established to issue each series of certificates. Each
trust fund will consist of:
(1) a pool of mortgage loans secured by liens on
commercial and/or multifamily residential properties;
and
(2) other assets specified in the accompanying prospectus
supplement, including any credit enhancement,
participation interests in mortgage loans,
installment contracts for the sale of mortgaged
properties or mortgage pass-through certificates.
[**Mobile home parks will represent security for a material concentration of the
mortgage loans comprising each trust fund, based on principal balances at the
time each series of certificates is issued.**]
38
<PAGE>
Version 8: Mobile Home Parks
[The following is to be inserted in the Prospectus immediately
following "Risk Factors -- Commercial and multifamily mortgage loans are subject
to special risks which may cause reduction in payments on your certificates":]
VARIETY OF FACTORS AFFECT THE CASH FLOW AND LIQUIDATION VALUE
OF MOBILE HOME PARKS WHICH MAY REDUCE PAYMENTS ON YOUR CERTIFICATES
In addition to risks generally associated with real estate,
the successful operation of a mortgaged property operated as a mobile home park
will generally depend upon the following factors:
(1) the number of competing parks in the local market;
(2) its age;
(3) its appearance;
(4) its reputation;
(5) the ability of management to provide adequate
maintenance and insurance; and
(6) the types of facilities and services it provides.
Mobile home parks also compete against alternative forms of
residential housing, including
(1) multifamily rental properties;
(2) cooperatively-owned apartment buildings;
(3) condominium complexes; and
(4) single-family residential developments.
Mobile home parks are "special purpose" properties that cannot
be readily converted to general residential, retail or office use. Thus, if the
operation of a mobile home park becomes unprofitable due to competition, age of
the improvements or other factors , and the borrower becomes unable to meet its
obligations on the related mortgage loan, the liquidation value of the park may
be substantially less, relative to the amount owing on the mortgage loan, than
would be the case if the park were readily adaptable to other uses.
39
<PAGE>
Version 8: Mobile Home Parks
[The following is to be inserted in the Prospectus immediately
following "The Mortgage Pools --General":]
MORTGAGE LOANS SECURED BY MOBILE HOME PARKS.
Mobile home parks consist of land that is divided into
"spaces" or "homesites" that are primarily leased to mobile home owners.
Accordingly, the related mortgage loans will be secured by mortgage liens on the
real estate (or a leasehold interest in the property) upon which the mobile
homes are situated, but not the mobile homes themselves. The mobile home owner
often invests in site-specific improvements such as carports, steps, fencing,
skirts around the base of the mobile home, and landscaping. The park owner
typically provides private roads within the park, common facilities and, in many
cases, utilities. Park amenities may include :
(1) driveways;
(2) visitor parking;
(3) recreational vehicle and pleasure boat storage;
(4) laundry facilities;
(5) community rooms;
(6) swimming pools;
(7) tennis courts;
(8) security systems; and
(9) healthclubs.
Due to relocation costs and, in some cases, demand for mobile
home spaces, the value of a mobile home in place in a park is generally higher,
and can be significantly higher, than the value of the same unit not placed in a
park. As a result, a well-operated 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 mobile home of a tenant
who defaulted in his or her space rent generally has an incentive to keep rental
payments current until the mobile home can be resold in place, rather than to
allow the unit to be removed from the park.
Mortgage loans secured by liens on mobile home parks are
affected by factors not associated with loans secured by liens on other types of
income-producing real estate. The successful operation of those types of
properties will generally depend upon the following:
40
<PAGE>
Version 8: Mobile Home Parks
(1) the number of competing parks;
(2) its age;
(3) its appearance;
(4) its reputation;
(5) the ability of management to provide adequate
maintenance and insurance, and
(6) the types of facilities and services it provides.
Mobile home parks also compete against alternative forms of
residential housing, including :
(1) multifamily rental properties;
(2) cooperatively-owned apartment buildings;
(3) condominium complexes;
(4) and single-family residential developments.
Mobile home parks are "special purpose" properties that cannot
be readily converted to general residential, retail or office use. Thus, if the
operation of a mobile home park becomes unprofitable due to competition, age of
the improvements or other factors , and the borrower becomes unable to meet its
obligations on the related mortgage loan, the liquidation value of the park may
be substantially less, relative to the amount owing on the mortgage loan, than
would be the case if the park were readily adaptable to other uses.
Some states regulate the relationship of a mobile home park
owner and its tenants. Commonly, these laws require a written lease, good cause
for eviction, disclosure of fees, and notification to residents of changed land
use, while prohibiting unreasonable rules, retaliatory evictions, and
restrictions on a resident's choice of unit vendors. Mobile home park 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. A few states offer more significant
protection. For example, there are provisions that limit the basis on which a
landlord may terminate a mobile home owner's tenancy or increase its rent or
prohibit a landlord from terminating a tenancy solely by reason of the sale of
the owner's mobile home. Some states also regulate changes in mobile home park
use and require that the landlord 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 mobile
home parks. These ordinances may limit rent increases to fixed percentages, to
percentages of increases in the consumer price index, to increases set or
approved by a governmental agency, or to 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 or permit decontrol
only in the relatively rare event that the mobile home is removed from the
homesite. Any limitations on a borrower's ability to raise property rents may
impair the borrower's ability to repay its mortgage loan from its net operating
income or the proceeds of a sale or refinancing of the related mortgaged
property.
41
<PAGE>
Version 8: Mobile Home Parks
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors-- Because the securities are in book-entry
form, your rights can only be exercised indirectly":]
MOBILE HOME PARKS ARE SUBJECT TO UNIQUE RISKS WHICH MAY REDUCE
PAYMENTS ON YOUR CERTIFICATES
______ of the mortgage loans, which represent _____ % of the
initial pool balance, are secured by mortgages on fee and/or leasehold interests
in mobile home parks. Mortgage loans that are secured by liens on those types of
properties are exposed to unique risks particular to those types of properties.
For more detailed information, you should refer to the following sections in the
accompanying prospectus :
(1) "Risk Factors -- Variety of factors affect the cash
flow and liquidation value of mobile home parks which
may reduce payments on your certificates"; and
(2) "The Mortgage Pools -- Mortgage Loans Secured by
Mobile Home Parks."
<PAGE>
The information contained in this supplement is not complete and may be changed.
This prospectus supplement is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
SUBJECT TO COMPLETION, DATED _____________, 1999
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ________________)
$ (APPROXIMATE)
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
Depositor
[---------------]
Mortgage Loan Sellers
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES _______
YOU SHOULD REVIEW CAREFULLY THE FACTORS SET FORTH UNDER "RISK FACTORS"
COMMENCING ON PAGE ___ OF THIS PROSPECTUS SUPPLEMENT AND PAGE ___ IN THE
ACCOMPANYING PROSPECTUS.
The certificates are asset backed securities issued by the trust. The
certificates are not obligations of Prudential Securities Secured Financing
Corporation or any of its affiliates.
Prudential Securities Secured Financing Corporation will not list the offered
certificates on any national securities exchange or on any automated quotation
system of any registered securities association such as NASDAQ.
This Prospectus Supplement may be used to offer and sell the certificates only
if it is accompanied by the Prospectus dated June __, 1999.
The trust fund:
o The trust fund will consist of a pool of ___ mortgage loans.
o The mortgage loans are generally secured by first liens on commercial and
multifamily properties.
o As of ____________, the mortgage loans had an aggregate principal balance
of $______________.
The certificates:
o The trust fund will issue ___ classes of certificates.
o Only the certificates described on the following table are being offered by
this Prospectus Supplement and the Prospectus.
o The certificates accrue interest from _________, ___.
On or about _________, ____, Prudential Securities Secured Financing Corporation
will sell these securities to Prudential Securities and [name other
underwriters], which will sell the offered certificates from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale.
<PAGE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE CERTIFICATES OR DETERMINED THAT THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRUDENTIAL SECURITIES
[Other Underwriters]
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS _________,____.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
Information about the certificates is provided in two separate
documents that progressively provide more detail: (a) the accompanying
prospectus, which provides general information, some of which may not apply to a
particular class of certificates, including your class; and (b) this prospectus
supplement, which describes the specific terms of your class of certificates.
IF THE TERMS OF YOUR CERTIFICATES VARY BETWEEN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS
PROSPECTUS SUPPLEMENT.
Cross-references are included in this prospectus supplement and in the
prospectus which direct you to more detailed descriptions of a particular topic.
You can also find references to key topics in the Table of Contents on page [ ]
and the Table of Contents in the prospectus on page [ ].
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement (including the prospectus and this prospectus
supplement). The prospectus and this prospectus supplement do not contain all of
the information contained in the registration statement. For further information
regarding the documents referred to in the prospectus and this prospectus
supplement, you should refer to the registration statement and the exhibits to
the registration statement. The registration statement and the exhibits can be
inspected and copied at the Public Reference Room of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 and the SEC's regional offices at Seven
World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center,
500 West Madison Street, Suite 1500, Chicago, Illinois 60661. Copies of these
materials can be obtained at prescribed rates from the Public Reference Section
of the SEC at 450 Fifth Street, N.W., Washington D.C. 20549. In addition, the
SEC maintains a public access site on the Internet through the World Wide Web at
which site reports, information statements and other information, including all
electronic filings, may be viewed. The Internet address of the World Wide Web
site is http://www.sec.gov.
The SEC allows us to "incorporate by reference" information that the
Depositor files with it, which means that the Depositor can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of the prospectus and this
prospectus supplement. Information that the Depositor files later with the SEC
will automatically update the information in the prospectus and this prospectus
supplement. In all cases, you should rely on the later information over
different information included in the prospectus or this prospectus supplement.
The Depositor incorporates by reference any future annual, monthly and special
reports and proxy materials filed with respect to any trust fund until we
terminate offering the Certificates. The Depositor has determined that its
financial statements are not material to the offering of any of the
Certificates. See "Financial Information." As a recipient of this prospectus,
you may request a copy of any document the Depositor incorporates by reference,
except exhibits to the documents (unless the exhibits are specifically
incorporated by reference), at no cost, by writing or calling: Prudential
Securities Secured Financing Corporation, One New York Plaza, New York, New York
10292, attention: David Rodgers, (212) 214-1000.
You can find the definitions of capitalized terms that are used in this
prospectus supplement beginning on page ___ in this prospectus supplement and
under the caption "Glossary" beginning on page ___ in the prospectus.
---------------------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS ACTING AS
UNDERWRITERS TO DELIVER A PROSPECTUS SUPPLEMENT AND A PROSPECTUS WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS AND SUBSCRIPTIONS.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Important Notice about Information Presented in
this Prospectus Supplement and the Accompanying
Prospectus......................................
Where You Can Find More Information.............
Summary.........................................
Risk Factors....................................
Description of the Mortgage Pool................
Prudential Securities Financing Corporation.....
Mortgage Loan Sellers...........................
Description of the Certificates.................
Yield and Maturity Considerations...............
Master Servicer and Special Servicer............
The Pooling and Servicing Agreement.............
Material Federal Income Tax Consequences........
ERISA Considerations............................
Legal Investment................................
Plan of Distribution............................
Use of Proceeds.................................
Legal Matters...................................
Ratings.........................................
Glossary........................................
Schedule A--Mortgage Loan Characteristics
Schedule B--Additional Loan Characteristics
Schedule C--Affiliated Borrowers
ii
<PAGE>
Prospectus
Important Notice about Information Presented in this
Prospectus and the Accompanying Prospectus Supplement...
Where You Can Find More Information.....................
Incorporation of Information by Reference..............
Reports..............................................
Summary of Prospectus...................................
Risk Factors............................................
The Depositor...........................................
Use of Proceeds.........................................
Description of the Certificates.........................
The Mortgage Pools......................................
Servicing of the Mortgage Loans.........................
Credit Enhancement......................................
Material Legal Aspects of the Mortgage Loans............
Material Federal Income Tax Consequences................
State and Other Tax Considerations......................
ERISA Considerations....................................
Legal Investment........................................
Plan of Distribution....................................
Legal Matters...........................................
Financial Information...................................
Rating..................................................
Glossary................................................
<PAGE>
SUMMARY
The following summary is a short description of the main terms of the
offering of the securities. For that reason, this summary does not contain all
of the information that may be important to you. To fully understand the terms
of the offering of the securities, you will need to read both this prospectus
supplement and the attached prospectus, each in its entirety.
OVERVIEW OF THE CERTIFICATES:
The trust fund will issue ___classes of certificates in an aggregate
principal amount equal to $______. ___ of those classes of certificates are
being offered by this prospectus supplement and ___ of those classes of
certificates will be issued separately in a private offering. The trust fund
will rely upon collections from the mortgage loans in the mortgage pool and
funds on deposit in certain accounts to make payments on the certificates.
Neither the depositor, nor the mortgage loan sellers nor any other person or
entity, will be liable for the payments on the certificates.
We are offering only the offered certificates to you with this
prospectus supplement and the accompanying prospectus, and are not offering the
private certificates to you pursuant to this prospectus supplement or the
prospectus. Only information on Class A-EC of the private securities is included
in this Summary. Class EC represents an interest-only strip with a notional
balance equal to the aggregate of all classes of certificates in the trust fund.
Class A-EC receives interest payments pro rata with Class A-1 and Class A-2 and
prior to Class B, Class C, Class D and Class E.
Ratings are by [Agencies]. 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. A security rating does not address
the likelihood or frequency of prepayments (both voluntary and involuntary), the
possibility that you might suffer a lower than expected yield, the likelihood of
receipt of prepayment premiums or yield maintenance charges, any allocation of
prepayment interest shortfalls, or the likelihood of collection by the master
servicer of default interest.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS INITIAL RATINGS APPROXIMATE APPROXIMATE
CERTIFICATE [AGENCIES] PERCENTAGE OF INITIAL PERCENTAGE OF
BALANCE OR POOL BALANCE SUBORDINATED
NOTIONAL AMOUNT SECURITIES
(+/- 5%)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Offered Certificates
- ------------------------------------------------------------------------------------------------------------------------------------
Class A-1 ____________
- ------------------------------------------------------------------------------------------------------------------------------------
Class A-2 ____________
- ------------------------------------------------------------------------------------------------------------------------------------
Class B ____________
- ------------------------------------------------------------------------------------------------------------------------------------
Class C ____________
- ------------------------------------------------------------------------------------------------------------------------------------
Class D ____________
- ------------------------------------------------------------------------------------------------------------------------------------
Class E ____________
- ------------------------------------------------------------------------------------------------------------------------------------
Private Certificates (not offered hereby)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS INITIAL RATINGS APPROXIMATE APPROXIMATE
CERTIFICATE [AGENCIES] PERCENTAGE OF INITIAL PERCENTAGE OF
BALANCE OR POOL BALANCE SUBORDINATED
NOTIONAL AMOUNT SECURITIES
(+/- 5%)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A- ____________
- ------------------------------------------------------------------------------------------------------------------------------------
EC
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table assumes no prepayments before maturity, with each ARD Loan
prepaying in full on the related Anticipated Repayment Date, and no defaults.
S-2
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
EXPECTED
AMORTIZATION
WEIGHTED AVERAGE PERIOD
CLASS PASS-THROUGH RATE LIFE (YEARS) (MONTH/YEAR)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Offered Certificates
- ------------------------------------------------------------------------------------------------------------------------------------
Class A-1 %
- ------------------------------------------------------------------------------------------------------------------------------------
Class A-2 %
- ------------------------------------------------------------------------------------------------------------------------------------
Class B %
- ------------------------------------------------------------------------------------------------------------------------------------
Class C %
- ------------------------------------------------------------------------------------------------------------------------------------
Class D %
- ------------------------------------------------------------------------------------------------------------------------------------
Class E %
- ------------------------------------------------------------------------------------------------------------------------------------
Private Certificates (not offered hereby)
- ------------------------------------------------------------------------------------------------------------------------------------
Class A-EC %
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Denominations...................... We will issue the offered certificates in
minimum denominations of $25,000 and
multiples of $1.00 in excess of 25,000.
S-3
<PAGE>
Priority of Distributions.......... From collections on the mortgages during the
prior collection period, amounts advanced by
the master servicer for the distribution
date, and any other amounts collected by the
master servicer and placed in the collection
account, the trust fund will pay the
following amounts on each distribution date
in the following order of priority:
(1) trustee fee payable to the trustee
for the trust fund;
(2) reimbursement of any unreimbursed
advances made by the master
servicer, plus interest on those
advances;
(3) fees payable to the master servicer
and the special servicer for
servicing the mortgage loans; and
(4) payments of principal and interest
to the various classes in
alphabetical order as shown in the
following chart. (Class A-EC is of
equal priority with Class A-1 and
Class A-2 only in respect of
interest.)
Entitlement to receive principal and
interest on any distribution date is
depicted in descending order. No principal
will be paid on the next class of
certificates until the principal balance of
the previous class of certificates has been
reduced to zero. The manner in which
mortgage loan losses are allocated is
depicted in ascending order.
S-4
<PAGE>
Class A-1, Class A-2
Class A-EC
Class B
Class C
Class D
Class E
Credit Enhancement................. The pooling and servicing agreement includes
certain features designed to provide
protection against losses and delays in
distributions to the Class A
certificateholders, Class A-EC
certificateholders and, to a lesser extent,
the Class B certificateholders and the other
certificateholders with certificates of a
later alphabetical designation. These
features are referred to as "credit
enhancement." Losses on the mortgage loans
or other shortfalls of allocating available
cash flow in some cases to the more senior
classes of certificates (for example, to the
Class A Certificates before the Class B
Certificates, to the Class B Certificates
before the Class C Certificates, and so
forth) before making allocations to
subordinate classes. This reallocation is
referred to as "subordination."
The credit enhancement for the certificates
will be as follows:
[specify features]
The Trust Fund..................... The trust fund will use the net proceeds
from the issuance and sale of the
certificates to purchase, on the closing
date, the assets that make up the mortgage
pool from Prudential Securities Secured
Funding Corporation, as the depositor. The
depositor will use a portion of the funds
from the issuance and sale of the securities
to purchase the commercial mortgages from
_____ and _____, as mortgage loan sellers.
[The trust fund may also pay for a portion
of the mortgage loans with the
certificates.]
The assets of the mortgage pool will consist
of fixed rate commercial mortgage loans that
are secured by first liens
S-5
<PAGE>
on commercial and multifamily properties.
The mortgage loans will have a total
outstanding principal balance of
$___________ as of ______, _____, the cutoff
date. The chart below represents the flow of
funds provided by investors for the
certificates and the mortgage loans sold by
the depositor.
S-6
<PAGE>
Mortgage Sellers
Prudential Securities
Net Proceeds Secured Financing Mortgage
Corporation-- Loans
Depositor
Net Proceeds Trust Fund Mortgage
Loans
Proceeds Investors Certificates
S-7
<PAGE>
Property of the Trust Fund..........The trust fund for each series will
primarily include the following, to the
extent provided in the pooling and servicing
agreement:
(1) the mortgage loans and collections
on the mortgage loans on and after
the cut-off date;
(2) any mortgaged property that has
been foreclosed upon by master
servicer or the special servicer on
behalf of the trust fund;
(3) accounts;
(4) rights to proceeds under certain
insurance policies that cover the
mortgaged properties;
(5) rights and remedies for any
breaches of representations,
warranties and covenants made by
the depositor, the mortgage
sellers, the master servicer
[specify others]; and
(6) other rights under the documents
relating to the mortgage loans, the
mortgages and the mortgaged
properties.
The composition of the assets making up the
mortgage pool is described in this
prospectus supplement in the section titled
"Mortgage Loans and Mortgaged Properties"
and in the schedules to this prospectus
supplement, each of which constitutes an
integral part of this prospectus supplement.
S-8
<PAGE>
Servicing of the Mortgage Pool......________ will act as master servicer and
______ as special servicer for the mortgage
loans in the mortgage pool owned by the
trust fund. The master servicer and special
servicer will handle all collections,
administer defaults and delinquencies and
otherwise service the contracts. The trust
will pay the master servicer and special
servicer a servicing fee [specify terms].
The master servicer will also be obligated
to advance to the trust fund interest and
principal (including , with respect to any
mortgage loans for which a balloon payment
is not made, the amount of interest and
principal that was payable immediately prior
to the default to the extent provided in the
pooling and service agreement) on the
mortgage loans that is due but unpaid by the
obligors. The master servicer will also be
required to make cash advances to cover
designated unpaid expenses on the mortgaged
properties and to maintain the security in
the mortgaged property. However, if the
master servicer determines that it will not
be able to recover an advance from an
obligor or from the proceeds of the
mortgaged property, the master servicer may
be reimbursed for previously made advances,
plus interest on those advances, from
amounts collected on other mortgage loans.
For more detailed information, you should
refer to "The Pooling and Servicing
Agreement-Advances" in this prospectus
supplement.
Early Termination...................The trust fund may be terminated and
therefor the certificates may be redeemed
early by designated entities when the
outstanding aggregate scheduled principal
balance of the mortgage loans is reduced to
10% of the initial pool balance of the
mortgage loans.
S-9
<PAGE>
For more detailed information, you should
refer to "Description of the Certificates-
Early Termination" in this prospectus
supplement.
RELEVANT PARTIES:
Depositor...........................Prudential Securities Secured Financing
Corporation
One New York Plaza
New York, New York 10292
(212) 214-1000
Master Servicer.....................[Name]
[Address]
[Phone Number]
Special Servicer....................[Name]
[Address]
[Phone Number]
Trustee.............................[Name]
[Address]
[Phone Number]
Mortgage Loan Sellers...............The mortgage loans will be purchased from
_____________ and _____________.
RELEVANT DATES AND PERIODS:
Cut-off Date........................_____________.
Closing Date........................On or about _____________.
Distribution Date...................Payments on the certificates will be made on
each distribution date which will be the
____ day of each month, or if that day is
not a business day, the next succeeding
business day. The first distribution date
will be _____________.
We expect that the scheduled final
distribution dates for the payment of
principal of the certificates will be as set
forth below. The dates are calculated
assuming that there
S-10
<PAGE>
are no defaults, delinquencies or
modifications of the mortgage loans after
______________.
CLASS SCHEDULED FINAL
DISTRIBUTION DATE
Class A-1
Class A-2
Class B
Class C
Class D
Class E
Record Date.........................The record date for payments on the
certificates is the close of business on the
last business day of each month. The record
date always relates to the distribution date
for the following calendar month.
Interest Accrual Period.............Interest on the certificates will be payable
on each distribution date, based on the
interest accrual for the calendar month
before the month in which the distribution
date occurs. Interest will be calculated
based on a 360-day year consisting of twelve
30-day months.
Collection Period...................Payments on the certificates on each
distribution date will be based on the
collections on the mortgage loans in the
mortgage pool during the preceding
collection period. The collection period is
the period beginning on the day after the
determination date in the preceding month
and ending on the determination date in the
month in which the payment is made. The
determination date is the ____ day of each
month, or if that day is not a business day,
the next business day. The collection period
for the first distribution date will begin
on the day after the cut-off date.
Due Date............................Payments on the mortgage loans in the
mortgage pool are due on the first day of
each month beginning on the first month on
which payments on a particular mortgage loan
are due (disregarding any applicable grace
periods). [describe any exceptions]
THE MORTGAGE LOANS AND MORTGAGED PROPERTIES:
The Mortgage Pool...................The assets of the trust fund will primarily
consist of the mortgage loans. Each mortgage
loan constitutes the
S-11
<PAGE>
obligation of one or more persons to repay a
specified sum with interest. Each mortgage
loan will be secured by a first lien on a
commercial or multifamily residential
property. [describe any exceptions]
The composition of the mortgage loans in the
mortgage pool as of the cut-off date are
summarized below. For more detailed
information, you should refer to the section
in this prospectus supplement titled
"Description of the Mortgage Pool" and to
the Exhibit A attached to this prospectus
supplement.
The "Initial Pool Balance" is the aggregate
of the cut-off date principal balances of
the mortgage loans. [describe any
qualifications]
S-12
<PAGE>
GENERAL MORTGAGE LOAN CHARACTERISTICS
(AS OF THE CUT-OFF DATE)
INITIAL POOL BALANCE
NUMBER OF MORTGAGE LOANS
AVERAGE LOAN BALANCE
MAXIMUM OF MORTGAGE BALANCES
MINIMUM OF MORTGAGE BALANCES
WEIGHTED AVERAGE MORTGAGE RATE (GROSS)
WEIGHTED AVERAGE MORTGAGE RATE (NET)
AMORTIZED WEIGHTED AVERAGE MATURITY (MONTHS)
RANGE OF AMORTIZATION TERMS
WEIGHTED AVERAGE UNDERWRITTEN DSCR
RANGE OF DSCRs
WEIGHTED AVERAGE LTV (CURRENT)
RANGE OF LTVs (CURRENT)
WEIGHTED AVERAGE BALLOON/ARD LTV
PERCENTAGE OF INITIAL POOL BALANCE MADE UP
OF:
FULLY AMORTIZING LOANS
BALLOON LOANS (INCLUDING ARD LOANS)
S-13
<PAGE>
DISTRIBUTION OF CUT-OFF DATE PRINCIPAL BALANCES
PERCENTAGE OF
AGGREGATE
NUMBER OF CURRENT
RANGE OF MORTGAGE PRINCIPAL
CURRENT PRINCIPAL BALANCES LOANS BALANCE
255,509 - 499,999
500,000 - 999,999
1,000,000 - 1,999,999
2,000,000 - 2,999,999
3,000,000 - 3,999,999
4,000,000 - 4,999,999
5,000,000 - 5,999,999
6,000,000 - 6,999,999
7,000,000 - 7,999,999
8,000,000 - 8,999,999
9,000,000 - 9,999,999
10,000,000 - 11,999,999
12,000,000 - 13,999,999
14,000,000 - 16,999,999
17,000,000 OR MORE ___ ___%
TOTAL ___ 100%
===================================================================
S-14
<PAGE>
DEBT SERVICE COVERAGE RATIOS
Debt service coverage ratios ("DSCRs") for
each Mortgage Loan are calculated based on
the ratio of the related annual underwritten
cash flow to the related annual debt
service, as more fully described in the
section of this prospectus supplement titled
"Description of the Mortgage Pool--Material
Characteristics of the Mortgage Pool."
RANGE OF DEBT SERVICE COVERAGE RATIOS
PERCENT OF
NUMBER OF INITIAL
DSCR LOANS POOL BALANCE
TOTAL _____ _______%
========================================================================
S-15
<PAGE>
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS
PERCENT OF
NUMBER OF INITIAL
ORIGINAL LTV LOANS POOL BALANCE
TOTAL _____ 100.00%
========================================================================
S-16
<PAGE>
PROPERTY TYPES
NUMBER OF PERCENT OF
MORTGAGED INITIAL
PROPERTY TYPE PROPERTIES POOL BALANCE
ASSISTED LIVING FACILITY
CONGREGATE CARE
HOSPITALITY
INDUSTRIAL
MIXED USE
MOBILE HOME PARK
MULTIFAMILY
NURSING HOME
OFFICE
OFFICE/INDUSTRIAL
RETAIL-ANCHORED
RETAIL-SHADOW ANCHORED
RETAIL-SINGLE TENANT
RETAIL-UNANCHORED
SELF-STORAGE
SPECIAL PURPOSE
WAREHOUSE _____ _____
TOTAL ____ _______%
========================================================================
S-17
<PAGE>
RANGE OF MATURITY YEARS
PERCENT OF
NUMBER OF INITIAL
MATURITY YEAR LOANS POOL BALANCE
2005
2006
2007
2008
2009
2010
2011
2012
2013
2015
2016
2017
2018 _____ ______
TOTAL _____ 100.00%
========================================================================
STRUCTURAL FEATURES:
Federal Tax Status..................Elections will be made to treat designated
portions of the Trust Fund as two separate
"REMICs". All of the offered certificates
will constitute "regular interests" in a
REMIC. The offered certificates generally
will be treated as newly originated debt
instruments for federal income tax purposes.
Certain classes not part of the offered
certificates will constitute "residual
interests" in a REMIC.
This means you will be required to include
in income all interest on our certificates
in accordance with the accrual method of
accounting, regardless of your usual method
of accounting. [Explain whether any of the
offered certificates is expected to be
treated for federal income tax reporting
purposes as having been issued with an
original issue discount.] We anticipate that
the offered certificates may be treated for
federal income tax purposes as having been
issued at a premium. [Explain which class,
if any]
If you are a mutual savings bank or domestic
building and loan association, the offered
certificates held by you will represent
interests in "qualifying real property
loans" within the meaning of Section 593(d)
of the
S-18
<PAGE>
Tax Code. If you are a REIT, the offered
certificates held by you will constitute
"real estate assets" within the meaning of
Section 856(c)(5)(B) of the Tax Code, and
income with respect to offered certificates
will be considered "interest on obligations
secured by mortgages on real property or on
interests in property" within the meaning of
Section 856(c)(3)(B) of the Tax Code. If you
are a domestic building and loan
association, the offered certificates held
by you will generally constitute a "regular
or residual interest in a REMIC" within the
meaning of Section 7701(a)(19)(C)(xi) of the
Tax Code only to the extent that the
Mortgage Loans are secured by multifamily
apartment buildings.
For additional information concerning the
application of United States federal income
tax laws to the trust fund and the
certificates, you should refer to the
section in the prospectus titled "Material
Federal Income Tax Consequences."
ERISA...............................The Class A Certificates are generally
eligible for purchase by employee benefit
plans, subject to certain considerations
discussed in the sections in this prospectus
supplement and the prospectus titled "ERISA
Considerations."
The other classes of offered certificates,
however, may not be acquired by any employee
benefit plan or an individual retirement
plan. [However, under limited circumstances,
Class __ Certificates may be purchased as
limited investments by persons using
insurance company general accounts or
separate accounts.]
You should refer to sections in this
prospectus supplement and the prospectus
titled "ERISA Considerations." If you are a
benefit plan fiduciary considering purchase
of the certificates of any class you should,
among other things, consult with your
counsel to determine whether all required
conditions have been satisfied.
SMMEA...............................The offered certificates will not constitute
mortgage-related securities pursuant to
SMMEA [explain any exceptions]. For more
information, you should refer to sections in
the prospectus supplement and the prospectus
titled "Legal Investment."
S-19
<PAGE>
RISK FACTORS
You should carefully consider the following risks and those in the
prospectus under "Risk Factors" before making an investment decision. Your
investment in the offered certificates will involve some degree of risk. If any
of the following risks are realized, your investment could be materially and
adversely affected. In addition, other risks unknown to us or which we currently
consider immaterial may also impair your investment.
MOST DECISIONS RELATING TO THE TRUST FUND ARE MADE BY THE SERVICER, THE
TRUSTEE OR THE SPECIAL SERVICER, AND THEIR DECISIONS MAY NOT BE REPRESENTATIVE
OF THOSE OF THE CERTIFICATEHOLDERS AND MAY ADVERSELY AFFECT THE INTERESTS OF THE
CERTIFICATEHOLDERS
Your certificates generally do not entitle you to vote, except with
respect to required consents to specific amendments to the pooling and servicing
agreement described in this prospectus supplement and, in some cases, to replace
parties to the pooling and servicing agreement. Generally, you have only very
limited right to participate in decisions with respect to the administration of
the trust fund (although, among other things, the controlling class will have
the right to replace the special servicer and the directing certificateholder
will have limited rights with respect to approving asset status reports, the
conduct of property appraisals and appraisal reductions described in this
prospectus supplement). Decisions relating to the administration of the trust
fund are generally made, subject to the express terms of the pooling and
servicing agreement, by the servicer, the trustee or the special servicer, as
applicable. Any decision made by one of those parties in respect of the trust
fund, even if made in the best interests of the certificateholders (as
determined by that party in its good faith and reasonable judgment), may be
contrary to the decision that would have been made by the holders of any
particular class or classes of offered certificates and may negatively affect
the interests of those holders.
COMPLICATIONS ASSOCIATED WITH YEAR 2000 DATE CONVERSION MAY ADVERSELY
AFFECT OPERATIONS OF THE TRUST FUND WHICH MAY RESULT IN REDUCED PAYMENTS ON YOUR
CERTIFICATES
S-20
<PAGE>
The change of date of January 1, 2000 may have a disruptive effect on
the ability of computerized systems relied on by the master servicer, the
special servicer and the trustee to perform basic functions. Such disruptions
could affect the following functions, among others:
(1) processing information with respect to the mortgage loans and
the certificates;
(2) collecting payments on the mortgaged loans;
(3) remitting payments to certificateholders; and
(4) servicing the mortgage loans.
You could be adversely affected if the computer systems of the master
servicer, the special servicer or the trustee are not fully Year 2000 capable
before January 1, 2000. The master servicer, the special servicer and the
trustee have made certain representations in the pooling and servicing Agreement
with respect to the steps that they are taking to address the year 2000 problem.
S-21
<PAGE>
ENVIRONMENTAL CONDITIONS OF THE MORTGAGED PROPERTIES MAY SUBJECT THE
TRUST FUND TO LIABILITY UNDER FEDERAL AND STATE LAWS, REDUCING THE VALUE AND
CASH FLOW OF THE MORTGAGED PROPERTIES, WHICH MAY RESULT IN REDUCED PAYMENTS ON
YOUR CERTIFICATES
Each of the mortgage loan sellers has represented to the transferor
that each of the related mortgaged properties was subject to a Phase I
"environmental site assessment" conducted consistently with:
(1) generally recognized industry standards;
(2) a similar study or an update of a previously conducted;
(3) environmental site assessment; or
(4) an update based upon information contained in an established
database.
Other than as described in the section titled "Description of the
Mortgage Pool--Material Characteristics of the Mortgage Pool--Environmental
Risks" in this prospectus supplement, the mortgage loan sellers have informed
the depositor that those assessments, studies or updates were conducted within
12 months prior to the cut-off date. The mortgage sellers have also stated that
the environmental assessments, screen assessments, studies or updates identified
no material adverse environmental factors anticipated to require any material
expenditure for any mortgaged property, except for:
(1) those cases where a qualified environmental consultant
investigated those factors and recommended no further
investigations or remediation;
(2) maintenance plan which was obtained or an escrow reserve
established to cover the estimated costs of obtaining that
plan;
(3) those cases in which soil or groundwater contamination was
suspected or identified and either (a) those factors were
remedied or abated prior to the closing date, (b) a letter was
obtained from the applicable regulatory authority stating that
no further action was required or (c) an environmental
insurance policy was obtained, a letter of credit was
provided, an escrow reserve account was established, or an
indemnity from the responsible party was obtained to cover the
estimated costs of any those cases in which an environmental
consultant recommended an operations and required
investigation, monitoring or remediation;
(4) those cases in which an offsite property is the location of a
leaking underground storage tank or groundwater contamination,
a responsible party has been identified under applicable law,
and either (a) that condition is not known to have affected
the mortgaged property or (b) the responsible party has either
received a letter from the applicable regulatory agency
stating nor further action is required, established a
remediation fund, or provided an indemnity or guaranty to the
borrower; and
(5) those cases involving small loans (with an original principal
balance of less than $1,000,000), when the borrower has
acknowledged in the related mortgage loan documents the
existence of that factor and expressly agreed to comply with
all federal, state and local statutes or regulations
respecting the factor.
The above information regarding the absence of material adverse
environmental conditions is based upon the environmental assessments, similar
studies or updates. The mortgage loan sellers, the depositor, the transferor,
and their respective affiliates have not independently verified this
information.
S-22
<PAGE>
The pooling and servicing agreement requires that the special servicer
obtain an environmental site assessment of each mortgaged property prior to
either acquiring title on behalf of the trust fund or assuming the property's
operations. This requirement may effectively delay foreclosure until a
satisfactory environmental site assessment is obtained or until any required
remedial action is taken. However, this requirement will also decrease the
likelihood that the trust fund will become liable under any environmental law.
Any environmental site assessment could potentially fail to reveal the factors
that could result in the trust fund becoming liable under any environmental law.
In addition, the pooling and servicing agreement's requirements may not
effectively insulate the trust fund from potential liability under environmental
laws.
For more information on environmental site assessments, you should
refer to the section in the prospectus titled "Material Legal Aspects of the
Mortgage Loans--Environmental Risks" and the section titled "The Pooling and
Servicing Agreement--Realization Upon Mortgage Loans--General Standards for
Conduct in Foreclosing or the Selling Defaulted Loans" in this prospectus
supplement.
SOME MORTGAGED PROPERTIES DO NOT HAVE OPERATING HISTORIES WHICH MAKE IT
DIFFICULT TO PREDICT FUTURE EVENTS WHICH MAY ADVERSELY AFFECT THE CASH FLOW OF
THESE PROPERTIES AND WHICH MAY REDUCE THE PAYMENTS ON YOUR CERTIFICATES
[ ] of the mortgaged properties securing the mortgage loans with a
cut-off date balance of approximately $________, representing approximately __%
of the initial pool balance, were constructed after [______________] and
consequently do not have significant operating histories. There can be no
assurance that the businesses operated at these mortgaged properties will be
successful. There can be no assurances that current occupancy levels of these
mortgaged properties will be maintained or that full occupancy will be achieved
or maintained or that as yet undiscovered physical or design problems with the
recently constructed mortgaged properties will not adversely affect occupancy
levels of any of those mortgaged property.
[RAPID RATE OF PRINCIPAL PAYMENTS AND/OR PRINCIPAL LOSSES ON THE
MORTGAGE LOANS MAY ADVERSELY AFFECT THE YIELD ON THE CLASS A-EC CERTIFICATES
If you purchase Class A-EC Certificates, your yield to maturity will be
extremely sensitive to the rate and timing of principal payments (including
prepayments) and principal losses with respect to the mortgage loans. Investors
should fully consider the associated risks, including the risk that a rapid rate
of principal payments and/or principal losses on the mortgage pool could result
in the failure by investors in the Class A-EC Certificates to fully recoup their
initial investments.
For more detailed information regarding these risks, you should refer
to the section in this prospectus supplement titled "Yield and Maturity
Considerations."]
S-23
<PAGE>
CONCENTRATION OF MORTGAGE LOANS IN ONE OR MORE GEOGRAPHIC AREAS REDUCES
DIVERSIFICATION AND MAY INCREASE THE RISK THAT YOUR CERTIFICATES MAY NOT BE PAID
IN FULL
A concentration of mortgaged properties in a particular state, region
or locale increases the exposure of the mortgaged pool to adverse conditions in
that state, region or locale, which may reduce the mortgaged property's income
and its foreclosure value. Possible adverse conditions may include:
(1) general economic or demographic conditions in the state,
region or locale or adverse developments affecting an industry
that is concentrated in the state or region;
(2) real estate market conditions in the state or region;
(3) state or local government regulations;
(4) natural disasters, such as earthquakes, floods, tornadoes and
hurricanes, which may not be fully covered by insurance; and
(5) other factors that are beyond the control of the related
borrower.
Some states or geographic regions may be more severely affected by
these factors than other states or regions, and to the extent that there is a
concentration of mortgaged properties or borrowers in that state or region, the
impact on the trust fund may be more significant than would be the case if the
properties were more geographically diversified.
For more detailed information regarding theses risks, you should refer
to sections in this prospectus supplement titled "Description of the Mortgage
Pool--Material Characteristics of the Mortgage Pool--Geographic Concentration."
BECAUSE THE SECURITIES ARE IN BOOK-ENTRY FORM, YOUR RIGHTS CAN ONLY BE
EXERCISED INDIRECTLY
One or more classes of the certificates initially will be represented
by certificates registered in the name of the nominee for the DTC, and will not
be registered in the names of the certificateholders or their nominees. Unless
and until definitive certificates are issued, beneficial owners of the
certificates will be able to exercise the rights of certificateholders only
indirectly through the DTC and its participating organizations.
For more detailed information regarding theses risks, you should refer
to the section in this prospectus supplement titled "Description of the
Certificates--Delivery, Form and Denomination Book-Entry Certificates."
S-24
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of ______ Mortgage Loans. The Mortgage
Loans have an Initial Pool Balance of approximately $_____________, subject to a
variance of plus or minus 5%. The following is a generalized description of the
terms and provisions of the Mortgage Loans in the aggregate. Many of the
individual Mortgage Loans have special terms and provisions that deviate from
this generalized description.
Generally, each Mortgage Loan is evidenced by a separate promissory
note. Each Mortgage Loan is secured by one or more Mortgages that create a first
lien on a related Mortgaged Property.
The percentage of the Initial Pool Balance represented by each type of
Mortgaged Property is as follows:
Number of Percent of
Mortgaged Initial
Property Type Properties Pool Balance
[Assisted Living Facility %
Congregate Care %
Hospitality %
Industrial %
Mixed Use %
Mobile Home Park %
Multifamily %
Nursing Home %
Office %
Office/Industrial %
Retail-Anchored %
Retail-Shadow Anchored %
Retail-Single Tenant %
Retail-Unanchored %
Self-Storage %
Special Purpose %
Warehouse] _____ _____%
Total _____ _____%
================================================================================
S-25
<PAGE>
No Mortgage Loan is insured or guaranteed by the United States of
America, any governmental agency or instrumentality, any private mortgage
insurer, the Depositor, the Transferor, the Mortgage Loan Sellers, the Master
Servicer, the Special Servicer, the Trustee or any of their respective
affiliates.
The Depositor will purchase the Mortgage Loans on or before the Closing
Date from the Transferor pursuant to a Mortgage Loan Purchase Agreement to be
dated on or about ___________. The Transferor will purchase ____ and ____
Mortgage Loans (representing approximately ____% and ____% of the Initial Pool
Balance) from [the related Mortgage Loan Sellers], on or before the Closing Date
pursuant to the Underlying Mortgage Loan Purchase Agreements. The Depositor will
assign the Mortgage Loans and make representations and warranties regarding the
Mortgage Loans to the Trustee pursuant to the Pooling and Servicing Agreement.
The Master Servicer and the Special Servicer will each service the Mortgage
Loans pursuant to the Pooling and Servicing Agreement. For more detailed
information, you should refer to the section in this prospectus supplement
titled "The Pooling and Servicing Agreement--Servicing of the Mortgage Loans;
Collection of Payments."
SECURITY FOR THE MORTGAGE LOANS
Each Mortgage Loan is secured by a Mortgage encumbering the related
Mortgaged Property. of the Mortgage Loans, representing approximately % of the
Initial Pool Balance provide for full or limited recourse against the related
borrower, or a guarantor or guarantors. The remainder of the Mortgage Loans are
non-recourse loans, meaning that if a borrower defaults under that loan,
recourse generally may be had only against the specific Mortgaged Property
securing that Mortgage Loan and any other assets specifically pledged by the
borrower to secure that Mortgage Loan. For example, each Mortgage Loan is also
secured by an assignment of the related borrower's interest in the leases,
rents, issues and profits of the related Mortgaged Property. Also, each Mortgage
Loan provides for the indemnification of the mortgagee by the related borrower
for the presence of any hazardous substances affecting the Mortgaged Property.
In some instances, additional collateral may exist. However, borrowers generally
have limited assets, and there can be no assurance that any borrower will have
sufficient assets to support any of the indemnification obligations that may
arise. For more detailed information, you should refer to the section in this
prospectus supplement titled "Risk Factors--Environmental" conditions of the
mortgaged properties may subject the trust fund to liability under federal and
state laws, reducing the value and cash flow of the mortgaged properties, which
may result in reduced payments on your certificates."
Except as described above under the section titled "--General", each
Mortgage constitutes a first lien on a Mortgaged Property. Generally that lien
is subject only to the following:
(1) liens for real estate and other taxes and special assessments;
(2) covenants, conditions, restrictions, rights of way, easements
and other encumbrances in effect as of the date of recording
of that Mortgage; and
(3) exceptions and encumbrances on the Mortgaged Property
reflected in the related title insurance policy.
S-26
<PAGE>
Ground Leases; Estates for Years. _____ of the Mortgage Loans,
representing approximately ______% of the Initial Pool Balance, are secured by a
first lien encumbering the related borrower's leasehold interest in the related
property. _____ of the Mortgage Loans, representing approximately ______% of the
Initial Pool Balance, are secured by first liens encumbering the related
borrower's leasehold interest in the related Mortgaged Property, together with
the fee owner's interest in that real property. ____ of the Mortgage Loans,
representing approximately _____% of the Initial Pool Balance, are secured by
first liens encumbering the related borrower's (1) fee interest in a portion of
the Mortgaged Property and (2) leasehold interest in the remainder of the
Mortgaged Property. The Mortgage Loan Sellers have represented that each ground
lease expires not less than 10 years after the maturity date of the related
Mortgage Loan (including extension options). For more detailed information, you
should refer to the section in the prospectus titled "Material Legal Aspects of
the Mortgage Loans--Foreclosure-Leasehold Risks."
MATERIAL TERMS AND CONDITIONS OF THE MORTGAGE LOANS
Due Dates. The Mortgage Loans provide for Monthly Payments to be due on
the Due Date, except _____ of the Mortgage Loans, representing approximately
____% of the Initial Pool Balance, provide for Monthly Payments to be due on the
____ day of each month. ___ of the Mortgage Loans, representing approximately
__% of the Initial Post Balance, provide for a grace period of ___ days or less
from the related Due Date before a scheduled payment is deemed to be
contractually delinquent for purposes of imposing a late charge.
Mortgage Rates; Calculations of Interest. Each Mortgage Loan accrues
interest at a Mortgage Rate that is fixed for the entire term of that Mortgage
Loan and does not permit any negative amortization or the deferral of interest
except that ____ of the Mortgage Loans, representing approximately _____% of the
Initial Pool Balance, provide that for a period of up to ____ years from
origination the borrower is obligated only to pay interest accrued each month.
____ of those Mortgage Loans, representing approximately % of the Initial Pool
Balance, have not yet reached the end of that period. These ____ Mortgage Loans,
together with a summary of the relevant provisions, are identified in
Schedules A and B each of which constitutes an integral part of this prospectus
supplement.
ARD Loans; Excess Interest. The ARD Loans, representing approximately %
of the Initial Pool Balance, bear interest at their respective Mortgage Rates
until an Anticipated Repayment Date specified in that loan. Commencing on the
Anticipated Repayment Date, each of these Mortgage Loans will bear interest at a
Revised Rate equal to the Mortgage Rate plus a specified percentage (generally,
no more than __%, so long as that Mortgage Loan is included in the Trust Fund).
Until the principal balance of that Mortgage Loan has been reduced to zero, the
borrower will only be required to pay interest at the Mortgage Rate, and the
interest accrued at the related Revised Rate over the interest that would have
accrued at the related Mortgage Rate will be deferred. The deferred interest
will not be added to the principal balance of the related Mortgage Loan, but
will itself accrue interest at the Revised Rate to the extent lawful.
S-27
<PAGE>
Borrowers under ARD Loans generally are required to enter into lockbox
agreements in which revenue from the related Mortgage Property will be deposited
into a lockbox account controlled by the Master Servicer, if conditions
specified in those ARD Loans are met, rather then paid directly to the borrower.
From and after the Anticipated Repayment Date, the related borrower generally
will be required to apply all monthly cash flow from the related Mortgaged
Property to pay the following amounts in the following order of priority:
(1) required payments to the tax and insurance escrow fund and any
ground lease escrow fund;
(2) payment of monthly debt service;
(3) payments to any other required escrow funds;
(4) payment of operating expenses pursuant to the terms of an
annual budget approved by the Master Servicer;
(5) payment of approved extraordinary operating expenses or
capital expenses not set forth in the approved annual budget
or allotted for in any escrow fund;
(6) principal on the Mortgage Loan until the principal is paid in
full; and
(7) Excess Interest.
As described below, each ARD Loan generally provides that the related
borrower is prohibited from prepaying the Mortgage Loan until one to six months
prior to the Anticipated Repayment Date. However, upon the commencement of that
period, the borrower may prepay the loan, in whole or in part, without payment
of a Prepayment Premium or Yield Maintenance Charge. The Anticipated Repayment
Date for each ARD Loan is listed in Schedule A which constitutes an integral
part of this prospectus supplement.
The Class __ Certificates will be entitled to all distributions of
Excess Interest, subject to the limitations set forth in the Pooling and
Servicing Agreement, including distributions on or after that on which the Class
__ Certificate Balance is reduced to zero. Additionally, the holders of 100% of
the Class __ Certificates or the Special Servicer will have the option to
purchase any ARD Loan on or after its Anticipated Repayment Date at a price
equal to its outstanding Scheduled Principal Balance plus accrued and unpaid
interest and unreimbursed Advances made with respect to that ARD Loan (with
interest on the unreimbursed Advances). As a condition to the purchase of any
ARD Loan described above, each of those holders will be required to deliver an
opinion of counsel to the effect that the purchase (or the right to purchase)
would not cause either REMIC to fail to qualify as a REMIC under the Tax Code
and either (1) an opinion of counsel to the effect that the purchase would not
result in a gain taxable as net income from prohibited transactions (imposed by
Tax Code Section 860F(a)(1)) or result in the imposition of any other tax on
either REMIC or (2) an accountant's certification to the effect that the
purchase would not result in the realization of any net income to either REMIC.
Amortization of Principal. The Balloon Loans, representing
approximately ____% of the Initial Pool Balance, provide for monthly payments of
principal based on amortization schedules longer than their remaining terms,
leaving
S-28
<PAGE>
substantial principal amounts due and payable on their respective maturity
dates. The remaining Mortgage Loans have amortization terms that match their
respective terms to maturity. The weighted average Balloon LTV applicable to the
Mortgage Pool is approximately ____%.
Prepayment Provisions. ____ of the Mortgage Loans, representing
approximately _____% of the Initial Pool Balance, provide there are no
restrictions on voluntary prepayments during a specified period (generally [two]
to [twelve] months) prior to the maturity date or Anticipated Repayment Date, as
applicable, of those Mortgage Loans. Prior to the specified period, if any, each
Mortgage Loan restricts voluntary prepayments in one or more of the following
ways:
(1) Imposing a "Lockout Period" by prohibiting any prepayments for
a specified period of time after the date of origination of
that Mortgage Loan;
(2) Imposing a "Yield Maintenance Charge" in connection with any
principal prepayment made during a Yield Maintenance Period;
or
(3) Imposing Prepayment Premiums (fees or premiums generally equal
to a fixed percentage of the then outstanding principal
balance of that Mortgage Loan) in connection with any
principal prepayment made during a Prepayment Premium Period.
of the Mortgage Loans that allow prepayment with either a Prepayment
Premium or Yield Maintenance Charge, representing % of the Initial Pool Balance,
also give the related borrower the option either to defease the Mortgage Loan
(as described below).
The Mortgage Loans generally require prepayments to be accompanied by a
full month's interest, regardless of the date on which they are made.
[The following table sets forth, for each month indicated in the table,
(1) the aggregate unpaid principal balance and the percentage of the Initial
Pool Balance
S-29
<PAGE>
expected to be outstanding and (2) the percentage of such amounts subject to a
Lockout Period, Yield Maintenance Charge or a Prepayment Premium, in each case
assuming no prepayments, defaults or extensions and based also upon the
assumptions set forth preceding the tables appearing under "Yield and Maturity
Considerations - Weighted Average Life" herein.]
[INSERT PREPAYMENT TABLE]
Schedule A attached hereto contains information regarding the Prepayment
Premiums applicable to each of the Mortgage Loans.
Prepayment Premiums and Yield Maintenance Charges are generally not
imposed in connection with involuntary prepayments resulting from a Casualty or
Condemnation, so long as no event of default then exists. The Prepayment
Premiums and Yield Maintenance Charges are payable in connection with
prepayments after an event of default but prior to the sale of the Mortgaged
Property. Some Mortgage Loans permit the related borrower to transfer the
related Mortgaged Property to a third party without prepaying the related
Mortgage Loan if conditions specified in those Mortgage Loans are satisfied,
including an assumption by the transferee of all of that borrower's obligations
in respect of that Mortgage Loan. For more detailed information, you should
refer to the section in this prospectus supplement titled
"--'Due-on-Encumbrance' and 'Due-on-Sale' Provisions."
You should note that the enforceability of provisions requiring payment
of Prepayment Premiums and Yield Maintenance Charges has been challenged in some
states, and that the collectibility of any Prepayment Premium depends on the
creditworthiness of the borrower. For more detailed information, you should
refer to the section in this prospectus supplement titled "Yield and Maturity
Considerations" and to the section in the prospectus titled "Material Legal
Aspects of the Mortgage Loans--Enforceability of Material Provisions."
Defeasance. ______ of the Mortgage Loans, representing approximately
_____% of the Initial Pool Balance, grant the related borrower the right, after
a specified period, to obtain the release of the lien of the related Mortgage on
the related Mortgaged Property by substituting direct, non-callable obligations
of the United States of America for that Mortgaged Property. Those securities
must, in the aggregate, provide for payments on or prior to each Due Date and on
the maturity date of the Mortgage Loan in amounts equal to or greater than the
amounts payable under the related promissory note on each of those dates (or, in
the case of the ARD Loans, through the related Anticipated Repayment Dates,
including prepayment in full on the related Anticipated Repayment Dates).
S-30
<PAGE>
Conditions to the related borrower's right to a defeasance include
delivery of the following documents:
(1) an opinion of counsel stating that the Trust REMICs will not
fail to maintain their respective statuses as REMICs as a
result of the defeasance; and
(2) in some cases, written confirmation from the Rating Agencies
that the defeasance will not result in a downgrading,
withdrawal or qualification of the respective ratings of any
outstanding classes of Certificates. [ of the Mortgage Loans,
representing approximately % of the Initial Pool Balance,
afford the related borrower the option either to prepay (with
an accompanying Yield Maintenance Charge) or to exercise the
defeasance feature.]
"Due-on-Encumbrance" and "Due-on-Sale" Provisions. The Mortgages
generally contain "due-on-encumbrance" clauses that permit the holder of the
Mortgage to accelerate the maturity of the related Mortgage Loan if the borrower
encumbers the related Mortgaged Property without its consent. Some borrowers are
allowed, under circumstances described in the related Mortgage Loans, to further
encumber the related Mortgaged Property with additional liens. For more detailed
information, you should refer to the section in the prospectus titled "Risk
Factors--If a borrower uses the mortgaged property as security for another loan,
the value of the mortgaged property may be reduced, which may result in reduced
payments on your certificates." The Master Servicer or the Special Servicer, as
applicable, will determine, in a manner consistent with the Servicing Standard
described in the section in this prospectus supplement titled "The Pooling and
Servicing Agreement--Servicing of the Mortgage Loans; Collection of Payments,"
whether to accelerate payment of a Mortgage Loan upon, or to consent to, any
additional encumbrance of the related Mortgaged Property. In some cases,
acceleration may not be waived except upon confirmation from each Rating Agency
that the waiver will not result in the downgrade, withdrawal or qualification
of its then current rating of any Class of Certificates.
The Mortgages generally prohibit the borrower from transferring the
Mortgaged Property, or allowing a change of ownership of the borrower, without
the mortgagee's prior consent. For this purpose, a change in ownership of the
borrower is generally defined to include:
(1) a specified percentage (generally from 10% to 49%) change in
the ownership of the borrower, a guarantor of the Mortgage
Loan, or the general partner or managing member of the
borrower;
(2) the removal, resignation or change in ownership of, or the
transfer or pledge of the partnership or membership interest
of, any general partner or managing member of a borrower or a
guarantor of the Mortgage Loan;
(3) with respect to some of the Mortgage Loans, the removal,
resignation or change in ownership of the managing agent of
the related Mortgaged Property; or
(4) the voluntary or involuntary transfer or dilution of the
controlling interest in the related borrower held by a
specified person.
With respect to some of the Mortgage Loans, the borrower may be entitled to
transfer the Mortgaged Property or allow a change in ownership if the conditions
specified in the related Mortgage Loan are satisfied, typically including one or
more of the following:
(1) no event of default has occurred;
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(2) the proposed transferee meets the mortgagee's customary
underwriting criteria;
(3) the Mortgaged Property continues to meet the mortgagee's
customary underwriting criteria;
(4) an acceptable assumption agreement is executed; and
(5) a specified assumption fee (generally between 0.5% and 1.0% of
the then outstanding principal balance of the related Mortgage
Loan) has been received by the mortgagee.
Some Mortgages also allow the following:
(1) changes in ownership between existing partners and members;
(2) transfers to family members (or trusts for the benefit of
family members), affiliated companies and individuals and
entities specified in those Mortgages;
(3) issuance by the borrower of new partnership or membership
interests;
(4) other changes in ownership for estate planning purpose
described in those Mortgages; or
(5) other transfers similar in nature to the foregoing described
in those Mortgages.
Upon any transfer or change in ownership of the Mortgaged Property
which is in direct violation of provisions contained in the Mortgage Loan
Documents, the holder of the Mortgage Loan is generally permitted to accelerate
the loan's maturity. For more detailed information, you should refer to the
section in the prospectus titled "Material Legal Aspects of the Mortgage
Loans--Enforceability of Material Provisions--Due-on-Sale Provisions." You
should note that the enforceability of due-on-sale and due-on-encumbrance
provisions has been challenged in several states.
Default Provisions. The related Mortgage Loan Documents generally
provide that an event of default will exist if:
(1) the borrower fails to pay any regular installment of principal
and/or interest (a) upon the date the same is due, (b) within
a specified period (generally five days to 10 days) after the
date upon which the same was due, or (c) within a specified
period (generally five days to 10 days) following written
notice from the mortgagee of the failure to make those
payments;
(2) the borrower violates prepayment, defeasance,
Due-on-Encumbrance or Due-on-Sale provisions;
(3) the borrower fails to pay taxes or other charges when due, to
keep all required insurance policies in full force and effect,
to cure any material violations of laws or ordinances
affecting the Mortgaged Property or to operate the related
Mortgaged Property according to specified standards;
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<PAGE>
(4) a mechanic's, materialman's or other lien is imposed against
the Mortgaged Property; or
(5) a bankruptcy, receivership or similar action is instituted
against the borrower or the Mortgaged Property.
Additionally, the related Mortgage Loan Documents may contain other
specified events of default, including one or more of the following:
(1) for multi-family rental properties, the unapproved conversion
of the related Mortgaged Property to a condominium or
cooperative;
(2) defaults under other agreements specified in the related
Mortgage Loan Documents;
(3) defaults under or unapproved modifications to any related
franchise agreement;
(4) material changes to or defaults under any related management
agreement; and
(5) for health-care related properties, the failure to correct any
deficiency that would justify termination of a Medicare or
Medicaid contract or a ban on new patients otherwise
qualifying for Medicaid or Medicare coverage or the assessment
of fines or penalties by any state or any Medicare, Medicaid,
health, reimbursement or licensing agency specified in the
related Mortgage Loan Document.
Upon an event of default, the Master Servicer or the Special Servicer
may take any action as it deems advisable to protect and enforce the rights of
the Trustee, on behalf of the Certificateholders, against the related borrower
and against the related Mortgaged Property, subject to the terms of the related
Mortgage Loan. Actions may include acceleration of maturity of the Mortgage Loan
or complete or partial foreclosure of the Mortgage Loan.
Default Interest. All of the Mortgage Loans provide for imposition of a
Default Interest. Default Interest is generally calculated as a specified rate
above the stated interest rate of that Mortgage Loan, and in some cases may be
calculated as a specified rate above a specified base rate (typically a prime
rate reported in The Wall Street Journal or published by major money center
banks). You should note that the enforceability of Default Interest provisions
has been challenged in several states. Also, the collectibility of any Default
Interest is dependent on the creditworthiness of the borrower. For more detailed
information, you should refer to the section in the prospectus titled "Material
Legal Aspects of the Mortgage Loans--Enforceability of Material Provisions."
Hazard, Liability and other Insurance. Each Mortgage Loan requires that
the related Mortgaged Property be insured against loss or damage by fire or
other risks and hazards covered by a standard extended coverage insurance
policy. Standard extended coverage insurance generally includes:
(1) commercial general liability insurance for bodily injury or
death and property damage;
(2) an "All Risk of Physical Loss" policy or standard extended
coverage policy;
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(3) other coverage as the related Mortgage Loan Seller may require
based on the specific characteristics of the Mortgaged
Property (including in each case other than where a Major
Tenant is self-insured or has independently procured similar
insurance, rental loss insurance and business interruption
insurance); and
(4) where appropriate, boiler and machinery coverage and flood
insurance.
Generally, the above insurance must be for an amount equal to (1) the
full replacement cost of the Mortgaged Property or (2) the outstanding principal
balance of the related Mortgage Loan, whichever is less, but in any event in an
amount sufficient to ensure that the insurer would not deem the borrower a
co-insurer. With respect to some of the Mortgage Loans, the related borrower has
satisfied the applicable insurance requirements by obtaining blanket insurance
policies.
The related Mortgage Loan Documents typically provide that upon a
Casualty to the Mortgaged Property, insurance proceeds in excess of a specified
amount will be paid to the mortgagee rather than the borrower. The mortgagee may
elect to apply the insurance proceeds it receives to the outstanding
indebtedness rather then to restoration of the related Mortgaged Property.
However, the mortgagee may be required to apply those proceeds to restoration of
the related Mortgaged Property if conditions specified in the related Mortgage
Loan Documents are met. These conditions typically include one or more of the
following:
(1) the insurance proceeds payable are less than a specified
amount;
(2) less than a specified percentage of the related Mortgaged
Property is destroyed;
(3) the value of the related Mortgaged Property following the
Casualty remains greater than either a specified amount or a
specified percentage of the value of the related Mortgaged
Property before the Casualty;
(4) the Casualty affects less than a specified percentage of the
net rentable area of the Mortgaged Property or interrupts less
than a specified percentage of the rentals from the Mortgaged
Property;
(5) restoration will cost less than a specified amount and the
proceeds are sufficient to complete the restoration;
(6) restoration can be accomplished within a specified time
period;
(7) the restored Mortgaged Property will adequately secure the
related Mortgage Loan;
(8) income (including rents and insurance proceeds) will be
adequate to service the debt during the restoration period;
and
(9) no event of default then exists.
Some leases require the borrower or the tenant to rebuild the buildings located
upon the related Mortgaged Property if a Casualty has occurred, and the related
Mortgage Loan Documents permit the application of insurance proceeds to satisfy
that requirement.
Condemnation. Generally the Mortgage Loans provide that all awards
payable to the borrower in connection with any Condemnation in respect of the
related Mortgaged Property will be paid directly to the mortgagee. The mortgagee
may elect to apply those proceeds to the outstanding
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indebtedness rather than to the restoration of the related Mortgaged Property.
However, the mortgagee may be required to apply those awards to restoration of
the related Mortgaged Property if conditions specified in the related Mortgage
Loan Documents are met. These conditions typically include one or more of the
following:
(1) the award is less than a specified amount;
(2) the Condemnation affects less than a specified percentage of
the net rentable area of the Mortgaged Property or interrupts
less than a specified percentage of the rentals from the
Mortgaged Property;
(3) restoration will cost less than a specified amount and
sufficient funds are available to complete the restoration;
(4) restoration can be accomplished within a specified time
period;
(5) income (including the Condemnation award, rentals and
insurance proceeds) will be adequate to service the debt
during the restoration period;
(6) no event of default then exists; and
(7) restoration is feasible and the Mortgaged Property will be
commercially viable after the restoration.
Some leases require the borrower or the tenant to restore the related Mortgaged
Property in the event of a Condemnation, and the related Mortgage Loan Documents
permit the application of Condemnation Proceeds to satisfy that requirement.
Delinquencies and Modifications. As of the Cut-off Date for each
Mortgage Loan, no Mortgage Loan was more than 30 days delinquent in respect of
any Monthly Payment, and no Mortgage Loan has been modified in any material
manner since its origination in connection with any default or threatened
default on the part of the related borrower.
MATERIAL CHARACTERISTICS OF THE MORTGAGE POOL
[Concentration of Mortgage Loans and Borrowers. Several of the Mortgage
Loans have Cut-off Date Principal Balances that are substantially higher than
the average Cut-off Date Principal Balance. The largest single Mortgage Loan has
a Cut-off Date Principal Balance of $[__________], which represents
approximately _____% of the Initial Pool Balance. The ten largest individual
Mortgage Loans have Cut-off Date Principal Balances that represent in the
aggregate approximately __% of the Initial Pool Balance.]
Descriptions of the Ten Largest Individual Mortgage Loans. See Schedule
B which constitutes an integral part of this prospectus supplement.
Affiliated Borrowers. ____, _____, and ___ Mortgage Loans, collectively
representing approximately ___%, ___% and ___% of the Initial Pool Balance,
respectively, were made to [two] or more affiliated entities. No set of Mortgage
Loans made to a single borrower or to a single group of affiliated borrowers
constitutes more than approximately ___% of the Initial Pool Balance. ________
Mortgage Loans, representing approximately ____% of the Initial Pool Balance,
are cross-collateralized and cross-defaulted with other Mortgage Loans made to
the same borrower or its affiliate. ____ Mortgage Loans, representing
approximately ____% of the Initial Pool Balance, are cross-defaulted with other
Mortgage Loans made to the same borrower or to its affiliate
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but are not cross-collateralized. "Cross-Collateralized Loans" and
"Cross-Defaulted Loans" reduce the risk that the inability of an individual
Mortgaged Property to generate net operating income sufficient to pay debt
service on that property will result in defaults (and ultimately losses) by
making the collateral available to support debt service on, and principal
repayment of, the aggregate indebtedness evidenced by the related
Cross-Collateralized Loans and by making it easier for a lender to foreclose on
performing collateral should the need arise. Schedule C, which constitutes an
integral part of this prospectus supplement, contains the Affiliated Borrower
Loan Table which sets forth more detailed information regarding Mortgage Loans
made to a single borrower or to a single group of affiliated borrowers.
Geographic Concentration. The Mortgaged Properties are located in
_______ states [and the U.S. Virgin Islands]. The states with the greatest
concentration of Mortgage Loans are indicated in the table below. No more than
_____% of the Mortgage Loans by Initial Pool Balance are secured by Mortgaged
Properties located in any state not indicated below.
PERCENTAGE
NUMBER OF OF INITIAL
STATE MORTGAGE LOANS POOL BALANCE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Environmental Risks. An ESA, a similar study, an update of a previously
conducted Phase 1 ESA, an update based on information contained in an
established database, or for loans with an original principal balance of less
than $1,000,000, an environmental transaction screen assessment was obtained by
the related Mortgage Loan Seller with respect to each of the Mortgaged
Properties within 12 months of the respective dates as of which the Mortgage
Loans were originated or purchased. Other than as described below, an ESA or
other similar study or update has been prepared within the 12 months preceding
the Cut-off Date for each Mortgage Property.
____ of the Mortgage Loans with original principal balances equal to or
greater than $1,000,000, representing approximately ___% of the Initial Pool
Balance, were funded only after receipt of a Phase I ESA performed on the
Mortgaged Properties less than 12 months before origination of the loan. As of
________, ___ of the Mortgage Loans with original principal balances equal to
greater than $1,000,000, representing approximately ___% of the Initial Pool
Balance, have Phase I ESA report dates that are over twelve months old , and
consequently, an update to these Phase I ESAs based on information contained in
an established database has been ordered and will be received prior to
____________ .
____ of the Mortgage Loans with original principal balances less than
$1,000,000, representing approximately ____% of the Initial Pool Balance, were
funded only after receipt of a Phase I ESA, a similar study, an update of a
previously conducted Phase I ESA or an update based upon information contained
an established database, performed on the Mortgaged Properties less than 12
months before origination of the loan. As of ____________, ___ of the Mortgage
Loans, representing approximately ___% of the Initial Pool Balance, have report
dates that are over twelve months old. Given the relatively small original
principal balances of these _____ Mortgage Loans and small percentage of the
total Mortgage Pool, no updates have been ordered.
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Other than as described below, the Mortgage Loan Sellers have informed
the Depositor that these ESAs, studies or updates did not identify any material
adverse environmental conditions or circumstances, except for:
(1) cases where those conditions or circumstances were
investigated further, and based upon additional investigation,
a qualified environmental consultant recommended no further
investigation or remediation;
(2) cases where a qualified environmental consultant recommended
an operations and maintenance plan and the maintenance plan
was obtained or an escrow reserve was established to cover the
estimated costs of obtaining the maintenance plan;
(3) cases where soil or groundwater contamination was suspected or
identified and either (a) that condition was remediated or
abated prior to the Closing Date; (b) a No Further Action
letter was obtained from the applicable regulatory authority,
or (c) either an environmental insurance policy was obtained,
a letter of credit provided, an escrow reserve account
established, or an indemnity from the responsible party was
obtained, to cover the estimated costs of any further required
investigation, testing, monitoring or remediation;
(4) cases in which an offsite property is the location of a
leaking underground storage tank or groundwater contamination,
a responsible party has been identified under applicable law,
and either (a)that condition is not known to have affected the
Mortgaged Property or (b) the responsible party has either
received a No Further Action letter from the applicable
regulatory agency, established a remediation fund, or provided
an indemnity or guaranty to the borrower; or
(5) cases in which, for small loans with an original principal
balance of less than $1,000,000, the borrower has acknowledged
in the Mortgage Loan Documents the existence of that condition
and expressly agreed to comply with all federal, state and
local statutes or regulations respecting that condition.
The foregoing information is based upon ESAs, similar studies or
updates and has not been independently verified by the Mortgage Loan Sellers,
the Depositor, the Transferor, or any of their respective affiliates.
The ESAs, studies or updates with respect to some Mortgaged Properties
identified adverse environmental conditions which could be important and require
material expenditure. [Describe]
You should understand that none of the Depositor, the Mortgage Loan
Sellers, the Master Servicer, the Special Servicer, the Trustee, any affiliate
of any of the foregoing, any environmental consultants or any other person
guarantees the absence of or extent of any environmental condition on the
Mortgaged Properties that could result in environmental liability. The ESAs,
similar studies and updates are limited in scope. An environmental condition may
not be discovered or have its severity revealed. Further, none of the
aforementioned persons or entities can give any assurance that future changes in
applicable environmental laws, the development or discovery of presently unknown
environmental conditions at the Mortgaged Properties or the deterioration of
existing conditions will not require material additional study costs or material
remediation expenses, or generate material liabilities, or otherwise put stress
on the borrower's cash flow.
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<PAGE>
Other Financing. __ of the Mortgage Loans, representing approximately
____% of the Initial Pool Balance, allow the borrower, under circumstances
specified in the Mortgage Loan Documents, either to maintain an existing
subordinate mortgage encumbering the Mortgaged Property or to grant a
subordinate mortgage in the future. These Mortgage Loans are identified in
Schedule A. The circumstances specified in the Mortgage Loan Documents typically
include one or more of the following
(1) The senior mortgagee approves the purpose, amount, term and
amortization period of the proposed subordinate debt, together
with the identity of the subordinate lender and the terms of
the subordinate loan document;
(2) The subordinate mortgage is unconditionally subordinated to
the related Mortgage Loan Documents, [and/or] the subordinate
lender is prohibited from exercising any remedies against the
borrower without the senior mortgagee's consent [and/or] from
receiving any payments on the subordinate debt if, for the
preceding 12 months, either (a) the aggregate debt service
coverage ratio for that Mortgage Loan and the subordinate debt
is less than a specified ratio (generally ranging from [1.20
to 1.30]), or (b) the aggregate loan to value ratio for that
Mortgage Loan and the subordinate debt is greater than a
specified ratio (generally ranging from [70% to 80%]);
(3) The subordinate debt is non-recourse;
(4) The Mortgaged Property is in acceptable economic condition as
of the effective date of the subordinate financing, as
typically indicated by the following: (a) the aggregate debt
service coverage ratio for that Mortgage Loan and the
subordinate debt is equal to or greater than a specified ratio
(generally [1.20]), and/or (b) the aggregate loan to value
ratio for that Mortgage Loan and the subordinate debt is less
than a specified ratio (generally ranging from [70% to 80%]);
and
(5) The conditions set forth in the Pooling and Servicing
Agreement for waiver of Due-on-Encumbrance provisions are met.
____ of the Mortgage Loans, representing approximately ____% of the
Initial Pool Balance, permit a specific existing or proposed subordinate
mortgage without specifying any particular circumstances.
Zoning Compliance. The related Mortgage Loan Seller received assurances
that all of the improvements located upon each respective Mortgaged Property
complied in all material respects with applicable Zoning Laws, or that those
improvements qualified as permitted nonconforming uses. In some cases, the
assurances were limited to a representation or warranty from the related
borrower, for breach of which recourse may be had to that borrower.
Tenant Matters. In connection with __ of the Mortgage Loans,
representing approximately ____% of the Initial Pool Balance, a major tenant
occupies more than 20% of the net leasable area of the related Mortgaged
Property. Many of these major tenants occupy their respective leased premises
pursuant to leases that require them to pay all applicable real property taxes,
maintain insurance over the improvements on the premises and maintain the
physical condition of those improvements. With respect to Mortgage Loans secured
by a retail, office or industrial property, the related Mortgage Loan Seller
generally obtained an estoppel certificate from each major tenant in which that
tenant indicated its intention to continue in the relevant lease and that that
tenant
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was not presently aware of any condition or event that would allow it to
terminate that lease prior to the end of the lease term. Generally, major
tenants do not have investment-grade credit ratings. Additional information
regarding major tenants is set forth in Schedule A of this prospectus
supplement.
Other Information. The following tables and Schedule A set forth
material information with respect to the Mortgage Loans and the Mortgaged
Properties. The information was primarily derived from financial statements
supplied by the borrowers which, in most cases, are unaudited and were not
prepared in accordance with generally accepted accounting principles. "Net
Operating Income" and "Cash Flow" do not represent the net operating income and
cash flow reflected on the borrower financial statements. The differences
between "Net Operating Income" and "Cash Flow" determined by the Mortgage Loan
Sellers and net operating income and cash flow reflected on the borrowers'
financial statements represent the adjustments made by the related Mortgage Loan
Seller as described below, to increase the level of consistency between the
financial statements provided by the borrowers. However, these adjustments were
subjective in nature and were not made in a uniform manner nor in accordance
with generally accepted accounting principles. "Underwritten NOI" and
"Underwritten Cash Flow" are pro forma numbers prepared by the related Mortgage
Loan Seller to reflect their assessment of the market based performance of the
related Mortgaged Property. None of the Depositor, the Transferor or the
Underwriter has made any attempt to verify the accuracy of the financial
statements supplied by the borrowers or the accuracy or appropriateness of the
adjustments discussed below to determine " Net Operating Income," "Cash Flow,"
"Underwritten NOI," and "Underwritten Cash Flow."
"Net Operating Income," "Cash Flow," "Underwritten NOI" and
"Underwritten Cash Flow" are not substitutes for, or improvements upon, net
income as determined in accordance with generally accepted accounting principles
as a measure of the results of a Mortgaged Property's operations or for cash
flows from operating activities determined in accordance with generally accepted
accounting principles as a measure of liquidity. No representation is made as to
the future net income or net cash flow of the Mortgaged Properties, nor are "Net
Operating Income," "Cash Flow," "Underwritten NOI" and "Underwritten Cash Flow"
as set forth in this prospectus supplement intended to represent those future
net income or net cash flow.
The Mortgage Loan Sellers have had appraisals of the Mortgaged
Properties conducted in compliance with the Tax Code of Professional Ethics and
Standards of Professional Conduct of the Appraisal Institute and the Uniform
Standards of Professional Appraisal Practice as adopted by the Appraisal
Standards Board of the Appraisal Foundation and accepted and incorporated into
FIRREA. No other person has prepared or obtained a separate appraisal or
reappraisal. Another appraiser might arrive at a different opinion of value. Any
Appraised Value might differ from the value that would be determined in a
current appraisal or the amount that would be realized upon a sale or
liquidation of the Mortgaged Property. Accordingly, you should not rely on the
Loan-to-Value Ratios set forth in this prospectus supplement as necessarily
indicative of the true Loan-to-Value Ratios.
Debt service coverage ratios are used by lenders of loans secured by
income producing property to measure the ratio of (1) cash currently generated
by a property annually that is available for debt service (that is, cash that
remains after payment of operating expenses) to (2) required annual debt service
payments. Debt service coverage ratios, however, only measure the current, or
recent, ability of a property to service mortgage debt. If a property is not
expected to have a stable operating cash flow (because, for instance, it is
subject to leases that expire during the loan term and provide for above-market
rents, or that are difficult to replace), a debt service coverage ratio may not
be a reliable indicator of a property's ability to service the mortgage debt
over the entire remaining loan term. In addition, a debt service coverage ratio
may not adequately reflect the significant amounts of cash that a
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<PAGE>
property owner may be required to expend to pay for capital improvements, tenant
improvements and leasing commissions when expiring leases are replaced.
Accordingly, we can give no assurance and make no representation that the Debt
Service Coverage Ratios accurately reflect the future ability of a Mortgaged
Property to generate sufficient cash flow to repay the related Mortgage Loan.
Due to rounding, percentages may not add to 100% and amounts may not add to the
indicated total.
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<PAGE>
<TABLE>
<CAPTION>
COLLATERAL CONTRIBUTORS
SCHEDULED
WEIGHTED PRINCIPAL
PERCENT OF AVERAGE WEIGHTED BALANCE AS OF
NUMBER OF INITIAL INTEREST AVERAGE THE CUT-OFF
COLLATERAL CONTRIBUTORS LOANS POOL BALANCE RATE DSCR(X) DATE
<S> <C> <C> <C> <C> <C>
% % $
% % $
% % $
---- ---- ---- ---- ------------
TOTAL % % $
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
PAYMENT TYPES
SCHEDULED
WEIGHTED WEIGHTED WEIGHTED PRINCIPAL
PERCENT OF AVERAGE AVERAGE AVERAGE WEIGHTED BALANCE
NUMBER OF INITIAL INTEREST REMAINING ORIGINAL AVERAGE AS OF THE
PAYMENT TYPES LOANS POOL BALANCE RATE TERM LTV DSCR(X) CUT-OFF DATE
<S> <C> <C> <C> <C> <C> <C> <C>
[AMORT. BALLOON % % $
FULLY AMORTIZING % % $
INT. ONLY, THEN AMORT BALL. % % $
INT. ONLY, THEN AMORT. % % $
GRADUATED P&I BALLOON] % % $
---- ---- ---- -------- ----- -------- ------------
TOTAL 100.00% % $
=================================================================================================================================
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF CUT-OFF DATE PRINCIPAL BALANCES
PERCENTAGE OF WEIGHTED WEIGHTED SCHEDULED
AGGREGATE AVERAGE AVERAGE WEIGHTED PRINCIPAL
NUMBER OF CURRENT MORTGAGE REMAINING AVERAGE WEIGHTED BALANCE AS OF
RANGE OF MORTGAGE PRINCIPAL INTEREST TERM TO CURRENT AVERAGE THE CUT-OFF
CURRENT PRINCIPAL BALANCES LOANS BALANCE RATE MATURITY LTV DSCR(X) DATE
<S> <C> <C> <C> <C> <C> <C> <C>
[255,509 - 499,999 % % $
500,000 - 999,999 % % $
1,000,000 - 1,999,999 % % $
2,000,000 - 2,999,999 % % $
3,000,000 - 3,999,999 % % $
4,000,000 - 4,999,999 % % $
5,000,000 - 5,999,999 % % $
6,000,000 - 6,999,999 % % $
7,000,000 - 7,999,999 % % $
8,000,000 - 8,999,999 % % $
9,000,000 - 9,999,999 % % $
10,000,000 - 11,999,999 % % $
12,000,000 - 13,999,999 % % $
14,000,000 - 16,999,999 % % $
17,000,000 OR MORE] % % $
---- ---- ---- -------- ----- -------- ------------
TOTAL 100% % $
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
RANGE OF MORTGAGE RATES
SCHEDULED
WEIGHTED WEIGHTED WEIGHTED PRINCIPAL
PERCENT OF AVERAGE AVERAGE AVERAGE WEIGHTED BALANCE
RANGE OF NUMBER OF INITIAL INTEREST REMAINING CURRENT AVERAGE AS OF THE
MORTGAGE RATES LOANS POOL BALANCE RATE TERM LTV DSCR(X) CUT-OFF DATE
<S> <C> <C> <C> <C> <C> <C> <C>
6.0001 - 6.2500% % % $
6.2501 - 6.5000% % % $
6.5001 - 6.7500% % % $
6.7501 - 7.0000% % % $
7.0001 - 7.2500% % % $
7.2501 - 7.5000% % % $
7.5001 - 7.7500% % % $
7.7501 - 8.0000% % % $
8.0001 - 8.2500% % % $
8.2501 - 8.5000% % % $
8.5001 - 8.7500% % % $
8.7501 - 9.0000% % % $
9.0001 - 9.2500% % % $
9.2501 - 9.5000% % % $
10.7501 - 11.0000%] % $
---- ---- ---- ---- ---- ---- --------------
TOTAL 100.00% % $
=================================================================================================================================
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
RANGE OF REMAINING TERMS TO MATURITY (MONTHS)
REMAINING WEIGHTED WEIGHTED WEIGHTED
TERMS TO PERCENT OF AVERAGE AVERAGE AVERAGE WEIGHTED CURRENT
MATURITY NUMBER OF INITIAL INTEREST REMAINING CURRENT AVERAGE PRINCIPAL
(MONTHS) LOANS POOL BALANCE RATE TERM LTV DSCR(X) BALANCE
<S> <C> <C> <C> <C> <C> <C> <C>
[71 - 90 % % $
91 - 110 % % $
111 - 130 % % $
131 - 150 % % $
151 - 170 % % $
171 - 190 % % $
191 - 210 % % $
211 - 230 % % $
231 - 250] % % $
---- ---- ---- ---- ---- ---- --------------
TOTAL 100.00% % $
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
RANGE OF MATURITY YEARS
SCHEDULED
WEIGHTED WEIGHTED WEIGHTED PRINCIPAL
PERCENT OF AVERAGE AVERAGE AVERAGE WEIGHTED BALANCE AS OF
MATURITY NUMBER OF INITIAL INTEREST REMAINING ORIGINAL AVERAGE THE CUT-OFF
YEAR LOANS POOL BALANCE RATE TERM LTV DSCR(X) DATE
<S> <C> <C> <C> <C> <C> <C> <C>
[2005 % % $
2006 % % $
2007 % % $
2008 % % $
2009 % % $
2010 % % $
2011 % % $
2012 % % $
2013 % % $
2015 % % $
2016 % % $
2017 % % $
2018] % % $
---- ---- ---- ---- ---- ---- ------------
TOTAL 100.00% % $
=================================================================================================================================
</TABLE>
S-43
<PAGE>
<TABLE>
<CAPTION>
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS
SCHEDULED
WEIGHTED WEIGHTED WEIGHTED PRINCIPAL
PERCENT OF AVERAGE AVERAGE AVERAGE WEIGHTED BALANCE
NUMBER OF INITIAL INTEREST REMAINING ORIGINAL AVERAGE AS OF THE
ORIGINAL LTV LOANS POOL BALANCE RATE TERM LTV DSCR(X) CUT-OFF DATE
<S> <C> <C> <C> <C> <C> <C> <C>
[15.01 - 35.00% % % $
40.01 - 45.00% % % $
45.01 - 50.00% % % $
50.01 - 55.00% % % $
55.01 - 60.00% % % $
60.01 - 65.00% % % $
65.01 - 70.00% % % $
70.01 - 75.00% % % $
75.01 - 80.00% % % $
80.01 - 85.00% % % $
85.01 - 95.00% % % $
95.01 - 96.00%] % % $
---- ---- ---- ---- ---- ---- --------------
TOTAL 100.00% % $
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
RANGE OF LOAN ORIGINATION YEARS
SCHEDULED
WEIGHTED WEIGHTED WEIGHTED PRINCIPAL
PERCENT OF AVERAGE AVERAGE AVERAGE WEIGHTED BALANCE AS OF
NUMBER OF INITIAL INTEREST REMAINING ORIGINAL AVERAGE THE CUT-OFF
ORIGINATION YEAR LOANS POOL BALANCE RATE TERM LTV DSCR(X) DATE
<S> <C> <C> <C> <C> <C> <C> <C>
[1997 % % $
1998 % % $
1999] % % $
---- ---- ---- ---- ---- ---- -------------
TOTAL 100.00% % $
=================================================================================================================================
</TABLE>
S-44
<PAGE>
<TABLE>
<CAPTION>
RANGE OF DEBT SERVICE COVERAGE RATIOS
WEIGHTED SCHEDULED
AVERAGE WEIGHTED WEIGHTED PRINCIPAL
PERCENT OF MORTGAGE AVERAGE AVERAGE WEIGHTED BALANCE AS OF
NUMBER OF INITIAL INTEREST REMAINING ORIGINAL AVERAGE THE CUT-OFF
DSCR(X) LOANS POOL BALANCE RATE TERM LTV DSCR(X) DATE
<S> <C> <C> <C> <C> <C> <C> <C>
[.9 - 1.00 % % $
1.01 - 1.15 % % $
1.16 - 1.20 % % $
1.21 - 1.25 % % $
1.26 - 1.30 % % $
1.31 - 1.35 % % $
1.36 - 1.40 % % $
1.41 - 1.45 % % $
1.46 - 1.50 % % $
1.51 - 1.55 % % $
1.56 - 1.60 % % $
1.61 - 1.65 % % $
1.66 - 1.70 % % $
1.71 - 1.75 % % $
1.76 - 1.80 % % $
1.81 - 1.85 % % $
1.86 - 1.90 % % $
1.91 - 1.95 % % $
1.96 - 2.00 % % $
2.00 - 2.15 % % $
2.16 - 2.50 % % $
2.51 - 3.00] % % $
---- ---- ---- ---- ---- ---- -------------
TOTAL 100.00% % $
=================================================================================================================================
</TABLE>
S-45
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPES
WEIGHTED SCHEDULED
PERCENT AVERAGE WEIGHTED WEIGHTED PRINCIPAL
NUMBER OF OF INITIAL MORTGAGE AVERAGE AVERAGE WEIGHTED BALANCE
MORTGAGED POOL INTEREST REMAINING ORIGINAL AVERAGE AS OF THE
PROPERTY TYPE PROPERTIES BALANCE RATE TERM LTV DSCR(X) CUT-OFF DATE
<S> <C> <C> <C> <C> <C> <C> <C>
[ASSISTED LIVING FACILITY % % $
CONGREGATE CARE % % $
HOSPITALITY % % $
INDUSTRIAL % % $
MIXED USE % % $
MOBILE HOME PARK % % $
MULTIFAMILY % % $
NURSING HOME % % $
OFFICE % % $
OFFICE/INDUSTRIAL % % $
RETAIL-ANCHORED % % $
RETAIL-SHADOW ANCHORED % % $
RETAIL-SINGLE TENANT % % $
RETAIL-UNANCHORED % % $
SELF-STORAGE % % $
SPECIAL PURPOSE % % $
WAREHOUSE] % % $
---- ---- ---- ---- ---- ---- -------------
TOTAL 100.00% % $
==================================================================================================================================
</TABLE>
S-46
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
SCHEDULED
WEIGHTED WEIGHTED WEIGHTED PRINCIPAL
NUMBER OF PERCENT OF AVERAGE AVERAGE AVERAGE WEIGHTED BALANCE
MORTGAGED INITIAL MORTGAGE REMAINING ORIGINAL AVERAGE AS OF THE
STATE PROPERTIES POOL BALANCE INTEREST RATE TERM LTV DSCR(X) CUT-OFF DATE
<S> <C> <C> <C> <C> <C> <C> <C>
[ALABAMA % % $
ALASKA % % $
ARIZONA % % $
CALIFORNIA % % $
COLORADO % % $
CONNECTICUT % % $
FLORIDA % % $
GEORGIA % % $
HAWAII % % $
IDAHO % % $
ILLINOIS % % $
INDIANA % % $
KANSAS % % $
KENTUCKY % % $
LOUISIANA % % $
MAINE % % $
MARYLAND % % $
MASSACHUSETTS % % $
MICHIGAN % % $
MINNESOTA % % $
MISSISSIPPI % % $
MISSOURI % % $
MONTANA % % $
NEVADA % % $
NEW HAMPSHIRE % % $
NEW JERSEY % % $
NEW YORK % % $
NORTH DAKOTA % % $
OHIO % % $
OKLAHOMA % % $
OREGON % % $
PENNSYLVANIA % % $
TENNESSEE % % $
TEXAS % % $
UTAH % % $
VERMONT % % $
VIRGIN ISLANDS % % $
VIRGINIA % % $
WASHINGTON] % % $
---- ---- ---- ---- ---- ---- -------------
TOTAL 100.00% % $
=================================================================================================================================
</TABLE>
S-47
<PAGE>
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The foregoing description of the Mortgage Pool and the Mortgaged
Properties is based upon scheduled principal payments due on the Mortgage Loans
on or before the Cut-off Date. Before we issue the Certificates, one or more
Mortgage Loans may be removed from the Mortgage Pool if the Depositor deems the
removal necessary or appropriate or if those Mortgage Loans are prepaid. A
limited number of other mortgage loans may be included in the Mortgage Pool
before we issue the Certificates, unless including those mortgage loans would
materially alter the characteristics of the Mortgage Pool, as described in this
prospectus supplement. Accordingly, the characteristics of the Mortgage Loans
constituting the Mortgage Pool at the time we issue the Certificates may vary
from those described in this prospectus supplement.
A Current Report on Form 8-K will be filed, together with the Pooling
and Servicing Agreement, with the Securities and Exchange Commission within 15
days after the initial issuance of the Certificates. The Form 8-K will be
available to the Certificateholders promptly after its filing. If Mortgage Loans
are removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, the removal or addition will be noted in the Form 8-K.
REPRESENTATIONS AND WARRANTIES; REPURCHASE
Each Mortgage Loan Seller will make representations and warranties to
the Transferor in the related Underlying Mortgage Loan Purchase Agreement. The
Transferor will make substantially similar representations and warranties to the
Depositor in the Mortgage Loan Sale Agreement. The sole remedy available to the
Trustee or Certificateholders for a Mortgage Loan Seller's failure to cure any
breach of those representations and warranties that materially and adversely
affect the interest of the Certificateholders in that Mortgage Loan is for the
Depositor to cure or repurchase the affected Mortgage Loan within 85 days of
receiving notice of the breach or as otherwise provided in the Pooling and
Servicing Agreement. The Depositor will assign its rights under the Mortgage
Loan Purchase Agreement (and, as a result, the rights of the Transferor under
the Underlying Mortgage Loan Purchase Agreements) to the Trustee for the benefit
of the Certificateholders.
All references in these representations and warranties are to related
documents and entities unless otherwise indicated. The representations and
warranties are made for each Mortgage Loan as of the date specified in the
related Underlying Mortgage Loan Purchase Agreement, and include the following
(subject to exceptions set forth in that Underlying Mortgage Loan Purchase
Agreement):
(1) Mortgage Loan Characteristics. The information set forth in
the mortgage loan schedule is true and complete in all
material respects. In the case of the information set forth
with respect to each Mortgage Loan under the captions
"Physical Occupancy %," "Occupancy As of Date," ["96 NOI," "97
NOI," "98 NOI,"] "Underwritten NOI," "Underwritten Net Cash
Flow" and "Underwritten NOI DSCR", however, the Mortgage Loan
Seller represents only that the information is an accurate
reproduction or derivation, as adjusted in accordance with its
customary underwriting practices, of the information provided
to it by the related borrower. The Mortgage Loan Seller takes
no responsibility for the truth, accuracy or completeness of
any of the information; however, the Mortgage Loan Seller has
no actual knowledge that the information is incorrect,
inaccurate or incomplete following the reasonable and
customary investigation performed by the Mortgage Loan Seller
in connection with its origination of the Mortgage Loans.
S-48
<PAGE>
(2) Loan Origination; Loan Underwriting. The Mortgage Loan was
originated by the Mortgage Loan Seller, an affiliate of the
Mortgage Loan Seller or an originator approved by the Mortgage
Loan Seller, and the Mortgage Loan substantially complied with
all of the terms, conditions and requirements of the Mortgage
Loan Seller's underwriting standards in effect at the time of
the origination or purchase of that Mortgage Loan, subject to
those exceptions as are noted in the related Mortgage File and
as the Mortgage Loan Seller approved in the exercise of
discretion consistent with that of a prudent commercial
mortgage lender.
(3) Domestic Borrower. The related borrower is an individual who
is a citizen of, or an entity organized under the laws of, a
state of the United States.
(4) Single-Purpose Entity. Each borrower of a Mortgage Loan in
excess of $25 million is an entity which has represented in
connection with the origination of the Mortgage Loan, or whose
organizational documents provide that so long as the Mortgage
Loan is outstanding, it will be a single-purpose entity.
(5) Delivery of Mortgage Loan Documents. The related Mortgage Loan
Seller has or will deliver to the Transferor or its designee,
within the time period prescribed by the related Underlying
Mortgage Loan Purchase Agreement, each of the documents
comprising the Mortgage File for each Mortgage Loan.
(6) Payment Current. All payments required to be made with respect
to the Mortgage Loan under the terms of the related promissory
note or Mortgage up to the closing date (including any
applicable grace or cure period) specified in the related
Underlying Mortgage Loan Purchase Agreement have been made.
Within the twelve months proceeding the closing date, there
had not been any delinquency in excess of 30 days.
(7) Equity Participation or Participation Interest. The Mortgage
Loan contains no equity participation by the Mortgage Loan
Seller and is a whole loan and not a participation interest.
Neither the related promissory note nor the Mortgage provides
for negative amortization or any contingent or additional
participation interest in the cash flow of the Mortgaged
Property. The Mortgage Loan Seller has no ownership interest
in that Mortgaged Property or in the borrower. Neither the
Mortgage Loan Seller nor any affiliate of the Mortgage
Loan Seller has any obligation to make any capital
contributions to the related borrower under the Mortgage or
any other related Mortgage Loan Document.
(8) Compliance with Applicable Laws. As of its origination, the
Mortgage Loan either complied with or was exempt from
applicable state or federal laws, regulations and other
requirements pertaining to usury. To the best of the Mortgage
Loan Seller's knowledge, as of the origination of the Mortgage
Loan, the related originator complied in all material respects
with the requirements of all other federal, state or local
laws applicable to the origination, servicing and collection
of the Mortgage Loan, including truth-in-lending laws, real
estate settlement procedures, equal credit opportunity and
S-49
<PAGE>
disclosure laws. No governmental or regulatory approval or
consent is required for the sale of the Mortgage Loan by the
Mortgage Loan Seller, and the Mortgage Loan Seller has full
right, power and authority to sell that Mortgage Loan. To the
extent necessary to ensure the enforceability and effective
transfer of the Mortgage Loan and the related promissory note,
the originator and/or the Mortgage Loan Seller each was
qualified and appropriately licensed to conduct business in
the jurisdiction in which the Mortgaged Property is located at
the time it had possession of the related promissory note.
(9) Proceeds Fully Disbursed. The proceeds of the Mortgage Loan
have been fully disbursed. Some of the proceeds may have been
disbursed into reserve accounts that are controlled by the
Mortgage Loan Seller and have been established as described in
Schedule A. There is no requirement for future advances under
the Mortgage Loan.
(10 Origination Expenses Paid. The borrower has paid, or has made
arrangements to pay, on a timely basis and to the appropriate
person all costs, fees and expenses incurred in connection
with the origination and closing of the Mortgage Loan,
including recording costs and fees.
(11) Documents Valid. Each of the related promissory note, the
Mortgage and any other related mortgage loan document is the
legal, valid and binding obligation of the borrower, the
related guarantor or other party executing that document and
is enforceable in accordance with its terms. Those documents
are subject to any non-recourse or partial recourse provisions
contained in those documents and may also be subject to
limitations to enforceability arising under bankruptcy,
insolvency, reorganization or other similar laws affecting
enforcement of creditors' rights generally, general principles
of equity, and any applicable anti-deficiency law. There is no
valid offset, defense, counterclaim or right of rescission
with respect to the promissory note, Mortgage or other
document. The operation of any of the terms of the promissory
note or the Mortgage, or the exercise of any right under the
promissory note or the Mortgage, will not render either the
Mortgage or the promissory note unenforceable or subject to
any valid right of rescission, offset, counterclaim or
defense, including the defense of usury. The Mortgage Loan
Seller has no knowledge that any right of rescission, offset,
counterclaim or defense has been asserted or is available with
respect to the promissory note or the Mortgage. The Mortgage
and related promissory note do not require the mortgagee to
release any portion of the Mortgaged Property except upon
payment in full of the loan or the exercise of a defeasance
feature]. In the case of Mortgaged Properties securing
cross-collateralized Mortgage Loans and Mortgage Loans secured
by multiple Mortgaged Properties, the mortgagee may be
required to release a Mortgaged Property upon payment of a
portion of the Mortgage Loan, determined as specified in the
related mortgage loan documents.
(12) Assignment of Mortgage: Note Endorsement. The assignment of
mortgage is or will be in recordable form and constitutes or
will constitute the Mortgage Loan Seller's legal, valid and
binding assignment to the Transferor of the Mortgage and any
related assignment of leases, rents and profits or assignment
of assignment of leases, rents and profits. The Mortgage Loan
Seller's endorsement and delivery of the related promissory
note to the Transferor in accordance with the terms of the
Underlying
S-50
<PAGE>
Mortgage Loan Purchase Agreement constitutes or will
constitute a legal, valid and binding assignment to the
Transferor of that promissory note, and, together with the
Mortgage Loan Seller's execution and delivery of the
assignment of mortgage to the Transferor, legally and validly
conveys or will convey all right, title and interest of the
Mortgage Loan Seller in that Mortgage Loan to the Transferor.
(13) First Lien. Based on the related policy of title insurance,
the Mortgage is a legal, valid and enforceable first lien on
the Mortgaged Property, except the Mortgage securing Mortgage
Loan Control # ___, which is a legal, valid and enforceable
second lien on the related Mortgaged Property. The first lien
includes all buildings and improvements on the Mortgaged
Property and all installations and mechanical, electrical,
plumbing, heating and air conditioning systems located in or
annexed to those buildings, and all additions, alterations and
replacements made at any time prior to the closing date of the
Mortgage Loan. The first lien does not include any related
personal property. The Mortgaged Property is free and clear of
all encumbrances and liens having priority over the first lien
of the Mortgage, except for:
(a) the lien of current real estate taxes and special
assessments not yet delinquent or accruing interest
or penalties;
(b) covenants, conditions and restrictions, rights of
way, easements and other matters of public record as
of the date of recording of the Mortgage which do not
materially and adversely (A) affect the value of the
Mortgaged Property as security for the Mortgage Loan
or (B) interfere with the related borrower's ability
to make required principal and interest payments or
to make use of that Mortgaged Property for the
intended purposes;
(c) leases and subleases for the Mortgaged Property which
the Mortgage Loan Seller did not require to be
subordinated to the lien of the Mortgage, provided
that those leases and subleases, if any, are with
entities which are not affiliated with the Mortgage
Loan Seller; and
(d) other matters which do not materially and adversely
(A) affect the value of the Mortgaged Property as
security for the Mortgage Loan, or (B) interfere with
the related borrower's ability to make required
principal and interest payments or to make use of the
Mortgaged Property for the intended purposes.
(14) No Modification, Release or Satisfaction. Except by a written
instrument which has been delivered to the Transferor or its
designee as part of the Mortgage File:
(a) neither the Mortgage nor the related promissory note
(including any amendments or supplements thereto) has
been impaired, waived, modified, altered, satisfied,
canceled, subordinated or rescinded;
(b) the Mortgaged Property has not been released from the
lien of the Mortgage; and
(c) the borrower has not been released from its
obligations under the Mortgage, in whole or in any
part, in any manner which would materially interfere
with the security intended to be provided by the
Mortgage.
S-51
<PAGE>
(15) Defeasance. Mortgage Loans that permit defeasance provide
that, after the applicable Defeasance Lockout Period, the
borrower may obtain the release of the related Mortgaged
Property, or a portion of the related Mortgaged Property, from
the lien of the related Mortgage by pledging to the Trustee
noncallable U.S. Treasury or other noncallable U.S. government
obligations that provide payments on or prior to all
successive payment dates to maturity (or, in the case of the
ARD Loans, through the related Anticipated Repayment Dates) in
the amounts due on those dates and upon the satisfaction of
other conditions set forth in the related Mortgage Loan
Documents. All Mortgage Loans containing defeasance provisions
have a Defeasance Lockout Period of not less than two years
after the Closing Date or include other conditions which will
ensure that the exercise of a defeasance option will not cause
either REMIC to fail to be a REMIC. Some of the Mortgage Loans
require that a REMIC opinion be provided as a condition to
exercise of any defeasance option, and the Mortgage or other
related Mortgage Loan Documents generally require the
satisfaction of one or more of the following conditions prior
to the defeasance of the related Mortgaged Property:
(a) the borrower must provide the mortgagee with a prior
written notice of not less than 30 days;
(b) the borrower must pay to the mortgagee or the
servicer of the Mortgage Loan, as the case may be, an
amount sufficient to purchase the government
obligations described above in this (15);
(c) the borrower must provide a written confirmation from
the Rating Agencies indicating that the defeasance
will not result in a downgrading, withdrawal or
qualification of the respective ratings of any
outstanding classes of Certificates;
(d) the borrower must deliver an officer's certificate to
the effect that all of the borrower's obligations
with respect to the Mortgage Loan have been satisfied
and that the Mortgage Loan is not in default; and
(e) the borrower must undertake to provide other
documents or information as the mortgagee may
reasonably request in connection with the defeasance.
(16) No Delinquent Taxes or Assessments. The Mortgage Loan Seller
knows of no taxes or governmental assessments, or installments
of taxes or assessment, which became due prior to the Closing
Date and which, if left unpaid, would be, or might become, a
lien on the Mortgaged Property having priority over the
Mortgage which has become delinquent so that (a) these taxes,
assessments or installments have commenced to accrue interest
or penalties, or (b) the applicable taxing authority may
commence proceedings to collect these taxes, assessments or
installments.
(17) Escrow or Reserve Deposits. As of the date specified in the
Underlying Mortgage Loan Purchase Agreement: (a) the related
reserve accounts, if any, contain all escrow deposits and
other payments required by the terms of the mortgage loan
documents to be held by the Mortgage Loan Seller as of the
date specified; and (b) the Mortgage Loan Seller has
transferred all amounts on deposit in the related reserve
account(s) to the
S-52
<PAGE>
Transferor. All escrow deposits required under the promissory
note, the Mortgage and any other Mortgage Loan Documents that
are not being transferred to the Transferor have been applied
in accordance with their intended purposes by the mortgage
loan originator, Mortgage Loan Seller or its agent.
(18) No Third Party Advances. The Mortgage Loan Seller has not,
directly or indirectly, (a) advanced funds; (b) induced or
solicited any payment from a Person other than the borrower;
or (c) to the Mortgage Loan Seller's knowledge, received
payment, from any person other than the borrower, of any
amount required under the promissory note or the Mortgage,
except for interest accruing from the date of the promissory
note or the date of disbursement of the proceeds of the
related Mortgage Loan, whichever is later, to the date which
precedes by 30 days the first Due Date under the promissory
note.
(19) No Condemnation or Damages. To the best of the Mortgage Loan
Seller's knowledge, except for partial condemnation
proceedings which do not materially and adversely affect the
value of the Mortgaged Property as security for the Mortgage
Loan, no proceedings for the total or partial condemnation of
the Mortgaged Property (a) have occurred since the date of the
appraisal relied upon in the origination of the Mortgage Loan
or (b) are pending or threatened. To the best of the Mortgage
Loan Selle s knowledge, the Mortgaged Property is free of
material damage. The Mortgage requires that any related
condemnation award be applied either to the restoration of the
Mortgaged Property or the payment of the outstanding principal
balance of or accrued interest on the Mortgage Loan.
(20) No Mechanics' Liens. To the knowledge of the Mortgage Loan
Seller, the Mortgaged Property (excluding any related personal
property) is free and clear of any mechanics' or materialmen's
or similar liens. No rights are outstanding that, under law,
could give rise to any liens which are or may be prior to, or
equal with, the lien of the related Mortgage, except those
which are insured against by the lender's title insurance
policy referred to in (24) below.
(21) Title Survey: Improvements; Separate Tax Parcels. The Mortgage
Loan Seller has satisfied the requirements of the title
insurance company for deletion from the title insurance policy
of the standard general exceptions for encroachments, boundary
and other survey matters and, if possible, for easements not
shown by the public records. With respect to any of the
Mortgaged Properites located in jurisdictions such as the
State of Texas in which the exception for easements not shown
by the public records could not be deleted, that exception is
customarily accepted by prudent commercial mortgage lenders in
that jurisdiction.
Except for encroachments and similar matters which are (a)
inconsequential, (b) do not materially and adversely affect
the value of the Mortgaged Property as security for the
Mortgage Loan, or (c) are insured against by the lender's
title insurance policy referred to in (24) below, surveys
and/or title insurance obtained at the time of origination
indicated that (a) none of the improvements which were
included for the purpose of determining the appraised value of
the Mortgaged Property in the appraisal at the time of the
origination of the Mortgage Loan lie outside the boundaries
and building restriction lines of the Mortgaged Property, and
(b) no improvements on adjoining properties encroach upon the
Mortgaged Property.
S-53
<PAGE>
Each Mortgaged Property constitutes one or more complete
separate tax lots or is subject to an endorsement under the
related title insurance policy described in (24) below.
(22) Title. The Mortgage Loan Seller has good title to and is the
sole owner and beneficial holder of the Mortgage Loan. The
Mortgage Loan Seller has full right and authority to sell and
assign the Mortgage Loan, is the sole mortgagee or beneficiary
of record under the Mortgage and is transferring the Mortgage
Loan to the Transferor free and clear of any and all liens,
encumbrances, participation interests, pledges, charges or
security interests of any nature encumbering the Mortgage
Loan.
(23) Compliance with Laws. To the best of the Mortgage Loan
Seller's knowledge, based upon a letter or letters from
governmental authorities, a legal opinion, an endorsement or
endorsements to the related title insurance policy, a
representation of the borrower at the time of origination of
the Mortgage Loan or other information acceptable to the
Mortgage Loan Seller at the time of origination of that
Mortgage Loan:
(a) no improvements located on or forming a part of the
Mortgaged Property are in violation of any applicable
zoning and building laws or ordinances;
(b) the Mortgaged Property complies with all other laws
and regulations pertaining to its use and occupancy
excluding Environmental Laws (see (35) and (36)
below) and all applicable insurance requirements;
(c) the borrower has obtained all inspections, licenses,
permits, authorizations, and certificates necessary
for compliance, including certificates of occupancy,
if available; and
(d) the Mortgage Loan Seller has not received
notification from any governmental authority that the
Mortgaged Property violates laws or regulations or is
being used, operated or occupied unlawfully or that
the borrower has failed to obtain those inspections,
licenses or certificates, except any violation,
unlawfulness or failure (A) which does not materially
and adversely affect the value of the Mortgaged
Property as security for the Mortgage Loan or the use
for which that Mortgaged Property was intended at the
time of origination, (B) which was specifically
addressed by the appraiser in the determination of
the appraised value, or (C) for which a reserve
account held for the related Mortgage Loan Seller has
been established in an amount sufficient to pay for
the estimated costs to correct the violation.
(24) Title Insurance. The lien of the Mortgage is or will be
insured by an ALTA lender's title insurance policy or another
state-approved form of lender's title insurance policy issued
in an amount not less than the stated principal amount of the
Mortgage Loan after all advances of principal. The policy
insures the Mortgage Loan Seller and its successors and
assigns that the Mortgage is a valid first lien on the
Mortgaged Property, subject only to exceptions described in
(13) above. If title insurance policy has not yet been issued
with respect to the Mortgage Loan, then that policy is
currently evidenced by a pro forma or specimen policy or by a
"marked-up" commitment for title insurance which was furnished
by the related title insurance company for purposes of closing
the Mortgage Loan. The premium for the title
S-54
<PAGE>
insurance policy has been paid in full and the title insurance
policy is or will be in full force and effect, and upon
endorsement and delivery of the related promissory note to the
Transferor and recording of the assignment of mortgage in
favor of the Transferor in the applicable real estate records,
the title insurance policy will inure to the benefit of the
Transferor. The title insurance policy (a) does not contain
the standard general exceptions for encroachments or boundary
or other survey matters and for easements not shown by the
public records, other than the exceptions as are customarily
accepted by prudent commercial mortgage lenders in the related
jurisdiction, and (b) only contains those exceptions for
encroachments and boundary and other survey matters as are
customarily accepted by prudent commercial mortgage lenders.
The Mortgage Loan Seller and its agents have not taken, or
omit to take, any action that would materially impair the
coverage benefits of any of the title insurance policies.
Neither the Mortgage Loan Seller nor any prior holder of the
Mortgage has made any claim under any title insurance policy.
(25) Insurance Related to Mortgaged Property. All improvements on
the Mortgaged Property are insured as follows:
(a) by a fire and extended perils insurance policy
containing a standard mortgagee clause naming the
originator or Mortgage Loan Seller and its successors
as additional insureds covering full replacement cost
in an amount not less than the lesser of (A) the full
replacement cost of all improvements to the Mortgaged
Property, and (B) the outstanding principal balance
of the Mortgage Loan, but in any event in an amount
sufficient to avoid the operation of any co-insurance
provisions contained in the insurance policy;
(b) by an insurance policy providing business
interruption or rental continuation coverage in an
amount not less than the income anticipated from 12
months of operations of the Mortgaged Property;
(c) by a comprehensive general liability insurance policy
in an amount not less than $1 million per occurrence;
(d) if any material improvement on the Mortgaged Property
is located in an area identified by the Federal
Emergency Management Agency as having special flood
hazards under the National Flood Insurance Act of
1968, as amended, by a flood insurance policy
providing coverage in an amount not less than the
lesser of (A) the stated principal amount of the
promissory note, and (B) the maximum amount of
insurance available under the Flood Disaster
Protection Act of 1973, as amended; and
(e) by a workers' compensation insurance policy as
required by applicable law.
The insurance premium for each insurance policy has been paid
or escrowed. Each insurance policy contains a clause providing
that it is not terminable and may not be reduced without 30
days prior written notice to the mortgagee except that, if
nonpayment of insurance premiums occurs, each insurance policy
provides for termination upon not less than 10 days prior
written notice. No notice of termination has been received by
the Mortgage Loan Seller. With respect to each insurance
policy, the Mortgage Loan Seller has received a certificate of
insurance or similar document dated within the last 12 months
stating that that policy is in
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full force and effect. The Mortgage Loan Seller has no
knowledge of any action, omission, misrepresentation,
negligence or fraud which would result in the failure of any
insurance policy. The Mortgage Loan Documents require the
related borrower or a tenant of that borrower to maintain
insurance policy at its expense, but authorizes the mortgagee
to maintain any one of these insurance policies at the
borrower's expense upon the borrower's or the tenant's failure
to do (subject to any applicable notice or cure period). The
related Mortgage and insurance policy require that any related
insurance proceeds, in excess of a specified amount, will be
applied either to the repair or restoration of all or part of
the Mortgaged Property or to the payment of the outstanding
principal balance of or accrued interest on the Mortgage Loan.
(26) UCC Financing Statements. One or more Uniform Commercial Code
financing statements have been filed or recorded, or have been
sent for filing or recording, wherever necessary to perfect
under applicable law a security interest in all furniture,
fixtures, equipment and other personal property, including
rights under leases and all agreements affecting the use,
enjoyment or occupancy of all or any part of the Mortgaged
Property, (a) which are collateral under the Mortgage or under
a security or similar agreement executed and delivered in
connection with the Mortgage Loan, and (b) in which a security
interest can be perfected by the filing of Uniform Commercial
Code financing statement(s) under applicable law.
(27) Default, Breach and Acceleration. The Mortgage Loan Seller
knows of no default, breach, violation or event of
acceleration existing under the Mortgage or the promissory
note and no event, other than failure to make payments due but
not yet delinquent, which, with the passage of time or with
notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event of
acceleration. The Mortgage Loan Seller has no knowledge that
the borrower is a debtor in any state or federal bankruptcy or
insolvency proceeding.
(28) Customary Provisions. The promissory note and the Mortgage,
together with applicable state law, contain customary and
enforceable provisions which render the rights and remedies of
the lender adequate for the practical realization against the
Mortgaged Property of the benefits of the security. Those
remedies include, for example, judicial or nonjudicial
foreclosure, subject to limitations to enforceability arising
under bankruptcy, insolvency, reorganization or other similar
laws, by general principles of equity or applicable
anti-deficiency laws or statutes.
(29) Access Routes. Surveys, title insurance reports, the title
insurance policy or other relevant documents indicate that at
the time of origination of the Mortgage Loan, (a) the related
borrower had sufficient rights with respect to amenities,
ingress and egress and similar matters identified in the
appraisal as critical to the appraised value of the Mortgaged
Property, and (b) the Mortgaged Property was receiving
adequate services from public or private water, sewer and
other utilities, none of which are subject to revocation as a
result of a foreclosure or change in ownership of an adjacent
property.
(30) Mortgage Loans Secured by Ground Lease but Not Fee Interest.
If the Mortgage Loan is secured in whole or in part by the
related borrower's interest as lessee under a ground lease of
all or a portion of the Mortgaged Property and the related fee
interest in the portion of the Mortgaged Property covered by
the ground lease is not subject or subordinate to the lien of
the Mortgage:
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(a) as of the date of the Closing of the Mortgage Loan,
the ground lease is in full force and effect, and the
ground lease or a memorandum of the ground lease has
been duly recorded in the applicable real estate
records and, to the knowledge of the Mortgage Loan
Seller (A) that ground lease does not prohibit the
interest of the related lessee from being encumbered
by the Mortgage, or a separate estoppel letter or
written agreement permitting the encumbrance by the
Mortgage has been obtained, and (B) there have been
no material changes in the terms of the ground lease
except as set forth in written instruments which are
part of the Mortgage File;
(b) except as may be indicated in the title insurance
policy, the lessee's leasehold interest in the
portion of the Mortgaged Property covered by the
ground lease is not subject to any liens or
encumbrances superior to, or of equal priority with,
the Mortgage;
(c) the lessee's interest in the ground lease may be
transferred to the Transferor and its successors and
assigns through foreclosure of the Mortgage or
conveyance in lieu of foreclosure and, thereafter,
may be transferred to another Person by the mortgagee
and its successors and assigns upon notice to, but
without the consent of, the lessor, provided that the
ground lease has not been terminated and all amounts
owed under that ground lease have been paid.
Alternatively, if any consent described above is
required, either (A) it has been obtained prior to
the date specified in the Underlying Mortgage Loan
Purchase Agreement, or (B) it is not to be
unreasonably withheld;
(d) the lessor is required to give notice of any default
under the ground lease by the lessee to the mortgagee
either under the terms of the ground lease or under
the terms of a separate estoppel letter or written
agreement;
(e) before the lessor may terminate the ground lease, the
mortgagee is entitled, under the terms of the ground
lease or a separate estoppel letter or written
agreement, to receive notice of any default by the
lessee under the ground lease, and after any notice
of default, to not less than the time provided to the
lessee under the ground lease to cure the default.
All rights of the lessee under the ground lease and
the related Mortgage (insofar as it relates to the
ground lease) may be exercised by or on behalf of the
mortgagee;
(f) the currently effective term of the ground lease,
excluding any extension or renewal which is not
binding on the lessor, extends not less than 10 years
beyond the Maturity Date of the Mortgage Loan;
(g) the ground lease does not impose any restrictions on
subletting which the Mortgage Loan Seller considered
to be commercially unreasonable at the time of
origination or purchase of the Mortgage Loan;
(h) the Mortgage Loan Seller has not received any notice
that (A) the lessor under the ground lease is
asserting a default by the lessee or an event of
default or (B) any event (other than rental or other
payments being due, but not yet delinquent) has
occurred which, with the passage of time or the
giving of
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notice would result in a default or an event of
default under the terms of the ground lease;
(i) the lessor has agreed that the ground lease may not
be amended, modified, cancelled or terminated without
the prior written consent of the Mortgage Loan Seller
and that any of these actions without the required
consent is not binding upon the mortgagee. The lessor
is required to enter into a new ground lease with the
mortgagee upon termination of the ground lease for
any reason, including rejection of the ground lease
in a bankruptcy proceeding; and
(j) under the terms of the ground lease and the Mortgage,
any related insurance proceeds or condemnation award
for other than a total or substantially total loss or
taking will be applied either to the payment of the
outstanding principal balance of and accrued interest
on the Mortgage Loan or to the repair or restoration
of all or part of the Mortgaged Property covered by
the ground lease. The mortgagee or a trustee
appointed by it will have the right to hold and
disburse those proceeds as the repair or restoration
progresses, except where the Mortgage Loan provides
that the related borrower or its agent may hold and
disburse those proceeds with respect to any loss or
taking less than a stipulated amount not greater than
$50,000.
(31) Deed of Trust. With respect to any Mortgage that is a deed of
trust or trust deed, a duly qualified trustee has either been
properly designated and currently serves or may be substituted
in accordance with applicable law. Except in connection with
(a) a trustee's sale after default by the borrower, or (b) the
release of the Mortgaged Property following the payment of the
Mortgage Loan in full, no fees or expenses are payable by the
Mortgage Loan Seller or the Transferor to the trustee under a
deed of trust.
(32) Cross-Security. The Mortgaged Property is not collateral or
security for the payment or performance of (a) any other
obligations owed to the originator or Mortgage Loan Seller
other than another Mortgage Loan being sold and assigned by
the Mortgage Loan Seller under the Underlying Mortgage Loan
Purchase Agreement, or (b) to the Mortgage Loan Seller's
knowledge, any other obligations owed to any Person other than
the Mortgage Loan Seller. The related promissory note is not
secured by any property other than a Mortgaged Property.
(33) Assignment of Leases, Rents and Profits. Unless the Mortgaged
Property is occupied by the borrower, the mortgage loan
documents include, either in the mortgage or in a separate
document, an assignment of leases, rents and profits or an
assignment of assignment of leases, rents and profits. The
recording of any assignment of leases, rents and profits
incorporated within the Mortgage or set forth in a separate
mortgage loan document creates a valid first priority
assignment of, or security interest in, the right to receive
all payments, if any, due under the leases.
(34) REMIC.
(a) The Mortgage Loan is principally secured by an
interest in real property and either (A) the fair
market value of that real property was at least 80%
of the adjusted issue price of the Mortgage Loan on
the date of origination or, if that Mortgage Loan has
been "significantly modified" within the meaning of
Section 1001 of the Tax Code, on the date of the
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modification (unless the modification may be
disregarded under Treas. Reg. Sec. 1.860G-2(b)(3)),
or (B) substantially all of the proceeds of the
Mortgage Loan were used to acquire or improve or
protect an interest in real property that, at
origination, was the only security for the Mortgage
Loan;
(b) The Mortgage Loan contains no equity participation by
the Mortgage Loan Seller, and neither the promissory
note nor the Mortgage provides for any contingent or
additional participation interest in the cash flow or
proceeds realized on disposition of the Mortgaged
Property; and
(c) the Mortgage Loan is a "qualified mortgage" as
defined in, and for purposes of, Section 860G of the
Tax Code and provides for the payments of interest at
a fixed rate or at a rate described in Treas. Reg.
Sec. 1.806G-1(a)(3).
(35) Environmental Site Assessments (ESAs). Subject to the
exceptions specified in this prospectus supplement under
"Description of the Mortgage Pool- Material Characteristics of
the Mortgage Pool-Environmental Risks," the ESAs, screen
assessments, studies or updates prepared or obtained in
connection with the origination of the Mortgage Loan
identified no material adverse environmental conditions or
circumstances anticipated to require any material expenditure
with respect to the Mortgaged Property, except for:
(a) those cases where those conditions or circumstances
were investigated further and based upon the
additional investigation, a qualified environmental
consultant recommended no further investigation or
remediation;
(b) those cases in which an operations and maintenance
plan was recommended by the environmental consultant
and the maintenance plan was obtained or an escrow
reserve established to cover the estimated costs of
obtaining the maintenance plan;
(c) those conditions in which soil or groundwater
contamination was suspected or identified and either
(A) that condition or circumstance was remediated or
abated prior to the date of closing of the Mortgage
Loan, (B) a "no further action" letter was obtained
from the applicable regulatory authority, or (C)
either an environmental insurance policy was
obtained, a letter of credit provided, an escrow
reserve account established, or an indemnity from the
responsible party was obtained, to cover the
estimated costs of any required investigation,
testing, monitoring or remediation;
(d) those cases in which (A) a leaking underground
storage tank or groundwater contamination was
identified to be located on or to have originated
from an offsite property, (B) a responsible party has
been identified under applicable law, and (C) either
that condition is not known to have affected the
Mortgaged Property or the responsible party has
either received a "no further action" letter from the
applicable regulatory agency, established a
remediation fund, or provided an indemnity or
guaranty to the borrower; and
(e) cases in which, for small loans with an original
principal balance of less than $1,000,000, the
borrower has acknowledged in the
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Mortgage Loan Documents the existence of that
condition and expressly agreed to comply with all
federal, state and local statutes or regulations
respecting the that condition.
(36) Notice of Environmental Problem. Other than with respect to
any conditions identified in the ESAs, screen assessments,
studies or updates referred to in (35), the Mortgage Loan
Seller:
(a) has not received actual notice from any federal,
state or other governmental authority of (A) any
failure of the Mortgaged Property to comply with any
applicable Environmental Laws, or (B) any known or
threatened release of Hazardous Materials on or from
the Mortgaged Property in violation of Environmental
Laws;
(b) has not received actual notice from the borrower
that, except as set forth in 35(e) above, (A) the
borrower has received any notice from any relevant
governmental authority, (B) the Mortgaged Property
fails to comply with Environmental Laws, or (C) the
borrower has received actual notice that there is any
known or threatened release of Hazardous Materials on
or from the Mortgaged Property in violation of
Environmental Laws; and
(c) has no actual knowledge that (A) the Mortgaged
Property fails to materially comply with any
applicable Environmental Law or (B) there has been
any known or threatened release of Hazardous
Materials on or from the Mortgaged Property where the
release falls outside of exceptions (a) through (e)
of (35) above.
(37) Recourse. The Mortgage Loan Documents contain standard
provisions providing for recourse against the borrower or a
principal of the borrower for damages sustained in connection
with the borrower's fraud, material misrepresentation,
misappropriation, willful misconduct or waste (except in the
case of ___ of the Mortgage Loans, representing approximately
% of the Initial Pool Balance) of any tenant security
deposits, rent, insurance proceeds or condemnation proceeds.
The Mortgage Loan ----- Documents contain provisions in which
the borrower or a principal of the borrower has agreed to
indemnify the mortgagee for damages resulting from violations
of Environmental Laws.
(38) Leases. Prior to the origination of the Mortgage Loan, the
Mortgage Loan Seller obtained tenant estoppel certificates
from all tenants whose leases covered more than 10% (20% if
the Mortgage Loan has an original principal balance less than
or equal to $2,500,000) of the net leasable area of the
Mortgaged Property; and based upon the tenant estoppel
certificates, no material defaults with respect to any of
those leases existed as of the date of the tenant estoppel
certificate. The Mortgage Loan Seller has not received any
notice of the existence of any default under any of those
leases or of the existence of any condition which, but for the
passage of time or the giving of notice would result in a
default.
(39) Environmental Compliance. One or more of the mortgage loan
documents contains either (a) a representation, warranty or
covenant that the borrower will not use, cause or permit to
exist on the Mortgaged Property any Hazardous Materials in
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violation of Environmental Law, or (b) an indemnity with
respect to any violation of Environmental Law in favor of the
Mortgage Loan Seller.
(40) Inspection. The Mortgage Loan Seller has inspected or caused
an inspection of the Mortgaged Property within the 12 months
preceding the date of the Underlying Mortgage Loan Purchase
Agreement.
(41) Subordinate Debt. Except as disclosed in Schedule A, the
Mortgage contains a provision for the acceleration of the
payment of the unpaid principal balance of the Mortgage Loan
if the borrower encumbers the Mortgaged Property without the
prior written consent of the mortgagee as described above in
this prospectus supplement in the section titled "Description
of the Mortgage Pool - Material Characteristics of the
Mortgage Pool-Other Financing." Consent may be withheld in the
mortgagee's sole discretion.
(42) Common Ownership. No two properties securing Mortgage Loans
are directly or indirectly under common ownership except to
the extent that the common ownership and the ownership
structure has been specifically disclosed in Schedule A.
(43) Operating or Financial Statement. The mortgage loan documents
require the borrower to furnish to the mortgagee at least
annually an operating statement with respect to the Mortgaged
Property or, in the case of a borrower-occupied Mortgaged
Property, a financial statement with respect to the borrower.
(44) Litigation. To the knowledge of the Mortgage Loan Seller,
there is no pending action, suit, proceeding, arbitration or
governmental investigation with respect to the borrower or the
Mortgaged Property which if determined adversely to the
borrower would have a material adverse effect on the value of
the Mortgaged Property or the borrower's ability to continue
to perform its obligations under the Mortgage Loan.
(45) Assisted Living Loans and Nursing Home Loans. With respect to
each Assisted Living Loan and each Nursing Home Loan, the
Mortgage Loan Seller represents and warrants that:
(a) to the knowledge of the Mortgage Loan Seller, each
facility operator or manager, the borrower, and the
related facility comply with all federal, state and
local laws, regulations, quality and safety
standards, accreditation standards and requirements
of the applicable state department of health;
(b) each operator, manager, borrower and facility holds,
in the name of the borrower, all requisite licenses,
permits, regulatory agreements or other approvals
necessary or desirable for the use and operation of
the facility, and these licenses are in full force
and effect, have not been transferred to any location
other than the related facility, have not been
pledged to secure any debt and are held free from
conflicts and restrictions that would materially
impair the intended use or operation of the facility;
(c) to the knowledge of the Mortgage Loan Seller, the
facility is in compliance with all requirements for
participation in Medicare and Medicaid, is in
compliance with all insurance, reimbursement and cost
reporting
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requirements and has a current provider agreement
which is in full force and effect;
(d) to the knowledge of the Mortgage Loan Seller, there
is no threatened or pending revocation, suspension,
termination, probation, restriction, limitation or
nonrenewal affecting the related operator, borrower
or Mortgage Loan Seller or any participation or
provider agreement, and there is no threatened or
pending proceeding or investigation by any
governmental agency with respect to the operator,
borrower or Mortgage Loan Seller;
(e) to the knowledge of the Mortgage Loan Seller, no
facility has committed a "Level A" or equivalent
violation, no statement of charges or deficiencies
has been made or penalty imposed, and no enforcement
action has been undertaken by any governmental agency
against the facility, operator or Mortgage Loan
Seller or any of their officers, directors or
stockholders, within the three years preceding the
sale of the related Mortgage Loan to the Transferor;
(f) to the knowledge of the Mortgage Loan Seller, there
are no current or pending Medicaid, Medicare or
third-party payor's program reimbursement audits or
appeals pending with respect to the facility;
(g) to the knowledge of the Mortgage Loan Seller, there
are no current or pending Medicaid, Medicare or
third-party payor's program recoupment efforts with
respect to the facility;
(h) to the knowledge of the Mortgage Loan Seller, the
borrower has not pledged any accounts receivable
relating to the operations of the facility as
security for any debt; and
(i) to the knowledge of the Mortgage Loan Seller, any
existing management agreement with respect to the
operation of the facility is in full force and effect
and no party to any of those agreements has defaulted
or evidenced intent to terminate or fail to renew
that agreement. Pursuant to the terms of those
agreements and the relevant statutes and regulations,
if any of those agreements is terminated, the
borrower, the Trustee or any other successor manager
of the facility need not obtain a certificate of need
prior to applying for or receiving a license to
operate the facility or receiving payments from
Medicare or Medicaid.
(46) ARD Loans. If the Mortgage Loan is an ARD Loan, it commenced
amortizing on its initial scheduled Due Date and provides
that:
(a) The spread used in calculating its Mortgage Rate will
increase by no more than 5% in connection with the
passage of its Anticipated Repayment Date;
(b) its Anticipated Repayment Date is of the term
specified in Schedule A and Schedule B following the
origination of the Mortgage Loan;
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(c) if it has not previously done so, the borrower is
required to enter into a "lockbox agreement" no later
than the Anticipated Repayment Date, in which all
revenue from the Mortgaged Property shall be
deposited directly into a designated account
controlled by the Servicer; and
(d) any cash flow from the Mortgaged Property that is
applied to amortize the Mortgage Loan following its
Anticipated Repayment Date shall, to the extent the
net cash flow is in excess of the Monthly Payment, be
net of budgeted and discretionary (servicer approved)
capital expenditures.
(47) Due-on-Sale. Subject to transfer rights allowed in accordance
with the provisions set forth in the Mortgage securing the
Mortgage Loan, the Mortgage contains a "due-on-sale" clause
that provides for the acceleration of the payment of the
unpaid principal balance of the Mortgage Loan if, without the
prior written consent of the mortgagee, the borrower transfers
or sells the Mortgaged Property.
(48) [SMMEA Qualification. Each Mortgage Loan was originated by a
savings and loan association, savings bank, commercial bank,
credit union, insurance company, or similar institution which
is supervised and examined by a Federal or State authority, or
by a mortgagee approved by the Secretary of Housing and Urban
Development pursuant to Sections 203 and 211 of the National
Housing Act.]
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
Prudential Securities Secured Financing Corporation, the Depositor, was
incorporated in the State of Delaware on August 26, 1988 as a wholly-owned,
limited purpose finance subsidiary of Prudential Securities Group Inc. (a
wholly-owned indirect subsidiary of The Prudential Insurance Company of
America). The Depositor's principal executive offices are located at One New
York Plaza, New York, New York 10292, Attention: David Rodgers. Its telephone
number is (212) 214-1000. The Depositor does not have, nor is it expected in the
future to have, any significant assets.
MORTGAGE LOAN SELLERS
The Depositor will purchase the Mortgage Loans to be included in the
Mortgage Pool on or before the Closing Date from the Transferor pursuant to the
Mortgage Loan Purchase Agreement. The Transferor will have purchased the
Mortgage Loans from the Mortgage Loan Sellers pursuant to the Underlying
Mortgage Loan Purchase Agreements.
[Provide information]
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of [15] Classes to be designated as the Class A-1,
Class A-2, Class A-EC, Class B, Class C, Class D, Class E, Class F, Class G,
Class H, Class J, Class K, Class L, Class M and Class N Certificates. Only the
Class A-1, Class A-2, Class B, Class C, Class D and Class E Certificates are
offered here. The initial Certificate Balance of each Class of Offered
Certificates is expected to be the balance set forth on the cover of this
prospectus supplement, subject to a permitted variance of plus or minus 5%,
depending on the aggregate principal balance of the Mortgage Loans actually
transferred to the Trust Fund.
The Pooling and Servicing Agreement will be included as part of the
Form 8-K to be filed with the SEC within 15 days after the Closing Date. For
more detailed information regarding the terms of the Pooling and Servicing
Agreement and the Certificates, you should refer to the sections in this
prospectus supplement titled "The Pooling and Servicing Agreement" and to the
section in the prospectus titled "Description of the Certificates" and
"Servicing of the Mortgage Loans."
The Certificates represent in the aggregate the entire beneficial
ownership interest in a Trust Fund consisting primarily of:
(1) the Mortgage Loans, all scheduled payments of interest and
principal due after the Cut-off Date (whether or not received)
and all payments under and proceeds of the Mortgage Loans
received after the Cut-off Date (exclusive of payments of
principal and interest due on or before the Cut-off Date);
(2) any REO Property;
(3) funds or assets as from time to time are deposited in the
Collection Account, the Distribution Account and any REO
Account;
(4) the rights of the mortgagee under all insurance policies with
respect to the Mortgage Loans;
(5) the Depositor's rights and remedies under the Mortgage Loan
Purchase Agreement, including rights with respect to
enforcement of repurchase obligations of the Mortgage Loan
Sellers in connection with any breaches of representations and
warranties concerning the Mortgage Loans pursuant to the
Underlying Mortgage Loan Purchase Agreements; and
(6) all of the related mortgagee's right, title and interest in
the Reserve Accounts.
The Certificate Balance of any Class of Certificates outstanding at any
time represents the maximum amount that the holders of that Class are entitled
to receive as distributions allocable to principal from the cash flow on the
Mortgage Loans and the other assets in the Trust Fund. The respective
Certificate Balance of each Class of Certificates will in each case be reduced
by amounts actually distributed on that Class that are allocable to principal
and by any Realized Losses allocated to that Class. The Class A-EC Certificates
are interest only Certificates, have no Certificate Balances and are not
entitled to distributions in respect of principal.
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DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Regular Certificates
will be made on each Distribution Date, commencing on _______________ . All
distributions (other than the final distribution on any Certificate) will be
made by the Trustee to the persons in whose names the Certificates are
registered at the close of business on the Record Date. All distributions will
be made in the following manner:
(1) by wire transfer of immediately available funds to the account
specified by the related Certificateholder at a bank or other
entity having appropriate facilities for transfer of funds, if
the Certificateholder (a) is DTC or its nominee or (b)
provides the Trustee with wiring instructions no less than
five Business Days prior to the related Record Date and is the
registered owner of Certificates with an aggregate Certificate
Balance or Notional Balance of at least $25,000; or
(2) by check mailed to the Certificateholder. The final
distribution on any Certificate will be made in like manner,
but only upon presentation or surrender of the Certificates at
the location specified in the notice to the holder of the
Certificates of the final distribution. The aggregate
distribution to be made on the Regular Certificates on any
Distribution Date will equal the Available Funds.
Allocations of Appraisal Reductions and Realized Losses on the
Distribution Date occurring during any Interest Accrual Period will be deemed to
have been made as of the first day of that Interest Accrual Period for purposes
of determining any Class Interest Distribution Amount. Notwithstanding the
foregoing, the Class Interest Distribution Amount for each Class of Certificates
will be reduced by that Class' pro rata share of any Prepayment Interest
Shortfall not offset by Prepayment Interest Surplus (determined pro rata
according to each Class Interest Distribution Amount without regard to this
sentence).
Priorities. On each Distribution Date, holders of each Class of
Certificates will receive distributions, up to the amount of Available Funds, in
the amounts and in the order of priority set forth below:
(1) concurrently, to the Class A-1, Class A-2 and Class A-EC
Certificates, pro rata based on their Class Interest
Distribution Amounts, up to their Class Interest Distribution
Amounts plus any unpaid Class Interest Shortfalls previously
allocated to each of those Classes,
(2) to the Class A-1 and Class A-2 Certificates, in reduction of
their Certificate Balances until reduced to zero, the
remaining Pooled Principal Distribution
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Amount for that Distribution Date in sequential order based on
their alphabetical class designations;
(3) to the Class A-1 and Class A-2 Certificates, pro rata, based
on the amount of unreimbursed Realized Losses previously
allocated to those Classes, from remaining Available Funds;
(4) to the Class B Certificates, up to its Class Interest
Distribution Amount plus unpaid Class Interest Shortfalls
previously allocated to that Class;
(5) after the Certificate Balances of the Classes with earlier
alphabetical class designations have been reduced to zero, to
the Class B Certificates, in reduction of its Certificate
Balance until reduced to zero, the remaining Pooled Principal
Distribution Amount;
(6) to the Class B Certificates the remaining Available Funds up
to the amount of any unreimbursed Realized Losses previously
allocated to that Class;
(7) to the Class C Certificates, up to its Class Interest
Distribution Amount plus unpaid Class Interest Shortfalls
previously allocated to that Class;
(8) after the Certificate Balances of the Classes with earlier
alphabetical class designations have been reduced to zero, to
the Class C Certificates, in reduction of its Certificate
Balance until reduced to zero, the remaining Pooled Principal
Distribution Amount;
(9) to the Class C Certificates the remaining Available Funds up
to the amount of any unreimbursed Realized Losses previously
allocated to that Class;
(10) to the Class D Certificates, up to its Class Interest
Distribution Amount plus unpaid Class Interest Shortfalls
previously allocated to that Class;
(11) after the Certificate Balances of the Classes with earlier
alphabetical class designations have been reduced to zero, to
the Class D Certificates, in reduction of its Certificate
Balance until reduced to zero, the remaining Pooled Principal
Distribution Amount;
(12) to the Class D Certificates the remaining Available Funds up
to the amount of any unreimbursed Realized Losses previously
allocated to that Class;
(13) to the Class E Certificates, up to its Class Interest
Distribution Amount plus unpaid Class Interest Shortfalls
previously allocated to that Class;
(14) after the Certificate Balances of the Classes with earlier
alphabetical class designations have been reduced to zero, to
the Class E Certificates, in reduction of its Certificate
Balance until reduced to zero, the remaining Pooled Principal
Distribution Amount;
(15) to the Class E Certificates the remaining Available Funds up
to the amount of any unreimbursed Realized Losses previously
allocated to that Class;
(16) to the Class F Certificates, up to its Class Interest
Distribution Amount plus unpaid Class Interest Shortfalls
previously allocated to that Class;
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(17) after the Certificate Balances of the Classes with earlier
alphabetical class designations have been reduced to zero, to
the Class F Certificates, in reduction of its Certificate
Balance until reduced to zero, the remaining Pooled Principal
Distribution Amount;
(18) to the Class F Certificates the remaining Available Funds up
to the amount of any unreimbursed Realized Losses previously
allocated to that Class;
(19) to the Class G Certificates, up to its Class Interest
Distribution Amount plus unpaid Class Interest Shortfalls
previously allocated to that Class;
(20) after the Certificate Balances of the Classes with earlier
alphabetical class designations have been reduced to zero, to
the Class G Certificates, in reduction of its Certificate
Balance until reduced to zero, the remaining Pooled Principal
Distribution Amount;
(21) to the Class G Certificates the remaining Available Funds up
to the amount of any unreimbursed Realized Losses previously
allocated to that Class;
(22) to the Class H Certificates, up to its Class Interest
Distribution Amount plus unpaid Class Interest Shortfalls
previously allocated to that Class;
(23) after the Certificate Balances of the Classes with earlier
alphabetical class designations have been reduced to zero, to
the Class H Certificates, in reduction of its Certificate
Balance until reduced to zero, the remaining Pooled Principal
Distribution Amount;
(24) to the Class H Certificates the remaining Available Funds up
to the amount of any unreimbursed Realized Losses previously
allocated to that Class;
(25) to the Class J Certificates, up to its Class Interest
Distribution Amount plus unpaid Class Interest Shortfalls
previously allocated to that Class;
(26) after the Certificate Balances of the Classes with earlier
alphabetical class designations have been reduced to zero, to
the Class J Certificates, in reduction of its Certificate
Balance until reduced to zero, the remaining Pooled Principal
Distribution Amount;
(27) to the Class J Certificates the remaining Available Funds up
to the amount of any unreimbursed Realized Losses previously
allocated to that Class;
(28) to the Class K Certificates, up to its Class Interest
Distribution Amount plus unpaid Class Interest Shortfalls
previously allocated to that Class;
(29) after the Certificate Balances of the Classes with earlier
alphabetical class designations have been reduced to zero, to
the Class K Certificates, in reduction of its Certificate
Balance until reduced to zero, the remaining Pooled Principal
Distribution Amount;
(30) to the Class K Certificates the remaining Available Funds up
to the amount of any unreimbursed Realized Losses previously
allocated to that Class;
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(31) to the Class L Certificates, up to its Class Interest
Distribution Amount plus unpaid Class Interest Shortfalls
previously allocated to that Class;
(32) after the Certificate Balances of the Classes with earlier
alphabetical class designations have been reduced to zero, to
the Class L Certificates, in reduction of its Certificate
Balance until reduced to zero, the remaining Pooled Principal
Distribution Amount;
(33) to the Class L Certificates the remaining Available Funds up
to the amount of any unreimbursed Realized Losses previously
allocated to that Class;
(34) to the Class M Certificates, up to its Class Interest
Distribution Amount plus unpaid Class Interest Shortfalls
previously allocated to that Class;
(35) after the Certificate Balances of the Classes with earlier
alphabetical class designations have been reduced to zero, to
the Class M Certificates, in reduction of its Certificate
Balance until reduced to zero, the remaining Pooled Principal
Distribution Amount;
(36) to the Class M Certificates the remaining Available Funds up
to the amount of any unreimbursed Realized Losses previously
allocated to that Class;
(37) to the Class N Certificates, up to its Class Interest
Distribution Amount plus unpaid Class Interest Shortfalls
previously allocated to that Class;
(38) after the Certificate Balance of each class with an earlier
alphabetical class designation has been reduced to zero, to
the Class N Certificates, in reduction of its Certificate
Balance until reduced to zero, the remaining Pooled Principal
Distribution Amount;
(39) to the Class N Certificates the remaining Available Funds up
to the amount of any unreimbursed Realized Losses previously
allocated to that Class; and
(40) any remaining funds shall be distributed to the Class R-I
Certificates.
Additional Master Servicer or Special Servicer compensation, interest
on Advances, extraordinary expenses of the Trust Fund and other similar items
will create a shortfall in Available Funds, which generally will result in a
Class Interest Shortfall for the class then outstanding with the latest
alphabetical class designation.
Distributions of Principal After Senior Principal Distribution
Cross-Over Date. Notwithstanding the foregoing, on each Distribution Date on and
after the Senior Principal Distribution Cross-Over Date, and on the final
Distribution Date in connection with the termination of the Trust Fund, all
distributions of principal to the Class A-1 and A-2 Certificates will be paid to
holders of those Classes of Certificates, pro rata based on their outstanding
Certificate Balances immediately prior to the related Distribution Date, until
the Certificate Balance of each of those Class is reduced to zero.
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Yield Maintenance Charges and Prepayment Premiums. Yield Maintenance
Charges collected during any Collection Period will be allocated as between the
Class A-EC Certificates and all other eligible Classes based on the Base
Interest Fraction. The product of the Base Interest Fraction and the aggregate
amount of the Yield Maintenance Charges will be allocated for distribution to
Classes entitled to receive principal distributions on the related Distribution
Date. The product of (a) the amount of principal distributed to each Class
(other than the Class A-EC Certificates) as a percentage of the principal
distributed to all those Classes multiplied by (b) the Base Interest Fraction
and multiplied by (c) the amount of Yield Maintenance Charges allocated to those
Classes will be distributed to each of those Classes. The remainder of the Yield
Maintenance Charges will be distributed to the Class A-EC Certificates.
____________ percent of the Prepayment Premiums collected during any
Collection Period will be allocated for distribution to Classes entitled to
receive principal distributions on the related Distribution Date on a pro rata
basis, based on the amount of principal distributed to each of those Class as a
percentage of the amount of principal distributed to all those classes. The
remainder of the Prepayment Premiums will be allocated to the Class A-EC
Certificates.
No Prepayment Premiums or Yield Maintenance Charges will be distributed
to holders of the Class F, Class G, Class H, Class J, Class K, Class L, Class M,
Class N or Residual Certificates. Instead, after the Certificate Balances of the
Class A-1, Class A-2, Class B, Class C, Class D and Class E Certificates have
been reduced to zero, all Prepayment Premiums and Yield Maintenance Charges will
be distributed to holders of the Class A-EC Certificates. For a more detailed
description of Prepayment Premiums and Yield Maintenance Charges, you should
refer to the section in this prospectus supplement titled "Description of the
Mortgage Pool-- Material Terms ands Conditions of the Mortgage Loans--Prepayment
Provisions" and to the section in the prospectus titledin"Material Legal Aspects
of the Mortgage Loans--Enforceability s."Material Provisions--Default Interest;
Late Charges; and Prepayment Fees."
Prepayment Premiums will be distributed on any Distribution Date only
to the extent they are received in respect of the Mortgage Loans in the related
Collection Period.
Default Interest with Respect to Balloon Payments. Default Interest
received with respect to a Mortgage Loan that is in default with respect to its
Balloon Payment will be distributed on the next Distribution Date to the holders
of the Class of Certificates that is entitled to distributions of principal on
that Distribution Date; provided that if more than one Class of Certificates is
entitled to distributions of principal on that Distribution Date, the amount of
Default Interest will be allocated among those Classes pro rata, based on their
respective Certificate Balances immediately prior to that Distribution Date.
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Realized Losses. Realized Losses on Mortgage Loans included in the
Mortgage Pool will be allocated to the outstanding class of Certificates with
the latest alphabetical class designation (other than the Residual Certificates
and Class A-EC Certificates) in reverse sequential order, until its Certificate
Balance is reduced to zero. However, on and after the Senior Principal
Distribution Cross-Over Date, Realized Losses will be allocated among the Class
A-1 and Class A-2 Certificates on a pro rata basis. Realized Losses allocated to
any class of Certificates other than the Residual Certificates will reduce the
Class A-EC Notional Balance.
Any amounts recovered in respect of any amounts previously written off
as Realized Losses will be distributed to the Classes of Certificates in reverse
order of allocation of Realized Losses thereto.
Available Funds will be reduced by the aggregate amount of any
indemnification payments made from amounts comprising assets of the Trust Fund
to any person under the Pooling and Servicing Agreement. The reduction of
amounts otherwise distributable to a Class shall be allocated first in respect
of interest and second in respect of principal but shall not be reimbursable and
so shall not create Class Interest Shortfalls and shall not constitute Realized
Losses. For more detailed information, you should refer to the section in the
prospectus titled "Servicing of the Mortgage Loans- Material Matters With
Respect to the Master Servicer, the Special Servicer, the Trustee and the
Depositor."
SCHEDULED FINAL DISTRIBUTION DATE
The Scheduled Final Distribution Date with respect to any Class of
Certificates is the Distribution Date on which the aggregate Certificate Balance
or aggregate Notional Balance, as the case may be, of that Class of Certificates
would be reduced to zero based on the assumptions set forth below. The Scheduled
Final Distribution Date shall in each case be as follows:
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CLASS SCHEDULED FINAL DISTRIBUTION DATE
Class A-1
Class A-2
Class B
Class C
Class D
Class E
The Scheduled Final Distribution Dates set forth above were calculated
without regard to any delays in the collection of Balloon Payments and without
regard to a reasonable liquidation time with respect to any Mortgage Loans that
may become delinquent. Accordingly, upon defaults on the Mortgage Loans, the
actual final Distribution Date for any class of Certificates may be later, and
could be substantially later, than the related Scheduled Final Distribution
Date.
In addition, the Scheduled Final Distribution Dates set forth above
were calculated assuming no prepayments (involuntary or voluntary), no exercise
of defeasance options, no Early Termination, no defaults, no condemnations, no
modifications, no extensions and payment in full of ARD Loans on the related
Anticipated Repayment Dates. Since the rate of payment (including prepayments)
of the Mortgage Loans can be expected to exceed the scheduled rate of payments,
and could exceed the scheduled rate by a substantial amount, the actual final
Distribution Date for any class of Certificates may be earlier, and could be
substantially earlier, than the related scheduled Final Distribution Date.
ADDITIONAL RIGHTS OF THE RESIDUAL CERTIFICATES
The Residual Certificates will remain outstanding for as long as the
Trust Fund exists. Holders of the Residual Certificates are not entitled to
regular or scheduled distributions in respect of principal, interest, Prepayment
Premiums, Yield Maintenance Charges or Excess Interest. Holders of the Residual
Certificates are not expected to receive any distributions until after the
Certificate Balances of all other Classes of Certificates have been reduced to
zero, and then will receive distributions only to the extent of any Available
Funds remaining on any Distribution Date and any remaining assets of the REMICs.
EARLY TERMINATION
The holder of the Class R-I Certificates representing greater than a
50% Percentage Interest of the Class R-I Certificates, and, if that holder does
not exercise this option, the Master Servicer and, if the Master Servicer does
not exercise this option, the Depositor, will have the option to purchase all of
the Mortgage Loans and all property remaining in the Trust Fund on any
Distribution Date on which the aggregate Scheduled Principal Balance of the
Mortgage Loans remaining in the Trust fund is less than 1% of the Initial Pool
Balance. Any purchase of the Mortgage Loans and other property in the Trust Fund
would effect an early termination of the Trust Fund and early retirement of the
outstanding Certificates. The purchase price payable upon the exercise of the
option on any Distribution Date will be an amount equal to the greater of:
(1) the sum of the following amounts:
(a) 100% of the outstanding principal balance of each
Mortgage Loan included in the Trust Fund as of the
last day of the month preceding
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that Distribution Date (less any Advances previously
made on account of principal); plus the fair market
value of all other property included in the Trust
Fund as of the last day of the preceding months, as
determined by an independent appraiser no more than
30 days prior to the last day of that month; plus
(b) all unpaid interest accrued on the principal balance
of each of those Mortgage Loans (including any REO
Mortgage Loan) at the Mortgage Rate to the last day
of that month (less any Advances previously made on
account of interest); plus
(c) unreimbursed Advances with interest at the Advance
Rate, unpaid servicing compensation and unpaid Trust
Fund expenses;
OR
(2) the aggregate fair market value of the Mortgage Loans and all
other property acquired in respect of any Mortgage Loan in the
Trust Fund on the last day of the month preceding that
Distribution Date, as determined by an independent appraiser
no more than 30 days prior to the last day of that month
together with one month's interest at the related Mortgage
Rate, plus disposition expenses.
Under the circumstances described under "Description of the Mortgage
Pool- Material Terms and Conditions of the Mortgage Loans-ARD Loans; Excess
Interest," the holders of 100% of the Class N Certificates or the Special
Servicer will have the option to purchase any ARD Loan on or after its
Anticipated Repayment Date at a price equal to its outstanding Scheduled
Principal Balance plus accrued and unpaid interest and unreimbursed Advances
made with respect thereto (with interest ). The exercise of this option may
accelerate repayment of some Certificates, but is not expected to result in
repayment of all Classes on the same Distribution Date.
DELIVERY, FORM AND DENOMINATION
Book-Entry Certificates. No Person acquiring a Book-Entry Certificate
will be entitled to receive a physical certificate except under the limited
circumstances described below. Absent those circumstances, the Book-Entry
Certificates will be registered in the name of a nominee of DTC and beneficial
interests in those Certificates will be held by the Beneficial Owners through
the book-entry facilities of DTC, as described in this prospectus supplement, in
denominations of $25,000 initial Certificate Balance or Notional Balance and
integral multiples of $1.00 in excess of $25,000. One certificate of each of
those Class may be issued that represents a different initial Certificate
Balance or Notional Balance to accommodate the remainder of the initial
Certificate Balance or Notional Balance of that Class. The Depositor has been
informed by DTC that its nominee will be Cede & Co. Accordingly, Cede & Co. is
expected to be the holder of record of the Book-Entry Certificates.
No Beneficial Owner of a Book-Entry Certificate will be entitled to
receive a Definitive Certificate representing that person's interest in the
Book-Entry Certificates except as set forth below. Unless and until Definitive
Certificates are issued to Beneficial Owners in respect of the Book-Entry
Certificates under the limited circumstances described in this prospectus
supplement, all references to actions taken by Certificateholders or holders
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will, in the case of the Book-Entry Certificates, refer to actions taken by DTC
upon instructions from its participants, and all references in this prospectus
supplement to distributions, notices, reports and statements to
Certificateholders or holders will, in the case of the Book-Entry Certificates,
refer to distributions, notices, reports and statements to DTC or Cede & Co., as
the case may be, for distribution to Beneficial Owners in accordance with DTC
procedures. DTC may discontinue providing its services as securities depository
with respect to the Book-Entry Certificates at any time by giving reasonable
notice to the Trustee. Under those circumstances, if a successor securities
depository is not obtained, certificates are required to be printed and
delivered. The Trustee, the Master Servicer, the Special Servicer and the
Certificate Registrar may for all purposes, including the making of payments due
on the Book-Entry Certificates, deal with DTC as the authorized representative
of the Beneficial Owners with respect to those Certificates.
DTC is a limited purpose trust company organized under the laws of the
State of New York, 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 Section 17A of the Securities Exchange
Act of 1934, as amended. DTC was created to hold securities for Participants and
to facilitate the clearance and settlement of securities transactions among
Participants through electronic computerized book-entry charges in Participants'
accounts, eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers (including the Underwriter),
banks, trust companies and clearing corporations and other organizations. The
Rules applicable to DTC and its participants are on file with the Securities and
Exchange Commission. Indirect access to the DTC system also is available to
banks, brokers, dealers, trust companies and other institutions that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. DTC is owned by a number of its Direct Participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc.
Purchases of Book-Entry Certificates under the DTC system must be made
by or through Direct Participants, which will receive a credit for the
Book-Entry Certificates on DTC's records. The ownership interest of each
Beneficial Owner is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their purchase, but Beneficial Owners are expected to receive
written confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Direct or Indirect Participant through
which the Beneficial Owner entered into the transaction. Transfers of ownership
interests in the Book-Entry Certificates are to be accomplished by entries made
on the books of Participants acting on behalf of Beneficial Owners. Beneficial
Owners will not receive certificates representing their ownership interests in
the Certificates except when the use of the book-entry system for the Book-Entry
Certificates is discontinued. Neither the Certificate Registrar nor the Trustee
will have any responsibility to monitor or restrict the transfer of ownership
interests in Book-Entry Certificates through the book-entry facilities of DTC.
To facilitate subsequent transfers, all Book-Entry Certificates
deposited by Participants with DTC are registered in the name of DTC's
partnership nominee, Cede & Co. The deposit of Book-Entry Certificates with DTC
and their registration in the name of Cede & Co. effect no change in beneficial
ownership. 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 Book-Entry Certificates are credited, which
may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Beneficial Owners will not be recognized as Certificateholders, as that term is
used in the Pooling and Servicing Agreement, by the Trustee or any Paying Agent
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appointed by the Trustee. Beneficial Owners will be permitted to exercise the
rights of Certificateholders only indirectly through DTC and its Participants.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to 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.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and other banks, the ability of a Beneficial
Owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to those
Book-Entry Certificates, may be limited due to lack of a definitive Certificate
for those Book-Entry Certificates. In addition, under a book-entry format,
Beneficial Owners may experience delays in their receipt of payments, since
distributions will be made by the Trustee or a Paying Agent on behalf of the
Trustee to Cede & Co., as nominee for DTC.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Book-Entry Certificates. Under its usual procedures, DTC mails an Omnibus Proxy
to the Trustee as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct Participants to
whose accounts the Securities are credited on that record date (identified in a
listing attached to the Omnibus Proxy). DTC may take conflicting actions with
respect to Percentage Interests or Voting Rights to the extent that Participants
whose holdings of Book-Entry Certificates evidence those Percentage Interests or
voting rights authorize divergent action.
Neither the Depositor, the Trustee, the Master Servicer, the Special
Servicer nor any Paying Agent will have any responsibility for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests of the Book-Entry Certificates registered in the name of Cede & Co.,
as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to those beneficial ownership interests. If DTC becomes insolvent, a
Participant or an Indirect Participant in whose name Book-Entry Certificates are
registered, the ability of the Beneficial Owners of those Book-Entry
Certificates to obtain timely payment may be impaired. In addition, in that
event, if the limits of applicable insurance coverage by the Securities Investor
Protection Corporation are exceeded or if the applicable insurance coverage is
otherwise unavailable, ultimate payment of amounts distributable with respect to
those Book-Entry Certificates may be impaired.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the Depositor believes to be
reliable, but the Depositor takes no responsibility for the accuracy of the
information.
Physical Certificates. Book-Entry Certificates will be converted to
Definitive Certificates and reissued to Beneficial Owners or their nominees,
rather than to DTC or its nominee, only if (1) (a) the Depositor advises the
Certificate Registrar in writing that DTC is no longer willing or able to
discharge properly its responsibilities as Depository with respect to any Class
of the Book-Entry Certificates and (b) the Depositor is unable to locate a
qualified successor or (2) the Depositor, at its option, advises the Trustee and
Certificate Registrar that it elects to terminate the book-entry system through
DTC with respect to any Class of the Book-Entry Certificates.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Certificate Registrar will be required to notify all affected
Beneficial Owners through DTC of the availability of Definitive Certificates.
Upon surrender by DTC of the physical certificates representing the affected
Book-Entry Certificates and receipt of instructions for re-registration, the
Certificate
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Registrar will reissue the Book-Entry Certificates as Definitive Certificates to
the Beneficial Owners. Upon the issuance of Definitive Certificates for purposes
of representing ownership of the Certificates originally issued as Book-Entry
Certificates, the registered holders of the Definitive Certificates will be
recognized as Certificateholders under the Pooling and Servicing Agreement and,
accordingly, will be entitled directly to receive payments on, and exercise
Voting Rights with respect to, and to transfer and exchange the Definitive
Certificates.
Definitive Certificates will be transferable and exchangeable at the
offices of the Trustee or the Certificate Registrar in accordance with the terms
of the Pooling and Servicing Agreement.
REGISTRATION AND TRANSFER
The holder of any Definitive Certificate may transfer or exchange the
same in whole or part (subject to the minimum authorized denomination) at the
corporate trust office of the Certificate Registrar or at the office of any
transfer agent. In exchange for any Definitive Certificate properly presented
for transfer or exchange with all necessary accompanying documentation, the
Certificate Registrar will, within five Business Days of the request if made at
the corporate trust office of the Certificate Registrar, or within ten Business
Days if made at the office of another transfer agent, execute and deliver to the
transferee or holder the transferred or exchange Definitive Certificate or
Definitive Certificates.
No fee or service charge will be imposed by the Certificate Registrar
for any registration of transfer or exchange referred to above. The Certificate
Registrar may require payment by each transferor of a sum sufficient to pay any
tax, expense or other governmental charge payable in connection with any that
transfer.
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
General. The yield on any Regular Certificate will depend on (1) the
price at which that Certificate is purchased by an investor and (2) the rate,
timing and amount of distributions on that Certificate. The rate, timing and
amount of distributions on any Regular Certificate will in turn depend on, among
other things:
(1) the rate and timing of principal payments (including voluntary
and involuntary prepayments) and the extent to which those
amounts are to be applied in reduction of the Certificate
Balance (or Notional Balance) of the Class of Certificates to
which that Certificate belongs;
(2) the rate, timing and severity of Realized Losses on the
Mortgage Loans and the extent to which those losses are
allocable in reduction of the Certificate Balance (or Notional
Balance) of any Class of Certificates;
(3) with respect to any class of Certificates (other than the
Class A-1, Class A-2, class B and Class C Certificates), the
Weighted Average Net Mortgage Rate as in effect from time to
time; and
(4) disproportionate principal payments (whether resulting from
differences in amortization schedules, prepayments or
otherwise) on Mortgage Loans having Net
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Mortgage Rates that are higher or lower than the current
Weighted Average Net Mortgage Rate will affect the yield on
the Class A-EC Certificates.
Rate and Timing of Principal Payments. The yield to holders of
Certificates purchased at a discount or premium will be affected by the rate and
timing of principal payments made in reduction of the Certificate Balance of
those Certificates. The Pooled Principal Distribution Amount for each
Distribution Date generally will be distributable in its entirety to each Class
of Regular Certificates, sequentially in order of Class designation, in each
case until the Certificate Balance of each of those Classes of Certificates is
reduced to zero. Consequently, the rate and timing of principal payments made in
reduction of the Certificate Balance of the Regular Certificates will be
directly related to the rate and timing of principal payments on or in respect
of the Mortgage Loans.
Defaults on the Mortgage Loans, particularly at or near their stated
maturity dates, may result in significant delays in payments of principal on the
Mortgage Loans and, accordingly, on the Certificates, while work-outs are
negotiated, foreclosures are completed or bankruptcy proceedings are resolved.
The yield to investors in the Subordinate Certificates will be very sensitive to
the timing and magnitude of losses on the Mortgage Loans due to liquidations
following a default, and will also be very sensitive to delinquencies in
payment. In addition, the Special Servicer has the option, subject to
limitations set forth in the related Mortgage Loans, to extend the maturity of
those Mortgage Loans following a default in the payment of a Balloon Payment.
For more information, you should refer to the sections in this prospectus
supplement titled "The Pooling and Servicing Agreement--Servicing of the
Mortgage Loans; Collection of Payments" and "--Realization Upon Mortgage Loans"
and to the section in the prospectus titled "Material Legal Aspects of the
Mortgage Loans-Foreclosure."
The rate and timing of principal payments and defaults and the severity
of losses on the Mortgage Loans may be affected by a number of factors,
including, without limitation, the terms of the Mortgage Loans (for example, the
provisions requiring the payment of Prepayment Premiums or Yield Maintenance
Charges and amortization terms that require Balloon Payments or include an
Anticipated Repayment Date), prevailing interest rates, the market value of the
Mortgaged Properties, the demographics and relative economic vitality of the
areas in which the Mortgaged Properties are located, the general supply and
demand for those facilities (and their uses) in those areas, the quality of
management of Mortgaged Properties, the servicing of the Mortgage Loans, federal
and state tax laws (which are subject to change) and other opportunities for
investment.
The rate of prepayment on the Mortgage Pool is likely to be affected by
the amount of any required Yield Maintenance Charges and Prepayment Premiums and
the borrowers' ability to refinance their related Mortgaged Loans. If prevailing
market interest rates for mortgage loans of a comparable type, term and risk
level have decreased enough to offset any required Yield Maintenance Charges and
Prepayment Premium, a borrower may have an increased incentive to refinance its
Mortgage Loan. Under those circumstances a borrower may refinance to "lock in" a
fixed rate or a lower rate or to take advantage of an initial "teaser rate" on
an adjustable rate mortgage loan (that is, a mortgage interest rate below that
which would otherwise apply if the applicable index and gross margin were
applied). Also, a borrower may refinance its Mortgage Loan to "cash out" (that
is, to take advantage of an increase in the market value of the Mortgaged
Property).
In addition, some borrowers may sell Mortgaged Properties in order to
realize their equity in those Mortgaged Properties, to meet cash flow needs or
to make other investments. Changes in federal, state and local tax laws or
deferral programs may also impact the refinance opportunities. Also, although
Excess Cash Flow is applied to reduce the principal of the ARD Loans after their
respective Anticipated Repayment Dates and the Mortgage Rates are reset at the
Revised Rates, there can be no assurance that any of those Mortgage Loans will
be prepaid on that date or any date
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prior to maturity. Under the circumstances described under "Description of the
Mortgage Pool- Material Terms and Conditions of the Mortgage Loans-ARD Loans;
Excess Interest," the holders of 100% of the Class N Certificates or the Special
Servicer will have the option to purchase any ARD Loan on or after its
Anticipated Repayment Date at a price equal to its outstanding Scheduled
Principal Balance, plus accrued and unpaid interest, and unreimbursed Advances
made with respect thereto, plus accrued and unpaid interest on those advances.
The exercise of this option may accelerate repayment of some Certificates, but
is not expected to result in repayment of all Classes on the same Distribution
Date.
If the markets for commercial and multifamily real estate should
experience an overall decline in property values so that the outstanding
balances of the Mortgage Loans exceed the value of the respective Mortgaged
Properties, a borrower under a non-recourse loan may have a decreased incentive
to fund operating cash flow deficits. As a result, actual losses may be higher
than those originally anticipated by investors.
Neither the Depositor, the Transferor, the Mortgage Loan Sellers nor
the Trustee, or any affiliate of any of them, makes any representation as to the
particular factors that will affect the rate and timing of prepayments and
defaults on particular Mortgage Loans or as to the relative importance of those
factors. None of them makes any representation as to the percentage of the
principal balance of the Mortgage Loans that will be prepaid at all or at any
time or as to whether a default will occur as of any date.
The extent to which the yield to maturity of any Class of Regular
Certificates may vary from the anticipated yield will depend upon the degree to
which they are purchased at a discount or premium and when, and to what degree,
payments of principal on the Mortgage Loans are in turn distributed in reduction
of the Certificate Balance of those Certificates. An investor should consider,
in the case of any Regular Certificate purchased at a discount, the risk that a
slower than anticipated rate of principal payments on the Mortgage Loans could
result in an actual yield to that investor that is lower than the anticipated
yield. An investor should consider, in the case of any Certificate purchased at
a premium (or the Class A-EC Certificates, which have no Certificate Balances),
the risk that a faster than anticipated rate of principal payments could result
in an actual yield to that investor that is lower than the anticipated yield. In
general, the earlier a payment of principal on the Mortgage Loans is distributed
in reduction of the Certificate Balance or Notional Balance of any Regular
Certificate purchased at a discount or premium the greater will be the effect on
an investor's yield to maturity. As a result, the effect on an investor's yield
of principal payments on the Mortgage Loans occurring at a rate higher (or
lower) than the rate anticipated by the investor during any particular period
would not be fully offset by a subsequent like reduction (or increase) in the
rate of those principal payments.
A Mortgage Loan as to which an Appraisal Reduction Event occurs may
generate collections at the same rate it had prior to that Appraisal Reduction
Event. Under those circumstances, available Funds will include the principal
portion of any Appraisal Reduction actually collected and the portion of the
interest payments actually collected that is equal to interest accrued on
unreversed Appraisal Reductions allocated to an outstanding Class at the related
Pass-Through Rate . Those amounts will be distributable to the more senior
outstanding Classes of Certificates, which therefore will receive collections in
respect of interest or principal at an increased rate. There can be no assurance
that a subsequent appraisal will reverse an Appraisal Reduction in whole or in
part, that the related borrower will thereafter make payments at any particular
rate or that Realized Losses will be reimbursed to any Class.
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Balloon Payments/ARD Loan Payments. ___of the Mortgage Loans
representing approximately ____% of the Initial Pool Balance, are Balloon Loans
that will have substantial payments (that is, Balloon Payments) due at their
stated maturities, unless previously prepaid. ________________ ___ of the
Mortgage Loans, representing approximately ____% of the Initial Pool Balance,
are ARD Loans. The ability of the borrowers to pay the Balloon Payments at the
maturity of the Balloon Loans or to prepay an ARD Loan in full on the related
Anticipated Repayment Dates may depend on their ability to sell or refinance the
Mortgaged Properties, which, in turn, will depend on a number of factors
described above many of which are beyond the control of the borrowers. The
Certificates are subject to the risk of default by the borrowers in making the
required Balloon Payments or prepayments of ARD Loans on their Anticipated
Repayment Dates. If any borrower is unable to make the applicable Balloon
Payment when due or to prepay an ARD Loan on the Anticipated Repayment Date, the
weighted average lives of the Certificates are likely to be longer than
expected.
Losses and Shortfalls. The yield to holders of the Regular Certificates
will also depend on the extent to which those holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Shortfalls in
Available Funds resulting from shortfalls in collections of amounts payable on
the Mortgage Loans (to the extent not advanced) or additional Master Servicer or
Special Servicer compensation, interest on Advances, extraordinary Trust Fund
expenses or other similar items will generally be borne as described above under
"Description of the Certificates."
Pass-Through Rate. The Pass-Through Rates on the Certificates other
than the Class D and E Certificates, are related to the Weighted Average Net
Mortgage Rate. Therefore, a decrease in the Net Mortgage Rate for any Mortgage
Loan (for example, as a result of a modification) will result in the
Certificates accruing interest at a rate higher than the Net Mortgage Rate for
the Mortgage Pool and there will not be sufficient cash flow to make all
interest payments due on each of those Classes. Any interest shortfall would
affect those Certificates in reverse sequential order commencing with the Class
N Certificates.
The Weighted Average Net Mortgage Rate will fluctuate over the lives of
the Certificates as a result of scheduled amortization, voluntary prepayments,
Appraisal Reductions and liquidations of Mortgage Loans. If principal payments,
including voluntary and involuntary Principal Prepayments, are made on a
Mortgage Loan with a relatively high Net Mortgage Rate at a rate faster than the
rate of principal payments on the Mortgage Pool as a whole, the Pass-Through
Rates applicable to the Certificates (other than the Class A-1, Class A-2, Class
B and Class C Certificates) will be adversely affected. Accordingly, the yield
on each of those Classes of Certificates will be sensitive to changes in the
outstanding principal balances of the Mortgage Loans as a result of scheduled
amortization, voluntary prepayments and liquidations of Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will
not be made to Certificateholders until, at the earliest, the _____ day of the
month following the month in which interest accrued on the Certificates, the
effective yield to the holders of the Regular Certificates will be lower than
the yield that would otherwise be produced by the applicable Pass-Through Rate
and purchase prices (assuming the prices did not account for the delay).
WEIGHTED AVERAGE LIFE
Weighted average life of a Certificate refers to the average amount of
time that will elapse from the Closing Date to the date of distribution to the
investor of each dollar distributed in reduction of Principal Balance or
Notional Balance of that security. The weighted average life of each class of
Certificates will be influenced by, among other things, the rate at which
principal of the Mortgage Loans is paid.
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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
rate of prepayment each month, expressed as an annual rate, relative to the then
outstanding principal balance of a pool of mortgage loans for the life of those
mortgage loans. As used in each of the following tables, the column headed "0%"
assumes that none of the Mortgage Loans is prepaid before maturity. The columns
headed "3%", "5%", "7%", "10%" and "15%" assume that no prepayments are made on
any Mortgage Loan during that Mortgage Loan's Lock out Period, if any, or during
that Mortgage Loan's Yield Maintenance Period, if any, or during that Mortgage
Loan's Defeasance Lockout Period, if any, and are otherwise made on each of the
Mortgage Loans at the indicated CPRs. CPR does not purport to be either an
historical description of the prepayment experience of any pool of mortgage
loans or a prediction of the anticipated rate of prepayment of any mortgage
loans, including the Mortgage Loans to be included in the Trust Fund.
The tables set forth below have been prepared on the basis of those
assumptions described below regarding the characteristics of the Mortgage Loans
that are expected to be included in the Mortgage Pool as described under
"Description of the Mortgage Pool" in this prospectus supplement and the
performance of the Mortgage Loans. The tables assume, among other things, that:
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(1) as of the Closing Date the Mortgage Loans (except as set forth
in this prospectus supplement) provide for a Monthly Payment
of principal and interest that would fully amortize the
remaining principal balance of those Mortgage Loans using the
Monthly Payments set forth in Schedule A hereto, commencing on
________________ (including Balloon Payments on the maturity
dates set forth in Schedule A);
(2) neither the Depositor, the Transferor nor the related Mortgage
Loan Seller will repurchase any Mortgage Loan, and none of the
Master Servicer, the Special Servicer, the Depositor or the
holders of the Class R-I Certificates will exercise its option
to purchase Mortgage Loans and cause a termination of the
Trust Fund;
(3) there are no delinquencies or Realized Losses;
(4) no Prepayment Premiums are paid;
(5) there are no Appraisal Reduction Amounts;
(6) payments on the Certificates will be made on the ___ day of
each month, commencing in ________________ (notwithstanding
that the ____ day of the month is not a Business Day or is
fewer than four Business Days after the related Determination
Date);
(7) there are no ongoing Trust Fund expenses payable out of the
Trust Fund other than Servicing Fees;
(8) the Regular Certificates will be purchased on the Closing
Date;
(9) no defaults occur with respect to any of the Mortgage Loans;
(10) all of the Mortgage Loans accrue interest based upon a 360 day
year composed of twelve 30 day months;
(11) all Mortgage Loans have a maturity date on the first day of a
month; and
(12) each ARD Loan is paid in full on its Anticipated Repayment
Date notwithstanding the fact that prepayments could occur
under the ARD Loans prior to that Anticipated Repayment Date
and that, in either case, those prepayments would not be
accompanied by payment of a Yield Maintenance Charge or
Prepayment Premium.
The actual performance of the Mortgage Loans will differ from the
assumptions used in calculating the tables set forth below, which are
hypothetical in nature and are provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. Any
difference between those assumptions and the actual performance of the Mortgage
Loans, or actual prepayment or loss experience, will affect the percentages of
initial Certificate Balance outstanding over time and the weighted average lives
of the classes of Certificates.
Subject to the foregoing discussion and assumptions, the following
tables indicate the weighted average life of each class of Certificates, and set
forth the percentages of the initial Certificate Balance or Notional Balance of
each class Certificates that would be outstanding after each of the Distribution
Dates shown based on different prepayment speed assumptions.
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(1) multiplying the amount of each distribution in reduction of
the Certificate Balance or Notional Balance of that Class by
the number of years from the date of purchase to the related
Distribution Date,
(2) adding the results; and
(3) dividing the sum by the aggregate distributions in reduction
of Certificate Balance or Notional Balance referred to in
first step above.
PERCENTAGE OF INITIAL CERTIFICATE BALANCE
(OR NOTIONAL BALANCE)
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
DISTRIBUTION CLASS [ ] CLASS [ ]
DATE PREPAYMENT SPEED PREPAYMENT SPEED
--------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.00% 3.00% 5.00% 7.00% 10.00% 15.00% 0.00% 3.00% 5.00% 7.00% 10.00% 15.00%
</TABLE>
MASTER SERVICER AND SPECIAL SERVICER
[Provide description]
THE POOLING AND SERVICING AGREEMENT
GENERAL
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The Certificates will be issued pursuant to the Pooling and Servicing
Agreement.
Upon written request, the Depositor will provide to a prospective or
actual holder of a Certificate a copy (without exhibits) of the Pooling and
Servicing Agreement without charge. Requests should be addressed to Prudential
Securities Secured Financing Corporation, One New York Plaza, New York, New York
10292, attention: David Rogers, at telephone number (212) 214-1000.
ASSIGNMENT OF THE MORTGAGE LOANS
On or before the Closing Date, the Depositor will assign or cause the
assignment of the Mortgage Loans, without recourse, to the Trustee for the
benefit of the holders of Certificates. On or before the Closing Date, the
Depositor will deliver to the Trustee the Trustee Mortgage File (with a copy to
the Master Servicer) for each Mortgage Loan, which includes the following:
(1) the original promissory note for the Mortgage Loan, endorsed
by the applicable Mortgage Loan Seller in blank in the
following form: "Pay to the order of , without recourse,"
which the Master Servicer or its designee is authorized to
complete and which promissory note and all endorsements of the
promissory note shall show a complete chain of endorsement
from the originator of the Mortgage Loan to the applicable
Mortgage Loan Seller, then to the Transferor an then to the
Depositor;
(2) (a) the original recorded Mortgage for the Mortgage Loan or a
copy of the Mortgage certified by the related title insurance
company, public recording office or closing agent in the form
in which it was executed or was submitted for recording, (b)
the related original recorded Assignment of Mortgage to the
applicable Mortgage Loan Seller or a copy of the Assignment of
Mortgage certified by the related title insurance company,
public recording office or closing agent in the form in which
it was executed or was submitted for recording, and (c) the
related original Assignment of Mortgage executed by the
applicable Mortgage Loan Seller in blank, which the Master
Servicer or its designee is authorized to complete and which,
except for the insertion of the name of the assignee and any
related recording information which is not yet available to
the applicable Mortgage Loan Seller, is in suitable form for
recordation in the jurisdiction in which the related Mortgaged
Property is located;
(3) if the security agreement for the Mortgage Loan is separate
from the related Mortgage, the original security agreement or
a counterpart of it, and if the security agreement is not
assigned under the Assignments of Mortgage described in clause
(2) above, the original assignment of the security agreement
to the applicable Mortgage Loan Seller or a counterpart of it
and the original assignment of the security agreement executed
by the applicable Mortgage Loan Seller in blank which the
Master Servicer or its designee is authorized to complete;
(4) a copy of each Form UCC-1 financing statement, if any, filed
with respect to personal property and fixtures constituting a
part of the Mortgaged Property for the Mortgage Loan, together
with a copy of each Form UCC-2 or UCC-3 assignment, if any, of
the financing statement to the applicable Mortgage Loan Seller
and a copy of each Form UCC-2 or UCC-3 assignment, if any, of
the financing statement executed by the applicable Mortgage
Loan Seller in blank which the Master Servicer or
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its designee is authorized to complete and which, except for
the insertion of the name of the assignee and any related
filing information which is not yet available to the
applicable Mortgage Loan Seller, is in suitable form for
filing in the filing office in which the financing statement
was filed;
(5) the original Loan Agreement for the Mortgage Loan, if any, or
a counterpart of it;
(6) the original lender's title insurance policy (or the original
pro forma title insurance policy) for the Mortgage Loan,
together with any endorsements to the lender's title insurance
policy;
(7) if any Assignment of Leases, Rents and Profits for the
Mortgage Loan is separate from the related Mortgage, (a) the
original recorded Assignment of Leases, Rents and Profits or a
copy of it certified by the related title insurance company,
public recording office or closing agent in the form in which
it was executed or was submitted for recording, (b) the
related original recorded reassignment of any instrument, if
any, to the applicable Mortgage Loan Seller or a copy of it
certified by the related title insurance company, public
recording office or closing agent in the form in which it was
executed or was submitted for recording, and (c) the related
original reassignment of any instrument, if any, executed by
the applicable Mortgage Loan Seller in blank which the Master
Servicer or its designee is authorized to complete and which,
except for the insertion of the name of the assignee and any
related recording information which is not yet available to
the applicable Mortgage Loan Seller, is in suitable form for
recordation in the jurisdiction in which the related Mortgaged
Property is located. Any reassignments may also be included in
a related Assignment of Mortgage and need not be a separate
instrument;
(8) copies of the ESAs or similar studies or reports on the
Mortgaged Property for the Mortgage Loan prepared in
connection with the origination of the Mortgage Loan;
(9) if any related assignment of contracts is separate from the
related Mortgage, the original assignment of contracts or a
counterpart of it, and if the assignment of contracts is not
assigned under the Assignments of Mortgage described in clause
(2) above, the related original reassignment of any instrument
to the applicable Mortgage Loan Seller or a counterpart of the
reassignment and the related original reassignment of any
instrument executed by the applicable Mortgage Loan Seller in
blank which the Master Servicer or its designee is authorized
to complete;
(10) with respect to any Reserve Accounts for the Mortgage Loan, a
copy of any separate agreement relating to the Reserve
Accounts between the related borrower and the originator;
(11) the original of any other written agreement, instrument or
document securing the Mortgage Loan, including original
guarantees for the Mortgage Loan or the original letter of
credit, if any, for the Mortgage Loan, together with any and
all amendments to the documents, including any amendment which
entitles the Master Servicer to draw upon the letter of credit
on behalf of the Trustee for the benefit of the
Certificateholders, and the original of each instrument or
other item of personal property given as security for the
Mortgage Loan for which possession by a secured party is
necessary to the secured party's valid, perfected, first
priority security interest in that
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Mortgage Loan, together with all assignments or endorsements
necessary to entitle the Master Servicer to enforce a valid,
perfected, first priority security interest in that Mortgage
Loan on behalf of the Trustee for the benefit of the
Certificateholders;
(12) with respect to any Reserve Accounts for the Mortgage Loan, a
copy of the UCC-1 financing statements, if any, submitted for
filing relating to the applicable Mortgage Loan Seller's
security interest in the Reserve Accounts and all funds
contained in those accounts, together with a copy of each Form
UCC-2 or UCC-3 assignment, if any, of the financing statement
to the applicable Mortgage Loan Seller and a copy of each Form
UCC-2 or UCC-3 assignment, if any, of the financing statement
executed by the applicable Mortgage Loan Seller in blank,
which the Master Servicer or its designee is authorized to
complete and which, except for the insertion of the name of
the assignee and any related filing information which is not
yet available to the applicable Mortgage Loan Seller, is in
suitable form for filing in the filing office in which the
financing statement was filed; and
(13) copies of any and all amendments, modifications, supplements
and waivers related to any of the foregoing.
If the Depositor cannot deliver any original or certified recorded
document described above on the Closing Date, the Depositor will use its best
efforts to deliver (or cause to be delivered) original or certified recorded
documents within 45 days from the Closing Date (subject to delays attributable
to the failure of the appropriate recording office to return those documents, in
which case the Depositor will deliver (or cause to be delivered) those documents
promptly upon receipt of them). The Trustee is obligated to review the Trustee
Mortgage File for each Mortgage Loan within 90 days after the later of delivery
or the Closing Date and report to the Depositor any missing documents or defects
in the Trustee Mortgage File that are required to be reported by the Trustee to
the Depositor.
The Master Servicer will hold all remaining Mortgage Loan Documents and
all other documents related to each Mortgage Loan, including copies of any
management agreements, ground leases, appraisals, surveys, environmental reports
and similar documents and any other written agreements relating to each Mortgage
Loan in trust for the benefit of the Trustee on behalf of Certificateholders.
The legal ownership of all records and documents with respect to each Mortgage
Loan prepared by or that come into the possession of the Master Servicer will
immediately vest in the Trustee, in trust for the benefit of Certificateholders.
SERVICING OF THE MORTGAGE LOANS; COLLECTION OF PAYMENTS
The Pooling and Servicing Agreement requires the Master Servicer and
the Special Servicer to service and administer the Mortgage Loans (or in the
case of the Special Servicer, the Specially Serviced Mortgage Loans and REO
Mortgage Loans) on behalf of the Trust Fund solely in the best interests of and
for the benefit of all of the Certificateholders and the Trust Fund, in
accordance with the terms of the Pooling and Servicing Agreement and the
Mortgage Loans. To the extent consistent with the foregoing and except to the
extent that the Pooling and Servicing Agreement provides for a contrary specific
course of action, each of the Master Servicer and the Special Servicer is
required to service and administer the Mortgage Loans (1) in the same manner in
which, and with the same care, skill, prudence and diligence with which it
services and administers similar mortgage loans for itself and other third-party
portfolios, giving due consideration to the customary and usual standards of
practice used by prudent institutional commercial mortgage loan servicers of
loans comparable to the
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Mortgage Loans, or (2) in the same manner in which, and with the same care,
skill, prudence and diligence with which it services and administers similar
mortgage loans that it owns, whichever standard of care is higher, and taking
into account its other obligations under the Pooling and Servicing Agreement and
with the purpose of maximizing the estimated net present value of each Mortgage
Loan, but without regard to the following:
(1) any other relationship that the Master Servicer, the Special
Servicer, any sub-servicer, the Depositor, the Trustee, or any
affiliate of any of them may have with the borrowers or any
affiliate of the borrowers;
(2) the ownership of any Certificate by the Master Servicer, the
Special Servicer or any affiliate of either;
(3) the Master Servicer's or the Trustee's obligations, as
applicable, to make Advances or to incur servicing expenses
with respect to the Mortgage Loans;
(4) the Master Servicer's, the Special Servicer's or any
sub-servicer's right to receive compensation for its services
under the Pooling and Servicing Agreement or for any
particular transaction;
(5) the ownership, servicing or management for others by the
Master Servicer, the Special Servicer or any sub-servicer of
any other mortgage loans or property; or
(6) any obligation of the Master Servicer to pay any indemnity
with respect to any repurchase obligation.
Each of the Master Servicer and the Special Servicer is permitted, at
its own expense, to employ sub-servicers, agents or attorneys in performing any
of its obligations under the Pooling and Servicing Agreement. In each of those
instances, neither the Master Servicer nor the Special Servicer will be relieved
of any of its obligations under the Pooling and Servicing Agreement and each
will be responsible for the acts and omissions of any of the sub-servicers,
agents or attorneys. The Pooling and Servicing Agreement provides, however, that
neither the Master Servicer nor the Special Servicer, nor any of their
directors, officers, employees or agents, will have any liability to the Trust
Fund or the Certificateholders for taking any action or refraining from taking
any action in good faith or for errors in judgment. The foregoing provision
would not protect the Master Servicer, the Special Servicer or any other person
from:
(1) any liability resulting from a breach of any of the Master
Servicer's or the Special Servicer's respective
representations or warranties in the Pooling and Servicing
Agreement;
(2) any specific liability imposed on the Master Servicer or the
Special Servicer for a breach of the servicing standards set
forth in the Pooling and Servicing Agreement; or
(3) any liability by reason of the Master Servicer's or the
Special Servicer's willful misfeasance, bad faith, fraud or
negligence in the performance of its duties under the Pooling
and Servicing Agreement or its reckless disregard of its
obligations and duties under the Pooling and Servicing
Agreement.
The Pooling and Servicing Agreement requires the Master Servicer and
the Special Servicer to make reasonable efforts to collect all payments called
for under the terms of the Mortgage Loans and to follow collection procedures as
are consistent with the servicing standards under the Pooling and
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Servicing Agreement. Consistent with the above, the Master Servicer or the
Special Servicer, as applicable, may, in its discretion, waive any late payment
charge or penalty fee in connection with any delinquent Monthly Payment or
Balloon Payment with respect to any Mortgage Loan. With respect to any ARD Loan,
the Pooling and Servicing Agreement prohibits the Master Servicer and the
Special Servicer from taking any enforcement action (other than requests for
collections) for payment of Excess Interest or principal in excess of the
principal component of the constant Monthly Payment for that ARD Loan before (1)
any acceleration of the maturity of that ARD Loan based on a default other than
the non-payment of Excess Interest or principal in excess of the principal
component of the related Scheduled Monthly Payment for that ARD Loan or (2) the
final maturity date of that ARD Loan.
ADVANCES
Subject to the limitations described below, the Master Servicer will be
obligated to advance on the Remittance Date an amount equal to the total or any
portion of the Monthly Payment on any Mortgage Loan that was delinquent as of
the close of business on the Business Day preceding that Remittance Date or,
upon a default in the payment of a Balloon Payment, the Assumed Scheduled
Payment for the related Balloon Loan, unless the Master Servicer determines that
any of those advances would be a Nonrecoverable Advance and delivers to the
Trustee an officer's certificate and accompanying documentation related to a
determination of nonrecoverability.
For any Distribution Date, the amount required to be advanced for a
Mortgage Loan that has been subject to an Appraisal Reduction Event will equal
the amount that would be required to be advanced by the Master Servicer without
giving effect to the Appraisal Reduction minus any Appraisal Reduction Amount
for that Mortgage Loan for that Distribution Date.
In addition to P&I Advances, the Master Servicer will also be obligated
(subject to the limitations described in this prospectus supplement) to make
Property Advances (a) to pay costs and expenses incurred in connection with
defaulted Mortgage Loans, acquisition of title to, or management of, REO
Properties, or the sale of defaulted Mortgage Loans or REO Properties, in each
case as specified in the Pooling and Servicing Agreement, (b) to pay delinquent
real estate taxes, assessments and hazard insurance premiums and (c) to cover
other similar costs and expenses necessary to protect and preserve the security
of the related Mortgage. None of the Master Servicer, the Special Servicer or
the Trustee, as applicable, shall be obligated to advance from its own funds any
amounts required to cure any failure of any Mortgaged Property to comply with
any applicable environmental law or to contain, clean up or remedy any
environmental condition present at any Mortgaged Property, and those expenses
shall be borne by the Trust Fund.
If the Trustee becomes the successor Master Servicer, the Trustee, as
successor Master Servicer acting in accordance with the servicing standards set
forth in the Pooling and Servicing Agreement, will be required to make the
Advances subject to its determination of recoverability. The Trustee will be
entitled to rely conclusively on any non-recoverability determination of the
Master Servicer. For more detailed information, you should refer to the section
below in this prospectus supplement titled "--The Trustee."
The obligation of the Master Servicer or the Trustee, as applicable, to
make Advances with respect to any Mortgage Loan continues through the
foreclosure of that Mortgage Loan and until the liquidation of the Mortgage Loan
or related Mortgaged Properties. Advances are intended to
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provide a limited amount of liquidity and not to guarantee or insure against
losses. Neither the Master Servicer nor the Trustee will be required to make any
Advance that it determines (possibly based on, among other things, an updated
Appraisal), in its good faith business judgment, will not be recoverable out of
related late payments, Insurance Proceeds, Liquidation Proceeds and other
collections with respect to the Mortgage Loan as to which the Advance was made.
To the extent that any borrower is not obligated under its Mortgage Loan
Documents to pay or reimburse any portion of any related outstanding Advances as
a result of a modification of the related Mortgage Loan by the Special Servicer
that forgives loan payments or other amounts that the Master Servicer or the
Trustee previously advanced, and the Master Servicer or the Trustee determines
that no other source of payment or reimbursement for those Advances is available
to it, those Advances will be deemed to be nonrecoverable. In addition, if the
Master Servicer or the Trustee, as applicable, determines that any Advance
previously made will not be recoverable from the foregoing sources, then the
Master Servicer or the Trustee, as applicable, will be reimbursed for the
Advance, plus interest , out of amounts on deposit in the Collection Account
before any distributions are made on the Certificates. The determination by the
Master Servicer or the Trustee must be evidenced by an officer's certificate
delivered to the Trustee (or, in the case of the Trustee, to the Depositor)
setting forth its determination of nonrecoverability and the procedure and
considerations of the Master Servicer or the Trustee, as applicable, forming the
basis of its determination. This officer's certificate must include a copy of
the Updated Appraisal or any other information or reports obtained by the Master
Servicer or the Trustee, as applicable, such as property operating statements,
rent rolls, property inspection reports, engineering reports and other
documentation which may support the determination as set forth in the
certificate.
The Master Servicer or the Trustee, as applicable, will be reimbursed
for any Advance it has made from (1) any collections on or in respect of the
particular Mortgage Loan or REO Property with respect to which the Advance was
made or (2) from any other amounts from time to time on deposit in the
Collection Account upon determining that the Advance is not recoverable in the
manner described in the preceding paragraph.
Except as set forth above with respect to Advances made during payment
grace periods, the Master Servicer or the Trustee, as applicable, will be
entitled to receive interest at the Advance Rate on its outstanding Advances.
The Master Servicer or the Trustee, as applicable, will be authorized to pay
itself interest on the Advances from general collections on all of the Mortgage
Loans before any payments are made to holders of Certificates. If the interest
on Advances is not offset by the Default Interest, a shortfall will result which
generally will result in a Class Interest Shortfall for the most Subordinate
Class then outstanding.
APPRAISAL REDUCTIONS
After an Appraisal Reduction Event has occurred for a Mortgage Loan, an
Appraisal Reduction will be calculated for that Mortgage Loan. An Appraisal
Reduction Event for a Mortgage Loan will occur at the earliest of:
(1) the third anniversary of the date on which the first extension
of the maturity date of that Mortgage Loan became effective as
a result of a modification of that Mortgage Loan by the
Special Servicer, which extension did not decrease the
aggregate amount of Monthly Payments on the Mortgage Loan;
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(2) 120 days after an uncured delinquency occurs for that Mortgage
Loan;
(3) the date on which a reduction in the amount of Monthly
Payments on that Mortgage Loan, or a change in any other
material economic term of that Mortgage Loan (other than an
extension of its maturity) becomes effective as a result of a
modification of that Mortgage Loan by the Special Servicer;
(4) 60 days after a receiver has been appointed;
(5) 60 days after the related borrower of that Mortgage Loan
declares bankruptcy or is the subject of an involuntary
bankruptcy proceeding; or
(6) immediately after that Mortgage Loan becomes an REO Mortgage
Loan; however, an Appraisal Reduction Event will not occur at
any time when the aggregate Certificate Balances of all
Classes of Certificates other than the Senior Certificates
have been reduced to zero.
The Appraisal Reduction for any Distribution Date and for any Mortgage
Loan as to which any Appraisal Reduction Event has occurred will be an amount
equal to the excess, if any, of
(1) the outstanding Scheduled Principal Balance of that Mortgage
Loan over
(2) the excess of:
(a) 90% of the appraised value of the related Mortgaged
Property as determined:
(A) by one or more appraisals, if that Mortgage
Loan has an outstanding Scheduled Principal
Balance equal to or in excess of $2,000,000,
conducted in compliance with the Code of
Professional Ethics and Standards of
Professional Conduct of the Appraisal
Institute and the Uniform Standards of
Professional Appraisal Practice as adopted
by the Appraisal Standards Board of the
Appraisal Foundation and accepted and
incorporated into FIRREA (the costs of which
will be paid by the Master Servicer as a
Property Advance), or =
(B) by either an appraisal conducted as
described in the preceding clause (A) or an
internal valuation performed by the Special
Servicer, if that Mortgage Loan has an
outstanding Scheduled Principal Balance less
than $2,000,000
over
(b) the sum of
(A) to the extent not previously advanced by the
Master Servicer or the Trustee, all unpaid
interest on that Mortgage Loan at a per
annum rate equal to its Mortgage Rate, plus
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(B) all unreimbursed Advances (and interest ) in
respect of that Mortgage Loan , plus
(C) all currently due and unpaid real estate
taxes and assessments, insurance premiums,
ground rents and all other amounts due and
unpaid with respect to that Mortgage Loan
(which taxes, assessments, premiums, ground
rents and other amounts have not been
subject to an Advance by the Master Servicer
or the Trustee.
If an appraisal is to be obtained as described above, the Special
Servicer must obtain the appraisal within 60 days of the occurrence of the
related Appraisal Reduction Event (and not more than 120 days thereafter,
including within the 120-day period the passage of any time period set forth in
the definition of Appraisal Reduction Event). If the appraisal is not obtained
by that date or if, for any Mortgage Loan with an outstanding Scheduled
Principal Balance of $1,000,000 or less, the Special Servicer elects not to
obtain an appraisal, the Appraisal Reduction for the related Mortgage Loan will
be 35% of the outstanding Scheduled Principal Balance of that Mortgage Loan as
of the date of the related Appraisal Reduction Event. On the first Determination
Date occurring on or after the delivery of the appraisal, the Special Servicer
will be required to calculate and report to the Master Servicer, and the Master
Servicer will report to the Trustee, the Appraisal Reduction to take into
account the appraisal.
As a result of calculating an Appraisal Reduction for a Mortgage Loan,
the P&I Advance for that Mortgage Loan for the related Remittance Date will be
reduced, which will have the effect of reducing the amount of interest available
for distribution to the Certificateholders. The Appraisal Reduction Amount for
any Distribution Date and any Mortgage Loan for which an Appraisal Reduction has
been calculated will equal the product of (1) one-twelfth of the Pass-Through
Rate for each Class of Certificates to which an Appraisal Reduction is allocated
and (2) the Appraisal Reduction for that Mortgage Loan. Appraisal Reductions
will be allocated to the Subordinate Certificates in reverse sequential order of
the Classes for purposes of determining Voting Rights. For more detailed
information, you should refer to the sections in this prospectus supplement
titled "--Realization Upon Mortgage Loans" and "--Voting Rights."
With respect to each Mortgage Loan as to which an Appraisal Reduction
has occurred (unless that Mortgage Loan has become a Corrected Mortgage Loan and
has remained current for twelve consecutive Monthly Payments and no other
Appraisal Reduction Event has occurred and is continuing), the Special Servicer
is required, within 30 days before each anniversary of the Appraisal Reduction
Event, unless the outstanding Scheduled Principal Balance of that Mortgage Loan
is $1,000,000 or less, to order an appraisal (which may be an update of a prior
appraisal) or, with respect to any Mortgage Loan with an outstanding principal
balance less than $2,000,000, perform an internal valuation or obtain an
appraisal (which may be an update of a prior appraisal), the cost of which will
be paid by the Master Servicer as a Property Advance recoverable from the Trust
Fund. Based upon the appraisal, internal valuation or, as described in the
second preceding paragraph, percentage calculation of the Appraisal Reduction,
as the case may be, the Special Servicer will redetermine and report to the
Master Servicer and the Trustee the amount of the Appraisal Reduction for that
Mortgage Loan, and the redetermined Appraisal Reduction will replace the prior
Appraisal Reduction for that Mortgage Loan. As an exception to the foregoing,
the Special Servicer will not be required to obtain an appraisal or perform an
internal valuation for a Mortgage Loan which is the subject of an Appraisal
Reduction Event if the Special Servicer has obtained an appraisal for the
related Mortgaged Property during the 12-month period before the occurrence of
the Appraisal Reduction Event. Instead, the Special Servicer may use the prior
appraisal in calculating any Appraisal Reduction for that Mortgage Loan.
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ACCOUNTS
Collection Account. The Master Servicer will establish and maintain a
Collection Account into which it will be required to deposit, within two
Business Days of receipt, the following payments and collections received or
made by it on or with respect to the Mortgage Loans:
(1) all payments on account of principal on the Mortgage Loans,
including the principal component of Unscheduled Payments on
the Mortgage Loans;
(2) all payments on account of interest and Default Interest on
the Mortgage Loans and the interest portion of all Unscheduled
Payments and all Prepayment Premiums;
(3) any amounts required to be deposited by the Master Servicer in
connection with losses realized on Permitted Investments with
respect to funds held in the Collection Account and in
connection with Prepayment Interest Shortfalls;
(4) (a) all Net REO Proceeds transferred from an REO Account, (b)
all amounts transferred from lockbox accounts in respect of
ARD Loans and payable to the Certificateholders and (c) all
Condemnation Proceeds, Insurance Proceeds and Net Liquidation
Proceeds not required to be applied to the restoration or
repair of the related Mortgaged Property;
(5) any amounts received from borrowers that represent recoveries
of Property Advances or Appraisal Reduction Excess
Collections; and
(6) any other amounts required by the provisions of the Pooling
and Servicing Agreement to be deposited into the Collection
Account by the Master Servicer or the Special Servicer,
including proceeds of any purchase or repurchase of a Mortgage
Loan as described under the sections in this prospectus
supplement titled "Description of the Mortgage
Pool--Representations and Warranties; Repurchase," "The
Pooling and Servicing Agreement-Realization Upon Mortgage
Loans" and "Description of the Certificates--Early
Termination."
The foregoing requirements for deposits in the Collection Account will
be exclusive, and any payments in the nature of late payment charges, late fees,
"insufficient funds" check charges, assumption fees, loan modification fees,
loan service transaction fees, extension fees, demand fees, beneficiary
statement charges and similar fees need not be deposited in the Collection
Account by the Master Servicer. To the extent permitted by applicable law, the
Master Servicer or the Special Servicer, as applicable, will be entitled to
retain any charges and fees received with respect to the Mortgage Loans. If the
Master Servicer deposits into the Collection Account amounts not required to be
deposited in the Collection Account, the Master Servicer may at any time
withdraw those amounts from the Collection Account.
Distribution Account. The Trustee will establish and maintain a
Distribution Account in its name in trust for the benefit of the holders of
Certificates. For each Distribution Date, the Master Servicer will deposit in
the Distribution Account, to the extent of funds on deposit in the Collection
Account on or before the Remittance Date, the
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aggregate amount of Pooled Available Funds as required by the Pooling and
Servicing Agreement, plus the following amounts:
(1) any Prepayment Premiums, Yield Maintenance Charges, Excess
Interest and Appraisal Reduction Excess Collections received
by the Master Servicer during the related Collection Period;
(2) any Default Interest received with respect to any Mortgage
Loan that is in default with respect to its Balloon Payment;
and
(3) amounts payable to the Trustee as compensation for its
services (including, but not limited to, the Trustee Fee).
To the extent not included in Available Funds, the Master Servicer will
remit to the Trustee all P&I Advances for deposit into the Distribution Account
on the related Remittance Date. For more detailed information, you should refer
to the section in this prospectus supplement titled "Description of the
Certificates--Distributions."
The Collection Account and the Distribution Account will be held in the
name of the Trustee (or, in the case of the Collection Account, the Master
Servicer on behalf of the Trustee) on behalf of the holders of Certificates, and
the Trustee (and, in the case of the Collection Account, the Master Servicer)
will be authorized to make withdrawals from those accounts. Each of the
Collection Account and the Distribution Account will be either (1) a segregated
account or accounts maintained with either a federally or state-chartered
depository institution or trust company the short term unsecured debt
obligations of which are rated [at least P-1 by Moody's and at least "A-1+" by
Fitch] or, if deposits are to be held in those accounts for 30 or more days, the
long term unsecured debt obligations of which (or of that institution's parent
holding company) are rated [at least A22 by Moody's and at least BBB by Fitch]
or (2) a segregated trust account or accounts maintained with an Eligible Bank.
Amounts on deposit in the Collection Account and other accounts may be invested
in Permitted Investments. For a listing of Permitted Investments, you should
refer to the section in the prospectus titled "Description of the
Certificates--Accounts."
WITHDRAWALS FROM THE COLLECTION ACCOUNT
The Master Servicer may make withdrawals from the Collection Account
for the following purposes:
(1) to remit on or before each Remittance Date to the Distribution
Account an amount equal to Available Funds and any Prepayment
Premiums, Yield Maintenance Charges, Excess Interest and
Appraisal Reduction Excess Collections for the related
Distribution Date;
(2) to pay or reimburse the Master Servicer or the Trustee, as
applicable, for Advances made by it and interest on the
Advances, but the Master
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Servicer's right to reimburse itself will be limited as
described above in the section in this prospectus supplement
titled "--Advances";
(3) to (a) pay on or before each Remittance Date to the Master
Servicer and the Special Servicer the fee portion of the
servicing compensation for the related Distribution Date
(provided that the Servicing Fees must be paid from interest
received on the related Mortgage Loan), (b) pay from time to
time to the Master Servicer any interest or investment income
earned on funds deposited in the Collection Account, (c) pay
to the Master Servicer as additional servicing compensation
any Prepayment Interest Surplus received in the preceding
Collection Period, and (d) pay to the Master Servicer or the
Special Servicer, as applicable, any other amounts
constituting additional servicing compensation;
(4) to pay on or before each Distribution Date to the Depositor,
the Transferor, the related Mortgage Loan Seller or other
purchaser of each Mortgage Loan or REO Property that has
previously been purchased or repurchased pursuant to the
Pooling and Servicing Agreement, all amounts received on that
Mortgage Loan or REO Property during the related Collection
Period and after the date as of which the price of the
purchase or repurchase was determined;
(5) to the extent not reimbursed or paid pursuant to any of the
above clauses, to reimburse or pay to the Master Servicer, the
Special Servicer, the Trustee and/or the Depositor, as
applicable, for other specified unreimbursed expenses incurred
by or on behalf of those persons pursuant to and to the extent
reimbursable under the Pooling and Servicing Agreement and to
satisfy any other payment or reimbursement obligations of the
Trust Fund under the Pooling and Servicing Agreement;
(6) to pay to the Trustee amounts payable as compensation,
including, but not limited to, the Trustee Fee, and amounts
requested by the Trustee to pay taxes on the net income with
respect to REO Properties (provided the Trustee will also have
the right to withdraw funds from the Collection Account to
make those payments);
(7) to withdraw any amount deposited into the Collection Account
that was not required to be deposited in the Collection
Account; and
(8) to clear and terminate the Collection Account pursuant to a
plan for termination and liquidation of the Trust Fund.
ENFORCEMENT OF "DUE-ON-SALE" AND "DUE-ON-ENCUMBRANCE" CLAUSES
The Master Servicer or the Special Servicer, as applicable, will be
obligated to enforce the Trustee's rights under the "due-on-sale" clause in the
related Mortgage Loan Documents to accelerate the maturity of the related
Mortgage Loan, unless
(1) the "due-on-sale" provision is not enforceable under
applicable law;
(2) the enforcement of the "due-on-sale" provision is reasonably
likely to result in meritorious legal action by the related
borrower; or
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(3) the Master Servicer or the Special Servicer, as applicable,
acting in accordance with the servicing standards described in
this prospectus supplement, determines that the enforcement of
the "due-on-sale" clause is not in the best interests of the
Trust Fund.
However, if the Scheduled Principal Balance of any Mortgage Loan or a
group of Mortgage Loans (1) made to a single borrower or affiliated borrowers or
(2) that is secured by any group of cross-collateralized Mortgaged Properties
equals or exceeds 5% of the Pool Balance, the Master Servicer or the Special
Servicer, as applicable, will not be permitted to refrain from enforcing the
Trustee's rights under the "due-on-sale" clause in that Mortgage Loan or a group
of Mortgage Loans without obtaining a confirmation from each Rating Agency that
forbearance will not result in the reduction, modification or withdrawal of its
then current rating of any Class of Certificates.
If :
(1) applicable law prohibits the enforcement of a "due-on-sale"
clause;
(2) the Master Servicer or the Special Servicer is otherwise
prohibited from taking that action; or
(3) the Master Servicer or the Special Servicer has determined
that enforcement of the "due-on-sale" clause is not in the
best interests of the Trust Fund in accordance with the
servicing standards described in this prospectus supplement
and obtains confirmation from the Rating Agencies that they
will not reduce, modify or withdraw their current rating of
any Class of Certificates,
then the Mortgage Loan in question may be assumed by a third person.
As a result of the assumption of the Mortgage Loan by a third person:
(1) the original borrower may be released from liability for the
unpaid principal balance of the Mortgage Loan and interest on
the principal balance at the applicable Mortgage Rate during
the remaining term of the Mortgage Loan;
(2) the Master Servicer may accept payments in respect of the
Mortgage Loan from the new owner of the related Mortgaged
Property; and
(3) the Master Servicer or the Special Servicer, as applicable,
may enter into an assumption agreement with a new purchaser in
which the new owner of the related Mortgaged Property will be
substituted as the borrower and the original borrower will be
released, so long as (to the extent permitted by law) the new
owner satisfies the underwriting requirements customarily
imposed by the Master Servicer or the Special Servicer, as
applicable, as a condition to its approval of a borrower on a
new mortgage loan substantially similar to the Mortgage Loan.
If a Mortgage Loan is assumed as described above, the Trustee, the
Master Servicer and the Special Servicer will not permit any modification of
that
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Mortgage Loan other than as described below in the section in this prospectus
supplement titled "--Amendments, Modifications and Waivers." The Master Servicer
or the Special Servicer, as applicable, will be entitled to retain as additional
servicing compensation any assumption fees paid by the original borrower or the
new owner in connection with the assumption of the Mortgage Loan. For more
information, you should refer to the section in the prospectus titled "Material
Legal Aspects of the Mortgage Loans-Enforceability of Material
Provisions-Due-on-Sale Provisions." A new owner of the related Mortgaged
Property may be substituted, or a junior or senior lien may be allowed on the
related Mortgaged Property, without the consent of the Master Servicer, the
Special Servicer or the Trustee in a bankruptcy proceeding involving the
Mortgaged Property.
If any Mortgage Loan contains a provision in the nature of a
"due-on-encumbrance" clause, which by its terms (1) provides that that Mortgage
Loan will (or may at the related mortgagee's option) become due and payable upon
the creation of any lien or other encumbrance on the related Mortgaged Property
or (2) requires the consent of the related mortgagee to the creation of any lien
or other encumbrance on that Mortgaged Property, then, for so long as that
Mortgage Loan is included in the Trust Fund, and borrower creates any lien or
other encumbrance, the Master Servicer or the Special Servicer, as applicable,
on behalf of the Trust Fund, will enforce the "due-on-encumbrance" provision. As
a result, the Master Servicer or the Special Servicer, as applicable, will
accelerate the payments due on that Mortgage Loan or withhold its consent to the
creation of those liens or other encumbrances, as applicable. However, the
Master Servicer or the Special Servicer, as applicable, will not enforce the
"due-on-encumbrance" provision if, acting in accordance with the applicable
servicing standards, it determines that the enforcement would not be in the best
interests of the Trust Fund and it is able to obtain the confirmation of each
Rating Agency that it will not downgrade, withdraw or qualify its then current
rating of any Class of Certificates as a result of forbearance from enforcement.
A "due-on-sale" or "due-on-encumbrance" clause may, under some
circumstances, be unenforceable against a borrower that is a debtor in a case
under the Bankruptcy Code. In addition, as an exception to the foregoing, the
Master Servicer or the Special Servicer, as applicable, may elect to refrain
from enforcing any "due-on-encumbrance" provision relating to any junior or
senior lien on a Mortgaged Property imposed in any bankruptcy proceeding
involving that Mortgaged Property.
INSPECTIONS; APPRAISALS
The Master Servicer (or the Special Servicer with respect to Specially
Serviced Mortgage Loans or REO Properties) is required, at its own expense, to
inspect each Mortgaged Property at the times and in the manner as are consistent
with the servicing standards described in this prospectus supplement, but will
in any event: (1) inspect each Mortgaged Property at least once every 12 months
(or 24 months for any Mortgage Loan with a principal balance of less then
$2,000,000), with the first inspection to be completed on or before
____________, unless each of the Rating Agencies has confirmed in writing that a
longer period between inspections (which may not exceed 24 months) will not
result, in and of itself, in a downgrading, withdrawal or qualification of the
rating then assigned by that Rating Agency to any Class of Certificates; and (2)
inspect the related Mortgaged Property as soon as practicable after the Master
Servicer or the Special Servicer, as applicable, has received any Financial and
Lease Reporting Fees for any Mortgage Loan (unless that property has been
inspected by the Master Servicer or the Special Servicer during the preceding
120-day period). In addition, if any Monthly Payment on any Mortgage Loan
becomes more than 60 days delinquent (without giving effect to any grace period
permitted under the related promissory note or Mortgage), the Special Servicer
will inspect each related Mortgaged Property at its own expense as soon as
practicable thereafter.
REALIZATION UPON MORTGAGE LOANS
If a Mortgage Loan has defaulted or, in the Special Servicer's
judgment, a payment default is imminent, the Special Servicer may at any time
institute foreclosure proceedings, exercise any power of sale contained in the
related Mortgage or otherwise acquire title to the related Mortgaged Property.
GENERAL STANDARDS FOR CONDUCT IN FORECLOSING OR SELLING DEFAULTED LOANS
Any costs and expenses incurred in any foreclosure or similar
proceedings will be advanced by the Master Servicer as a Property Advance,
unless the Master Servicer determines that the Advance would constitute a
Nonrecoverable Advance.
If the Special Servicer elects to proceed with a non-judicial
foreclosure in accordance with the laws of the jurisdiction in which the subject
Mortgaged Property is located, the Special Servicer will not be required to
pursue a deficiency judgment against the related borrower or any other liable
party if (1) the laws of the jurisdiction do not permit a deficiency judgment
after a non-judicial foreclosure or (2) the Special Servicer determines, in its
best judgment, that the likely recovery resulting from a deficiency judgment
will not be sufficient to warrant the cost, time, expense and/or exposure of
pursuing the deficiency judgment and that determination is evidenced by an
officer's certificate delivered to the Trustee.
The Special Servicer, on behalf of the Trust Fund, is prohibited from
obtaining title to a Mortgaged Property as a result of or in lieu of foreclosure
or otherwise obtaining title to any direct or indirect partnership interest or
other equity interest in any borrower pledged pursuant to a pledge agreement and
become the beneficial owner of a Mortgaged Property, and otherwise acquiring
possession of, or taking any other action with respect to, any Mortgaged
Property if, as a result of any of those actions, the Trustee, for the Trust
Fund or the Certificateholders, would be considered to hold title to, to be a
"mortgagee-in-possession" of, or to be an "owner" or "operator" of that
Mortgaged Property within the meaning of CERCLA or any comparable law, unless
the Special Servicer has previously determined, in accordance with the servicing
standards set forth in the Pooling and Servicing Agreement and based on an
updated ESA prepared within the past twelve months by a person independent of
the Special Servicer who regularly conducts environmental assessments, that:
(1) that Mortgaged Property is in compliance with applicable
environmental laws in all material respects or, if that
Mortgaged Property is found not to be in compliance after
consultation with an environmental consultant, that it would
be in the best economic interest of the Trust Fund to take
those actions as are necessary to bring that Mortgaged
Property in compliance with those laws; and
(2) there are no circumstances present at that Mortgaged Property
relating to the use, management or disposal of any hazardous
materials for which investigation, testing, monitoring,
containment, clean-up or remediation could reasonably be
required under any currently effective federal, state or local
law or regulation, or that, if any hazardous materials are
present for which any of those actions could reasonably be
required, after consultation with an environmental consultant,
it would be in the best economic interest of the Trust Fund to
take those actions with respect to that Mortgaged Property.
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If the environmental assessment last obtained by the Special Servicer
with respect to a Mortgaged Property indicates that that Mortgaged Property may
not be in compliance with applicable environmental laws in all material respects
or that hazardous materials may be present but does not definitively establish
that fact, the Special Servicer will cause further environmental tests as the
Special Servicer deems prudent to protect the interests of Certificateholders to
be conducted by a person independent of the Special Servicer who regularly
conducts those tests. Any of those tests will be deemed part of the ESA obtained
by the Special Servicer for these purposes.
If title to any Mortgaged Property is acquired in foreclosure or by
deed-in-lieu of foreclosure, the deed or certificate of sale will be issued to
the Trustee or to its nominee (which may not be the Master Servicer or the
Special Servicer) or a separate trustee or co-trustee on behalf of the Trust
Fund. Notwithstanding any acquisition of title and cancellation of the related
Mortgage Loan, that Mortgage Loan will be considered to be a Mortgage Loan held
in the Trust Fund until the time the related REO Property is sold by the Trust
Fund and will be reduced by Net REO Proceeds allocated to the principal.
If the Trust Fund acquires a Mortgaged Property by foreclosure or
deed-in-lieu of foreclosure upon a default of a Mortgage Loan, the Pooling and
Servicing Agreement provides that the Special Servicer must administer that
Mortgaged Property in a manner so that it qualifies at all times as "foreclosure
property" within the meaning of Tax Code Section 860G(a)(8). The Pooling and
Servicing Agreement also requires that, within 90 days of the Trust Fund's
acquisition of that Mortgaged Property, the Special Servicer contract with an
Independent Contractor (as defined in the Pooling and Servicing Agreement) for
the management and operation of that Mortgaged Property, unless the Special
Servicer provides the Trustee , at the Trust Fund's expense, an opinion of
counsel that the operation and management of the Mortgaged Property other than
through an independent contractor will not cause that Mortgaged Property to fail
to qualify as "foreclosure property."
The Special Servicer may offer to sell to any person any Specially
Serviced Mortgage Loan or any REO Property, if and when the Special Servicer
determines, consistent with the servicing standards set forth in the Pooling and
Servicing Agreement, that the sale of that loan or property would be in the best
economic interests of the Trust Fund. In any event, the Special Servicer will
offer to sell each REO Property so that the sale of that REO Property will occur
within the period specified in the Pooling and Servicing Agreement. For any sale
of a Specially Serviced Mortgaged Loan or a REO Property described above, the
Special Servicer will give the Trustee at least 10 Business Days' prior written
notice of its intention to sell. The Special Servicer will accept an offer from
any person that is determined by the Special Servicer to be a fair price for
that Specially Serviced Mortgage Loan or REO Property, if the highest offeror is
not an Interested Person, or is determined to be a fair price by the Trustee
(which may be based upon updated independent appraisals received by the Trustee
or the Special Servicer, as applicable), if the highest offeror is an Interested
Person; provided, however, that any offer by an Interested Person in the amount
of the Repurchase Price shall be deemed to be a fair price. Neither the Trustee,
in its individual capacity, nor any of its affiliates may offer to purchase any
Specially Serviced Mortgage Loan or any REO Property and nothing in this
prospectus supplement is intended to allow it. In addition, the Special Servicer
may accept an offer that is not the highest offer if it determines, in
accordance with the servicing standards set forth in the Pooling and Servicing
Agreement, that acceptance of that offer would be in the best interests of the
holders of Certificates (for example, if the prospective buyer making the lower
offer is more likely to perform its obligations, or other terms offered by the
prospective buyer making the lower offer are more favorable).
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The Special Servicer will prepare an Asset Status Report for each
Mortgage Loan which becomes a Specially Serviced Mortgage Loan within 30 days
after the servicing of that Mortgage Loan is transferred to the Special
Servicer. The Special Servicer will deliver each Asset Status Report to the
Master Servicer and the Rating Agencies. The Special Servicer will be required
to implement the courses of action detailed in the report in a commercially
reasonable manner. However, the Special Servicer will not be required to take or
refrain from taking any action that would cause it to violate applicable law,
the Pooling and Servicing Agreement (including the servicing standards set forth
in the Pooling and Servicing Agreement) or the REMIC Provisions.
After a default in the payment of a Balloon Payment, the Special
Servicer may, acting in accordance with the servicing standards set forth in the
Pooling and Servicing Agreement, grant any number of successive extensions of up
to 12 months (or the period from the beginning of the first of the extensions,
if shorter) on the defaulted Mortgage Loan. However, the Special Servicer may
not grant any extension that (1) permits the related borrower to make payments
of only interest for a period of longer than 12 months in the aggregate, or (2)
extends the maturity date of the related Mortgage Loan beyond the Scheduled
Final Distribution Date for the Class N Certificates or the date that is 10
years before the expiration of any related ground lease with respect to the
Mortgaged Property securing that Mortgage Loan without the written consent of
each Rating Agency.
AMENDMENTS, MODIFICATIONS AND WAIVERS
Neither the Master Servicer nor the Special Servicer may amend, modify,
waive or otherwise consent to the change of the stated maturity date of any
Mortgage Loan, the payment of principal of or interest (including Default
Interest) on any Mortgage Loan, or any other term of any Mortgage Loan, unless:
(1) that amendment, modification, waiver or consent is not a
"significant modification" under Section 1001 of the Tax Code;
(2) to the extent that amendment, modification, waiver or consent
would constitute a "significant modification" under Section
1001 of the Tax Code, that modification is occasioned by a
default or a reasonably foreseeable default on that Mortgage
Loan; or
(3) the Master Servicer or the Special Servicer shall have
received an Opinion of Counsel (at the Trust Fund's expense)
that that amendment, modification or waiver would not cause an
imposition of a tax under the REMIC Provisions or cause a loss
of the REMIC status.
THE TRUSTEE
___________________________. will act as the Trustee pursuant to the
Pooling and Servicing Agreement. The Trustee's corporate trust office is located
at _____________________.
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The Trustee may resign at any time by giving written notice to the
Depositor, the Master Servicer, the Special Servicer and the Rating Agencies.
Upon notice of the Trustee's resignation, the Master Servicer will appoint a
successor trustee. If no successor trustee is appointed within 30 days after the
giving of notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for appointment of a successor trustee.
The Depositor or the Master Servicer may remove the Trustee if, among
other things, any of the following events occur:
(1) the Trustee ceases to be eligible to continue as trustee under
the Pooling and Servicing Agreement;
(2) the Trustee at any time becomes incapable of acting;
(3) the Trustee is adjudged bankrupt or insolvent;
(4) a receiver of the Trustee or its property is appointed; or
(5) any public officer takes charge or control of the Trustee or
its property.
The holders of Certificates representing a majority of the aggregate
Voting Rights may remove the Trustee upon written notice to the Master Servicer,
the Special Servicer, the Depositor and the Trustee. No resignation or removal
of the Trustee or appointment of a successor trustee will become effective until
the acceptance of the appointment by the successor trustee.
The Trust Fund will indemnify the Trustee and its directors, officers,
employees, agents and affiliates against any and all losses, liabilities,
damages, claims or expenses (including reasonable attorneys' fees) arising in
respect of the Pooling and Servicing Agreement or the Certificates (but only to
the extent that they are expressly reimbursable under the Pooling and Servicing
Agreement or are "unanticipated expenses incurred by the REMIC" under Treasury
Regulations Section 1.860G-1(b)(s)(ii)) other than those resulting from the
negligence, fraud, bad faith or willful misconduct of the Trustee and those for
which those indemnified persons are indemnified by the Master Servicer or the
Special Servicer as described in the last sentence of this paragraph. The
Trustee will not be required to expend or risk its own funds or otherwise incur
financial liability in the performance of any of its duties under the Pooling
and Servicing Agreement or in the exercise of any of its rights or powers if, in
the Trustee's opinion, the repayment of those funds or adequate indemnity
against that risk or liability is not reasonably assured to it. Each of the
Master Servicer and the Special Servicer will indemnify the Trustee and its
directors, officers, employees, agents and affiliates against any losses,
liabilities, damages, claims and expenses resulting from the willful misconduct,
fraud, bad faith and/or negligence in the performance of the Master Servicer's
or the Special Servicer's respective duties under the Pooling and Servicing
Agreement or by reason of reckless disregard of the Master Servicer's or the
Special Servicer's respective obligations and duties under the Pooling and
Servicing Agreement.
DUTIES OF THE TRUSTEE
The Trustee, the Master Servicer and the Special Servicer will make no
representation as to the validity or sufficiency of the Pooling and Servicing
Agreement, the Certificates or this prospectus supplement or the validity,
enforceability or sufficiency of the Mortgage Loans or related documents. The
Trustee will not be accountable for the use or application by the Depositor of
any Certificates or of the proceeds of those Certificates, or for the use or
application of any funds paid to the Depositor, the Master Servicer or the
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Special Servicer in respect of the Mortgage Loans, or any funds deposited in or
withdrawn from the Collection Account or the Distribution Account by the
Depositor, the Master Servicer or the Special Servicer, other than with respect
to any funds held by the Trustee.
If no Event of Default has occurred of which the Trustee has actual
knowledge or, after the curing of all Events of Default which may have occurred,
the Trustee is required to perform only those duties specifically required under
the Pooling and Servicing Agreement. Upon receipt of the various certificates,
reports and other instruments required to be furnished to it, the Trustee is
required to examine those documents and to determine only whether they conform
on their face to the requirements of the Pooling and Servicing Agreement.
If the Master Servicer fails to make any required Advance, the Trustee,
as successor Master Servicer, will be required to make the Advance to the extent
that the Advance is not deemed to be nonrecoverable. The Trustee will be
entitled to rely conclusively on any determination by the Master Servicer that
an Advance, if made, would be a Nonrecoverable Advance. The Trustee will be
entitled to reimbursement for each Advance made by it in the same manner and to
the same extent as the Master Servicer. For more detailed information, you
should refer to the section in this prospectus supplement titled "--Advances."
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be entitled to receive a monthly Servicing Fee
with respect to each Mortgage Loan . The Servicing Fee relating to each Mortgage
Loan will be retained by the Master Servicer from payments and collections
(including Insurance Proceeds and Liquidation Proceeds) on that Mortgage Loan.
The Master Servicer will also be entitled to retain as additional servicing
compensation:
(1) investment income earned on amounts on deposit in the
Collection Account and the Reserve Accounts (to the extent
consistent with applicable law and the related Mortgage Loan
Documents);
(2) amounts collected on the Mortgage Loans that are not Specially
Serviced Mortgage Loans in the nature of late payment charges,
late fees, "insufficient funds" check charges (including with
respect to Specially Serviced Mortgage Loans), loan service
transaction fees, extension fees, demand fees, modification
fees, assumption fees, beneficiary statement charges and
similar fees and charges (but excluding any Prepayment
Premiums, Yield Maintenance Charges, Excess Interest,
Appraisal Reduction Excess Collections, Default Interest or
other amounts required to be deposited or retained in the
Collection Account);
(3) Financial and Lease Reporting Fees relating to any Mortgage
Loan that is not a Specially Serviced Mortgage Loan and to the
extent permitted under the related Mortgage Loan; and
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(4) Prepayment Interest Surplus (to the extent not offset against
any Prepayment Interest Shortfall in accordance with the
Pooling and Servicing Agreement).
The Master Servicer will reimburse the Trustee for out of pocket
expenses incurred by the Trustee in the performance of its duties in accordance
with the Pooling and Servicing Agreement.
The Master Servicer will pay all expenses incurred in connection with
its responsibilities under the Pooling and Servicing Agreement (subject to
reimbursement as described in this prospectus supplement).
SPECIAL SERVICING
With respect to any Mortgage Loan that is designated a Specially
Serviced Mortgage Loan, the Master Servicer will transfer its servicing
responsibilities to the Special Servicer, but will continue to perform the
following functions:
(1) receive payments on that Mortgage Loan (including amounts
collected by the Special Servicer);
(2) make calculations relating to that Mortgage Loan as required
by the Pooling and Servicing Agreement; and
(3) make remittances and prepare reports to the Trustee relating
to that Mortgage Loan.
If the related Mortgaged Property is acquired in respect of any that
Mortgage Loan whether through foreclosure, deed-in-lieu of foreclosure or
otherwise, the Special Servicer will continue to be responsible for the
operation and management of the Mortgaged Property. The Master Servicer will
have no responsibility for the performance by the Special Servicer of its duties
under the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement will define a "Specially Serviced
Mortgage Loan" to include any Mortgage Loan with respect to which:
(1) the related borrower is 60 or more days delinquent in the
payment of principal and interest (regardless of whether P&I
Advances have been reimbursed );
(2) the related borrower has expressed to the Master Servicer its
inability to pay the Mortgage Loan or a hardship in paying the
Mortgage Loan in accordance with its terms;
(3) the Master Servicer has received notice that the related
borrower has (a) become the subject of any bankruptcy,
insolvency or similar proceeding, (b) admitted in writing its
inability to pay its debts as they come due, or (c) made an
assignment for the benefit of creditors;
(4) the Master Servicer has received notice of a foreclosure or
threatened foreclosure of any lien on the Mortgaged Property
securing that Mortgage Loan;
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(5) a default of which the Master Servicer has notice (other than
a failure by the related borrower to pay principal or
interest) and which materially and adversely affects the
interests of the Certificateholders has occurred and remains
unremedied for the applicable grace period specified in the
Mortgage Loan (or, if no grace period is specified, 60 days);
with the understanding that a default requiring a Property
Advance will be deemed to materially and adversely affect the
interests of the Certificateholders;
(6) the related borrower has failed to make a Balloon Payment when
due (unless the Master Servicer and the Special Servicer agree
in writing that that Mortgage Loan is likely to be paid in
full within 30 days after the borrower's failure to pay);
(7) the Master Servicer proposes to commence foreclosure or other
workout arrangements; or
(8) the Master Servicer otherwise determines that there is a
material risk of default by the related borrower.
A Mortgage Loan will cease to be a Specially Serviced Mortgage Loan:
(1) with respect to the circumstances described in clauses (1) and
(6) above, when the related borrower has brought the Mortgage
Loan current and thereafter has made three consecutive full
and timely Monthly Payments on that Mortgage Loan; with the
understanding that, with respect to the circumstances
described in clause (6), the related borrower may satisfy the
requirements above pursuant to any workout recommended by the
Special Servicer;
(2) with respect to the circumstances described in clauses (2) and
(4) above, when those circumstances cease to exist in the good
faith judgment of the Special Servicer and with respect to the
circumstances described in clauses (3) and (7), when those
circumstances cease to exist;
(3) with respect to the circumstances described in clause (5)
above, when the default is cured; or
(4) with respect to the circumstances described in clause (8)
above, when the Master Servicer determines that there is no
longer a material risk of default by the related borrower,
provided that, in any case, no circumstance exists (as described above) at the
time that would cause that Mortgage Loan to be otherwise characterized as a
Specially Serviced Mortgage Loan.
If any Specially Serviced Mortgage Loan, in accordance with its
original terms or as modified in accordance with the Pooling and Servicing
Agreement, becomes a performing Mortgage Loan (through workout by the Special
Servicer or otherwise) for three consecutive Monthly Payments (provided no
additional event of default is foreseeable in the reasonable judgment of the
Special Servicer), the Special Servicer will return the full servicing
responsibilities of that Mortgage Loan to the Master Servicer.
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_______________ will be the initial Special Servicer. The Special
Servicer may be removed and a successor Special Servicer may be appointed in the
following manner:
(1) first, by the holders of the majority of the aggregate Voting
Rights of the Class M Certificates at the time when Realized
Losses allocated to the Class N Certificates equal or exceed
75% of the initial Certificate Balance of that Class, but only
until the time when Realized Losses allocated to the Class M
Certificates equal or exceed 50% of the initial Certificate
Balance of that Class;
(2) second, by the holders of the majority of the aggregate Voting
Rights of the Class L Certificates, but only until the time
when Realized Losses allocated to the Class L Certificates
equal or exceed 50% of the initial Certificate Balance of that
Class; and
(3) thereafter, by the holders of the majority of the aggregate
Voting Rights of the second most subordinate Class of
Certificates then outstanding, but only until the time when
Realized Losses allocated to that Class equal or exceed 50% of
the initial Certificate Balance of that Class.
If any removal of the Special Servicer is made without cause, then the
costs of transferring the servicing responsibilities to a successor Special
Servicer will be paid by the removing Certificateholders as described in the
Pooling and Servicing Agreement.
The removal of the Special Servicer and the appointment of a successor
Special Servicer will not be effective until (1) the successor Special Servicer
has assumed in writing all of the responsibilities, duties and liabilities of
the Special Servicer under the Pooling and Servicing Agreement pursuant to an
agreement satisfactory to the Trustee, and (2) each of the Rating Agencies
confirms to the Trustee in writing that the appointment of and assumption by the
successor Special Servicer will not result, in and of itself, in a downgrading,
withdrawal or qualification of the rating then assigned by that Rating Agency to
any Class of Certificates.
The Special Servicer will be entitled to the Special Servicing Fee on
each Specially Serviced Mortgage Loan on a monthly basis. In addition to the
Special Servicing Fee, the Special Servicer will also receive, with respect to
any Specially Serviced Mortgage Loan or REO Property that is sold or transferred
or otherwise liquidated (except in connection with the repurchase of a Mortgage
Loan as described under "Description of the Mortgage Pool--Representations and
Warranties; Repurchase"), a ) Disposition Fee equal to the product of ):
(1) the excess, if any, of (a) the proceeds of the sale or
liquidation of that Specially Serviced Mortgage Loan or REO
Property over (b) any broker's commission and related
brokerage referral fees; and
(2) (a) [___%], if the sale or liquidation occurs within 12 months
after the date on which the Mortgage Loan initially became a
Specially Serviced Mortgage Loan or (b) [___%], if the sale or
liquidation occurs upon or after the expiration of that
12-month period.
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Furthermore, the Special Servicer will receive, as additional servicing
compensation, a Workout Fee. If any Corrected Mortgage Loan again becomes a
Specially Serviced Mortgage Loan, any right to the Workout Fee relating to that
Mortgage Loan earned from the initial modification, restructuring or workout of
that Mortgage Loan will terminate, and the Special Servicer will be entitled to
a new Workout Fee for that Specially Serviced Mortgage Loan upon resolution or
workout of the subsequent event of default under that Specially Serviced
Mortgage Loan. Each of the foregoing fees, along with expenses related to
special servicing of a Mortgage Loan, will be payable out of funds otherwise
available to pay principal and interest on the Certificates.
The Special Servicer will also be entitled to retain as additional
servicing compensation (1) all investment income earned on amounts on deposit in
any REO Account and (2) to the extent permitted under the related Mortgage Loan,
all amounts collected with respect to the Specially Serviced Mortgage Loans in
the nature of late payment charges, late fees, assumption fees, loan
modification fees, extension fees, Financial and Lease Reporting Fees (to the
extent those fees are not required to be remitted to the related borrower
pursuant to the related promissory note), loan service transaction fees,
beneficiary statement charges or similar items (but excluding any Default
Interest, Yield Maintenance Charges or other Prepayment Premiums, Excess
Interest or Appraisal Reduction Excess Collections), in each case to the extent
received with respect to any Specially Serviced Mortgage Loan and not required
to be deposited or retained in the Collection Account pursuant to the Pooling
and Servicing Agreement.
REPORTS TO CERTIFICATEHOLDERS; AVAILABLE INFORMATION
Monthly Reports. On each Distribution Date, the Trustee will mail to
each Certificateholder, with copies to the Depositor, the Paying Agent, the
Underwriter, the Master Servicer and each Rating Agency, a statement on the
distribution to be made on that date, setting forth for each Class:
(1) the Pooled Principal Distribution Amount and the amount
allocable to principal included in Available Funds;
(2) The Class Interest Distribution Amount distributable to that
Class and the amount of Available Funds allocable thereto,
together with any Class Interest Shortfall allocable to that
Class;
(3) The amount of any P&I Advances by the Master Servicer or the
Trustee included in the amounts distributed to the
Certificateholders;
(4) The Certificate Balance of each Class of Certificates after
giving effect to the distribution of amounts in respect of the
Pooled Principal Distribution Amount on that Distribution
Date;
(5) Realized Losses and their allocation to the Certificate
Balance of any Class of Certificates;
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(6) The Scheduled Principal Balance of the Mortgage Loans as of
the Due Date preceding that Distribution Date;
(7) The number and aggregate principal balance of the Mortgage
Loans (a) delinquent one month, (b) delinquent two months, (c)
delinquent three or more months, (d) as to which foreclosure
proceedings have been commenced, and (e) that otherwise
constitute Specially Serviced Mortgage Loans, and, with
respect to each Specially Serviced Mortgage Loan, the amount
of Property Advances made during the related Collection
Period, the amount of P&I Advances made on that Distribution
Date, the aggregate amount of Property Advances made that
remain unreimbursed and the aggregate amount of P&I Advances
made that remain unreimbursed;
(8) With respect to any Mortgage Loan that became an REO Mortgage
Loan during the preceding calendar month, the principal
balance of that Mortgage Loan as of the date it became an REO
Mortgage Loan;
(9) As of the Due Date preceding that Distribution Date, as to any
REO Property sold during the related Collection Period, the
date on which the Special Servicer made a Final Recovery
Determination and the amount of the proceeds of the sale
deposited into the Collection Account, and the aggregate
amount of REO Proceeds and Net REO Proceeds (in each case
other than Liquidation Proceeds) and other revenues collected
by the Special Servicer with respect to each REO Property
during the related Collection Period and credited to the
Collection Account, in each case identifying that REO Property
by name;
(10) The outstanding principal balance of each REO Mortgage Loan as
of the close of business on the immediately preceding Due Date
and the appraised value of the related REO Property per the
most recent appraisal obtained;
(11) The amount of the servicing compensation paid to the Master
Servicer with respect to that Distribution Date, and the
amount of the additional servicing compensation that was paid
to the Master Servicer with respect to that Distribution Date;
(12) The amount of any Special Servicing Fee, Disposition Fee or
Workout Fee paid to the Special Servicer with respect to that
Distribution Date;
(13) The amount of any Appraisal Reduction allocated, and the
amount of any Appraisal Reduction Excess Collections received,
during the related Collection Period on a loan-by-loan basis
and the total Appraisal Reduction Amount as of that
Distribution Date; and
(14) (a) The amount of Yield Maintenance Charges or Prepayment
Premiums collected and any Excess Interest received during the
related Collection Period, and (b) the amount of Default
Interest received during the related Collection Period.
In the case of information furnished pursuant to clauses (1), (2), (3)
and (14)(a) above, the amounts will be expressed as a dollar amount in the
aggregate for all Certificates of each applicable Class, and will be expressed
as a dollar amount for each Class of Certificates for a certificate having a
denomination of $1,000 initial Certificate Balance or Notional Balance.
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Within a reasonable period of time after the end of each calendar year,
the Trustee will furnish to each person who at any time during that calendar
year was a holder of a Certificate (except for a Residual Certificate) a
statement containing the information set forth in clauses (1) and (2) above,
aggregated for that calendar year or applicable portion of that year during
which that person was a Certificateholder. The obligation of the Trustee to
furnish the above information will be deemed to have been satisfied to the
extent that it provided substantially comparable information pursuant to any
requirements of the Tax Code as from time to time in effect.
On each Distribution Date, the Trustee will mail to each holder of a
Residual Certificate a copy of the reports mailed to the other
Certificateholders on that Distribution Date and a statement setting forth the
amounts, if any, actually distributed on the Residual Certificates on that
Distribution Date.
Within a reasonable period of time after the end of each calendar year,
the Trustee will furnish to each person who at any time during that calendar
year was a holder of a Residual Certificate a statement setting forth the
amounts actually distributed on that Certificate aggregated for that calendar
year or applicable portion of that year during which that person was a
Certificateholder. The obligation of the Trustee to furnish the above
information will be deemed to have been satisfied to the extent that it provided
substantially comparable information pursuant to any requirements of the Tax
Code as from time to time in effect.
In addition, the Trustee will provide each Certificateholder with any
additional information, if any, regarding the Mortgage Loans that the Master
Servicer or the Special Servicer, in its sole discretion, delivers to the
Trustee for distribution to the Certificateholders. Also, all or a portion of
the information made available in the Distribution Date Statements may be
obtained by accessing a World Wide Website maintained by the Trustee at
_______________________.
Other Available Information. The Master Servicer or the Special
Servicer, if applicable, will promptly give notice to the Trustee, who will
provide a copy to each Certificateholder, each Rating Agency, the Depositor, the
Underwriter, the related Mortgage Loan Seller and the Master Servicer or the
Special Servicer (if affecting a Special Serviced Mortgage Loan), of (1) any
notice from a borrower or insurance company regarding an upcoming voluntary or
involuntary prepayment (including that resulting from a Casualty or
Condemnation) of all or part of the related Mortgage Loan (provided that a
request by a borrower or other party for a quotation of the amount necessary to
satisfy all obligations with respect to a Mortgage Loan will not, in and of
itself, be deemed to be notice under this clause (1)); and (2) any other
occurrence known to it with respect to a Mortgage Loan or REO Property that the
Master Servicer or the Special Servicer determines in accordance with the
servicing standards set forth in the Pooling and Servicing Agreement would have
a material effect on that Mortgage Loan or REO Property. The notice referred to
in (2) will include an explanation as to the reason for the material effect on
the Mortgage Loan or REO Property (with the understanding that any extension of
the term of any Mortgage Loan will in any event be deemed to have a material
effect).
In addition to the other reports and information made available and
distributed to the Depositor, the Underwriter, the Trustee or the
Certificateholders pursuant to the provisions of the Pooling and Servicing
Agreement, the Master Servicer and the Special Servicer will, in accordance with
the reasonable rules and procedures as they may adopt, also make available any
information relating to the Mortgage Loans, the Mortgaged Properties or the
borrowers for review by the Depositor, the Underwriter, the Trustee, the
Certificateholders and any other persons to whom the Master Servicer or the
Special Servicer, as the case may be, believes disclosure of the above
information is appropriate, unless prohibited by applicable law or by any
documents related to a Mortgage Loan. In providing additional information, the
Master Servicer or the Special Servicer may, to the extent it deems necessary or
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appropriate, require the recipient of the information to execute an agreement
governing the availability, use and disclosure of the information. The agreement
to be obtained by the Master Servicer or the Special Servicer may also contain
indemnification provisions for the Master Servicer or the Special Servicer, as
applicable, against any liability or damage that may arise from disclosing the
information.
Upon reasonable prior written request, the Trustee will also make
available during normal business hours, for review by the Depositor, the Rating
Agencies, any Certificateholder, the Underwriter, any person identified to the
Trustee by a Certificateholder as a prospective transferee of a Certificate and
any other persons to whom the Trustee believes disclosure is appropriate, the
following items:
(1) the Pooling and Servicing Agreement;
(2) all monthly statements to Certificateholders delivered since
the closing date;
(3) all annual statements as to compliance delivered to the
Trustee and the Depositor; and
(4) all annual independent accountants' reports delivered to the
Trustee and the Depositor.
The Master Servicer or the Special Servicer, as appropriate, will make
available at its offices during normal business hours, for review by the
Depositor, the Underwriter, the Trustee, the Rating Agencies, any
Certificateholder, any person identified to the Master Servicer or the Special
Servicer, as applicable, by a Certificateholder as a prospective transferee of a
Certificate, and any other persons to whom the Master Servicer or the Special
Servicer, as applicable, believes disclosure is appropriate, the following
items:
(1) the inspection reports prepared by or on behalf of the Master
Servicer or the Special Servicer, as applicable, in connection
with the property inspections conducted by the Master Servicer
or the Special Servicer, as applicable;
(2) any and all modifications, waivers and amendments of the terms
of a Mortgage Loan entered into by the Master Servicer or the
Special Servicer; and
(3) any and all officer's certificates and other evidence
delivered to the Trustee and the Depositor to support the
Master Servicer's determination that any Advance was, or if
made, would be, a Nonrecoverable Advance, in each case except
to the extent doing so is prohibited by applicable law or by
any document relating to a Mortgage Loan.
Each of the Master Servicer, the Special Servicer and the Trustee will
be permitted to require payment of a sum sufficient to cover the reasonable
costs and expenses incurred by it in providing copies of or access to any of the
above information. However, any costs and expenses arising from any request of
this type by a Rating Agency will be paid by the Master Servicer.
The Master Servicer will, on behalf of the Trust Fund, prepare, sign
and file with the SEC any and all reports, statements and information relating
to the Trust Fund that the Master Servicer or the Trustee determines are
required to be filed with the SEC pursuant to Sections 13(a) or 15(d) of the
1934 Act. Each of those reports, statements and information must be filed on or
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before the required filing date for that report, statement or information.
Notwithstanding the foregoing, the Depositor will file with the SEC, within 15
days of the closing date, a Form 8-K together with the Pooling and Servicing
Agreement.
None of the Trustee, the Master Servicer and the Special Servicer will
be responsible for the accuracy or completeness of any information supplied to
it by a borrower or other third party for inclusion in any notice or in any
other report or information furnished or provided by the Trustee, Master
Servicer or the Special Servicer under the Pooling and Servicing Agreement. The
Trustee, the Master Servicer and the Special Servicer will be indemnified and
held harmless by the Trust Fund against any loss, liability or expense incurred
in connection with any legal action relating to any statement or omission or
alleged statement or omission in or from any notice, report or information
described above, including any report filed with the SEC.
VOTING RIGHTS
The voting rights assigned to each Class will be:
(1) 0% in the case of the Residual Certificates;
(2) in the case of any other Class of P&I Certificates, a
percentage equal to the product of (a) 96% so long as the
Class A-EC Notional Balance is greater than zero and 97%
thereafter and (b) a fraction, the numerator of which is equal
to the aggregate outstanding Certificate Balance of that Class
and the denominator of which is equal to the aggregate
outstanding Certificate Balances of all Classes of
Certificates;
(3) in the case of the Class A-EC Certificates, 1% so long as the
Class A-EC Notional Balance is greater than zero, and 0%
thereafter; and
(4) 3% in the case of the Class N Certificates.
The Voting Rights of any Class of Certificates will be allocated among
holders of Certificates of that Class in proportion to their respective
Percentage Interests; however, any Certificate held or beneficially owned by the
Depositor, the Master Servicer, the Special Servicer, the Trustee, a property
manager or a borrower or any of their affiliates will be deemed not to be
outstanding and the Voting Rights to which it is entitled will not be taken into
account in determining whether the requisite percentage of Voting Rights
necessary to effect any consent, approval or waiver that specifically relates to
any of those persons has been obtained (unless the consent, approval or waiver
is to an action that would materially and adversely affect the interests of the
holders of any Class of Certificates while any of those persons is the holder of
Certificates aggregating not less than 66 2/3% of the Percentage Interest of
that Class).
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, two separate REMIC elections will be
made with respect to the Trust Fund, creating two REMICs. Upon the issuance of
the Offered Certificates, O'Melveny & Myers LLP will deliver its opinion,
generally to the effect that, assuming compliance with all provisions of the
Pooling and Servicing Agreement, (1) each pool of assets with respect to which a
REMIC election is made will qualify as a REMIC under the Tax Code, and (2) (a)
the Class A-1, Class A-2, Class A-EC, Class B, Class C, Class D and Class E
Certificates will be, or will represent ownership of, REMIC "regular interests"
and (b) each residual interest will be the sole "residual interest" in the
related REMIC.
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Because they represent regular interests, the Regular Certificates
generally will be treated as newly originated debt instruments for federal
income tax purposes. Holders of those Classes of Certificates will be required
to include in income all interest on those Certificates in accordance with the
accrual method of accounting, regardless of a Certificateholder's usual method
of accounting. The Offered Certificates are not expected to be treated for
Federal income tax reporting purposes as having been issued with original issue
discount. For purposes of determining the rate of accrual of market discount,
original issue discount and premium for federal income tax purposes, it has been
assumed that the Mortgage Loans will prepay at the rate of 0% CPR, with all ARD
Loans prepaying on their related Anticipated Repayment Dates. No representation
is made as to whether the Mortgage Loans will prepay at that rate or any other
rate.
Some Classes of the Offered Certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
any of those Classes of Certificates will be treated as holding a Certificate
with bond premium will depend on that Certificateholder's purchase price.
Holders of those Classes of Certificates should consult their own tax advisors
regarding the possibility of making an election to amortize any bond premium.
See "Material Federal Income Tax Consequences" in the Prospectus.
Offered Certificates held by a mutual savings bank or domestic building
and loan association will represent interests in "qualifying real property
loans" within the meaning of Section 593(d) of the Tax Code. Offered
Certificates held by a real estate investment trust will constitute "real estate
assets" within the meaning of Section 856(c)(5)(B) of the Tax Code, and income
with respect to Offered 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 Tax Code. Offered Certificates held
by a domestic building and loan association will generally constitute a "regular
or residual interest in a REMIC" with the meaning of Section 7701(a)(19)(C)(xi)
of the Tax Code only in the proportion that the Mortgage Loans are secured by
multifamily apartment buildings. See "Material Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Status of
REMIC Certificates" in the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, you should refer to the section in the
prospectus titled "Material Federal Income Tax Consequences--Taxation of"REMIC
Income."
DUE TO THE COMPLEXITY OF THESE RULES AND THE CURRENT UNCERTAINTY AS TO
THE MANNER OF THEIR APPLICATION TO THE TRUST FUND AND CERTIFICATEHOLDERS, IT IS
PARTICULARLY IMPORTANT THAT POTENTIAL INVESTORS CONSULT THEIR OWN TAX ADVISORS
REGARDING THE TAX TREATMENT OF THEIR ACQUISITION, OWNERSHIP AND DISPOSITION OF
THE CERTIFICATES.
ERISA CONSIDERATIONS
SUMMARY
The Subordinate Certificates may not be purchased by or transferred to:
an employee benefit plan or other retirement arrangement,
including an individual retirement account or a Keogh plan,
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(1) which is subject to the fiduciary responsibility provisions of
ERISA or Section 4975 of the Tax Code, or a governmental plan
subject to any Similar Law;
(2) a collective investment fund in which those Plans are
invested;
(3) other persons acting on behalf of any Plan or using the assets
of any Plan or any entity whose underlying assets include plan
assets by reason of a Plan's investment in the entity (within
the meaning of Department of Labor Regulations Section
2510.3-101); or
(4) an insurance company that is using assets of any insurance
company separate account or general account in which the
assets of those Plans are invested (or which are deemed
pursuant to ERISA or any Similar Law to include assets of
those Plans) other than an insurance company using the assets
of its general account under circumstances whereby the assets
of the Trust Fund will not be treated as "plan assets" for
purposes of applying the fiduciary responsibility and the
prohibited transactions provisions of ERISA, the Tax Code or
any Similar Law.
Each prospective transferee of a Certificate will be required to deliver to the
Depositor, the Certificate Registrar and the Trustee either: (a) a transferee
representation letter, substantially in the form of Exhibit D-2 to the Pooling
and Servicing Agreement, stating that that prospective transferee is not a
person referred to in clause (1), (2), (3) or (4) above, or (b) an opinion of
counsel which establishes to the satisfaction of the Depositor, the Trustee and
the Certificate Registrar that the purchase and holding of that Certificate will
not result in the assets of the Trust Fund being deemed to be "plan assets" and
subject to the fiduciary responsibility or prohibited transaction provision of
ERISA, the Tax Code or any Similar Law, and will not constitute or result in a
non-exempt prohibited transaction within the meaning of Section 406 or 407 of
ERISA, Section 4975 of the Tax Code or any Similar Law, and will not subject the
Master Servicer, the Special Servicer, the Depositor, the Trustee or the
Certificate Registrar to any obligation of liability (including obligations or
liabilities under ERISA or Section 4975 of the Tax Code). If a prospective
transferee elects to deliver the opinion of counsel referred to in (b), then
that opinion of counsel will be at the expense of that prospective transferee
and not the expense of the Trustee, the Trust Fund, the Master Servicer, the
Special Servicer, the Certificate Registrar or the Depositor.
TO THE EXTENT ANY OFFERED CERTIFICATE IS IN BOOK-ENTRY FORM, THE HOLDER
OF BENEFICIAL INTEREST IN THAT CERTIFICATE AND ANY TRANSFEREE OF THE BENEFICIAL
INTEREST WILL BE DEEMED TO HAVE REPRESENTED THAT IT IS NOT A PERSON REFERRED TO
IN CLAUSES (1), (2), (3) OR (4) ABOVE.
None of the Residual Certificates may be purchased by or transferred to
a Plan. Accordingly, the following discussion does not purport to discuss the
considerations under ERISA or Tax Code Section 4975 with respect to the
purchase, holding or disposition of the Residual Certificates.
REQUIREMENTS UNDER ERISA
General. ERISA and the Tax Code impose duties and restrictions on Plans
and some persons who perform services for Plans. In accordance with ERISA's
general fiduciary standards, before investing in a Certificate a Plan fiduciary
should determine whether to do so is permitted under the governing Plan
instruments and is appropriate for the Plan in view of its overall investment
policy and the composition and diversification of its portfolio. A Plan
fiduciary should especially consider the ERISA requirement of investment
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prudence and the sensitivity of the return on the Certificates to the rate of
principal repayments (including voluntary prepayments by the borrowers and
involuntary liquidations) on the Mortgage Loans, as discussed in "Yield and
Maturity Considerations" in this prospectus supplement.
Parties in Interest/Disqualified Persons. Other provisions of ERISA
(and corresponding provisions of the Tax Code) prohibit one or more transactions
involving the assets of a Plan and persons who have specified relationships to
the Plan (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Tax Code). The Depositor, the
Underwriter, the Master Servicer, the Special Servicer or the Trustee or one or
more of their affiliates might be considered or might become "parties in
interest" or "disqualified persons" with respect to a Plan. If so, the
acquisition or holding of Certificates by or on behalf of that Plan could be
considered to give rise to a "prohibited transaction" within the meaning of
ERISA and the Tax Code unless an administrative exemption described below or
some other exemption is available. Special caution should be exercised before
the assets of a Plan are used to purchase a Certificate if, with respect to
those assets, the Depositor, the Underwriter, the Master Servicer, the Special
Servicer or the Trustee or an of their affiliates either: (1) has discretionary
authority or control with respect to the investment or management of assets of
that Plan, or (2) has authority or responsibility to give, or regularly gives,
investment advice with respect to those assets pursuant to an agreement or
understanding that the advice given will serve as a primary basis for investment
decisions with respect to those assets and the advice will be based on the
particular needs of the Plan.
Delegation of Fiduciary Duty. Further, if the assets included in the
Trust Fund were deemed to constitute Plan assets, it is possible that a Plan's
investment in the Certificates might be deemed to constitute a delegation under
ERISA of the duty to manage Plan assets by the fiduciary deciding to invest in
the Certificates, and some transactions involved in the operation of the Trust
Fund might be deemed to constitute prohibited transactions under ERISA and the
Tax Code. Neither ERISA nor the Tax Code define the term "plan assets."
The United States Department of Labor has issued Plan Asset Regulations
concerning whether a Plan's assets will be considered to include an interest in
the underlying assets of an entity (such as the Trust Fund) for purposes of the
general fiduciary responsibility provisions of ERISA, as well as for the
prohibited transaction provisions of ERISA and the Tax Code, if the Plan
acquires an "equity interest" (such as a Certificate) in an entity.
Exceptions are provided in the Plan Asset Regulations whereby an
investing Plan's assets would be considered merely to include its interest in
the Certificates instead of being deemed to include an interest in the
underlying assets of a Trust Fund. However, the Depositor cannot predict in
advance, nor can there be any continuing assurance whether those exceptions may
be applicable, because of the factual nature of the rules set forth in the Plan
Asset Regulations. For example, one of the exceptions in the Plan Asset
Regulations states that the underlying assets of an entity will not be
considered "plan assets" if less than 25% of the value of each class of equity
interests is held by "benefit plan investors," which are defined as Plans,
individual retirement accounts and employee benefit plans not subject to ERISA
(for example, governmental plans), but this exception is tested immediately
after each acquisition of an equity interest in the entity whether upon initial
issuance or in the secondary market.
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ADMINISTRATIVE EXEMPTIONS
Individual Administrative Exemptions. The Department has granted to
Prudential Securities Incorporated an individual administrative exemption
(Prohibited Transaction Exemption 90-32, 55 Fed. Reg. 23147 (June 6, 1990, as
amended by Prohibited Transaction Exemption 97-34, 62 Fed. Reg. 39021 (July 21,
1997)) referred to in this prospectus supplement as the "Exemption," for some
mortgage-backed and asset-backed certificates underwritten in whole or in part
by Prudential Securities Incorporated. The Exemption may be applicable to the
initial purchase, the holding and the subsequent resale by a Plan of some
certificates, such as the Senior Certificates, underwritten by the Underwriter,
representing interests in pass-through trusts that consist of receivables, loans
and other obligations specified in the Exemption, provided that the conditions
and requirements of the Exemption are satisfied. The loans described in the
Exemption include mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) The acquisition of Certificates by a Plan is on terms
(including the price for the Certificates) that are at least
as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party;
(2) The rights and interests evidenced by Certificates acquired by
the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust fund;
(3) The Certificates acquired by the Plan have received a rating
at the time of acquisition of the Certificates that is one of
the three highest generic rating categories from either
Moody's Investors Service, Inc., Fitch IBCA, Inc., S&P or Duff
& Phelps;
(4) The Trustee must not be an affiliate of any member of the
Restricted Group;
(5) The sum of all payments made to and retained by the
Underwriter in connection with the distribution of
certificates represents not more than reasonable compensation
for underwriting the certificates; the sum of all payments
made to and retained by the Depositor pursuant to the
assignment of the mortgage loans to the Trust represents not
more than the fair market value of those mortgage loans; the
sum of all payments made to and retained by the Master
Servicer and any other Servicer represents 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
(6) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
SEC under the 1933 Act.
In addition, the Trust must also meet the following requirements:
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(1) The corpus of the trust fund must consist solely of assets of
the type that have been included in other investment pools;
(2) Certificates in other investment pools must have been rated in
one of the three highest rating categories by Moody's
Investors Service, Inc., Fitch IBCA, Inc., S&P or Duff &
Phelps for at least one year before the Plan's acquisition of
the certificates pursuant to the Exemption; and
(3) Certificates evidencing interests in other investment pools
must have been purchased by investors other than Plans for at
least one year before any Plan's acquisition of the
Certificates pursuant to the Exemption.
If the conditions of the Exemption are met, the acquisition, holding
and resale of Certificates by Plans would be exempt from the prohibited
transaction provisions of ERISA and the Tax Code (regardless of whether a Plan's
assets would be considered to include an ownership interest in the Mortgage
Loans in the Mortgage Pool).
Moreover, the Exemption provides relief from some
self-dealing/conflict-of-interest prohibited transactions that may occur if a
Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables, loans or
obligations held in the trust provided that, among other requirements:
(1) in the case of an acquisition in connection with the initial
issuance of certificates, at least 50% of each class of
certificates in which Plans have invested is acquired by
persons independent of the Restricted Group; and at least 50%
of the aggregate interest in the trust is acquired by persons
independent of the Restricted Group;
(2) fiduciary (or its affiliate) is an obligor with respect to 5%
or less of the fair market value of the obligations contained
in the trust;
(3) the Plan's investment in certificates of any class does not
exceed 25% of all of the certificates of that class
outstanding at the time of the acquisitions; and
(4) immediately after the acquisition no more than 25% of the
assets of the Plan with respect to which that person is a
fiduciary are invested in certificates representing an
interest in one or more trusts containing assets sold or
served by the same entity.
The Exemption does not apply to the purchasing or holding of
Certificates by Plans sponsored by any member of the Restricted Group.
THE CHARACTERISTICS OF THE SUBORDINATE CERTIFICATES AND THE RESIDUAL
CERTIFICATES DO NOT MEET THE REQUIREMENTS OF THE EXEMPTION. ACCORDINGLY, THE
SUBORDINATE CERTIFICATES AND RESIDUAL CERTIFICATES MAY NOT BE PURCHASED BY OR
TRANSFERRED TO A PLAN OR PERSON ACTING ON BEHALF OF ANY PLAN OR USING THE ASSETS
OF ANY PLAN, OTHER THAN AN INSURANCE COMPANY USING ASSETS OF ITS GENERAL ACCOUNT
UNDER CIRCUMSTANCES IN WHICH THE PURCHASE OR TRANSFER OF THOSE CERTIFICATES
WOULD NOT CONSTITUTE OR RESULT IN A PROHIBITED TRANSACTION.
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Before purchasing a Senior Certificate, a fiduciary of a Plan should
make its own determination as to the availability of the exemptive relief
provided by the Exemption or the availability of any other prohibited
transaction exemptions, and whether the conditions of any of those exemptions
will be applicable to the Senior Certificates. Any fiduciary of a Plan
(including an entity that is deemed to hold Plan assets for purposes of ERISA
and the Tax Code) considering whether to purchase a Senior Certificate should
also carefully review with its own legal advisors the applicability of the
fiduciary duty and prohibited transaction provisions of ERISA and the Tax Code
to the proposed investment and the availability of the Exemption.
THE SALE OF SENIOR CERTIFICATES TO A PLAN IS IN NO RESPECT A
REPRESENTATION BY THE DEPOSITOR, THE UNDERWRITER OR ANY OTHER MEMBER OF THE
RESTRICTED GROUP THAT THIS INVESTMENT MEETS ALL RELEVANT LEGAL REQUIREMENTS WITH
RESPECT TO INVESTMENTS BY PLANS GENERALLY OR ANY PARTICULAR PLAN OR THAT THIS
INVESTMENT IS APPROPRIATE FOR PLANS GENERALLY OR ANY PARTICULAR PLAN.
EXEMPT PLAN
A governmental plan as defined in Section 3(32) of ERISA is not subject
to ERISA or Tax Code Section 4975 but may be subject to a Similar Law. 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 Similar Law.
UNRELATED BUSINESS TAXABLE INCOME; RESIDUAL CERTIFICATES
The purchase of a Residual Certificate by any employee benefit plan
qualified under Tax Code Section 401(a) and exempt from taxation under Tax Code
Section 501(a), including most varieties of ERISA Plans, may give rise to
"unrelated business taxable income" as described in Tax Code Sections 511-515
and 860E. Further, before the purchase of Residual Certificates, a prospective
transferee may be required to provide an affidavit to a transferor that it is
not, nor is it purchasing a Residual Certificate on behalf of, a "Disqualified
Organization," which term as defined in the Glossary to the Prospectus includes
some tax-exempt entities not subject to Tax Code Section 511, including some
governmental plans, as discussed in the section in the prospectus titled
"Material Federal Income Tax Consequences." Accordingly, Plans may not purchase
Residual Certificates.
LEGAL INVESTMENT
The Class A-1, Class A-2, and Class B Certificates will be
mortgage-related securities for purposes of the SMMEA. The appropriate
characterization of the Certificates under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase the Certificates, may be subject to significant interpretive
uncertainties.
The Depositor makes no representations as to the proper
characterization of the Certificates for legal investment purposes, financial
institution regulatory purposes or other purposes or as to the ability of
particular investors to purchase the Certificates under applicable legal
investment restrictions. These uncertainties may adversely affect the liquidity
of the Certificates. Accordingly, 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 Certificates
constitute a legal investment or are subject to investment, capital or other
restrictions.
PLAN OF DISTRIBUTION
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Prudential Securities Incorporated and ___________________, as
Underwriters, have agreed, severally and not jointly, pursuant to the
Underwriting Agreement , to purchase from the Depositor the principal or
notional balances of Certificates set forth below.
Aggregate Initial
CLASS Certificate Balance
Class A-1..........................
Class A-2..........................
Class B............................
Class C............................
Class D............................
Class E............................
The Underwriter has informed the Transferor and Depositor that it
proposes to offer the Offered Certificates for sale from time to time in one or
more negotiated transactions, or otherwise, at varying prices to be determined,
in each case, at the time of the related sale. The Underwriter may effect those
transactions by selling those Certificates to or through dealers, and those
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter or purchasers of the
Certificates for whom they may act as agent. The Underwriter and any dealers
that participate with the Underwriter in the distribution of the Certificates
purchased by the Underwriter may be deemed to be underwriters, and any discounts
or commissions received by them and any profit on the resale of Certificates by
them or the Underwriter may be deemed to be underwriting discounts or
commissions under the 1933 Act.
The Underwriting Agreement provides that the obligations of the
Underwriter are subject to conditions precedent set forth in the Underwriting
Agreement and the Underwriter will be obligated to purchase all of the
Certificates if any are purchased.
The Underwriter is an affiliate of the Transferor, and therefore will
also receive an additional indirect economic benefit from this transaction (that
is, an interest in the profit made by the Transferor on its sale of the Mortgage
Loans to the Depositor).
The Depositor has agreed to indemnify the Underwriter against specific
liabilities, including liabilities under the 1933 Act, or contribute to payments
that the Underwriter may be required to make in respect of those liabilities.
The Underwriter has advised the Depositor that it currently expects to
make a market in the Certificates, although it has no obligation to do so. Any
market making may be discontinued at any time, and there can be no assurance
that an active public market for the Certificates will develop. For further
information regarding any offer or sale of the Certificates pursuant to this
prospectus supplement and the prospectus, you should refer to the section in the
prospectus titled "Plan of Distribution"
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USE OF PROCEEDS
The Depositor will apply the net proceeds from the sale of Certificates
to pay the purchase price of the Mortgage Loans, to repay indebtedness that has
been incurred to obtain funds to acquire the Mortgage Loans and to pay costs of
structuring, issuing and underwriting the Certificates.
LEGAL MATTERS
Legal matters will be passed upon for the Depositor and for the
Underwriter by O'Melveny & Myers LLP.
RATINGS
It is a condition to the issuance of the Offered Certificates that each
class of Offered Certificates be assigned the ratings indicated on the cover
hereof by Fitch and by Moody's .
The Rating Agencies' ratings on mortgage pass-through certificates
address the likelihood of the receipt by holders of payments of interest and
principal to which they are entitled by the Rated Final Distribution Date. The
Rating Agencies' ratings take into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the Certificates,
and the extent to which the payment stream in the mortgage pool is adequate to
make payments required under the Certificates. Ratings on mortgage pass-through
certificates do not, however, represent an assessment of the likelihood, timing
or frequency of principal prepayments by borrowers or the degree to which those
prepayments (both voluntary and involuntary) might differ from those originally
anticipated. The security ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield. In addition,
ratings on mortgage pass-through certificates do not address the likelihood of
receipt of Prepayment Premiums or the timing of the receipt of Prepayment
Premiums or the likelihood of collection by the Master Servicer of Default
Interest. In general, the ratings thus address credit risk and not prepayment
risk.
There can be no assurance as to whether any rating agency not requested
to rate the Certificates will nonetheless issue a rating and, if so, what that
rating would be. A rating assigned to the Certificates by a rating agency that
has not been requested by the Depositor to do so may be lower than the rating
assigned by the Rating Agencies pursuant to the Depositor's request.
The rating of the 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 agency.
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GLOSSARY
"ARD" indicates the Anticipated Repayment Date.
"ARD AMOUNT OR ARD BALANCE" for any ARD Loan is equal to the Scheduled Principal
Balance as of the related Anticipated Repayment Date.
"ARD LOANS" bear interest at their respective Mortgage Rates until a specified
"ANTICIPATED REPAYMENT DATE"; commencing on such Anticipated Repayment Date,
each such Mortgage Loan will bear interest at a fixed annual rate (the "REVISED
RATE") equal to the Mortgage Rate plus a specified percentage (generally, no
more than __%, so long as the Mortgage Loan is included in the Trust Fund).
Until the principal balance of such Mortgage Loan has been reduced to zero, such
Mortgage Loan will only be required to pay interest at the Mortgage Rate, and
the interest accrued at the related Revised Rate over the interest that would
have accrued at the related Mortgage Rate will be deferred. Such deferred
interest will not be added to the principal balance of the related Mortgage
Loan, but will itself accrue interest at the Revised Rate to the extent such
accrual is lawful. Such accrued and deferred interest, and any interest accrued
thereon, is referred to herein as "EXCESS INTEREST".
"ADVANCES" means P&I Advances together with Property Advances.
"ADVANCE RATE" means the interest rate on outstanding Advances which the Master
Servicer or Trustee is entitled to receive, which, except with respect to
Advances made during payment grace periods, will be equal to the prime rate
published in The Wall Street Journal, or if The Wall Street Journal is no longer
published, The New York Times.
"ANNUAL DEBT SERVICE" means, for any Mortgage Loan, the current annual debt
service (including interest allocable to the payment of the related Servicing
Fee, Trustee Fee and principal) payable with respect to such Mortgage Loan
during the 12-month period commencing on the Cut-off Date (assuming no
prepayments occur).
"ANTICIPATED REPAYMENT DATE" shall have the meaning set forth in the definition
of ARD Loans.
"APPRAISAL REDUCTION" means, for any Distribution Date and for any Mortgage Loan
as to which any Appraisal Reduction Event has occurred, an amount equal to the
excess, if any, of
(1) the outstanding Scheduled Principal Balance of such Mortgage
Loan over
(2) the excess of
(a) 90% of the appraised value of the related Mortgaged
Property as determined
(A) by one or more appraisals, if such Mortgage Loan
has an outstanding Scheduled Principal Balance equal
to or in excess of $2,000,000, conducted in
compliance with the Code of Professional Ethics and
Standards of Professional Conduct of the Appraisal
Institute and the Uniform Standards of Professional
Appraisal Practice as adopted by the Appraisal
Standards Board of the Appraisal Foundation and
accepted and incorporated into FIRREA (the costs of
which will be paid by the Master Servicer as a
Property Advance) or
(B) by either an appraisal conducted as described in
the preceding clause (A) or an internal valuation
performed by the Special Servicer, if such Mortgage
Loan has an outstanding Scheduled Principal Balance
less than $2,000,000 over
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(b) the sum of
(A) to the extent not previously advanced by the
Master Servicer or the Trustee, all unpaid interest
on such Mortgage Loan at a per annum rate equal to
its Mortgage Rate,
(B) all unreimbursed Advances (and interest thereon)
in respect of such Mortgage Loan and
(C) all currently due and unpaid real estate taxes
and assessments, insurance premiums, ground rents and
all other amounts due and unpaid with respect to such
Mortgage Loan (which taxes, assessments, premiums,
ground rents and other amounts have not been subject
to an Advance by the Master Servicer or the Trustee.
"APPRAISAL REDUCTION AMOUNT" for any Distribution Date and any Mortgage Loan for
which an Appraisal Reduction has been calculated will equal the product of (1)
one-twelfth of the Pass-Through Rate for each Class of Certificates to which an
Appraisal Reduction is allocated and (2) the Appraisal Reduction for such
Mortgage Loan.
"APPRAISAL REDUCTION EVENT" for a Mortgage Loan will occur at the earliest of:
(7) the third anniversary of the date on which
the first extension of the maturity date of
such Mortgage Loan became effective as a
result of a modification of such Mortgage
Loan by the Special Servicer, which
extension did not decrease the aggregate
amount of Monthly Payments on the Mortgage
Loan;
(8) 120 days after an uncured delinquency occurs
for such Mortgage Loan;
(9) the date on which a reduction in the amount
of Monthly Payments on such Mortgage Loan,
or a change in any other material economic
term of such Mortgage Loan (other than an
extension of its maturity) becomes effective
as a result of a modification of such
Mortgage Loan by the Special Servicer;
(10) 60 days after a receiver has been appointed;
(11) 60 days after the related borrower of such
Mortgage Loan declares bankruptcy or is the
subject of an involuntary bankruptcy
proceeding; or
immediately after such Mortgage Loan becomes an REO Mortgage Loan; provided,
however, that an Appraisal Reduction Event will not occur at any time when the
aggregate Certificate Balances of all Classes of Certificates other than the
Senior Certificates have been reduced to zero.
"APPRAISED VALUE" means the appraised value of such property as determined by an
appraisal made not more than nine months prior to the origination date of the
related Mortgage Loan and reviewed by the related Mortgage Loan Seller.
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"ASSET STATUS REPORT" The Special Servicer will prepare a report for each
Mortgage Loan which becomes a Specially Serviced Mortgage Loan within 30 days
after the servicing of such Mortgage Loan is transferred to the Special
Servicer.
"AVAILABLE FUNDS" for a Distribution Date will be the sum of all previously
undistributed Monthly Payments or other receipts on account of principal of and
interest on or in respect of the Mortgage Loans (including Unscheduled Payments
and Net REO Proceeds, if any) received by the Master Servicer during the related
Collection Period, all P&I Advances made in respect of such Distribution Date,
and all other amounts required to be placed in the Collection Account by the
Master Servicer (including any Appraisal Reduction Excess Collections).
"Available Funds" does not include the Following:
(1) the Trustee Fee payable for the related Collection Period
(which amount will be paid to the Trustee prior to any other
allocations or distributions on each Distribution Date);
(2) amounts used to reimburse the Master Servicer or the Trustee,
as applicable, for previously unreimbursed Advances and
interest thereon;
(3) the Servicing Fee, Special Servicing Fee, Disposition Fee,
Workout Fee and other compensation due to the Master Servicer
and Special Servicer with respect to each Mortgage Loan;
(4) all amounts used to pay late fees, late charges and similar
fees, "insufficient funds" check charges, loan modification
fees, extension fees, loan service transaction fees, demand
fees, beneficiary statement charges, assumption fees and
similar fees, which the Master Servicer or the Special
Servicer, as applicable, is entitled to retain as additional
servicing compensation;
(5) all amounts representing scheduled Monthly Payments due after
the Due Date in the related Collection Period (such amounts to
be treated as received on the Due Date when due);
(6) other amounts payable to the Master Servicer or Special
Servicer (collectively referred to as "LIQUIDATION PROCEEDS"
in respect of unpaid servicing compensation from:
(a) amounts received in connection with the sale or
liquidation of Specially Serviced Mortgage Loans, by
foreclosure, trustee's sale or otherwise;
(b) amounts (other than Insurance Proceeds) received in
connection with the taking of a Mortgaged Property by
exercise of the power of eminent domain or
condemnation ("CONDEMNATION PROCEEDS") or
(c) proceeds of insurance policies to the extent not
applied to the restoration of the Mortgaged Property
or released to the borrower in accordance with the
normal servicing procedures of the Master Servicer or
the related sub-servicer and the terms and conditions
of the related Mortgage and promissory note
("INSURANCE PROCEEDS")
(7) all amounts representing reimbursable expenses of the Master
Servicer, the Special Servicer or the Trustee and amounts
permitted to be retained by the Master Servicer or the Special
Servicer or withdrawn by the Master Servicer from the
Collection Account to cover such expenses;
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(8) Prepayment Premiums, Yield Maintenance Charges and Excess
Interest received in the related Collection Period, which are
to be distributed separately as described herein;
(9) interest or investment income with respect to funds on deposit
in the Collection Account, Reserve Accounts or Advance Payment
Account; and
(10) Default Interest received in the related Collection Period
with respect to a Mortgage Loan that is in default with
respect to its Balloon Payment.
"AVAILABLE FUNDS ALLOCATION" means the amount and order of priority of
distribution on each Distribution Date to holders of each Class of Certificates,
up to the amount of Available Funds.
"BALLOON/ARD LTV" means the Balloon Amount or ARD Amount for such Mortgage Loan
as of the Cut-off Date divided by the Appraised Value of the related Mortgaged
Property.
"BALLOON AMOUNT" or "BALLOON BALANCE" means the principal amount, if any, due at
maturity, taking into account scheduled amortization, assuming no prepayments or
defaults.
"BALLOON LOANS" are Mortgage Loans which provide for monthly payments of
principal based on amortization schedules longer than their remaining terms,
thereby leaving substantial principal amounts due and payable on their
respective maturity dates.
"BALLOON PAYMENT" is the final payment on a Balloon Loan, together with interest
for the one-month period preceding such Balloon Loan's maturity date.
"BASE INTEREST FRACTION" with respect to any principal prepayment on any
Mortgage Loan and with respect to any class of Certificates is a fraction (a)
whose numerator is the amount, if any, by which (1) the Pass-Through Rate on
such Class of Certificates exceeds (2) the Yield Rate used in calculating the
Yield Maintenance Charge with respect to such principal prepayment and (b) whose
denominator is the amount, if any, by which the (1) Mortgage Rate on such
Mortgage Loan exceeds (2) the Yield Rate used in calculating the Yield
Maintenance Charge with respect to such principal prepayment; provided, however,
that under no circumstances shall the Base Interest Fraction be greater than
one; if such Yield Rate is greater than or equal to the lesser of (a) the
Mortgage Rate on such Mortgage Loan and (b) the related Pass-Through Rate, then
the Base Interest Fraction shall equal zero.
"BENEFICIAL OWNERS" means investor holding beneficial interests in the
Book-Entry Certificates through the book-entry facilities of DTC.
"BOOK-ENTRY CERTIFICATE" an Offered Certificate other than a Class A-EC
Certificate.
"BUSINESS DAY" means any day other than a Saturday, Sunday or a day on which
banking institutions in the States of New York, ____________ or ____________ are
authorized or obligated by law, executive order or governmental decree to close.
"CASH FLOW" means the NOI for the related Mortgaged Property decreased by tenant
improvements, leasing commissions, capital expenditures and other non-recurring
expenditures, as appropriate.
"CASUALTY" means the related Mortgage Loan Documents typically provide that in
the event of damage to the related Mortgaged Property insurance proceeds in
excess of a specified amount will be paid to the mortgagee rather than the
borrower.
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"CERTIFICATE REGISTRAR" means the certificate registrar appointed pursuant to
the Pooling and Servicing Agreement.
"CLASS A-EC NOTIONAL BALANCE" as of any date is equal to the sum of the
Certificate Balances of the Class A-1, Class A-2, Class B, Class C, Class D,
Class E, Class F, Class G, Class H, Class J, Class K, Class L, Class M and Class
N Certificates.
"CLASS D STRIP" percentage means the percentage which is subtracted from the
Weighted Average Net Mortgage Rate to equal the .Pass-Through Rate.
"CLASS INTEREST DISTRIBUTION AMOUNT" with respect to any Distribution Date and
each class of Certificates other than the Residual Certificates is the amount of
interest accrued on the Certificate Balance or Notional Balance of such Class
during the related Interest Accrual Period at the applicable Pass-Through Rate.
"CLASS INTEREST SHORTFALL" for any Class of Certificates on any Distribution
Date means the excess, if any, of the amount of interest required to be
distributed to the holders of such Class of Certificates on such Distribution
Date over the amount of interest actually distributed to such holders. No
interest will accrue on unpaid Class Interest Shortfalls.
"COLLECTION ACCOUNT" means the Master Servicer will establish and maintain a
segregated account or into which it will be required to deposit, within two
Business Days of receipt, the following payments and collections received or
made by it on or with respect to the Mortgage Loans:
(1) all payments on account of principal on the Mortgage Loans,
including the principal component of Unscheduled Payments on
the Mortgage Loans;
(2) all payments on account of interest and Default Interest on
the Mortgage Loans and the interest portion of all Unscheduled
Payments and all Prepayment Premiums;
(3) any amounts required to be deposited by the Master Servicer in
connection with losses realized on Permitted Investments with
respect to funds held in the Collection Account and in
connection with Prepayment Interest Shortfalls;
(4) (a) all Net REO Proceeds transferred from an REO Account, (b)
all amounts transferred from lockbox accounts in respect of
ARD Loans and payable to the Certificateholders and (c) all
Condemnation Proceeds, Insurance Proceeds and Net Liquidation
Proceeds not required to be applied to the restoration or
repair of the related Mortgaged Property;
(5) any amounts received from borrowers that represent recoveries
of Property Advances or Appraisal Reduction Excess
Collections; and
(6) any other amounts required by the provisions of the Pooling
and Servicing Agreement to be deposited into the Collection
Account by the Master Servicer or the Special Servicer,
including, without limitation, proceeds of any purchase or
repurchase of a Mortgage Loan as described under the sections
in this prospectus supplement titled "Description of the
Mortgage Pool--Representations and Warranties; Repurchase,"
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"The Pooling and Servicing Agreement-Realization Upon Mortgage
Loans" and " Description of the Certificates--Early
Termination."
"CORRECTED MORTGAGE LOAN" a Specially Serviced Mortgage Loan, which in
accordance with its original terms or as modified in accordance with the Pooling
and Servicing Agreement, becomes a performing Mortgage Loan (through workout by
the Special Servicer or otherwise) for three consecutive Monthly Payments
(provided no additional event of default is foreseeable in the reasonable
judgment of the Special Servicer).
"COLLECTION PERIOD" with respect to a Distribution Date, is the period beginning
on the day following the Determination Date in the month preceding the month in
which such Distribution Date occurs (or, in the case of the Distribution Date
occurring in ________________, on the day after the Cut-off Date) and ending on
the Determination Date in the month in which such Distribution Date occurs.
"COMMISSION" means the Securities and Exchange Commission.
"CONDEMNATION" means any taking or exercise of the power of eminent domain with
respect to a Mortgaged Property.
"CONDEMNATION PROCEEDS" shall have the meaning set forth in the definition of
Available Funds.
"CONSTANT PREPAYMENT RATE" OR "CPR" means assumed constant rate of prepayment
relative to the then outstanding principal balance of a pool of new mortgage
loans for the life of such mortgage loans.
"CREDIT ENHANCEMENT" features of the pooling and servicing agreement designed to
provide protection against losses and delays in distributions to the Class A
Certificateholders, and to a lesser extent, the Class B Certificateholders [and
the other certificateholders to an increasingly lesser extent].
"CUT-OFF DATE PRINCIPAL BALANCE" of each Mortgage Loan is the unpaid principal
balance thereof as of the Cut-off Date, after application of all payments of
principal due on or before such date, whether or not received.
"DSCR" means the Debt Service Coverage Ratios for each Mortgage Loan.
"DTC" means The Depository Trust Company.
"DEBT SERVICE COVERAGE RATIO," "UNDERWRITTEN DSCR" or "DSCR" means, (a) the
Underwritten Cash Flow for the related Mortgaged Property divided by (b) the
Annual Debt Service for such Mortgage Loan.
"DEFAULT INTEREST" means all of the Mortgage Loans provide for imposition of a
rate of interest higher than the stated interest rate upon the occurrence of an
event of default.
"DEFAULT RATE" with respect to any Mortgage Loan, is the annual rate at which
interest accrues on such Mortgage Loan following any event of default on such
Mortgage Loan, including a default in the payment of a Monthly Payment or a
Balloon Payment.
"DEPOSITOR" Prudential Securities Secured Financing Corporation, formerly known
as P-B Secured Financing Corporation.
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"DISPOSITION FEE" is a fee the Special Servicer receives in addition to the
Special Servicing Fee, with respect to any Specially Serviced Mortgage Loan or
REO Property that is sold or transferred or otherwise liquidated (except in
connection with the repurchase of a Mortgage Loan as described under
"Description of the Mortgage Pool--Representations and Warranties; Repurchase"),
equal to the product of (1) the excess, if any, of (a) the proceeds of the sale
or liquidation of such Specially Serviced Mortgage Loan or REO Property over (b)
any broker's commission and related brokerage referral fees.
"DISTRIBUTION ACCOUNT" means a segregated account or accounts established and
maintained by The Trustee in its name in trust for the benefit of the holders of
Certificates.
"DISTRIBUTION DATE" refers to each of the dates on which distributions on the
Regular Certificates will be made on the ____ day of each month or, if such day
is not a Business Day, then on the next succeeding Business Day, commencing on
_______________, provided that no such day shall be fewer than four Business
Days after the related Determination Date.
"DUE DATE" means the date for Monthly Payments on the Mortgage Loans.
"DUFF & PHELPS" means Duff & Phelps Credit Rating Service.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"ESA" means an environmental site assessment a similar study, an update of a
previously conducted Phase 1 ESA, an update based on information contained in an
established database, or for loans with an original principal balance of less
than $1,000,000, an environmental transaction screen assessment was obtained by
the related Mortgage Loan Seller with respect to each of the Mortgaged
Properties within 12 months of the respective dates as of which the Mortgage
Loans were originated or purchased thereby.
"ELIGIBLE BANK" means a federally or state chartered depository institution or
trust company acting in its fiduciary capacity, having, in either case, a
combined capital and surplus of at least $50,000,000 and subject to supervision
or examination by federal or state authority and subject to regulations
regarding fiduciary funds on deposit substantially similar to 12 CFR 9.10(b), or
as to which the Trustee has been informed in writing by each Rating Agency that
the maintenance of such account will not, in and of itself, result in a
downgrading, withdrawal or qualification of the rating then assigned by such
Rating Agency to any Class of Certificates.
"EXCESS CASH FLOW" means The cash flow from the Mortgaged Property securing an
ARD Loan after payments of items (1) through (5) above is referred to herein as
________________.
"EXCESS INTEREST" shall have the meaning set forth in the definition of ARD
Loan.
"FORM 8-K" means a Current Report on Form 8-Kwill be filed, together with the
Pooling and Servicing Agreement, with the Securities and Exchange Commission
within 15 days after the initial issuance of the Certificates.
"INSURANCE PROCEEDS" shall have the meaning set forth in the definition of
Available Funds.
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"INDIRECT PARTICIPANTS" are banks, brokers, dealers, trust companies and other
institutions that have indirect access to the DTC system by clearing through or
maintaining a custodial relationship with a Participant, either directly or
indirectly.
"INITIAL POOL BALANCE" is the aggregate of the cut-off date principal balances
of the mortgage loans, and gives effect to the deposit into the loan account for
__________, principal amounts payable on its due date in __________ as if that
payment were made before ____________.
"INTEREST ACCRUAL PERIOD" with respect to any Distribution Date is the calendar
month preceding the month in which such Distribution Date occurs. Interest for
each Interest Accrual Period is calculated based on a 360-day year consisting of
twelve 30-day months.
"INTERESTED PERSON" means the Depositor, the Master Servicer, the Special
Servicer, the Trustee, any borrower or property manager of a Mortgaged Property,
an independent contractor engaged by the Special Servicer to manage or operate
an REO Property or any known affiliate of any of the foregoing.
"LIQUIDATION PROCEEDS" shall have the meaning set forth in the definition of
Available Funds.
"LOAN ____ ACCOUNT" means, with respect to Mortgage Loan Control #____, an
account established and funded with an amount equal to one scheduled payment
thereof.
"LOAN-TO-VALUE RATIO" "APPRAISED LTV" or "LTV" means the principal balance of
such Mortgage Loan as of the Cut-off Date divided by the Appraised Value of the
related Mortgaged Property.
"LOCKOUT PERIOD" means a specified period of time after the date of origination
of such Mortgage Loan during which prepayments are prohibited.
"MASTER SERVICER MORTGAGE FILE" Mortgage Loan Documents and all other documents
related to each Mortgage Loan, including copies of any management agreements,
ground leases, appraisals, surveys, environmental reports and similar documents
and any other written agreements relating to each Mortgage Loan held by the
Master Servicer in trust for the benefit of the Trustee on behalf of
Certificateholders.
"MONTHLY PAYMENT" with respect to any Mortgage Loan for any Distribution Date
(other than any REO Mortgage Loan) is the scheduled monthly payment of principal
and interest, excluding any Balloon Payment, that is payable by the related
borrower on the related Due Date. The Monthly Payment with respect to an REO
Mortgage Loan for any Distribution Date is the monthly payment that would
otherwise have been payable on the related Due Date had the related Mortgage
Loan not been discharged (after giving effect to any extension or other
modification), determined as set forth in the Pooling and Servicing Agreement.
"MORTGAGE" means one or more mortgages, deeds of trust, deeds to secure debt or
other similar security instruments securing each Mortgage Loan.
"MORTGAGED PROPERTY" means a fee simple estate, an estate for years or a
leasehold estate in a real property with a first lien created by a Mortgage.
"MORTGAGE LOAN PURCHASE AGREEMENT" means an agreement pursuant to which the
Depositor will purchase the Mortgage Loans on or before the Closing Date from
the Transferor.
"MORTGAGE RATE" means an interest rate on each of the Mortgage Loans [Each
Mortgage Loan accrues interest at an annualized rate that is fixed for the
entire term of such Mortgage Loan and does not permit any negative amortization
or the deferral of interest except that ____ of the Mortgage Loans, representing
approximately _____% of the Initial Pool Balance, provide that for a period of
up to ____ years from origination the borrower is obligated only to pay interest
accrued each month.].
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"NET COLLECTIONS" means, with respect to any Corrected Mortgage Loan, an amount
equal to all payments on account of principal and interest on such Mortgage Loan
and all Prepayment Premiums, Yield Maintenance Charges and Excess Interest.
"NET MORTGAGE RATE" for each Mortgage Loan is the Mortgage Rate for such
Mortgage Loan in the absence of a default and exclusive of Excess Interest,
minus the related Servicing Fee Rate and the Trustee Fee Rate.
"NET OPERATING INCOME" or "NOI" means revenue derived from the use and operation
of the Mortgaged Property (primarily rental income) less operating expenses
(such as utilities, general administrative expenses, management fees,
advertising, repairs and maintenance) and less fixed expenses (such as insurance
and real estate taxes). NOI generally does not reflect capital expenditures,
replacement reserves, interest expense, income taxes and non-cash items such as
depreciation or amortization. The Mortgage Loan Sellers have informed the
Depositor that they have adjusted items of revenue and expense shown on the
borrower's financial statements in order to reflect the historical operating
results for a Mortgaged Property on a normalized basis (e.g., adjusting for the
payment of two years of real estate taxes in a single year). Revenue was
generally adjusted to eliminate security deposits and to eliminate non-recurring
items and items not related to the operation of the Mortgaged Property. Expense
was generally adjusted to eliminate distributions to owners, items of expense
not related to the operation of the Mortgaged Property, non-recurring items,
such as capital expenditures, and refunds of security deposits. The Mortgage
Loan Sellers have informed the Depositor that they have made the adjustments
based upon their review of borrower financial statements, their own experience
in originating loans and, in some cases, conversations with borrowers. The
adjustments were subjective in nature and were not uniform for each Mortgaged
Property. ["96 NOI" and "97 NOI" reflect calendar year operations for 1996 and
1997, respectively. "98 NOI," on the other hand, reflects operations for one of
three periods: (a) at least eight months, annualized, (b) the trailing 12 months
beginning some month in 1998, or (c) calendar year 1998.]
"NET REO PROCEEDS" with respect to any REO Property and any related Mortgage
Loan, are all revenues received by the Special Servicer with respect to such REO
Property or REO Mortgage Loan that are not Liquidation Proceeds, net of any
insurance premiums, taxes, assessments and other costs and expenses permitted to
be paid from the related REO Account pursuant to the Pooling and Servicing
Agreement.
"NONRECOVERABLE ADVANCE" means an Advance which the Master Servicer determines
to be nonrecoverable.
"OCCUPANCY RATE" means the percentage of gross leasable area, rooms, units,
beds, pads or sites of a Mortgaged Property that are leased or occupied.
Occupancy rates are calculated based upon the most recent rent information
received by the related Mortgage Loan Seller. The "Occupancy Percentage" and
"Occupancy Date" for each Mortgage Loan are based upon rent information received
by the related Mortgage Loan Seller from the related borrower or mortgage loan
originator (if other than the related Mortgage Loan Seller).
"P&I ADVANCE" means an amount the Master Servicer will be obligated to advance
on the Business Day preceding each Distribution Date (the "REMITTANCE DATE"),
equal to the total or any portion of the Monthly Payment on any Mortgage Loan
that was delinquent as of the close of business on the Business Day preceding
such Remittance Date or, in the event of a default in the payment of a Balloon
Payment, the Assumed Scheduled Payment for the related Balloon Loan, unless the
Master Servicer determines that any such advance would be a Nonrecoverable
Advance and delivers to the Trustee an officer's certificate and accompanying
documentation related to a determination of nonrecoverability.
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"PARTICIPANTS" means the participating organizations in DTC.
"PASS-THROUGH RATE" for any Class of Regular Certificates is the per annum rate
at which interest accrues on the Certificates of such Class during any Interest
Accrual Period, and is set forth under "Summary" herein.
"PAYING AGENT" means any paying agent appointed by the Trustee.
"PERMITTED INVESTMENTS" means the United States government securities and other
investments as specified in the Pooling and Servicing Agreement Amounts in which
the Collection Account.
"PLAN ASSET REGULATIONS" means regulations issued by The United States
Department of Labor concerning whether a Plan's assets will be considered to
include an interest in the underlying assets of an entity (such as the Trust
Fund) for purposes of the general fiduciary responsibility provisions of ERISA,
as well as for the prohibited transaction provisions of ERISA and the Tax Code,
if the Plan acquires an "equity interest" (such as a Certificate) in an entity.
"POOL BALANCE" as of any date will be the aggregate of the outstanding principal
balances of the Mortgage Loans in the Mortgage Pool as of such date.
"POOLED PRINCIPAL DISTRIBUTION AMOUNT" for any Distribution Date will be equal
to the sum (without duplication) of:
(1) the principal component of all scheduled Monthly Payments
(other than Balloon Payments) that become due on the Mortgage
Loans during the related Collection Period regardless of
whether received;
(2) the principal component of all Assumed Scheduled Payments[
INSERT], as applicable, deemed to become due during the
related Collection Period with respect to any Balloon Loan
that is delinquent in respect of its Balloon Payment
regardless of whether received;
(3) the Scheduled Principal Balance of each Mortgage Loan that
was, during the related Collection Period, repurchased from
the Trust Fund in connection with the breach of a
representation or warranty or an early termination of the
Trust Fund as described under "Early Termination";
(4) the portion of Unscheduled Payments allocable to principal of
any Mortgage Loan that was liquidated during the related
Collection Period;
(5) the principal component of any Balloon Payment received during
the related Collection Period;
(6) all Principal Prepayments received in the related Collection
Period; and
(7) all full or partial recoveries in respect of principal,
including Insurance Proceeds, Liquidation Proceeds,
Condemnation Proceeds and Net REO Proceeds.
"POOLING AND SERVICING AGREEMENT" means the Certificates will be issued pursuant
to a Pooling and Servicing Agreement, to be dated on or about ____________ (the
by and among the Depositor, the Master Servicer, the Special Servicer and the
Trustee.
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"PREPAYMENT INTEREST SHORTFALL" means the amount of interest a borrower is not
required to pay or does not pay because of a Principal Prepayment thereby made
during any Collection Period relative to the amount of interest that would have
accrued on the Mortgage Loan during such Collection Period in the absence of
such Principal Prepayment.
"PREPAYMENT INTEREST SURPLUS" with respect to any Principal Prepayment means the
amount by which (a) interest received from the related borrower in respect of
such Mortgage Loan during such Collection Period exceeds interest at the related
Net Mortgage Rate on the Scheduled Principal Balance of such Mortgage Loan that
would have been due in the absence of such Principal Prepayment.
"PREPAYMENT PREMIUMS" are payments received on a Mortgage Loan in connection
with a Principal Prepayment thereon, calculated as a fixed percentage of the
amount of principal to be prepaid.
"PRINCIPAL PREPAYMENTS" are payments of principal made by a borrower on a
Mortgage Loan that are received in advance of the scheduled Due Date for such
payments and that are not accompanied by an amount of interest representing the
full amount of scheduled interest due on any date or dates in any month or
months subsequent to the month of prepayment.
"PROPERTY ADVANCES" means cash advance the Master Servicer is obligated to make
(a) to pay certain costs and expenses incurred in connection with defaulted
Mortgage Loans, acquisition of title to, or management of, REO Properties, or
the sale of defaulted Mortgage Loans or REO Properties, (b) to pay delinquent
real estate taxes, assessments and hazard insurance premiums and (c) to cover
other similar costs and expenses necessary to protect and preserve the security
of the related Mortgage.
"REMIC" means real estate mortgage investment conduits.
"REO ACCOUNT" means such funds or assets as from time to time are deposited in
the Collection Account, the Distribution Account and any account established in
connection with REO Properties.
"REO PROPERTY" means if the related Mortgaged Property is acquired in respect of
any such Mortgage Loan whether through foreclosure, deed-in-lieu of foreclosure
or otherwise (upon acquisition, an).
"REO MORTGAGE LOAN" is any Mortgage Loan as to which the related Mortgaged
Property has become an REO Property.
"REALIZED LOSS" with respect to any Distribution Date will mean the amount, if
any, by which (1) the aggregate Certificate Balance after giving effect to
distributions made on such Distribution Date, exceeds (2) the aggregate
Scheduled Principal Balance of the Mortgage Loans as of the Due Date in the
month in which such Distribution Date occurs.
"RECORD DATE" means The record date for payments on the certificates is the
close of business on the last business day of each month. The record date always
relates to the distribution date for the following calendar month.
"REMAINING TERM TO MATURITY" means the number of Due Dates remaining from the
Cut-off Date until the maturity of a mortgage loan (or, for ARD Loans, through
the related Anticipated Repayment Dates).
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"REMAINING AMORTIZATION TERM" for any Mortgage Loan is calculated as the
original amortization term of the related Mortgaged Loan (based upon such
Mortgage Loan's original balance, interest rate and monthly payment, in the case
of the ARD Loans, assuming prepayment in full on the related Anticipated
Repayment Date) less the number of Due Dates through and including the Cut-off
Date.
"RESTRICTED GROUP" means any of the Depositor, the Underwriter, the Master
Servicer, the Special Servicer, any obligor with respect to the Mortgage Loans
included in the Trust Fund constituting more than 5% of the aggregate
unamortized balance of the assets in the Trust Fund, or any affiliate of such
parties.
"REVISED RATE" shall have the meaning set forth in the definition of ARD Loan.
"S&P" Standard & Poor's Rating Services, a division of the McGraw-Hill
Companies.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984.
"SCHEDULED PRINCIPAL BALANCE" of any Mortgage Loan as of any Due Date will be
the principal balance of such Mortgage Loan as of such Due Date, after giving
effect to (1) any Principal Prepayments, prepayments that do not include
prepayment premiums or other unscheduled recoveries of principal and any Balloon
Payments received during the related Collection Period and (2) any payment in
respect of principal due on or before such Due Date (excluding Balloon Payments,
but including the principal portion of any Assumed Scheduled Payment),
irrespective of any delinquency in payment by the borrower. The Scheduled
Principal Balance of any REO Mortgage Loan as of any Due Date is equal to the
principal balance thereof outstanding on the date that the related Mortgaged
Property became an REO Property minus any Net REO Proceeds allocated to
principal and minus the principal component of Monthly Payments due thereon on
or before such Due Date. With respect to any Mortgage Loan, from and after the
date on which the Master Servicer makes a determination that it has recovered
all amounts that it reasonably expects to be finally recoverable "FINAL RECOVERY
DETERMINATION" the Scheduled Principal Balance thereof will be zero.
"SCHEDULED FINAL DISTRIBUTION DATE" with respect to any Class of Certificates is
the Distribution Date on which the aggregate Certificate Balance or aggregate
Notional Balance, as the case may be, of such Class of Certificates would be
reduced to zero based on the assumptions set forth below.
"SENIOR PRINCIPAL DISTRIBUTION CROSS-OVER DATE" will be the first Distribution
Date on which the aggregate Certificate Balance of the Class A-1 and A-2
Certificates (before any distributions are made) exceeds the sum of (a) the
aggregate Scheduled Principal Balance of all Mortgage Loans on such Distribution
Date and (b) the portion of the Available Funds that will remain after the
required distributions of interest to be made to such classes on such
Distribution Date.
"SERVICING FEE" means the monthly servicing fee which the Master Servicer is
entitled to with respect to each Mortgage Loan and for each Distribution Date
equal to one-twelfth (1/12) of a per annum rate (the related "SERVICING FEE
RATE" ranging from [0.05%] to [0.25%] (in the case of the Mortgage Loans sold to
the Transferor by [relevant Mortgage Seller]) and equal to [0.05%] (in the case
of the Mortgage Loans sold to the Transferor by [relevant Mortgage Seller])
multiplied by the Scheduled Principal Balance of such Mortgage Loan as of the
Due Date in the month preceding the month in which such Distribution Date
occurs.
"SERVICING FEE RATE" shall have the meaning specified in the definition of
Servicing Fee.
"SINGLE-PURPOSE ENTITY" shall mean a person, other than an individual, which
does not engage in any business unrelated to the related Mortgaged Property and
its financing, does not have any assets other than those related to its interest
in such Mortgaged Property or its financing, or any indebtedness other than as
permitted by the related Mortgage or the other documents in the Mortgage File,
has its own books and records separate and apart from any other person and holds
itself out as being a legal entity, separate and apart from any other person.
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"SPECIALLY SERVICED MORTGAGE LOAN" means the Pooling and Servicing Agreement
will define a to include any Mortgage Loan with respect to which:
(1) the related borrower is 60 or more days delinquent in the
payment of principal and interest (regardless of whether P&I
Advances have been reimbursed in respect thereof);
(2) the related borrower has expressed to the Master Servicer its
inability to pay the Mortgage Loan or a hardship in paying the
Mortgage Loan in accordance with its terms;
(3) the Master Servicer has received notice that the related
borrower has (a) become the subject of any bankruptcy,
insolvency or similar proceeding, (b) admitted in writing its
inability to pay its debts as they come due, or (c) made an
assignment for the benefit of creditors;
(4) the Master Servicer has received notice of a foreclosure or
threatened foreclosure of any lien on the Mortgaged Property
securing such Mortgage Loan;
(5) a default of which the Master Servicer has notice (other than
a failure by the related borrower to pay principal or
interest) and which materially and adversely affects the
interests of the Certificateholders has occurred and remains
unremedied for the applicable grace period specified in the
Mortgage Loan (or, if no grace period is specified, 60 days);
provided, that in any case a default requiring a Property
Advance will be deemed to materially and adversely affect the
interests of the Certificateholders;
(6) the related borrower has failed to make a Balloon Payment when
due (unless the Master Servicer and the Special Servicer agree
in writing that such Mortgage Loan is likely to be paid in
full within 30 days after such default);
(7) the Master Servicer proposes to commence foreclosure or other
workout arrangements; or )
(8) the Master Servicer otherwise determines that there is a
material risk of default by the related borrower.]
"SPECIAL SERVICING FEE" means fees to which the Special Servicer is entitled
including a special servicing fee equal to one-twelfth of [__%] of the
outstanding Scheduled Principal Balance of each Specially Serviced Mortgage Loan
on a monthly basis.
"TAX CODE" means the Internal Revenue Code of 1986.
"TRANSFEROR" means Prudential Securities Credit Corp.
"UNDERLYING MORTGAGE LOAN PURCHASE AGREEMENTS" refers to the separate
agreements, collectively, pursuant to which the Transferor will purchase ____
and ____ Mortgage Loans (representing approximately ____% and ____% of the
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Initial Pool Balance) from [the related Mortgage Loan Sellers], on or before the
Closing Date.
"UNDERWRITER" means Prudential Securities Incorporated and ___________________.
"UNDERWRITING AGREEMENT" means the agreement, dated ___ 1999, pursuant to which
the Underwriters have agreed, severally and not jointly to purchase from the
Depositor specified principal or notional balances of Certificates.
"UNDERWRITTEN CASH FLOW" for the related Mortgage Loan Seller means the
Underwritten NOI for such Mortgage Loan decreased by an amount that the related
Mortgage Loan Seller has determined to be an appropriate allowance, based upon
its underwriting guidelines, for average annual tenant improvements and leasing
commissions. [The related Mortgage Loan Seller] calculation is also decreased by
capital expenditures and other expenditures, as appropriate.
"UNDERWRITTEN NOI" means the NOI for the related Mortgaged Property on an annual
basis as determined by the related Mortgage Loan Seller in accordance with its
underwriting guidelines for similar properties.
"UNSCHEDULED PAYMENTS" are all Liquidation Proceeds, Condemnation Proceeds and
Insurance Proceeds payable under the Mortgage Loans, the Repurchase Prices of
any Mortgage Loans that are repurchased or purchased pursuant to the Pooling and
Servicing Agreement and any other payments under or with respect to the Mortgage
Loans not scheduled to be made, including Principal Prepayments, but excluding
Prepayment Premiums, Yield Maintenance Charges and Excess Interest.
"VOTING RIGHTS" assigned to each Class will be:
(1) 0% in the case of the Residual Certificates;
(2) in the case of any other Class of [P&I CERTIFICATES], a
percentage equal to the product of (a) 96% so long as the
Class A-EC Notional Balance is greater than zero and 97%
thereafter and (b) a fraction, the numerator of which is equal
to the aggregate outstanding Certificate Balance of such Class
and the denominator of which is equal to the aggregate
outstanding Certificate Balances of all Classes of
Certificates;
(3) in the case of the Class A-EC Certificates, 1% so long as the
Class A-EC Notional Balance is greater than zero, and 0%
thereafter; and 3% in the case of the Class N Certificates.
"WEIGHTED AVERAGE MATURITY" means the weighted average of the Remaining Terms to
Maturity of the Mortgage Loans.
"WEIGHTED AVERAGE NET MORTGAGE RATE" for any Interest Accrual Period is a per
annum rate equal to the weighted average of the amount of interest accrued on
the Mortgage Loans at the related Mortgage Rates during the related Interest
Accrual Period, weighted on the basis of the Scheduled Principal Balances
thereof as of the first day of such Interest Accrual Period.
"WORKOUT FEE" is an additional servicing compensation for the Special Servicer
equal to the product of [___%] and the amount of Net Collections received by the
Master Servicer or the Special Servicer with respect to each Corrected Mortgage
Loan.
S-129
<PAGE>
"YEAR BUILT" is based on information contained in deed records, appraisals,
engineering surveys, architectural papers, title insurance, and/or other
insurance policies.
"YEAR RENOVATED" is based upon information contained in the appraisal of the
related Mortgaged Property.
"YEAR 2000 CAPABLE" means a product or service capable of accurately processing,
proving and receiving date data from, into and between the twentieth and
twenty-first centuries, and which will correctly create, store, process and
output information related to or including dates on or after December 31, 1999
as a result of the changing of the date from 1999 to 2000, including leap year
calculations, when used for the purpose for which it was intended, assuming that
all other products, including hardware and software, when used in combination
with the product or service properly exchange date data.
"YIELD MAINTENANCE CHARGE" will be the greater of (1) a specified Prepayment
Premium or (2) the present value, as of the date of such prepayment, of the
remaining scheduled payments of principal and interest on the portion of the
Mortgage Loan being prepaid (including any Balloon Payment or principal balance
due on the Anticipated Repayment Date for an ARD Loan) determined by discounting
such payments at the Yield Rate, less the amount prepaid.
"YIELD RATE" generally is a per annum rate calculated by the linear
interpolation of the yields of U.S. Treasury constant maturities with maturity
dates (one longer, one shorter) most nearly approximating the maturity date (or,
with respect to ARD Loans, the Anticipated Repayment Date) of the Mortgage Loan
being prepaid, as reported in Federal Reserve Statistical Release H.15--Selected
Interest Rates under the heading U.S. Government Securities/Treasury constant
maturities, for the week ending prior to the date of the prepayment, or the
monthly equivalent of such rate. If Federal Reserve Statistical Release
H.15--Selected Interest Rates is no longer published, the Master Servicer shall
select a comparable publication to determine the relevant Yield Rate. With
respect to Mortgage Loan Control #___, representing ____% of the Initial Pool
Balance, the Yield Rate is a per annum rate calculated as described above plus a
spread.
S-130
<PAGE>
SCHEDULE A
EXPLANATORY NOTES
Shaded Loans signify either single notes secured by multiple mortgages, or
cross-collateralized/cross-defaulted notes and mortgages.
Crossed loans include a summation of particular loan parameters (e.g., Cut-off
date balance) on the top line of the loan group, therefore some loan totals are
duplicated and must be adjusted to attain portfolio totals.
Sets of Mortgage Loans that have identical numeric coding designate multiple
Mortgage Loans that are cross-collateralized and cross-defaulted.
Some ratios including Cut-off Date Balance/Unit or SF, DSCR, LTV and Balloon LTV
are calculated on a combined basis for Mortgage Loans that are secured by
multiple Mortgaged Properties or are cross-collateralized and cross-defaulted.
"ARD" indicates the Anticipated Repayment Date.
The Amortization Term shown is the basis for determining the fixed monthly
principal and interest payment as set forth in the related note. For those
Mortgage Loans utilizing an actual/360 interest calculation methodology, the
actual amortization to a zero balance may require more monthly payments than
indicated.
In general for each Mortgaged Property, "Physical Occupancy Percent" was
determined based on a rent roll provided by the related borrower. In some cases,
"Physical Occupancy Percent" was determined based on an appraisal, operating
statement or occupancy report.
"Largest Tenant" refers to the tenant that represents the greatest percentage of
the total square footage at the related Mortgaged Property.
S-131
<PAGE>
"Prepayment Description" indicates prepayment provisions from the first
regularly scheduled payment date, as stated in the Mortgage Loan. "YM"
represents yield maintenance. "YM1", "YM2", "YM3" and "YM5" represent the
greater of yield maintenance or one percent, two percent, three percent and five
percent of the outstanding principal balance at that time, respectively. The
stated percentages represent specified percentage Prepayment Premiums. "Open"
represents a period during which principal prepayments are permitted without
payment of a Prepayment Premium. For each Mortgage Loan, the sum of the numbers
set forth under the Prepayment Description category represents the number of
months in the original term to maturity.
"Seasoning" represents the approximate number of months elapsed from the date of
the first regularly scheduled payment to the Cut-Off Date.
All Mortgage Loans (except for the Mortgage Loan, Control No. 256) are first
liens secured by mortgages on commercial or multi-family residential properties.
NOI numbers which are blank were either not available or were obtained from a
period of time that the information was not comparable.
THIS SCHEDULE A CONSTITUTES AN
INTEGRAL PART OF THE PROSPECTUS SUPPLEMENT
TO WHICH IT IS ATTACHED
Schedule A
Loan Characteristics
Shaded Mortgage Loans signify either single notes secured by multiple Mortgages,
or cross-collateralized/cross-defaulted notes and Mortgages.
Crossed loans (i.e., cross-collateralized or cross-defaulted Mortgage Loans)
include a summation of particular loan parameters (e.g. Cut-off Date Balance) on
the top line of the loan group, therefore some loan totals are duplicated and
must be adjusted to attain portfolio totals.
"___", "____", and "____" denote __________________________ and ______________,
respectively, as Mortgage Loan Originators.
Some ratios including Cut-off Date Balance/Unit or SF, DSCR, LTV and Balloon LTV
are calculated on a combined basis for Mortgage Loans that are secured by
multiple Mortgaged Properties or are cross-collateralized and cross-defaulted.
"ARD" indicates the Anticipated Repayment Date.
S-132
<PAGE>
The Amortization Term shown is the basis for determining the fixed monthly
principal and interest payment as set forth in the related Note. For those
Mortgage Loans utilizing an actual/360 interest calculation methodology, the
actual amortization to a zero balance may require more monthly payments than
indicated.
"Largest Tenant Name" refers to the tenant that represents the greatest
percentage of the total square footage at the related Mortgaged Property.
YM represents yield maintenance. "YM1", "YM2", "YM3" , "YM4" and "YM5" represent
the greater of yield maintenance or one percent, two percent, three percent,
four percent and five percent of the outstanding principal balance at that time,
respectively. The stated percentages represent specified Prepayment Premiums.
"Open" represents a period during which principal prepayments are permitted
without payment of a Prepayment Premium. For each Mortgage Loan, the sum of the
numbers set forth under the ==== Prepayment Description category represents the
number of months in the original term to maturity.
"LO" denotes that a Mortgage Loan is locked out for a period during which
prepayment is not permitted.
"DEF" denotes defeasance and indicates that a loan may be defeased only during
the indicated period.
Yield Maintenance Description provides a summation of the calculation of any
yield Maintenance Charge. [Note that with respect to Mortgage Loan Control #___,
the Yield Maintenance Charge is calculated as the Treasury Rate plus _____ basis
points per annum.]
"Seasoning" represents the approximate number of months elapsed from the date of
the first regularly scheduled payment to the Cut-off Date.
Missing NOI data points occur because the data was not available or because they
apply to a time period that is not comparable to other Mortgage Loans in the
Mortgage Loan Pool.
Due on Sale provides a confirmation that exercises at the related lender's
option with a fee payable for the option.
Fixed Loan Type identifies that interest will accrue on the balance of the
related Mortgage Loan at the indicated fixed coupon during the term of the loan.
"NAP" denotes data is not applicable
Current LTV Ratio is calculated using the original appraised value and the
Cut-off Date Mortgage Loan Balance.
All reserve holdback balances, monthly reserves and monthly escrows were
obtained from the servicer.
[1998 NOI - Generally, 1996 and 1997 NOI indicates a January through December
calendar year. 1998 NOI may be calculated on any one of the three following
methods.
January through December calendar year.
Trailing twelve months ending in the last six months of 1998.
At least eight months annualized.]
S-133
<PAGE>
Schedule B
Additional Loan Characteristics
THIS SCHEDULE B CONSTITUTES AN
INTEGRAL PART OF THE PROSPECTUS SUPPLEMENT
TO WHICH IT IS ATTACHED
S-134
<PAGE>
SCHEDULE C
Affiliated Borrowers
Percent
MORTGAGE LOAN Cut-Off Relationship of Cross Collateralized and
CONTROL # Balance Borrower Cross Defaulted
121
137
144
124
124a
124b
127a
127b
127c
132a
132b
148a
148b
133
147
149
150
THIS SCHEDULE C CONSTITUTES AN
INTEGRAL PART OF THE PROSPECTUS SUPPLEMENT
TO WHICH IT IS ATTACHED
S-135
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this prospectus
supplement or the prospectus and, if given or made, that information or
representation must not be relied upon as having been authorized by the
Depositor or the Underwriter. This prospectus supplement and the prospectus do
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered here in any jurisdiction to any person to whom it is unlawful
to make those offers in that jurisdiction. Neither the delivery of this
prospectus supplement or the prospectus nor any sale made under the prospectus
shall, under any circumstances, create an implication that the information in
this prospectus supplement is correct as of any time subsequent to the date
hereof or that there has been no change in the affairs of the depositor since
date hereof.
COMMERCIAL MORTGAGE
PASS-THROUGH CERTIFICATES,
SERIES 1999-NRF1
PRUDENTIAL SECURITIES SECURED
FINANCING CORPORATION
PROSPECTUS SUPPLEMENT
PRUDENTIAL SECURITIES
MAY __, 1999
S-136
<PAGE>
[SIDEBAR]
The information contained in this prospectus is not complete and may be
changed. This prospectus supplement is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
[END SIDEBAR]
PROSPECTUS
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
Depositor
COMMERCIAL/MULTIFAMILY MORTGAGE PASS-THROUGH CERTIFICATES
(Issuable in Series)
THE TRUST FUNDS-
(1) A new trust fund will be established to issue each
series of certificates.
(2) Each trust fund will consist of:
- a pool of mortgage loans secured by liens on
commercial or multifamily residential properties; and
- other assets specified in the applicable prospectus
supplement.
THE CERTIFICATES-
(1) will represent interests in the related trust fund
and will be paid only from the related trust fund
assets; and
(2) will be issued as part of a designated series that
may include one or more classes.
BEFORE YOU PURCHASE ANY OF THESE SECURITIES, BE SURE YOU UNDERSTAND THE
STRUCTURE OF THE TRANSACTION AND THE RISKS. SEE ESPECIALLY THE RISK FACTORS
BEGINNING ON PAGE ___ OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE CERTIFICATES OR DETERMINED THAT
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The securities to be issued are asset backed certificates issued by a trust. The
securities represent interests only in the related trust fund and do not
represent interests in or obligations of Prudential Securities Secured Financing
Corporation or any of its affiliates. Unless otherwise specified in the
applicable prospectus supplement, neither the certificates nor the underlying
assets are insured or guaranteed by any governmental agency or other person.
This prospectus may be used to offer and sell any series of
certificates only if accompanied by the prospectus supplement for that series.
June , 1999
1
<PAGE>
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
APPLICABLE PROSPECTUS SUPPLEMENT.............................................
WHERE YOU CAN FIND MORE INFORMATION............................................
REPORTS ......................................................................
SUMMARY OF PROSPECTUS..........................................................
RISK FACTORS...................................................................
THE DEPOSITOR..................................................................
THE TRUST FUND.................................................................
USE OF PROCEEDS................................................................
DESCRIPTION OF THE CERTIFICATES................................................
THE MORTGAGE POOLS.............................................................
SERVICING OF THE MORTGAGE LOANS................................................
CREDIT ENHANCEMENT.............................................................
MATERIAL LEGAL ASPECTS OF THE MORTGAGE LOANS..................................
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.......................................
STATE AND OTHER TAX CONSIDERATIONS.............................................
ERISA CONSIDERATIONS...........................................................
LEGAL INVESTMENT...............................................................
PLAN OF DISTRIBUTION...........................................................
LEGAL MATTERS..................................................................
FINANCIAL INFORMATION..........................................................
RATING ......................................................................
GLOSSARY......................................................................
2
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
AND THE APPLICABLE PROSPECTUS SUPPLEMENT
We provide information to you about the certificates in two separate
documents: this prospectus, which provides general information, some of which
may not apply to a particular series of certificates, including your series; and
the applicable prospectus supplement, which will describe the specific terms of
the offered certificates .
IF WE DESCRIBE THE TERMS OF THE SERIES OF OFFERED CERTIFICATES
DIFFERENTLY IN THIS PROSPECTUS THAN WE DO IN THE APPLICABLE PROSPECTUS
SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION IN THE PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and
the applicable prospectus supplement, including the information incorporated by
reference. We have not authorized anyone to provide you with different
information. We are not offering the certificates in any state where the offer
is not permitted.
We have included cross-references to captions in these materials where
you can find related discussions that we believe will enhance your understanding
of the topic being discussed. The Table of Contents of this prospectus and the
Table of Contents included in the applicable prospectus supplement list the
pages on which these captions are located. You can also find references to key
topics in the Table of Contents on the preceding page.
We have started with several introductory sections describing the trust
fund and the certificates in abbreviated form, followed by a more complete
description of the terms. The introductory sections are:
* Summary of Prospectus--gives a brief introduction to the certificates
to be offereds; and
* Risk Factors--describes briefly some of the risks to investors of a
purchase of the certificates.
You can find the definitions of capitalized terms that are used in this
prospectus under the caption "Glossary" beginning on page __ in this prospectus.
Whenever we use words like "intends," anticipates" or "expects" or
similar words in this prospectus, we are making a forward-looking statement, or
a projection of what we think will happen in the future. Forward-looking
statements are inherently subject to a variety of circumstances, many of which
are beyond our control that could cause actual results to differ materially from
what we think they might be. Any forward-looking statements in this prospectus
speak only as of the date of this prospectus. We do not assume any
responsibility to update or review any forward-looking statement contained in
this prospectus to reflect any change in our expectation about the subject of
that forward-looking statement or to reflect any change in events, conditions or
circumstances on which we have based any forward-looking statement .
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement (including this prospectus and the prospectus
supplement). This prospectus and the applicable prospectus supplement do not
contain all of the information contained in the registration statement. For
further information regarding the documents referred to in this prospectus and
the applicable prospectus supplement, you should refer to the registration
statement and the exhibits to the registration statement. The registration
statement and the exhibits can be inspected and copied at the Public Reference
Room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and the Sec's
regional offices at Seven World Trade Center, 13th Floor, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1500, Chicago,
Illinois 60661. Copies of these materials can be obtained at prescribed rates
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington D.C. 20549. In addition, the SEC maintains a public access site on
the Internet through the World Wide Web at which site reports, information
statements and other information, including all electronic filings, may be
viewed. The Internet address of the World Wide Web site is http://www.sec.gov.
The SEC allows us to "incorporate by reference" information that we
file with the SEC, which allows us to disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and the applicable prospectus
supplement. Information that we file later with the SEC will automatically
update the information in this prospectus and the applicable prospectus
supplement. In all cases, you should rely on the later information over
different information included in this prospectus or the applicable prospectus
supplement. We incorporate by reference any future annual, monthly and special
reports and proxy materials filed with respect to any trust fund until we
terminate offering the certificates. We have determined that our financial
statements are not material to the offering of any of the certificates. See
"Financial Information." As a recipient of this prospectus, you may request a
copy of any document we incorporate by reference, except exhibits to the
documents (unless the exhibits are specifically incorporated by reference), at
no cost, by writing or calling: Prudential Securities Secured Financing
Corporation, One New York Plaza, New York, New York 10292, attention: David
Rodgers, (212) 214-1000.
REPORTS
You will receive statements containing information regarding principal
and interest payments and the related trust fund, as described in this
prospectus and the applicable prospectus supplement for each series of
certificates, in connection with each payment of principal or interest and
annually. Any financial information in those reports will most likely not have
been examined or reported upon by an independent public accountant. For more
information, you should refer to the section in this prospectus titled
"Description of the Certificates-Reports to Certificateholders." The master
servicer for each series of certificates will deliver periodic statements
containing information relating to the mortgage loans to the related trustee,
and, in addition, will deliver to the trustee on a yearly basis a statement from
a firm of independent public accountants regarding the examination of documents
and records relating to the servicing of the mortgage loans in the related trust
fund. For more information, you should refer to the section in this prospectus
titled "Servicing of the Mortgage Loans-Evidence of Compliance." Copies of the
monthly and annual statements provided by the master servicer to the trustee
will be delivered to certificateholders of each series of certificates upon
request addressed to our principal executive offices located at Prudential
Securities Secured Financing Corporation, One New York Plaza, New York, New York
10292, attention: David Rodgers, (212) 214-1000.
3
<PAGE>
SUMMARY OF PROSPECTUS
This summary includes selected information from this prospectus. It
does not contain all of the information you need to consider in deciding whether
to buy any class of the offered Certificates. To understand the terms of the
offering of the offered certificates, you should read carefully this entire
prospectus and the applicable prospectus supplement.
TITLE OF CERTIFICATES................... Commercial/Multifamily Mortgage
Pass-Through Certificates, issuable
in series.
DEPOSITOR............................... Prudential Securities Secured
Financing Corporation, One New York
Plaza, New York, New York 10292.
Its telephone number is
(212) 214-1000.
ISSUER..................................
A separate trust fund to be established by the depositor with respect to each
series of certificates
DESCRIPTION OF CERTIFICATES; RATING........ The certificates of each series
will be issued pursuant to a
pooling and servicing agreement
and may be issued in one or more
classes. The certificates of each
series will represent an interest
in the property of the related
trust fund, consisting primarily
of commercial mortgage loans and
collections and proceeds on these
loans. Each class will be rated
not lower than investment grade by
one or more nationally recognized
statistical rating agencies at the
date of issuance.
The applicable prospectus supplement includes important information on the trust
funds, certificates, and risks, including information on the following:
(1) the name of the master servicer and special servicer,
the circumstances when a special servicer will be
appointed and their respective obligations (if any)
to make advances to cover delinquent payments on the
mortgage loans, taxes, assessments or insurance
premiums;
(2) the assets in the trust fund, including a description
of the pool of commercial mortgage loans which are
secured by commercial and multifamily residential
property;
(3) the identity and attributes of each class within a
series of certificates, including whether any credit
enhancement benefits any class of a series of
certificates;
(4) the tax status of the certificates; and
(5) whether the certificates will be eligible to be
purchased by investors subject to ERISA or will be
mortgage related securities for purposes of SMMEA.
4
<PAGE>
RISK FACTORS
You should carefully consider the following risks and those in the
applicable prospectus supplement in the section titled "Risk Factors" before
making an investment decision. Your investment in the offered certificates will
involve some degree of risk. If any of the following risks are realized, your
investment could be materially and adversely affected. In addition, other risks
unknown to us or which we currently consider immaterial may also impair your
investment.
LACK OF OR NATURE OF SECONDARY MARKET FOR THE CERTIFICATES MAY MAKE IT
DIFFICULT TO RESELL YOUR CERTIFICATES AT ALL OR AT THE PRICE YOU WANT
The absence of a secondary market for the certificates could limit your
ability to resell them. There have been times in the past where there have been
very few buyers of asset backed certificates (that is, there has been a lack of
liquidity), and there may be those times in the future. This means that if in
the future you want to sell any of the certificates, before they mature, you may
not be able to find a buyer or, if you find a buyer, the selling price may be
less than it would have ===== been if a secondary market existed for the
certificates.
ANY SERIES OF CERTIFICATES MAY RELY ONLY ON THE ASSETS IN ITS RELATED
TRUST FUND FOR PAYMENTS OF PRINCIPAL AND INTEREST AND INSUFFICIENT AMOUNT OF
ASSETS IN THE TRUST FUND MAY RESULT IN REDUCED PAYMENTS ON YOUR CERTIFICATES
The certificates will not be guaranteed by us or any of our affiliates.
The only sources of funds for payment on a series of certificates will generally
be the assets of the related trust fund and, to the extent provided in the
applicable prospectus supplement, any credit enhancement. A portion of the
amounts remaining in some funds or accounts may be withdrawn under conditions
described in the applicable prospectus supplement. A series of certificates will
have a claim against or security interest in the trust funds for another series
only if specified in the applicable prospectus supplement. As a result, you may
suffer a loss on your certificates if the sources for payment are insufficient
to pay all the principal of and interest on the certificates.
SUBORDINATED CERTIFICATES MAY NOT RECEIVE FULL PAYMENT IF LOSSES OCCUR
ON THE RELATED MORTGAGE LOANS
If provided in the applicable prospectus supplement, distributions of
interest and principal on one or more classes of a series of certificates may be
subordinated in priority of payment to distributions of interest and principal
due on one or more other classes of that series of certificates. Subordination
has the effect of increasing the likelihood of payment on the senior classes of
that series of certificates and decreasing the likelihood of payment on the
subordinated class of certificates. If there are losses in the collection of
principal of or interest on mortgage loans or shortfalls upon foreclosure on the
security for the mortgage loans, the amount of those losses or shortfalls will
be borne first by one or more classes of the subordinated certificates. The
remaining amount of those losses or shortfalls, if any, will be borne by the
remaining classes of certificates in the priority and subject to the limitations
specified in the applicable prospectus supplement. In addition, any credit
enhancement may be used by the certificates of a higher priority class before
the principal of the lower priority classes of certificates of that series has
been repaid. Therefore, the impact of significant losses in the collection of
the mortgage loans and shortfalls upon foreclosure on the security for the
mortgage loans may fall primarily upon those classes of certificates with a
lower payment priority.
5
<PAGE>
CREDIT ENHANCEMENT WILL NOT BE PROVIDED FOR ALL CERTIFICATES; CREDIT
ENHANCEMENT WILL NOT COVER ALL LOSSES SO YOU MAY NOT RECEIVE FULL PAYMENT EVEN
WHERE THERE IS CREDIT ENHANCEMENT
The prospectus supplement for a series of certificates will describe
any credit enhancement in the related trust fund, such as letters of credit,
insurance policies, surety bonds, limited guarantees, reserve funds or other
types of credit support. Credit enhancement will be subject to the conditions
and limitations described in this prospectus and in the applicable prospectus
supplement and is not expected to cover all potential losses or risks or
guarantee repayment of principal of and interest on the certificates.
-- Credit enhancement cannot guarantee that losses will not be incurred
on the certificates, particularly for classes of a series of certificates that
may have a lower priority of payments , be subordinated to other classes, or
share a limited amount of one form of credit enhancement with other series of
certificates.
SINCE MORTGAGE LOANS ARE NOT GUARANTEED , IF THERE ANY SHORTFALLS IN
THE PAYMENTS UNDER THE MORTGAGE LOANS, YOU MAY NOT RECEIVE FULL PAYMENT ON YOUR
CERTIFICATES
No mortgage loan is insured or guaranteed by the United States of
America, any governmental agency or instrumentality or any private mortgage
insurer. No mortgage loan is insured or guaranteed by us, the transferor, the
mortgage loan sellers, the master servicer, the special servicer, the trustee or
any of their respective affiliates. As a result, if one or more borrowers
default on their payment obligations on the mortgage loans, there may not be
sufficient funds to make payments on the certificates and you may suffer losses
on your investment.
THE ACTUAL PREPAYMENT RATE AND ANY REPURCHASES OF MORTGAGE LOANS MAY
REDUCE THE YIELD ON YOUR INVESTMENT
In deciding whether to purchase any offered certificates, you should
make an independent decision as to the appropriate prepayment assumptions to be
used. The pre-tax return on your investment will change from time to time for a
number of reasons, including the following:
The rate of return of principal is uncertain. The amount of
distributions of principal of the certificates and the times when you receive
those distributions depends on the amount and the times at which borrowers make
principal payments of the underlying mortgage loans, and on whether we or the
servicer purchases the underlying mortgage loans.
Prepayments of the mortgage loans in any trust fund by the related
borrowers generally will result in a faster rate of principal payments on one or
more classes of the related certificates than if payment on those mortgage loans
are made as scheduled. The prepayment rate on mortgage loans may be influenced
by a variety of economic, tax, legal and social factors. While one prepayment
rate may be used for the purpose of pricing the certificates, there can be no
assurance that the actual prepayment rate will be faster or slower than any
assumed prepayment rate.
In addition, the master servicer or the special
servicer, under the circumstances described in the prospectus supplement, may
have the option to extend the maturity of the mortgage loans following a
default, which would have the effect of extending the life of the certificates.
6
<PAGE>
We will be required to repurchase a mortgage loan
from the trust if we breach our representations and warranties with respect to
that mortgage loan. In addition, the servicer may have the option to purchase
the mortgage loans in the trust fund and may be obligated to purchase mortgage
loans from the trust fund under the circumstances described in the prospectus
supplement.
You bear reinvestment risk. You will bear the risk that the
timing and amount of distributions on your certificates will prevent
you from attaining your desired yield. If you receive a payment of
principal of the certificates prior to when you expect, you may not be
able to reinvest that amount at a rate of interest equal to the
interest rate on the certificates. If prevailing interest rates fall
significantly below the applicable rates borne by the mortgage loans
included in a trust fund, principal prepayments are likely to be higher
than if prevailing rates remain at or above the rates borne by those
mortgage loans. The certificates are thus likely to produce more
returns of principal to investors when market interest rates fall below
the interest rates on the mortgage loans and produce fewer returns of
principal when market interest rates are above the interest rates on
the mortgage loans. As a result, you are likely to receive more money
to reinvest at a time when other investments generally are producing a
lower yield than that on the certificates, and are likely to receive
less money to reinvest when other investments generally are producing a
higher yield than that on the certificates.
For more information on principal and prepayments and their effect
on the average life of related certificates, you should refer to the section in
the applicable prospectus supplement titled "Yield and Maturity Considerations."
RESTRICTIONS ON VOLUNTARY PREPAYMENTS MAY PROVE INEFFECTIVE AND MAY
REDUCE THE YIELD ON YOUR INVESTMENT
The restrictions on voluntary prepayments contained in a promissory
note (including lockout periods, yield maintenance charges and prepayment
premiums) affect the rate and timing of principal payments made on the related
mortgage loan. Most of the mortgage loans provide that , with limited
exceptions, a prepayment of the mortgage loans must be accompanied by a yield
maintenance charge or other prepayment premium. The existence of yield
maintenance charges or other prepayment premiums generally will result in the
mortgage loans prepaying at a lower rate. However, the requirement that a
prepayment be accompanied by a yield maintenance charge or other prepayment
premium may not provide a sufficient economic disincentive to a borrower seeking
to refinance at a more favorable interest rate (if, for example, interest rates
fall). An obligation to pay a yield maintenance charge or other prepayment
premium may potentially be unenforceable under applicable state or federal law
(including federal bankruptcy law). Even if a yield maintenance charge or
prepayment premium is enforceable, the foreclosure proceeds received with
respect to a defaulted mortgage loan may be insufficient to provide the yield
you expect. If either event were to occur, the yield on your investment may be
reduced.
7
<PAGE>
For more information about restrictions on voluntary prepayments, you
should refer to the section in the applicable prospectus supplement titled
"Description of the Mortgage Pool--Material Terms and Conditions of the Mortgage
Loans--Prepayment Provisions."
RATINGS ON THE CERTIFICATES DO NOT GUARANTEE THE TIMING OR PAYMENT IN
FULL OF THE CERTIFICATES
The rating assigned by a rating agency to a class of certificates
reflects the rating agency's assessment of the likelihood that holders of
certificates of that class will receive all payments to which the holders of
those certificates are entitled under the certificates. The ratings will be
based on the structural, legal and issuer-related aspects associated with those
certificates, the nature of the underlying mortgage loans and the credit quality
of any credit enhancer. The rating does not constitute an assessment of the
likelihood of principal prepayments by borrowers of the loans underlying the
certificates. A rating will not address the possibility of prepayment at higher
rates than anticipated by an investor which may cause the investor to experience
a lower than anticipated yield. In extreme cases, holders of stripped interest
certificates may fail to recoup their initial investments.
COMMERCIAL AND MULTIFAMILY MORTGAGE LOANS ARE SUBJECT TO SPECIAL
RISKS WHICH MAY CAUSE REDUCTION IN PAYMENTS ON YOUR CERTIFICATES
Your investment decision should take into account that commercial and
multifamily mortgage lending generally involves risks that are different than
those faced in connection with other types of lending. The following factors,
among others, contribute to these risks:
(1) Larger loans provide lenders with less diversification of risk
and the potential for greater losses from the delinquency
and/or default of individual loans;
(2) Many of the mortgage loans are non-recourse obligations, the
repayment of which is often solely dependent upon the
successful operation of the related mortgaged properties;
(3) Commercial and multifamily property values and net operating
income can be volatile;
(4) Many of the mortgage loans are balloon loans, which principal
amounts do not fully amortize but instead provide for a
substantial principal payment at their stated maturity, so
your investment may be exposed to additional risks associated
with both the value of the related mortgaged property and the
borrower's ability to obtain new financing when the balloon
payment is due;
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(5) An increase in vacancy rates, a decline in rental rates, or an
increase in operating expenses or necessary capital
expenditures may impair a borrower's ability to repay its
loan;
(6) Changes in the general economic climate, an excess of
comparable space in the area, a reduction in demand for real
estate in the area, the attractiveness of the property to
tenants and guests and perceptions of the property's safety,
convenience and services may adversely affect the income from
and market value of a mortgaged property; and
(7) Government regulations and changes in real estate, zoning or
tax laws, changes in interest rate levels or potential
liability under environmental and other laws may affect real
estate values and income.
AGING, DETERIORATION AND POOR CONSTRUCTION QUALITY OF MORTGAGED
PROPERTIES MAY SUBJECT BORROWERS TO ADDITIONAL EXPENSES WHICH MAY ADVERSELY
AFFECT THEIR ABILITY TO PAY THEIR LOANS AND WHICH MAY RESULT IN REDUCED PAYMENTS
ON YOUR CERTIFICATES
Old or poorly constructed mortgaged properties are likely to require
more expenditures for maintenance, repairs and improvements. Even mortgaged
properties that were well constructed and have been well maintained will require
improvements in order for them to maintain their value and retain tenants and
other occupants. Therefore, borrowers may from time to time be required to incur
significant expenses to improve their mortgaged properties, which may adversely
affect their ability to meet their obligations on the related mortgage loans. If
borrowers default on their payment obligations, you may suffer losses on your
certificates.
LIMITED ADAPTABILITY FOR OTHER USES MAY SUBSTANTIALLY LOWER THE VALUE
OF SOME MORTGAGED PROPERTIES WHICH MAY RESULT IN REDUCED PAYMENTS ON YOUR
CERTIFICATES
Some of the mortgaged properties would require substantial capital
expenditures to convert to an alternative use. If the operation of a mortgaged
property with this characteristic becomes unprofitable due to, among other
factors,
(1) competition;
(2) age of the improvements;
(3) decreased demand; or
(4) zoning restrictions,
and as a result the borrower becomes unable to meet its obligations, the
liquidation value of that mortgaged property may be substantially less than
would be the case if that property were more readily adaptable to other uses.
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IF A LEASE EXPIRES OR IS OTHERWISE TERMINATED, IT MAY NOT BE RENEWED IN
A TIMELY MANNER OR AT ALL OR IT MAY BE RENEWED FOR LOWER LEASE PAYMENTS , WHICH
MAY RESULT IN REDUCED PAYMENTS ON YOUR CERTIFICATES
We cannot assure you that:
(1) leases that expire can be renewed;
(2) the space covered by leases that expire or are terminated can
be leased in a timely manner at comparable rents or on
comparable terms; or
(3) the borrower will have the cash or be able to obtain the
financing to fund any required tenant improvements.
If vacant space in the mortgaged properties could not be leased for a
significant period of time, if tenants were unable to meet their lease
obligations or if, for any other reason, rental payments could not be collected,
income from and the market value of the mortgaged properties would be adversely
affected. If a tenant defaults, delays and costs in enforcing the lessor's
rights could occur. In addition, tenants at the mortgaged properties may be
entitled to terminate their leases or reduce their rents based upon negotiated
lease provisions. For example, some leases provide that tenants may terminate or
reduce their rents if an important tenant known as an "anchor tenant" ceases
operations at the related mortgaged property. A tenant's lease may also be
terminated or otherwise affected if the tenant becomes the subject of a
bankruptcy proceeding.
THE MORTGAGED PROPERTIES FACE COMPETITION FROM VARIOUS SOURCES, WHICH
COULD ADVERSELY AFFECT THE NET OPERATING INCOME AND MARKET VALUES OF THE
PROPERTIES , RESULTING IN REDUCED PAYMENTS ON YOUR CERTIFICATES
Factors affecting the competitive position of the mortgaged properties
include:
(1) the existence of similar properties located in the same area,
which attract similar types of occupants on the basis of more
favorable rental rates, location, condition and features;
(2) the existence of any oversupply of available space in a
particular market either as a result of new construction or a
decrease in the number of occupants, which adversely affects
the rental rates for the mortgaged properties; and
(3) the possibility of other properties being converted to
competitive uses as a result of trends in the use of property
by occupants (for example, the establishment of more
home-based offices and businesses or the conversion of
warehouse space for multifamily use).
POOR MANAGEMENT OF THE MORTGAGED PROPERTIES MAY ADVERSELY AFFECT THE
OPERATION OF THOSE PROPERTIES, WHICH COULD LOWER THE CASH FLOW AND
MARKET VALUE OF THOSE PROPERTIES, RESULTING IN REDUCED PAYMENTS ON YOUR
CERTIFICATES
The successful operation of the mortgaged properties also depends on
the performance of the respective property managers of the mortgaged properties.
The property managers may be responsible for:
(1) responding to changes in local market factors such as
competition and patterns of demand;
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(2) managing leasing activities such as planning and implementing
the rental rate structure, including establishing levels of
rent payments; and
(3) ensuring that maintenance and capital improvements can be
carried out in a timely fashion.
To the extent the property managers do not properly perform these
duties, the cash flow and market value for the related mortgaged properties
could suffer, which could have an adverse affect on the certificates.
IF TENANT LEASES DO NOT CONTAIN ATTORNMENT PROVISIONS OR IF LEASES ARE
SUBORDINATED TO MORTGAGE LOANS, THE FORECLOSURE VALUE OF THE MORTGAGED
PROPERTY CAN BE ADVERSELY AFFECTED AND MAY REDUCE PAYMENTS ON YOUR
CERTIFICATES
Some of the tenant leases, including some of the anchor tenant leases, may
not contain provisions that require the tenant to attorn to, or recognize as
landlord under the lease, a successor owner of the property following
foreclosure. In some states, if tenant leases do not contain attornment
provisions, those leases may terminate upon the transfer of the property to a
foreclosing lender or purchaser at foreclosure.
In addition, some of the tenant leases, including some of the anchor
tenant leases, may be either subordinate to the liens created by the mortgage
loans or contain a provision that requires the tenant to subordinate the lease
if the lender agrees to enter into a non-disturbance agreement. In some states,
if tenant leases are subordinate to the liens created by the mortgage loans ,
those leases may terminate upon the transfer of the property to a foreclosing
lender or purchaser at foreclosure.
If a foreclosure of a mortgaged property occurs in a state where leases
may terminate as described above, the property could experience a further
decline in value if those leases are terminated (for example, if those tenants
were paying above-market rents).
If the lease contains provisions inconsistent with the mortgage (for
example, provisions relating to application of insurance proceeds or
condemnation awards), the provisions of the lease will take precedence over the
provisions of the mortgage.
IF TENANT LEASES ARE NOT SUBORDINATE TO MORTGAGE LIENS, THE
FORECLOSURE VALUE OF THE MORTGAGED PROPERTY COULD BE ADVERSELY AFFECTED AND MAY
REDUCE PAYMENTS ON YOUR CERTIFICATES
If a mortgage loan is subordinate to a lease, the lender of that loan
will not (unless it has otherwise agreed with the tenant) possess the right to
dispossess the tenant upon foreclosure of the property, which may reduce the
value of the property. The decline in the foreclosure value of those properties
may result in insufficient funds to make payments on your certificates.
REGIONAL FACTORS MAY ADVERSELY AFFECT THE VALUE AND CASH FLOW OF
MORTGAGED PROPERTIES , WHICH MAY REDUCE PAYMENTS ON YOUR CERTIFICATES
Repayments by borrowers and the market values of the mortgaged
properties could be affected by:
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(1) economic conditions generally or in the regions where the
borrowers and the mortgaged properties are located;
(2) conditions in the real estate markets where the mortgaged
properties are located;
(3) changes in governmental rules and fiscal policies;
(4) natural disasters; and
(5) other factors that are beyond the control of the borrowers.
The economy of any state or region in which a mortgaged property is
located may be adversely affected to a greater degree than that of other areas
of the country by developments affecting industries concentrated in that state
or region.
IF A BORROWER USES THE MORTGAGED PROPERTY AS SECURITY FOR ANOTHER LOAN,
THE VALUE OF THE MORTGAGED PROPERTY MAY BE REDUCED , WHICH MAY RESULT
IN REDUCED PAYMENTS ON YOUR CERTIFICATES
In general, the borrowers are prohibited from using the mortgaged
property to secure other loans without the lender's approval. The pooling and
servicing agreement will permit the master servicer and the special servicer to
approve another loan if specified conditions are met, including approval by each
rating agency rating the certificates. The absence of these conditions may not
become evident, however, until the related mortgage loan otherwise defaults. If
one or more subordinate liens are imposed on a mortgaged property or the
borrower incurs other indebtedness, the trust fund is subject to additional
risks. Some of those risks are:
(1) the borrower may defer necessary maintenance of the mortgaged
property in order to pay the required debt service on the
subordinate loan, and the value of the mortgaged property may
decline as a result;
(2) the borrower may have an incentive (for example, because the
interest rate is higher) to repay the subordinate or unsecured
loan before the mortgage loan , which would reduce payments to
the trust fund;
(3) it may be more difficult for the borrower to refinance the
mortgage loan or to sell the mortgaged property for the
purpose of making any balloon payment upon the maturity of the
mortgage loan or for the purpose of making a prepayment in
full on or about the anticipated repayment date in the case of
any ARD Loan; and
(4) additional debt increases the risks that the borrower could
become insolvent or subject to bankruptcy or similar
proceedings or might complicate bankruptcy proceedings,
delaying foreclosure on the mortgaged property.
APPRAISALS AND ENGINEERING REPORTS ARE OF LIMITED VALUE SINCE THE
ACTUAL VALUE OF THE PROPERTIES MAY BE DIFFERENT FROM THEIR APPRAISED VALUE
In making your investment decision, you should not rely on appraisals
and engineering reports on mortgaged properties as your only indicator of the
actual value or physical characteristics of the mortgaged properties. In
general, appraisals represent the analysis and opinion of qualified experts and
are not guarantees of present or future value. Moreover, appraisals seek to
establish the amount a willing buyer would pay a willing seller. That amount
could be significantly higher than the amount received upon the sale of a
mortgaged property under a distressed or liquidation sale. The architectural and
engineering reports represent the analysis of the individual engineers or site
inspectors at or before the origination of the respective mortgage loans. The
reports may not have been updated since they were originally conducted and may
not have revealed all necessary or desirable repairs, maintenance or capital
improvement items.
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CHANGES IN ZONING LAWS MAY REDUCE THE VALUE AND INCOME OF THE RELATED
MORTGAGED PROPERTIES AND COULD LOWER THE CASH FLOW OF THOSE PROPERTIES,
WHICH MAY REDUCE THE PAYMENTS ON THE CERTIFICATES
The mortgaged properties are typically subject to applicable building
and zoning ordinances and codes affecting the construction and use of real
property. Because the zoning laws applicable to a mortgaged property (including
density, use, parking and set back requirements) are generally subject to change
at any time, some improvements upon the mortgaged properties may not comply
fully with all applicable current and future zoning laws. Changes in zoning laws
may limit the ability of the related borrower to renovate the premises and, in
the event of a substantial casualty loss, rebuild or utilize the premises "as
is." These changes may reduce the value and income of the mortgaged property.
A BORROWER'S COSTS OF COMPLIANCE WITH APPLICABLE LAWS AND REGULATIONS
MAY REDUCE ITS ABILITY TO REPAY THE MORTGAGE LOAN , WHICH MAY RESULT IN
REDUCED PAYMENTS ON YOUR CERTIFICATES
A borrower may be required to incur costs to comply with various
existing and future federal, state or local laws and regulations applicable to
the related mortgaged property. These costs, or the imposition of injunctive
relief, penalties or fines in connection with the borrower's noncompliance,
could negatively impact the borrower's cash flow and, consequently, its ability
to pay its mortgage loan.
For more detailed information about regulatory compliance costs, you
should refer to the section of this prospectus titled "Material Legal Aspects of
the Mortgage Loans--Americans With Disabilities Act."
A TENANT'S DEFAULT ON ITS LEASE OF A SINGLE TENANT PROPERTY COULD
ADVERSELY AFFECT THE BORROWER'S ABILITY TO PAY ITS LOANS WHICH MAY RESULT IN
REDUCED PAYMENTS ON YOUR CERTIFICATES
Some of the mortgaged properties are leased wholly or in large part to
a single tenant or are wholly or in large part owner-occupied. If a single
tenant failed to perform its obligations under its lease (or, in the case of an
owner-occupied mortgaged property, under the related mortgage loan documents) ,
that failure could reduce the mortgaged property's value and the cash flow and
adversely affect the related borrower's ability to make payments on its mortgage
loan.
For more information on risks associated with default of single tenant
properties, you should refer to the section in the applicable prospectus
supplement titled "Description of the Mortgage Pool--Material Characteristics of
the Mortgage Pool--Tenant Matters" and ind"Schedule A" to theg applicable
prospectus supplement.
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If a significant portion of a mortgaged property is leased to a single
tenant who vacates or fails to perform its obligations, the failure of the
borrower to release the portion of the mortgaged property will have a greater
adverse effect on your investment than if the mortgaged property were leased to
a larger number of tenants.
MOST OF THE MORTGAGE LOANS ARE BALLOON LOANS THAT ARE SUBJECT TO A
GREATER RISK OF DEFAULT, AND THE FAILURE OF ANY BORROWER TO MAKE THE BALLOON
PAYMENT COULD RESULT IN REDUCED PAYMENTS ON YOUR CERTIFICATES
Most of the mortgage loans are balloon loans. Balloon loans involve a
greater risk of default than self-amortizing loans. A borrower's ability to make
a balloon payment typically will depend upon its ability either to refinance the
related mortgaged property or to sell the mortgaged property at a price
sufficient to allow it to make the balloon payment. A number of factors will
affect the borrower's ability to sell or refinance the mortgaged property,
including:
(1) available mortgage rate levels;
(2) the related mortgaged property's fair market value;
(3) the borrower's equity in the related mortgaged property;
(4) the borrower's financial condition;
(5) the related mortgaged property's operating history;
(6) tax laws;
(7) prevailing economic conditions; and
(8) the availability of credit for multifamily or commercial
properties.
For more information about risks of default of balloon payments, you
should refer to the section in the applicable prospectus supplement titled
"Yield and Maturity Considerations--Yield Considerations--Balloon Payments/ARD
Loan Payments."
DELINQUENT MORTGAGE LOANS, BY CAUSING DEFAULTS AND PREPAYMENTS, MAY
RESULT IN REDUCED PAYMENTS ON YOUR CERTIFICATES
If so provided in the applicable prospectus supplement, the trust fund
for a particular series of certificates may include mortgage loans that are past
due and would be serviced by a special servicer. The inclusion of delinquent
mortgage loans in a trust fund may increase the risk of defaults and prepayments
on mortgage loans and consequently adversely affect the yield on that series of
certificates. Certificates may benefit from credit enhancement if provided in
the applicable prospectus supplement. However, any credit enhancement may not
cover all losses related to delinquent mortgage loans.
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EXTENSIONS AND MODIFICATIONS OF DEFAULTED MORTGAGE LOANS WILL NOT
ASSURE INCREASE IN THE AMOUNT OF RECEIPTS FROM THE DEFAULTED MORTGAGE
LOANS AND MAY RESULT IN REDUCED PAYMENTS ON YOUR CERTIFICATES
To maximize recoveries on defaulted mortgage loans, a master servicer
or special servicer may extend and modify mortgage loans that are in default or
are likely to be in default, particularly with respect to balloon payments,
within the parameters specified in the applicable prospectus supplement. A
master servicer or a special servicer may receive workout fees, management fees,
liquidation fees or other similar fees based on receipts from or proceeds of
those mortgage loans. Although a master servicer or special servicer generally
will be required to determine that any extension or modification is reasonably
likely to produce a greater recovery amount than liquidation, there can be no
assurance that any extensions or modifications will increase the amount of
receipts from mortgage loans that are in default or are likely to be in default.
LOANS MADE TO NONINDIVIDUALS MAY POSE GREATER RISKS OF REDUCED CASH
FLOW WHICH MAY RESULT IN REDUCED PAYMENTS ON YOUR CERTIFICATES BECAUSE
THOSE BORROWERS MAY HAVE LIMITED ASSETS, MAY SEEK PROTECTION UNDER THE
BANKRUPTCY LAWS AND MAY ENGAGE IN PROTRACTED LITIGATION DUE TO THEIR
SOPHISTICATION
Mortgage loans made to partnerships, corporations or other entities may
entail risks of loss from delinquency and foreclosure that are greater than
those of mortgage loans made to individuals. For example, an entity, as opposed
to an individual, may be more inclined to seek legal protection from its
creditors, such as the trust fund, under the bankruptcy laws. Many of these
entities do not have personal assets and creditworthiness at stake, unlike
individuals involved in bankruptcies. The borrower's sophistication may increase
the likelihood of protracted litigation or bankruptcy in default situations
because a sophisticated borrower will be aware of its rights against the lender
and may have more resources to make effective use of all of its defenses to
payment, including filing for bankruptcy.
BANKRUPTCY OF BORROWERS MAY ADVERSELY AFFECT PAYMENTS ON MORTGAGE
LOANS WHICH MAY RESULT IN REDUCED PAYMENTS ON YOUR CERTIFICATES
Some of the borrowers may have businesses and liabilities unrelated to
the mortgaged property which may make the borrower more likely to become
insolvent or the subject of a bankruptcy proceeding. In addition, a borrower, as
an owner of real estate, will be subject to potential liabilities and risks
which may or may not be related to ownership of the mortgaged property. We
cannot assure you that a borrower will not file for bankruptcy protection or
that creditors of a borrower, or a corporate or individual general partner or
member of a borrower, will not initiate a bankruptcy or similar proceeding
against that borrower. If this happens, the cash flow associated with the
mortgage loan could be delayed, reduced or eliminated.
For more information about risks of bankruptcy, you should refer to the
section in this prospectus titled "Material Legal Aspects of the Mortgage
Loans--Foreclosure--Bankruptcy Laws."
LITIGATION AGAINST A BORROWER MAY REDUCE ITS ABILITY TO MEET ITS
MORTGAGE OBLIGATIONS WHICH MAY RESULT IN REDUCED PAYMENTS ON YOUR
CERTIFICATES
From time to time, legal proceedings may be threatened or instituted
against a borrower and its affiliates relating to their business. Litigation may
reduce a borrower's ability to meet its obligations under the related mortgage
loan and therefore reduce the trust fund's cash flow .
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CONCENTRATION OF MORTGAGE LOANS AND BORROWERS DECREASES DIVERSIFICATION
AND MAY INCREASE THE RISK THAT YOU WILL NOT RECEIVE FULL PAYMENT ON
YOUR CERTIFICATES
In general, a mortgage pool composed of loans having larger average
balances and a smaller number of loans may be subject to losses that are more
severe than if the aggregate balance of the mortgage loans in the pool was more
evenly distributed. In all cases, you should carefully consider all aspects of
any mortgage loan representing a significant percentage of the initial pool
balance to ensure it is subject to risks acceptable to you. Additionally, a
mortgage pool with a high concentration of mortgage loans to the same borrower
or related borrowers is subject to the potential risk that a borrower undergoing
financial difficulties might divert its resources or undertake remedial actions
(such as a bankruptcy) in order to alleviate those difficulties. If this occurs,
it could adversely affect payments on the mortgage loans or the value of the
mortgage properties and therefore your investment.
For more information concerning the mortgage pool and the exposure to
concentration risks, you should refer to the section in the applicable
prospectus supplement titled "Description of the Mortgage Pool--Material
Characteristics of the Mortgage Pool--Concentration of Mortgage Loans and
Borrowers."
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LIMITATIONS ON THE ENFORCEABILITY OF CROSS-COLLATERALIZATION
ARRANGEMENTS MAY HAVE AN ADVERSE EFFECT ON RECOURSE AFTER A DEFAULT ON A CROSS-
COLLATERALIZED MORTGAGE LOAN , RESULTING IN REDUCED PAYMENTS ON YOUR
CERTIFICATES
Arrangements by which some of the mortgage loans are
cross-collateralized and cross-defaulted with one or more related mortgage loans
could be challenged as fraudulent conveyances by the creditors or the bankruptcy
estate of any of the related borrowers. Under federal and most state fraudulent
conveyance statutes, the granting of a mortgage lien by a person may be voided
if a court were to determine that:
(1) the borrower did not receive fair consideration or reasonably
equivalent value when pledging mortgaged property for the
equal benefit of the other related borrowers, and
(2) the borrower 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.
A lien granted by a borrower on a cross-collateralized loan to secure
the mortgage loan of an affiliated borrower, or any payment on a loan of an
affiliated borrower, could potentially be avoided as a fraudulent conveyance. If
this were to occur, the trust fund's security in the mortgage loan and resulting
cash flows may be reduced.
NATURE OF NON-RECOURSE LOANS MAY RESULT IN INSUFFICIENT AMOUNTS TO PAY
OFF THE RELATED MORTGAGE LOAN UPON DEFAULT WHICH COULD REDUCE THE PAYMENTS ON
YOUR CERTIFICATES
The majority of the mortgage loans are non-recourse loans. Under these
non-recourse loans, if a borrower defaults, the trust fund may recover amounts
due generally only against the specific mortgaged property securing the mortgage
loan and any other assets (if any) pledged to secure the mortgage loan. As a
result, the payment of each non-recourse mortgage loan depends primarily upon
the sufficiency of the net operating income from the related mortgaged property
and, at maturity, upon the market value of that mortgaged property.
For a more detailed description of the mortgage pool, you should refer
to the applicable prospectus supplement, including the section titled
"Description of the Mortgage Pool--General."
In those cases where recourse against the borrower is permitted by the
loan documents, the ability to collect from the borrower is dependent upon the
creditworthiness, solvency and other factors specific to the borrower and
generally are not within our control or the control of any of the mortgage loan
sellers, the transferor, the master servicer, the special servicer, the trustee
or any of their affiliates. Therefore, even if there is recourse, we cannot
assure you that significant amounts will be realized in respect of that recourse
in the event of a default or any mortgage loan.
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FORECLOSURE OF ANY MORTGAGED PROPERTY MAY SUBJECT THE TRUST FUND TO
TAXES, WHICH COULD LOWER THE CASH FLOW FROM THAT PROPERTY, RESULTING IN REDUCED
PAYMENTS ON YOUR CERTIFICATES
If the trust fund acquires a mortgaged property in a foreclosure or
deed-in-lieu of foreclosure, the trust fund might become subject to federal (and
possibly state or local) tax, at the highest marginal corporate rate (currently
35%), on a portion of its net income from the operation and management of that
mortgaged property. As a consequence, the net proceeds available for
distribution to certificateholders would be reduced.
COURTS MAY REFUSE TO ENFORCE DUE-ON-SALE, DUE-ON-ENCUMBRANCE AND
DEBT-ACCELERATION CLAUSES, ADVERSELY AFFECTING EXERCISE OF REMEDIES UPON
DEFAULTED MORTGAGE LOANS, WHICH MAY LOWER THE CASH FLOW FROM THE MORTGAGED
PROPERTIES, RESULTING IN REDUCED PAYMENTS ON YOUR CERTIFICATES
The mortgage loans will generally contain "due-on-sale" and
"due-on-encumbrance" clauses. These clauses permit the lender to accelerate the
maturity of the mortgage loan if the related borrower sells or otherwise
transfers or encumbers the related mortgaged property in violation of the
mortgage. The mortgage loans will also generally include a debt-acceleration
clause. A debt-acceleration clause permits the lender to accelerate the debt
upon specified monetary or non-monetary defaults of the borrower.
The courts of a state, however, may refuse to permit the foreclosure or
other sale of a mortgaged property or refuse to permit the acceleration of the
indebtedness if the breach or default is immaterial or does not materially
adversely affect the lender's security, or if enforcement of the clause would be
inequitable, unjust, or unconscionable. In that case, the lender will not be
able to exercise its remedies under the mortgage loan and there may be
insufficient funds to make payments on your certificates.
TRUST FUNDS MAY NOT HAVE A PERFECTED SECURITY INTEREST IN ALL
ASSIGNMENTS OF LEASES AND RENTS , WHICH MAY LOWER THE CASH FLOW FROM
THE MORTGAGED LOANS, RESULTING IN REDUCED PAYMENTS ON YOUR CERTIFICATES
The applicable prospectus supplement will describe whether and to what
extent the mortgage loans will be secured by an assignment of leases and rents.
Under an assignment of leases and rents, the borrower typically assigns its
rights as landlord under the leases on the related mortgaged property and the
related income 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.
If the borrower defaults, the license terminates and the lender is entitled to
collect rents. These assignments are typically not perfected as security
interests until the lender takes possession of the related mortgaged property or
a receiver is appointed. Some state laws may require that the lender take
possession of the mortgaged property and obtain a judicial appointment of a
receiver before becoming entitled to collect the rents. In addition, if
bankruptcy or similar proceedings are commenced by or in respect of the
borrower, the lender's ability to collect the rents may be adversely affected.
For a more detailed description of these issues, you should refer to
the section of this prospectus titled "Material Legal Aspects of the Mortgage
Loans-Leases and Rents."
THE ENVIRONMENTAL CONDITION OF MORTGAGED PROPERTIES MAY SUBJECT THE
TRUST FUND TO LIABILITY UNDER FEDERAL AND STATE LAWS WHICH MAY REDUCE
THE VALUE AND CASH FLOW OF THE MORTGAGED PROPERTY AND POSSIBLY
RESULTING IN REDUCED PAYMENTS ON YOUR CERTIFICATES
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Tenants and occupants may affect the environmental condition of a
mortgaged property. Current and future environmental laws, ordinances or
regulations may impose additional compliance obligations on business operations
that can be met only by significant capital expenditures.
Adverse environmental conditions subject to the trust fund to the
following risks:
(1) a diminution in the value of a mortgaged property or the
inability to foreclose against that mortgaged property;
(2) inability to lease the mortgaged property to potential
tenants;
(3) the potential that the related borrower may default on a
mortgage loan due to the borrower's inability to pay high
investigation and/or remediation costs or difficulty in
bringing its operations into compliance with environmental
laws; and
(4) liability for clean-up costs or other remedial actions which
could exceed the value of the mortgaged property.
Under federal and state laws, a statutory lien over the subject
property may secure the reimbursement of remedial costs incurred by regulatory
agencies to address environmental violations. That statutory lien over a
mortgage property would adversely affect its value and could make foreclosure
upon it following default by the related borrower impractical. Under various
federal, state and local laws, ordinances and regulations, the trust fund may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under, adjacent to or in that property. Liability for the cost of any
required remediation generally is not limited under applicable laws, and could
exceed the value of the property.
For more information on the trust fund's potential environmental risks,
you should refer to the section in this prospectus titled "Material Legal
Aspects of the Mortgage Loans--Environmental Risks" and the section in theg
applicable prospectus supplement titled "Description of the Mortgagen
Pool--Material Characteristics of the Mortgage Pool--Environmental Risks."
Under federal and state laws, it is possible that the trust fund may be
held liable for the costs of addressing releases or threatened releases of
hazardous substances at a mortgaged property.
For more information on the trust fund's potential liability for
releases of hazardous substances, you should refer to the section in this
prospectus titled "Material Legal Aspects of the Mortgage Loans--Environmental
Risks."
Junior mortgage loans will be paid only after the senior claims are
paid in full, so there may not be adequate funds left to pay the junior claims
in full, which may result in reduced payments on your certificates.
Some of the mortgage loans may be junior mortgage loans. The primary
risk to holders of mortgage loans secured by junior liens is the possibility
that a foreclosure of a related senior lien would extinguish the junior lien
and that adequate funds will not be received in connection with the foreclosure
to pay the debt held by the holder of the junior mortgage loan after
satisfaction of all related senior liens.
For more detailed information on the risks to holder of mortgage loans
secured by junior liens, you should refer to the sections in this prospectus
titled "Material Legal Aspects Of The Mortgage Loans -- Junior Mortgages; Rights
of Senior Mortgagees or Beneficiaries" and "--Foreclosure.''
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BANKRUPTCY OF THE DEPOSITOR COULD RESULT IN REDUCED PAYMENTS ON
YOUR CERTIFICATES
If we become subject to bankruptcy proceedings, you could experience
losses or delays in the payments on your securities. We will sell the mortgage
loans to the trust. However, if we become subject to a bankruptcy proceeding,
the court in the bankruptcy proceeding could conclude that we effectively still
owns the mortgage loans by concluding that the sale to any trust fund was not a
"true sale" for bankruptcy purposes. If a court were to reach this conclusion,
you could experience losses or delays in payments on the certificates as a
result of, among other things:
(1) the "automatic stay" which prevents secured creditors from
exercising remedies against a debtor in bankruptcy without
permission from the court and provisions of the United States
bankruptcy code that permit substitution for collateral in
certain circumstances;
(2) certain tax or government liens on the our property (that
arose prior to the transfer of mortgage loans to the trust
funds) having a prior claim on collections before the
collections are used to make payments on your certificates;
and
(3) the trust funds not having a perfected security interest in
(a) one or more of the properties securing the related
mortgage loans or (b) any cash collections held by the master
servicer at the time the master servicer becomes the subject
of a bankruptcy proceeding.
See "Material Legal Aspects of the Mortgage Loans -Bankruptcy
Considerations relating to the Depositor" in this prospectus.
THE INTERESTS OF THE MASTER SERVICER OR THE SPECIAL SERVICER MAY
CONFLICT WITH THOSE OF THE TRUST FUND REGARDING THE MASTER SERVICER OR
SPECIAL SERVICER'S PURCHASE OF CERTIFICATES AND SERVICING OF NON-TRUST
FUND LOANS, WHICH MAY ADVERSELY AFFECT THEIR PERFORMANCE IN RESPECT OF
THE TRUST FUND AND WHICH MAY RESULT IN REDUCED PAYMENTS ON YOUR
CERTIFICATES
The master servicer and/or special servicer may purchase and own
certificates, including subordinate certificates. Under those circumstances, it
is possible that the interests of the master servicer or special servicer, as a
holder of the certificates of any class, may differ from those of the holders of
certificates of any other class. The master servicer and special servicer may
continue to service existing mortgage loans and new mortgage loans for third
parties, including portfolios of mortgage loans similar to the mortgage loans
owned by the trust fund. These mortgage loans and the related mortgaged
properties may be in the same markets as, or have owners, borrowers and/or
property managers in common with, some of the mortgage loans owned by the trust
fund and the related mortgaged properties. To the extent that overlap exists,
the interests of the master servicer, the special servicer and their respective
affiliates and their other clients may differ from, and compete with, the
interests of the trust fund. The master servicer and the special servicer are
required, however, to service the mortgage loans owned by the trust fund in
accordance with the servicing standard contained in the pooling and servicing
agreements.
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ERISA IMPOSES LIMITATIONS ON WHO CAN PURCHASE THE CERTIFICATES;
NONCOMPLIANCE MAY MATERIALLY AND ADVERSELY AFFECT THE TRUST FUND AND
RESULT IN REDUCED PAYMENTS ON YOUR CERTIFICATES
Generally, Title I of ERISA and various sections of the Tax Code apply
to investments made by employee benefit plans and transactions involving the
assets of those plans. Due to the complexity of regulations that govern those
plans, prospective benefit plan investors that are subject to ERISA or the Tax
Code are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the certificates of any series.
For more detailed information, you should refer to the section in this
prospectus titled "ERISA Considerations."
SUBORDINATED CERTIFICATES CAN BE ALLOCATED TAXABLE INCOME IN EXCESS OF
DISTRIBUTIONS RECEIVED IN A DEFAULT SITUATION
A holder of a certificate in a class of subordinate certificates could
be allocated taxable income attributable to accruals of interest and original
issue discount in excess of cash distributed to that holder if mortgage loans
were in default giving rise to delays in distributions.
For more detailed information, you should refer to the section in this
prospectus titled "Material Federal Income Tax Consequences-Taxation of Regular
Certificates."
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THE DEPOSITOR
The Depositor will deposit the Mortgage Loans into the Trust Fund. The
Depositor was incorporated in the State of Delaware on August 26, 1988 as a
wholly owned, limited purpose finance subsidiary of Prudential Securities Group
Inc. The principal executive offices of the Depositor are located at One New
York Plaza, New York, New York 10292, attention David Rodgers, (212) 214-1000.
The Depositor will have no servicing obligations or responsibilities
with respect to any series of Certificates, Mortgage Pool or Trust Fund. The
Depositor does not have, and does not expect to have, any significant assets.
The Depositor was organized for the purposes of establishing trusts,
selling interests in the trusts and acquiring and selling mortgage assets to
those trusts. Neither the Depositor, its parent nor any of its affiliates will
insure or guarantee collections on the Mortgage Loans or distributions on the
Certificates. Unless otherwise specified in the applicable prospectus
supplement, the assets of the Trust Funds will be acquired by the Depositor
directly or through one or more affiliates.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds
from the sale of each series of Offered Certificates to:
(1) purchase the Mortgage Loans relating to that series;
(2) repay debt that was incurred to acquire Mortgage Loans;
(3) obtain credit enhancement, if any, for the series; and
(4) pay costs of structuring, issuing and underwriting the
Certificates.
Certificates may be exchanged by the Depositor for Mortgage Loans if so
specified in the applicable prospectus supplement.
DESCRIPTION OF THE CERTIFICATES
The Certificates of each series will be issued pursuant to a separate
Pooling and Servicing Agreement to be entered into among the Depositor, the
Master Servicer, the Special Servicer, if any, and the Trustee for that series
of Certificates and any other parties described in the applicable prospectus
supplement, substantially in the form filed as an exhibit to the Registration
Statement of which this prospectus is a part or in another form as may be
described in the applicable prospectus supplement. The following summaries
describe general provisions of the Certificates and the Pooling and Servicing
Agreement. However, the prospectus supplement for each series of Certificates
will more fully describe the Certificates and the provisions of the related
Pooling and Servicing Agreement, which may be different from the following
summaries.
At the time of issuance, the Offered Certificates of each series will
be rated in one of the four highest categories by a nationally recognized
statistical rating organization.
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 Agency.
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GENERAL
Each series of Certificates will be issued in registered or book-entry
form and will represent beneficial ownership interests in the Trust Fund for
that series. The Trust Fund for each series will primarily include, to the
extent provided in the Pooling and Servicing Agreement:
(1) the Mortgage Loans conveyed to the Trustee pursuant to the
Pooling and Servicing Agreement;
(2) all payments on or collections from the Mortgage Loans due
after the Cut-off Date;
(3) all REO property, as defined in the applicable prospectus
supplement;
(4) all revenue received in respect of any REO Property;
(5) all insurance policies with respect to the Mortgage Loans;
(6) all assignments of leases, rents and profits and security
agreements;
(7) all indemnities or guaranties given as additional security for
the Mortgage Loans;
(8) the Trustee's interest in all Reserve Accounts;
(9) the Collection Account;
(10) the Distribution Account and the REO Account;
(11) all environmental indemnities relating to the Mortgaged
Properties;
(12) all rights and remedies under the Mortgage Loan Purchase and
Sale Agreement; and
(13) all proceeds of any of the foregoing (excluding interest
earned on deposits in any Reserve Account, to the extent that
interest belongs to the related borrower).
In addition, the Trust Fund for a series may include private mortgage
pass-through certificates, certificates issued or guaranteed by the FHLMC,
Fannie Mae and GNMA, as well as various forms of Credit Enhancement. See "Credit
Enhancement." Other assets contained in a Trust Fund will be described more
fully in the applicable prospectus supplement.
If so specified in the applicable prospectus supplement, Certificates
of a given series may be issued in several classes. The classes may:
(1) pay interest at different rates,
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(2) represent different allocations of the right to receive
principal and interest payments, such as subordination,
(3) be structured to receive principal payments in sequence by
class (each class in a group of sequential pay classes would
be entitled to be paid in full before the next class in the
group is entitled to receive any principal payments), or
(4) provide for payments of principal only or interest only or for
disproportionate payments of principal and interest.
Subordinate Certificates of a given series of Certificates may
be offered in the same prospectus supplement as the senior
Certificates of that series or may be offered in a separate
offering document.
Each class of Certificates will be issued in the minimum denominations
specified in the applicable prospectus supplement.
The prospectus supplement for each series will contain a description of
their characteristics and specific risk factors, including, as applicable, the
following:
(1) mortgage principal prepayment effects on the weighted average
lives of classes;
(2) the risk that interest only, or disproportionately interest
weighted, classes purchased at a premium may not return their
purchase prices under rapid prepayment scenarios; and
(3) the degree to which an investor's yield is sensitive to
principal prepayments.
The Offered Certificates of each series will be freely transferable and
exchangeable at the office specified in the related Pooling and Servicing
Agreement and prospectus supplement. Some classes of Certificates, however, may
be subject to transfer restrictions described in the applicable prospectus
supplement.
DISTRIBUTIONS ON CERTIFICATES
The Trustee (or a paying agent that may be identified in the applicable
prospectus supplement) will distribute to the Certificateholders amounts
described in the applicable prospectus supplement on the related Distribution
Date. These distributions will begin on the date specified in the applicable
prospectus supplement following the establishment of the related Trust Fund. In
general, the distributions will include previously undistributed payments of
principal (including principal prepayments, if any) and interest on the Mortgage
Loans received by the Master Servicer or the Special Servicer after the related
Cut-off Date and prior to the date specified in the applicable prospectus
supplement for each Distribution Date. The Trustee shall mail checks for the
distributions to the address of the person entitled to the payment as it appears
on the certificate register maintained by the Trustee (or wire transfer those
funds if so specified in the applicable prospectus supplement). The final
distribution in retirement of the Certificates of each series will be made only
upon presentation and surrender of the Certificates at the office or agency
specified in the notice to the Certificateholders of the final distribution.
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ACCOUNTS
The Master Servicer will establish and maintain a Collection Account in
the name of the Trustee for the benefit of the Certificateholders for each
Series of Certificates. The Master Servicer generally will be required to
deposit into the Collection Account all amounts received on or in respect of the
Mortgage Loans. The Master Servicer will be entitled to withdraw amounts from
the Collection Account to, among other things:
(1) transfer designated amounts for the related Distribution Date
into the Distribution Account;
(2) pay Property Protection Expenses, taxes, assessments and
insurance premiums and designated third-party expenses;
(3) pay accrued and unpaid servicing fees and other servicing
compensation to the Master Servicer and the Special Servicer,
if any; and
(4) reimburse the Master Servicer, the Special Servicer, the
Trustee and the Depositor for designated expenses and
indemnify the Depositor, the Master Servicer and the Special
Servicer
The applicable prospectus supplement may provide for additional
circumstances in which the Master Servicer will be entitled to make withdrawals
from the Collection Account.
The Trustee will establish a Distribution Account in the name of the
Trustee for the benefit of the Certificateholders for each series of
Certificates. The Master Servicer generally will be required to transfer to the
Distribution Account amounts held in the Collection Account to make
distributions to Certificateholders for a given Distribution Date. On each
Distribution Date, the Trustee will use amounts on deposit in the Distribution
Account to distribute interest and principal to the Certificateholders in the
manner described in the applicable prospectus supplement.
The amount in the Collection Account or the Distribution Account at any
time may be invested in Permitted Investments that are payable on demand or
mature, or are subject to withdrawal or redemption, on or before the business
day before the next Master Servicer Remittance Date, in the case of the
Collection Account, or the business day before the next Distribution Date, in
the case of the Distribution Account. The Master Servicer will be required to
remit to the Distribution Account on or before the Master Servicer Remittance
Date amounts on deposit in the Collection Account that are required for
distribution to Certificateholders. The income from the investment of funds in
the Collection Account and the Distribution Account in Permitted Investments
will be paid to the Master Servicer as additional servicing compensation, and
the Master Servicer will bear the risk of loss of funds in the Collection
Account and the Distribution Account resulting from these investments. The
Master Servicer will be required to deposit the amount of any loss in the
Collection Account or the Distribution Account, as the case may be, promptly as
realized.
The Master Servicer or the Special Servicer generally will establish
and maintain a REO Account to be used in connection with REO Properties and
other Mortgaged Properties specified in the applicable prospectus supplement, if
any. To the extent set forth in the Pooling and Servicing Agreement, withdrawals
from the REO Account will be made to, among other things,
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(1) make remittances to the Collection Account;
(2) pay taxes, assessments, insurance premiums, other amounts
necessary for the proper operation, management and maintenance
of the REO Properties and those Mortgaged Properties and
designated third-party expenses; and
(3) provide for the reimbursement of specific expenses in respect
of the REO Properties and those Mortgaged Properties.
The amount in the REO Account at any time may be invested in Permitted
Investments that are payable on demand or mature, or are subject to withdrawal
or redemption, on or before the business day before the day on which those
amounts are required to be remitted to the Master Servicer for deposit in the
Collection Account. The income from the investment of funds in the REO Account
in Permitted Investments will be paid to the Master Servicer, or the Special
Servicer, if applicable, as additional servicing compensation, and the Master
Servicer or the Special Servicer, as applicable, will bear the risk of loss of
funds in the REO Account resulting from those investments. The Master Servicer
or the Special Servicer, as applicable, will be required to deposit the amount
of any loss in the REO Account promptly as realized.
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AMENDMENT OF POOLING AND SERVICING AGREEMENT
Generally, the Pooling and Servicing Agreement for each series may be
amended from time to time by the parties thereto without the consent of any of
the Certificateholders to:
(1) cure any ambiguity,
(2) correct or supplement any provisions that may be inconsistent
with any other provisions,
(3) amend any provision to the extent necessary or desirable to
maintain the rating or ratings assigned to each of the classes
of Certificates by each Rating Agency, or
(4) address other matters or questions arising under the Pooling
and Servicing Agreement that will not (a) be inconsistent with
the provisions of the Pooling and Servicing Agreement, (b)
result in the downgrading, withdrawal or qualification of the
rating or ratings then assigned to any outstanding class of
Certificates and (c) adversely affect in any material respect
the interests of any Certificateholder, as evidenced by an
opinion of counsel.
Each Pooling and Servicing Agreement may be amended from time to time
by the parties thereto with the consent of the holders of each of the classes of
Certificates representing at least a percentage specified in the related Pooling
and Servicing Agreement of each class of Certificates affected by the amendment.
However, no amendment shall:
(1) reduce in any manner the amount of, or delay the timing of,
payments received on Mortgage Loans that are required to be
distributed on any Certificate, without the consent of each
affected Certificateholder;
(2) change the percentage of Certificates required to consent to
any action or inaction under the Pooling and Servicing
Agreement, without the consent of the holders of all
outstanding Certificates; or
(3) alter the obligations of the Master Servicer or the Trustee to
make an advance, without the consent of the holders of all
Certificates representing all of the Voting Rights of the
class or classes affected by that amendment.
Further, the Pooling and Servicing Agreement for each series may
provide that the parties, without the consent of the Certificateholders, may
amend the Pooling and Servicing Agreement to modify, eliminate or add to any of
its provisions to the extent necessary or helpful to maintain the qualification
of any REMIC related to the series or to prevent the imposition of any
additional material state or local taxes, while any of the Certificates are
outstanding. However, those actions, as evidenced by an opinion of counsel, must
not adversely affect in any material respect the interest of any
Certificateholder.
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The applicable prospectus supplement will specify the method for
allocating Voting Rights among holders of Certificates of a class. Any
Certificate beneficially owned by the Depositor, the Master Servicer, the
Special Servicer, any borrower, the Trustee or any of their respective
affiliates will be deemed not to be outstanding. However, Certificates
beneficially owned by the Master Servicer, the Special Servicer, or any of their
affiliates will be deemed to be outstanding in connection with any required
consent to an amendment of the Pooling and Servicing Agreement that relates to
an action that would materially adversely affect in any material respect the
interests of the Certificateholders of any class while the Master Servicer, the
Special Servicer, or any of their affiliates owns at least a percentage of that
class specified in the related Pooling and Servicing Agreement.
The Pooling and Servicing Agreement relating to each series may provide
that no amendment to the Pooling and Servicing Agreement will be made unless
there has been delivered in accordance with the Pooling and Servicing Agreement
an opinion of counsel to the effect that that amendment will not cause that
series to fail to qualify as a REMIC at any time that any of the Certificates
are outstanding.
The prospectus supplement for a series may describe other or different
provisions concerning the amendment of the related Pooling and Servicing
Agreement required by the Rating Agencies rating Certificates of that series.
TERMINATION OF POOLING AND SERVICING AGREEMENT
The obligations of the parties to the Pooling and Servicing Agreement
for each series will terminate upon:
(1) the purchase of all of the assets of the related Trust Fund,
as described in the applicable prospectus supplement;
(2) the later of (a) the distribution to Certificateholders of
that series of the final payment on the last outstanding
Mortgage Loan or (b) the disposition of all property acquired
upon foreclosure or deed-in-lieu of foreclosure with respect
to the last outstanding Mortgage Loan and the remittance to
the Certificateholders of all funds due under the Pooling and
Servicing Agreement;
(3) the sale of the assets of the related Trust Fund after the
principal amounts of all Certificates have been reduced to
zero under circumstances set forth in the Pooling and
Servicing Agreement; or
(4) the mutual consent of the parties and all Certificateholders.
For each series, the Trustee will give or cause to be given written
notice of termination of the Pooling and Servicing Agreement to each
Certificateholder and the final distribution under the Pooling and Servicing
Agreement will be made only upon surrender and cancellation of the related
Certificates at an office or agency specified in the notice of termination.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution for each series, the Trustee (or a
paying agent identified in the applicable prospectus supplement) will forward to
each Certificateholder a statement setting forth information relating to the
distribution as specified in the Pooling and Servicing Agreement and described
in the applicable prospectus supplement.
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THE TRUSTEE
The Depositor will select a bank or trust company to act as Trustee
under the Pooling and Servicing Agreement for each series and the Trustee will
be identified, and its obligations under that Pooling and Servicing Agreement
will be described, in the applicable prospectus supplement. The Rating Agencies
rating Certificates of a series may require the appointment of a Fiscal Agent to
guarantee one or more obligations of the Trustee who would be a party to the
Pooling and Servicing Agreement. In that event, the Fiscal Agent will be
identified, and its obligations under the Pooling and Servicing Agreement will
be described, in the applicable prospectus supplement. See "Servicing of the
Mortgage Loan-Material Matters with Respect to the Master Servicer, the Special
Servicer, the Trustee and the Depositor."
THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist of mortgage loans secured by first or
junior Mortgages on, or Installment Contracts for the sale of, fee simple or
leasehold interests in Mortgaged Properties consisting of properties improved by
office buildings, health-care related properties, congregate care facilities,
hotels and motels, industrial properties, warehouse, mini- warehouse, and
self-storage facilities, mobile home parks, multifamily properties, cooperative
apartment buildings, nursing homes, office/retail properties, anchored retail
properties, single-tenant retail properties, unanchored retail properties and
other commercial real estate properties, multifamily residential properties
and/or mixed residential commercial properties. A Mortgage Pool may also include
participation interests in some types of mortgage loans, private- label mortgage
pass-through certificates, certificates issued or guaranteed by FHLMC, Fannie
Mae or GNMA, mortgage pass-through certificates, or collateralized mortgage
obligations.
All Mortgage Loans will be of one or more of the following types:
(1) Mortgage Loans with fixed interest rates;
(2) Mortgage Loans with adjustable interest rates;
(3) Mortgage Loans whose principal balances fully amortize over
their remaining terms to maturity;
(4) Mortgage Loans whose principal balances do not fully amortize,
but instead provide for a substantial principal payment at the
stated maturity of the loan (commonly known as balloon loans);
(5) Mortgage Loans that provide for recourse against only the
Mortgaged Properties; and
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Mortgage Loans that provide for recourse against the other assets of
the related borrowers.
Mortgage Loans may also be secured by one or more assignments of leases
and rents, management agreements or operating agreements relating to the
Mortgaged Property and in some cases by letters of credit, personal guarantees
or both. Pursuant to an assignment of leases and rents, the obligor on the
related Note assigns its right, title and interest as landlord under each lease
and the income derived from that lease to the related mortgagee, while retaining
a license to collect the rents for so long as there is no default. If the
obligor defaults, the license terminates and the related mortgagee is entitled
to collect the rents from tenants to be applied to the monetary obligations of
the obligor. State law may limit or restrict the enforcement of the assignment
of leases and rents by a mortgagee until the mortgagee takes possession of the
related mortgaged property and/or a receiver is appointed. For more detailed
information, you should refer to the section in this prospectus titled "Material
Legal Aspects Of The Mortgage Loans-Leases and Rents."
If specified in the applicable prospectus supplement, a Trust Fund may
include a number of Mortgage Loans with a single obligor or related obligors,
however, the principal balance of mortgage loans to a single obligor or group of
related obligors will not exceed 45% of the initial principal amount of the
Certificates for a series. If the Mortgage Pool securing Certificates for any
series includes a Mortgage Loan or mortgage-backed security or a group of
Mortgage Loans or mortgage backed securities of a single obligor or group of
related obligors representing 10% or more, but less than 45%, of the principal
amount of those Certificates, the prospectus supplement will contain
information, including financial information, regarding the credit quality of
the obligors. The Mortgage Loans will be newly originated or seasoned, and will
be acquired by the Depositor either directly or through one or more affiliates.
Unless otherwise specified in the prospectus supplement, the Mortgage
Loans will not be insured or guaranteed by the United States, any governmental
agency, any private mortgage insurer or any other person or entity.
The applicable prospectus supplement relating to each series will
specify (1) the Mortgage Loan Seller or Mortgage Loan Sellers relating to the
Mortgage Loans, which may include REITs, commercial banks, savings and loan
associations, other financial institutions, mortgage banks, credit companies,
insurance companies, real estate developers or other HUD approved lenders, and
(2) the underwriting criteria to the extent available in connection with
originating the Mortgage Loans. The criteria applied by the Depositor in
selecting the Mortgage Loans to be included in a Mortgage Pool will vary from
series to series. The prospectus supplement relating to each series also will
provide specific information regarding the characteristics of the Mortgage Loans
as of the Cut-off Date, including:
(1) the aggregate principal balance of the Mortgage Loans;
(2) the types of properties securing the Mortgage Loans and the
aggregate principal balance of the Mortgage Loans secured by
each type of property;
(3) the interest rate or range of interest rates of the Mortgage
Loans;
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(4) the origination dates and the original and, for seasoned
Mortgage Loans, remaining terms to stated maturity of the
Mortgage Loans;
(5) the loan-to-value ratios at origination and, for seasoned
Mortgage Loans, current loan balance-to-original value ratios
of the Mortgage Loans;
(6) the geographic distribution of the Mortgaged Properties
underlying the Mortgage Loans;
(7) the minimum interest rates, margins, adjustment caps,
adjustment frequencies, indices and other similar information
applicable to adjustable rate Mortgage Loans;
(8) the debt service coverage ratios relating to the Mortgage
Loans; and
(9) payment delinquencies, if any, relating to the Mortgage Loans.
The applicable prospectus supplement will also specify any materially inadequate
documentation relating to the Mortgage Loans and other characteristics of the
Mortgage Loans relating to each series. If specified in the applicable
prospectus supplement, the Depositor may segregate the Mortgage Loans in a
Mortgage Pool into separate "Mortgage Loan Groups" (as described in the
applicable prospectus supplement) as part of the structure of the payments of
principal and interest on the Certificates of a series. In that case, the
Depositor will disclose the above-specified information by Mortgage Loan Group.
The Depositor will file a current report on Form 8-K with the SEC
within 15 days after the Closing Date of each series of Certificates, as
specified in the applicable prospectus supplement, which will set forth
information with respect to the Mortgage Loans included in the Trust Fund for a
series as of the related Closing Date. The Form 8-K will be available to the
Certificateholders of the related series promptly after its filing
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates of each series, the
Depositor will assign to the Trustee the Mortgage Loans, together with all
scheduled payments of interest and principal due after the Cut-off Date
(regardless whether received prior to the Cut-off Date) and all payments of
interest and principal received by the Depositor or the Master Servicer on or
with respect to the Mortgage Loans after the Cut-off Date. The Trustee will
execute and deliver Certificates evidencing the beneficial ownership interests
in the related Trust Fund to the Depositor in exchange for the Mortgage Loans.
Each Mortgage Loan will be identified in the Mortgage Loan Schedule appearing as
an exhibit to the Pooling and Servicing Agreement for the related series. The
Mortgage Loan Schedule will contain information on each Mortgage Loan, including
the outstanding principal balance as of the close of business on the Cut-off
Date, the interest rate, the scheduled monthly (or other periodic) payment of
principal and interest as of the Cut-off Date, the maturity date of each Note
and the address of the property securing the Note.
In addition, the Depositor will, as to each Mortgage Loan, deliver to
the Trustee:
(1) the Note, endorsed to the order of the Trustee without
recourse;
(2) the Mortgage and an executed assignment of the Mortgage in
favor of the Trustee or otherwise as required by the Pooling
and Servicing Agreement;
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(3) any assumption, modification or substitution agreements
relating to the Mortgage Loan;
(4) a mortgagee's title insurance policy (or owner's policy in the
case of an Installment Contract), together with endorsements,
or an attorney's opinion of title issued as of the date of
origination of the Mortgage Loan; and
(5) other relevant documents described in the applicable
prospectus supplement.
REPRESENTATIONS AND WARRANTIES
The Mortgage Loan Seller will make representations and warranties in
the Mortgage Loans sold by the Mortgage Loan Seller to the Depositor. The
Mortgage Loan Seller may be an affiliate of the Depositor. The representations
and warranties will generally include:
(1) that title insurance (or in the case of Mortgaged Properties
located in areas where title insurance is generally not
available, an attorney's opinion of title) and any required
hazard insurance on the related Mortgaged Property was
effective at the origination of each Mortgage Loan, and that
each policy (or opinion of title) remained in effect on the
date of purchase of the Mortgage Loan from the Mortgage Loan
Seller,
(2) that the Mortgage Loan Seller had good and marketable (or
indefeasible, in the case of real property located in Texas)
title to each Mortgage Loan,
(3) that each mortgage constituted a valid first lien on the
Mortgaged Property (subject only to permissible title
insurance exceptions);
(4) that there were no delinquent tax or assessment liens against
the Mortgaged Property; and
(5) that all required payments were current for each Mortgage
Loan.
Each prospectus supplement will specify the representations and warranties being
made by the Mortgage Loan Seller.
All of the representations and warranties of a Mortgage Loan Seller
about a Mortgage Loan generally will be made as of the date the Mortgage Loan
Seller sold the Mortgage Loan to the Depositor. The applicable prospectus
supplement will indicate if a different date is applicable. A substantial period
of time may have elapsed between that date and the date of the initial issuance
of the series of Certificates evidencing an interest in that Mortgage Loan.
Since the representations and warranties of the Mortgage Loan Seller do not
address events that may occur following the sale of a Mortgage Loan by the
Mortgage Loan Seller, the repurchase obligation of the Mortgage Loan Seller
described below will not arise if, on or after the date of the sale of a
Mortgage Loan by the Mortgage Loan Seller to the Depositor, the relevant event
occurs that would have given rise to that obligation. However, the Depositor
will not include any Mortgage Loan in the Trust Fund for any series of
Certificates if anything has come to the its attention that would cause it to
believe that the representations and warranties of the Mortgage Loan Seller
about the Mortgage Loan will not be accurate and complete in all material
respects as of the related Cut-off Date. If specified in the applicable
prospectus supplement, the Depositor will make representations and warranties
about a Mortgage Loan for the benefit of Certificateholders of a series as of
the date of sale of that Mortgage Loan to the Depositor.
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Upon the discovery of the breach of any representation or warranty made
by the Mortgage Loan Seller about a Mortgage Loan that materially and adversely
affects the interests of the Certificateholders of the related series, the
Mortgage Loan Seller generally will be obligated to repurchase that Mortgage
Loan. The purchase price for that Mortgage Loan will generally equal the unpaid
principal balance of that Mortgage Loan at the date of repurchase or, in the
case of a series of Certificates as to which the Depositor has elected to treat
the related Trust Fund as a REMIC, at a price that avoids a tax on a prohibited
transaction, as described in Section 860F(a) of the Tax Code, in each case
together with accrued interest at the interest rate for that Mortgage Loan to
the first day of the month following the repurchase and the amount of any
unreimbursed advances made by the Master Servicer in respect of the Mortgage
Loan, together with interest on that advanced amount at the reimbursement rate.
The Master Servicer must enforce the repurchase obligation of the Mortgage Loan
Seller for the benefit of the Trustee and the Certificateholders following the
practices it would employ in its good faith business judgment were it the owner
of the Mortgage Loan. This repurchase obligation will generally constitute the
sole remedy available to the Certificateholders of a series for a breach of a
representation or warranty by a Mortgage Loan Seller, and the Depositor and the
Master Servicer will have no liability to the Trust Fund for any breach of that
sort. The applicable prospectus supplement will indicate whether any additional
remedies will be available to the Certificateholders. No assurance can be given
that a Mortgage Loan Seller will carry out its repurchase obligation with
respect to the Mortgage Loans.
If specified in the applicable prospectus supplement, the Mortgage Loan
Seller may be permitted to substitute alternate Mortgage Loans upon the
occurrence of the following:
(1) Mortgage Loans initially included in a Trust Fund do not
conform to their description in the applicable prospectus
supplement; or
(2) a breach of a representation or warranty by the Mortgage Loan
Seller that materially and adversely affects the interests of
the Certificateholders is discovered or a document in the
related Mortgage Loan File is materially defective.
The Mortgage Loan Seller may substitute alternate Mortgage Loans by delivering
replacement Mortgage Loans to the Trustee within a specified period of time
after the issuance of that series of Certificates. The applicable prospectus
supplement will describe any required characteristics of substituted Mortgage
Loans.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Master Servicer will be specified in the applicable prospectus
supplement and may be an affiliate of the Depositor. Each prospectus supplement
will provide information about the Master Servicer. The Master Servicer will be
responsible for servicing the Mortgage Loans pursuant to the Pooling and
Servicing Agreement for the related series. To the extent described in the
applicable prospectus supplement, one or more Special Servicers may be a party
to the Pooling and Servicing Agreement or may be appointed by holders of
designated classes of Regular Certificates or by another specified party.
Information about the Special Servicer will be set forth in the applicable
prospectus supplement.
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A Special Servicer for any series of Certificates may be an affiliate
of the Depositor or the Master Servicer and may hold, or be affiliated with the
holder of, subordinate Certificates of that series. A Special Servicer may be
entitled to any of the rights and subject to any of the obligations of a Master
Servicer. In general, a Special Servicer's duties will relate to defaulted
Mortgage Loans or Specially Serviced Mortgage Loans, including instituting
foreclosures, negotiating work-outs and asset management activities with respect
to any REO Property. The applicable prospectus supplement will describe the
rights, obligations and compensation of any Special Servicer for a particular
series of Certificates. The Master Servicer or Special Servicer generally may
subcontract the servicing of all or a portion of the Mortgage Loans to one or
more sub-servicers provided that specified conditions are met. A sub-servicer
may be an affiliate of the Depositor and may have other business relationships
with Depositor and its affiliates.
COLLECTIONS AND OTHER SERVICING PROCEDURES
The Master Servicer and the Special Servicer will each use reasonable
efforts to collect all payments under the Mortgage Loans and will follow
collection procedures as it deems necessary or desirable. Unless otherwise
specified in the applicable prospectus supplement, the Master Servicer or the
Special Servicer may, in its discretion, waive any late payment charge or
penalty fees in connection with a late payment of a Mortgage Loan and, if
specified in the applicable prospectus supplement, may extend the due dates for
payments due on a Mortgage Loan.
The Master Servicer will establish and maintain an Escrow Account in
which the Master Servicer must deposit amounts received from each borrower, if
required by the terms of the related Mortgage Loan documents, to provide for the
Escrow Payments. The Special Servicer must remit amounts received for that
purpose on Mortgage Loans serviced by it to the Master Servicer for deposit into
the Escrow Account, and will be entitled to direct the Master Servicer to make
withdrawals from the Escrow Account if required for servicing of those Mortgage
Loans. Withdrawals from the Escrow Account generally may be made to:
(1) effect timely payment of taxes, assessments, mortgage and
hazard insurance premiums and other comparable items;
(2) transfer funds to the Collection Account to reimburse the
Master Servicer or the Trustee, as applicable, for any
advance, with interest, relating to Escrow Payments;
(3) restore or repair the Mortgaged Properties;
(4) clear and terminate that account;
(5) pay interest and other amounts to borrowers on balances in the
Escrow Account, if required by the terms of the related
Mortgage Loan documents or by applicable law; and
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(6) remove amounts not required to be deposited in the Escrow
Account.
The applicable prospectus supplement may provide for other permitted withdrawals
from the Escrow Account. The Master Servicer will be entitled to all income on
the funds in the Escrow Account invested in Permitted Investments not required
to be paid to borrowers by the terms of the related Mortgage Loan documents or
by applicable law. The Master Servicer will be responsible for the
administration of the Escrow Account.
INSURANCE
The Master Servicer will use its reasonable efforts to require each
borrower to maintain insurance in accordance with the related Mortgage Loan
documents, which generally will include a standard fire and hazard insurance
policy with extended coverage. To the extent required by the related Mortgage
Loan, the coverage of each standard hazard insurance policy will be in an amount
that is at least equal to the lesser of:
(1) the full replacement cost of the improvements and equipment
securing the Mortgage Loan; or
(2) the outstanding principal balance owing on the Mortgage Loan
or the amount necessary to prevent any reduction in the policy
by reason of the application of co-insurance and to prevent
the Trustee under the Mortgage Loan from being deemed to be a
co-insurer, in each case with a replacement cost rider.
The Master Servicer will also use reasonable efforts to require each borrower to
maintain the following insurance:
(1) insurance providing coverage against 12 months of rent
interruptions; and
(2) any other insurance required by the related Mortgage Loan
documents.
Subject to the requirements for modification, waiver or amendment of a Mortgage
Loan (See "Modifications, Waivers and Amendments"), the Master Servicer may in
its reasonable discretion consistent with the servicing standard set forth in
the related Pooling and Servicing Agreement waive the requirement of a Mortgage
Loan that the related borrower maintain earthquake insurance on the related
Mortgaged Property.
If a Mortgaged Property is located at the time of origination of the
related Mortgage Loan in a federally designated special flood hazard area, the
Master Servicer will use reasonable efforts to require the related borrower to
maintain flood insurance in an amount equal to the lesser of the unpaid
principal balance of the related Mortgage Loan and the maximum amount obtainable
for the Mortgage Loan. The related Pooling and Servicing Agreement will provide
that the Master Servicer will be required to maintain the foregoing insurance if
the related borrower fails to maintain this insurance to the extent available at
commercially reasonable rates and to the extent the Trustee, as mortgagee, has
an insurable interest. The cost of insurance maintained by the Master Servicer
will be advanced by the Master Servicer.
The Master Servicer or the Special Servicer will cause to be maintained
fire and hazard insurance with extended coverage on each REO Property in an
amount that is at least equal to the full replacement cost of the improvements
and equipment on that REO Property. The cost of insurance with respect to an REO
Property will be payable out of amounts on deposit in the related REO Account or
will be advanced by the Master Servicer or the Special Servicer. The Master
Servicer or the Special Servicer will maintain flood insurance providing
substantially the same coverage as described above on any REO Property that was
located in a federally designated special flood hazard area at the time the
related Mortgage Loan was originated. The Master Servicer or the Special
Servicer will maintain for each REO Property:
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(1) public liability insurance;
(2) loss of rent endorsements; and
(3) any other insurance required in the related Mortgage Loan
documents.
Any insurance that is required to be maintained on any REO Property will only be
required to the extent available at commercially reasonable rates.
The related Pooling and Servicing Agreement will provide that the
Master Servicer or Special Servicer may satisfy its obligation to cause hazard
insurance policies to be maintained by maintaining a master force placed
insurance policy insuring against losses on the Mortgage Loans or REO
Properties, as the case may be. The incremental cost of hazard insurance
allocable to any particular Mortgage Loan or REO Property, if not borne by the
related borrower, will be an expense of the Trust Fund. Alternatively, the
Master Servicer or Special Servicer, if any, may satisfy its obligation by
maintaining, at its expense, a blanket policy (that is, not a master force
placed policy) insuring against losses on the Mortgage Loans or REO Properties,
as the case may be. If a blanket or master force placed policy contains a
deductible clause, the Master Servicer or the Special Servicer, if any, will be
obligated to deposit in the Collection Account all sums that would have been
deposited but for that clause to the extent any deductible exceeds:
(1) the deductible limitation that pertained to the related
Mortgage Loan, or
(2) in the absence of any deductible limitation, the deductible
limitation that is consistent with the servicing standard
under the related Pooling and Servicing Agreement.
In general, the standard form of fire and hazard extended coverage
insurance policy will cover physical damage to, or destruction of, the
improvements on the Mortgaged Property caused by fire, lightning, explosion,
smoke, windstorm, hail, riot, strike and civil commotion, subject to the
conditions and exclusions particularized in each policy. Since the standard
hazard insurance policies relating to the Mortgage Loans will be underwritten by
different insurers and will cover Mortgaged Properties located in various
states, they will not contain identical terms and conditions. Their most
significant terms, however, generally will be determined by state law and
conditions. Most standard hazard insurance policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in some cases, vandalism. The foregoing list merely
indicates some types of uninsured risks and is not intended to be all-inclusive.
Any losses incurred with respect to Mortgage Loans due to uninsured risks
(including earthquakes, mudflows and floods) or insufficient hazard insurance
proceeds could affect distributions to the Certificateholders.
The standard hazard insurance policies covering Mortgaged Properties
typically will contain a "coinsurance" clause which, in effect, will require the
insured at all times to carry insurance of a specified percentage (generally 80%
to 90%) of the full replacement value of the improvements on the Mortgaged
Property to recover the full amount of any partial loss. If the insured's
coverage falls below this specified percentage, the "co-insurance" clause will
provide that the insurer's liability upon a partial loss will not exceed the
greater of:
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(1) the actual cash value (the replacement cost less physical
depreciation) of the improvements damaged or destroyed; and
(2) the proportion of the loss, without deduction for
depreciation, as the amount of insurance carried bears to the
specified percentage of the full replacement cost of those
improvements.
The prospectus supplement may describe other provisions concerning the
insurance policies required to be maintained under the related Pooling and
Servicing Agreement.
Unless otherwise specified in the applicable prospectus supplement, no
pool insurance policy, special hazard insurance policy, bankruptcy bond,
repurchase bond or guarantee insurance will be maintained with respect to the
Mortgage Loans nor will any Mortgage Loan be subject to FHA insurance.
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under the National Housing Act of 1934,
as amended, and the United States Housing Act of 1937, as amended. To the extent
specified in the applicable prospectus supplement, all or a portion of the
Mortgage Loans may be insured by the FHA. The Master Servicer will be required
to take those steps as are reasonably necessary to keep the FHA insurance in
full force and effect.
FIDELITY BONDS AND ERRORS AND OMISSIONS
The Master Servicer and the Special Servicer are generally required to
obtain and maintain in effect a fidelity bond or similar form of insurance
coverage (which may provide blanket coverage) insuring against loss by fraud,
theft or other intentional misconduct of the officers and employees of the
Master Servicer and the Special Servicer. The Master Servicer and the Special
Servicer may self-insure against loss occasioned by the errors and omissions of
the officers and employees of the Master Servicer and the Special Servicer so
long as the criteria set forth in the related Pooling and Servicing Agreement
are met.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer's principal compensation for its activities under
the Pooling and Servicing Agreement for each series will be a "Servicing Fee"
(as defined in the applicable prospectus supplement) with respect to each
Mortgage Loan. The exact amount and calculation of the Servicing Fee will be
established in the prospectus supplement and Pooling and Servicing Agreement for
the related series. Because the aggregate unpaid principal balance of the
Mortgage Loans will generally decline over time, the Master Servicer's servicing
compensation will ordinarily decrease as the Mortgage Loans amortize. In
addition, the Master Servicer may be entitled to receive, as additional
compensation, (1) Prepayment Premiums, late fees and other fees collected from
borrowers and (2) all income earned on funds deposited in the Collection Account
and Distribution Account (as described under "Description of the
Certificates-Accounts") and, except to the extent the income on those funds is
required to be paid to the related borrowers, the Escrow Account. The Master
Servicer will generally pay the fees and expenses of the Trustee. The amount and
calculation of the Special Servicing Fee will be described in the prospectus
supplement and Pooling and Servicing Agreement for the related series. In
addition to the compensation described above, the Master Servicer and the
Special Servicer (or any other party specified in the applicable prospectus
supplement) may retain, or be entitled to the reimbursement of, other amounts
and expenses as described in the applicable prospectus supplement.
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ADVANCES
The applicable prospectus supplement will describe any obligations of
the Master Servicer and the Special Servicer to make any advances for delinquent
payments on Mortgage Loans, payments of taxes, assessments, insurance premiums
and Property Protection Expenses or otherwise. Any advances will be made in the
form and manner described in the prospectus supplement and Pooling and Servicing
Agreement for the related series.
MODIFICATIONS, WAIVERS AND AMENDMENTS
The Master Servicer or the Special Servicer will have the discretion to
modify, waive or amend a some of the terms of any Mortgage Loan without the
consent of the Trustee or any Certificateholder subject to conditions that are
listed in the Pooling and Servicing Agreement, including the condition that any
modification, waiver or amendment will not result in the Mortgage Loan ceasing
to be a "qualified mortgage" under the REMIC Regulations.
EVIDENCE OF COMPLIANCE
A firm of independent certified public accountants will provide the
related Trustee with a report, on or before a specified date of each year
beginning a specified time after the Cut-off Date, stating that:
(1) it has obtained a letter of representation from an officer of
the Master Servicer or Special Servicer, which includes an
assertion that the Master Servicer or Special Servicer has
complied with the minimum mortgage loan servicing standards
(to the extent applicable to commercial and multifamily
mortgage loans) identified in the Uniform Single Attestation
Program for Mortgage Bankers established by the Mortgage
Bankers Association of America, with respect to the Master
Servicer's or, if applicable, the Special Servicer's servicing
of commercial and multifamily mortgage loans during the most
recently completed calendar year; and
(2) on the basis of an examination conducted by that firm in
accordance with standards established by the American
Institute of Certified Public Accountants, the representation
is fairly stated in all material respects, subject only to
exceptions and other qualifications that, in its opinion ,
those standards require it to report.
In rendering its report the accounting firm may rely, as to the matters
relating to the direct servicing of commercial and multifamily mortgage loans by
sub-servicers, upon comparable reports of firms of independent public
accountants rendered on the basis of examination of those sub-servicers
conducted in accordance with the same standards (rendered within one year of its
report). The prospectus supplement may provide that additional reports of
independent certified public accountants relating to the servicing of mortgage
loans may be required to be delivered to the Trustee.
In addition, the Master Servicer and the Special Servicer generally
will each deliver to the Trustee, the Depositor and each Rating Agency, annually
on or before a date specified in the Pooling and Servicing Agreement, a
statement signed by an officer of the Master Servicer or the Special Servicer,
as applicable, to the effect that, based on a review of its activities during
the preceding calendar year, to the best of that officer's knowledge, the Master
Servicer or the Special Servicer, as applicable, has fulfilled in all material
respects its obligations under the Pooling and Servicing Agreement throughout
that year or, if there has been a default in the fulfillment of any its
obligation, specifying each default known to that officer.
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MATERIAL MATTERS WITH RESPECT TO THE MASTER SERVICER, THE SPECIAL SERVICER, THE
TRUSTEE AND THE DEPOSITOR
The Pooling and Servicing Agreement for each series will also provide
that none of the Depositor, the Master Servicer, the Special Servicer, or any
general or limited partner, director, officer, employee or agent of the
Depositor, the Master Servicer or the Special Servicer, will be under any
liability to the Trust Fund or the Certificateholders for taking any action or
for refraining from taking any action in good faith pursuant to the Pooling and
Servicing Agreement, or for errors in judgment. However, neither the Depositor,
the Master Servicer, the Special Servicer nor any partner, director, officer,
employee or agent of any of them will be protected against:
(1) any liability for a breach of any representations or
warranties under the Pooling and Servicing Agreement; and
(2) any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith, fraud or negligence (or, in
the case of the Master Servicer or Special Servicer, if any, a
breach of the servicing standards set forth in the Pooling and
Servicing Agreement) in the performance of its duties or by
reason of negligent disregard of its respective obligations
and duties under the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement will further provide that the
Depositor, the Master Servicer, the Special Servicer, and any limited or general
partner, director, officer, employee or agent of the Depositor, the Master
Servicer, the Special Servicer, will be indemnified by the Trust Fund for any
loss, liability or expense incurred in connection with any legal action relating
to the Pooling and Servicing Agreement or the Certificates, other than any loss,
liability or expense incurred by reason of its respective willful misfeasance,
bad faith, fraud or negligence (or, in the case of the Master Servicer or the
Special Servicer, a breach of the servicing standard set forth in the Pooling
and Servicing Agreement) in the performance of duties under the Pooling and
Servicing Agreement or by reason of negligent disregard of its respective
obligations and duties under the Pooling and Servicing Agreement. Any loss
resulting from indemnification by the Trust Fund will reduce amounts
distributable to Certificateholders. The prospectus supplement will specify any
variations to the foregoing required by the Rating Agencies rating a series of
Certificates.
In addition, the Pooling and Servicing Agreement will generally provide
that none of the Depositor, the Special Servicer or the Master Servicer, or any
limited or general partner, director, officer, employee or agent of the
Depositor, the Master Servicer or the Special Servicer, will be under any
obligation to appear in, prosecute or defend any legal action that is not
related to its duties under the Pooling and Servicing Agreement and which, in
its opinion, may cause it to incur any expense or liability. The Master Servicer
or the Special Servicer may, in its discretion, undertake any action that is
related to its obligations under the Pooling and Servicing Agreement and that it
deems necessary or desirable. In that event, the legal expenses of that action
and any resulting liability (except any liability related to the Master
Servicer's or the Special Servicer's obligations to service the Mortgage Loans
in accordance with the servicing standard under the Pooling and Servicing
Agreement) will be expenses of the Trust Fund, and the Master Servicer or
Special Servicer will be entitled to be reimbursed therefor.
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Under the Pooling and Servicing Agreement, there may be a successor to
the Master Servicer or the Special Servicer, subject to the following
restrictions:
(1) each of the Rating Agencies must confirm in writing that any
merger or consolidation and succession of the Master Servicer
or the Special Servicer will not result in a downgrading,
withdrawal or qualification of the rating then assigned by
that Rating Agency to any class of the Certificates; and
(2) any additional restrictions on merger or consolidation of the
Master Servicer or the Special Servicer described in the
applicable prospectus supplement must be satisfied.
A successor of the Master Servicer or the Special Servicer may be:
(1) any person into which the Master Servicer or the Special
Servicer may be merged or consolidated, or
(2) any person resulting from any merger or consolidation to which
the Master Servicer or the Special Servicer is a party, or
(3) any person succeeding to the business of the Master Servicer
or the Special Servicer.
The successor will be deemed to have assumed all of the liabilities and
obligations of the Master Servicer or the Special Servicer under the Pooling and
Servicing Agreement.
Generally, the Master Servicer or the Special Servicer may assign its
rights and delegate its duties and obligations under the Pooling and Servicing
Agreement in connection with the sale or transfer of a substantial portion of
its mortgage servicing or asset management portfolio provided that specified
conditions are met, including the written consent of the Trustee and written
confirmation by each of the Rating Agencies that the assignment and delegation
by the Master Servicer or the Special Servicer will not, in and of itself,
result in a downgrading, withdrawal or qualification of the rating then assigned
by that Rating Agency to any class of Certificates. The applicable prospectus
supplement will describe any additional restrictions on assignments of Master
Servicer or the Special Servicer's obligations.
The Pooling and Servicing Agreement will provide that the Master
Servicer or the Special Servicer may not resign from its obligations and duties
as Master Servicer or Special Servicer under the Pooling and Servicing
Agreement, except upon the determination that performance of its duties is no
longer permissible under applicable law and provided that the determination is
evidenced by an opinion of counsel delivered to the Trustee. No resignation or
removal will become effective until the Trustee or a successor Master Servicer
or Special Servicer has assumed the obligations of the Master Servicer or the
Special Servicer under the Pooling and Servicing Agreement.
The Trustee for each Pooling and Servicing Agreement will be named in
the applicable prospectus supplement. The commercial bank or trust company
serving as Trustee may have normal banking relationships with the Depositor, the
Master Servicer, the Special Servicer and/or any of their respective affiliates.
The Trustee can resign from its obligations under the Pooling and
Servicing Agreement at any time, in which event a successor Trustee will be
appointed. In addition, the Depositor may remove the Trustee if the Trustee
ceases to be eligible to act as Trustee under the Pooling and Servicing
Agreement or becomes insolvent, at which time the Depositor will appoint a
successor Trustee. The Trustee may also be removed at any time by the holders of
Certificates evidencing the percentage of Voting Rights specified in the
applicable prospectus supplement. Any resignation and removal of the Trustee,
and the appointment of a successor Trustee, will not become effective until
acceptance of the appointment by the successor Trustee.
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The Depositor is not obligated to monitor or supervise the performance
of the Master Servicer, Special Servicer, if any, or the Trustee under the
Pooling and Servicing Agreement.
EVENTS OF DEFAULT
Events of Default with respect to the Master Servicer or the Special
Servicer under the Pooling and Servicing Agreement for each series will consist
of:
(1) any failure by the Master Servicer or the Special Servicer to
remit to the Collection Account or any failure by the Master
Servicer to remit to the Trustee for deposit into the
Distribution Account any amount required to be remitted
pursuant to the Pooling and Servicing Agreement;
(2) any failure by the Master Servicer or Special Servicer to
observe or perform in any material respect any of its other
covenants or agreements or the breach of its representations
or warranties (which breach materially and adversely affects
the interests of the Certificateholders, the Trustee, the
Master Servicer or the Special Servicer with respect to any
Mortgage Loan) which in each case continues unremedied for 30
days after the giving of written notice of that failure to the
Master Servicer or the Special Servicer, as applicable, by the
Depositor or the Trustee, or to the Master Servicer or Special
Servicer, if any, by the Depositor and the Trustee by the
holders of Certificates evidencing Voting Rights of at least
25% of any affected Class;
(3) confirmation in writing by any of the Rating Agencies that the
then current rating assigned to any class of Certificates
would be withdrawn, downgraded or qualified unless the Master
Servicer or Special Servicer, as applicable, is removed;
(4) events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and actions by,
on behalf of or against the Master Servicer or Special
Servicer indicating its insolvency or inability to pay its
obligations; or
(5) any failure by the Master Servicer to make a required advance.
The applicable prospectus supplement may provide for other Events of Default to
the extent required by the Rating Agencies rating a series of Certificates.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default remains unremedied, the Trustee may, and
at the written direction of the holders of Certificates representing 25% of the
aggregate Voting Rights of all Certificates will, terminate all the rights and
obligations of the Master Servicer or Special Servicer, as the case may be. Upon
any termination of the Master Servicer or the Special Servicer, as applicable,
under the Pooling and Servicing Agreement, the Master Servicer or the Special
Servicer, as applicable, will receive all accrued and unpaid servicing
compensation through the date of termination plus, in the case of the Master
Servicer, all advances (plus interest on advances) as provided in the Pooling
and Servicing Agreement.
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The holders of Certificates representing at least 66 2/3% of the
aggregate Voting Rights of the Certificates may, on behalf of all holders of
Certificates, waive any default by the Master Servicer or Special Servicer, if
any, in the performance of its obligations under the Pooling and Servicing
Agreement and its consequences, except a default in making any required deposits
to (including advances) or payments from the Collection Account or the
Distribution Account or in remitting payments as received, in each case in
accordance with the Pooling and Servicing Agreement. Upon any waiver of a past
default, that default will cease to exist, and any Event of Default arising from
that default will be deemed to have been remedied for every purpose of the
Pooling and Servicing Agreement. No waiver will impair Certificateholder's
rights with respect to subsequent defaults.
On and after the date of termination, the Trustee will succeed to all
authority and power of the Master Servicer or the Special Servicer, as
applicable, under the Pooling and Servicing Agreement and will be entitled to
similar compensation arrangements to which the Master Servicer or the Special
Servicer, as applicable, would have been entitled. The Trustee must appoint, or
petition a court of competent jurisdiction for the appointment of, an
established mortgage loan servicing institution with a net worth of at least
$10,000,000 and that is either Fannie Mae or FHLMC approved (the appointment of
which will not result in the downgrading, withdrawal or qualification of the
rating or ratings then assigned to any class of Certificates as evidenced in
writing by each Rating Agency) to act as successor to the Master Servicer or the
Special Servicer, as applicable, if:
(1) the Trustee is unwilling or unable to act in that capacity;
(2) the holders of Certificates representing a majority of the
aggregate Voting Rights request;
(3) the Trustee is not rated in one of its two highest long-term
debt rating categories by each of the Rating Agencies; or
(4) the Trustee is not approved as a servicer by the Rating
Agencies.
The Trustee will be obligated to act as Master Servicer or Special Servicer as
applicable until a successor is appointed. The Trustee and any successor may
agree upon the servicing compensation to be paid, which cannot be greater than
the compensation payable to the Master Servicer or the Special Servicer, as the
case may be, under the Pooling and Servicing Agreement.
No Certificateholder will have the right under the Pooling and
Servicing Agreement to institute any proceeding with respect to the Pooling and
Servicing Agreement or the Mortgage Loans, unless:
(1) the holder has given the Trustee a written notice of a default
under the Pooling and Servicing Agreement and of the
continuance of the default;
(2) the holders of Certificates representing a majority of the
aggregate Voting Rights allocated to each affected class have
made written request of the Trustee to institute the
proceeding in its own name as Trustee under the Pooling and
Servicing Agreement and have offered to the Trustee reasonable
indemnity as it may require against the related costs,
expenses and liabilities; and
(3) the Trustee, for 30 days after its receipt of the notice,
request and offer of indemnity described above, has neglected
or refused to institute the requested proceeding.
The Trustee will have no obligation to institute, conduct or defend any
litigation under or related to the Pooling and Servicing Agreement at the
request, order or direction of any of the holders of Certificates, unless the
holders of Certificates have offered to the Trustee reasonable security or
indemnity against the related costs, expenses and liabilities which may be
incurred by the Trustee by taking those actions.
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CREDIT ENHANCEMENT
GENERAL
The amounts , types and provider of Credit Enhancement for one or more
classes of a series of Certificates or the related Mortgage Loans , if any, will
be specified in the applicable prospectus supplement. Credit Enhancement may be
in the form of a letter of credit, the subordination of one or more classes of
the Certificates of a series, the establishment of one or more reserve funds,
surety bonds, certificate guarantee insurance, the use of cross-support
features, limited guarantees or another method of Credit Enhancement described
in the applicable prospectus supplement, or any combination of the foregoing.
It is unlikely that Credit Enhancement will provide protection against
all risks of loss or guarantee repayment of the entire principal balance of the
Certificates and interest on the Certificates. If losses occur that exceed the
amount covered by Credit Enhancement or that are not covered by Credit
Enhancement, Certificateholders will bear their allocable share of losses. See
"Risk Factors-Credit enhancement Limitations will not be provided for all
certificates; credit enhancement will not cover all losses so you may not
receive full payment even where there is credit enhancement."
ENHANCEMENT LIMITATION
If Credit Enhancement is provided with respect to a series or the related
Mortgage Loans, we will provide the following information prior to the date of
the applicable prospectus supplement :
(1) the amount payable under the Credit Enhancement;
(2) any conditions to payment of Credit Enhancement not described
in this prospectus;
(3) the conditions (if any) under which the amount payable under
the Credit Enhancement may be reduced and under which the
Credit Enhancement may be terminated or replaced; and
(4) the material provisions of any agreement relating to the
Credit Enhancement.
Additionally, prior to the date of the applicable prospectus supplement, we will
provide the information set forth below with respect to the issuer of any
third-party Credit Enhancement, including:
(1) a brief description of its principal business activities;
(2) its principal place of business, the jurisdiction of
organization and the jurisdictions under which it is chartered
or licensed to do business;
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(3) if applicable, the identity of regulatory agencies that
exercise primary jurisdiction over the conduct of its
business; and
(4) its total assets and stockholders' or policyholders' surplus,
if applicable, as of the date specified in that prospectus
supplement.
If the holders of any Certificates of any series will be materially dependent
upon the issuer of any third party Credit Enhancement for timely payment of
interest and/or principal on their Certificates, the Depositor will file a
current report on Form 8-K on or prior to the date of the applicable prospectus
supplement, which will include any material information regarding the issuer of
any third party Credit Enhancement for those Certificates, including audited
financial statements to the extent required.
SUBORDINATE CERTIFICATES
If so specified in the applicable prospectus supplement, one or more
classes of a series may be Subordinate Certificates. The rights of the holders
of Subordinate Certificates to receive distributions of principal and interest
from the Distribution Account on any Distribution Date will be subordinated to
the rights of the holders of Senior Certificates to receive distributions of
principal and interest to the extent specified in the applicable prospectus
supplement. In addition, subordination may be affected by the allocation of
losses first to Subordinate Certificates in reduction of the principal balance
of those Certificates until the principal balance of those Certificates is
reduced to zero before any losses are allocated to Senior Certificates. The
Pooling and Servicing Agreement may require a separate trustee other than the
Trustee to be appointed to act on behalf of holders of Subordinate Certificates.
A series may include one or more classes of Subordinate Certificates
entitled to receive cash flows remaining after distributions are made to all
other classes designated as being senior thereto. A series may also include one
or more classes of Subordinate Certificates that will be allocated losses prior
to any losses being allocated to other classes of Certificates designated as
being senior thereto. If so specified in the applicable prospectus supplement,
the subordination of a class may apply only in the event of (or may be limited
to) losses not covered by insurance policies or other Credit Enhancement, such
as losses arising from damage to property securing a Mortgage Loan not covered
by standard hazard insurance policies.
The applicable prospectus supplement will describe any subordination in
greater detail and provide, to the extent applicable, information concerning:
(1) the amount of subordination of a class or classes of
Subordinate Certificates in a series,
(2) the circumstances in which subordination will be applicable,
(3) the manner, if any, in which the amount of subordination will
decrease over time,
(4) the manner of funding any related reserve fund,
(5) the conditions under which amounts in any applicable reserve
fund will be used to make distributions to holders of Senior
Certificates and/or to holders of Subordinate Certificates or
be released from the applicable Trust Fund, and
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(6) if one or more classes of Subordinate Certificates of a series
are Offered Certificates, the sensitivity of distributions on
those Certificates based on default assumptions described in
the prospectus supplement (see "Risk Factors-Subordinated
Certificates may not receive full payment if losses occur on
the related mortgage loans" in this prospectus).
RESERVE FUNDS
If so specified in the applicable prospectus supplement, one or more
Reserve Funds may be established with respect to one or more classes of the
Certificates of a series, in which cash, a letter of credit, Permitted
Investments or a combination of any of the foregoing, in the amounts specified
in the applicable prospectus supplement will be deposited. The Reserve Funds may
also be funded over time by the deposit of a specified amount of the
distributions received on the applicable Mortgage Loans if specified in the
applicable prospectus supplement. The Depositor may pledge the Reserve Funds to
a separate collateral agent specified in the applicable prospectus supplement.
Amounts on deposit in any Reserve Fund for one or more classes of
Certificates of a series will be applied by the Trustee for the purposes, in the
manner, and to the extent specified in the applicable prospectus supplement. A
Reserve Fund may be provided to increase the likelihood of timely payments of
principal of and interest on the Certificates, if required as a condition to the
rating of a series by any Rating Agency. Reserve Funds may be established to
provide limited protection, in an amount satisfactory to a Rating Agency,
against losses not covered by insurance policies or other Credit Enhancement.
Reserve Funds may also be established for other purposes and in amounts as will
be specified in the applicable prospectus supplement. Following each
Distribution Date amounts in any Reserve Fund in excess of any amount required
to be maintained in that account may be released from the Reserve Fund under the
conditions and to the extent specified in the applicable prospectus supplement
and will not be available for further application by the Trustee.
Moneys deposited in any Reserve Fund generally will be invested in
Permitted Investments. Generally, any reinvestment income or other gain from
investments will be credited to the related Reserve Fund for a series, and any
loss resulting from investments will be charged to the Reserve Fund. If
specified in the applicable prospectus supplement, income or other gain from
investments made with the moneys in the Reserve Fund may be payable to the
Master Servicer or Special Servicer, as applicable, as additional servicing
compensation, and any loss resulting from those investments will be borne by the
Master Servicer or Special Servicer, as applicable. The Reserve Fund for a
series will be a part of the Trust Fund only if the applicable prospectus
supplement so specifies. If the Reserve Fund is not a part of the Trust Fund,
the right of the Trustee to make draws on the Reserve Fund will be an asset of
the Trust Fund.
Additional information concerning any Reserve Fund will be set forth in
the applicable prospectus supplement, including the initial balance of the
Reserve Fund, the balance required to be maintained in the Reserve Fund, the
manner in which the required balance will decrease over time, the manner of
funding the Reserve Fund, the purpose for which funds in the Reserve Fund may be
applied to make distributions to Certificateholders and use of investment
earnings, if any, from the Reserve Fund.
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CROSS-SUPPORT FEATURES
If the Mortgage Pool for a series is divided into separate Mortgage
Loan Groups, each securing a separate class or classes of a series, Credit
Enhancement may be provided by a cross-support feature that requires that
distributions be made on Senior Certificates secured by one Mortgage Loan Group
prior to distributions on Subordinate Certificates secured by another Mortgage
Loan Group within the Trust Fund. The applicable prospectus supplement for a
series that includes a cross-support feature will describe the manner and
conditions for applying the cross-support feature.
CERTIFICATE GUARANTEE INSURANCE
If so specified in the applicable prospectus supplement, certificate
guarantee insurance with respect to a series of Certificates may be provided by
one or more insurance companies. Certificate guarantee insurance will guarantee,
with respect to one or more classes of Certificates of the applicable series,
timely distributions of interest and full distributions of principal on the
basis of a schedule of principal distributions set forth in or determined in the
manner specified in the applicable prospectus supplement. Certificate guarantee
insurance may also guarantee against any payment made to a Certificateholder
that is subsequently recovered as a "voidable preference" payment under the
Bankruptcy Code. A copy of the certificate guarantee insurance for a series, if
any, will be filed with the SEC as an exhibit to the Form 8-K to be filed with
the SEC within 15 days of issuance of the Certificates of the applicable series.
LIMITED GUARANTEE
If so specified in the prospectus supplement with respect to a series
of Certificates, Credit Enhancement may be provided in the form of a limited
guarantee issued by a guarantor named in the Credit Enhancement.
LETTER OF CREDIT
If so specified in the prospectus supplement with respect to a series
of a Certificate, Credit Enhancement may be provided by a letter of credit
issued by a bank or financial institution named in the Credit Enhancement. The
coverage, amount and frequency of any reduction in coverage provided by a letter
of credit issued with respect to one or more classes of Certificates of a series
will be set forth in the applicable prospectus supplement.
POOL INSURANCE POLICIES; SPECIAL HAZARD INSURANCE POLICIES
If so specified in the prospectus supplement relating to a series of
Certificates, the Depositor will obtain a pool insurance policy for the Mortgage
Loans in the related Trust Fund. The pool insurance policy will cover any loss
(subject to the limitations described in a applicable prospectus supplement) by
reason of default to the extent a related Mortgage Loan is not covered by any
primary mortgage insurance policy. The amount and terms of any coverage will be
set forth in the ========== prospectus supplement.
If so specified in the applicable prospectus supplement, the Depositor
will also obtain a special hazard insurance policy for the related Trust Fund in
the amount and with terms set forth in that prospectus supplement for each
series of Certificates as to which a pool insurance policy is provided. The
special hazard insurance policy will, subject to the limitations described in
the applicable prospectus supplement, protect against loss by reason of damage
to Mortgaged Properties caused by those types of hazards not insured against
under the standard form of hazard insurance policy for the respective states in
which the Mortgaged Properties are located.
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SURETY BONDS
If so specified in the prospectus supplement relating to a series of
Certificates, Credit Enhancement with respect to one or more classes of
Certificates of a series may be provided by the issuance of a surety bond issued
by a financial guarantee insurance company named in the Credit Enhancement. The
coverage, amount and frequency or any reduction in coverage provided by a surety
bond will be set forth in the prospectus supplement relating to that series.
FRAUD COVERAGE
If so specified in the applicable prospectus supplement, losses
resulting from fraud, dishonesty or misrepresentation in connection with the
origination or sale of the Mortgage Loans may be covered to a limited extent by
(1) representations and warranties to the effect that no fraud,
dishonesty or misrepresentation in connection with the
origination or sale of the Mortgage Loans had occurred;
(2) a Reserve Fund;
(3) a letter of credit; or
(4) some other method.
The amount and terms of any fraud coverage will be set forth in the
applicable prospectus supplement.
BORROWER BANKRUPTCY BOND
If so specified in the applicable prospectus supplement, losses
resulting from a bankruptcy proceeding relating to a borrower or obligor
affecting the Mortgage Loans in a Trust Fund with respect to a series of
Certificates may be covered under a borrower bankruptcy bond (or any other
instrument that will not result in a withdrawal, downgrading or qualification of
the rating of the Certificates of a series by any of the Rating Agencies that
rated any Certificates of that series). Any borrower bankruptcy bond or other
instrument will provide for coverage in an amount and with terms meeting the
criteria of the Rating Agencies rating any Certificates of the related series as
described in the applicable prospectus supplement.
MATERIAL LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains general summaries of the material
legal aspects of mortgage loans. Because many of the legal aspects of mortgage
loans are governed by applicable state laws (which may vary substantially), the
following summaries do not purport to be complete, to reflect the laws of any
particular state, to reflect all the laws applicable to any particular Mortgage
Loan or to encompass the laws of all states in which the properties securing the
Mortgage Loans are situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
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GENERAL
All of the Mortgage Loans are loans evidenced by (or, in the case of mortgage
pass-through certificates, supported by) a note or bond that is secured by a
lien and security interest in property created under related security
instruments, which may be mortgages, deeds of trust or deeds to secure debt,
depending upon the prevailing practice and law in the state in which the
Mortgaged Property is located. As used in this prospectus, unless the context
otherwise requires, the term "mortgage" includes mortgages, deeds of trust and
deeds to secure debt. Any of the foregoing mortgages will create a lien upon, or
grant a title interest in, the mortgaged property. The priority of the lien or
title interest created by each mortgage will depend on:
(1) the terms of the mortgage;
(2) the existence of any separate contractual arrangements with
others holding interests in the mortgaged property;
(3) the order of recordation of the mortgage in the appropriate
public recording office; and
(4) the actual or constructive knowledge of the mortgagee as to
any unrecorded liens, leases or other interests affecting the
mortgaged property.
Mortgages typically do not possess priority over governmental claims for real
estate taxes, assessments and, in some states, for reimbursement of remediation
costs of environmental conditions identified by those states. See "Environmental
Risks." In addition, the Tax Code provides priority to some tax liens over the
lien of the mortgage. The borrower is generally responsible for maintaining the
property in good condition and for paying real estate taxes, assessments and
hazard insurance premiums associated with the property.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
an interest in real property between two parties: a borrower (the borrower and
usually the owner of the subject property) and a mortgagee (the lender).
A deed of trust is a three-party instrument, wherein a trustor (the
equivalent of a borrower), grants the property to a trustee, in trust with a
power of sale, for the benefit of a beneficiary (the lender) as security for the
payment of the secured indebtedness.
A deed to secure debt is a two party instrument in which the grantor
(the equivalent of a borrower) conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee (the lender) until the time the
underlying debt is repaid, generally with a power of sale as security for the
indebtedness evidenced by the related note.
As used in this prospectus, unless the context otherwise requires, the
term "borrower" includes a borrower under a mortgage, a trustor under a deed of
trust and a grantor under a deed to secure debt, and the term, "mortgagee"
includes a mortgagee under a mortgage, a beneficiary under a deed of trust and a
grantee under a deed to secure debt. The mortgagee's authority under a mortgage,
the beneficiary's and 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 mortgage, the law of the state in which the real property is
located, federal laws and, in some cases, with respect to a trustee in deed of
trust transactions, the directions of the beneficiary. The Mortgage Loans (other
than Installment Contracts) will consist of (or, in the case of mortgage
pass-through certificates, be supported by) loans secured by mortgages.
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The real property covered by a mortgage is most often the fee estate in
land and improvements. However, a mortgage may encumber other interests in real
property such as a tenant's interest in a lease of land, leasehold improvements
or both, and the leasehold estate created by that lease. A mortgage covering an
interest in real property other than the fee estate requires special provisions
in the instrument creating that interest, in the mortgage or in a separate
agreement with the landlord or other party to that instrument, to protect the
mortgagee against termination of that interest before the mortgage is paid.
PERSONALTY
Some types of mortgaged properties, such as nursing homes, hotels,
motels and industrial plants, are likely to derive a significant part of their
value from personal property that does not constitute "fixtures" under
applicable state real property law, and therefore, would not be subject to the
lien of a mortgage. Those types of properties are generally pledged or assigned
as security to the mortgagee under the UCC. To perfect its security interest in
those types of properties, the mortgagee generally must file UCC financing
statements and, to maintain perfection of the security interest, file
continuation statements generally every five years.
INSTALLMENT CONTRACTS
The Mortgage Loans may also consist of Installment Contracts (also
sometimes called contracts for deed). Under an Installment Contract, the seller
(the mortgagee) retains legal title to the property and enters into an agreement
with the purchaser (the borrower) for the payment of the purchase price plus
interest, over the term of that Installment Contract. Only after full
performance by the borrower of the Installment Contract is the mortgagee
obligated to convey title to the property to the borrower. As with mortgage or
deed of trust financing, during the effective period of the Installment
Contract, the borrower is generally responsible for maintaining the property in
good condition and for paying real estate taxes, assessments and hazard
insurance premiums associated with the property.
The method of enforcing the rights of the mortgagee under an
Installment Contract varies on a state-by-state basis depending upon the extent
to which state courts are willing or able to enforce the Installment Contract
strictly according to its terms. The terms of Installment Contracts generally
provide that upon a default by the borrower, the borrower loses his or her right
to occupy the property, the entire indebtedness is accelerated and the
borrower's equitable interest in the property is forfeited. The mortgagee in
that situation does not have to foreclose to obtain title to the property,
although in some cases both a quiet title action to clear title to the property
(if the borrower has recorded notice of the Installment Contract) and an
ejectment action to recover possession may be necessary.
In a few states, particularly in cases of a default during the early
years of an Installment Contract, ejectment of the borrower and a forfeiture of
his or her interest in the properly will be permitted. However, in most states,
laws (analogous to mortgage laws) have been enacted to protect borrowers under
Installment Contracts from the harsh consequences of forfeiture. These laws may
require the mortgagee to pursue a judicial or nonjudicial foreclosure with
respect to the property, give the borrower a notice of default and some grace
period during which the Installment Contract may be reinstated upon full payment
of the default amount. Additionally, the borrower may have a post-foreclosure
statutory redemption right, and, in some states, a borrower with a significant
equity investment in the property may be permitted to share in the proceeds of
any sale of the property after the indebtedness is repaid or may otherwise be
entitled to a prohibition of the enforcement of the forfeiture clause.
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JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES OR BENEFICIARIES
Some of the Mortgage Loans may be secured by junior mortgages that are
subordinate to senior mortgages held by other lenders or institutional
investors. In those cases, the rights of the Trust Fund (and therefore the
Certificateholders), as mortgagee under a junior mortgage, will be subordinate
to those of the mortgagee under the senior mortgage, including the prior rights
of the senior mortgagee to:
(1) receive rents, hazard insurance proceeds and condemnation
proceeds; and
(2) cause the property securing the Mortgage Loan to be sold upon
the occurrence of a default under the senior mortgage, which
would extinguish the lien of the junior mortgage, unless the
Master Servicer or Special Servicer, if applicable, either
asserts the Trust Fund's subordinate interest in the related
property in the foreclosure of the senior mortgage (to the
extent permitted by state law) or satisfies the defaulted
senior loan.
As discussed more fully below, in many states a junior mortgagee may satisfy a
defaulted senior loan in full, or may cure the default and bring the senior loan
current, in either event adding the amounts expended to the balance due on the
junior loan. Absent a provision in the senior mortgage or the existence of a
recorded request for notice in compliance with applicable state law (if any), no
notice of default is typically required to be given to the junior mortgagee.
The form of the mortgage used by many institutional lenders confers on
the mortgagee the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply those proceeds and awards to any indebtedness secured
by the mortgage in the order the mortgagee may determine. Thus, if improvements
on the property are damaged or destroyed by fire or other casualty, or if the
property (or any part of the property) is taken by condemnation, the mortgagee
under the senior mortgage will have the prior right to collect any applicable
insurance proceeds and condemnation awards and to apply the same to the
indebtedness secured by the senior mortgage. However, the laws of some states
may provide that unless the security of the mortgagee has been materially
impaired, the borrower must be allowed to use any applicable insurance proceeds
or partial condemnation awards to restore the property.
The form of mortgage used by many institutional lenders typically
contains a "future advance" clause that provides that additional amounts
advanced to or on behalf of the borrower by the mortgagee are to be secured by
the mortgage. The "future advance" clause is valid under the laws of most
states. In some states, however, the priority of any advance made under the
clause depends upon whether the advance was an "obligatory" or "optional"
advance. If the mortgagee is obligated to advance the additional amounts, the
advance may be entitled to receive the same priority as amounts initially made
under the mortgage, notwithstanding that other junior mortgages or other liens
may have encumbered the property between the date of recording of the senior
mortgage and the date of the future advance and that the mortgagee had actual
knowledge of those intervening junior mortgages or other liens at the time of
the advance. If the mortgagee is not obligated to advance the additional amounts
and has actual knowledge of any intervening junior mortgages or other liens, the
advance may be subordinate to the intervening junior mortgages or other liens.
In many other states, all advances under a "future advance" clause are given the
same priority as amounts initially made under the mortgage so long as advances
do not exceed a specified "credit limit" amount stated in the recorded mortgage.
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Another provision typically found in the form of the mortgage used by
many institutional lenders obligates the borrower:
(1) to pay all taxes and assessments affecting the property before
delinquency;
(2) to pay, when due, all other encumbrances, charges and liens
affecting the property that may be prior to the lien of the
mortgage;
(3) to provide and maintain hazard insurance on the property;
(4) to maintain and repair the property and not to commit or
permit any waste of the property; and
(5) to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee under the
mortgage.
Upon a failure of the borrower to perform any of these obligations, the mortgage
typically provides the mortgagee the option to perform the obligation itself,
with the borrower agreeing to reimburse the mortgagee for any sums expended by
the mortgagee in connection therewith (which typically become part of the
indebtedness secured by the mortgage).
The form of mortgage used by many institutional lenders also typically
requires the borrower to obtain the consent of the mortgagee as to all actions
affecting the mortgaged property, including, among others:
(1) all leasing activities (including new leases and termination
or modification of existing leases),
(2) any alterations, modifications or improvements to the
buildings and other improvements forming a part of the
mortgaged property, and
(3) all property management activities affecting the mortgaged
property (including new management or leasing agreements or
any termination or modification of existing management or
leasing agreements).
Tenants will often refuse to execute a lease unless the mortgagee executes a
written agreement with the tenant not to disturb the tenant's possession of its
premises in the event of a foreclosure. A senior mortgagee may refuse to consent
to matters approved by a junior mortgagee with the result that the value of the
security for the junior mortgage is diminished. For example, a senior mortgagee
may decide not to approve a lease or refuse to grant to a tenant a
non-disturbance agreement and as a result the value of the mortgaged property
may be diminished.
FORECLOSURE
Foreclosure is a legal procedure that allows the mortgagee 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 and, by reason of any default, the indebtedness has
been accelerated, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness. Foreclosure procedures with respect to the enforcement of a
mortgage vary from state to state. Although there are other foreclosure
procedures available in some states that are either infrequently used or
available only in limited circumstances, the two primary methods of foreclosing
a mortgage are judicial foreclosure and non-judicial foreclosure pursuant to a
power of sale granted in the mortgage. In either case, the actual foreclosure of
the mortgage will be accomplished pursuant to a public sale of the mortgaged
property by a designated official or by the trustee under a deed of trust. The
purchaser at any foreclosure sale acquires only the estate or interest in the
mortgaged property encumbered by the mortgage. For example, if the mortgage only
encumbered a tenant's leasehold interest in the property, the purchaser will
only acquire that leasehold interest, subject to the tenant's obligations under
the lease to pay rent and perform other covenants contained in the lease.
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JUDICIAL FORECLOSURE
A judicial foreclosure of a mortgage is a judicial action initiated by
the service of legal pleadings upon all necessary parties having an interest in
the real property. Delays in completion of foreclosure may occasionally result
from difficulties in locating the necessary parties to the action. Since a
judicial foreclosure is a lawsuit, it is subject to all of the procedures,
delays and expenses attendant to litigation, sometimes requiring up to several
years to complete if contested. At the completion of a judicial foreclosure, if
the mortgagee prevails, the court ordinarily issues a judgment of foreclosure
and appoints a referee or other designated official to conduct a public sale of
the property. These sales are made in accordance with procedures that vary from
state to state.
NON-JUDICIAL FORECLOSURE
In the majority of cases, foreclosure of a deed of trust (and in some
instances, other types of mortgage instruments) is accomplished by a
non-judicial trustee's sale pursuant to a provision in the deed of trust that
authorizes the trustee, generally following a request from the beneficiary, to
sell the mortgaged property at public sale upon any default by the borrower
under the terms of the note or deed of trust. In addition to the specific
contractual requirements set forth in the deed of trust, a non-judicial
trustee's sale is also typically subject to any applicable judicial or statutory
requirements imposed in the state where the mortgaged property is located. The
specific requirements that must be satisfied by a trustee prior to the trustee's
sale vary from state to state. Examples of the varied requirements imposed by
some states are:
(1) that notices of both the borrower's default and the
mortgagee's acceleration of the debt be provided to the
borrower;
(2) that the trustee record a notice of default and send a copy of
the notice to the borrower, any other person having an
interest in the real property, including any junior
lienholders, any person who has recorded a request for a copy
of a notice of default and notice of sale, any successor in
interest to the borrower and to other persons identified by
those states;
(3) that the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in
arrears, plus, in some states, allowed costs and expenses
incurred by the mortgagee in connection with the default; and
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(4) the method (publication, posting, recording, etc.), timing,
content, location and other particulars as to any required
public notices of the trustee's sale.
Foreclosure of a deed to secure debt is generally accomplished by a non-judicial
sale similar to that required by a deed of trust, except that the mortgagee or
its agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
LIMITATIONS ON MORTGAGEE'S RIGHTS
Courts may apply general equitable principles in connection with
foreclosure proceedings to limit a mortgagee's remedies. These equitable
principles are generally designed to relieve the borrower from the legal effect
of his defaults under the loan documents to the extent the legal effect is
determined to be harsh or unfair. Examples of judicial remedies that have been
fashioned include requiring mortgagees to undertake affirmative and expensive
actions to determine the causes of the borrower's default and the likelihood
that the borrower will be able to reinstate the loan, requiring the mortgagees
to reinstate loans or recast payment schedules to accommodate borrowers who are
suffering from temporary financial disability, and limiting the rights of
mortgagees to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failing to maintain the property adequately or
executing a second mortgage affecting the property.
Even if a foreclosure is allowed, a third party may be unwilling to
purchase the property at the foreclosure sale for a variety of reasons,
including the difficulty of determining the exact status of title to the
mortgaged property, the potential existence of redemption rights (see "Rights of
Redemption" below) and because the physical condition and financial performance
of the mortgaged property may have deteriorated during the foreclosure
proceedings. Some states require the mortgagee to disclose all known facts
materially affecting the value of the mortgaged property to potential bidders at
a trustee's sale, which may have an adverse affect on the trustee's ability to
sell the mortgaged property or the sale price of the mortgaged property. A 1980
decision of the United States Court of Appeals for the Fifth Circuit (Durrett v.
Washington National Insurance Company) suggested that even a non-collusive,
regularly conducted foreclosure sale could be a fraudulent transfer under the
Bankruptcy Code if (1) the foreclosure sale was held while the debtor was
insolvent and not more than one year before the filing of the bankruptcy
petition; and (2) the price paid for the foreclosed property did not represent
"fair consideration." In 1994, the United States Supreme Court rejected that
interpretation of the Bankruptcy Code. However, the reasoning in the Durrett
case could nonetheless be persuasive to courts interpreting state fraudulent
conveyance law with provisions similar to the Bankruptcy Code provisions
construed in Durrett.
For the reasons discussed in the prior paragraph, it is common for the
mortgagee to purchase the property from the trustee, referee or other designated
official for an amount equal to or less than the outstanding principal amount of
the secured indebtedness, together with accrued and unpaid interest and the
expenses of foreclosure to extinguish the secured debt. A mortgagee commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. In addition, a
mortgagee may be responsible under federal or state law for the cost of cleaning
up a mortgaged property that is environmentally contaminated. See "Environmental
Risks" below. The mortgagee also assumes the burdens of ownership and management
of the property (frequently through the employment of a third party management
company), including third party liability, paying operating expenses and real
estate taxes and making repairs, until a sale of the property to a third party
can be arranged. The costs of operating and maintaining commercial property may
be significant and may be greater than the income derived from that property.
The costs of management and operation of mortgaged properties that are hotels,
motels or nursing or convalescent homes or hospitals may be particularly
significant because of the expertise, knowledge and, with respect to nursing or
convalescent homes or hospitals, regulatory compliance required to run these
operations and the effect that foreclosure and a change in ownership may have on
the public's and the industry's (including franchisers') perception of the
quality of those operations. The mortgagee will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the mortgagee's investment in the property.
As a result, a mortgagee could realize an overall loss on a mortgage loan even
if the related 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 mortgage loan, plus accrued interest.
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Under the REMIC Regulations and the related Pooling and Servicing
Agreement, the Master Servicer or Special Servicer, if any, may be permitted
(and in some cases may be required) to hire an independent contractor to operate
any REO Property which could result in significantly greater costs than direct
operation by the Master Servicer or Special Servicer, if any. See "Servicing of
the Mortgage Loans-Collections and Other Servicing Procedures."
RIGHTS OF REDEMPTION
The purposes of a foreclosure are to enable the mortgagee to realize
upon its security and to bar the borrower, and all persons who have an interest
in the property that is subordinate to the mortgage being foreclosed, from any
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure sale, those having an interest
that is subordinate to that of the foreclosing mortgagee have an equity of
redemption and may redeem the property by paying the entire debt with interest.
In addition, in some states, when a foreclosure action has been commenced, the
redeeming party must pay a specified portion of costs of that action. Persons
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated. Equity of redemption is generally a common-law (non-statutory) right
that only exists prior to completion of the foreclosure sale and is not waivable
by the borrower.
In contrast to the common law doctrine of equity of redemption, in some
states, the borrower and foreclosed junior lienors are given a statutory period
(1) prior to the foreclosure sale, in which to reinstate the mortgage in good
standing by paying past due amounts and a portion of costs of the mortgage
determined by those states and (2) after the completion of the foreclosure sale,
in which to redeem the property from the foreclosure sale by payment of a
redemption price. The required redemption price varies from state to state. Some
states require the payment of the entire principal balance of the loan, accrued
interest and expenses of foreclosure, others require the payment of the
foreclosure sale price, while other states require the payment of only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the mortgagee to sell the foreclosed property (or to depress the
price received by the mortgagee at the foreclosure sale). The exercise of a
statutory right of redemption may defeat the title of any purchaser at a
foreclosure sale or any purchaser from the mortgagee after a foreclosure sale.
Consequently, the practical effect of the redemption right is often to
force the mortgagee to retain the property and pay the expenses of ownership
until the redemption period has run. Some states permit a mortgagee to
invalidate an attempted exercise of a statutory redemption right if the
mortgagee waives its right to any deficiency judgment. In some states, there is
no right to redeem property after a trustee's sale under a deed of trust.
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Under the REMIC Regulations currently in effect, property acquired by
foreclosure generally must not be held for more than three years. With respect
to a series of Certificates for which an election is made to qualify the Trust
Fund or a part of the Trust Fund as a REMIC, the Pooling and Servicing Agreement
will permit foreclosed property to be held for more than three years if the
Trustee receives (a) an extension from the IRS or (b) an opinion of counsel to
the effect that holding the property for that period is permissible under the
REMIC Regulations.
Borrowers under Installment Contracts generally do not have the
benefits of redemption periods such as those that exist in the same jurisdiction
for mortgage loans. If redemption statutes do exist under state laws for
Installment Contracts, the redemption period may be shorter than for mortgages.
ANTI-DEFICIENCY LEGISLATION
Some of the Mortgage Loans will be nonrecourse loans where recourse may
be had only against the specific property pledged to secure the related Mortgage
Loan and not against the borrower's other assets in the event of default by a
borrower. Even if a mortgage by its terms provides for recourse against the
borrower, some states have imposed prohibitions against or limitations upon
exercising that recourse. For example, some state statutes limit the right of
the mortgagee to 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 borrower equal in most cases to the difference between the
net amount realized upon the public sale of the real property and the amount due
to the mortgagee. Other statutes require the mortgagee to exhaust the security
afforded under a mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower. In some states, the
mortgagee has the option of bringing a personal action against the borrower on
the debt without first exhausting its security, however, in some of these
states, a mortgagee choosing to pursue that kind of action may be deemed to have
elected its remedy and may be precluded from exercising any remedies with
respect to the security. Consequently, the practical effect of the election
requirement, when applicable, is that mortgagees will usually proceed first
against the security rather than bringing personal action against the borrower.
Other statutory provisions limit any deficiency judgment against the borrower
following a judicial sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is generally to prevent a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low bids, or the
absence of bids, at the judicial sale.
LEASEHOLD RISKS
Some of the Mortgage Loans may be secured by a mortgage encumbering the
borrower's leasehold interest under a ground lease. Leasehold mortgages are
subject to risks not associated with mortgages encumbering a fee ownership
interest in the mortgaged property. The most significant of these risks is that
the ground lease creating the leasehold estate could terminate, depriving the
leasehold mortgagee of its security. The ground lease may terminate if, among
other reasons, the ground lessee breaches or defaults in its obligations under
the ground lease or there is a bankruptcy of the ground lessee or the ground
lessor. Examples of protective provisions that may be included in the related
ground lease, or a separate agreement between the ground lessee, the ground
lessor and the mortgagee, to minimize that risk are:
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(1) the right of the mortgagee to receive notices from the ground
lessor of any defaults by the borrower;
(2) the right to cure any defaults, with adequate cure periods;
(3) if a default is not susceptible to cure by the mortgagee, the
right to acquire the leasehold estate through foreclosure or
otherwise prior to any termination of the ground lease;
(4) the ability of the ground lease to be assigned to and by the
mortgagee or a purchaser at a foreclosure sale and for a
release of the assigning ground lessee's liabilities under the
ground lease;
(5) the right of the mortgagee to enter into a ground lease with
the ground lessor on the same terms and conditions as the old
ground lease upon a termination of the old ground lease; and
(6) provisions for disposition of any insurance proceeds or
condemnation awards payable upon a casualty to, or
condemnation of, the mortgaged property.
In addition to the foregoing protections, the leasehold mortgage may prohibit
the ground lessee from treating the ground lease as terminated in the event of
the ground lessor's bankruptcy and rejection of the ground lease by the trustee
for the debtor-ground lessor, and may assign to the mortgagee the debtor-ground
lessee's right to reject a lease pursuant to Section 365 of the Bankruptcy Code,
although the enforceability of this type of assignment has not been established.
An additional manner in which to obtain protection against the termination of
the ground lease is to have the ground lessor enter into a mortgage encumbering
the fee estate in addition to the mortgage encumbering the leasehold interest
under the ground lease, so if the ground lease is terminated, the mortgagee may
nonetheless possess rights contained in the fee mortgage. Without the
protections described in this paragraph, a leasehold mortgagee may be more
likely to lose the collateral securing its leasehold mortgage. No assurance can
be given that any or all of these protective provisions will be obtained in
connection with any particular Mortgage Loan.
BANKRUPTCY LAWS
Borrowers often file bankruptcy to delay or prevent exercise of
remedies under loan documents. Numerous statutory and common law provisions,
including the Bankruptcy Code and state laws affording relief to debtors, may
interfere with and delay the ability of a mortgagee to obtain payment of the
loan, to realize upon collateral and/or to enforce a deficiency judgment. For
example, under the Bankruptcy Code virtually all actions (including foreclosure
actions and deficiency judgment proceedings) are automatically stayed upon the
filing of the bankruptcy petition and often no interest or principal payments
are made during the course of the bankruptcy proceeding (although "adequate
protection" payments for anticipated diminution, if any, in the value of the
mortgaged property may be made). The delay and consequences caused by an
automatic stay can be significant. A particular borrower may become subject to
the Bankruptcy Code either by voluntary or involuntary petition or by virtue of
the doctrine of "substantive consolidation" by an affiliate of the borrower
becoming a debtor under the Bankruptcy Code. Additionally, the filing of a
petition in bankruptcy by or on behalf of a junior lienor or junior mortgagee
may stay the senior mortgagee from taking action to foreclose out the junior
lien.
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Under the Bankruptcy Code, provided substantive and procedural
safeguards for the mortgagee are met, the amount and terms of a mortgage or deed
of trust secured by property of the debtor may be modified under some
circumstances. The outstanding amount of the loan secured by the real property
may be reduced to the then current value of the property (with a corresponding
partial reduction of the amount of the mortgagee's security interest), thus
leaving the mortgagee a general unsecured creditor for the difference between
the then current value and the outstanding balance of the loan. Other
modifications may include the reduction in the amount of each monthly payment,
which reduction may result from a reduction in the rate of interest and/or the
alteration of the repayment schedule (with or without affecting the unpaid
principal balance of the loan) and/or an extension (or acceleration) of the
final maturity date. Some bankruptcy courts have approved plans, based on the
particular facts of the reorganization case before them, that affected the
curing of a mortgage loan default by paying arrearages over a number of years. A
bankruptcy court may also permit a debtor to de-accelerate a secured loan and to
reinstate the loan even though the mortgagee had accelerated the loan and final
judgment of foreclosure had been entered in state court (provided no sale of the
property had yet occurred) before the filing of the debtor's petition, even if
the full amount due under the original loan is never repaid. Other types of
significant modifications to the terms of the mortgage may be acceptable to the
bankruptcy court, often depending on the particular facts and circumstances of
the specific case.
Federal bankruptcy law may interfere with or affect the ability of a
mortgagee to enforce an assignment of rents and leases or a security interest in
hotel revenues related to the mortgaged property. In connection with a
bankruptcy proceeding involving a borrower, Section 362 of the Bankruptcy Code
automatically stays any attempts by the mortgagee to enforce any assignment of
rents and leases or security interest. The legal proceedings necessary to
resolve a situation like that can be time-consuming and may result in
significant delays in the receipt of the rents or hotel revenues. Rents or hotel
revenues may also be lost:
(1) if the assignment or security interest is not fully documented
or perfected under state law before commencement of the
bankruptcy proceeding;
(2) to the extent rents or hotel revenues are used by the borrower
to maintain the mortgaged property or for other court
authorized expenses;
(3) to the extent other collateral may be substituted for the
rents or hotel revenues; and
(4) if the bankruptcy court determines that it is necessary or
appropriate "based on the equities of the case."
To the extent a borrower's ability to make payment on a mortgage loan
is dependent on payments under a lease of the related property, the borrower's
ability may be impaired by the commencement of a bankruptcy proceeding relating
to the lessee under the lease. Under the Bankruptcy Code, the filing of a
petition in bankruptcy by or on behalf of a lessee results in an automatic stay
barring 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 before the filing of the lessee's
petition.
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In addition, the Bankruptcy Code generally provides that a bankruptcy
trustee or debtor in possession may, subject to approval of the bankruptcy
court, either (1) assume the lease and retain it or assign it to a third party
or (2) reject the lease. If the lease is assumed, the bankruptcy trustee or
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. Those remedies may be insufficient,
however, as the lessor may be forced to continue under the lease with a lessee
that is a poor credit risk or an unfamiliar tenant if the lease was assigned,
and any assurances provided to the lessor may, in fact, be inadequate. There may
be a significant period of time between the date that a lessee files a
bankruptcy petition and the date that the lease is assumed or rejected. Although
the lessee is obligated to make all lease payments currently with respect to the
post-petition period, there is a risk that payments will not be made due to the
lessee's poor financial condition. If the lease is rejected, the lessor will be
treated as an unsecured creditor with respect to its claim for damages for
termination of the lease, and the lessor must relet the mortgaged property
before the flow of lease payments will recommence. In addition, pursuant to
Section 502(b)(6) of the Bankruptcy Code, a lessor's damages for lease rejection
are limited.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery, as a preferential transfer, of some payments made by the borrower
under the related Mortgage Loan to the Trust Fund. Payments on long-term debt
may be protected from recovery as preferences if they are payments in the
ordinary course of business made on debts incurred in the ordinary course of
business. Whether any particular payment would be protected depends upon the
facts specific to a particular transaction. If a Mortgage Loan includes any
guaranty, and the guaranty waives any rights of subrogation or contribution,
then some payments by the guarantor to the Trust Fund also may be avoided and
recovered as fraudulent conveyances.
A trustee in bankruptcy or a debtor in possession or various creditors
who extend credit after a case is filed may be entitled to collect costs and
expenses in preserving or selling the mortgaged property ahead of payment to the
mortgagee. In some circumstances, a trustee in bankruptcy or debtor in
possession may have the power to grant liens senior to or of equal priority with
the lien of a mortgage, and analogous state statutes and general principles of
equity may also provide a borrower with means to halt a foreclosure proceeding
or sale and enforce a restructuring of a mortgage loan on terms a mortgagee
would not otherwise accept.
A trustee in bankruptcy or a debtor in possession also may be entitled
to subordinate the lien created by the mortgage loan to other liens or the
claims of general unsecured creditors. Generally, this requires proof of
"unequitable conduct" by the mortgagee. However, various courts have expanded
the grounds for equitable subordination to apply to various non-pecuniary claims
for items such as penalties and fines. A court may find that any prepayment
charge, various late payment charges and other claims by mortgagees may be
subject to equitable subordination on these grounds.
A trustee in bankruptcy or a debtor in possession also may be entitled
to avoid all or part of any claim or lien by the mortgagee if and to the extent
a judgment creditor or a bona fide purchaser of real estate could have done so
outside of bankruptcy. Generally, in circumstances involving some defect in the
language, execution or recording of the mortgage loan documents.
BANKRUPTCY CONSIDERATIONS RELATING TO THE DEPOSITOR
The Depositor will warrant in the Pooling and Servicing Agreement that
the sale of the Mortgage Loans by it to the Trust Fund is a valid sale.
Notwithstanding the foregoing, if the Depositor were to become a debtor in a
bankruptcy case a court could take the position that the sale of the Mortgage
Loans to the Trust Fund should instead be treated as a pledge of the Mortgage
Loans to secure a borrowing of such debtor. If a court were to reach those
conclusions, or a filing were made under the United States Bankruptcy Code or
similar applicable state laws by or against the Depositor, or if an attempt were
made to litigate any of the foregoing issues, delays in payments on the
Certificates (and possible reductions in the amount of such payments) could
occur. In addition, if the transfer of the Mortgage Loans to the Trust Fund is
treated as a pledge instead of a sale, a tax or government lien on the property
of the Depositor arising before the transfer of any Mortgage Loan to the Trust
Fund may have priority over the Trust Fund's interest in that Mortgage Loan.
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In addition, cash collections on the Mortgage Loans may be commingled
with the funds of the Master Servicer and, in the event of the bankruptcy of the
Master Servicer, the Trust Fund may not have a perfected interest in those cash
collections.
ENVIRONMENTAL RISKS
Real property pledged as security to a mortgagee may be subject to
environmental risks arising from the presence of hazardous materials on, under,
adjacent to, or in that property. The environmental condition of mortgaged
properties may be affected by the actions and operations of tenants and
occupants of the properties. Mortgaged properties that are, or have been, the
site of manufacturing, industrial or disposal activity or have been built with
or contain asbestos-containing material or other indoor pollutants pose
particular concerns. In addition, current and future environmental laws,
ordinances or regulations, including new requirements developed by federal
agencies pursuant to the mandates of the Clean Air Act Amendments of 1990, may
impose additional compliance obligations on business operations that can be met
only by significant capital expenditures.
A mortgagee may be exposed to risks related to environmental conditions
including:
(1) a diminution in the value of a mortgaged property;
(2) potential default on a mortgage loan due to the borrower's
inability to pay high remediation costs or difficulty in
bringing its operations into compliance with environmental
laws;
(3) in some circumstances as more fully described below, liability
for clean-up costs or other remedial actions which could
exceed the value of the mortgaged property or the unpaid
balance of the related mortgage loan; or
(4) the inability to sell the related Mortgage Loan in the
secondary market. In some circumstances, a mortgagee may
choose not to foreclose on contaminated property rather than
risk incurring liability for remedial actions.
A mortgagee 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), which may
decrease the amount that prospective buyers are willing to pay for the affected
property, sometimes substantially, and would as a result decrease the ability of
the mortgagee to recoup its investment in a loan upon foreclosure.
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In some states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a mortgagee
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.
Under federal law and the laws of some states, the owner's failure to
perform remedial actions required under environmental laws may in some
circumstances give rise to a lien on the mortgaged property to ensure the
reimbursement of remedial costs incurred by federal and state regulatory
agencies. In several states this lien has priority over the lien of an existing
mortgage against the property. Since the costs of remedial action could be
substantial, the value of a mortgaged property as collateral for a mortgage loan
could be adversely affected by the existence of an environmental condition
giving rise to a lien.
CERCLA AND RELATED LAWS
Under some circumstances, it is possible that environmental cleanup
costs, or the obligation to take remedial actions, can be imposed on a mortgagee
such as the Trust Fund with respect to each series. Under the laws of some
states and under CERCLA, strict liability may be imposed on present and past
"owners" and "operators" of contaminated real property for the costs of
clean-up. Liability under many of these federal and state laws may exist even if
the mortgagee did not cause or contribute to the contamination and regardless of
whether the mortgagee has actually taken possession of a mortgaged property
through foreclosure, deed in lieu of foreclosure or otherwise. Moreover,
liability described above is not limited to the original or unamortized
principal balance of a loan or to the value of the property securing a loan.
CERCLA's definition of "owner" or "operator" excludes persons "who
without participating in the management of the facility, holds indicia of
ownership primarily to protect his security interest". This is known as the
"secured creditor exemption." The Lender Liability Act clarifies CERCLA's
secured creditor exemption. Under the Lender Liability Act, a secured lender who
is " participating in management" by exercising control over operational aspects
of the facility will be liable, but a number of environmentally related
activities before the loan is made and during its pendency as well as "workout"
steps to protect a security interest are not construed as participating in
management and will not trigger liability. The Lender Liability Act also
identifies the circumstances in which foreclosure and post-closure activities
will not trigger CERCLA liability. The Lender Liability Act also amends the
Solid Waste Disposal Act to limit the liability of lenders holding a security
interest for costs of cleaning up contamination from underground storage tanks.
However, the Lender Liability Act has no effect on state environmental laws
similar to CERCLA that may not provide a secured creditor exemption.
CERCLA's "innocent landowner" defense to strict liability may be
available to a mortgagee that has taken title to a mortgaged property and has
performed an appropriate environmental site assessment that does not disclose
existing contamination and meets other requirements of the defense. However, it
is unclear whether the environmental site assessment must be conducted upon loan
origination, before foreclosure or both, and uncertainty exists as to what kind
of environmental site assessment must be performed to qualify for the defense.
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Beyond statute-based environmental liability, hazardous environmental
conditions on a property may also be subject to common law causes of action (for
example, causes of actions arising from death, personal injury or damage to
property). Although it may be more difficult to hold a mortgagee liable in those
cases, unanticipated or uninsured liabilities of the borrower may jeopardize the
borrower's ability to meet its loan obligations. At the time the Mortgage Loans
were originated, it is possible that no environmental assessment or a very
limited environmental assessment of the Mortgaged Properties was conducted.
The related Pooling and Servicing Agreement contains provisions
restricting the ability of the Master Servicer or the Special Servicer, if any,
to acquire title to any Mortgaged Property or take over its operation unless a
satisfactory phase I or other specified environmental assessment has been
obtained. Enforcement of the security for the related Note is precluded until a
satisfactory environmental assessment is obtained and/or any required remedial
action is taken. This requirement will reduce the likelihood that a given Trust
Fund will become liable for any environmental conditions affecting a Mortgaged
Property, but will make it more difficult to realize on the security for the
Mortgage Loan. There can be no assurance that any environmental assessment
obtained by the Master Servicer or the Special Servicer, if any, will detect all
possible environmental conditions or that the other requirements of the Pooling
and Servicing Agreement, even if fully observed by the Master Servicer or the
Special Servicer, if any, will in fact insulate a given Trust Fund from
liability for environmental conditions.
If a mortgagee is or becomes liable for clean-up costs, it may bring an
action for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but those persons or entities may be
without substantial assets, bankrupt or otherwise judgment proof. Furthermore,
an action against the borrower may be adversely affected by the limitations on
recourse in the loan documents. Similarly, in some states anti-deficiency
legislation and other statutes requiring the mortgagee to exhaust its security
before bringing a personal action against the borrower (see "Anti-Deficiency
Legislation" above) may curtail the mortgagee's ability to recover from its
borrower the environmental clean-up and other related costs and liabilities
incurred by the mortgagee. Accordingly, it is possible that these costs could
become a liability of the Trust Fund and become a loss to the
Certificateholders. Shortfalls occurring as the result of imposition of any
clean-up costs will be addressed in the prospectus supplement and Pooling and
Servicing Agreement for the related series.
OTHER ENVIRONMENTAL RISKS
Other environmental laws may affect the value of a mortgaged property,
or impose cleanup costs or liabilities, including those related to asbestos,
radon, lead paint and underground storage tanks.
Some federal, state and local laws, regulations and ordinances govern
the handling of ACMs in the event of the remodeling, renovation or demolition of
a building. These laws, as well as common law standards, may impose liability
for releases of ACMs and may allow third parties to seek recovery from owners or
operators of real properties for personal injuries associated with those
releases. In addition, federal law requires that building owners inspect their
facilities for ACMs and presumed ACMs (consisting of thermal system insulation,
surfacing materials and asphalt and vinyl flooring in buildings constructed
before 1981) and transfer all information regarding ACMs and presumed ACMs in
their facilities to successive owners.
The EPA has concluded that radon gas, a naturally occurring substance,
is linked to increased risks of lung cancer. Although there are no current
federal or state requirements mandating radon gas testing, the EPA and the
United States Surgeon General recommend testing residences for the presence of
radon and that abatement measures be undertaken if radon concentrations in
indoor air meet or exceed specified limits.
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The Lead Paint Act requires federal agencies to promulgate regulations
that will require owners of residential housing constructed before 1978 to
disclose to potential residents or purchasers any known lead-paint hazards. The
Lead Paint Act creates a private right of action with treble damages available
for any failure to so notify. Federal agencies have issued regulations
delineating the scope of this disclosure obligation which became effective in
September of 1996 for owners of more than four residential dwellings and in
December of 1996 for owners of one to four residential dwellings. In addition,
the ingestion of lead-based paint chips or dust particles by children can result
in lead poisoning, and the owner of a property where those circumstances exist
may be held liable for those injuries. Finally, federal law mandates that
detailed worker safety standards must be complied with where construction,
alteration, repair or renovation of structures that contain lead, or materials
that contain lead, is contemplated.
Underground storage tanks are, and in the past have been, frequently
located at properties used for industrial, retail and other business purposes.
Federal law, as well as the laws of most states, currently require underground
storage tanks used for the storage of fuel or hazardous substances and waste to
meet standards designed to prevent releases from the underground storage tanks
into the environment. Underground storage tanks installed before the
implementation of these standards, or that otherwise do not meet these
standards, are potential sources of contamination to the soil and groundwater.
Land owners may be liable for the costs of investigating and remediating soil
and groundwater contamination that may emanate from leaking underground storage
tanks.
ENFORCEABILITY OF MATERIAL PROVISIONS
Default Interest; Late Charges; and Prepayment Fees.
Some of the Mortgage Loans may contain provisions requiring the
borrower to pay late charges or additional interest if required payments are not
made on time. In some states there may be limitations upon the enforceability of
these provisions, and no assurance can be given that any of these provisions in
any Mortgage Loan will be enforceable. Some of the Mortgage Loans may also
contain provisions prohibiting any prepayment of the loan prior to maturity or
requiring the payment of a prepayment fee in connection with any prepayment.
Even if enforceable, a requirement for prepayment fees may not deter borrowers
from prepaying their Mortgage Loans. Although some states will allow the
enforcement of these provisions upon a voluntary prepayment of a mortgage loan,
other states may not allow these provisions after a mortgage loan has been
outstanding for a specified number of years or if enforcement would be
unconscionable, or the allowed amount of any prepayment fee may be limited (that
is, to a specified percentage of the original principal amount of the mortgage
loan, to a specified percentage of the outstanding principal balance of a
mortgage loan or to a fixed number of months' interest on the prepaid amount).
In some states there may be limitations upon the enforceability of prepayment
fee provisions applicable in connection with a default by the borrower or an
involuntary acceleration of the secured indebtedness, and no assurance can be
given that any of these provisions related to a mortgage loan will be
enforceable under those circumstances. The applicable laws of some states may
also treat some prepayment fees as usurious if in excess of statutory limits.
See "Applicability of Usury Laws."
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Due-on-Sale Provisions.
The enforceability of due-on-sale provisions has been the subject of
legislation or litigation in many states, and their enforceability has been
limited or denied in some cases, usually involving single family residential
mortgage transactions. Due-on-sale provisions typically provide that: (1) the
mortgage loan will (or may at the mortgagee's option) become due and payable
upon the sale or other transfer of an interest in the related mortgaged property
or (2) the mortgage loan may not be assumed without the consent of the related
mortgagee in connection with any sale or other transfer. The Garn-St. Germain
Act preempts state constitutional, statutory and case law that prohibits
due-on-sale clauses. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their right to
regulate these clauses with respect to mortgage loans that were: (1) originated
or assumed during the "window period" under the Garn-St. Germain Act, which
ended in all cases not later than October 15, 1982; and (2) originated by
lenders other than national banks, federal savings institutions or federal
credit unions.
The Federal Home Loan Mortgage Corporation has taken the position in
its published mortgage servicing standards that, out of a total of eleven
"window period states," five states (Arizona, Michigan, Minnesota, New Mexico
and Utah) have enacted statutes extending, on various terms and for varying
periods, the prohibition of due-on-sale clauses with respect to one or more
categories of loans that were originated or assumed during the "window period"
applicable to that state. Also, the Garn-St. Germain Act does "encourage"
lenders to permit assumption of loans at the original rate of interest or at
some other rate less than the average of the original rate and the market rates.
The Pooling and Servicing Agreement for each series generally will
provide that if any Mortgage Loan contains a provision in the nature of a
"Due-on-Sale" clause, then for so long as the Mortgage Loan is included in the
Trust Fund, the Master Servicer or the Special Servicer, if any, on behalf of
the Trustee, will take the actions it deems to be in the best interest of the
Trust Fund in accordance with the servicing standard set forth in the Pooling
and Servicing Agreement, and may waive or enforce any due-on-sale clause
contained in the related Note or Mortgage.
In addition, under the Bankruptcy Code, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under some circumstances, be
eliminated in any modified mortgage resulting from that bankruptcy proceeding.
Acceleration on Default.
It is expected that the Mortgage Loans will include a
"Debt-Acceleration" clause, which permits the mortgagee to accelerate the full
debt upon a monetary or nonmonetary default of the borrower. The courts of all
states will enforce acceleration clauses in the event of a material payment
default if appropriate notices of default have been effectively given. However,
the equity courts of any state may refuse to foreclose a mortgage when an
acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable. Furthermore, in some
states, the borrower may avoid foreclosure and reinstate an accelerated loan by
paying only the defaulted amounts and, in other states, the defaulted amounts
plus the costs and attorneys' fees incurred by the mortgagee in collecting the
defaulted payments.
State courts are also known to apply various legal and equitable
principles to avoid enforcement of the forfeiture provisions of Installment
Contracts. For example, a mortgagee's practice of accepting late payments from
the borrower may be deemed a waiver of the forfeiture clause. State courts also
may impose equitable grace periods for payment of arrearages or otherwise permit
reinstatement of the Installment Contract following a default. Not infrequently,
if a borrower under an Installment Contract has significant equity in the
property, equitable principles will be applied to reform or reinstate the
Installment Contract or to permit the borrower to share the proceeds upon a
foreclosure sale of the property if the sale price exceeds the debt.
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SOLDIERS' AND SAILORS' RELIEF ACT
Under the terms of the Relief Act, unless a mortgagee obtains a court
order to the contrary, a borrower who enters military service after the
origination of the borrower's 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. For purposes of the Relief Act, persons entered
into military service include members of the Army, Navy, Air Force, Marines,
Coast Guard, members of the National Guard or any Reserves who are called to
active duty status after the origination of their mortgage loan, and officers of
the U.S. Public Health Service assigned to duty with the military. Any shortfall
in interest collections resulting from the application of the Relief Act, to the
extent not covered by any applicable Credit Enhancement, could result in losses
to the certificateholders. In addition, the Relief Act imposes limitations that
would impair the ability of the Master Servicer or the Special Servicer, if any,
to foreclose on an affected Mortgage Loan during the borrower's period of active
duty status and, under some circumstances, during an additional three months
thereafter. Thus, if the affected Mortgage Loan goes into default, there may be
delays and losses occasioned by the inability to foreclose the Mortgaged
Property in a timely fashion. Because the Relief Act applies to borrowers who
enter military service (including reservists who are later called to active
duty) after origination of their mortgage loan, no information can be provided
as to the number of Mortgage Loans that may be affected by the Relief Act. The
Relief Act may also be applicable if the borrower is an entity owned or
controlled by a person in a military service.
APPLICABILITY OF USURY LAWS
State and federal usury laws limit the interest that mortgagees are
entitled to receive on a mortgage loan. In determining whether a given
transaction is usurious, courts may include charges in the form of "points" and
"fees" in the determination of the "interest" charged in connection with a loan.
If the amount charged for the use of the money loaned is found to exceed a
statutorily established maximum rate, the form employed and the degree of
overcharge are both immaterial.
Statutes differ in their provision as to the consequences of a usurious
loan. One type of statute requires the mortgagee to forfeit the interest above
the applicable limit or imposes a specified penalty. For example, the borrower
may have the recorded mortgage or deed of trust canceled upon paying its debt
with lawful interest, or the mortgagee may foreclose, but only for the debt plus
lawful interest, in either case, subject to any applicable credit for excessive
interest collected from the borrower and any penalty owed by the mortgagee. A
second, more severe type of statute results in the invalidation of the
transaction. Under this second type of statute, the borrower may have the
recorded mortgage or deed of trust canceled without any payment and the
mortgagee is prohibited from foreclosing.
Under Title V of the federal Depository Institutions Deregulation and
Monetary Control Act of 1980, as amended , some types of residential (including
multifamily, but not other commercial) first mortgage loans may be exempted from
state usury limitations. However, until April 1, 1983, states were allowed to
adopt laws or constitutional provisions expressly rejecting Title V and even
where Title V is not so rejected, any state is authorized to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Some states have rejected Title V and/or taken action to limit discount points
or other charges.
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ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans, originated by nonfederally chartered lenders have historically been
subjected to a variety of restrictions. These restrictions differed from state
to state, resulting in difficulties determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially with
respect to residential (including multifamily, but not other commercial)
mortgage loans as a result of the enactment of Title VIII of the Garn-St.
Germain Act .
Title VIII provides that, notwithstanding any state law to the
contrary:
(1) state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the
[Comptroller of the Currency] with respect to origination of
alternative mortgage instruments by national banks;
(2) state-chartered credit unions may originate alternative
mortgage instruments in accordance with regulations
promulgated by the NCUA with respect to origination of
alternative mortgage instruments by federal credit unions; and
(3) all other nonfederally chartered housing creditors, including
state-chartered savings and loan associations, state chartered
savings banks and mortgage banking companies may originate
alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board
(now the Office, of Thrift Supervision) with respect to
origination of alternative mortgage instruments by federal
savings and loan associations.
Title VIII authorized any state to reject applicability of the
provisions of Title VIII by adopting, before October 15, 1985, a law or
constitutional provision expressly rejecting the applicability of those
provisions. Some states have taken that action. A mortgagee's failure to comply
with the applicable federal regulations in connection with the origination of an
alternative mortgage instrument could subject that mortgage loan to state
restrictions that would not otherwise be applicable.
LEASES AND RENTS
Some of the Mortgage Loans may be secured by an assignment of leases
and rents, either through assignment provisions incorporated in the mortgage,
through a separate assignment document or both. Under an assignment of leases
and rents, the borrower typically assigns to the mortgagee the borrower's right,
title and interest as landlord under each lease and the income derived from that
lease, while retaining a right to collect the rents for so long as there is no
default under the mortgage loan documentation. Upon a default, the mortgagee may
be entitled to collect rents. However, a mortgagee's failure to take necessary
steps to "perfect" its interest in rents may result in the mortgagee's inability
to collect all or a portion of the rents. In order to "perfect" an interest in
rents, some state laws require not only proper recording of the assignment of
leases and rents, but also require the mortgagee to take possession of the
property and/or obtain judicial appointment of a receiver before the mortgagee
is entitled to collect rents. Mortgagees taking possession of property may incur
potentially substantial risks attendant to that possession, including liability
for environmental clean-up costs and other risks inherent to property ownership
and operation. In addition, if a bankruptcy or similar proceeding is commenced
by or in respect of the borrower, the mortgagee's ability to collect the rents
may also be adversely affected.
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SECONDARY FINANCING; DUE-ON-ENCUMBRANCE PROVISIONS
If a borrower encumbers a mortgaged property with one or more junior
liens, the senior mortgagee is subjected to additional risk, such as the
following:
(1) the borrower may have difficulty servicing and repaying
multiple loans and if the junior loan permits recourse to the
borrower and the senior loan does not, a borrower may be more
likely to repay sums due on the junior loan than those due on
the senior loan;
(2) acts of the senior mortgagee that prejudice the junior
mortgagee or impair the junior mortgagee's security may create
a superior equity in favor of the junior mortgagee (for
example, if the borrower and the senior mortgagee agree to an
increase in the principal amount of, or the interest rate
payable on, the senior loan, the senior mortgagee may lose its
priority to the extent an existing junior mortgagee is
prejudiced or the borrower is additionally burdened);
(3) 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 mortgagees can impair the security available to the
senior mortgagee and can interfere with, delay and in some
circumstances even prevent the taking of action by the senior
mortgagee; and
(4) the bankruptcy of a junior mortgagee may operate to stay
foreclosure or similar proceedings by the senior mortgagee.
Some of the Mortgage Loans may not restrict secondary financing,
permitting the borrower to use the Mortgaged Property as security for one or
more additional loans. Some of the Mortgage Loans may contain a
"Due-on-Encumbrance" clause which: (1) provides that the Mortgage Loan will (or
may at the mortgagee's option) become due and payable upon the creation of any
lien or other encumbrance on the related Mortgaged Property, or (2) requires the
consent of the related mortgagee to the creation of any the lien or other
encumbrance on the related Mortgaged Property. However, the "Due-on-Encumbrance"
clauses may be unenforceable in some jurisdictions under some circumstances.
The Pooling and Servicing Agreement for each series will generally
provide that if any Mortgage Loan contains a "Due-on-Encumbrance" clause, then
for so long as the Mortgage Loan is included in a given Trust Fund, the Master
Servicer, or the Special Servicer (if the Mortgage Loan is a Specially Serviced
Mortgage Loan), will, in a manner consistent with the servicing standard set
forth in the Pooling and Servicing Agreement, exercise (or decline to exercise)
any right it may have as the mortgagee of record with respect to the Mortgage
Loan to (1) accelerate the payments on the Mortgage Loan; or (2) withhold its
consent to the creation of any lien or other encumbrance.
TYPE OF MORTGAGED PROPERTY
A mortgagee may be subject to additional risk depending upon the type
and use of the mortgaged property in question. For instance, mortgaged
properties that are hospitals, nursing homes or convalescent homes may present
special risks to mortgagees in large part due to significant governmental
regulation of the ownership, operation, maintenance, control and financing of
health care institutions. Mortgages encumbering mortgaged properties that are
owned by the borrower under a condominium form of ownership are subject to the
declaration, by-laws and other rules and regulations of the condominium
association. Mortgaged properties that are hotels or motels may present
additional risk to the mortgagee because (1) hotels and motels are typically
operated pursuant to franchise, management and operating agreements that may be
terminable by the operator, and (2) the transferability of the hotel's
operating, liquor and other licenses to the entity acquiring the hotel either
through purchase or foreclosure is subject to the vagaries of local law
requirements. In addition, mortgaged properties that are multifamily residential
properties or cooperatively owned multifamily properties may be subject to rent
control laws, which could impact the future cash flows of those properties.
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CRIMINAL FORFEITURES
Various federal and state laws provide for the civil or criminal
forfeiture of property (including real estate) used or intended to be used to
commit or aid in the commission of illegal acts or property purchased with the
proceeds of those illegal acts. Even though these laws were originally intended
as tools to fight organized crime and drug related crimes, there is a current
trend toward expanding the scope of these laws. Some laws (such as the Racketeer
Influenced and Corrupt Organizations law and the Comprehensive Crime Control Act
of 1984) provide for notice, opportunity to be heard and for defenses for
"innocent lienholders." However, given the uncertain scope of these laws and
their relationship to existing constitutional protections afforded property
owners, no assurance can be made that enforcement of any law of this type with
respect to any Mortgaged Property would not deprive the Trust Fund of its
security for the related Mortgage Loan.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and
rules promulgated under those laws, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove structural, architectural and communication barriers
from existing places of public accommodation so that those modified
accommodations are accessible and usable by disabled individuals. Modifications
must be undertaken to the extent "readily achievable." The "readily achievable"
standard takes into account the financial resources of the affected site, owner,
landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, those
laws may also impose these requirements on a foreclosing mortgagee who succeeds
to the interest of the borrower as owner or landlord. Furthermore, since the "
readily achievable" standard may vary depending on the financial condition of
the owner or landlord, a foreclosing mortgagee who is financially more capable
than the borrower of complying with the requirements of those laws may be
subject to more stringent requirements than those to which the borrower is
subject.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
Certificates. This discussion does not address every aspect of the federal
income tax consequences that may be applicable to particular categories of
investors in light of their personal investment circumstances or their special
treatment under the federal income tax rules. The authorities on which this
discussion is based are subject to change or differing interpretations, possibly
retroactively. This discussion reflects the applicable provisions of the Code,
as well as the REMIC Regulations promulgated by the Treasury. Potential
investors should consult their own tax advisors regarding the tax treatment of
their acquisition, ownership and disposition of Certificates.
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FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
General. An election may be made with respect to a particular series of
Certificates, to treat the Trust Fund or one or more segregated pools of assets
in the Trust Fund as one or more REMICs within the meaning of Tax Code Section
860D. A Trust Fund or portion of the Trust Fund as to which a REMIC election is
made is referred to as a "REMIC Pool". For purposes of this discussion,
Certificates of a series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more classes of
"Regular Certificates" and one class of "Residual Certificates" for each REMIC
Pool. Qualification as a REMIC requires ongoing compliance with conditions
specified in the Tax Code.
With respect to each series of REMIC Certificates, O'Melveny & Myers
LLP, counsel to the Depositor, has advised the Depositor that in the firm's
opinion, assuming:
(1) the making of the REMIC election;
(2) compliance with the Pooling and Servicing Agreement; and
(3) compliance with any changes in the law, including any
amendments to the Tax Code or applicable Treasury regulations,
each REMIC Pool will qualify as a REMIC. In that case, the Regular Certificates
will be considered to be "regular interests" in the REMIC Pool and generally
will be treated for federal income tax purposes as newly originated debt
instruments, and the Residual Certificates will be considered to be "residual
interests" in the REMIC Pool. The prospectus supplement for each series of
Certificates will indicate whether any REMIC elections will be made with respect
to the related Trust Fund, in which event references to "REMIC" or "REMIC Pool"
in this prospectus will refer to each REMIC Pool specified in the applicable
prospectus supplement. If so specified in the applicable prospectus supplement,
the portion of a Trust Fund as to which a REMIC election is not made may be
treated as either a FASIT or as a grantor trust for federal income tax purposes.
See "Federal Income Tax Consequences for FASIT Certificates" and " Federal
Income Tax Consequences for Certificates as to Which No REMIC Election Is Made".
Status of REMIC Certificates. REMIC Certificates held by a domestic
building and loan association will constitute "a regular or residual interest in
a REMIC" within the meaning of Tax Code Section 7701(a)(19)(C)(xi), but only in
the same proportion that the assets of the REMIC Pool would be treated as
"loans...secured by an interest in real property which is...residential real
property" (such as single family or multifamily properties, but not commercial
properties) within the meaning of Tax Code Section 7701(a)(19)(C)(v) or as other
assets described in Tax Code Section 7701(a)(19)(C), and otherwise will not
qualify for REMIC treatment. REMIC Certificates held by a real estate investment
trust will constitute "real estate assets" within the meaning of Tax Code
Section 856(c)(4)(A), and interest on the Regular Certificates and income with
respect to Residual Certificates will be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Tax Code Section 856(c)(3)(B) in the same proportion that the
assets of the REMIC Pool would be so treated. If at all times 95% or more of the
assets of the REMIC Pool qualify for each of the foregoing treatments, the REMIC
Certificates will qualify for the corresponding status in their entirety. For
purposes of Tax Code Section 856(c)(4)(A), payments of principal and interest on
the Mortgage Loans that are reinvested pending distribution to holders of REMIC
Certificates qualify for REMIC treatment. Where two REMIC Pools are a part of a
tiered structure they will be treated as one REMIC for purposes of the tests
described above respecting asset ownership of more or less than 95%. REMIC
Certificates held by a regulated investment company will not constitute
"Government Securities" within the meaning of Tax Code Section 851(b)(3)(A)(i).
REMIC Certificates held by some financial institutions will constitute an
"evidence of indebtedness" within the meaning of Tax Code Section 582(c)(1). The
Small Business Job Protection Act of 1996 repealed the reserve method for bad
debts of domestic building and loan associations and mutual savings banks, and
eliminated the asset category of "qualifying real property loans" in former Tax
Code Section 593(d) for taxable years beginning after December 31, 1995. The
requirement in the Small Business Job Protection Act of 1996 that those
institutions must "recapture" a portion of their existing bad debt reserves is
suspended if a specified portion of their assets are maintained in "residential
loans" under Tax Code Section 7701(a)(19)(C)(v), but only if those loans were
made to acquire, construct or improve the related real property and not for the
purpose of refinancing. No effort will be made to identify the portion of the
Mortgage Loans of any series meeting this requirement, and no representation is
made in this regard.
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Qualification as a REMIC. The REMIC Pool must comply with ongoing
requirements set forth in the Tax Code in order for the REMIC Pool to qualify as
a REMIC. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool may consist of assets
other than "qualified mortgages" and "permitted investments", beginning the
close of the third calendar month after the "Startup Day" (which for purposes of
this discussion is the date of issuance of the REMIC Certificates) and at all
times thereafter. The REMIC Regulations provide a safe harbor for the asset test
if at all times the aggregate adjusted basis of the nonqualified assets is less
than 1% of the aggregate adjusted basis of all the REMIC Pool's assets. An
entity that fails to meet the safe harbor may nevertheless demonstrate that it
holds no more than a de minimis amount of nonqualified assets. A REMIC also must
provide "reasonable arrangements" to prevent its residual interest from being
held by "disqualified organizations" and must furnish applicable tax information
to transferors or agents that violate this requirement. The Pooling and
Servicing Agreement for each series will contain a provision designed to meet
this requirement. See "Taxation of Residual Certificates-Tax-Related
Restrictions on Transfer of Residual Certificates-Disqualified Organizations".
A qualified mortgage is any obligation principally secured by an
interest in real property and either transferred to the REMIC Pool on the
Startup Day in exchange for Regular Certificates or Residual Certificates or
purchased by the REMIC Pool within a three-month period thereafter pursuant to a
fixed price contract in effect on the Startup Day. Qualified mortgages include
whole mortgage loans, such as the Mortgage Loans, certificates of beneficial
interest in a grantor trust that holds mortgage loans, regular interests in
another REMIC, loans secured by timeshare interests and loans secured by shares
held by a tenant stockholder in a cooperative housing corporation, provided
that, in general, (1) the fair market value of the real property securing the
mortgage (including buildings and structural components of buildings) is at
least 80% of the principal balance of the related Mortgage Loan or underlying
mortgage loan either at origination of the relevant loan or as of the Startup
Day (an original loan-to-value ratio of not more than 125% with respect to the
real property securing the mortgage) or (2) substantially all the proceeds of
the Mortgage Loan or the underlying mortgage loan were used to acquire, improve
or protect an interest in real property that, at the origination date, was the
only security for the Mortgage Loan or underlying mortgage loan.
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If the Mortgage Loan has been substantially modified other than in
connection with a default or reasonably foreseeable default, it must meet the
loan-to-value test in (1) of the preceding sentence as of the date of the last
modification or at closing. A qualified mortgage includes a qualified
replacement mortgage, which is any property that would have been treated as a
qualified mortgage if it were transferred to the REMIC Pool on the Startup Day
and that is received either (a) in exchange for any qualified mortgage within a
three-month period thereafter or (b) in exchange for a "defective obligation"
within a two-year period thereafter.
A "defective obligation" includes the following:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or warranty
made at the time of transfer to the REMIC Pool has been
breached;
(3) a mortgage that was fraudulently procured by the borrower; and
(4) a mortgage that was not in fact principally secured by real
property (but only if that mortgage is disposed of within 90
days of discovery).
A Mortgage Loan that is "defective" as described in the last clause
above that is not sold or, if within two years of the Startup Day, exchanged,
within 90 days of discovery, ceases to be a qualified mortgage after the 90-day
period. A qualified mortgage also includes any regular interest in a FASIT
transferred to the REMIC Pool on the Startup Day in exchange for Regular
Certificates or Residual Certificates, or purchased by the REMIC Pool within
three months after the Startup Day pursuant to a fixed price contract in effect
on the Startup Day, provided that at least 95% of the value of the FASIT assets
is at all times attributable to obligations principally secured by interests in
real property and which are transferred to or purchased by a REMIC as provided
in this sentence.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until distributed to holders of interests in the REMIC Pool. A qualified reserve
asset is any intangible property (other than a REMIC residual interest) held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for payments of expenses of the REMIC Pool or amounts due
on the regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and other contingencies. The reserve
fund will be disqualified if more than 30% of the gross income from the assets
in the reserve fund for the year is derived from the sale or other disposition
of property held for less than three months, unless required to prevent a
default on the regular interests caused by a default on one or more qualified
mortgages. A reserve fund must be reduced "promptly and appropriately" as
payments on the Mortgage Loans are received. Foreclosure property is real
property acquired by the REMIC Pool in connection with the default or imminent
default of a qualified mortgage and generally not held beyond the close of the
third taxable year following the acquisition of the property by REMIC Pool ,
with possible extensions granted by the Service of up to an additional three
years.
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In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet other requirements. All of the interests in a REMIC
Pool must be either: (1) one or more classes of regular interests or (2) a
single class of residual interests on which distributions are made pro rata. A
regular interest is an interest in a REMIC Pool that is issued on the Startup
Day with fixed terms, is designated as a regular interest, unconditionally
entitles the holder to receive a specified principal amount (or other similar
amount), and 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, or consist of a specified, nonvarying portion of the interest
payments on qualified mortgages. The specified principal amount may consist of a
fixed number of basis points, a fixed percentage of the total interest, or a
fixed or qualified variable or inverse variable rate on some or all of the
qualified mortgages minus a different fixed or qualified variable rate. The
specified principal amount of a regular interest that provides for interest
payments consisting of a specified, nonvarying portion of interest payments on
qualified mortgages may be zero. A residual interest is an interest in a REMIC
Pool other than a regular interest that is issued on the Startup Day and that is
designated as a residual interest. An interest in a REMIC Pool 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 residual interest
in the REMIC Pool, and are dependent on the absence of defaults or delinquencies
on qualified mortgages or permitted investments, lower than reasonably expected
returns on permitted investments, unanticipated expenses incurred by the REMIC
Pool or prepayment interest shortfalls. Accordingly, the Regular Certificates of
a series will constitute one or more classes of regular interests, and the
Residual Certificates with respect to that series will constitute a single class
of residual interests on which distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more
of the ongoing requirements of the Tax Code for REMIC status during any taxable
year, the Tax Code provides that the entity will not be treated as a REMIC for
that year and thereafter. In this event, an entity with multiple classes of
ownership interests may be treated as a separate association taxable as a
corporation under Treasury regulations, and the Regular Certificates may be
treated as equity interests in those corporations. The Tax Code, however,
authorizes the Treasury Department to issue regulations that address situations
where failure to meet one or more of the requirements for REMIC status occurs
inadvertently and in good faith, and disqualification of the REMIC Pool would
occur absent regulatory relief. Investors should be aware, however, that the
Conference Committee Report to the 1986 Act indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
GENERAL
In general, interest, original issue discount and market discount on a
Regular Certificate will be treated as ordinary income to a Regular
Certificateholder as they accrue, and principal payments on a Regular
Certificate will be treated as a return of capital to the extent of the Regular
Certificateholder's basis in the Regular Certificate. Regular Certificateholders
must use the accrual method of accounting with regard to Regular Certificates,
regardless of the method of accounting otherwise used by those Regular
Certificateholders.
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ORIGINAL ISSUE DISCOUNT
Compound Interest Certificates will be, and other classes of Regular
Certificates may be, issued with "original issue discount" within the meaning of
Tax Code Section 1273(a). Holders of any class of Regular Certificates having
original issue discount generally must include original issue discount in
ordinary income for federal income tax purposes as it accrues, in accordance
with the constant yield method that takes into account the compounding of
interest in advance of receipt of the cash attributable to that income. The
following discussion is based in part on the OID Regulations under Tax Code
Sections 1271 through 1273 and 1275 and in part on the provisions of the 1986
Act. Regular Certificateholders should be aware that the OID Regulations do not
adequately address some of the issues relevant to prepayable securities, such as
the Regular Certificates, and to the extent these issues are not addressed in
the regulations, the Depositor intends to apply the methodology described in the
Conference Committee Report to the 1986 Act. No assurance can be provided that
the Service will not take a different position as to those matters not currently
addressed by the OID Regulations. Moreover, the OID Regulations include an
anti-abuse rule allowing the Service to apply or depart from the OID Regulations
where necessary or appropriate to ensure a reasonable tax result in light of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors regarding the appropriate method for reporting
interest and original issue discount with respect to the Regular Certificates.
Each Regular Certificate will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price". The issue price
of a class of Regular Certificates offered pursuant to this prospectus generally
is the first price at which a substantial amount of Regular Certificates of that
class is sold to the public (excluding bond houses, brokers and underwriters).
The Depositor intends to treat the issue price of a class as to which there is
no substantial sale as of the issue date or that is retained by the Depositor as
the fair market value of that class as of the issue date, although the situation
is unclear under the OID Regulations. The issue price of a Regular Certificate
also includes the amount paid by an initial Regular Certificateholder for
accrued interest that relates to a period prior to the issue date of the Regular
Certificate, unless the Regular Certificateholder elects on its federal income
tax return to exclude that amount from the issue price and to recover it on the
first Distribution Date. The stated redemption price at maturity of a Regular
Certificate always includes the original principal amount of the Regular
Certificate, but generally will not include distributions of stated interest if
the interest distributions constitute "qualified stated interest". Under the OID
Regulations, qualified stated interest generally means interest payable at a
single fixed rate or a qualified variable rate (as described below) provided
that the interest payments are unconditionally payable at intervals of one year
or less during the entire term of the Regular Certificate. It is possible that
no interest on any class of Regular Certificates will be treated as qualified
stated interest, because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Certificate. However, except as
provided below or in the applicable prospectus supplement, because the
underlying Mortgage Loans provide for remedies in the event of default, the
Depositor intends to treat interest with respect to the Regular Certificates as
qualified stated interest. Distributions of interest on a Compound Interest
Certificate, or on other Regular Certificates with respect to which deferred
interest will accrue, will not constitute qualified stated interest, in which
case the stated redemption price at maturity of those Regular Certificates
includes all distributions of interest as well as principal on the Regular
Certificates. Likewise, the Depositor intends to treat an "interest only" class,
or a class on which interest is substantially disproportionate to its principal
amount (a so-called "super-premium" class) as having no qualified stated
interest. In instances where the interval between the issue date and the first
Distribution Date on a Regular Certificate is shorter than the interval between
subsequent Distribution Dates, the interest attributable to the additional days
will be included in the stated redemption price at maturity.
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Under a de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if the original issue discount is less
than 0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For this
purpose, the weighted average maturity of the Regular Certificate is computed as
the sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until all distributions in
reduction of [principal] are scheduled to be made by a fraction, the numerator
of which is the amount of each distribution included in the stated redemption
price at maturity of the Regular Certificate and the denominator of which is the
stated redemption price at maturity of the Regular Certificate. The Conference
Committee Report to the 1986 Act provides that the schedule of those
distributions should be determined in accordance with the related Prepayment
Assumption and the anticipated reinvestment rate, if any, relating to the
Regular Certificates. The Prepayment Assumption with respect to a series of
Regular Certificates will be set forth in the applicable prospectus supplement.
Holders generally must report de minimis original issue discount pro rata as
principal payments are received, and that income will be capital gain if the
Regular Certificate is held as a capital asset. However, under the OID
Regulations, Regular Certificateholders may elect to accrue all de minimis
original issue discount as well as market discount and market premium under the
constant yield method. For more information, you should refer to the section in
this prospectus titled "Election to Treat All Interest Under the Constant Yield
Method."
A Regular Certificateholder generally must include in gross income for
any taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Certificate accrued during an accrual
period for each day on which it holds the Regular Certificate, including the
date of purchase but excluding the date of disposition. The Depositor will treat
the monthly period ending on the day before each Distribution Date as the
accrual period. With respect to each Regular Certificate, a calculation will be
made of the original issue discount that accrues during each successive full
accrual period (or shorter period from the date of original issue) that ends on
the day before the related Distribution Date on the Regular Certificate. The
Conference Committee Report to the 1986 Act states that the rate of accrual of
original issue discount is intended to be based on the Prepayment Assumption.
The original issue discount accruing in a full accrual period would be the
excess, if any, of (1) the sum of (a) the present value of all of the remaining
distributions to be made on the Regular Certificate as of the end of that
accrual period that are included in the Regular Certificate's stated redemption
price at maturity and (b) the distributions made on the Regular Certificate
during the accrual period that are included in the Regular Certificate's stated
redemption price at maturity, over (2) the adjusted issue price of the Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence is calculated
based on the following:
(1) the yield to maturity of the Regular Certificate at the issue
date;
(2) events (including actual prepayments) that have occurred prior
to the end of the accrual period; and
(3) the Prepayment Assumption.
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For these purposes, the adjusted issue price of a Regular Certificate
at the beginning of any accrual period equals the issue price of the Regular
Certificate, increased by the aggregate amount of original issue discount with
respect to the Regular Certificate that accrued in all prior accrual periods and
reduced by the amount of distributions included in the Regular Certificate's
stated redemption price at maturity that were made on the Regular Certificate in
those prior periods. The original issue discount accruing during any accrual
period (as determined in this paragraph) will then be divided by the number of
days in the period to determine the daily portion of original issue discount for
each day in the period. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of original issue discount must be
determined according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to some classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to the Regular Certificates.
ACQUISITION PREMIUM
A purchaser of a Regular Certificate at a price greater than its
adjusted issue price but less than its stated redemption price at maturity will
be required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over its adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively a
subsequent purchaser may elect to treat all acquisition premium under the
constant yield method, as described below under the heading "Election to Treat
All Interest Under the Constant Yield Method".
VARIABLE RATE REGULAR CERTIFICATES
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate if,
generally, (1) the issue price does not exceed the original principal balance by
more than a specified de minimis amount; and (2) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates", (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate , or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate". A floating rate is a
qualified floating rate if variations in the rate can reasonably be expected to
measure contemporaneous variations in the cost of newly borrowed funds, or where
the rate is subject to a fixed multiple that is greater than 0.65, but not more
than 1.35. The rate may also be increased or decreased by a fixed spread or
subject to a fixed cap or floor, or a cap or floor that is not reasonably
expected as of the issue date to affect the yield of the instrument
significantly. Two or more qualified floating rates will be treated as a single
qualified floating rate if all the qualified floating rates can reasonably be
expected to have approximately the same values throughout the terms of the
instrument. This requirement will be conclusively presumed to be satisfied if
the values of the qualified floating rates are within 0.25% of each other on the
issue date. An objective rate (other than a qualified floating rate) is a rate
that is determined using a single fixed formula and that is based on objective
financial or economic information, provided that the information is not (1)
within the control of the issuer or a related party or (2) unique to the
circumstances of the issuer or a related party. A qualified inverse floating
rate is an objective rate that is equal to a fixed rate minus a qualified
floating rate that inversely reflects contemporaneous variations in the cost of
newly borrowed funds; an inverse floating rate that is not a qualified floating
rate may nevertheless be an objective rate. A class of Regular Certificates may
be issued that does not have a variable rate under the OID Regulations, for
example, a class that bears different rates at different times during the period
it is outstanding to the extent that it is considered significantly
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"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is
possible that that particular class may be considered to bear "contingent
interest" within the meaning of the OID Regulations. The OID Regulations, as
they relate to the treatment of contingent interest, are by their terms not
applicable to Regular Certificates. However, if final regulations dealing with
contingent interest with respect to Regular Certificates apply the same
principles as the OID Regulations, they may lead to different timing of income
inclusion than would be the case under the OID Regulations. Furthermore,
application of those principles could lead to the characterization of gain on
the sale of contingent interest Regular Certificates as ordinary income.
Investors should consult their tax advisors regarding the appropriate treatment
of any Regular Certificate that does not pay interest at a fixed rate or
variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate qualifies as a
regular interest in a REMIC if: (1) it bears interest at a rate that qualifies
as a qualified floating rate under the OID Regulations and that is set at a
current value (or the highest, lowest or average of two or more qualified
floating rates), including a rate based on the average cost of funds of one or
more financial institutions, or a positive or negative multiple of that rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans which bear
interest at a fixed rate or at a qualifying variable rate under the REMIC
Regulations, including a rate that is subject to one or more caps or floors, or
(2) it bears one or more qualifying variable rates for one or more periods or
one or more fixed rates for one or more periods, and a different variable rate
or fixed rate for other periods. Accordingly, unless otherwise indicated in the
applicable prospectus supplement, the Depositor intends to treat Regular
Certificates that qualify as regular interests under this rule in the same
manner as obligations bearing a variable rate for original issue discount
reporting purposes.
The amount of original issue discount with respect to a Regular
Certificate bearing a variable rate of interest will accrue in the manner
described above under "Original Issue Discount" with the yield to maturity and
future payments on the Regular Certificate generally to be determined by
assuming that interest will be payable for the life of the Regular Certificate
based on the initial rate (or, if different, the value of the applicable
variable rate as of the pricing date) for the relevant class. Unless otherwise
specified in the applicable prospectus supplement, the Depositor intends to
treat that variable interest as qualified stated interest, other than variable
interest on an interest-only or super-premium class, which will be treated as
non-qualified stated interest includible in the stated redemption price at
maturity. Ordinary income reportable for any period will be adjusted based on
subsequent changes in the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise
by applicable final regulations, the Depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on Mortgage Loans or Mortgage Certificates having fixed or
adjustable rates, as having qualified stated interest, except to the extent that
initial "teaser" rates cause sufficiently "back-loaded" interest to create more
than de minimis original issue discount. The yield on those Regular Certificates
for purposes of accruing original issue discount will be a hypothetical fixed
rate based on the fixed rates, in the case of fixed rate Mortgage Loans, and
initial "teaser rates" followed by fully indexed rates, in the case of
adjustable rate Mortgage Loans. In the case of adjustable rate Mortgage Loans,
the applicable index used to compute interest on the Mortgage Loans in effect on
the pricing date (or possibly the issue date) will be deemed to be in effect
beginning with the period in which the first weighted average adjustment date
occurring after the issue date occurs. Adjustments will be made in each accrual
period either increasing or decreasing the amount of ordinary income reportable
to reflect the actual Pass-Through Rate on the Regular Certificates.
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DEFERRED INTEREST
Under the OID Regulations, all interest on a Regular Certificate as to
which there may be deferred interest is includible in the stated redemption
price at maturity of that Regular Certificate. Accordingly, any deferred
interest that accrues with respect to a class of Regular Certificates may
constitute income to the holders of those Regular Certificates prior to the time
distributions of cash for deferred interest are made.
MARKET DISCOUNT
A purchaser of a Regular Certificate may be subject to the market
discount rules of Tax Code Sections 1276 through 1278. Under these Tax Code
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which the
purchaser's original basis in the Regular Certificate (1) is exceeded by the
then-current principal amount of the Regular Certificate or (2) in the case of a
Regular Certificate having original issue discount, is exceeded by the adjusted
issue price of that Regular Certificate at the time of purchase. The purchaser
generally will be required to recognize ordinary income to the extent of accrued
market discount on the Regular Certificate as distributions includible in the
stated redemption price at maturity of the Regular Certificate are received, in
an amount not exceeding any distribution. The market discount would accrue in a
manner to be provided in Treasury regulations and should take into account the
Prepayment Assumption. The Conference Committee Report to the 1986 Act provides
that until regulations are issued, market discount would accrue either (1) on
the basis of a constant interest rate or (2) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for that period plus
the remaining interest as of the end of that period, or in the case of a Regular
Certificate issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for that period plus the remaining original issue discount as
of the end of that period. The purchaser generally will be required to treat a
portion of any gain on a sale or exchange of the Regular 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 as partial distributions in reduction of the stated
redemption price at maturity were received. The purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable on the Regular Certificate. The deferred portion of
interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Certificate for that year. Any deferred interest
expense is, in general, allowed as a deduction not later than the year in which
the related market discount income is recognized or the Regular Certificate is
disposed of. As an alternative to the inclusion of market discount in income on
the foregoing basis, the Regular Certificateholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by that Regular Certificateholder in that taxable year or thereafter,
in which case the interest deferral rule will not apply. See "Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which that election may be deemed to be made.
Market discount with respect to a Regular Certificate will be
considered to be zero if the market discount is less than 0.25% of the stated
redemption price at maturity of the Regular Certificate multiplied by the
weighted average maturity of the Regular Certificate (determined as described
above in the third paragraph under "Original Issue Discount") remaining after
the date of purchase. De minimis market discount apparently should be reported
in a manner similar to de minimis original issue discount. Treasury regulations
implementing the market discount rules have not yet been issued, and therefore
investors should consult their own tax advisors regarding the application of
these rules. Investors should also consult Revenue Procedure 92-67 concerning
the elections to include market discount in income currently and to accrue
market discount on the basis of the constant yield method.
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PREMIUM
A Regular Certificate purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds that Regular Certificate as a
"capital asset" within the meaning of Tax Code Section 1221, the Regular
Certificateholder may elect under Tax Code Section 171 to amortize the premium
under the constant yield method. The Conference Committee Report to the 1986 Act
indicates a Congressional intent that the same rules that will apply to the
accrual of market discount on installment obligations will also apply to
amortizing bond premium under Tax Code Section 171 on installment obligations
such as the Regular Certificates, although it is unclear whether the
alternatives to the constant yield method described above under "Market
Discount" are available. Amortizable bond premium will be treated as an offset
to interest income on a Regular Certificate rather than as a separate deduction
item. See " Election to Treat All Interest Under the Constant Yield Method"
below regarding an alternative manner in which the Tax Code Section 171 election
may be deemed to be made.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD METHOD
A holder of a debt instrument such as a Regular Certificate may elect
to treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to that election, (1) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (2) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make a constant yield method election on an instrument by
instrument basis or for a class or group of debt instruments. However, if the
holder makes that election with respect to a debt instrument with amortizable
bond premium or with market discount, the holder is deemed to have made
elections to amortize bond premium or to report market discount income currently
as it accrues under the constant yield method, respectively, for all debt
instruments acquired by the holder in the same taxable year or thereafter. The
election is made on the holder's federal income tax return for the year in which
the debt instrument is acquired and is irrevocable except with the approval of
the Service. Investors should consult their own tax advisors regarding the
advisability of making that election.
SALE OR EXCHANGE OF REGULAR CERTIFICATES
If a Regular Certificateholder sells or exchanges a Regular
Certificate, the Regular Certificateholder will recognize gain or loss equal to
the difference, if any, between the amount received and its adjusted basis in
the Regular Certificate. The adjusted basis of a Regular Certificate generally
will equal the cost of the Regular Certificate to the seller, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Regular Certificate and reduced by amounts
included in the stated redemption price at maturity of the Regular Certificate
that were previously received by the seller, by any amortized premium and by
previously recognized losses.
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Except as described above with respect to market discount, and except
as provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the long-term
capital gain holding period (currently more than one year). Any gain will be
treated as ordinary income
(1) if a Regular Certificate is held as part of a "conversion
transaction" as defined in Tax Code Section 1258(c), up to the
amount of interest that would have accrued on the Regular
Certificateholder's net investment in the conversion
transaction at 120% of the appropriate applicable Federal rate
under Tax Code Section 1274(d) in effect at the time the
taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any
prior distribution of property that was held as a part of that
transaction;
(2) in the case of a non-corporate taxpayer, to the extent the
taxpayer has made an election under Tax Code Section 163(d)(4)
to have net capital gains taxed as investment income at
ordinary rates; or
(3) to the extent that the gain does not exceed the excess, if
any, of (a) the amount that would have been includible in the
gross income of the holder if its yield on the Regular
Certificate were 110% of the applicable Federal rate as of the
date of purchase, over (b) the amount of income actually
includible in the gross income of that holder with respect to
the Regular Certificate.
In addition, gain or loss recognized from the sale of a Regular
Certificate by some banks or thrift institutions will be treated as ordinary
income or loss pursuant to Tax Code Section 582(c). Capital gains of specified
non-corporate taxpayers are subject to a lower maximum tax rate (20%) than
ordinary income of those taxpayers (39.6%) for property held for more than one
year. The maximum tax rate for corporations is the same with respect to both
ordinary income and capital gains.
TREATMENT OF LOSSES
Holders of Regular Certificates will be required to report income with
respect to Regular Certificates on the accrual method of accounting, without
giving effect to delays or reductions in distributions attributable to defaults
or delinquencies on the Mortgage Loans allocable to a particular class of
Regular Certificates, except to the extent it can be established that those
losses are uncollectible. Accordingly, the holder of a Regular Certificate may
have income, or may incur a diminution in cash flow as a result of a default or
delinquency, but may not be able to take a deduction (subject to the discussion
below) for the corresponding loss until a subsequent taxable year. In this
regard, investors are cautioned that while they may generally cease to accrue
interest income if it reasonably appears that the interest will be
uncollectible, the Internal Revenue Service may take the position that original
issue discount must continue to be accrued in spite of its uncollectibility
until the debt instrument is disposed of in a taxable transaction or becomes
worthless in accordance with the rules of Tax Code Section 166. To the extent
the rules of Tax Code Section 166 regarding bad debts are applicable, it appears
that holders of Regular Certificates that are corporations or that otherwise
hold the Regular Certificates in connection with a trade or business should in
general be allowed to deduct as an ordinary loss any loss sustained during the
taxable year on account of any Regular Certificates becoming wholly or partially
worthless, and that, in general, holders of Regular Certificates that are not
corporations and do not hold the Regular Certificates in connection with a trade
or business will be allowed to deduct as a short-term capital loss any loss with
respect to principal sustained during the taxable year on account of a portion
of any class or subclass of the Regular Certificates becoming wholly worthless.
Although the matter is not free from doubt, non-corporate holders of Regular
Certificates should be allowed a bad debt deduction at the time the principal
balance of any class or subclass of the Regular Certificates is reduced to
reflect losses resulting from any liquidated Mortgage Loans. The Service,
however, could take the position that non-corporate holders would be allowed a
bad debt deduction to reflect losses only after all Mortgage Loans remaining in
the Trust Fund have been liquidated or the class of Regular Certificates has
been otherwise retired. The Service could also assert that losses on the Regular
Certificates are deductible based on some other method that may defer those
deductions for all holders, such as reducing future cash flow for purposes of
computing original issue discount. This may have the effect of creating
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"negative" original issue discount which would be deductible only against future
positive original issue discount or otherwise upon termination of the class.
Holders of Regular Certificates are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained
with respect to those Regular Certificates. While losses attributable to
interest previously reported as income should be deductible as ordinary losses
by both corporate and non-corporate holders, the Internal Revenue Service may
take the position that losses attributable to accrued original issue discount
may only be deducted as short-term capital losses by non-corporate holders not
engaged in a trade or business. Special loss rules are applicable to banks and
thrift institutions, including rules regarding reserves for bad debts. Investors
are advised to consult their tax advisors regarding the treatment of losses on
Regular Certificates.
TAXATION OF RESIDUAL CERTIFICATES
TAXATION OF REMIC INCOME
Generally, the "daily portions" of REMIC taxable income or net loss
will be includible as ordinary income or loss in determining the federal taxable
income of Residual Certificateholders and will not be taxed separately to the
REMIC Pool. The daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in that quarter and by
allocating the daily portion among the Residual Certificateholders in proportion
to their holdings of Residual Certificates in the REMIC Pool on that day. REMIC
taxable income is generally determined in the same manner as the taxable income
of an individual using the accrual method of accounting, except that:
(1) the limitations on deductibility of investment interest
expense and expenses for the production of income do not
apply;
(2) all bad loans will be deductible as business bad debts; and
(3) the limitation on the deductibility of interest and expenses
related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue
discount income and market discount income, if any, on the Mortgage Loans,
reduced by amortization of any premium on the Mortgage Loans, plus income from
amortization of issue premium, if any, on the Regular Certificates, plus income
on reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the Regular
Certificates. The REMIC Pool's deductions include interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Loans, other administrative expenses of the REMIC Pool and realized losses on
the Mortgage Loans. The requirement that Residual Certificateholders report
their pro rata share of taxable income or net loss of the REMIC Pool will
continue until there are no Certificates of any class of the related series
outstanding.
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The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates or income from amortization of issue
premium on the Regular Certificates, on the other hand. If an interest in the
Mortgage Loans is acquired by the REMIC Pool at a discount, and one or more of
the Mortgage Loans is prepaid, the Residual Certificateholder may recognize
taxable income without being entitled to receive a corresponding amount of cash
because (1) the prepayment may be used in whole or in part to make distributions
in reduction of principal on the Regular Certificates and (2) the discount on
the Mortgage Loans which is includible in income may exceed the deduction
allowed upon distributions on those Regular Certificates on account of any
unaccrued original issue discount relating to those Regular Certificates. When
there is more than one class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates when
distributions in reduction of principal are being made in respect of earlier
classes of Regular Certificates to the extent that those earlier classes are not
issued with substantial discount. If taxable income attributable to that kind of
mismatching is realized, in general, losses would be allowed in later years as
distributions on the later classes of Regular Certificates are made. Taxable
income may also be greater in earlier years than in later years as a result of
the fact that interest expense deductions, expressed as a percentage of the
outstanding principal amount of the series of Regular Certificates, may increase
over time as distributions in reduction of principal are made on the lower
yielding classes of Regular Certificates, whereas to the extent that the REMIC
Pool includes fixed rate Mortgage Loans, interest income with respect to any
given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual
Certificateholders must have sufficient other sources of cash to pay any
federal, state or local income taxes due as a result of this kind of mismatching
or unrelated deductions against which to offset that income, subject to the
discussion of "excess inclusions" below under "-Limitations on Offset or
Exemption of REMIC Income." The timing of the mismatching of income and
deductions described in this paragraph, if present with respect to a series of
Certificates, may have a significant adverse effect upon the Residual
Certificateholder's after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during some periods may exceed the income
reflected by that Residual Certificateholder for those periods in accordance
with generally accepted accounting principles. Investors should consult their
own accountants concerning the accounting treatment of their investment in
Residual Certificates.
BASIS AND LOSSES
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Certificateholder is limited to the adjusted basis of
the Residual Certificate as of the close of the quarter (or time of disposition
of the Residual Certificate if earlier), determined without taking into account
the net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for the Residual Certificate. The
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Certificateholder and will be decreased (but not
below zero), first, by a cash distribution from the REMIC Pool and, second, by
the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. Any loss that is disallowed on account of this limitation may
be carried over indefinitely with respect to the Residual Certificateholder as
to whom the loss was disallowed and may be used by the Residual
Certificateholder only to offset any income generated by the same REMIC Pool.
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A Residual Certificateholder will not be permitted to amortize directly
the cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's basis
in its assets. A recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual
Certificateholders described above under "Taxation of REMIC Income", the period
of time over which the issue price is effectively amortized may be longer than
the economic life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present
value of anticipated tax liabilities exceeds the present value of anticipated
cash flows. The REMIC Regulations appear to treat the issue price of a residual
interest as zero rather than a negative amount for purposes of determining the
REMIC Pool's basis in its assets. The preamble to the REMIC Regulations states
that the Service may provide future guidance on the proper tax treatment of
payments made by a transferor of that residual interest to induce the transferee
to acquire the interest, and Residual Certificateholders should consult their
own tax advisors in this regard.
To the extent the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate is
greater that the corresponding portion of the REMIC Pool's basis in the Mortgage
Loans, the Residual Certificateholder will not recover a portion of his basis
until termination of the REMIC Pool (unless future Treasury regulations are
revised to provide for periodic adjustments to the REMIC income otherwise
reportable by that holder). For more information, you should refer to the
following sections in this prospectus titled "Treatment of Material Items of
REMIC Income and Expense-Market Discount" regarding the basis of Mortgage Loans
to the REMIC Pool and "-Sale or Exchange of a Residual Certificate" regarding
possible treatment of a loss upon termination of the REMIC Pool as a capital
loss.
TREATMENT OF MATERIAL ITEMS OF REMIC INCOME AND EXPENSE
Although the Depositor intends to compute REMIC income and expense in
accordance with the Tax Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Depositor makes no representation as to the
specific method it will use for reporting income with respect to the Mortgage
Loans and expenses with respect to the Regular Certificates, and different
methods could result in different timing of reporting of taxable income or net
loss to Residual Certificateholders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of issue
premium will be determined in the same manner as original issue discount income
on Regular Certificates as described above under "Taxation of Regular
Certificates-Original Issue Discount" and "-Variable Rate Regular Certificates,"
without regard to the de minimis rule described in those sections, and
"-Acquisition Premium."
Deferred Interest. Any deferred interest that accrues with respect to
any adjustable rate Mortgage Loans held by the REMIC Pool will constitute income
to the REMIC Pool and will be treated in a manner similar to the deferred
interest that accrues with respect to Regular Certificates as described above
under "Taxation of Regular Certificates-Deferred Interest".
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool allocable
to the Mortgage Loans is exceeded by their unpaid principal balances. The REMIC
Pool's basis in Mortgage Loans is the fair market value of the Mortgage Loans,
based on the aggregate of the issue prices (or the fair market value of retained
Classes) of the regular and residual interests in the REMIC Pool immediately
after the transfer of the Mortgage Loans to the REMIC Pool. In respect of
Mortgage Loans that have market discount to which Tax Code Section 1276 applies,
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the accrued portion of market discount would be recognized currently as an item
of ordinary income in a manner similar to original issue discount. Market
discount income generally should accrue in the manner described above under
"Taxation of Regular Certificates-Market Discount".
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Loans exceeds the unpaid principal balances of the Mortgage Loans, the REMIC
Pool will be considered to have acquired the Mortgage Loans at a premium equal
to the amount of any excess. In a manner analogous to the discussion above under
"Taxation of Regular Certificates-Premium", a REMIC Pool that holds a Mortgage
Loan as a capital asset under Tax Code Section 1221 may elect under Tax Code
Section 171 to amortize premium on whole mortgage loans or mortgage loans
underlying MBS that were originated after September 27, 1985 or MBS that are
REMIC regular interests under the constant yield method. Amortizable bond
premium will be treated as an offset to interest income on the Mortgage Loans,
rather than as a separate deduction item. To the extent that the borrowers with
respect to these Mortgage Loans are individuals, Tax Code Section 171 will not
be available for premium on Mortgage Loans (including underlying mortgage loans)
originated on or before September 27, 1985. Premium with respect to these
Mortgage Loans may be deductible in accordance with a reasonable method
regularly employed by the holder of these loans. The allocation of this premium
pro rata among principal payments should be considered a reasonable method;
however, the Service may argue that the premium should be allocated in a
different manner, such as allocating it entirely to the final payment of
principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
A portion or all of the REMIC taxable income includible in determining
the federal income tax liability of a Residual Certificateholder will be subject
to special treatment. That portion, referred to as the "excess inclusion", is
equal to the excess of REMIC taxable income for the calendar quarter allocable
to a Residual Certificate over the daily accruals for that quarterly period of
(1) 120% of the long-term applicable Federal rate that would have applied to the
Residual Certificate (if it were a debt instrument) on the Startup Day under Tax
Code Section 1274(d), multiplied by (2) the adjusted issue price of that
Residual Certificate at the beginning of that quarterly period. For this
purpose, the adjusted issue price of a Residual Certificate at the beginning of
a quarter is the issue price of the Residual Certificate, plus the amount of
daily accruals of REMIC income described in this paragraph for all prior
quarters, decreased by any distributions made with respect to the Residual
Certificate prior to the beginning of the quarterly period. Accordingly, the
portion of the REMIC Pool's taxable income that will be treated as excess
inclusions will be a larger portion of income as the adjusted issue price of the
Residual Certificates diminishes.
The portion of a Residual Certificateholder's REMIC taxable income
consisting of the excess inclusions generally may not be offset by other
deductions, including net operating loss carry forwards, on the Residual
Certificateholder's return. However, net operating loss carryovers are
determined without regard to excess inclusion income. Further, if the Residual
Certificateholder is an organization subject to the tax on unrelated business
income imposed by Tax Code Section 511, the Residual Certificateholder's excess
inclusions will be treated as unrelated business taxable income of the Residual
Certificateholder for purposes of Tax Code Section 511. In addition, REMIC
taxable income is subject to 30% withholding tax with respect to specified
persons who are not U.S. Persons (as defined below under "Tax-Related
Restrictions on Transfer of Residual Certificates-Foreign Investors"), and the
portion of the REMIC taxable income attributable to excess inclusions is not
eligible for any reduction in the rate of withholding tax (by treaty or
otherwise). See "Taxation of Some Foreign Investors-Residual Certificates"
below. Finally, if a real estate investment trust or a regulated investment
company owns a Residual Certificate, a portion (allocated under Treasury
regulations yet to be issued) of dividends paid by the real estate investment
trust or a regulated investment company could not be offset by net operating
losses of its shareholders, would constitute unrelated business taxable income
for tax-exempt shareholders, and would be ineligible for reduction of
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withholding to persons who are not U.S. Persons. The Small Business Job
Protection Act of 1996 has eliminated the special rule permitting thrift
institutions to use net operating losses and other allowable deductions to
offset their excess inclusion income from Residual Certificates that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except with respect to Residual
Certificates continuously held by thrift institutions since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect of excess inclusions on the alternative
minimum taxable income of a Residual Certificateholder. First, alternative
minimum taxable income for a Residual Certificateholder is determined without
regard to the special rule, discussed above, that taxable income cannot be less
than excess inclusions. Second, a Residual Certificateholder's alternative
minimum taxable income for a taxable year cannot be less than the excess
inclusions for the year. Third, the amount of any alternative minimum tax net
operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1996, unless a Residual Certificateholder elects to have these rules apply
only to taxable years beginning after August 20, 1996.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below) other than in connection with the formation of a REMIC Pool and the
Disqualified Organization sells the Residual Certificate within seven days after
the Startup Day pursuant to a bonding contract, a tax would be imposed in an
amount equal to the product of (x) the present value of the total anticipated
excess inclusions with respect to the Residual Certificate for periods after the
transfer and (y) the highest marginal federal income tax rate applicable to
corporations. The REMIC Regulations provide that the anticipated excess
inclusions are based on actual prepayment experience to the date of the transfer
and projected payments based on the Prepayment Assumption. The present value
rate equals the applicable Federal rate under Tax Code Section 1274(d) as of the
date of the transfer for a term ending with the last calendar quarter excess
inclusions are expected to accrue. This tax generally would be imposed on the
transferor of the Residual Certificate, except where the transfer is through an
agent (including a broker, nominee or other middleman) for a Disqualified
Organization, the tax would instead be imposed on the agent. However, a
transferor of a Residual Certificate would in no event be liable for 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. The tax also may be waived by the Treasury Department if the
Disqualified Organization promptly disposes of the residual interest and the
transferor pays income tax at the highest corporate rate on the excess
inclusions for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" has excess inclusion income
with respect to a Residual Certificate during a taxable year and a Disqualified
Organization is the record holder of an equity interest in the entity, then a
tax is imposed on the Pass-Through Entity equal to the product of (x) the amount
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of excess inclusions on the Residual Certificate that are allocable to the
interest in the Pass-Through Entity during the period the interest is held by
the Disqualified Organization, and (y) the highest marginal federal corporate
income tax rate. This tax would be deductible from the ordinary gross income of
the Pass-Through Entity for the taxable year. The Pass-Through Entity would not
be liable for this tax if it has received an affidavit from the record holder
that it is not a Disqualified Organization or stating that holder's taxpayer
identification number and, during the period that person is the record holder of
the Residual Certificate, the Pass-Throug Entity does not have actual knowledge
that the affidavit is false.
Except as may be provided in Treasury regulations, any person holding
an interest in a Pass-Through Entity as a nominee for another will, with respect
to that interest, be treated as a Pass-Through Entity.
The Pooling and Servicing Agreement with respect to a series of
Certificates will provide that no legal or beneficial interest in a Residual
Certificate may be transferred unless (1) the proposed transferee provides to
the transferor and the Trustee an affidavit providing its taxpayer
identification number and stating that it is the beneficial owner of the
Residual Certificate, is not a Disqualified Organization and is not purchasing
the Residual Certificates on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman of the Disqualified Organization), and (2) the
transferor provides a statement in writing to the Depositor and the Trustee that
it has no actual knowledge that the affidavit is false. Moreover, the Pooling
and Servicing Agreement will provide that any attempted or purported transfer in
violation of these transfer restrictions will be null and void and will vest no
rights in any purported transferee. Each Residual Certificate with respect to a
series will bear a legend referring to these restrictions on transfer, and each
Residual Certificateholder will be deemed to have agreed, as a condition of
ownership of the Residual Certificate, to any amendments to the related Pooling
and Servicing Agreement required under the Tax Code or applicable Treasury
regulations to effectuate the foregoing restrictions. Information necessary to
compute an applicable excise tax must be furnished to the Service and to the
requesting party within 60 days of the request, and the Depositor or the Trustee
may charge a fee for computing and providing that information.
Noneconomic Residual Interests. Under the REMIC Regulations, a transfer
of a "noneconomic residual interest" to a Residual Certificateholder (other than
a Residual Certificateholder who is not a U.S. Person) is disregarded for all
federal income tax purposes if a significant purpose of the transferor is to
impede the assessment or collection of tax, and the transferor would continue to
be treated as the owner of the Residual Certificates and thus would continue to
be subject to tax on its allocable portion of the net income of the REMIC Pool.
A residual interest in a REMIC (including a residual interest with a positive
value at issuance) is a "noneconomic residual interest" unless, at the time of
the transfer, (1) the present value of the expected future distributions on the
residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (2) the transferor
reasonably expects that the transferee will receive distributions from the REMIC
at or after he time at which taxes accrue on the anticipated excess inclusions
in an amount sufficient to satisfy the accrued taxes. The anticipated excess
inclusions and the present value rate are determined in the same manner
discussed above under "Disqualified Organizations". The REMIC Regulations
explain that a significant purpose to impede the assessment or collection of tax
exists if the transferor, at the time of the transfer, either knew or should
have known that the transferee would be unwilling or unable to pay taxes due on
its share of the taxable income of the REMIC. A safe harbor is provided if (1)
the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and found that the
transferee historically had paid its debts as they came due and found no
significant evidence to indicate that the transferee would not continue to pay
its debts as they came due in the future, and (2) the transferee represents to
the transferor that it understands that, as the holder of the noneconomic
residual interest, the transferee may incur tax liabilities in excess of cash
flows generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Pooling
and Servicing Agreement with respect to each series of Certificates will require
the transferee of a Residual Certificate to certify to the matters in the
preceding sentence as part of the affidavit described above under the heading
"Disqualified Organizations". The transferor must have no actual knowledge or
reason to know that those statements are false.
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Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person", unless the transferee's income
is effectively connected with the conduct of a trade or business within the
United States or not otherwise subject to a withholding tax. A Residual
Certificate is deemed to have tax avoidance potential unless, at the time of the
transfer, (1) the future value of expected distributions equals at least 30% of
the anticipated excess inclusions after the transfer, and (2) the transferor
reasonably expects that the transferee will receive sufficient distributions
from the REMIC Pool at or after the time at which the excess inclusions accrue
and prior to the end of the next succeeding taxable year for the accumulated
withholding tax liability to be paid. If the non-U.S. Person transfers the
Residual Certificate back to a U.S. Person, the transfer will be disregarded and
the foreign transferor will continue to be treated as the owner unless
arrangements are made so that the transfer does not have the effect of allowing
the transferor to avoid tax on accrued excess inclusions.
The prospectus supplement relating to a series of Certificates may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which a transfer to a non-U.S. Person may be made.
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the difference, if any,
between the amount received and its adjusted basis in the Residual Certificate
(as described above under "Taxation of Residual Certificates-Basis and Losses")
at the time of the sale or exchange. In addition to reporting the taxable income
of the REMIC Pool, a Residual Certificateholder will have taxable income to the
extent that any cash distribution to it from the REMIC Pool exceeds its adjusted
basis on that Distribution Date. This income will be treated as gain from the
sale or exchange of the Residual Certificate. It is possible that the
termination of the REMIC Pool may be treated as a sale or exchange of a Residual
Certificateholder's Residual Certificate, in which case, if the Residual
Certificateholder has an adjusted basis in its Residual Certificate remaining
when its interest in the REMIC Pool terminates, and if the Residual
Certificateholder holds the Residual Certificate as a capital asset under Tax
Code Section 1221, then the Residual Certificateholder will recognize a capital
loss at that time in the amount of the remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as
ordinary income (1) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Tax Code Section 1258(c), up to the amount of
interest that would have accrued on the Residual Certificateholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of that transaction or (2) in
the case of a non-corporate taxpayer, to the extent the taxpayer has made an
election under Tax Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss recognized
from the sale of a Residual Certificate by some banks or thrift institutions
will be treated as ordinary income or loss pursuant to Tax Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except
as provided in Treasury regulations yet to be issued, the wash sale rules of Tax
Code Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after the sale or disposition, acquires (or enters into any other transaction
that results in the application of Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Certificate.
MARK TO MARKET REGULATIONS
The Service has issued Mark to Market Regulations relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. This mark-to-market requirement applies to all securities of a
dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The Mark to Market Regulations provide that,
for purposes of this mark-to-market requirement, a Residual Certificate is not
treated as a security and thus may not be marked to market. The Mark to Market
Regulations apply to all Residual Certificates acquired on or after January 4,
1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS
Income from prohibited transactions by the REMIC Pool will not be part
of the calculation of income or loss includible in the federal income tax
returns of Residual Certificateholders, but rather will be taxed directly to the
REMIC Pool at a 100% rate. Prohibited transactions generally include
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(1) the disposition of a qualified mortgage other than pursuant to
a (a) substitution within two years of the Startup Day for a
defective (including a defaulted) obligation (or repurchase in
lieu of substitution of a defective (including a defaulted)
obligation at any time) or for any qualified mortgage within
three months of the Startup Day, (b) foreclosure, default or
imminent default of a qualified mortgage, (c) bankruptcy or
insolvency of the REMIC Pool or (d) qualified (complete)
liquidation ;
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to
hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow investments
other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4), it is not a prohibited transaction to sell
REMIC Pool property to prevent a default on Regular Certificates as a result of
a default on qualified mortgages or to facilitate a clean-up call (generally, an
optional termination to save administrative costs when no more than a small
percentage of the Certificates is outstanding). The REMIC Regulations indicate
that the modification of a Mortgage Loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the Mortgage Loan, the waiver of a due-on-sale or
due-on-encumbrance clause or the conversion of an interest rate by a borrower
pursuant to the terms of a convertible adjustable rate Mortgage Loan.
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY
In general, the REMIC Pool will be subject to a tax at a 100% rate on
the value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool : =
(1) during the three months following the Startup Day;
(2) made to a qualified reserve fund by a Residual
Certificateholder;
(3) in the nature of a guarantee;
(4) made to facilitate a qualified liquidation or clean-up call;
and
(5) as otherwise permitted in Treasury regulations yet to be
issued.
NET INCOME FROM FORECLOSURE PROPERTY
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property", determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions of up
to an additional four years. Net income from foreclosure property generally
means gain from the sale of a foreclosure property that is inventory property
and gross income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
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It is not anticipated that the REMIC Pool will receive income or
contributions subject to tax under the preceding three paragraphs, except as
described in the applicable prospectus supplement with respect to net income
from foreclosure property on a commercial or multifamily residential property
that secured a Mortgage Loan. In addition, unless otherwise disclosed in the
applicable prospectus supplement, it is not anticipated that any material state
income or franchise tax will be imposed on a REMIC Pool.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the
meaning of Tax Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC Pool's final tax return a date on which the adoption of
a plan of complete liquidation is deemed to occur, and sells all of its assets
(other than cash) within a 90-day period beginning on the date of the adoption
of the plan of liquidation, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Certificates
and Residual Certificateholders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership on Form 1066, U.S. Real Estate
Mortgage Investment Conduit Income Tax Return. The Trustee will be required to
sign the REMIC Pool's returns. Treasury regulations provide that, except where
there is a single Residual Certificateholder for an entire taxable year, the
REMIC Pool will be subject to the procedural and administrative rules of the Tax
Code applicable to partnerships, including the determination by the Service of
any adjustments to, among other things, items of REMIC income, gain, loss,
deduction or credit in a unified administrative proceeding. The Residual
Certificateholder owning the largest percentage interest in the Residual
Certificates will be obligated to act as "tax matters person", as defined in
applicable Treasury regulations, with respect to the REMIC Pool. Each Residual
Certificateholder will be deemed, by acceptance of the Residual Certificates, to
have agreed to the appointment of the tax matters person as provided in the
preceding sentence and to the irrevocable designation of the Master Servicer as
agent for performing the functions of the tax matters person.
LIMITATIONS ON DEDUCTION OF SOME EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to specified itemized deductions described in Tax Code
Section 67, to the extent that those itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Tax Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (1) 3% of the
excess, if any, of adjusted gross income over $126,600 for the taxable year
beginning in 1999 ($63,300 in the case of a married individual filing a separate
return) (subject to adjustments for inflation in subsequent years) or (2) 80% of
the amount of itemized deductions otherwise allowable for that year. In the case
of a REMIC Pool, itemized deductions may include deductions under Tax Code
Section 212 for the servicing fee and all administrative and other expenses
relating to the REMIC Pool, or any similar expenses allocated to the REMIC Pool
with respect to a regular interest it holds in another REMIC. Investors who hold
REMIC Certificates either directly or indirectly through some pass-through
entities may have their pro rata share of those expenses allocated to them as
additional gross income, but may be subject to a limitation on deductions.
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In addition, those expenses are not deductible for purposes of
computing the alternative minimum tax, and may cause investors subject to the
alternative minimum tax to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Certificates in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. However,
the additional gross income and limitation on deductions will apply to the
allocable portion of those expenses to holders of Regular Certificates, as well
as holders of Residual Certificates, where Regular Certificates are issued in a
manner that is similar to pass-through certificates in a fixed investment trust.
In general, that allocable portion will be determined based on the ratio that a
REMIC Certificateholder's income, determined on a daily basis, bears to the
income of all holders of Regular Certificates and Residual Certificates with
respect to a REMIC Pool. As a result, individuals, estates or trusts holding
REMIC Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or some other pass-through entities described
in the foregoing temporary Treasury regulations) may have taxable income in
excess of the interest income at the pass-through rate on Regular Certificates
that are issued in a single class or otherwise consistently with fixed
investment trust status or in excess of cash distributions for the related
period on Residual Certificates. Unless otherwise indicated in the applicable
prospectus supplement, the expenses described in this paragraph will be
allocable to the Residual Certificates.
TAXATION OF SOME FOREIGN INVESTORS
REGULAR CERTIFICATES
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons, will be considered "portfolio interest" and generally will not
be subject to 30% United States withholding tax, provided that the Non-U.S.
Person (1) is not a "10-percent shareholder" within the meaning of Tax Code
Section 871(h)(3)(B) or a controlled foreign corporation described in Tax Code
Section 881(c)(3)(C) and (2) provides the Trustee, or the person who would
otherwise be required to withhold tax from those distributions under Tax Code
Section 1441 or 1442, with an appropriate statement, signed under penalties of
perjury, identifying the beneficial owner and stating, among other things, that
the beneficial owner of the Regular Certificate is a Non-U.S. Person. If this
statement, or any other required statement, is not provided, 30% withholding
will apply unless reduced or eliminated pursuant to an applicable tax treaty or
unless the interest on the Regular Certificate is effectively connected with the
conduct of a trade or business within the United States by the Non-U.S. Person.
In the latter case, the Non-U.S. Person will be subject to United States federal
income tax at regular rates. Prepayment Premiums distributable to Regular
Certificateholders who are Non-U.S. Persons may be subject to 30% United States
withholding tax. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate.
RESIDUAL CERTIFICATES
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Certificateholders who are Non-U.S. Persons are treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Certificateholders may qualify as "portfolio interest", subject to the
conditions described in "Regular Certificates" above, but only to the extent
that (1) the Mortgage Loans (including mortgage loans underlying MBS) were
issued after July 18, 1984 and (2) the Trust Fund or segregated pool of assets
in the Trust Fund (as to which a separate REMIC election will be made), to which
the Residual Certificate relates, consists of obligations issued in "registered
form" within the meaning of Tax Code Section 163(f)(1). Generally, whole
mortgage loans will not be, but MBS and regular interests in another REMIC Pool
will be, considered obligations issued in registered form. Furthermore, a
Residual Certificateholder will not be entitled to any exemption from the 30%
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion". See "Taxation of Residual
Certificates-Limitations on Offset or Exemption of REMIC Income". If the amounts
paid to Residual Certificateholders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
those Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to those Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, these amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when the
Residual Certificate is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Certificates-Foreign
Investors" above concerning the disregard of some transfers having "tax
avoidance potential". Investors who are Non-U.S. Persons should consult their
own tax advisors regarding this specific tax consequences of owning Residual
Certificates.
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BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the
sale of the Regular Certificates to or through some brokers, may be subject to a
"backup" withholding tax under Tax Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and, under
some circumstances, principal distributions) unless the Regular
Certificateholder complies with specified reporting and/or certification
procedures, including the provision of its taxpayer identification number to the
Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or the Certificateholder is otherwise an exempt recipient under
applicable provisions of the Tax Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the Service or
allowed as a credit against the Regular Certificateholder's federal income tax
liability.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of any market discount on the Regular
Certificates will be made annually to the Service and to individuals, estates,
non-exempt and non-charitable trusts, and partnerships who are either holders of
record of Regular Certificates or beneficial owners who own Regular Certificates
through a broker or middleman as nominee. All brokers, nominees and other
non-exempt holders of record of Regular Certificates (including corporations,
non-calendar year taxpayers, securities or commodities dealers, real estate
investment trusts, investment companies, common trust funds, thrift institutions
and charitable trusts) may request these types of information for any calendar
quarter by telephone or in writing by contacting the person designated in
Service Publication 938 with respect to a particular series of Regular
Certificates. Holders through nominees must request this information from the
nominee.
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The Service's Form 1066 has an accompanying Schedule Q, Quarterly
Notice to Residual Interest Holders of REMIC Taxable Income or Net Loss
Allocation. Treasury regulations require that Schedule Q be furnished by the
REMIC Pool to each Residual Certificateholder by the end of the month following
the close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Service concerning Tax Code Section 67
expenses (see "Limitations on Deduction of Some Expenses" above) allocable to
those holders. Furthermore, under those regulations, information must be
furnished quarterly to Residual Certificateholders, furnished annually to
holders of Regular Certificates, and filed annually with the Service concerning
the percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Status of REMIC Certificates".
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC ELECTION
IS MADE
STANDARD CERTIFICATES
GENERAL
If no election is made to treat a Trust Fund (or a segregated pool of
assets in the Trust Fund) with respect to a series of Certificates that are not
designated as "Stripped Certificates", as a REMIC, the Trust Fund will be
classified as a grantor trust under subpart E, Part 1 of subchapter J of the Tax
Code and not as an association taxable as a corporation or a "taxable mortgage
pool" within the meaning of Tax Code Section 7701(i). Where there is no fixed
retained yield with respect to the Mortgage Loans underlying these Standard
Certificates, the Standard Certificateholder in the series will be treated as
the owner of a pro rata undivided interest in the ordinary income and corpus
portions of the Trust Fund represented by its Standard Certificate and will be
considered the beneficial owner of a pro rata undivided interest in each of the
Mortgage Loans, subject to the discussion below under "Premium and
Discount-Recharacterization of Servicing Fees". Accordingly, the holder of a
Standard Certificate of a particular series will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Loans represented by its Standard Certificate, including interest at
the coupon rate on the Mortgage Loans, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by the
Master Servicer, in accordance with the Standard Certificateholder's method of
accounting. A Standard Certificateholder generally will be able to deduct its
share of the servicing fee and all administrative and other expenses of the
Trust Fund in accordance with its method of accounting, provided that the
amounts are reasonable compensation for services rendered to that Trust Fund.
However, investors who are individuals, estates or trusts who own Standard
Certificates, either directly or indirectly through some pass-through entities,
will be subject to limitation with respect to specified itemized deductions
described in Tax Code Section 67, including deductions under Tax Code Section
212 for the servicing fee and all the administrative and other expenses of the
Trust Fund, to the extent that the deductions, in the aggregate, do not exceed
two percent of an investor's adjusted gross income. In addition, Tax Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (1) 3% of the
excess, if any, of adjusted gross income over $126,600 for the taxable year
beginning in 1999 ($63,300 in the case of a married individual filing a separate
return) (subject to adjustments for inflation in subsequent years), or (2) 80%
of the amount of itemized deductions otherwise allowable for that year. As a
result, those investors holding Standard Certificates, directly or indirectly
through a pass-through entity, may have aggregate taxable income in excess of
the aggregate amount of cash received on those Standard Certificates with
respect to interest at the pass-through rate on those Standard Certificates. In
addition, these expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause investors subject to the alternative
minimum tax to be subject to significant additional tax liability. Moreover,
where there is fixed retained yield with respect to the Mortgage Loans
underlying a series of Standard Certificates or where the servicing fee is in
excess of reasonable servicing compensation, the transaction will be subject to
the application of the "stripped bond" and "stripped coupon" rules of the Tax
Code, as described below under "Stripped Certificates" and "Premium and
Discount-Recharacterization of Servicing Fees", respectively.
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TAX STATUS
Standard Certificates will have the following status for federal income
tax purposes:
(1) A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Tax Code Section
7701(a)(19) will be considered to represent "loans...secured
by an interest in real property which is...residential real
property" within the meaning of Tax Code Section
7701(a)(19)(C)(v), provided that the real property securing
the Mortgage Loans represented by that Standard Certificate is
of the type described in that section of the Tax Code.
(2) A Standard Certificate owned by a real estate investment trust
will be considered to represent "real estate assets" within
the meaning of Tax Code Section 856(c)(4)(A) to the extent
that the assets of the related Trust Fund consist of qualified
assets, and interest income on those assets will be considered
"interest on obligations secured by mortgages on real
property" within the meaning of Tax Code Section 856(c)(3)(B)
to the same extent.
(3) A Standard Certificate owned by a REMIC will be considered to
represent an "obligation . . . which is principally secured by
an interest in real property" within the meaning of Tax Code
Section 860G(a)(3)(A) to the extent that the assets of the
related Trust Fund consist of "qualified mortgages" within the
meaning of Tax Code Section 860G(a)(3).
PREMIUM AND DISCOUNT
Standard Certificateholders are advised to consult with their tax
advisors as to the federal income tax treatment of premium and discount arising
either upon initial acquisition of Standard Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Standard Certificate will be determined generally as described above under the
section in this prospectus titled "Taxation of Regular Certificates -
Acquisition Premium."
Original Issue Discount. The original issue discount rules will be
applicable to a Standard Certificateholder's interest in those Mortgage Loans as
to which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount income are applicable to
mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate borrowers (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, original issue discount could arise by the charging of points by
the originator of the mortgages in an amount greater than a statutory de minimis
exception, including a payment of points currently deductible by the borrower
under applicable Tax Code provisions or, under some circumstances, by the
presence of "teaser rates" on the Mortgage Loans.
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Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to that income.
Unless indicated otherwise in the applicable prospectus supplement, no
prepayment assumption will be assumed for purposes of this accrual. However, Tax
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if the Mortgage Loans acquired by a
Standard Certificateholder are purchased at a price equal to the then unpaid
principal amount of the Mortgage Loans, no original issue discount attributable
to the difference between the issue price and the original principal amount of
the Mortgage Loans (i.e., points) will be includible by that holder.
Market Discount. Standard Certificateholders will be subject to the
market discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "Material Federal Income Tax Consequences for REMIC Certificates-Taxation
of Regular Certificates-Market Discount", except that the ratable accrual
methods described in those sections will not apply and it is unclear whether a
Prepayment Assumption would apply. Rather, the holder will accrue market
discount pro rata over the life of the Mortgage Loans, unless the constant yield
method is elected. Unless indicated otherwise in the applicable prospectus
supplement, no prepayment assumption will be assumed for purposes of that
accrual.
Recharacterization of Servicing Fees. If the servicing fee paid to the
Master Servicer were deemed to exceed reasonable servicing compensation, the
excess amount would represent neither income nor a deduction to
Certificateholders. In this regard, there are no authoritative guidelines for
federal income tax purposes as to either the maximum amount of servicing
compensation that may be considered reasonable in the context of this or similar
transactions or whether, in the case of the Standard Certificate, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that the servicing fee would exceed reasonable servicing compensation
as to some of the Mortgage Loans would be increased. Service guidance indicates
that excess servicing will cause the Mortgage Loans to be treated under the
"stripped bond" rules and provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of the safe harbor amounts is not greater than the value of the
services provided.
Accordingly, if the Service's approach is upheld, a servicer who
receives a servicing fee in excess of reasonable servicing compensation would be
viewed as retaining an ownership interest in a portion of the interest payments
on the Mortgage Loans. Under the rules of Tax Code Section 1286, the separation
of ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of the Mortgage Loans as "stripped
coupons" and "stripped bonds". Subject to the de minimis rule discussed below
under "-Stripped Certificates", each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Standard Certificates, and the original issue discount
rules of the Tax Code would apply to the holder of the stripped bonds or
stripped coupons. While Standard Certificateholders would still be treated as
owners of beneficial interests in a grantor trust for federal income tax
purposes, the corpus of the trust could be viewed as excluding the portion of
the Mortgage Loans the ownership of which is attributed to the Master Servicer,
or as including that portion as a second class of equitable interest. Applicable
Treasury regulations treat that arrangement as a fixed investment trust, since
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the multiple classes of trust interests should be treated as merely facilitating
direct investments in the trust assets and the existence of multiple classes of
ownership interests is incidental to that purpose. In general, this
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Standard Certificateholder, except that the
income reported by a cash method holder may be slightly accelerated. See
"Stripped Certificates" below for a further description of the federal income
tax treatment of stripped bonds and stripped coupons.
Sale or Exchange of Standard Certificates. Upon sale or exchange of a
Standard Certificate, a Standard Certificateholder will recognize gain or loss
equal to the difference between the amount received and its aggregate adjusted
basis in the Mortgage Loans and the other assets represented by the Standard
Certificate. In general, the aggregate adjusted basis will equal the Standard
Certificateholder's cost for the Standard Certificate, increased by the amount
of any income previously reported with respect to the Standard Certificate and
decreased by the amount of any losses previously reported with respect to the
Standard Certificate and the amount of any distributions received on the
Standard Certificate. Except as provided above with respect to market discount
on any Mortgage Loans, and except for financial institutions subject to the
provisions of Tax Code Section 582(c), any gain or loss would be capital gain or
loss if the Standard Certificate was held as a capital asset. However, gain on
the sale of a Standard Certificate will be treated as ordinary income (1) if a
Standard Certificate is held as part of a "conversion transaction" as defined in
Tax Code Section 1258(c), up to the amount of interest that would have accrued
on the Standard Certificateholder's net investment in the conversion transaction
at 120% of the appropriate applicable Federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as a part of that transaction or (2) in the case of a non-corporate taxpayer, to
the extent that taxpayer has made an election under Tax Code Section 163(d)(4)
to have net capital gains taxed as investment income at ordinary income rates.
Capital gains of specified non-corporate taxpayers are subject to a lower
maximum tax rate (20%) than ordinary income of those taxpayers (39.6%) for
property held for more than one year . The maximum tax rate for corporations is
the same with respect to both ordinary income and capital gains.
STRIPPED CERTIFICATES
GENERAL
Pursuant to Tax Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments.
The Certificates will be subject to those rules if:
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(1) the Depositor or any of its affiliates retains (for its own
account or for purposes of resale), in the form of fixed
retained yield or otherwise, an ownership interest in a
portion of the payments on the Mortgage Loans;
(2) the Master Servicer is treated as having an ownership interest
in the Mortgage Loans to the extent it is paid (or retains)
servicing compensation in an amount greater than reasonable
consideration for servicing the Mortgage Loans (see "Standard
Certificates-Premium and Discount-Recharacterization of
Servicing Fees" above); and
(3) Certificates are issued in two or more classes or subclasses
representing the right to non-pro-rata percentages of the
interest and principal payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to
own "stripped bonds" with respect to its pro rata share of all or a portion of
the principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid to the Master Servicer, to the extent that those fees
represent reasonable compensation for services rendered. See discussion above
under "Standard Certificates-Premium and Discount-Recharacterization of
Servicing Fees". Although not free from doubt, for purposes of reporting to
Stripped Certificateholders, the servicing fees will be allocated to the
Stripped Certificates in proportion to the respective entitlements to
distributions of each class (or subclass) of Stripped Certificates for the
related period or periods. The holder of a Stripped Certificate generally will
be entitled to a deduction each year in respect of the servicing fees, as
described above under "Standard Certificates-General", subject to the limitation
described in that section.
Tax Code Section 1286 treats a stripped bond or a stripped coupon as an
obligation issued at an original issue discount on the date that the stripped
interest is purchased. Although the treatment of Stripped Certificates for
federal income tax purposes is not clear in some respects at this time,
particularly where the Stripped Certificates are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, the Depositor has been
advised by counsel that (1) the Trust Fund will be treated as a grantor trust
under subpart E, Part 1 of subchapter J of the Tax Code and not as an
association taxable as a corporation or a "taxable mortgage pool" within the
meaning of Tax Code Section 7701(i), and (2) each Stripped Certificate should be
treated as a single installment obligation for purposes of calculating original
issue discount and gain or loss on disposition. This treatment is based on the
interrelationship of Tax Code Section 1286, Tax Code Sections 1272 through 1275,
and the OID Regulations. While under Tax Code Section 1286 computations with
respect to Stripped Certificates arguably should be made in one of the ways
described below under "Taxation of Stripped-Certificates-Possible Alternative
Characterizations," the OID Regulations state, in general, that two or more debt
instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument for original issue
discount purposes. The Pooling and Servicing Agreement requires that the Trustee
make and report all computations described below using this aggregate approach,
unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 assume that
a Stripped Certificate will be treated as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount and
that the interest component of a Stripped Certificate would be treated as
qualified stated interest under the OID Regulations. Pursuant to these final
regulations the purchaser of a Stripped Certificate will be required to account
for any discount as market discount rather than original issue discount unless
either (1) the initial discount with respect to the Stripped Certificate was
treated as zero under the de minimis rule of Tax Code Section 1273(a)(3), or (2)
no more than 100 basis points in excess of reasonable servicing is stripped off
the related Mortgage Loans. Any market discount would be reportable as described
under "Material Federal Income Tax Consequences for REMIC Certificates-Taxation
of Regular Certificates-Market Discount," without regard to the de minimis rule
in those sections and assuming that a prepayment assumption is employed in the
computation in those sections.
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STATUS OF STRIPPED CERTIFICATES
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that Stripped Certificates owned by applicable holders
should be considered to represent "real estate assets" within the meaning of Tax
Code Section 856(c)(4)(A), "obligation[s] principally secured by an interest in
real property" within the meaning of Tax Code Section 860G(a)(3)(A), and "loans
. . . secured by an interest in real property which is . . . residential real
property" within the meaning of Tax Code Section 7701(a)(19)(C)(v), and interest
(including original issue discount) income attributable to Stripped Certificates
should be considered to represent "interest on obligations secured by mortgages
on real property" within the meaning of Tax Code Section 856(c)(3)(B), provided
that in each case the Mortgage Loans and interest on the Mortgage Loans qualify
for that treatment.
TAXATION OF STRIPPED CERTIFICATES
Original Issue Discount. Except as described above under "General",
each Stripped Certificate will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, which may be prior to the receipt of the cash
attributable to that income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Tax Code made by the
1986 Act, the amount of original issue discount required to be included in the
income of a Stripped Certificateholder in any taxable year likely will be
computed generally as described above under "Federal Income Tax Consequences for
REMIC Certificates-Taxation of Regular Certificates-Original Issue Discount" and
"-Variable Rate Regular Certificates". However, with the apparent exception of a
Stripped Certificate qualifying as a market discount obligation, as described
above under "General", the issue price of a Stripped Certificate will be the
purchase price paid by each holder of the Stripped Certificate, and the stated
redemption price at maturity will include the aggregate amount of the payments,
other than qualified stated interest to be made on the Stripped Certificate to
that Stripped Certificateholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Certificateholder's recognition
of original issue discount will be either accelerated or decelerated and the
amount of original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by the Stripped Certificateholder's Stripped Certificate. While
the matter is not free from doubt, the holder of a Stripped Certificate should
be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis in
a Stripped Certificate to recognize an ordinary loss equal to the portion of
unrecoverable basis.
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As an alternative to the method described above, the fact that some or
all of the interest payments with respect to the Stripped Certificates will not
be made if the Mortgage Loans are prepaid could lead to the interpretation that
the interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Certificates. However, if final regulations dealing with contingent
interest with respect to the Stripped Certificates apply the same principles as
the OID Regulations, the regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of those principles could lead to the characterization of gain on
the sale of contingent interest Stripped Certificates as ordinary income.
Investors should consult their tax advisors regarding the appropriate tax
treatment of Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a
Stripped Certificate prior to its maturity will result in gain or loss equal to
the difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in the Stripped Certificate, as described
above under "Material Federal Income Tax Consequences for REMIC
Certificates-Taxation of Regular Certificates-Sale or Exchange of Regular
Certificates". To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Certificates, the subsequent
purchaser will be required for federal income tax purposes to accrue and report
any excess as if it were original issue discount in the manner described above.
It is not clear whether the assumed prepayment rate that is to be used in the
case of a Stripped Certificateholder other than an original Stripped
Certificateholder should be the Prepayment Assumption or a new rate based on the
circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is currently
unclear whether for federal income tax purposes the classes of Stripped
Certificates should be treated separately or aggregated for purposes of the
rules described above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible interpretations
of the applicable Tax Code provisions. For example, the Stripped
Certificateholder may be treated as the owner of
(1) one installment obligation consisting of the Stripped
Certificate's pro rata share of the payments attributable to
principal on each Mortgage Loan and a second installment
obligation consisting of the Stripped Certificate's pro rata
share of the payments attributable to interest on each
Mortgage Loan;
(2) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each
Mortgage Loan; or
(3) a separate installment obligation for each Mortgage Loan,
representing the Stripped Certificate's pro rata share of
payments of principal and/or interest to be made with respect
thereto.
Alternatively, the holder of one or more classes of Stripped
Certificates may be treated as the owner of a pro rata fractional undivided
interest in each Mortgage Loan to the extent that the Stripped Certificate, or
classes of Stripped Certificates in the aggregate, represent the same pro rata
portion of principal and interest on each Mortgage Loan, and a stripped bond or
stripped coupon (as the case may be), treated as an installment obligation or
contingent payment obligation, as to the remainder. Final regulations issued on
December 28, 1992 regarding original issue discount on stripped obligations make
the foregoing interpretations less likely to be applicable. The preamble to
those regulations states that they are premised on the assumption that an
aggregation approach is appropriate for determining whether original issue
discount on a stripped bond or stripped coupon is de minimis, and solicits
comments on appropriate rules for aggregating stripped bonds and stripped
coupons under Tax Code Section 1286.
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Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
FEDERAL INCOME TAX CONSEQUENCES FOR FASIT CERTIFICATES
If specified in the prospectus supplement relating to a particular
series of Certificates, an election may be made to treat the related Trust Fund
or one or more segregated pools of assets in the related Trust Fund as one or
more FASITs. Qualification as a FASIT requires ongoing compliance with
conditions specified in the Tax Code. With respect to each series of FASIT
Certificates, O'Melveny & Myers LLP, counsel to the Depositor, will advise the
Depositor that in the firm's opinion, assuming:
(1) the making of a FASIT election;
(2) compliance with the Pooling and Servicing Agreement; and
(3) compliance with any changes in the law, including any
amendments to the Tax Code or applicable Treasury Regulations
promulgated under the Tax Code;
each FASIT Pool will qualify as a FASIT. In that case, the Regular
Certificates will be considered to be "regular interests" in the FASIT and will
be treated for federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificate will be considered the "ownership
interest" in the FASIT Pool. The prospectus supplement for each series of
Certificates will indicate whether one or more FASIT elections will be made with
respect to the related Trust Fund.
FASIT treatment has become available pursuant to recently enacted
legislation, and no Treasury Regulations have as yet been issued detailing the
circumstances under which a FASIT election may be made or the consequences of
making that election. If a FASIT election is made with respect to any Trust Fund
or as to any segregated pool of assets in the Trust Fund, the applicable
prospectus supplement will describe the Federal income tax consequences of
making that election.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish to each Standard Certificateholder, within a
reasonable time after the end of each calendar year, or Stripped
Certificateholder, at any time during that year, information (prepared on the
basis described above) as the Trustee deems to be necessary or desirable to
enable the Certificateholders to prepare their federal income tax returns. The
information will include the amount of original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amounts required to be reported by the Trustee may
not be equal to the proper amount of original issue discount required to be
reported as taxable income by a Certificateholder, other than an original
Certificateholder that purchased at the issue price. In particular, in the case
of Stripped Certificates, unless provided otherwise in the applicable prospectus
supplement, reporting will be based upon a representative initial offering price
of each class of Stripped Certificates. The Trustee will also file this original
issue discount information with the Service. If a Certificateholder fails to
supply an accurate taxpayer identification number or if the Secretary of the
Treasury determines that a Certificateholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 31%
backup withholding may be required in respect of any reportable payments, as
described above under "Material Federal Income Tax Consequences for REMIC
Certificates-Backup Withholding".
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TAXATION OF SOME FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Tax Code Section 1441 or 1442
to nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or a lower rate as may be
provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Standard Certificateholder or Stripped
Certificateholder on original issue discount recognized by the Standard
Certificateholder or Stripped Certificateholders on the sale or exchange of that
Certificate also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and those persons will
be subject to the same certification requirements, described above under
"Material Federal Income Tax Consequences for REMIC Certificates-Taxation of
Some Foreign Investors-Regular Certificates".
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences", potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State tax law may differ substantially
from the corresponding federal law, and the discussion above does not describe
the tax laws of any state or other jurisdiction. Prospective investors should
consult their own tax advisors with respect to the various state tax
consequences of investments in the Offered Certificates.
ERISA CONSIDERATIONS
ERISA imposes various requirements on ERISA Plans and prohibits some
transactions between ERISA Plans and persons who are "parties in interest" (as
defined under ERISA) with respect to assets of those Plans. Section 4975 of the
Tax Code prohibits a similar set of transactions between Tax Code Plans and
persons who are "disqualified persons" (as defined in the Tax Code) with respect
to Tax Code Plans. Some employee benefit plans, such as governmental plans and
church plans (if no election has been made under Section 410(d) of the Tax Code)
are not subject to the requirements of ERISA or Section 4975 of the Tax Code,
and assets of those plans may be invested in Certificates, subject to the
provisions of other applicable federal and state law. However, any governmental
or church plan which is qualified under Section 401 (a) of the Tax Code and
exempt from taxation under Section 501(a) of the Tax Code is subject to the
prohibited transaction rules set forth in Section 503 of the Tax Code.
Investments by ERISA Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that investments be made in accordance with
the documents governing the ERISA Plan. Before investing in a Certificate, an
ERISA Plan fiduciary should consider, among other factors, whether to do so is
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appropriate in view of the overall investment policy and liquidity needs of the
ERISA Plan. ERISA Plan fiduciary should especially consider the sensitivity of
the investments to the rate of principal payments (including prepayments) on the
Mortgage Loans, as discussed in the prospectus supplement related to a series.
PROHIBITED TRANSACTIONS
Section 406 of ERISA and Section 4975 of the Tax Code prohibit parties
in interest with respect to ERISA Plans and disqualified persons with respect to
the Tax Code Plans from engaging in specified transactions involving the Plans
or "plan assets" of those Plans, unless a statutory or administrative exemption
applies to the transaction. Section 4975 of the Tax Code and Sections 502(i) and
502(l) of ERISA provide for the imposition of excise taxes and civil penalties
on some persons that engage or participate in those prohibited transactions. The
Depositor, the Underwriter, the Master Servicer, the Special Servicer, if any,
or the Trustee or any of their affiliates may be considered or may become
parties in interest or disqualified persons with respect to a Plan. If so, the
acquisition or holding of Certificates by, on behalf of or with "plan assets" of
the Plan may be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and/or Section 4975 of the Tax Code, unless an exemption is
available. Further, if the underlying assets included in a Trust Fund were
deemed to constitute "plan assets," some transactions involved in the operation
of the Trust Fund may be deemed to constitute prohibited transactions under
ERISA and/or the Tax Code. Neither ERISA nor Section 4975 of the Tax Code
defines the term "plan assets."
Special caution should be exercised before assets of a Plan are used to
purchase a Certificate if, with respect to those assets, the Depositor, the
Underwriter, the Master Servicer, the Special Servicer, if any, or the Trustee
or any of their affiliates either (a) has discretionary authority or control
with respect to the investment or management of those assets, including the
purchasing or sale of securities or other property, or (b) has authority or
responsibility to give, or regularly gives, investment advice with respect to
those assets pursuant to an agreement or understanding that that advice will
serve as a primary basis for investment decisions with respect to those assets
and that that advice will be based on the particular needs of the Plan.
The Department has issued Plan Asset Regulations concerning whether a
Plan's assets will be considered to include an undivided interest in each of the
underlying assets of an entity (such as the Trust Fund) for purposes of the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and Section 4975 of the Tax Code, if the Plan
acquires an "equity interest" (such as a Certificate) in an entity.
Some exceptions are provided in the Plan Asset Regulations pursuant to
which an investing Plan's assets would be considered merely to include its
interest in the Certificates instead of being deemed to include an undivided
interest in each of the underlying assets of the Trust Fund. However, it cannot
be predicted in advance, nor can there be a continuing assurance that the
exceptions may be applicable, because of the factual nature of some of the rules
set forth in the Regulations. For example, one of the exceptions in the Plan
Asset Regulations states that the underlying assets of an entity will not be
considered "plan assets" if less than 25% of the value of each class of equity
interests is held by "Benefit Plan Investors," which are defined as ERISA Plans,
Tax Code Plans, individual retirement accounts and employee benefit plans not
subject to ERISA (for example, governmental plans). This exemption is tested
immediately after each acquisition of an equity interest in the entity whether
upon initial issuance or in the secondary market. Absent any restrictions on
purchase or transfer, it cannot be assured that benefit plan investors will own
less than 25% of each class of Certificates.
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Pursuant to the Plan Asset Regulations, if the assets of the Trust Fund
were deemed to be "plan assets" by reason of the investment of assets of a Plan
in any Certificates, the "plan assets" of that Plan would include an undivided
interest in the Mortgage Loans, the mortgages underlying the Mortgage Loans and
any other assets held in the Trust Fund. Therefore, because the Mortgage Loans
and other assets held in the Trust Fund may be deemed to be "plan assets" of
each Plan that purchases Certificates, in the absence of an exemption, the
purchase, sale or holding of Certificates of any series or class by or with the
assets of a Plan could result in a prohibited transaction and the imposition of
civil penalties or excise taxes. Depending on the relevant facts and
circumstances, some prohibited transaction exemptions may apply to the purchase,
sale or holding of Certificates of any series or class by a Plan-for example,
PTCE 95-60, which exempts some transactions between insurance company general
accounts and parties in interest; PTCE 91-38, which exempts some transactions
between bank collective investment funds and parties in interest; PTCE 90-1,
which exempts some transactions between insurance company pooled separate
accounts and parties in interest; or PTCE 84-14, which exempts some transactions
effected on behalf of a Plan by a "qualified professional asset manager."
There can be no assurance that any of these exemptions will apply with
respect to any Plan's investment in any Certificates or, even if an exemption
were deemed to apply, that any exemption would apply to all prohibited
transactions that may occur in connection with that investment. Also, the
Department has issued Underwriter's Exemptions. An Underwriter's Exemption can
only apply to mortgage-backed securities which, among other conditions, are sold
in an offering with respect to which underwriter serves as the sole or a
managing underwriter, or as a selling or placement agent. If an Underwriter's
Exemption might be applicable to a series of Certificates, the applicable
prospectus supplement will refer to the possibility. Further, the applicable
prospectus supplement may provide that one or more classes or series of
Certificates may not be purchased by, or transferred to, Plans or may only be
purchased by, or transferred to, an insurance company for its general account
under circumstances that would not result in a prohibited transaction.
Any fiduciary or other Plan investor who proposes to invest "plan
assets" of a Plan in Certificates of any series or Class should consult with its
counsel with respect to the potential consequences under ERISA and Section 4975
of the Tax Code of any acquisition and ownership of those Certificates.
UNRELATED BUSINESS TAXABLE INCOME-RESIDUAL INTERESTS
The purchase of a Certificate evidencing an interest in the Residual
Interest in a series that is treated as a REMIC by any employee benefit or other
plan that is exempt from taxation under Tax Code Section 501(a), including most
varieties of Plans, may give rise to "unrelated business taxable income" as
described in Tax Code Sections 511-515 and 860E. Further, prior to the purchase
of an interest in a Residual Interest, a prospective transferee may be required
to provide an affidavit to a transferor that it is not, nor is it purchasing an
interest in a Residual Interest on behalf of, a "Disqualified Organization,"
which term as defined above includes some tax-exempt entities not subject to Tax
Code Section 511, such as some governmental plans, as discussed above under
"Material Federal Income Tax Consequences-Taxation of Holders of Residual
Certificates" and "-Restrictions on Ownership and Transfer of Residual
Certificates."
Due to the complexity of these rules and the penalties imposed upon
persons involved in prohibited transactions, it is particularly important that
individuals responsible for investment decisions with respect to ERISA Plans and
Tax Code Plans consult with their counsel regarding the consequences under ERISA
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and/or the Tax Code of their acquisition and ownership of Certificates. The sale
of Certificates to a Plan is in no respect a representation by the Depositor,
the applicable underwriter or any other service provider with respect to the
Certificates, such as the Trustee, the Master Servicer and the Special Servicer,
if any, that this investment meets all relevant legal requirements with respect
to investments by plans generally or any particular Plan or that this investment
is appropriate for Plans generally or any particular Plan.
LEGAL INVESTMENT
SECONDARY MORTGAGE ENHANCEMENT ACT OF 1984
The applicable prospectus supplement specifies the Offered Certificates
that are "mortgage related securities" for purposes of SMMEA. Non-SMMEA
Certificates are subject to various legal investment restrictions which prohibit
some investors from purchasing the Non-SMMEA Certificates. Accordingly,
investors whose investment authority is subject to legal restrictions should
consult their own legal advisors to determine whether and to what extent the
Non-SMMEA Certificates constitute legal investments for them.
Generally, the only classes of Offered Certificates that will be
"mortgage related securities" for purposes of SMMEA are as follows:
(1) Certificates rated in one of the two highest rating categories
by one or more Rating Agencies;
(2) Certificates that are part of a series evidencing interests in
a Trust Fund consisting of loans originated by various types
of Originators as specified in SMMEA; and
(3) Certificates that are part of a series evidencing interests in
a Trust Fund consisting of mortgage loans each of which is
secured by a first lien on either:
(a) a single parcel of real estate with a residential
and/or mixed residential and commercial structure, or
(b) one or more parcels of real estate with one or more
commercial structures.
Under SMMEA, a number of states enacted legislation on or before October 3, 1991
limiting to various extents the ability of some entities (in particular,
insurance companies) to invest in "mortgage related securities" secured by liens
on residential, or mixed residential and commercial properties, in most cases by
requiring the affected investors to rely solely upon existing state law, and not
SMMEA. Pursuant to Section 347 of the Riegle Community Development and
Regulatory Improvement Act of 1994, states may enact legislation, on or before
September 23, 2001, prohibiting or restricting the purchase, holding or
investment by state regulated entities in certificates satisfying the rating and
qualified Originator requirements for "mortgage related securities," but
evidencing interests in a Trust Fund consisting, in whole or in part, of first
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liens on one or more parcels of real estate upon which are located one or more
commercial structures. Accordingly, the investors affected by this legislation
will be authorized to invest in Offered Certificates qualifying as "mortgage
related securities" only to the extent provided in this legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows (subject in each case to
regulations the applicable federal regulatory authority may prescribe):
(1) federal savings and loan associations and federal savings
banks may invest in, sell or otherwise deal in "mortgage
related securities" without limitation as to the percentage of
their assets represented by those securities;
(2) federal credit unions may invest in mortgage related
securities; and
(3) national banks may purchase mortgage related securities for
their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C.
Section 24 (Seventh).
Effective December 31, 1996, 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 various general standards in 12 C.F.R. Section 1.5 concerning
"safety and soundness" and retention of credit information), various "Type IV
securities," (defined in 12 C.F.R. Section 1.2 (1) to include various
"commercial mortgage-related securities" and "residential mortgage-related
securities"). As so defined, "commercial mortgage-related security" and
"residential mortgage-related security" mean, in relevant part, "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,"
no representation is made as to whether any class of Certificates will qualify
as "commercial mortgage-related securities," and thus as "Type IV securities,"
for investment by national banks.
Federal credit unions should review NCUA Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities. The NCUA has adopted rules, codified as 12 C.F.R. Section 703.5
(f)-(k), which prohibit federal credit unions from investing in various mortgage
related securities (including securities such as some classes of the Offered
Certificates), except under limited circumstances. Effective January 1, 1998,
the NCUA has amended its rules governing investments by federal credit unions at
12 C.F.R. Part 703; the revised rules will permit investments in "mortgage
related securities" under some limited circumstances, but will prohibit
investments in 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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OTHER RESTRICTIONS
All depository institutions considering an investment in the Offered
Certificates should review the "Policy Statement of the FFEIC. The Policy
Statement, which has been adopted by the Board of Governors of the Federal
Reserve System, the OCC, the Federal Depository Insurance Company and the Office
of Thrift Supervision, and by the NCUA (with some modifications), prohibits
depository institutions from investing in some "high-risk mortgage securities"
(including securities such as some classes of the Offered Certificates), except
under limited circumstances, and sets forth various investment practices deemed
to be unsuitable for regulated institutions. On September 29, 1997, the FFEIC
released for public comment a proposed 1997 Statement which would replace the
Policy Statement. As proposed, the 1997 Statement would delete the specific
"high-risk mortgage securities" tests, and substitute general guidelines which
depository institutions should follow in managing risks (including market,
credit, liquidity, operational (transactional), and legal risks) applicable to
all securities (including mortgage pass-through securities and
mortgage-derivative products) used for investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by federal or state authorities before purchasing any
class of the Offered Certificates, as some classes may be deemed unsuitable
investments, or may otherwise be restricted, under those rules, policies or
guidelines (in some instances irrespective of SMMEA).
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, provisions which
may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," and, with regard to any class of the Offered
Certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
Other than specifying which Offered Certificates are "mortgage related
securities," we make no representations as to the proper characterization of any
class of Offered Certificates for legal investment purposes, financial
institution regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase any class of Offered Certificates under
applicable legal investment restrictions. These uncertainties (and any
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered Certificates) may
adversely affect the liquidity of any class of Offered Certificates.
Accordingly, all investors 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 of any class
constitute legal investments or are subject to investment, capital or other
restrictions.
PLAN OF DISTRIBUTION
We may sell the Certificates in series either directly or through
underwriters or dealers. The applicable prospectus supplement or prospectus
supplements for each series will describe the terms of the offering for that
series and will state the public offering or purchase price of each class of
Certificates of that series, or the method by which the price of each class of
Certificates of that series is to be determined, and the net proceeds to the
Depositor from the sale.
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If we use underwriters in the sale of any Certificates the underwriters
will acquire the Certificates for their own account and may resell the
Certificates in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. The obligations of the
underwriters to purchase the Certificates will be subject to conditions set
forth in the relevant agreement. The underwriters generally will be obligated to
purchase all of the Certificates of a series offered by a prospectus supplement
if any of those Certificates are purchased. The underwriters may sell debt
securities to or through dealers, and those dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters. The
underwriters may change from time to time any initial public offering price and
any discounts, concessions or commissions allowed or re-allowe or paid to
dealers.
The specific managing underwriter or underwriters, if any, with respect
to the offer and sale of a particular series of Certificates will be set forth
on the cover of the applicable prospectus supplement and the members of the
underwriting syndicate, if any, will be named in the prospectus supplement. We
will identify any underwriters and describe their compensation in a prospectus
supplement.
We also may sell Certificates directly to purchasers without the
involvement of underwriters in which case the applicable prospectus supplement
will contain information regarding the terms of that offering and any agreements
entered into in connection with that offering.
Purchasers of Certificates, including dealers, may, depending on the
facts and circumstances of those purchases, be deemed to be "underwriters"
within the meaning of the 1933 Act in connection with reoffers and sales by them
of Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any reoffer and sale of the Certificates.
LEGAL MATTERS
Legal matters relating to the Certificates will be passed upon for the
Depositor by O'Melveny & Myers LLP, New York, New York, and for the Underwriters
as specified in the applicable prospectus supplement.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this prospectus or in the applicable prospectus
supplement.
RATING
It is a condition of issuance that a Rating Agency rate the Offered
Certificates as investment grade, that is, in one of the four highest rating
categories.
Ratings on the Offered Certificates address the likelihood of all
payments to certificateholders pursuant to the terms of the Certificates. The
ratings of the Offered Certificates will be based on the structural, legal and
issuer-related aspects associated with those Certificates, the nature of the
underlying mortgage loans and the credit quality of the guarantor, if any.
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Ratings do not represent any assessment of the likelihood of principal
prepayments by borrowers of the loans underlying the Offered Certificates and
ratings do not represent the degree by which any actual prepayments might differ
from anticipated prepayments. As a result, holders of the Certificates may
suffer a lower than anticipated yield.
A rating is not a recommendation to buy, sell or hold the related
Offering Certificates. There is no assurance that a rating of the Offered
Certificates will not be lowered or withdrawn by the assigning Rating Agency if,
in its judgment, circumstances so warrant. The ratings of the Offered
Certificates should be evaluated independently from similar ratings on other
types of securities.
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GLOSSARY
"1986 ACT" means the Tax Reform Act of 1986.
"1997 STATEMENT" means the FFEIC proposed "Supervisory Policy Statement on
Investment Securities and End-User Derivatives Activities", which would replace
the Policy Statement.
"ACMS" means asbestos-containing materials.
"ADA" means Under Title III of the Americans with Disabilities Act of 1990 and
rules promulgated thereunder.
"BANKRUPTCY CODE" means the federal Bankruptcy Code, as amended from time to
time (11 U.S.C.).
"BENEFIT PLAN INVESTORS" which are defined as ERISA Plans, Tax Code Plans,
individual retirement accounts and employee benefit plans not subject to ERISA.
"CERTIFICATEHOLDERS" means registered holders of Certificates.
"CLOSING DATE" means the date of the initial issuance of each series of
Certificates.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLECTION ACCOUNT" means the master servicer will establish and maintain a
collection account on behalf of the certificateholders. Generally, payments
received on the mortgage loans will be deposited into the collection account.
"COMPOUND INTEREST CERTIFICATES" means Certificates on which interest is not
currently paid.
"CREDIT ENHANCEMENT" means certain classes of a series of certificates may have
the benefit of credit enhancement intended to increase the likelihood of
payments on those certificates. Credit enhancement may be in the form of a
letter of credit, a liquidity facility, the subordination of one or more other
classes of a series of certificates, reserve funds, overcollateralization,
surety bonds, certificate guarantee insurance, or other types of credit support.
It is unlikely that credit enhancement will protect against all risks of loss.
Credit enhancement cannot guarantee that losses will not be incurred on the
certificates. The applicable prospectus supplement will describe the amount and
types of credit enhancement, the identity of any entity providing credit
enhancement, the limitations of credit enhancement and other information
relating to any credit enhancement.
"DEFECTIVE OBLIGATION" includes (i) a mortgage in default or as to which default
is reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the mortgagor,
and (iv) a mortgage that was not in fact principally secured by real property
(but only if such mortgage is disposed of within 90 days of discovery).
"DEPARTMENT" means the U.S. Department of Labor.
"DEPOSITOR" means Prudential Securities Financing Corp.
"DISQUALIFIED ORGANIZATION" means the United States, any state or political
subdivision thereof, any foreign government, any international organization, any
agency or instrumentality of any of the foregoing (not including an
instrumentality if all of its activities are subject to tax and, except in the
case of the Federal Home Loan Mortgage Corporation, a majority of its board of
directors is not selected by any such governmental entity), any cooperative
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organization furnishing electric energy or providing telephone service to
persons in rural areas as described in Tax Code Section 1381(a)(2)(C), and any
organization (other than a farmers' cooperative described in Tax Code Section
521) that is exempt from taxation under the Tax Code unless such organization is
subject to the tax on unrelated business income imposed by Tax Code Section 511.
"DISTRIBUTION ACCOUNT" means the trustee will establish and maintain a
distribution account on behalf of the certificateholders. The master servicer
generally will deposit into the distribution account amounts held in the
collection account to pay principal and interest on the certificates in the
manner described in the related prospectus supplement.
"DISTRIBUTION DATE" means a day specified in a prospectus supplement upon which
distributions are to be made to the related Certificateholders.
"EPA" means the United States Environmental Protection Agency.
"EQUITY OF REDEMPTION" refers to a doctrine that provides that until the
property covered by a mortgage has been sold in accordance with a properly
conducted foreclosure sale, those having an interest that is subordinate to that
of the foreclosing mortgagee have an equity of redemption and may redeem the
property by paying the entire debt with interest.
"ERISA" means The Employee Retirement Income Security Act of 1974, as amended.
"ERISA PLANS" means employee benefit plans subject to ERISA.
"ESCROW ACCOUNT" means an escrow account established and maintained by the
Master Servicer in which the Master Servicer must deposit amounts received from
each mortgagor, if required by the terms of the related Mortgage Loan documents,
for the payment of taxes, assessments, certain mortgage and hazard insurance
premiums and other comparable items ("ESCROW PAYMENTS").
"ESCROW PAYMENTS" shall have the meaning ascribed to that term in the definition
of Escrow Account.
"EVENT OF DEFAULT" means an event of default with respect to the Master Servicer
or the Special Servicer under the Pooling and Servicing Agreement for each
series.
"EXCESS SERVICING" means payment of a servicing fee to the Master Servicer which
is in excess of reasonable compensation.
"FASIT" means a financial asset securitization investment trust.
"FFEIC" means Federal Financial Institutions Examination Council.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FORFEITURE LAWS" means the various federal and state laws, collectively, which
provide for the civil or criminal forfeiture of property (including real estate)
used or intended to be used to commit or aid in the commission of illegal acts
or property purchased with the proceeds of such illegal acts.
"FORM 8-K" means the Securities and Exchange Commission Form 8-K pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934.
"GARN-ST. GERMAIN ACT" means the Garn-St. Germain Depository Institutions Act of
1982.
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"GNMA" means the Governmental National Mortgage Association.
"HAZARDOUS MATERIALS" are generally defined as any dangerous, toxic or hazardous
pollutants, chemicals, wastes or substances, including, among others, those so
identified in CERCLA or any other environmental laws now existing, including,
among others, asbestos and asbestos-containing materials, polychlorinated
biphenyls, radon gas, petroleum and petroleum products, urea formaldehyde and
any substances classified as being "in inventory," "usable work in process" or a
similar classification that would, if classified as unusable, be included in the
foregoing definition.
"INSTALLMENT CONTRACTS" means installment contracts for the sale of, fee simple
or leasehold interests in properties improved by office buildings, health-care
related properties, congregate care facilities, hotels and motels, industrial
properties, warehouse, mini-warehouse, and self-storage facilities, mobile home
parks, multifamily properties, cooperative apartment buildings, nursing homes,
office/retail properties, anchored retail properties, single-tenant retail
properties, unanchored retail properties and other commercial real estate
properties, multifamily residential properties and/or mixed residential
commercial properties (each, a "MORTGAGED PROPERTY").
"LEAD PAINT ACT" means the Residential Lead-Based Paint Hazard Reduction Act of
1992.
"LENDER LIABILITY ACT" means the Asset Conservation, Lender Liability, and
Deposit Insurance Protection Act of 1996.
"MBS" means mortgage backed securities.
"MARK TO MARKET REGULATIONS" means regulations issued by the Service under Tax
Code Section 475 relating to the requirement that a securities dealer mark to
market securities held for sale to customers.
"MASTER SERVICER" has the meaning assigned to that term in the definition of
"Pooling and Servicing Agreement". The servicer of the Mortgage Loans (the
"Master Servicer") will be specified in the applicable prospectus supplement and
may be an affiliate of the Depositor.
"MASTER SERVICER REMITTANCE DATE" means the business day before a Distribution
Date upon which the Master Servicer is required to remit to the Distribution
Account amounts on deposit in the Collection Account that are required for
distribution to Certificateholders.
"MORTGAGE" means a mortgage loan secured by first or junior mortgages, deeds of
trust or similar instruments.
"MORTGAGE LOAN" means each mortgage loan, Installment Contract, participation
interest, certificate, or collateralized mortgage obligation in a Mortgage Pool.
"MORTGAGE LOAN GROUPS" means groups of Mortgage Loans segregated by the
Depositor as more fully described in the Prospectus Supplement.
"MORTGAGE LOAN SCHEDULE means a schedule appearing as an exhibit to a Pooling
and Servicing Agreement and listing the Mortgage Loans for the related series.
"MORTGAGE LOAN SELLER means the seller of a Mortgage Loan to the Depositor.
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"MORTGAGE POOL" means a pool of mortgage loans, which may include participation
interests in mortgage loans, mortgage pass-through or collateralized mortgage
obligation certificates, installment contracts and certificates issued or
guaranteed by certain United States governmental agencies. Each mortgage loan
will constitute the obligation of one or more persons to repay a specified sum
with interest and will be secured by first or junior mortgages, deed of trust or
similar security instruments on, or installment contracts for the sale of,
commercial or multifamily residential property. Commercial or multifamily
residential property may include fee simple or leasehold interests in property
improved by office buildings, health-care related properties, congregate care
facilities, hotels and motels, industrial properties, warehouse, mini-warehouse,
and self-storage facilities, mobile home parks, multifamily properties,
cooperative apartment buildings, nursing homes, office/retail properties,
anchored retail properties, single-tenant properties, unanchored retail
properties and other commercial real estate properties, multifamily residential
properties, each of which may be located in any or all states and the U.S.
Virgin Islands. The mortgage loans will not be guaranteed or insured by the
depositor or any of its affiliates. The prospectus supplement will indicate
whether the mortgage loans will be guaranteed or insured by any governmental
agency or instrumentality or other person. All mortgage loans will have been
purchased, either directly or indirectly, by the depositor on or before the
initial issuance date of the related series of certificates.
"MORTGAGED PROPERTY" shall have the meaning assigned to such term in the
definition of "Installment Contracts".
"MORTGAGEE" unless the context otherwise requires, includes a mortgagee under a
mortgage, a beneficiary under a deed of trust and a grantee under a deed to
secure debt. seller under an Installment Contract.
"MORTGAGOR" unless the context otherwise requires, includes a mortgagor under a
mortgage, a trustor under a deed of trust and a grantor under a deed to secure
debt purchaser under an Installment Contract.
"NCUN" means the National Credit Union Administration.
"NONECONOMIC RESIDUAL INTEREST" means a residual interest in a REMIC (including
a residual interest with a positive value at issuance) unless, at the time of
the transfer of such residual interest, (1) the present value of the expected
future distributions on the residual interest at least equals the product of the
present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs, and (2) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after he time at which taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
"NON-SMMEA CERTIFICATES" means Certificates not qualifying as "mortgage related
securities" under SMMEA.
"NON-U.S. PERSON" means any person who is not a U.S. Person.
"NOTE" means the promissory note, bond, mortgage consolidation agreement,
installment contract or other similar instrument related to an assignment of
leases and rents.
"OCC" means Office of the Comptroller of the Currency.
"OFFERED CERTIFICATES" means certificates offered by this prospectus and the
accompanying prospectus supplement.
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"OID REGULATIONS" means the temporary and final Treasury regulations issued on
February 2, 1994, as amended on June 14, 1996 under Tax Code Sections 1271
through 1273 and 1275.
"PASS-THROUGH ENTITY" means any regulated investment company, real estate
investment trust, common trust fund, partnership, trust or estate and certain
corporations operating on a cooperative basis. Except as may be provided in
Treasury regulations, any person holding an interest in a Pass-Through Entity as
a nominee for another will, with respect to that interest, be treated as a
Pass-Through Entity.
"PERMITTED INVESTMENTS" will generally consist of one or more of the following,
unless the Rating Agencies rating Certificates of a series require other or
additional investments:
(1) direct obligations of, or guarantees as to timely payment of
principal and interest by, the United States or any agency or
instrumentality thereof, provided that those obligations are
backed by the full faith and credit of the United States of
America;
(2) direct obligations of the FHLMC (debt obligations only),
Fannie Mae (debt obligations only), the Federal Farm Credit
System (consolidated system-wide bonds and notes only), the
Federal Home Loan Banks (consolidated debt obligations only),
the Student Loan Marketing Association (debt obligations
only), the Financing Corp. (consolidated debt obligations
only) and the Resolution Funding Corp. (debt obligations
only);
(3) federal funds time deposits in, or certificates of deposit of,
or bankers' acceptances or repurchase obligations issued by,
any bank or trust company, savings and loan association or
savings bank, depositing institution or trust company having
the highest short-term debt obligation from Standard & Poor's
Rating Services, a division of the McGraw-Hill Companies, Inc.
("S&P") or such lower rating as will not result in the
downgrade or withdrawal of the rating or ratings then assigned
to the Certificates by any Rating Agency rating the
Certificates, provided, in each case, the maturity is not more
than 365 days;
(4) commercial paper having a maturity of 365 days or less
(including both non-interest-bearing discount obligations and
interest-bearing obligations payable on demand or on a
specified date not more than one year after the date of
issuance thereof and demand notes that constitute vehicles for
investment in commercial paper) that is rated by each Rating
Agency rating the Certificates in its highest short-term
unsecured rating category;
(5) units of taxable money market funds or mutual funds that seek
to maintain a constant asset value and have been rated by each
Rating Agency rating the Certificates as Permitted
Investments;
(6) if previously confirmed in writing to the Trustee, any other
demand, money market or time deposit, or any other obligation,
security or investment as may be acceptable to each Rating
Agency rating the Certificates as a permitted investment of
funds backing securities having ratings equivalent to each
Rating Agency's highest initial rating of the Certificates;
and
(7) such other obligations as are acceptable as Permitted
Investments to each Rating Agency rating the Certificates;
provided, however, that (a) if S&P is rating the Certificates,
none of the obligations or securities listed above may have an
"r" highlighter affixed to its rating if rated by S&P; (b)
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except for units of money market funds pursuant to clause (5)
above, each obligation or security will have a fixed dollar
amount of principal due at maturity which cannot vary or
change; (c) except for units of money market funds pursuant to
clause (5) above, if any obligation or security provides for a
variable rate of interest, interest will be tied to a single
interest rate index plus a single fixed spread (if any) and
move proportionately with that index; and (d) if any of the
obligations or securities listed in paragraphs (3) -(6) above
are not rated by each Rating Agency rating the Certificates,
such investment will nonetheless qualify as a Permitted
Investment if it is rated by one of the Rating Agencies rating
the Certificates and one other nationally recognized
statistical rating organization; and provided, further, that
such instrument continues to qualify as a "cash flow
investment" pursuant to Tax Code Section 860G(a)(6) earning a
passive return in the nature of interest and that no
instrument or security will be a Permitted Investment if (a)
such instrument or security evidences a right to receive only
interest payments or (b) the right to receive principal and
interest payments derived from the underlying investment
provides a yield to maturity in excess of 120% of the yield to
maturity at par of the underlying investment as of the date of
its acquisition.
"PLANS" means Tax Code Plans together with ERISA Plans.
"PLAN ASSET REGULATIONS" means regulations issued by the Department concerning
whether a Plan's assets will be considered to include an undivided interest in
each of the underlying assets of an entity for purposes of the general fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Tax Code, if the Plan acquires an "equity
interest" in an entity.
"POLICY STATEMENT" means the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992, as revised April 15, 1994, of the FFIEC.
"POOLING AND SERVICING AGREEMENT" means an agreement pursuant to which a series
of Certificates is issued and which is entered into among the Depositor, the
master servicer (the "MASTER SERVICER"), the special servicer (the "SPECIAL
SERVICER"),if any, and the Trustee for that series of Certificates and any other
parties described in the related prospectus supplement.
"PREPAYMENT ASSUMPTION" means the assumed rate of prepayment of the Mortgage
Loans.
"PTCE" means Prohibited Transaction Class Exemption.
"PROPERTY PROTECTION EXPENSES" means certain costs and expenses incurred in
connection with defaulted Mortgage Loans, the acquisition of title to, or
management of, REO Property, or the sale of defaulted Mortgage Loans or REO
Properties. The applicable prospectus supplement may provide for additional
circumstances in which the Master Servicer will be entitled to make withdrawals
from the Collection Account.
"RATING AGENCY" means each nationally recognized statistical rating organization
specified in a prospectus supplement as rating Offered Certificates.
"REITS" means Real Estate Investment Trusts.
"REMIC CERTIFICATES" means Certificates of a series as to which one or more
REMIC elections are made.
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"REMIC POOL" means a Trust Fund or portion thereof as to which a REMIC election
is made.
"REMIC REGULATIONS" mean regulations promulgated by the U.S. Department of
Treasury (regarding REMICs).
"REO ACCOUNT" means an account established and maintained by the Master Servicer
or Special Servicer to be used in connection with REO Properties and any other
Mortgaged Properties specified in the related prospectus supplement.
"RELIEF ACT" means the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
"REGULAR CERTIFICATEHOLDER" means the holder of a Regular Certificate.
"RESERVE ACCOUNT" means any reserve or escrow account established pursuant to
any of the Mortgage Loan documents.
"RESERVE FUND" means each of one or more reserve funds which may be established
with respect to one or more classes of the Certificates of a series if so
specified in the related prospectus supplement, in which cash, a letter of
credit, Permitted Investments or a combination thereof, in the amounts specified
in the related prospectus supplement will be deposited.
"RESIDUAL CERTIFICATEHOLDERS" means holders of Residual Certificates.
"SBJPA OF 1996" means the Small Business Job Protection Act of 1996.
"SMMEA means the Secondary Mortgage Market Enhancement Act of 1984, as amended.
"SENIOR CERTIFICATES" means the senior Certificates in any series which includes
Subordinate Certificates.
"SERVICE" means the Internal Revenue Service.
"SERVICING FEE" means the Master Servicer's principal compensation for its
activities under the Pooling and Servicing Agreement for each series; the exact
amount and calculation of which is established in the prospectus supplement and
Pooling and Servicing Agreement for the related series.
"SPECIAL SERVICING FEE" means the fee for the servicing of Specially Serviced
Mortgage Loans.
"SPECIALLY SERVICED MORTGAGE LOANS" means defaulted Mortgage Loans or those
Mortgage Loans that otherwise require special servicing.
"SPECIAL SERVICER" has the meaning assigned to that term in the definition of
"Pooling and Servicing Agreement".
"STANDARD CERTIFICATES" means any series of Certificates that is not designated
as Stripped Certificates.
"STANDARD CERTIFICATEHOLDER" means the holder of a Standard Certificate.
"STARTUP DAY" means the date of issuance of the REMTC Certificates.
"STRIPPED CERTIFICATE" means Certificates subject to Tax Code Section 1286,
which provides that the separation of ownership of the right to receive some or
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all of the principal payments on an obligation from ownership of the right to
receive some or all of the interest payments results in the creation of
"stripped bonds" with respect to principal payments and "stripped coupons";
Stripped Certificates include "Stripped Interest Certificates" and "Stripped
Principal Certificates" as to which no REMIC election is made.
"STRIPPED CERTIFICATEHOLDER" means a holder of a Stripped Certificate.
"SUBORDINATE CERTIFICATES" means one or more subordinate classes of a series if
so specified in the related prospectus supplement.
"TAX CODE PLANS" means employee benefit plans subject to Section 4975 of the Tax
Code.
"TITLE V" means Title V of the federal Depository Institutions Deregulation and
Monetary Control Act of 1980, as amended.
"TITLE VIII" means Title VIII of the Garn-St. Germain Act.
"TREASURY" means the U.S. Department of Treasury.
"TRUST FUND" for a series means the trust fund created pursuant that series'
Pooling and Servicing Agreement.
"TRUSTEE" means the bank or trust company which the Depositor selects to act as
trustee under a given Pooling and Servicing Agreement.
"UCC" means Uniform Commercial Code.
"U.S. PERSON" means 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 State, an estate that is subject to United States federal
income tax regardless of the source of its income or a trust if (a) for taxable
years beginning after December 31, 1996 (or for taxable years ending after
August 20, 1996, if the trustee has made an applicable election), a court within
the United States is able to exercise primary supervision over the
administration of such trust, and one or more United States persons have the
authority to control all substantial decisions of such trust, or (b) for all
other taxable years, such trust is subject to United States federal income tax
regardless of the source of its income (or, to the extent provided in applicable
Treasury Regulations, certain trusts in existence on August 20, 1996 which are
eligible to elect to be treated as U.S. Persons).
"USTS" means Underground storage tanks.
"UNDERWRITER'S EXEMPTION" means an individual administrative exemption from
application of certain prohibited transaction restrictions of ERISA and the Tax
Code, issued by the Department to an underwriters of mortgage-backed securities.
"VOTING RIGHTS" means the consent or approval of the holders of a specified
percentage of the aggregate Certificate Balance of all outstanding Certificates
of a series or any similar means of allocating decision-making under the related
Pooling and Servicing Agreement specified in the related prospectus supplement.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the Offered Certificates, other than
underwriting discounts and commissions:
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee $ 413,000
Engraving Fee $ 5,000
Legal Fees and Expenses $ 400,000
Accounting Fees and Expenses $ 250,000
Trustee Fees and Expenses $ 40,000
Blue Sky Qualification Fees and Expenses $ 10,000
Rating Agency Fees (Two Agencies) $1,300,000
Miscellaneous $ 10,000
----------
Total $2,428,000
</TABLE>
ITEM 15 INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 7 of the proposed Underwriting Agreement, the
Underwriters are obligated under certain circumstances to indemnify certain
controlling persons of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933.
The Registrant's By-laws provide for indemnification of directors and
officers of the Registrant to the full extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they are or
were directors, officers, employees or agents, against expenses incurred in any
such action, suit or proceeding.
The Pooling and Servicing Agreements may provide that no director,
officer employee or agent of the Registrant is liable to the Trust Fund or the
Certificateholders, 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; provided, however, that the Pooling and Servicing
Agreements may provide that such indemnification will not extend to any loss,
liability or expense (i) that such person is specifically required to bear
pursuant to the terms of such Pooling and Servicing Agreement, or is incidental
to the performance of obligations and duties thereunder and is not otherwise
reimbursable pursuant to such Pooling and Servicing Agreement, or is incidental
to the performance of obligations and duties thereunder and is not otherwise
reimbursable pursuant to such Pooling and Servicing Agreement; (ii) incurred in
connection with any breach of a representation, warranty or covenant made in
such Pooling and Servicing Agreement; (iii) incurred by reason of misfeasance,
bad faith or gross negligence in the performance of obligations or duties under
such Pooling and Servicing Agreement, or by reason of reckless disregard of such
obligations or duties; or (iv) incurred in connection with any violation of any
state or federal securities law.
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ITEM 16 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
All financial statements, schedules and historical
financial information of the Registrant have been omitted as they
are not applicable.
(b) Exhibits:
1.1 Form of Underwriting Agreement
4.1 Form of Pooling and Servicing Agreement*
5.1 Opinion of O'Melveny & Myers LLP as to legality of the
Certificates**
8.1 Opinion of O'Melveny & Myers LLP as to certain tax matters
(included in Exhibit 5.1)**
23.1 Consent of O'Melveny & Myers LLP (Included in Exhibits 5.1 and 8.1
hereto)**
24.1 Power of Attorney***
===============
* Previously filed.
** To be filed by amendment.
*** Included on page II-4.
ITEM 17 UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(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;
iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change of such information in the
Registration Statement.
provided, however, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is contained
in periodic reports filed by the Issuer pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
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.
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(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.
The Registrant hereby undertakes 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 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.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 15 above,
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 against the Registrant 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.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that based upon
its reasonable belief that the appropriate security ratings will be obtained by
the time of the respective sale of registered securities, it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
its 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
19th day of May, 1999.
PRUDENTIAL SECURITIES
SECURED FINANCING CORPORATION
/s/ Vincent T. Pica II
---------------------------
Name: Vincent T. Pica II
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No.1 to Registration Statement has been signed below as of May 19th,
1999, by the following persons in the capacities indicated:
SIGNATURE TITLE
/s/ Martin Pfinsgraff* Chairman
----------------------
Martin Pfinsgraff
/s/ Vincent T. Pica II Director and President
(Principal Executive
---------------------- Officer)
Vincent T. Pica II
/s/ Leland B. Paton* Director
----------------------
Leland B. Paton
/s/ P. Carter Rise* Director
----------------------
P. Carter Rise
/s/ William Horan* Chief Financial Officer
----------------------
William Horan
<PAGE>
/s/ Robert Troiano Treasurer
(Principal Accounting
----------------------- Officer)
Robert Troiano
*By: Vincent T. Pica II
------------------------
Attorney-in-Fact
<PAGE>
KNOW ALL MEN THESE PRESENTS, that the person whose signature appears below
constitutes and appoints Vincent T. Pica II his/her true and lawful
attorney-in-fact and agent, with full powers of substitution and resubstitution,
for and in his/her name, place and stead, in any and all capacities to sign any
or all amendments (including post-effective amendments) to this Registration
Statement and any or all other documents in connection therewith, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
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 might or could be done in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his/her substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE
/s/ Robert Troiano Treasurer
---------------------------
Robert Troiano
