<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998
------------------
Commission file number 1-10360
-------
CRIIMI MAE INC.
- --------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 52-1622022
- ------------------------------------------ ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(301) 816-2300
- --------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of July 30, 1998
- ---------------------------- ----------------------------------
Common Stock, $.01 par value 48,034,099
<PAGE>2
CRIIMI MAE INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
Page
----
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - as of June 30, 1998
(unaudited) and December 31, 1997 . . . . . . . 3
Consolidated Statements of Income - for the
three and six months ended June 30, 1998
and 1997 (unaudited) . . . . . . . . . . . . . 5
Consolidated Statement of Changes in
Shareholders' Equity - for the six months
ended June 30, 1998 (unaudited) . . . . . . . . 7
Consolidated Statements of Cash Flows -
for the six months ended June 30, 1998
and 1997 (unaudited) . . . . . . . . . . . . . 8
Notes to Consolidated Financial Statements . . .
(unaudited) . . . . . . . . . . . . . . . . . . 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 38
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 53
Item 2. Changes in Securities . . . . . . . . . . . . . . 54
Item 3. Defaults Upon Senior Notes . . . . . . . . . . . 54
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . 54
Item 5. Other Information . . . . . . . . . . . . . . . . 54
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 55
Signature . . . . . . . . . . . . . . . . . . . . . . . . 56
<PAGE>3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- --------------
(unaudited)
<S> <C> <C>
Assets:
Mortgage Assets:
Subordinated CMBS, at fair value $1,566,016,034 $ 35,424,387
Subordinated CMBS, at amortized cost -- 1,079,055,459
Mortgage securities, insured loans, at
fair value 587,031,839 18,888,883
Mortgage securities, insured loans, at
amortized cost -- 586,224,858
Investment in originated loans, at
amortized cost 503,643,362 --
Equity Investments 44,731,988 46,234,269
Receivables and other assets 120,209,124 105,368,838
Cash and cash equivalents 20,423,168 2,108,794
-------------- --------------
Total assets $2,842,055,515 $1,873,305,488
============== ==============
<PAGE>4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Liabilities:
Securitized mortgage obligations:
Collateralized bond obligations-CMBS $ 117,674,604 $ 137,061,676
Collateralized mortgage obligations -
insured loans 527,168,191 559,363,321
Collateralized mortgage obligations -
originated loans 390,159,048 --
Senior unsecured notes 99,890,133 99,877,695
Repurchase Agreements-CMBS 957,668,475 585,379,360
Other financing facilities 28,700,000 33,250,000
Payables and accrued expenses 18,291,043 12,460,018
-------------- --------------
Total liabilities 2,139,551,494 1,427,392,070
-------------- --------------
Minority interests in
consolidated subsidiaries 927,708 932,431
-------------- --------------
Shareholders' equity:
Convertible preferred stock 18,796 18,294
Common stock 478,001 406,703
Net unrealized gains on securities 117,951,440 1,082,811
Additional paid-in capital 583,128,076 448,524,552
-------------- --------------
701,576,313 450,032,360
Less treasury shares, at cost-
538,635 shares -- (5,051,373)
-------------- --------------
Total shareholders' equity 701,576,313 444,980,987
-------------- --------------
Total liabilities and shareholders'
equity $2,842,055,515 $1,873,305,488
============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE><CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1998 1997 1998 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $35,547,939 $17,515,784 $66,438,960 $34,279,820
Collateralized mortgage obligations -
insured loans 11,277,667 12,251,276 22,865,904 24,912,078
Collateralized mortgage obligations -
originated loans 2,749,695 -- 2,749,695 --
----------- ----------- ----------- -----------
Total interest income 49,575,301 29,767,060 92,054,559 59,191,898
----------- ----------- ----------- -----------
Interest and related expenses:
Fixed-rate collateralized bond obligations - CMBS 2,355,015 2,897,118 5,169,181 5,681,129
Fixed-rate collateralized mortgage
obligations - insured loans 10,198,204 10,637,167 20,654,525 21,593,028
Fixed-rate collateralized mortgage
obligations - originated loans 1,998,166 -- 1,998,166 --
Fixed-rate senior unsecured notes 2,431,723 -- 4,831,347 --
Floating-rate repurchase agreements - CMBS 14,629,517 3,347,292 25,858,460 7,726,844
Other financing facilities 450,659 184,499 943,458 386,999
----------- ----------- ----------- -----------
Total interest expense 32,063,284 17,066,076 59,455,137 35,388,000
----------- ----------- ----------- -----------
Net interest margin 17,512,017 12,700,984 32,599,422 23,803,898
----------- ----------- ----------- -----------
Gain on sale of securities 29,140,689 -- 29,140,689 --
Equity in earnings from investments 941,719 730,940 2,244,696 1,545,462
Other income 1,623,924 348,749 2,811,981 1,269,096
(Loss) gain on mortgage dispositions (92,283) 95,000 (45,834) 17,233,949
General and administrative expenses (3,047,234) (2,656,255) (6,030,991) (5,061,491)
Amortization of assets acquired in the Merger (719,394) (719,391) (1,438,788) (1,438,782)
----------- ----------- ----------- -----------
27,847,421 (2,200,957) 26,681,753 13,548,234
----------- ----------- ----------- -----------
Net income before minority interest 45,359,438 10,500,027 59,281,175 37,352,132
Minority interest in net income of
consolidated subsidiary (15,055) (87,842) (41,364) (7,840,407)
Dividends on preferred stock (1,918,007) (1,541,478) (3,557,504) (3,366,865)
----------- ----------- ----------- -----------
Net income available to common shareholders $43,426,376 $ 8,870,707 $55,682,307 $26,144,860
=========== =========== =========== ===========
<PAGE>6
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Net income per common share:
Basic $ 0.92 $ 0.24 $ 1.23 $ 0.75
=========== =========== =========== ===========
Diluted $ 0.85 $ 0.23 $ 1.16 $ 0.69
=========== =========== =========== ===========
Shares used in computing basic
earnings per share, exclusive of
shares held in treasury 47,274,908 37,736,831 45,101,762 34,825,567
=========== =========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>7
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Net
Preferred Common Stock Unrealized Additional Total
Stock Par Par Gains on Paid-in Undistributed Treasury Shareholders'
Value Value Securities Capital Net Income Shares Equity
---------- ------------ ------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997 $ 18,294 $ 406,703 $ 1,082,811 $ 448,524,552 $ -- $ (5,051,373)$ 444,980,987
Net income -- -- -- -- 59,239,811 -- 59,239,811
Dividends paid on
preferred shares -- -- -- -- (3,557,504) -- (3,557,504)
Dividends paid on common
shares -- -- -- -- (35,551,273) -- (35,551,273)
Conversion of preferred shares
into common shares (998) 4,585 -- (3,587) -- -- --
Stock options exercised -- 352 -- 256,932 -- -- 257,284
Adjustment to net unrealized
gains on securities -- -- 116,868,629 -- -- -- 116,868,629
Shares issued 1,500 71,747 -- 119,265,132 -- -- 119,338,379
Treasury shares
retired -- (5,386) -- (5,045,987) -- 5,051,373 --
---------- ------------ ------------- ------------- ------------- ------------ -------------
Balance, June 30,
1998 $ 18,796 $ 478,001 $ 117,951,440 $ 562,997,042 $ 20,131,034 $ -- $ 701,576,313
========== ============ ============= ============= ============= ============ =============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>8
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1998 1997
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 59,239,811 $ 29,511,726
Adjustments to reconcile net income to net cash provided
by operating activities:
Reclassification of cash gain on sale of collateralized
bond obligation to investing activities (29,140,689) --
Amortization of discount and deferred financing
costs on debt 2,448,867 1,853,564
Amortization of assets acquired in the Merger 1,438,788 1,438,782
Depreciation and other amortization 850,940 419,595
Discount/Premium amortization on mortgages and Subordinated CMBS (1,248,750) 122,554
Net loss/(gains) on mortgage dispositions 45,834 (17,181,590)
Equity in earnings from investments 800,818 (272,891)
Valuation adjustment to hedges -- 28,250
Minority interests in earnings of consolidated subsidiary 41,364 7,840,407
Changes in assets and liabilities:
(Increase) decrease in receivables and other assets (24,076,015) 33,967
Increase (decrease) in payables and accrued expenses 1,002,637 (201,430)
Increase in interest payable 5,078,498 575,898
-------------- ------------
Net cash provided by operating activities 16,482,103 24,168,832
-------------- ------------
Cash flows from investing activities:
Proceeds from sale of collateralized bond obligation 334,919,531 --
Purchase of originated loans (495,825,576) --
Purchase of Subordinated CMBS (786,870,157) (80,984,641)
Net funding of loan origination reserve 10,658,541 (1,885,800)
Payment of deferred costs (9,049,031) (2,141)
Distributions received from equity investments 4,350,000 --
Proceeds from mortgage dispositions 32,734,704 69,349,521
Receipt of principal payments 7,992,195 3,139,128
Purchase of Real Estate Owned Property -- (3,700,116)
Servicing rights acquired and contributed to Services Partnership (3,928,957) (2,422,077)
-------------- ------------
Net cash (used in) investing activities (905,018,750) (16,506,126)
-------------- ------------
<PAGE>9
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Cash flows from financing activities:
Proceeds from sale of CMO bonds 390,068,687 --
Proceeds from debt issuances 1,862,928,331 151,001,288
Principal payments on debt obligations (1,418,311,314) (173,260,149)
Increase in deferred financing costs (8,275,482) (1,865,075)
Dividends (including return of capital) paid to shareholders,
including minority interests (39,154,864) (52,822,348)
Proceeds from the issuance of convertible preferred shares 15,000,000 --
Proceeds from the issuance of common shares 104,595,663 75,200,833
-------------- ------------
Net cash provided by (used in) financing activities 906,851,021 (1,745,451)
-------------- ------------
Net increase in cash and cash equivalents 18,314,374 5,917,255
Cash and cash equivalents, beginning of period 2,108,794 10,966,354
-------------- ------------
Cash and cash equivalents, end of period $ 20,423,168 $ 16,883,609
============== ============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>10
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
CRIIMI MAE Inc. ("CRIIMI MAE" or the "Company") is a fully integrated
commercial mortgage company structured as a self-administered real estate
investment trust ("REIT"). CRIIMI MAE's primary activities include (i)
originating, servicing, and securitizing commercial mortgage loans and
commercial mortgage backed securities ("CMBS") and (ii) acquiring non-investment
grade subordinated securities backed by first mortgage loans on multifamily
properties and other commercial real estate ("Subordinated CMBS"). CRIIMI MAE
believes that its focus on acquiring Subordinated CMBS, together with its
expertise in underwriting, servicing and originating commercial mortgage loans
and CMBS, has enabled the Company to take advantage of the rapid growth in the
securitization of debt backed by commercial mortgage loans.
CRIIMI MAE owns 100% of multiple financing and operating subsidiaries
(discussed in Note 6), and various interests in other entities which either own
or service mortgage assets.
The Company intends to conduct its business so as not to become regulated
as an investment company under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). Under the Investment Company Act, a non-exempt
entity that is an investment company is required to register with the Securities
and Exchange Commission ("SEC") and is subject to extensive, restrictive and
potentially adverse regulation relating to, among other things, operating
methods, management, capital structure, dividends and transactions with
affiliates. The Investment Company Act exempts entities that are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" ("Qualifying Interests"). Under current
interpretation by the staff of the SEC, to qualify for this exemption, CRIIMI
MAE, among other things, must maintain at least 55% of its assets in Qualifying
Interests. Pursuant to such SEC staff interpretations, CRIIMI MAE's Government
Insured Mortgage Assets and originated loans are Qualifying Interests. The
Company will acquire Subordinated CMBS only when such mortgage assets are
collateralized by pools of first mortgage loans, when the Company can monitor
the performance of the underlying mortgage loans through loan management and
servicing rights, and when the Company has appropriate workout/foreclosure
rights with respect to the underlying mortgage loans. When such arrangements
exist, CRIIMI MAE believes that the related Subordinated CMBS constitute
Qualifying Interests for purposes of the Investment Company Act. Therefore,
CRIIMI MAE believes that it should not be required to register as an "investment
company" under the Investment Company Act as long as it continues to invest
primarily in such Subordinated CMBS and/or in other Qualifying Interests.
However, if the SEC or its staff were to take a different position with respect
to whether CRIIMI MAE's Subordinated CMBS constitute Qualifying Interests, the
Company could be required to modify its business plan so that either (i) it
would not be required to register as an investment company or (ii) it would
comply with the Investment Company Act and be able to register as an investment
company. In such event, (i) modification of the Company's business plan so that
it would not be required to register as an investment company would likely
entail a disposition of a significant portion of the Company's Subordinated CMBS
or the acquisition of significant additional assets, such as Government Insured
Mortgage Assets, which are Qualifying Interests or (ii) modification of the
Company's business plan to register as an investment company, which would result
in significantly increased operating expenses and would likely entail
significantly reducing the Company's indebtedness (including the possible
prepayment of the Company's repurchase agreement financing and/or the Notes),
which could also require it to sell a significant portion of its assets. No
assurances can be given that any such dispositions or acquisitions of assets, or
deleveraging, could be accomplished on favorable terms. Consequently, any such
modification of the Company's business plan could have a material adverse effect
<PAGE>11
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization - Continued
on the Company. Further, if it were established that the Company were an
unregistered investment company, there would be a risk that the Company would be
subject to monetary penalties and injunctive relief in an action brought by the
SEC, that the Company would be unable to enforce contracts with third parties
and that third parties could seek to obtain recission of transactions undertaken
during the period it was established that the Company was an unregistered
investment company. Any such results would be likely to have a material adverse
effect on the Company.
2. Basis of Presentation
In management's opinion, the accompanying unaudited consolidated financial
statements of CRIIMI MAE, CRIIMI MAE Management Inc. ("CRIIMI Management"),
CRIIMI MAE Financial Corporation, CRIIMI MAE Financial Corporation II, CRIIMI
MAE Financial Corporation III, CRIIMI MAE QRS 1, Inc., CRIIMI MAE Holding Inc.,
CRIIMI MAE Holding L.P. and CRIIMI, Inc., and CRIIMI MAE CMBS Corporation
contain all adjustments (consisting of only normal recurring adjustments and
consolidating adjustments) necessary to present fairly the consolidated
financial position of CRIIMI MAE as of June 30, 1998 and December 31, 1997, the
consolidated results of its operations for the three and six months ended June
30, 1998 and 1997 and its cash flows for the six months ended June 30, 1998 and
1997.
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the SEC. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. While management believes that the disclosures presented are adequate
to make the information not misleading, it is recommended that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes included in CRIIMI MAE's Annual Report filed
on Form 10-K for the year ended December 31, 1997.
<PAGE>12
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies - Continued
Method of Accounting
--------------------
The consolidated financial statements of CRIIMI MAE are prepared on
the accrual basis of accounting in accordance with generally accepted
accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
-----------------
Certain amounts in the consolidated financial statements as of and for
December 31, 1997 and the three and six months ended June 30, 1997 have
been reclassified to conform to the 1998 presentation.
Transfer of Financial Assets
----------------------------
The Company transfers assets (mortgages and mortgage securities) in
securitization transactions where the transferred assets become the sole
source of repayment for newly issued debt. When both legal and control
rights to a financial asset are transferred, the transfer is treated as a
sale. Transfers are assessed on an individual component basis. In a
securitization, the cost basis of the original assets transferred is
allocated to each of the new financial components based upon the relative
fair value of the new financial components. For components where sale
treatment is achieved, a gain or loss is recognized for the difference
between that components allocated cost basis and fair value. For
components where sale treatment is not achieved, an asset is recorded
representing the allocated cost basis of the new financial components
retained and the related incurrence of debt is also recorded. In
transactions where none of the components are sold, the Company recognizes
the incurrence of debt and the character of the collateralizing assets
remain unchanged.
Subordinated CMBS
-----------------
On May 8, 1998, CRIIMI MAE consummated a transaction which resulted in
the sale of a portion of its Subordinated CMBS portfolio (Note 4). In
accordance with Generally Accepted Accounting Principles ("GAAP"), the
Company will no longer classify CMBS Securities as Held to Maturity. The
Company's CMBS Securities will be classified as Available for Sale. As a
result, CRIIMI MAE will now carry its Subordinated CMBS at fair
<PAGE>13
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies - Continued
market value where changes in fair value are recorded as a component of
stockholders equity. As of June 30, 1998, the fair value is approximately
$100 million in excess of their amortized cost basis.
CRIIMI MAE recognizes income from Subordinated CMBS using the
effective interest method, using the anticipated yield over the projected
life of the investment. Changes in anticipated yields are generally due to
revisions in estimates of future credit losses, actual losses incurred and
actual prepayments. Changes in anticipated yield resulting from prepayments
are recognized over the remaining life of the investment with recognition
of a cumulative catch-up at the date of change from the original investment
date. CRIIMI MAE recognizes impairment on its Subordinated CMBS whenever
it determines that the current estimate of expected future credit losses
exceeds credit losses as originally projected. Impairment losses are
determined by comparing the fair value of a Subordinated CMBS to its
current carrying amount, the difference being recognized as a loss. If
future credit loss estimates are increased and the fair value of the
related Subordinated CMBS is in excess of its carrying amount, the yield is
adjusted accordingly on a prospective basis. Reduced estimates of credit
losses are recognized as an adjustment to the estimated yield over the
remaining life of the Subordinated CMBS.
Investment in Originated Loans
------------------------------
This portfolio consists of commercial loans originated and securitized
by CRIIMI MAE. The origination fee income, application fee income and
costs associated with originating the loans were deferred and the net
amount was added to the basis of the loans on the balance sheet. Income is
recognized using the effective interest method and consists of mortgage
income from the loans and amortization of deferred loan costs. Expenses
from this portfolio consists of interest expense, discount amortization and
amortization of costs incurred in conjunction with the securitization.
CRIIMI MAE has the intent to hold these loans to maturity and therefore the
mortgage security collateral is classified as Held for Investment and are
recorded at amortized cost on the balance sheet. The Company recognizes
impairment on the loans when it is probable that they will not be able to
collect all amounts due according to the contractual terms of the loan
agreement. The Company measures impairment based on the present value of
expected future cash flows discounted at the loans effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Mortgage Securities - Insured Loans
-----------------------------------
CRIIMI MAE's consolidated investment in mortgage securities comprises
participation certificates evidencing a 100% undivided beneficial interest
in Government Insured Multifamily Mortgages issued or sold pursuant to
programs of the Federal Housing Administration (FHA) (FHA-Insured Loans)
and mortgage-backed securities guaranteed by the Government National
Mortgage Association (GNMA) (GNMA Mortgage-Backed Securities). Payment of
principal and interest on FHA-Insured Loans is insured by the US Department
of Housing and Urban Development (HUD) pursuant to Title 2 of the National
Housing Act. Payment of principal and interest on GNMA Mortgage-Backed
Securities is guaranteed by GNMA pursuant to Title 3 of the National
Housing Act.
As a result of the May 8, 1998 transaction involving the sale of a
portion of its Subordinated CMBS portfolio (Note 4), the Company, in
accordance with GAAP, will no longer classify these mortgage securities as
<PAGE>14
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies - Continued
Held to Maturity. The Company's mortgage securities will be classified as
Available for Sale. As a result, the Company will now carry its mortgage
securities at fair value where changes in fair value are recorded as a
component of stockholders' equity. As of June 30, 1998, the fair value is
approximately $18 million in excess of their amortized cost basis.
The difference between the cost and the unpaid principal balance at
the time of purchase is carried as a discount or premium and amortized over
the remaining contractual life of the mortgage using the effective interest
method. The effective interest method provides a constant yield of income
over the term of the mortgage.
Mortgage income comprises amortization of the discount plus the stated
mortgage interest payments received or accrued less amortization of the
premium.
Interest Rate Protection Agreements
-----------------------------------
CRIIMI MAE acquires interest rate protection agreements to reduce its
exposure to interest rate risk. The costs of such agreements which qualify
for hedge accounting are amortized over the interest rate agreement term.
To qualify for hedge accounting, the interest rate protection agreement
must meet two criteria: (1) the debt to be hedged exposes CRIIMI MAE to
interest rate risk and (2) the interest rate protection agreement reduces
CRIIMI MAE's exposure to interest rate risk. In the event that interest
rate protection agreements are terminated, the associated gain or loss is
deferred over the remaining term of the agreement, provided that the
underlying hedged asset or liability still exists. Amounts to be paid or
received under interest rate protection agreements are accrued currently
and are netted with interest expense for financial statement presentation
purposes. Additionally, in the event that interest rate protection
agreements do not qualify as hedges, such agreements are reclassified to be
investments accounted for at fair value, with any gain or loss included as
a component of income.
Consolidated Statements of Cash Flows
-------------------------------------
Cash payments made for interest during the six months ended June 30,
1998 and 1997 were $51,927,772 and $32,958,537, respectively.
Per Share Amounts
-----------------
Basic earnings per share amounts for the three and six months ended
June 30, 1998 and 1997 represent net income available to common
shareholders' divided by the weighted average common shares outstanding
during each period. Diluted earnings per share amounts for the three and
six months ended June 30, 1998 and 1997 are adjusted for dilutive common
stock equivalents for which CRIIMI MAE includes stock options and certain
classes of preferred stock. See Note 12 for a reconciliation of basic
earnings per share to diluted earnings per share.
New Accounting Statements
-------------------------
During 1997, FASB Issued SFAS No. 130 "Reporting Comprehensive Income"
("FAS 130"). FAS 130 states that all items that are required to be
recognized under accounting standards as components of comprehensive income
are to be reported in the statement of income. This would include net
income as currently reported by CRIIMI MAE adjusted for unrealized gains
<PAGE>15
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies - Continued
and losses related to CRIIMI MAE's sale of callable investment grade
securities (as discussed in Note 4), Subordinated CMBS, mortgages and IO
CMBS accounted for as "available for sale". Net unrealized gains and
losses are currently reported in the shareholders' equity section of the
balance sheet. FAS 130 is effective beginning January 1, 1998.
Comprehensive income under FAS 130 for the three months ended June 30,
1998 and 1997 would be $161,939,772 and $10,563,221, respectively, and for
the six months ended June 30, 1998 and 1997 would be $176,108,440 and
$20,717,220, respectively.
During 1997, FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes
standards for the way that public business enterprises report information
about operating segments and related disclosures about products and
services, geographical areas and major customers. FAS 131 is effective for
the year ending 1998.
During 1998, FASB issued SFAS 133 "Accounting for Derivative
Instruments and for Hedging Activities" ("FAS 133"). FAS 133 establishes
accounting and reporting standards for derivative investments and for
hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. FAS 133 is effective for the
Company beginning January 1, 2000. The Company is evaluating its eventual
impact on its financial statements.
4. Mortgage Assets - Subordinated CMBS
Since mid 1994, CRIIMI MAE has been in the business of purchasing
Subordinated CMBS. Through March 31, 1998, CRIIMI MAE had acquired 112
individual securities collateralized by 30 mortgage securitization pools. In
December 1996, 35 of these securities from 12 separate mortgage securitization
pools were resecuritized by CRIIMI MAE aggregating $449 million face amount
(CBO-1). CBO-1 involved CRIIMI MAE's public issuance of investment grade
securities with a face amount of $142 million and retention of investment grade
securities with a face amount of $307 million. Through CBO-1, CRIIMI MAE
obtained a higher overall weighted average credit rating for its new securities
than the weighted average credit rating on the related CMBS collateral. CBO-1
was initially accounted for as a financing of the resecuritized assets.
However, in conjunction with the 1998 resecuritization discussed below, a
portion of the retained securities from CBO-1 have subsequently been sold and
the remaining amortized cost basis of those CMBS assets has been allocated to
the securities retained.
During 1997, FAS 125 "Accounting for Transfers and Servicing of Financial
Assets" became effective. This statement significantly changed the accounting
treatment for transfers of financial assets. FAS 125 changed accounting
standards to require transfers of assets to be accounted for on a component
basis instead of as an entire unit. Accordingly, components (securities) are
treated as sales or retained interests based upon CRIIMI MAE's ability to
control the component. Components where control is not retained are treated as
sales and those where control is retained are treated as retained interests.
As previously discussed, in May 1998, CRIIMI MAE completed another
resecuritization of CMBS assets, with a combined face value of approximately
<PAGE>16
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Mortgage Assets - Subordinated CMBS - Continued
$1.8 billion involving 75 individual securities collateralized by 19 mortgage
securitization pools and 3 of the retained securities from CBO-1 (CBO-2). CBO-2
involved CRIIMI MAE's private placement of securities with a face amount of $468
million and retention of securities with a face amount of approximately $1.3
billion. Certain securities included call provisions to enable CRIIMI MAE to 1)
call bonds if market conditions warrant, and 2) call bonds when it is no longer
cost effective to service them. As a result, CBO-2 resulted in a sale of
certain securities and retention of new securities. In accordance with FAS 125,
the assets collateralizing the resecuritization are "derecognized" and the
combined amortized cost basis of the collateralizing assets was allocated to the
new securities issued. CRIIMI MAE received $345 million for the investment
grade securities sold without call provisions which had an allocated cost basis
of $306 million, resulting in a gain of $29.1 million. CRIIMI MAE recorded
retained assets totaling $926 million representing the allocated amortized cost
basis for the $123 million face amount of investment grade securities issued
with call provisions and the $1.3 billion face amount of non-investment grade
retained interests in CBO-2. CBO-2 generated $160 million of excess proceeds
primarily as a result of a higher overall weighted average credit rating for its
new securities as compared to the weighted average credit rating on the related
CMBS collateral. These excess proceeds were used to acquire additional
Subordinated CMBS during the second quarter of 1998.
The sale of certain securities requires reclassification of CRIIMI MAE's
entire portfolio of mortgage securities (consisting of mortgage security
collateral, and CMBS) from held to maturity to available for sale. Therefore,
CRIIMI MAE's securities, effective second quarter of 1998, are reflected on the
balance sheet at fair market value and the difference between amortized cost and
fair market value is reflected as a component of shareholders' equity. This
reclassification resulted in an increase in shareholders' equity of
approximately $117 million as of June 30, 1998.
Additionally, as part of CBO-2, CRIIMI MAE's servicing affiliate sold
trustee servicing rights on CBO-2 for $4.2 million, resulting in a gain of
approximately $400,000 for financial reporting purposes, which is included in
equity in earnings from investments on the consolidated statements of income,
and gain of $4.2 million for tax purposes.
<PAGE>17
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Mortgage Assets - Subordinated CMBS - Continued
At June 30, 1998, CRIIMI MAE held the following securities:
<TABLE><CAPTION>
Original 6/30/98
Anticipated Anticipated
Unleveraged Unleveraged
Yield to Yield to
Pool(4) Maturity (1)(3) Maturity (2)(3)
- ------------ ------------ ------------
<S> <C> <C>
Retained Securities from
CRIIMI 1996 C1 (CBO1) 19.5% 19.5%
DLJ Mortgage Acceptance Corp.
Series 1997 CF2 Tranche B-30C 8.1% 8.1%
Nomura Asset Securities Corp.
Series 1998-D6 Tranche B7 12.0% 12.0%
Retained Securities from
CRIIMI 1998 C1 (CBO2) 10.3% 10.3%
Mortgage Capital Funding, Inc.
Series 1998-MC1 8.9% 8.9%
Chase Commercial Mortgage Securities
Corp.
Series 1998-1 8.8% 8.8%
First Union/Lehman Brothers
Series 1998 C2 8.9% 8.9%
Morgan Stanley Commercial Inc.
Series 1998-WF2 8.5% 8.5%
Weighted Average 10.2%(3) 10.2%(3)
(1) Represents the original anticipated yield to maturity of the Subordinated CMBS, based on management's estimate of the timing
and amount of future credit losses and prepayments.
(2) Unless otherwise noted, changes in the June 30, 1998 anticipated yield to maturity from that originally anticipated are
primarily the result of changes in prepayment assumptions relating to mortgage collateral.
(3) Represents the anticipated weighted average unleveraged yield over the expected average life of the Company's Subordinated CMBS
portfolio as of the date of acquisition and June 30, 1998, respectively.
(4) As of June 30, 1998, CRIIMI MAE serviced a total CMBS pool of $29.5 billion. Approximately .4% of the total CMBS pool is
specially serviced by CRIIMI MAE, of which, .3% of the loans are specially serviced due to payment default and the remainder is
specially serviced due to non-payment default.
</TABLE>
<PAGE>18
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Mortgage Assets - Subordinated CMBS - Continued
The aggregate investment by the underlying rating of the Subordinated CMBS is
as follows:
<TABLE>
<CAPTION>
Face Amount Fair Value
as of as of Amortized Cost as of
June 30, 1998 June 30, 1998 June 30, 1998 December 31, 1997
Security Rating(2) (in millions) % (in millions)(1) (in millions) (in millions)
- --------------- ------------------- -------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
AA- $ -- $ -- $ -- $ -- $ 5.6
A 62.6 3% 63.1 56.7 --
BBB 150.6 7% 143.6 126.4 4.0
BBB- 115.2 5% 108.1 92.4 --
BB+ 382.0 17% 335.2 304.6 8.6
BB 248.9 11% 239.9 233.6 445.0
BB- 81.6 4% 67.9 65.5 89.8
B+ 128.7 6% 97.7 92.5 --
B 285.1 13% 208.1 197.0 357.4
B- 191.1 9% 105.8 102.1 44.6
CCC 91.9 4% 38.4 36.0 10.9
Unrated 460.5 21% 158.2 159.7 113.2
-------- ------ --------- -------- ---------
Total(3) $2,198.2 100% $ 1,566.0 $1,466.5 $ 1,079.1
======== ====== ========= ======== =========
(1) The estimated fair values of Subordinated CMBS are based on the dealers' quoted market prices or an average of market quotes
for the Company's other Subordinated CMBS and represent the carrying value of the assets.
(2) During the three months ended June 30, 1998, CRIIMI MAE purchased tranches of subordinated CMBS from four separate
transactions that have a combined face value of approximately $610 million, and purchase price aggregating approximately $450
million.
(3) Refer to Footnote 7 for additional information regarding the total face amount and purchase price of Subordinated CMBS for tax
purposes.
</TABLE>
<PAGE>19
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Mortgage Assets - Subordinated CMBS - Continued
As of June 30, 1998, the mortgage loans underlying CRIIMI MAE's
Subordinated CMBS portfolio were secured by properties of the types and at the
locations identified below:
Property Type Percentage(3) Geographic(1) Percentage(3)
- ------------- ------------ ------------ ---------
Multifamily 32% California 17%
Retail 28% Texas 13%
Office 14% Florida 7%
Hotel 13% Other (2) 63%
Other 13%
(1) No significant concentration by region.
(2) No other individual state makes up more than 5% of the total.
(3) Based on a percentage of the total unpaid principal balance of the
underlying loans.
The Subordinated CMBS tranches owned by CRIIMI MAE provide credit support
to the more senior tranches of the related commercial securitization. Cash flow
from the underlying mortgages generally is allocated first to the senior
tranches, with the most senior tranche having a priority right to cash flow.
Then, any remaining cash flow is allocated generally among the other tranches in
order of their relative seniority. To the extent there are defaults and
unrecoverable losses on the underlying mortgages, resulting in reduced cash
flows, the subordinate tranche will bear this loss first. To the extent there
are losses in excess of the most subordinate tranches stated right to principal
and interest, then the remaining tranches will bear such losses in order of
their relative subordination.
The accounting treatment under GAAP requires that the income on
Subordinated CMBS be recorded based on the effective interest method using the
anticipated yield over the expected life of these mortgage assets. This
currently results in income which is lower for financial statement purposes than
for tax purposes. Additionally, this method can result in GAAP income
recognition which is greater than cash received. For the three and six months
ended June 30, 1998, the amount of income recognized in excess of cash due to
the effective interest rate method was approximately $738,000 and approximately
$2.2 million, respectively. For the three and six months ended June 30, 1997,
the amount of income recognized in excess of cash due to the effective interest
rate method was approximately $159,000 and approximately $674,000, respectively.
CRIIMI MAE's anticipated returns on its Subordinated CMBS are based upon a
number of assumptions that are subject to certain business and economic
uncertainties and contingencies. Examples of these include the prevailing
interest rates on that portion of the Subordinated CMBS which has been financed
with floating rate debt, interest payment shortfalls due to delinquencies on the
underlying mortgage loans, the ability to renew repurchase agreements and the
terms of any such renewed agreements and the availability of alternative
financing. Further examples include the timing and magnitude of credit losses
on the mortgage loans underlying the Subordinated CMBS that are a result of the
general condition of the real estate market (including competition for tenants
and their related credit quality) and changes in market rental rates. As these
uncertainties and contingencies are difficult to predict and are subject to
future events which may alter these assumptions, no assurance can be given that
the anticipated yields to maturity, discussed above and elsewhere, will be
achieved.
<PAGE>20
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Loan Origination Program
Included in CRIIMI MAE's portfolio of mortgage assets are loans originated
through its mortgage loan conduit program with a major financial institution
(the Program). The Program is designed to create pools of multifamily and
commercial mortgage loans, either through origination or acquisition, for the
purpose of issuing commercial mortgage-backed securities. During the warehouse
period, a financial institution will fund and originate in its name all mortgage
loans under the Program, and as collateral, CRIIMI MAE is required to deposit a
portion of each loan amount in a reserve account. In conjunction with the loan
origination program, the Company may also make mezzanine loans which have a
second priority position in the same property. In such case, CRIIMI MAE
generally requires a form of participation interest in the property as
consideration for making the mezzanine loan. The Company funded mezzanine loans
in the amount of $4 million as of June 30, 1998. Additionally, subsidiaries of
CRIIMI MAE will service the mortgage loans, and CRIIMI MAE will facilitate the
securitization of the loans (see discussion below). In conjunction with any
securitization, the Company will take title and finance a portion of the loans
by creating and placing investment grade securities with investors. The Company
will take title to and retain the balance of the cash flow, as well as any
prepayment penalties.
In June 1998, the company securitized $496 million of its "No-Lock"
commercial mortgage product originated or acquired through the Program, and
through CRIIMI MAE CMBS Corp., issued Commercial Mortgage Loan Trust
Certificates, Series 1998-1. The loans have a weighted average net interest
rate of 7.3%, a weighted average maturity of approximately 11 years and at June
30, 1998, a fair value of approximately $504 million. The basis of the loans
includes approximately $8 million of deferred loan costs that will be amortized
over the life of the securitization and recognized in income using the effective
interest rate method. In addition to the $496 million included in the
securitization, the Company has originated $170 million through June 30, 1998.
In conjunction with these loans, the Company has deposited $20.5 million in a
deposit account.
Through this securitization, CRIIMI MAE sold $397 million face amount of
fixed-rate investment grade securities (see also Note 10). CRIIMI MAE retained
the remaining principal and interest cash flows from the mortgage loans that
collateralize the securitization. CRIIMI MAE has call rights on each of the
issued securities and therefore has not surrendered control of the collateral,
thus requiring the transaction to be accounted for as a financing of the
mortgage loans. A CRIIMI MAE affiliate, CRIIMI MAE Services Limited
Partnership, will act as loan manager, master servicer and special servicer for
the mortgage trust.
Additionally, in April 1998, CRIIMI MAE announced an agreement with
Prudential Mortgage Capital Company L.L.C., the commercial mortgage affiliate of
The Prudential Insurance Company of America to originate and subsequently
securitize large "No-Lock" loans ranging from $30 million to $100 million. The
first "No-Lock" large loan transaction was closed at the end of the second
quarter, financing three office buildings.
6. Mortgage Securities
CRIIMI MAE's consolidated portfolio of mortgage security collateral and
mortgages is comprised of FHA-Insured Loans and GNMA Mortgage-Backed Securities.
Additionally, mortgage security collateral includes Federal Home Loan Mortgage
Corporation (Freddie Mac) participation certificates which are collateralized by
GNMA Mortgage-Backed Securities, as discussed below. As of June 30, 1998,
<PAGE>21
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Securities - Continued
approximately 21% of CRIIMI MAE's investment in mortgage security collateral and
mortgages were FHA-Insured Loans and approximately 79% were GNMA Mortgage-Backed
Securities (including loans which collateralize Freddie Mac participation
certificates). FHA-Insured Loans and GNMA Mortgage-Backed Securities are
collectively referred to as mortgages herein.
Through its wholly owned subsidiaries, CRIIMI MAE owns the following
mortgages directly and indirectly:
<PAGE>22
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Securities - Continued
<TABLE><CAPTION>
As of June 30, 1998
---------------------
Weighted
Average
Number of Fair Amortized Effective Weighted Average
Mortgages Value(a)(c) Cost Interest Rate Remaining Term
--------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE (b) 5 $ 18,919,173 $ 18,397,873 8.02% 34 years
CRIIMI MAE Financial Corporation(b) 44 184,713,448 178,644,165 8.34% 31 years
CRIIMI MAE Financial Corporation II(b) 58 249,359,794 243,308,943 7.21% 29 years
CRIIMI MAE Financial Corporation III(b) 33 134,039,424 129,043,359 8.05% 31 years
--------- ------------ ------------
140 $587,031,839 $569,394,340
========= ============ ============
As of December 31, 1997
-------------------------
Weighted
Average
Number of Fair Amortized Effective Weighted Average
Mortgages Value(a) Cost Interest Rate Remaining Term
--------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 5 $ 18,888,883 $ 18,447,382 8.09% 34 years
CRIIMI MAE Financial Corporation 48 196,619,210 189,759,543 8.39% 31 years
CRIIMI MAE Financial Corporation II 59 252,208,500 247,614,722 7.19% 29 years
CRIIMI MAE Financial Corporation III 37 154,535,482 148,850,593 8.05% 31 years
--------- ------------ ------------
149 $622,252,075 $604,672,240
========= ============ ============
(a) The estimated fair values of CRIIMI MAE's mortgages are presented in accordance with generally accepted accounting principles
which define fair value as the amount at which a financial instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. These estimated fair values, however, do not represent the liquidation value
or the market value of CRIIMI MAE. The fair value of the Government Insured Multifamily Mortgages is based on quoted market prices.
At December 31, 1997, CRIIMI MAE mortgages were classified as Available for Sale and carried at fair value on the balance sheet, the
remaining mortgages were carried at amortized cost.
(b) During the six months ended June 30, 1998, there were nine prepayments of mortgages held by CRIIMI MAE and its financing
subsidiaries. These prepayments generated net proceeds of approximately $32.7 million and resulted in net financial statement
losses of approximately $46,000, which are included in gains on mortgage dispositions on the accompanying consolidated statement of
income for the six months ended June 30, 1998.
</TABLE>
<PAGE>23
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Reconciliation of Financial Statement Net Income to Tax
Basis Income
Reconciliations of the financial statement net income to the tax basis
income for the six months ended June 30, 1998 and 1997 are as follows:
<TABLE><CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Consolidated financial statement net income $ 45,344,383 $ 10,412,185 $ 59,239,811 $ 29,511,726
Gain on sale of collateralized bond obligation (29,140,689) -- (29,140,689) --
Reamortization of Subordinated CMBS 9,053,150 1,605,617 11,316,175 2,638,352
Interest expense adjustments for collateralized
bond obligation (5,028,033) -- (5,028,033) --
Amortization of assets acquired in the Merger 719,394 719,391 1,438,788 1,438,782
Equity in earnings from investments 3,334,922 291,689 3,422,740 442,289
Amortization and other interest expense
adjustments (354,120) (650,999) (830,532) (939,158)
Mortgage dispositions 46,970 -- 209,982 91,850
Capital gain on Installment Note 331,831 -- 331,831 --
Adjustment due to accounting for subsidiary
as a pooling for financial statement
purposes and a purchase for tax purposes -- -- -- (2,132,614)
Other (17,694) 19,350 (27,142) 10,424
------------ ------------ ------------ ------------
Tax basis income $ 24,290,114 $ 12,397,233 $ 40,932,931 $ 31,061,651
============ ============ ============ ============
Dividends paid on preferred shares (1,918,007) (1,541,478) (3,557,504) (3,366,865)
------------ ------------ ------------ ------------
Tax basis income available to
common shareholders $ 22,372,107 $ 10,855,755 $ 37,375,427 $ 27,694,786
============ ============ ============ ============
Tax basis income per share:
Income before gains from CFR $ 0.47 $ 0.28 $ 0.81 $ 0.57
Capital gain from CFR -- -- -- 0.22
------------ ------------ ------------ ------------
Total tax basis income per share $ 0.47 $ 0.28 $ 0.81 $ 0.79
============ ============ ============ ============
Tax Basis Shares Outstanding 47,795,989 38,149,257 46,113,921 35,276,822
============ ============ ============ ============
</TABLE>
Differences between financial statement net income and tax basis income
available to common shareholders principally relate to differences in the
methods of accounting for the sale of securities in conjunction with the CBO
transaction, Subordinated CMBS (see also Note 4), amortization of certain
deferred costs, merger of the CRI Mortgage Businesses and, prior to 1998, the
merger of the CRIIMI Funds.
The entire CBO-2 transaction was accounted for as a financing for tax
purposes. As such, the Company will recognize income for tax purposes from the
entire group of mortgage securitization pools (34 total) with an aggregate face
amount of $2.7 billion and purchase price of $1.9 billion.
<PAGE>24
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Common Shares
CRIIMI MAE filed with the Securities and Exchange Commission a Shelf
Registration Statement on Form S-3 to register for sale, Debt Securities,
Preferred Shares, Warrants and Common Shares of CRIIMI MAE to the public. In
May 1998, CRIIMI MAE increased the aggregate public offering price of the S-3
shelf filing to $350 million, with a balance available at June 30, 1998 of $350
million.
In January 1998, CRIIMI MAE completed an offering of 2.389 million common
shares at a price of $15 1/8 per share, resulting in net proceeds of
approximately $34 million. These proceeds were used to paydown a working
capital line, purchase Subordinated CMBS and to fund a portion of the loan
origination program.
In March 1998, CRIIMI MAE completed an offering of 2.6 million common
shares at an offering price of $15 5/16 per share, which resulted in net
offering proceeds of approximately $38 million. Net proceeds of the offering
were used to fund a portion of the loan origination program and to purchase
Subordinated CMBS.
In July 1998, the Company's Articles of Incorporation were amended to
increase the number of common shares authorized from 60 million to 120 million
at a special shareholders meeting.
In December 1997, CRIIMI MAE registered with the Securities and Exchange
Commission up to 3 million shares of CRIIMI MAE common stock ("common shock") in
connection with a new Dividend Reinvestment and Stock Purchase Plan (the
"Plan"). Subsequently, in July 1998, the Company authorized additional shares
of approximately 4.7 million. The Plan allows investors the opportunity to
purchase additional CRIIMI MAE Common Shares through the reinvestment of CRIIMI
MAE's dividends, optional cash payments and initial cash investments. During
the six months ended June 30, 1998, 2,199,660 common shares were issued in
conjunction with the Plan, resulting in net proceeds of approximately $33
million.
For the quarters ended March 31, and June 30, 1998, dividends of $.37 and
$.40 per share, respectively were paid to common shareholders of record as of
March 20, 1998 and June 19, 1998, respectively. The dividends were paid on
March 31, and June 30, 1998, respectively.
9. Preferred Shares
CRIIMI MAE's charter authorizes the issuance of up to 25,000,000 shares of
preferred stock, of which 150,000 shares have been classified as Series A
Preferred Shares, 3,000,000 shares have been classified as Series B Preferred
Shares and 300,000 shares have been classified as Series C as of June 30, 1998.
As of June 30, 1998 and 1997, there were no Series A Preferred Shares
outstanding.
During the six months ended June 30, 1998, 49,794 Series B Preferred Shares
were converted into 113,748 common shares resulting in 1,629,582 Series B
Preferred Shares outstanding as of June 30, 1998. Dividends paid and accrued on
Series B Preferred Shares totaled $2,868,064 for the six months ended June 30,
1998.
In March 1997, CRIIMI MAE entered into an agreement with an institutional
investor pursuant to which the Company had the right to sell, and such investor
was obligated to purchase, up to 300,000 shares of Series C Cumulative
<PAGE>25
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Preferred Stock - Continued
Convertible Preferred Stock at a price of $100 per share. The preferred stock
is convertible into common shares at the option of the holders and is subject to
redemption by CRIIMI MAE. During the six months ended June 30, 1998, 50,000
Series C Preferred Shares were converted into 344,827 common shares.
Additionally, in February 1998, the company issued the remaining 150,000 shares,
generating proceeds of $15 million. As of June 30, 1998, 250,000 Series C
Preferred Shares were outstanding. Dividends paid and accrued on Series C
Preferred Shares totaled $689,440 for the six months ended June 30, 1998.
<PAGE>26
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities
The following table summarizes CRIIMI MAE's debt outstanding as of June 30,
1998 and December 31, 1997:
<TABLE><CAPTION>
Six months ended June 30, 1998
-----------------------------------------------------------------------------
Balance at Eff. rate Average Average Maturity
Type of Debt quarter end at qtr. end Balance Eff. Rate Date
- ------------ ------------ ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Securitized Mortgage Obligations:
FHLMC Funding Note (1) 231,730,560 7.4% 234,508,645 7.4% September 2031
FNMA Funding Note (2) 126,118,169 7.3% 138,754,051 7.3% March 2035
CMOs (3) 169,319,462 7.4% 172,469,184 7.4% January 2033
CMO - Loan Originations(6) 390,159,048 6.5% 56,044,946 6.5% October 2001-
May 2008
Subordinated CMBS(7) 117,674,604 7.5% 33,807,069 7.5% November 2006-
November 2011
Repurchase Agreements-Subordinated
CMBS 957,668,475 6.8% 723,942,537 7.0% May 1999 -
December 2000
Bank Term Loan(5) 3,700,000 4.3% 3,825,576 3.9% December 1998-
July 1999
Working line of credit 25,000,000 7.4% 14,462,455 7.5% December 1998
Senior unsecured notes 99,890,133 9.1% 99,883,914 9.1% December 2002
--------------
Total $2,121,260,451(8)
==============
</TABLE>
<PAGE>27
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
<TABLE><CAPTION> Year ended December 31, 1997
--------------------------------------------------------
Balance Eff. Rate Average Average
Type of Debt at year end at year end Balance Eff. Rate
- ------------ -------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Securitized Mortgage Obligations:
FHLMC Funding Note (1) $ 235,773,439 7.4% $236,752,371 7.4%
FNMA Funding Note (2) 145,527,438 7.3% 150,431,262 7.3%
CMOs (3) 178,062,444 7.4% 187,986,472 7.4%
Subordinated CMBS(4) 137,061,676 7.7% 141,382,710 7.7%
Repurchase Agreements- Subordinated CMBS 585,379,360 7.2% 280,516,984 7.0%
Bank Term Loans(5) 3,250,000 1.8% 5,006,078 2.2%
Working line of credit 30,000,000 7.2% 1,032,609 7.2%
Senior unsecured notes 99,877,695 9.1% 10,869,565 9.1%
--------------
Total $1,414,932,052
==============
(1) As of June 30, 1998 and December 31, 1997, the face amount of the note was $240,192,866 and $244,429,739, respectively, with
unamortized discount of $8,462,306 and $8,656,300, respectively. During the six months ended June 30, 1998 and 1997, discount
amortization of $193,994 and $168,445, respectively, were recorded as interest expense.
(2) As of June 30, 1998 and December 31, 1997, the face amount of the note was $128,359,107 and $147,927,688, respectively, with
unamortized discount of $2,240,938 and $2,400,250, respectively. During the six months ended June 30, 1998 and 1997, discount
amortization of $159,312 and $121,869, respectively, were recorded as interest expense.
(3) As of June 30, 1998 and December 31, 1997, the face amount of the note was $173,949,104 and $182,848,907, respectively, with
unamortized discount of $4,629,642 and $4,786,463, respectively. During the six months ended June 30, 1998 and 1997, discount
amortization of $156,821 and $181,959, respectively, were recorded as interest expense.
(4) Balance represents face amount of notes, as the issuance did not include any bond discount.
(5) The effective interest rate as of June 30, 1998 and December 31, 1997 includes the impact of a rate reduction agreement which
was in place from July 1995 through June 30, 1998, providing for a reduction in the rate on a portion of the loan based on balances
maintained at the bank.
(6) As of June 30, 1998, the face amount of the tranches was $396,660,461 with unamortized discount of $6,501,413. During the six
months ended June 30, 1998 discount amortization of $90,361 was recorded in interest expense.
(7) As of June 30, 1998, the face amount of the tranches was $122,612,000 with an unamortized discount of $4,937,396. During the
six months ended June 30, 1998 discount amortization of $35,390 was recorded in interest expense.
(8) Excludes off-balance sheet debt of $477 million in connection with the May 1998 collateralized bond obligation transaction.
</TABLE>
<PAGE>28
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
Securitized Mortgage Obligations - Subordinated CMBS
- ----------------------------------------------------
In May 1998, CRIIMI MAE, through its wholly-owned subsidiary CRIIMI MAE
CMBS Corp., issued an aggregate of $468 million of longer-term, fixed-rate
investment grade securities to reduce an equivalent amount of short-term,
floating rate repurchase agreement financing used to initially fund the CMBS
acquisitions. The transaction was classified as follows: of the total $468
million investment grade securities, $345 million were non-callable securities
and $123 million were callable securities. As a result of the implementation of
FAS 125, this classification results in sale treatment for those securities
where control was transferred, and financing treatment for those securities
where control was not transferred; control being defined as the right to call
the securities. Accordingly, the $345 million of investment grade securities
and the corresponding debt are treated off-balance sheet and the $123 million of
investment grade securities and the corresponding debt are recorded on the
balance sheet. In addition, the $142 million of debt issued in conjunction with
the December 1996 resecuritization was included in the May 1998 transaction and
is treated as off-balance sheet debt.
Collateralized Mortgage Obligations - Originated Loans
- ------------------------------------------------------
In June 1998, through the securitization of $496 million of originated or
acquired commercial mortgage loans, CRIIMI MAE sold $397 million face amount of
fixed-rate investment grade securities. The discount on the collateralized
mortgage obligation is being amortized on a level yield basis. Transaction
costs of selling the bonds were capitalized and are included in deferred
financing fees on the accompanying balance sheet as of June 30, 1998. The
tranches not sold to the public were partially financed with repurchase
agreements. The repurchase agreements are secured by the No-Lock CMO tranches
with an aggregate fair value of approximately $109 million.
Repurchase Agreements-Subordinated CMBS
- -----------------------------------------
As previously discussed, when purchasing Subordinated CMBS, CRIIMI MAE
initially finances (generally through repurchase agreements) a portion of the
respective fair values of Subordinated CMBS. These repurchase agreements are
either provided by the issuer of the CMBS pool or through master repurchase
agreements, as discussed below. As of June 30, 1998, the repurchase agreements
on Subordinated CMBS have maturity dates ranging from March 1999 to December
2000 and have interest rates that are generally based on the one-month London
Interbank Offered Rate (LIBOR), plus a spread ranging from 1.0% to 1.5%.
In September 1997, CRIIMI MAE entered into a three-year master assignment
agreement with a lender to finance up to $200 million of additional and/or
existing investments in lower rated Subordinated CMBS. In early 1998, this
agreement was amended to provide up to $350 million in secured borrowings. As
of June 30, 1998 and December 31, 1997, approximately $293 million, and $152
million, respectively, in borrowings were outstanding under this facility.
Outstanding borrowings under this master repurchase agreement are secured by the
financed Subordinated CMBS.
In addition, in early 1996, CRIIMI MAE entered into a three-year master
repurchase agreement with a lender to finance up to $200 million of additional
and/or existing investments in lower rated Subordinated CMBS. In early 1998,
this agreement was amended to provide for up to $500 million in secured
borrowings. As of June 30, 1998 and December 31, 1997, approximately $182
million and $180 million, respectively, in borrowings were outstanding under
this facility. Outstanding borrowings under this master repurchase agreement
<PAGE>29
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
are secured by the financed Subordinated CMBS.
The repurchase agreements are secured by certain rated CMBS security
tranches with an aggregate fair value of approximately $1.2 billion as of June
30, 1998 and $891 million as of December 31, 1997. At June 30, 1998, CRIIMI MAE
had repurchase agreements with German American Capital Corporation, Lehman
Brothers Commercial Paper, First Union National Bank of North Carolina, Morgan
Stanley and Company International Limited, Merrill Lynch Mortgage Capital Inc.
and Citicorp Securities, Inc. These repurchase agreements qualify as financings
under FAS 125.
Senior Unsecured Notes
- ----------------------
In November 1997, CRIIMI MAE issued senior unsecured notes ("Notes") due on
December 1, 2002 in an aggregate principal amount of $100 million. The Notes
are unsecured and will be effectively subordinated to the claims of any secured
lender to the extent of the value of the collateral securing such indebtedness.
Interest on the Notes is payable semi-annually in arrears on June 1 and December
1, commencing June 1, 1998 at a fixed annual rate of 9.125%. The Notes are
redeemable at any time, in whole or in part, at the option of CRIIMI MAE.
The Indenture contains certain covenants which, among other things, could
restrict the ability of the Company and its subsidiaries to incur additional
indebtedness, pay dividends, or make distributions in respect of the Company's
or such subsidiaries capital stock, make other restricted payments, enter into
transactions with affiliates or related persons, or consolidate, merge or sell
all or substantially all of their assets. These covenants are subject to
exceptions and qualifications.
The Company cannot incur additional indebtedness (except for Permitted
Debt, which includes repurchase agreements, working capital lines of credit,
borrowings under facilities in place as of November 21, 1997), unless at the
time of such incurrence either (a) the ratio of Adjusted Earnings Available for
Fixed Charges to Adjusted fixed charges giving proforma effect for the new
borrowings is greater than 1.75 to 1.0 or (b) the Adjusted Debt to Capital Ratio
on a proforma basis after giving effect to the incurrence of the new debt is
less than 2.0 to 1.0.
Bank Term Loans
- ---------------
In connection with the 1995 Merger, CRIIMI Management assumed certain debt
of the CRI Mortgage Businesses in the principal amount of $9.1 million (Bank
Term Loan). The Bank Term Loan is secured by certain cash flows generated by
CRIIMI MAE's direct and indirect interests in the AIM Funds and is guaranteed by
CRIIMI MAE. The loan requires quarterly principal payments of $650,000 and
matures on December 31, 1998. The amount outstanding as of June 30, 1998 and
December 31, 1997 is $1.95 million and $3.2 million, respectively. Interest on
the loan is based on CRIIMI MAE's choice of one, two or three-month LIBOR, plus
a spread of 1.25%.
Working Capital Line of Credit
- ------------------------------
In late 1996, CRIIMI MAE entered into an unsecured working capital line of
credit provided by two lenders with a termination date of December 31, 1998,
which currently provides for up to $40 million in borrowings. Outstanding
borrowings under this line of credit bear interest at one-month LIBOR, plus a
spread of 1.75%. As of June 30,
1998 and December 31, 1997, $25 million and $30 million, respectively in
<PAGE>30
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
borrowings were outstanding under this facility.
Other Debt Related Information
- ------------------------------
As previously stated, changes in interest rates will have no impact on the
cost of funds or the collateral requirements on CRIIMI MAE's fixed-rate debt,
which approximates 54% of CRIIMI MAE's consolidated debt as of June 30, 1998.
Fluctuations in interest rates will continue to impact the value on that portion
of CRIIMI MAE's mortgage assets which are not match-funded and could impact
potential returns to shareholders through increased cost of funds on the
floating-rate debt in place. CRIIMI MAE has a series of interest rate cap
agreements in place in order to partially limit the adverse effects of rising
interest rates on the remaining floating-rate debt. When CRIIMI MAE's cap
agreements expire, CRIIMI MAE will have interest rate risk to the extent
interest rates increase on any floating-rate borrowings unless the caps are
replaced or other steps are taken to mitigate this risk. However, as previously
discussed, CRIIMI MAE's investment policy requires that at least 75% of
floating-rate debt be hedged. As of June 30, 1998, 85% of CRIIMI MAE's floated-
rate debt is hedged. The flexibility in CRIIMI MAE's leverage is dependent
upon, among other things, the levels of unencumbered assets, which are
inherently linked to prevailing interest rates and changes in the credit of the
underlying asset. In certain circumstances, including, among other things,
increases in interest rates, changes in market spreads, or decreases in credit
quality of underlying assets, CRIIMI MAE would be required to provide additional
collateral in connection with its short-term, floating-rate borrowing
facilities. From time to time, the Company has been required to fund such
additional collateral needs. In each instance, the Company has had adequate
unencumbered assets to meet its operating, investing and financing requirements,
and management continually monitors the levels of unencumbered collateral.
CRIIMI MAE's ability to extend or refinance debt facilities upon maturity
will depend on a number of variables including, among other things, CRIIMI MAE's
financial condition and its current and projected results from operations which
are impacted by a number of variables. Management continuously monitors CRIIMI
MAE's overall financing and hedging strategy in an effort to ensure that CRIIMI
MAE is making optimal use of its borrowing ability based on market conditions
and opportunities.
For the six months ended June 30, 1998, CRIIMI MAE's weighted average cost
of borrowing, including amortization of discounts and deferred financing fees of
approximately $1.9 million, was approximately 7.55%. As of June 30, 1998,
CRIIMI MAE's debt-to-equity ratio was approximately 3.0 to 1.0. Under certain
of CRIIMI MAE's existing debt facilities, CRIIMI MAE's debt-to-equity ratio, as
defined, may not exceed 5.0 to 1.0.
11. Interest Rate Hedge Agreements
CRIIMI MAE has entered into interest rate protection ("caps") agreements to
partially limit the adverse effects of rising interest rates on its floating-
rate borrowings. Interest rate caps provide protection to CRIIMI MAE to the
extent interest rates, based on a readily determinable interest rate index,
increase above the stated interest rate cap, in which case, CRIIMI MAE will
receive payments based on the difference between the index and the cap. None of
CRIIMI MAE's caps are held for trading purposes. As of June 30, 1998, CRIIMI
MAE held caps with a notional amount of approximately $835 million. The caps
are used to hedge current variable rate debt and variable rate debt expected to
be incurred throughout the year to fund the Company's planned acquisition of
Subordinated CMBS.
<PAGE>31
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Interest Rate Hedge Agreements - Continued
<TABLE><CAPTION>
Notional
Amount Effective Date Maturity Date(b) Cap Index
- ------------ -------------------- ----------------- ------ -------
<S> <C> <C> <C> <C>
$ 50,000,000 July 20, 1993 July 20, 1998 6.2500% 3M LIBOR
35,000,000 February 2, 1994 February 2, 1999 6.1250% 1M LIBOR
100,000,000 April 8, 1997 April 10, 2000 6.6875% 1M LIBOR
100,000,000 September 22, 1997 September 22, 2000 6.6563% 1M LIBOR
100,000,000 November 7, 1997 November 7, 2000 6.6563% 1M LIBOR
50,000,000 December 23, 1997 December 23, 2000 6.9688% 1M LIBOR
100,000,000 March 11, 1998 March 10, 2001 6.6875% 1M LIBOR
100,000,000 March 31, 1998 March 31, 2001 6.6875% 1M LIBOR
100,000,000 June 4, 1998 June 4, 2001 6.6563% 1M LIBOR
100,000,000 June 26, 1998 June 26, 2001 6.6563% 1M LIBOR
- ------------
$835,000,000(a)
============
(a) CRIIMI MAE's designated interest rate protection agreements hedge CRIIMI MAE's floating-rate borrowing costs.
(b) The weighted average strike price of approximately 6.6% and a weighted average remaining term for these interest rate cap
agreements is approximately 2.3 years.
</TABLE>
CRIIMI MAE is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate protection agreements should interest rates
exceed the caps. However, management does not anticipate nonperformance by any
of the counterparties. All of the counterparties have long-term debt ratings of
A+ or above by Standard and Poor's and A1 or above by Moody's. Management
believes that these caps are highly liquid. The cap could be sold or
transferred with the consent of the counterparties. Management does not believe
that this consent would be withheld. Although none of CRIIMI MAE's caps are
exchange-traded, there are a number of financial institutions which enter into
these types of transactions as part of their day-to-day activities.
12. Earnings Per Share
The following table reconciles basic and diluted earnings per share under
FAS 128 for the three and six months ended June 30, 1998 and 1997:
<PAGE>32
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Earnings Per Share - Continued
<TABLE><CAPTION>
For the six months ended June 30, 1998 For the six months ended June 30, 1997
-------------------------------------- -----------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
---------- ------------ --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
- ---------
Net Income Available
to Common
Shareholders $55,682,307 45,101,762 $ 1.23 $26,144,860 34,825,567 $ 0.75
Effect of Dilutive
Securities
- ------------------
Net effect of assumed
exercise of stock
options -- 926,102 -- 1,001,239
Convertible Preferred
Stock(1) 3,557,504 5,177,520 3,366,865 6,940,382
----------- ----------- ----------- -----------
Diluted EPS
- -----------
Income available to
Common Shareholders
and assumed
conversions(2) $59,239,811 51,205,384 $ 1.16 $29,511,725 42,767,188 $ 0.69
=========== =========== ========= =========== =========== =========
<PAGE>33
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Earnings Per Share - Continued
For the three months ended June 30, 1998 For the three months ended June 30, 1997
----------------------------------------- -----------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
---------- ------------ --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
- ---------
Net Income Available
to Common
Shareholders $43,426,376 47,274,908 $ 0.92 $ 8,870,707 37,736,831 $ 0.24
Effect of Dilutive
Securities
- ------------------
Net effect of assumed
exercise of stock
options -- 877,779 -- 1,008,840
Convertible Preferred
Stock(1) 1,918,007 5,426,079 -- --
----------- ----------- ----------- -----------
Diluted EPS
- -----------
Income available to
Common Shareholders
and assumed
conversions(2) $45,344,383 53,578,766 $ 0.85 $ 8,870,707 38,745,671 $ 0.23
=========== =========== ========= =========== =========== =========
(1) 1,629,582 shares of Series B Preferred Shares were outstanding at June 30, 1998. For the six months ended June 30, 1998 and
the quarter ended June 30, 1998, Series B and Series C Preferred Shares were dilutive and the common stock equivalents are included
in the calculation. The common stock equivalents for the six months ended June 30, 1998 for Series B and C are 3,736,825 and
1,440,695 shares, respectively. The common stock equivalents for the three months ended June 30, 1998 for Series B and C are
3,722,617 and 1,703,461 shares, respectively. For the six months ended June 30, 1997, common stock equivalents for Series B were
included in the calculation of diluted EPS because the effect would be dilutive. The common stock equivalents for the six months
ended June 30, 1997 for Series B are 6,828,532 shares. However, for the quarter ended June 30, 1997, common stock equivalents for
these shares were not included in the calculation of diluted EPS because the effect would be anti-dilutive.
(2) Subsequent to June 30, 1998, CRIIMI MAE issued 255,412 common shares in connection with the dividend reinvestment plan.
</TABLE>
13. Transactions with Related Parties
Below is a summary of the related party transactions which occurred during
the three and six months ended June 30, 1998 and 1997. These items are described
further in the text which follows:
<PAGE>34
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Transactions with Related Parties - Continued
<TABLE><CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AMOUNTS RECEIVED OR ACCRUED FROM RELATED PARTIES
- ------------------------------------------------
CRIIMI,Inc.
- -----------
Income (c) $ 322,666 $ 406,365 $ 676,114 $ 806,003
Return of capital (d) 1,526,333 -- 2,341,104 450,096
------------ ------------ ------------ ------------
Total $ 1,848,999 $ 406,365 $ 3,017,218 $ 1,256,099
============ ============ ============ ============
CRI/AIM Investment Limited
Partnership (d) $ 149,543 $ 167,843 $ 308,715 $ 335,831
============ ============ ============ ============
CRIIMI MAE Services Limited Partnership(i) $ 3,114,000 $ -- $ 3,164,000 $ --
============ ============ ============ ============
Expense Reimbursements to CRIIMI Management(b)
- -------------------------------------------
CRI Liquidating and the AIM Funds $ 56,624 $ 55,587 $ 124,452 $ 149,619
============ ============ ============ ============
PAYMENTS TO CRI:
- --------------------
Expense reimbursement - CRIIMI MAE
Management Inc. (g) $ 93,577 $ 94,393 $ 158,287 $ 204,179
============ ============ ============ ============
PAYMENTS TO THE ADVISER
- -----------------------
Annual fee - CRI Liquidating (a)(f) $ -- $ -- $ -- $ 11,468
Incentive fee - CRI Liquidating (e) -- -- -- 958,081
------------ ------------ ------------ ------------
Total $ -- $ -- $ -- $ 969,549
============ ============ ============ ============
Capitol Hotel Group (h) $ 15,456 $ -- $ 25,297 $ --
============ ============ ============ ============
Other (j) $ -- $ -- $ -- $ --
============ ============ ============ ============
<FN>
(a) Included in the accompanying consolidated statements of income as fees to related party.
(b) Included as general and administrative expenses on the accompanying consolidated statements of income.
(c) Included as equity in earnings from investments on the accompanying consolidated statements of income.
(d) Included as a reduction of equity investments on the accompanying consolidated balance sheets.
(e) Netted with gains on mortgage dispositions on the accompanying consolidated statements of income. Due to the final
liquidation of CRI liquidating in 1997, no incentive fees are due for 1998.
(f) As a result of reaching the carryover CRIIMI I target yield during the first quarter of 1997, CRI Liquidating paid
deferred annual fees of $12,726 during the six months ended June 30, 1997. Due to the final liquidation of CRI
Liquidating in 1997, no annual fees are due for 1998.
(g) Pursuant to an agreement between CRIIMI MAE and CRI (the CRI Administrative Services Agreement), CRI provides CRIIMI MAE
with certain administrative and office facility services and other services, at cost, with respect to certain aspects of
CRIIMI MAE's business. CRIIMI MAE uses the services provided under the CRI Administrative Services Agreement to the
extent such services are not performed by CRIIMI Management or provided by another service provider. The CRI
<PAGE>35
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Transactions with Related Parties - Continued
Administrative Services Agreement is terminable on 30 days notice at any time by CRIIMI MAE.
(h) Included as a reduction of net income earned from Real Estate Owned property which is included in other investment income
on the accompanying consolidated statements of income.
(i) This is a distribution included in balance sheet as a decrease in investment in CRIIMI MAE Services Limited Partnership.
(j) Garret G. Carlson, a director of CRIIMI MAE from 1989 to the present and a member of the Special Committee that considered
the purchase by CRIIMI MAE of the CRI Mortgage Businesses during 1994-95, is self-employed in the real estate development
business. As of 1994-95, Mr. Carlson and/or his affiliates served as general partners in approximately seven real estate
development projects which had been developed prior to 1985 with the financial assistance of CRI, Inc. ("CRI"). During
the development phase of these projects and in all cases before 1985, CRI or its affiliates provided equity financing
through the syndication of limited partnership interests in certain "upper tier" limited partnerships which held limited
partnership interests in the "lower tier" partnerships which were responsible for the development of the projects.
Pursuant to partnership agreements dating back to the formation of the partnerships prior to 1985, Mr. Carlson and CRI or
their respective affiliates have received and continue to receive fees or other moneys from these partnerships.
In addition, prior to 1990 a real estate partnership in which Mr. Carlson or his affiliate was a general partner borrowed
money from an affiliate of CRI for the development of a real estate project. By 1990, neither Mr. Carlson nor any
affiliate of his continued to have any financial interest in this project.
Robert F. Tardio, a director of CRIIMI MAE from 1989 until April 1997 and a member of the Special Committee that
considered the purchase by CRIIMI MAE of the CRI Mortgage Businesses during 1994-95, is currently retired. In or about
1984, Mr. Tardio, through a family trust, became an investor in a hotel partnership syndicated by CRI. Although Mr.
Tardio's family trust continues to own an interest in this hotel project, neither he nor the family trust has received a
distribution of funds from this investment and he expects to receive none in the future. Since before Mr. Tardio joined
the CRIIMI MAE Board of Directors, Mr. Tardio regarded his investment in the hotel partnership as being without
substantial value.
The Chairman and President of CRIIMI MAE have certain management interests and equity investments in two borrowers whose
mortgage loans have an aggregate balance of approximately $22 million which were included in CRIIMI MAE's June 1998
Commercial Mortgage Obligation transaction. These two mortgage loans were originated and underwritten by Citicorp Real
Estate, Inc. and were made to CRI Hotel Income Partners, L.P. (the "CRI Hotel Loan") and Arboretum Village, L.P. (the
"Arboretum Village Loan"). The Chairman and President of CRIIMI MAE are the Chairman and President, respectively, of, and
holders of a 100% equity interest in, C.R.I., Inc., which is the general partner of CRICO Hotel Associates I, L.P., the
general partner of CRI Hotel Income Partners, L.P. C.R.I., Inc. is also the managing general partner of Arboretum
Villages, L.P.
</FN>
</TABLE>
14. Litigation
In June 1995, Edge Partners, L.P. (the Plaintiff), derivatively on behalf
of CRIIMI MAE, filed a Derivative Complaint in the District Court of Maryland,
Southern Division. This complaint was dismissed in December 1995. The
Plaintiff filed a First Amended Class and Derivative Complaint (the Complaint)
in February 1996. The Complaint names as defendants each of the Directors who
served on the board at the time of the Merger and CRIIMI MAE as a nominal
defendant. Each of the Directors has an indemnity from CRIIMI MAE.
Count I of the complaint alleges violations of Section 14(a) of the
Exchange Act for issuing a materially false and misleading proxy in connection
with the Merger and brings such count individually on its own behalf and asks
the court to certify such count as a class action. Count II alleges a breach of
fiduciary duty owed to CRIIMI MAE and its shareholders and purports to bring
such count derivatively in the right of and for the benefit of CRIIMI MAE.
Through the Complaint, the Plaintiff seeks, among other relief, that
unspecified damages be accounted to CRIIMI MAE, that the stockholder vote in
connection with the Merger be null and void and that certain salaries and other
remuneration paid to the Directors be returned to CRIIMI MAE.
<PAGE>36
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Litigation - Continued
On February 3, 1998, the Company, the individual defendants and the
Plaintiff executed a settlement agreement. Under the terms of the settlement
agreement, the Company is not required to make or receive any payments as a
result of the settlement, but instead made certain disclosures and adopted a
non-binding policy sought by the Plaintiff. The settlement agreement was
approved by the court and became effective on June 16, 1998.
<PAGE>37
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction and Business Strategy
- ----------------------------------
Introduction
- ------------
CRIIMI MAE Inc.'s ("CRIIMI MAE" or the "Company") Management's Discussion
and Analysis of Financial Condition and Results of Operations contains
statements that may be considered forward looking. These statements contain a
number of risks and uncertainties as discussed herein and in CRIIMI MAE's other
reports filed with the Securities and Exchange Commission that could cause
actual results to differ materially (See further discussion under "Forward
Looking Statements" on page 47).
General
- -------
CRIIMI MAE is a fully integrated commercial mortgage company structured as
a self-administered real estate investment trust (REIT). CRIIMI MAE's primary
activities include (i) originating, servicing and securitizing commercial
mortgage loans and commercial mortgage backed securities ("CMBS") and (ii)
acquiring non-investment grade subordinated securities backed by first mortgage
loans on multifamily, retail and other commercial real estate. CRIIMI MAE's
focus on acquiring Subordinated CMBS and originating commercial mortgage loans
together with its expertise in underwriting, servicing and originating
commercial mortgage loans and CMBS, has enabled the Company to take advantage of
the rapid growth in the securitization of debt backed by commercial mortgage
loans.
CRIIMI MAE conducts its mortgage loan servicing and advisory operations
through its affiliate, CRIIMI MAE Services Limited Partnership (the "Services
Partnership"). As of June 30, 1998, the Services Partnership was responsible
for certain servicing functions on a mortgage loan portfolio of approximately
$31.5 billion, as compared to approximately $8.8 billion as of July 1, 1997.
CRIIMI MAE has increased its mortgage advisory and servicing activities
primarily through its purchases of Subordinated CMBS by acquiring certain
servicing rights for the mortgage loans collateralizing the Subordinated CMBS,
as well as providing servicing on the loans closed through the CRIIMI MAE loan
origination program. CRIIMI MAE has been awarded Master Servicing assignments
on three CMBS portfolios totaling $2.6 billion as of June 30, 1998, as well as
its own portfolio of originated loans. The addition of Master Servicing to the
Company's portfolio administration program provides an additional revenue stream
and gives the Company greater supervision over the mortgage loans that back a
securitization. CRIIMI MAE will generally purchase Subordinated CMBS only when
satisfactory arrangements exist which enable it to closely monitor the
underlying mortgage loans and provide CRIIMI MAE with appropriate
workout/foreclosure rights with respect to the underlying mortgage loans due to
its status as Special Servicer or Master Servicer. CRIIMI MAE believes that all
transactions entered into to date have had such satisfactory arrangements.
<PAGE>38
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Business Strategy
- -------------------
CRIIMI MAE believes that its position as a leading purchaser of
Subordinated CMBS, combined with its commercial loan servicing and origination
capabilities and its access to the capital markets, provides the Company with a
competitive advantage to capitalize on current opportunities existing in the
securitized debt market. Significant elements of CRIIMI MAE's current business
strategy are summarized below:
o Increase its portfolio of Subordinated CMBS:
---------------------------------------------
CRIIMI MAE has surpassed its initial 1998 CMBS acquisition target of $600
million by acquiring or committing to acquire more than $850 million of
Subordinated CMBS through June 1998. As a result, the Company has further
increased its 1998 acquisition targets, and intends to acquire additional
Subordinated CMBS during the second half of 1998. The Company believes
that its loan origination, servicing and underwriting capabilities are
competitive advantages as the Company competes against other investors for
the acquisition of Subordinated CMBS.
o Originate commercial mortgage loans:
------------------------------------
In June 1998, the Company securitized $496 million of commercial mortgage
loans originated or acquired through the "No Lock" conduit loan program.
Through June 30, 1998, the Company had originated $666 million through this
program, which was launched in 1997. The program allows borrowers the
flexibility to prepay loans at any time by paying a fixed schedule of
prepayment penalties. Later this year the Company intends to complete
another securitization, aggregating approximately $800 million. As
previously discussed, in connection with any such securitization, CRIIMI
MAE will acquire and retain the mortgage loans on its books with the intent
to hold the loans until maturity or prepayment. The Company will finance a
portion of the loans by creating and placing investment grade securities
backed by these loans with investors and will retain the balance of the
cash flow, as well as any prepayment penalties. CRIIMI MAE will also serve
as master and special servicer for the loan pool.
In April 1998, CRIIMI MAE announced an agreement with Prudential
Mortgage Capital Company L.L.C., the commercial mortgage affiliate of The
Prudential Insurance Company of America to begin originating large "No
Lock" loans from $30 million to $100 million. The Company closed its first
"No Lock" large loan at the end of the second quarter.
CRIIMI MAE currently has five regional origination offices and plans
to open an additional office in Chicago during the third quarter.
o Expand the Company's servicing portfolio:
-----------------------------------------
In conjunction with the Company's anticipated growth in the loan
origination program and Subordinated CMBS acquisitions, the servicing
portfolio will increase accordingly. The additional servicing will provide
the Company with the rights to actively oversee and manage its assets, as
well as generate additional income.
o Resecuritize Subordinated CMBS:
-------------------------------
During May 1998, CRIIMI MAE completed its second resecuritization of
Subordinated CMBS, with a face amount of $1.8 billion (CBO-2). CRIIMI MAE
intends to resecuritize Subordinated CMBS on an annual basis. By
resecuritizing a substantial portion of the Subordinated CMBS in its
<PAGE>39
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
portfolio, CRIIMI MAE will better match the maturities of a portion of its
liabilities with the maturities of the pooled Subordinated CMBS assets and
replace the related short-term, floating-rate debt with non-recourse,
long-term, fixed-rate debt, as well as generate additional proceeds to fund
growth.
o Access Capital Markets:
----------------------
The Company expects to raise capital during 1998 through a variety of
sources, the net proceeds of which are intended to be used primarily to
purchase Subordinated CMBS and fund a portion of loans originated through
CRIIMI MAE's "No-Lock" programs. Through June 1998, the Company has raised
$120 million through equity offerings, comprised of $72 million from two
common shares offerings, $33 million from common shares issued in
connection with the Dividend Reinvestment and Stock Purchase Plan and $15
million from the issuance of preferred shares. Additionally, during the
second quarter 1998, the Company generated additional proceeds of $160
million in connection with CBO-2.
Results of Operations
- ---------------------
Prospectively, the Company will report Funds from Operations ("FFO").
Management believes that FFO is an important and widely used measure of the
operating performance of REITs which provides a relevant basis for comparison
among REITs. (See "Funds from Operations" on page 40.)
1998 versus 1997
- ----------------
Tax Basis Income
----------------
For the three months ended June 30 1998, CRIIMI MAE earned income available
to common shareholders of approximately $22.3 million or $0.47 per share,
compared to income available to common shareholders of $10.9 million or $0.28
per share for the three months ended June 30, 1997. For the six months ended
June 30 1998, income available to common shareholders of approximately $37.4
million or $0.81 per share, compared to income available to common shareholders
before gains from a subsidiary that liquidated all of its assets and dissolved
as of December 31, 1997 was $20.0 million or $0.57 per share for the six months
ended June 30, 1997. Total tax basis income for the six months ended June 30,
1997 of $0.79 per share included $0.22 per share of non-recurring income from
the mortgage dispositions of a subsidiary noted above.
The primary factors resulting in the net increase in income were the
increase associated with CRIIMI MAE's growing portfolio of Subordinated CMBS, as
well as the addition of net income from the loans originated through CRIIMI
MAE's No-Lock program. Also contributing to the increase was an increase in
equity in earnings from investments, primarily due to the $4.2 million gain on
the sale of the trustee strip associated with the resecuritization described in
Note 4. Partially offsetting these increases to tax basis income were increases
in interest expense and general and administrative expenses as further discussed
under Financial Statement Net Income and a decrease in mortgage interest income
earned due to the prepayment of certain CRIIMI MAE mortgages during 1998 and
1997.
Financial Statement Net Income
------------------------------
Net income available to common shareholders for financial statement
purposes was approximately $43.4 million for the three months ended June 30,
1998, a 390% increase from approximately $8.9 million for the corresponding
period in 1997. Net income available to common shareholders for financial
<PAGE>40
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
statement purposes was approximately $55.7 million for the six months ended June
30, 1998, a 113% increase from approximately $26.1 million for the corresponding
period in 1997. On a basic earnings per share basis, financial statement net
income for the three months ended June 30, 1998 increased approximately 283% to
$0.92 per weighted average common share from $0.24 per weighted average common
share for the corresponding period in 1997. On a basic earnings per share
basis, financial statement net income for the six months ended June 30, 1998
increased approximately 64% to $1.23 per weighted average common share from
$0.75 per weighted average common share for the corresponding period in 1997.
Descriptions of the significant changes in financial statement net income are
discussed below.
Interest Income - Subordinated CMBS
- -----------------------------------
Interest income from Subordinated CMBS increased by approximately $18.0
million or 103% to $35.5 million for the three months ended June 30, 1998 from
$17.5 million for the corresponding period in 1997. Interest income from
Subordinated CMBS increased by approximately $32.1 million or 94% to $66.4
million for the six months ended June 30, 1998 from $34.3 million for the
corresponding period in 1997. This increase was the result of the acquisition
of Subordinated CMBS at purchase prices aggregating approximately $780 million
for the six months ended June 30, 1998 and $554 million during the twelve months
ended December 31, 1997. This increase is partially offset due to the reduction
in basis of CMBS assets in connection with the sale treatment of the non-
callable securities sold in the resecuritization described in Note 4. Statement
of Financial Accounting Standards 125 "Accounting for Transfers of Servicing of
Financial Assets" (FAS 125) allows the resecuritization to be treated in
component parts therefore some parts may be accounted for as financings and
other parts may be accounted for as sales.
Generally accepted accounting principles requires that the income on
Subordinated CMBS be recorded based on the effective interest method using the
anticipated yield over the expected life of these mortgage assets. This
currently results in income which is lower for financial statement purposes than
for tax purposes. Based on the timing and amount of future credit losses and
certain other assumptions estimated by management, as discussed below, the
anticipated weighted average unleveraged yield over the expected average life of
CRIIMI MAE's Subordinated CMBS for financial statement purposes as of June 30,
1998 was approximately 10.2%. Although there can be no assurance, the
anticipated weighted average leveraged yield over the expected life of CRIIMI
MAE's existing Subordinated CMBS for financial statement purposes as of June 30,
1998 is approximately 16.4%. This return was determined based on the
anticipated yield over the expected weighted average life of the Subordinated
CMBS, which considers, among other things, anticipated losses, net of interest
expense attributable to the financing of the rated tranches at current interest
rates and borrowing amounts.
CRIIMI MAE's estimated returns on its Subordinated CMBS are based upon a
number of assumptions that are subject to certain business and economic
uncertainties and contingencies. Examples of these uncertainties and
contingencies include the prevailing interest rates on that portion of the
Subordinated CMBS which has been financed with floating rate debt, interest
payment shortfalls due to delinquencies on the underlying mortgage loans, the
ability to renew repurchase agreements and the terms of any such renewed
agreements and the availability of alternative financing. Further examples of
these uncertainties and contingencies include the timing and magnitude of credit
losses on the mortgage loans underlying the Subordinated CMBS that are a result
of the general condition of the real estate market (including competition for
tenants and their related credit quality) and changes in market rental rates.
As these uncertainties and contingencies are difficult to predict and are
<PAGE>41
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
subject to future events which may alter these assumptions, no assurance can be
given that the anticipated yields, discussed above and elsewhere herein, will be
achieved.
In making acquisitions of Subordinated CMBS, CRIIMI MAE applies its
experience in underwriting multifamily and other commercial real estate to
perform extensive due diligence on the properties collateralizing the loans
underlying the Subordinated CMBS. The Company's employees have broad experience
underwriting and servicing various types of performing and nonperforming income-
producing real estate, including multifamily, retail and hotel properties.
CRIIMI MAE "re-underwrites" or reviews, a significant portion of the mortgage
loans in a prospective pool by reviewing historical and current operating
records of the underlying real estate assets, appraisals, environmental studies,
market studies and architectural and engineering studies, all to independently
assess the stabilized performance level of the underlying properties. In
addition, the Company conducts site visits at a substantial number of the
properties. The Company stresses the adjusted net operating incomes of the
properties to simulate certain recessionary scenarios and applies market or
greater capitalization rates to assess loan quality.
Interest Income Collateralized Mortgage Obligations - Insured Loans
- -------------------------------------------------------------------
Interest income from collateralized mortgage obligations-insured loans
("insured loans") decreased by approximately $1.0 million or 8% to $11.3 million
for the three months ended June 30, 1998 from $12.3 million for the
corresponding period in 1997. Interest income from insured loans decreased by
approximately $2.0 million or 8% to $22.9 million for the six months ended June
30, 1998 from $24.9 million for the corresponding period in 1997. The decrease
in mortgage income results from the prepayment of insured mortgages held by
CRIIMI MAE and its wholly owned subsidiaries. The prepayments aggregated
approximately $33 million and $27 million of amortized cost for the six months
ended June 30, 1998 and the twelve months ended December 31, 1997, respectively.
Interest Income - Collateralized Mortgage Obligations -
Originated Loans
- -------------------------------------------------------
Interest income from collateralized mortgage obligations - originated loans
("originated loans") increased by 100% for the three and six months ended June
30, 1998. Interest income from originated loans of approximately $2.7 million
was derived from the first securitization of CRIIMI MAE's "No Lock" conduit loan
product. The securitization, totaling $496 million, was completed June 1998.
Interest Expense
- ----------------
Interest expense increased by approximately $15 million or 88% to
approximately $32.1 million for the three months ended June 30, 1998 from
approximately $17.1 million for the corresponding period in 1997. Interest
expense increased by approximately $24.1 million or 68% to approximately $59.5
million for the six months ended June 30, 1998 from approximately $35.4 million
for the corresponding period in 1997. These increases were principally a result
of additional amounts borrowed in connection with the acquisition of
Subordinated CMBS during 1997 and the first six months of 1998. Additionally,
CRIIMI MAE incurred interest expense in connection with the senior unsecured
notes issued during fourth quarter 1997 and the collateralized mortgage
obligations issued June 1998. These increases are partially offset by the $477
million of debt derecognized on the financial statements in conjunction with the
CBO-2 transaction.
<PAGE>42
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Net Interest Margin
- -------------------
Net interest margin increased by approximately $4.8 million or 38% for the
three months ended June 30, 1998 to approximately $17.5 million from
approximately 12.7 million for the corresponding period in 1997. For the six
months ended June 30, 1998, net interest margin increased approximately $8.8 or
37% to approximately $32.6 million from approximately $23.8 million for the
corresponding period in 1997. Net interest margin increased for the three and
six months ended June 30, 1998, as previously discussed.
Gain on Sale of Securities
- --------------------------
As previously discussed, in May 1998, CRIIMI MAE completed the sale of $468
million of investment grade securities created through the resecuritization of
approximately $1.8 billion of its Subordinated CMBS. CRIIMI MAE recognized a
gain of approximately $29.1 million on the sale of $345 million investment grade
securities sold without call provisions, recognizing CRIIMI MAE's transfer of
control on those securities. The sale of $123 million investment grade
securities with significant call provisions was treated as a financing and
resulted in an unrealized gain of approximately $26 million. Certain securities
included call provisions to enable CRIIMI MAE to 1) repurchase bonds if market
conditions warrant, and 2) call bonds when it is no longer cost effective to
service them. The sold investment grade securities treated as financing, as
well as approximately $1.3 billion face amount of investment grade and non-
investment grade securities retained by CRIIMI MAE are now required to be
reflected on CRIIMI MAE's balance sheet at their fair market value.
Additionally, due to the sale treatment under FAS 125, all remaining
Subordinated CMBS and government insured mortgage securities are required to be
carried at fair market value. This reclassification currently results in an
unrealized gain of approximately $117 million.
Additionally, as part of CBO-2, CRIIMI MAE's servicing affiliate sold
trustee servicing rights for $4.2 million, resulting in a gain of $4.2 million
for tax purposes, and approximately $400,000 for financial reporting purposes.
Equity In Earnings From Investments
- -----------------------------------
Equity in earnings from investments increased by approximately $211,000 or
29% to approximately $942,000 for the three months ended June 30, 1998 as
compared to $731,000 for the corresponding period in 1997. Equity in earnings
from investments increased by approximately $700,000 or 45% to approximately
$2.2 million for the six months ended June 30, 1998 as compared to $1.5 million
for the corresponding period in 1997. This increase is due primarily to higher
net income from Services Partnership, which resulted from increases in servicing
fee streams and float income earned on escrow balances derived from the steadily
expanding servicing portfolio. The servicing portfolio has grown to
approximately $31.5 billion as of June 30, 1998, as compared to approximately
$8.8 billion as of July 1, 1997. The increased float income and servicing fees
were partially offset by increased general and administrative expenses
associated with the growth in the servicing portfolio, as well as amortization
of certain purchased servicing rights. Additionally, as previously discussed,
Services Partnership recognized a gain of approximately $400,000 on the sale of
a trustee servicing strip in conjunction with the CBO-2 transaction completed in
May 1998.
Other Income
- ------------
Other income increased by approximately $1.3 million or 366% to
approximately $1.6 million for the three months ended June 30, 1998 as compared
to approximately $349,000 for the corresponding period in 1997. Other income
<PAGE>43
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
increased by approximately $1.5 million or 122% to approximately $2.8 million
for the six months ended June 30, 1998 as compared to approximately $1.3 million
for the corresponding period in 1997. This increase was primarily attributable
to an increase in short-term interest and other income earned during the first
two quarters of 1998 on the amounts deposited in the loan origination reserve
account, which had an average balance of approximately $52 million and
approximately $45 million during the three and six months ended June 30, 1998,
respectively. Approximately $682,000 and approximately $1.4 million of short-
term interest income and net-carry income were earned on these deposits for the
three and six months ended June 30, 1998, respectively. Amounts earned on the
origination reserve account for the period ending June 30, 1997 were immaterial.
(Loss)Gain on Mortgage Dispositions
- -----------------------------------
For the three months ended June 30, 1998 and 1997, (losses)/gains on
mortgage dispositions were approximately $(92,000) and $95,000, respectively.
For the six months ended June 30, 1998 and 1997, (losses)/gains on mortgage
dispositions were approximately $(46,000) and $17.2 million, respectively. The
following table summarizes the mortgage dispositions for the three and six
months ended June 30, 1998 and 1997 for GAAP purposes:
<PAGE>44
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
<TABLE><CAPTION>
1998
Amortized
Face Value Cost Gain/(Loss)(2)
---------- ---------- --------------
<S> <C> <C> <C>
For the quarter
ended June 30 7,377,715 7,405,659 (92,283)
========== ========== =========
For the six months
ended June 30 32,503,033 32,780,536 (45,834)
========== ========== =========
1997 (1)
Amortized GAAP
Face Value Cost Gain/(Loss)(2)
---------- ---------- --------------
<S> <C> <C> <C>
For the quarter
ended June 30 -- -- 95,000
========== ========== ==========
For the six months
ended June 30 66,266,058 51,897,661 17,233,949
========== ========== ==========
(1) For the six month period and quarter ended June 30, 1997, gains from the
sales of CRI Liquidating assets totaled approximately $17.3 million and $95,000,
respectively. This entity was fully liquidated as of December 31, 1997 and
therefore no gains or losses from CRI Liquidating will be recognized for 1998 or
future periods.
(2) GAAP gain/(loss) is calculated based on the difference between the face
value of the mortgage and the amortized cost, plus or minus the difference
between the stated interest received less the effective interest due, plus
prepayment penalties (if any), less any unamortized mortgage costs.
</TABLE>
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased by approximately $400,000 or
15% to approximately $3.0 million for the three months ended June 30, 1998 as
compared to approximately $2.6 million for the corresponding period in 1997.
General and administrative expenses increased by approximately $1.0 million or
19% to approximately $6.0 million for the six months ended June 30, 1998 as
compared to approximately $5.0 million for the corresponding period in 1997.
The increase in general and administrative during these periods is primarily the
result of the continual growth of CRIIMI MAE's commercial mortgage operations.
Funds from Operations
- ---------------------
Funds from operations (FFO) were $45.0 million for the three months ended
June 30, 1998 compared to approximately $9.9 million for the comparable period
in the prior year, an increase of approximately $35.1 million. Funds from
operations were approximately $58.3 million for the six months ended June 30,
<PAGE>45
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
1998 compared to approximately $28.2 million for the comparable period in the
prior year, an increase of approximately $30.1 million. The following table
reconciles funds from operations and net income:
<TABLE><CAPTION>
For the three months ended
-----------------------------
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
Net income available to common shareholders $43,426,376 $ 8,870,707
Amortization of merger assets 719,394 719,391
Other amortization/depreciation 830,632 301,234
----------- -----------
Funds from operations $44,976,402 $ 9,891,332
=========== ===========
</TABLE>
<TABLE><CAPTION>
For the six months ended
---------------------------
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
Net income available to common shareholders $55,682,307 $26,144,860
Amortization of merger assets 1,438,788 1,438,782
Other amortization/depreciation 1,238,061 598,059
----------- -----------
Funds from operations $58,359,156 $28,181,701
=========== ===========
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund the company's operations, which is
disclosed in the Consolidated Statement of Cash Flows for the applicable
periods. Funds from operations should not be considered as an alternative to
net income as an indicator of the Company's operating performance, nor as an
alternative to the Statement of Cash Flows as a measure of liquidity. FFO, as
defined by the National Association of Real Estate Investment Trusts, represents
net income (computed in accordance with generally accepted accounting
principles) applicable to common shares excluding gains or losses from debt
restructurings and sales of property, plus depreciation and amortization, and
after adjustments from unconsolidated partnerships and joint ventures.
Management believes that the prohibitions against the inclusion of gains or
losses on sales of property in FFO and the inclusion of extraordinary or unusual
items was not meant to address the sales of disposition of securities as it
applies to the Company. Accordingly, the Company includes gains or losses from
such sales in its calculation of FFO on both a relevant supplemental measure
because it provides a basis for comparisons among REITS, FFO as presented may
not be comparable to similarly titled measures reported by other REITS.
Cash Flow
- ---------
1998 versus 1997
- ----------------
Net cash provided by operating activities decreased for the six months
ended June 30, 1998 as compared to the corresponding period in 1997 primarily
<PAGE>46
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
due to the increase in receivables and other assets of approximately $24
million. This increase is due largely to the ordinary operating interest
receivable on Subordinated CMBS which has increased as a result of acquisitions
during 1997 and the first half of 1998. Also included in the net change in
receivables and other assets is interest income receivable due on the
collateralized mortgage obligation-originated loans, which closed June 1998 and
$3.5 million of mezzanine loans funded during the first six months of 1998.
While generally accepted accounting principles require CRIIMI MAE to report
the $29.1 million cash gain on the sale of its collateralized bond obligation as
investing activities in the statement of cash flow, CRIIMI MAE believes this
cash gain is more reflective of its operating business. CRIIMI MAE's business
plan anticipates selling these assets, at least annually, and believes that the
cash gain should be considered together with cash flow from operating activities
in evaluating its operating performance.
Net cash used in investing activities increased for the six months ended
June 30, 1998 as compared to the corresponding period in 1997 principally as a
result of the increased purchases of Subordinated CMBS. Also contributing to
the increase in cash used in investing activities was the purchase of the
commercial loans, approximately $495 million, for CRIIMI MAE's "No-Lock"
originated loan securitization. These increases were partially offset by the
$335 million of proceeds received from the sale of collateralized bond
obligations in conjunction with CBO-2, as previously discussed.
Net cash provided by financing activities increased for the six months
ended June 30, 1998 as compared to the corresponding period in 1997. Net cash
provided by financing activities increased primarily due to proceeds from debt
issuances related to the sale of the collateralized mortgage obligation and
floating-rate repurchase debt, net of principal payments, and increased proceeds
from equity offerings.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Financial Flexibility
- --------------------
To meet its capital requirements, CRIIMI MAE uses proceeds from long-term,
fixed-rate debt refinancings, repurchase agreements, other borrowings, issuances
of common and preferred shares and an unsecured working capital line of credit.
Through June 30, 1998, CRIIMI MAE has raised approximately $105 million from
public offerings of common shares and common shares issued in connection with
the Dividend Reinvestment and Stock Purchase Plan and approximately $15 million
from a "Series C" Preferred Share private placement. Additionally, the Company
generated additional proceeds of $160 million in connection with CBO-2.
In general, CRIIMI MAE initially funds a significant portion of its
Subordinated CMBS acquisitions with short-term, variable-rate debt. CRIIMI
MAE's financing strategy is to refinance a significant portion of this short-
term variable-rate acquisition debt with fixed-rate debt having maturities that
match those of the underlying collateral through resecuritizations of its
Subordinated CMBS. In May 1998, CRIIMI MAE completed the second
resecuritization of its Subordinated CMBS portfolio, which under FAS 125,
qualified for both sale and financing accounting. Through the May 1998
transaction, CRIIMI MAE refinanced $468 million of its variable rate debt with
fixed-rate match-funded debt. As previously stated, the transaction also
generated net proceeds of approximately $160 million, which were used primarily
to fund additional CMBS. CRIIMI MAE also recognized a gain of approximately
$29.1 million on the sale of $345 million non-callable securities and an
unrealized gain of approximately $26 million on the sale of $123 million
callable investment grade securities treated as financings for accounting
purposes. Additionally, due to the sale treatment under FAS 125, all remaining
<PAGE>47
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Subordinated CMBS and government insured mortgages are required to be carried at
fair market value. This reclassification currently results in an unrealized
gain of approximately $117 million.
The Company's ability to execute its business strategy, including the
acquisition of additional Subordinated CMBS, and its loan origination and
securitization program, depends to a significant degree on its ability to obtain
additional capital. Factors which could affect the Company's access to the
capital markets, or the costs of such capital, include changes in interest
rates, general economic conditions and perception in the capital markets of the
Company's business, covenants under the Company's current and future debt
securities and credit facilities, results of operations, leverage, financial
conditions and business prospects.
The Company's financial flexibility is also affected by its ability to
borrow money in sufficient amounts and on favorable terms and by its ability to
renew or replace on a continuous basis its maturing short-term borrowings. As
previously discussed, in late 1997, CRIIMI MAE entered into a three-year master
assignment agreement with a lender to finance up to $200 million of additional
and/or existing investments in lower-rated Subordinated CMBS, which was amended
in early 1998, to finance up to $350 million in secured borrowings. Outstanding
borrowings under this master assignment agreement are secured by the financed
Subordinated CMBS. In addition, in early 1996 CRIIMI MAE entered into a three-
year master repurchase agreement with a lender to finance up to $200 million of
additional and/or existing investments in lower-rated Subordinated CMBS. During
early 1998, CRIIMI MAE amended this agreement to provide up to $500 million in
secured borrowings and extended the term to December 2000.
For the six months ended June 30, 1998, CRIIMI MAE's weighted average cost
of borrowing (including amortization of discounts and deferred financing fees of
approximately $1.9 million) was approximately 7.55%. As of June 30, 1998,
CRIIMI MAE's debt-to-equity ratio was approximately 3.0 to 1.0. Under certain
of CRIIMI MAE's existing debt facilities, CRIIMI MAE's debt-to-equity ratio, as
defined, may not exceed 5.0 to 1.0.
CRIIMI MAE has a series of interest rate cap agreements in place in order
to partially limit the adverse effects of rising interest rates on the floating-
rate debt. When CRIIMI MAE's cap agreements expire, CRIIMI MAE will have
interest rate risk to the extent interest rates increase on any floating-rate
borrowings unless the caps are replaced or other steps are taken to mitigate
this risk. CRIIMI MAE's investment policy requires that at least 75% of
floating-rate debt be hedged; however, there can be no assurance that the
Company will be able to do so. As of June 30, 1998, 85% of CRIIMI MAE's
outstanding floating-rate debt is hedged with interest rate cap agreements that
have weighted average strike price of approximately 6.6% and a weighted average
remaining term of 2.3 years. The flexibility in CRIIMI MAE's leverage is
dependent upon, among other things, the levels of unencumbered assets, which are
inherently linked to prevailing interest rates and in certain circumstances
increases in interest rates, changes in market spreads, or decreases in credit
quality of underlying assets. Due to the aforementioned factors, CRIIMI MAE
would be required to provide additional collateral in connection with its short-
term, floating-rate borrowing facilities. From time to time, the Company has
been required to fund such additional collateral needs. In each instance, the
Company has had adequate unencumbered assets to meet its operating, investing
and financing requirements, and management continually monitors the levels of
unencumbered collateral.
CRIIMI MAE's repurchase agreements are executed through a sale of
securities with a simultaneous agreement to repurchase them in the future at the
same price plus a contracted rate of interest. The Company's repurchase
agreements qualify as financings under Financial Accounting Standard 125,
<PAGE>48
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" and are accounted for as such. At June 30, 1998, CRIIMI MAE had
repurchase agreements with German American Capital Corporation, Lehman Brothers
Commercial Paper, First Union National Bank of North Carolina, Morgan Stanley
International Co., Ltd., Merrill Lynch Mortgage Capital Inc. and Citicorp
Securities Inc.
Dividends
- ---------
CRIIMI MAE's principal objectives are to enhance the value of CRIIMI MAE's
capital stock and to provide increasing dividends to its shareholders. Tax
basis recurring income, as well as financial statement recurring net income
increased for the six months ended June 30, 1998 as compared to the
corresponding periods in 1997 and, as a result, total dividends increased.
Dividends paid per share are summarized below:
<PAGE>49
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
</TABLE>
<TABLE><CAPTION>
For the three months ended For the six months ended
June 30, (1) June 30, (1)
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Common Shares .40 .35 .77 .70
Series B Preferred Shares .915 .797 1.76 1.59
(1) In addition to the per share amounts as described above, Series A Preferred Shares paid $50,867 for the six months ended
June 30, 1997 and Series C Preferred Shares paid $407,061 and $689,440, respectively for the three and six months ended
June 30, 1998.
</TABLE>
The cash dividends paid by CRIIMI MAE and by its subsidiaries may vary
during each period due to several factors. Some of the factors which impact
CRIIMI MAE's dividend include (i) the level of income earned on uninsured
mortgage assets, such as Subordinated CMBS and originated loans, which varies
depending on prepayments, defaults, etc., (ii) the level of income earned on
CRIIMI MAE's or its subsidiaries' insured mortgage security collateral depending
on prepayments, defaults, etc., (iii) the fluctuating yields on short-term debt
and the rate at which CRIIMI MAE's LIBOR-based debt is priced, as well as the
rate CRIIMI MAE pays on its other borrowings, (iv) the yield at which principal
from scheduled monthly mortgage asset payments, mortgage dispositions, loan
origination reserves, escrow deposits and distributions from its subsidiaries
can be reinvested, (v) changes in operating expenses, and (vi) dividends paid on
preferred shares. CRIIMI MAE's dividends will also be impacted by the timing
and amounts of cash flows attributable to its other lines of business - mortgage
servicing, advisory and origination services.
REIT STATUS
- -----------
CRIIMI MAE has qualified and intends to continue to qualify as a REIT under
Sections 856-860 of the Internal Revenue Code. As a REIT, CRIIMI MAE does not
pay taxes at the corporate level. Qualification for treatment as a REIT
requires CRIIMI MAE to meet certain criteria, including certain requirements
regarding the nature of their ownership, assets, income and distributions of
taxable income. CRIIMI MAE however, may be subject to tax at normal corporate
rates on net income or capital gains not distributed.
Investment Company Act
- ----------------------
CRIIMI MAE intends to conduct its business so as not to become regulated as
an investment company under the Investment Company Act. Under the Investment
Company Act, a non-exempt entity that is an investment company is required to
register with the Securities and Exchange Commission ("SEC") and is subject to
extensive, restrictive and potentially adverse regulation relating to, among
other things, operating methods, management, capital structure, dividends and
transactions with affiliates. The Investment Company Act exempts entities that
are "primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" ("Qualifying
Interests"). Under current interpretation by the staff of the SEC, to qualify
for this exemption, CRIIMI MAE, among other things, must maintain at least 55%
of its assets in Qualifying Interests. Pursuant to SEC staff interpretations,
CRIIMI MAE's Government Insured Mortgage Assets and Originated Loans are
Qualifying Interests, but such investments currently comprise only approximately
38% of the Company's assets. Subordinated CMBS currently comprise approximately
55% of CRIIMI MAE's assets.
<PAGE>50
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
The Company will acquire Subordinated CMBS only when such mortgage assets
are collateralized by pools of first mortgage loans, when the Company can
monitor the performance of the underlying mortgage loans through loan management
and servicing rights, and when the Company has appropriate workout/foreclosure
rights with respect to the underlying mortgage loans. When such arrangements
exist, CRIIMI MAE believes that the related Subordinated CMBS constitute
Qualifying Interests for purposes of the Investment Company Act. Therefore,
CRIIMI MAE believes that it should not be required to register as an "investment
company" under the Investment Company Act as long as it continues to invest
primarily in such Subordinated CMBS and/or in other Qualifying Interests.
However, if the SEC or its staff were to take a different position with respect
to whether CRIIMI MAE's Subordinated CMBS constitute Qualifying Interests, the
Company could be required to modify its business plan so that either (i) it
would not be required to register as an investment company or (ii) it would
comply with the Investment Company Act and be able to register as an investment
company. In such event (i) modification of the Company's business plan so that
it would not be required to register as an investment company would likely
entail a disposition of a significant portion of the Company's Subordinated CMBS
or the acquisition of significant additional assets, such as Government Insured
Mortgage Assets, which are Qualifying Interests or (ii) modification of the
Company's business plan to register as an investment company, which would result
in significantly increased operating expenses and would likely entail
significantly reducing the Company's indebtedness (including the possible
prepayment of the Company's repurchase agreement financing and/or the Notes),
which could also require it to sell a significant portion of its assets. No
assurances can be given that any such dispositions or acquisitions of assets, or
deleveraging, could be accomplished on favorable terms. Any such modification
of the Company's business plan could have a material adverse effect on the
Company. Further, if it were established that the Company were an unregistered
investment company, there would be a risk that the Company would be subject to
monetary penalties and injunctive relief in an action brought by the SEC, that
the Company would be unable to enforce contracts with third parties and that
third parties could seek to obtain rescission of transactions undertaken during
the period it was established that the Company was an unregistered investment
company. Any such results would be likely to have a material adverse effect on
the Company and its ability to service its debt obligations.
OTHER EVENTS
- ------------
In June 1995, Edge Partners, L.P. (the Plaintiff), derivatively on behalf
of CRIIMI MAE, filed a Derivative Complaint in the District Court of Maryland,
Southern Division. This complaint was dismissed in December 1995. The
Plaintiff filed a First Amended Class and Derivative Complaint (the Complaint)
in February 1996. The Complaint names as defendants each of the Directors who
served on the board at the time of the Merger and CRIIMI MAE as a nominal
defendant. Each of the Directors has an indemnity from CRIIMI MAE.
Count I of the complaint alleges violations of Section 14(a) of the
Securities Exchange Act of 1934 for issuing a materially false and misleading
proxy in connection with the Merger and brings such count individually on its
own behalf and asks the court to certify such count as a class action. Count II
alleges a breach of fiduciary duty owed to CRIIMI MAE and its shareholders and
purports to bring such count derivatively in the right of and for the benefit of
CRIIMI MAE. Through the Complaint, the Plaintiff seeks, among other relief,
that unspecified damages be accounted to CRIIMI MAE, that the stockholder vote
in connection with the Merger be null and void, and that certain salaries and
other remuneration paid to the Directors be returned to CRIIMI MAE.
On February 3, 1998, the Company, the individual defendants and the
Plaintiff executed a settlement agreement. Under the terms of the settlement
<PAGE>51
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
agreement, the Company is not required to make or receive any payments as a
result of the settlement, but instead made certain disclosures and adopted a
non-binding policy sought by the Plaintiff. The settlement agreement was
approved by the court and became effective June 16, 1998.
Forward-Looking Statements
- --------------------------
In accordance with the Private Securities Litigation Reform Act of
1995, the Company can obtain a "Safe Harbor" for forward-looking statements by
identifying those statements and by accompanying those statements with
cautionary statements which identify factors that could cause actual results to
differ from those in the forward-looking statements. Accordingly, the following
information contains or may contain forward-looking statements: (1) information
included or incorporated by reference in this Quarterly Report on Form 10-Q,
including, without limitation, statements made under Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations, (2)
information included or incorporated by reference in future filings by the
Company with the Securities and Exchange Commission including, without
limitation, statements with respect to growth, projected revenues, earnings,
returns and yields on its portfolio of mortgage assets, the impact of interest
rates, costs, and business strategies and plans (including, without limitation,
plans to purchase additional Subordinated CMBS and other mortgage assets and
plans to expand the servicing and origination of mortgage assets), and (3)
information contained in written material, releases and oral statements issued
by or on behalf of, the Company, including, without limitation, statements with
respect to growth, projected revenues, earnings, returns and yields on its
portfolio of mortgage assets, the impact of interest rates, costs and business
strategies and plans (including, without limitation, plans to purchase
additional subordinated commercial mortgage-backed securities and other mortgage
assets and plans to expand the servicing and origination of mortgage assets).
The Company's actual results may differ materially from those contained in the
forward-looking statements identified above. Factors which may cause such a
difference to occur include, but are not limited to, (i) heightened competition,
including specifically increased competition for acceptable mortgage asset
purchase opportunities with financial institutions, including banks, insurance
companies, savings and loan associations, pension funds, and other real estate
investment trusts and investors in real estate and mortgage assets which have
investment objectives similar to those of the Company and some of which may have
greater financial resources than the Company, (ii) the availability of suitable
opportunities for the acquisition, ownership and disposition of mortgage assets,
and yields available from time to time on such mortgage assets, (which, in turn,
depend to a large extent on the type of mortgage asset involved, prevailing
interest rates, the nature and geographical location of the property,
competition and other factors, none of which can be predicted with certainty),
(iii) regulatory and litigation matters, (iv) interest rates, (v) imbalances in
cash available for distribution caused by an unanticipated level of defaults
and/or prepayments on the Company's portfolio of mortgage assets, (vi) the
Company's ability to refinance debt on terms that are comparable to current
terms when such debt becomes due, and (vii) trends in the economy which affect
confidence and demand for the Company's portfolio of mortgage assets,
particularly trends affecting the Company's assets.
Other
- -----
CRIIMI MAE is currently in the process of evaluating its information technology
infrastructure for Year 2000 compliance. The Company does not expect that the
cost to modify its information technology infrastructure to be Year 2000
compliant will be material to its financial condition or results of operations.
The Company does not anticipate any material disruption in its operations as a
result of any failure by the Company to be in compliance. The Company is
<PAGE>52
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
currently evaluating Year 2000 compliance status of its suppliers and
borrowers. In the event that any of the Company's significant suppliers or
borrowers do not successfully and timely achieve Year 2000 compliance, the
Company's business or operations could be adversely affected.
<PAGE>53
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 14 of the notes to the consolidated financial
statements of CRIIMI MAE Inc., which is incorporated herein by reference.
<PAGE>54
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Reference is made to Note 9 of the notes to the consolidated financial
statements of CRIIMI MAE Inc., which is incorporated herein by reference.
ITEM 3. DEFAULTS UPON SENIOR NOTES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1998 Annual Meeting of Shareholders was held on May 12, 1998.
(c) The matters voted upon and the results of such votes are as follows:
1. The election of William B. Dockser as a director: 37,068,453
shares voted in favor and 378,742 shares withheld votes.
2. The election of G. Richard Dunnells as a director: 37,074,770
shares voted in favor and 372,425 shares withheld votes.
3. A proposal to amend the Stock Option Plan for Key Employees to
increase the number of shares available under the plan:
31,238,037 shares voted in favor; 5,559,282 shares voted against
and 649,876 shares abstained.
4. A proposal to ratify the selection of Arthur Andersen LLP as the
Corporation's independent accountants: 36,882,508 shares voted
in favor, 264,192 shares voted against and 300,495 shares
abstained.
ITEM 5. OTHER INFOMATION
Not applicable.
<PAGE>55
PART II. OTHER INFORMATION
ITEM 6(a). EXHIBITS
The exhibits filed as part of this report are listed below:
Exhibit No. Description
---------- -----------
10 Whole loan origination facility agreement between
Prudential Securities Credit Corp., and CRIIMI MAE
Inc., dated as of June 1, 1998 (filed herewith)
27 Financial Data Schedule (filed herewith)
ITEM 6(b). REPORTS ON FORM 8-K
Date Purpose
---- -------
May 18, 1998 To report sale of $468 million of investment grade
securities created through the resecuritization of $1.8
billion of commercial mortgage backed securities.
<PAGE>56
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CRIIMI MAE INC.
/s/ July 31, 1998 /s/ Cynthia O. Azzara
----------------------- -----------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Principal Accounting Officer
and Chief Financial Officer<PAGE>
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 20,423
<SECURITIES> 2,153,048
<RECEIVABLES> 120,209
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
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<TOTAL-ASSETS> 2,842,055
<CURRENT-LIABILITIES> 18,291
<BONDS> 2,092,560
0
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<COMMON> 478
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<TOTAL-LIABILITY-AND-EQUITY> 2,842,055
<SALES> 0
<TOTAL-REVENUES> 126,252
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<OTHER-EXPENSES> 7,470
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</TABLE>
WHOLE LOAN ORIGINATION FACILITY AGREEMENT
THIS WHOLE LOAN ORIGINATION FACILITY AGREEMENT (this "Agreement") is made
as of this 1st day of June, 1998 (the "Effective Date") by and among PRUDENTIAL
SECURITIES INCORPORATED, a Delaware corporation ("PSI"), having an address at
One New York Plaza, New York, New York 10292-2018, PRUDENTIAL SECURITIES CREDIT
CORP., a Delaware corporation ("PSCC") having an address at One New York Plaza,
New York, New York 10292-2018, and CRIIMI MAE INC. a Maryland corporation,
having an office at 11200 Rockville Pike, Rockville, Maryland 20852 ("CRIIMI
MAE").
RECITALS
A. PSI, PSCC and CRIIMI MAE desire to develop a funding facility to
finance the origination of commercial mortgage loans ("Mortgage Loans") secured
by multifamily residential properties and commercial properties located
throughout the United States (the "Facility"). It is contemplated that CRIIMI
MAE shall identify, originate and underwrite Mortgage Loans to be funded through
the Facility upon PSCC's determination, in its sole discretion, to fund.
B. Contemporaneously with the origination of Mortgage Loans through
the Facility, it is contemplated that Prudential Mortgage Capital Company
L.L.C., a Delaware limited liability company ("PMCC") will originate mortgage
loans similar to the Eligible Loans (as hereinafter defined) pursuant to a
separate agreement between PMCC and CRIIMI MAE (the "PMCC Agreement).
C. The parties contemplate that the Mortgage Loans shall be combined
with mortgage loans originated by PMCC (the "PMCC Loans") into a pool of loans
having an aggregate principal amount of up to $1,000,000,000 in accordance with
the terms and conditions contained herein and the PMCC Agreement with a view to
the purchase by CRIIMI MAE or a wholly-owned subsidiary of CRIIMI MAE of the
Mortgage Loans and the PMCC Loans (collectively, the "Pooled Loans") and the
financing of such purchase through a securitization of the Pooled Loans and the
issuance of pass-through Certificates or other commercial mortgage-backed
securities ("CMBSs") (such a transaction, a "Securitization"). It is intended
that the Mortgage Loans to be acquired through the Facility will be funded by,
closed in the name of and, pending the consummation of a Securitization or other
disposition, held by PSCC. CRIIMI MAE's affiliate, CRIIMI MAE Services Limited
Partnership, an affiliate of CRIIMI MAE ("CRIIMI MAE Services"), will service
such Mortgage Loans during the period that the Mortgage Loans are being
aggregated through the Facility.
D. To enable CRIIMI MAE to effect a Securitization, PSCC intends to
grant to CRIIMI MAE an option to purchase the Mortgage Loans, and PMCC intends
to grant CRIIMI MAE an option to purchase the PMCC Loans, with the option
exercise price to be obtained by CRIIMI MAE in part through its receipt of the
proceeds of the Securitization and in part through other sources (which may
include financing under the Securities Repurchase Facility contemplated by
Article VI of this Agreement).
E. CRIIMI MAE presently intends to effect a Securitization and
purchase the Mortgage Loans and the PMCC Loans. The parties intend, however,
that CRIIMI MAE shall not be under any obligation to do so, and desire to
provide for PSCC's and PMCC's respective rights to retain the Mortgage Loans and
the PMCC Loans and, in PSCC's case, the option purchase price paid by CRIIMI
MAE, in the event CRIIMI MAE does not exercise its purchase option.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:<PAGE>
ARTICLE I.
LOAN ORIGINATION
Section I.01 Mortgage Loan Origination by CRIIMI MAE. (A) From and after the
Effective Date, CRIIMI MAE shall use its best efforts to identify and originate
Mortgage Loans that are Eligible Loans for inclusion in the Facility. As used
in this Agreement, an "Eligible Loan" is a Mortgage Loan that (i) is secured by
a first mortgage lien on the related borrower's fee simple or leasehold estate
in the real property collateral for the Eligible Loan (the "Mortgaged
Property"), (ii) is in an original principal amount of not more than $50,000,000
(in the case of a Mortgage Loan secured by a single Mortgaged Property), or more
than $100,000,000 (in the case of a Mortgage Loan secured by more than one
Mortgaged Property), (iii) requires monthly payments due on the first day of
each month, with interest payable in arrears, (iv) has a term to maturity of not
less than 7 nor more than 15 years, (v) has a loan to appraised value ratio not
exceeding 80%, (vi) has a debt service coverage ratio of not less than 1.20 to
1; (vii) satisfies the underwriting criteria set forth in Section 1.02 and
(viii) with respect to which the representations and warranties contained in
Section 2.01(A) are true and correct in all material respects on the date of
funding or purchase, as the case may be. The Mortgaged Property securing an
Eligible Loan may consist of one or more of the following types of properties:
multifamily residential projects, retail property, hotel property, assisted
living facilities, office buildings, self-storage facilities, warehouse
property, industrial property and manufactured housing communities. The parties
agree that (x) only Mortgage Loans underwritten by CRIIMI MAE may be included in
the Facility and (y) only Mortgage Loans originated through the Facility and
PMCC Loans may be included in a Securitization, provided that CRIIMI MAE agrees
to give good faith consideration to the inclusion in the Securitization of other
loans held by third parties and having the characteristics of Eligible Loans.
Eligible Loans may, but shall not be required to, include yield maintenance and
prepayment prohibitions. Without limiting the generality of the foregoing,
Eligible Loans may permit prepayment of the principal amount thereof, together
with all accrued and unpaid interest and other outstanding amounts on written
notice, provided that any such prepayment provision shall also require payment
of the following prepayment penalties: 3% penalty for prepayment during the
first three (3) years of the Mortgage Loan; 2% for prepayment during years four
(4), five (5) and six (6) of the Mortgage Loan; and 1% for prepayment during
years seven (7), eight (8) and nine (9) of the Mortgage Loan. No prepayment
penalty shall be required in connection with a prepayment in year ten (10) of
the Mortgage Loan or thereafter. PSCC agrees to give good faith consideration to
the inclusion as Eligible Loans of one or more Mortgage Loans having an initial
principal amount in excess of the maximum amounts set forth in this Section,
provided that PSCC shall be under no obligation to so include any such Mortgage
Loan. Anything in this Agreement to the contrary notwithstanding, a Mortgage
Loan shall not be an Eligible Loan if any of the representations and warranties
set forth in Section 2.01(B) of this Agreement shall not be true, complete and
correct in all material respects at the time of closing and funding, or closing
of the acquisition, of such Mortgage Loan. Criteria for Eligible Loans shall be
revised from time to time to comply with modifications required by one or more
nationally recognized statistical rating organizations (each, a "Rating
Agency') standards. Any such revisions shall be subject to the consent of all
parties to this Agreement.
(B) Notwithstanding the provisions of clause (viii) of Section 1.01(A),
PSCC and PSI acknowledge that CRIIMI MAE is engaged in originating and acquiring
"mezzanine loans", the terms of which may include equity participation by CRIIMI
MAE, participation in the cash flow or proceeds of disposition of the related
Mortgaged Property, CRIIMI MAE's acquisition of an ownership interest in the
Mortgaged Property or related Borrower CRIIMI MAE's acquisition of a security
interest in partnership or other equity interests in the related Borrower,
and/or CRIIMI MAE's acquisition of junior liens on the related Mortgaged
Property. Mortgage Loans secured by property that is or will be the subject of
a mezzanine loan may be proposed for inclusion in the Facility as Eligible
Loans, provided that any such mezzanine loan is subordinated to the Mortgage
Loan and any lien on the related Mortgaged Property is subordinated to the lien
of the Mortgage Loan pursuant to subordination terms satisfactory to PSCC, in
its sole discretion.
Section I.02 Underwriting of Mortgage Loans.
(A) Not later than 30 days following the Effective Date, PSCC and
CRIIMI MAE shall determine the underwriting standards for Mortgage Loans to be
included in the Facility. CRIIMI MAE shall adhere to such Mortgage Loan
underwriting standards in connection with its origination of Mortgage Loans for
the Facility. Such underwriting standards maybe modified from time to time with
PSCC's prior written consent. Pending the determination of such underwriting
standards, Mortgage Loans proposed for inclusion in the facility shall be
underwritten in accordance with standards satisfactory to PSCC.
(B) With respect to each Mortgage Loan identified by CRIIMI MAE and
proposed to PSCC for inclusion in the Facility as an Eligible Loan, CRIIMI MAE
shall prepare, or cause to be prepared, a comprehensive underwriting memorandum.
Such underwriting memorandum shall be in a form reasonably satisfactory to PSCC
and shall include the following information with respect to the Mortgage Loan to
which it relates:
(i) a description of the related Mortgaged Property;
(ii) a capitalization rate valuation computed in accordance with
industry practices for similar loans;
(iii) an analysis of the historical and projected operating
results of the related Mortgaged Property;
(iv) a calculation of the debt service coverage ratio and Mortgage
Loan to appraised value ratio for the Mortgage Loan;
(v) a rent roll for the related Mortgaged Property;
(vi) market information for the geographic area in which the Mortgaged
Property is situated;
(vii) photographs of the Mortgaged Property;
(viii) a site map showing the location of the related Mortgaged
Property;
(ix) information regarding sales and leases of comparable properties
in the vicinity of the Mortgaged Property;
(x) a description of the proposed borrower, including its business,
management, financial condition and credit history;
(xi) an analysis of the proposed borrower's business experience;
(xii) the proposed terms and conditions, including the
subordination provisions, of any related mezzanine financing; and
(xiii) such other information as may be reasonably requested by
PSCC in connection with its consideration of the proposed Mortgage Loan as
an Eligible Loan.
(C) After receipt of the final underwriting memorandum for a Mortgage
Loan, PSCC shall review such memorandum to determine the proposed Mortgage
Loan's compliance with CRIIMI MAE's underwriting criteria and its status as an
Eligible Loan. Based on such review, PSCC may, in its sole discretion, accept
the Mortgage Loan for the Facility, reject the proposed Mortgage Loan submitted
by CRIIMI MAE, or further evaluate the proposed Mortgage Loan. Provided that,
subsequent to receipt of the prospective borrower's application for the proposed
Mortgage Loan, PSCC shall have been afforded a reasonable opportunity to conduct
a site visit at the proposed Mortgaged Property and its environs, PSCC shall
give written notice to CRIIMI MAE of its acceptance or rejection of each
Mortgage Loan within four (4) business days after receipt of the underwriting
memorandum from CRIIMI MAE and shall use its best efforts to give such notice
within two (2) business days. In the event that PSCC shall not have notified
CRIIMI MAE of its acceptance or rejection within such four-business day period,
the proposed Mortgage Loan shall be deemed rejected.
Section I.03 Mortgage Loan Commitment; Rate Lock; Documentation and Closing.
(A) Upon receipt of PSCC's written notice of approval of a Mortgage
Loan presented to it for inclusion in the Facility, CRIIMI MAE shall prepare and
submit to PSCC for signature a Purchase Price and Terms Letter ("PPT") in the
form annexed as Exhibit A-1 to this Agreement (in the case of a Mortgage Loan to
be funded) or Exhibit A-2 to this Agreement (in the case of a Mortgage Loan to
be purchased). Upon receipt of a PPT executed by PSCC with respect to a
Mortgage Loan, CRIIMI MAE shall issue its standard loan commitment letter to the
related borrower and shall forward a copy thereof to PSCC. CRIIMI MAE shall not
issue a commitment letter with respect to a Mortgage Loan to be funded or
purchased by PSCC through the Facility prior to receipt of a PPT with respect to
such Mortgage Loan, and no such loan commitment letter shall be materially
amended, modified or supplemented by CRIIMI MAE without prior written notice to
and consent of PSCC.
(B) Each commitment letter issued with respect to the Facility shall
provide for an interest rate expressed as a spread over applicable Treasury
securities. Each such commitment letter shall, if specified in the related PPT,
permit the prospective borrower to "lock" or "fix" the interest rate on the
Mortgage Loan (a "Rate Lock") pursuant to an agreement satisfactory to PSI and
PSCC and specify that PSCC will lock or fix the interest rate for such Mortgage
Loan on a date mutually agreeable to CRIIMI MAE and the prospective borrower if
CRIIMI MAE has offered the prospective borrower a Rate Lock and such prospective
borrower has elected a Rate Lock and remitted the deposit therefor specified in
the commitment letter. At CRIIMI MAE's request, PSI will review with CRIIMI MAE
PSI'S proposed hedging strategy. On the date fixed by CRIIMI MAE and the
prospective mortgagor for the fixing of the interest rate, PSI will enter into
appropriate hedging arrangements with respect to each such Rate Lock. CRIIMI
MAE shall notify PSI immediately upon receipt of actual notice that any Eligible
Loan subject to a Rate-Lock will not be closed and funded under the Facility.
PSI shall thereupon terminate its hedging arrangements with respect to such
locked-in rate. The costs incurred by PSI in terminating such hedging
arrangements shall be borne by CRIIMI MAE.
(C) All Mortgage Loans funded under the Facility shall be documented
on the most current forms of Promissory Note; Mortgage, Assignment of Rents and
Security Agreement; Assignment of Leases and Rents; Environmental Indemnity
Agreement and other standard mortgage documents of PMCC, as the foregoing may be
modified from time to time by PMCC (including, without limitation, modifications
required by the Rating Agencies in connection with or for purposes of
facilitating a Securitization), together with riders thereto as provided by PSCC
(the "PMCC Loan Documents") or other forms approved by PSCC. PSCC shall provide
copies of any such modified PMCC Loan Documents to CRIIMI MAE and its counsel
promptly after implementation of any such modifications. CRIIMI MAE
acknowledges that it has reviewed the PMCC Loan Documents and that such
documents, to the extent no modifications are made which would materially
adversely affect the mortgagee's interest thereunder, are acceptable to CRIIMI
MAE for the purposes of the Facility and CRIIMI MAE's obligations under this
Agreement; provided, however, that CRIIMI MAE shall be entitled to request
changes to the PMCC Loan Documents at CRIIMI MAE's sole cost and expense. Any
such changes (which may be of general applicability or negotiated with respect
to a particular Mortgage Loan), including changes required to implement CRIIMI
MAE's "No-lock" prepayment terms described in Section 1.10, shall be subject to
PSCC's reasonable approval. The parties acknowledge that any Mortgage Loans
acquired in the secondary market pursuant to Section 1.06 may not be documented
utilizing the PMCC Loan Documents approved for the Facility.
(D) All costs and expenses associated with the origination,
preparation of Mortgage Loan documents, title review and closing costs of any
Mortgage Loan, including, without limitation, legal and brokerage fees, shall be
paid by the borrower as provided in the commitment letter issued with respect to
a Mortgage Loan unless otherwise agreed by PSCC and CRIIMI MAE.
(E) CRIIMI MAE shall retain, at its expense (but subject to the
preceding Section 1.03(D)), counsel of its choosing, reasonably satisfactory to
PSI and PSCC, to represent CRIIMI MAE, PSI and PSCC in connection with the
negotiation and closing of Mortgage Loans. The fees and expenses of any
additional counsel retained by PSI or PSCC in connection with the negotiation
and closing of Mortgage Loans shall be paid by PSI and PSCC. CRIIMI MAE shall
provide PSCC with CRIIMI MAE's or its counsel's standard closing procedures, and
shall follow such Mortgage Loan closing procedures, except as otherwise
requested by PSCC. In connection with the closing and funding of each Eligible
Loan under the Facility, CRIIMI MAE shall deliver the following documents to
PSCC at the time or times specified in CRIIMI MAE's closing procedures:
(i) a notice of borrowing providing the amount of the advance,
executed by an authorized officer of CRIIMI MAE;
(ii) a schedule providing the terms of the Mortgage Loan to be funded,
approved by an authorized officer of CRIIMI MAE;
(iii) wire transfer instructions;
(iv) an acknowledgement of receipt of documents delivered for closing
from a title insurance company; and
(v) a closing certification by counsel retained by CRIIMI MAE to
represent CRIIMI MAE and PSCC in connection with the closing of the
Mortgage Loan.
(F) CRIIMI MAE shall require the borrower under an Eligible Loan
either to (i) appoint a title insurance company approved by PSCC to act as
escrow agent in connection with the closing of each Eligible Loan included in
the Facility or (ii) furnish to PSCC a closing protection letter from a title
insurance company approved by PSCC confirming and acknowledging that the title
company appointed to act as escrow agent is an authorized agent of such approved
title company. The provisions of this Subsection (F) shall not be applicable to
Mortgage Loans that are closed and funded pursuant to "New York style" closing
procedures.
(G) In connection with the closing of a Mortgage Loan, PSCC shall
advance (i) in the case of a new Mortgage Loan, 100% of the par value of the
Mortgage Loan, and (ii) in the case of a Section 1.06 Loan, as defined below,
100% of the lesser of the purchase price of such Mortgage Loan or the Market
Value thereof provided, that the amount advanced with respect to a Section 1.06
Loan shall not be more than 105% of the par value thereof (the amount determined
pursuant to clause (i) or (ii), as the case may be, being the "Loan Amount").
The "Market Value" of a Mortgage Loan shall be the fair market value thereof,
determined by PSI by reference to the prices for similar loans in the secondary
market for mortgage loans among institutional sellers and purchasers, taking
into account the value of the hedging transaction associated with such Mortgage
Loan as well as the scheduled payments of principal, interest and other amounts
due on the Mortgage Loan.
(H) Notwithstanding anything to the contrary set forth herein,
Mortgage Loans will be funded and closed in the name of PSCC, provided that, if
required by applicable licensing, regulatory, or other legal requirements, PSCC
shall use its best efforts to fund and close such loan in the name of PMCC or
another entity such that the Certificates or other securities to be issued in
the Securitization will qualify as "mortgage related securities" within the
meaning of Section 3(a)(41) of the Securities Exchange Act of 1934, as amended.
In the event that one or more Mortgage Loans is closed in the name of PMCC or
any such other entity, the representations, warranties, covenants and agreements
of CRIIMI MAE shall be deemed to have been made to, with, and for the benefit of
PMCC or such other entity. Upon any assignment of such Mortgage Loan or Loans
by PMCC or such other entity to PSCC, all of the assignor's rights under such
representations, warranties, covenants and agreements shall be assigned to and
vested in PSCC. PSCC further agrees to use its reasonable best efforts to apply
for licensure as a mortgage lender in those states in which such licensure is
required and to obtain approval as a mortgagee by the Secretary of Housing and
Urban Development pursuant to Sections 203 and 211 of the National Housing Act.
Section I.04 Origination Fees. CRIIMI MAE may, but shall not be obligated to,
charge a prospective mortgagor a commitment fee or an origination fee in
connection with the issuance of a commitment letter. Any such loan commitment
origination fees collected in connection with the issuance of a commitment
letter or otherwise may be retained by CRIIMI MAE.
Section I.05 Custodial Arrangements. Not later than the first closing of the
funding or purchase of a Mortgage Loan originated by CRIIMI MAE hereunder, the
parties shall select a bank to act as custodian the ("Custodian") of the
promissory notes, mortgages, and all other documents customarily retained by
custodians on behalf of institutional lenders (collectively, the "Loan
Documents") pursuant to an agreement (the "Custodial Agreement") on terms
mutually satisfactory to the parties hereto and the Custodian. Anything in this
Agreement to the contrary notwithstanding, it shall be a condition to PSCC's
obligation to fund or purchase any Mortgage Loan originated by CRIIMI MAE
pursuant to this Agreement that the parties shall have entered into the
Custodial Agreement. CRIIMI MAE shall deliver all Loan Documents to the
Custodian promptly following the closing of an Eligible Loan (other than Loan
Documents required to be filed or recorded, which shall be delivered to the
Custodian promptly upon the receipt of such documents from the relevant filing
or recordation office). The fees and expenses of the Custodian shall be paid by
CRIIMI MAE.
Section I.06 Secondary Market Mortgage Loan Acquisitions. In the event CRIIMI
MAE proposes that PSCC acquire any existing Mortgage Loan or Loans from an
unrelated third-party through the Facility, PSCC and CRIIMI MAE shall establish
in advance written procedures for the acquisition of such Mortgage Loan or
Mortgage Loans consistent with the terms of this Agreement. Such procedures
shall include, without limitation, CRIIMI MAE'S preparation of an underwriting
memorandum with respect to Mortgage Loans proposed to be acquired, such other
actions as shall be necessary to demonstrate that any such Mortgage Loan should
be considered to be an Eligible Loan, and the payment of an "Initial Haircut
Payment" (as defined in Section 3.01(A)) by CRIIMI MAE to PSCC in connection
with the closing of the acquisition of any such Mortgage Loan. Any Mortgage
Loans acquired pursuant to this Section 1.06 shall be subject to the purchase
option granted by PSCC to CRIIMI MAE pursuant to Section 5.01. The costs and
expenses related to all secondary market Mortgage Loan acquisitions shall be
paid as agreed upon by the parties, provided that any broker's, finder's or
similar fees shall be paid solely by CRIIMI MAE. Any Mortgage Loan acquired or
to be acquired in the secondary market through the Facility is herein after
referred to as a "Section 1.06 Loan."
Section I.07 Maximum Facility Size. The maximum principal amount of Mortgage
Loans which PSCC shall be required to fund through the Facility shall be $500
million in the aggregate, which amount may be increased in PSI's and PSCC's sole
discretion. <PAGE>
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
Section II.01 Representations and Warranties of CRIIMI MAE.
(A) CRIIMI MAE hereby represents and warrants to PSI and PSCC, and
their respective successors and assigns as provided in this Agreement (subject
to the qualifications with respect to matters of enforceability set forth below
in Section 2.01(B)) that:
(i) Due Organization; Qualification; REIT Status. CRIIMI MAE is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Maryland, is duly qualified to transact business as a
foreign corporation, in good standing and licensed in each state in which
the nature of its business or property owned by it requires such
qualification and licensure. CRIIMI MAE has, at all relevant times,
maintained its qualifications as a Real Estate Investment Trust under the
Internal Revenue Code of 1986, as amended.
(ii) Authority. CRIIMI MAE has the full power, authority and legal
right to execute and deliver this Agreement (and all agreements executed
and delivered by CRIIMI MAE in connection herewith) and to perform all
transactions contemplated by this Agreement (and all agreements executed
and delivered by CRIIMI MAE in connection herewith). CRIIMI MAE has duly
authorized the execution, delivery and performance of this Agreement (and
all agreements executed and delivered by CRIIMI MAE in connection
herewith), and has duly executed and delivered this Agreement (and all
agreements executed and delivered by CRIIMI MAE in connection herewith).
This Agreement (and each agreement executed and delivered by CRIIMI MAE in
connection herewith) constitutes the legal, valid and binding obligation of
CRIIMI MAE enforceable in accordance with its terms, except as such
enforcement may be limited by bankruptcy, insolvency, reorganization,
receivership, moratorium or other laws relating to or affecting the rights
of creditors generally and by general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or at
law).
(iii) No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and
conditions of this Agreement by CRIIMI MAE, will (a) conflict with or
result in a breach of any of the terms, conditions or provisions of CRIIMI
MAE's certificate of incorporation, as amended, or other organization
documents or any agreement or instrument to which CRIIMI MAE is now a party
or by which it (or any of its properties) is bound, or constitute a default
or result in an acceleration of indebtedness under any of the foregoing;
(b) conflict with or result in a breach of any legal restriction if
compliance therewith is necessary (1) to ensure the enforceability of this
Agreement, or (2) for CRIIMI MAE to perform its duties and obligations
under this Agreement (or any agreement executed and delivered by CRIIMI MAE
in connection herewith); (c) result in the violation of any law, rule,
regulation, order, judgment or decree to which CRIIMI MAE or its property
is subject if compliance therewith is necessary (1) to ensure the
enforceability of this Agreement or any Mortgage Loan, or (2) for CRIIMI
MAE to perform its duties and obligations under this Agreement (or any
agreement executed and delivered by CRIIMI MAE in connection herewith); or
(d) result in the creation or imposition of any lien, charge or encumbrance
that would have a material adverse effect upon any of its properties
pursuant to the terms of any mortgage, contract, deed of trust or other
instrument, or materially impair the ability of PSCC to acquire, hold,
administer or dispose of or otherwise to realize on the Mortgage Loans.
(iv) Solvency. CRIIMI MAE is solvent and the execution, delivery and
performance of this Agreement (1) will not cause CRIIMI MAE to become
insolvent, and (2) is not intended by CRIIMI MAE to hinder, delay or
defraud any of its creditors.
(v) No Consent Required. No consent, approval, authorization or
order of, or registration or filing with, or notice to, any court or
governmental agency or body having jurisdiction or regulatory authority
over CRIIMI MAE is required for (a) CRIIMI MAE's execution and delivery of
this Agreement (and each agreement executed and delivered by CRIIMI MAE in
connection herewith) (b) the consummation by CRIIMI MAE of the transactions
contemplated by this Agreement (and each agreement executed and delivered
by CRIIMI MAE in connection herewith) or, to the extent so required, such
consent, approval, authorization, order, registration, filing or notice has
been obtained, made or given (as applicable), except that (x) CRIIMI MAE
may not be duly qualified to transact business as a foreign corporation or
licensed in one or more states if such qualification or licensing is not
necessary (1) to ensure the enforceability of any Mortgage Loan, or (2) for
CRIIMI MAE to perform its duties and obligations under this Agreement (or
any agreement executed and delivered by CRIIMI MAE in connection herewith),
and (y) CRIIMI MAE makes no representation with respect to any required
registration under the federal Securities Act of 1933, as amended (the
"Securities Act"), or any state securities or blue sky law in connection
with a Securitization. Without limitation of the foregoing, CRIIMI MAE
represents and warrants that it is licensed as a mortgage broker in each
jurisdiction in which such license is necessary in connection with the
execution, delivery and performance of this Agreement.
(vi) Ability to Perform. CRIIMI MAE does not believe, nor does it
have any reason or cause to believe, that it cannot perform each and every
covenant of CRIIMI MAE contained in this Agreement (or any agreement
executed and delivered by CRIIMI MAE in connection herewith).
(vii) No Litigation Pending. There are no actions, suits or
proceedings pending or to CRIIMI MAE's knowledge threatened against CRIIMI
MAE which draw into question the validity of this Agreement or which (if
decided adversely to CRIIMI MAE), either in any one instance or in the
aggregate, would result in any material adverse change in the business,
operations, or financial condition of CRIIMI MAE or would impair materially
the ability of CRIIMI MAE to perform its duties and obligations under this
Agreement (or any agreement executed and delivered by CRIIMI MAE in
connection herewith).
(viii) No Brokers. CRIIMI MAE has not dealt with any Person (other
than PSI, PSCC and their affiliates) that may be entitled, by reason of any act
or omission of CRIIMI MAE, to any commission or compensation from PSI, PSC, PMCC
or any of their affiliates in connection with this Agreement or the transactions
contemplated hereby.
(ix) No Untrue Information. No statement, report, or other document
relating to any Mortgage Loan furnished by or on behalf of CRIIMI MAE or any
affiliate thereof in writing (including electronic media) in connection with
CRIIMI MAE's underwriting of and origination of the Mortgage Loans will contain
any untrue statement by CRIIMI MAE or any affiliate thereof of any material fact
or an omission by CRIIMI MAE or any affiliate thereof of a material fact
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
(x) No Default. CRIIMI MAE is not in default or breach of any
agreement or instrument to which CRIIMI MAE is now a party or by which it (or
any of its properties) is bound which breach or default would materially and
adversely affect the ability of CRIIMI MAE to perform its obligations under this
Agreement.
(B) CRIIMI MAE (with respect to each Mortgage Loan to be presented to
PSCC as an Eligible Loan) hereby represents and warrants to PSI and PSCC and
their respective successors and assigns as provided in this Agreement (subject
to the qualifications with respect to matters of enforceability set forth below
in this Section 2.01(B)) that as of the date of closing and funding, or
acquisition, of such Mortgage Loan, as the case may be, each of the following
representations shall be true and correct with respect to such Mortgage Loan:
(i) Underwriting Memorandum. The information set forth in the
Underwriting Memorandum and the Preliminary Mortgage Loan Schedule annexed
to the PPT is true and correct in all material respects.
(ii) Mortgage Loans Documents. CRIIMI MAE has delivered to PSCC
each of the documents comprising the Mortgage Loan Documents
(iii) Payment Current. With respect to a Section 1.06 Loan,
all payments required to be made with respect to such Mortgage Loan under
the terms of the related Note or Mortgage (inclusive of any applicable
grace or cure period) up to the Closing Date have been made. Within the
twelve months preceding such closing date, there has not been any
delinquency in excess of 30 days with respect to such Mortgage Loan.
(iv) Equity Participation or Participation Interest. Except as
disclosed in the related underwriting memorandum, such Mortgage Loan does
not contain any equity participation by CRIIMI MAE or any other person and
is a whole loan and not a participation certificate; neither the related
Note nor the related Mortgage provides for negative amortization or any
contingent or additional interest in the form of participation in the cash
flow of the related Mortgaged Property. Except as so disclosed, CRIIMI MAE
has no ownership interest in such Mortgaged Property or the related
Borrower.
(v) Compliance with Applicable Laws. As of the date of its
origination, such Mortgage Loan either complied with or was exempt from and
(in the case of a Section 1.06 Loan) on the closing date such Mortgage Loan
either complies with or is exempt from applicable state or federal laws,
regulations and other requirements pertaining to usury. CRIIMI MAE has
complied and, in the case of a Section 1.06 Loan, as of the date of
origination of such Mortgage Loan, the originator complied, in all material
respects, with the requirements of any and all other federal, state or
local laws applicable to the origination, servicing and collection of such
Mortgage Loan, including, without limitation, if applicable,
truth-in-lending, real estate settlement procedures, equal credit
opportunity and disclosure laws.
(vi) Proceeds Fully Disbursed. Except as disclosed in the
related underwriting memorandum, the proceeds of such Mortgage Loan have
been or at the closing date thereof will be fully disbursed, and there is
no requirement for future advances thereunder. All costs, fees and
expenses incurred in connection with the origination and closing of such
Mortgage Loan, including, without limitation, recording costs and fees,
have been paid to the appropriate person or arrangements have been made for
their payment to the appropriate person on a timely basis by the related
Borrower.
(vii) Documents Valid. Each of the related Note, the related
Mortgage and any other related Mortgage Loan Document is the legal, valid
and binding obligation of the related Borrower, the related guarantor or
other party executing such document, enforceable in accordance with its
terms, subject to any non-recourse provisions in the Mortgage Loan
Documents and applicable state anti-deficiency laws. There is no valid
offset, defense, counterclaim or right of rescission with respect to such
Note, Mortgage or other Mortgage Loan Document, nor will the operation of
any of the terms of such Note or such Mortgage, or the exercise of any
right thereunder, render either such Mortgage or such Note unenforceable or
subject to any valid right of rescission, offset, counterclaim or defense,
including without limitation the defense of usury, and CRIIMI MAE has no
knowledge that any such right of rescission, offset, counterclaim or
defense has been asserted or is available with respect thereto.
(viii) Assignment of Mortgage: Note Endorsement. With respect
to any Section 1.06 Loan, the related Assignment of Mortgage (except for
any related recording information which is not yet available to CRIIMI MAE)
shall be in recordable form and shall evidence the related seller's legal,
valid and binding assignment to PSCC of the related Mortgage and any
related Assignment of Leases, Rents and Profits. The seller's endorsement
and delivery of the related Note to PSCC constitutes the seller's legal,
valid and binding transfer to PSCC of such Note, and together with such
seller's execution and delivery of such Assignment of Mortgage to PSCC,
legally and validly conveys all right, title and interest of the seller in
such Mortgage Loan to PSCC.
(ix) First Lien. The related Mortgage is a legal, valid and
enforceable first lien on the related Mortgaged Property (including all
buildings and improvements on such Mortgaged Property and all installations
and mechanical, electrical, plumbing, heating and air conditioning systems
located in or annexed to such buildings, and all additions, alterations and
replacements made at any time prior to the closing date of such Mortgage
Loan with respect to the foregoing, but excluding any related personal
property), which Mortgaged Property is free and clear of all encumbrances
and liens having priority over the first lien of such Mortgage, except for
(1) the lien of current real estate taxes and special assessments not yet
delinquent or accruing interest or penalties, (2) covenants, conditions and
restrictions, rights of way, easements and other matters of public record
as of the date of recording of such Mortgage which do not or will not
materially and adversely (A) affect the value of such Mortgaged Property as
security for such Mortgage Loan, or (B) interfere with the related
Borrower's ability to make required principal and interest payments or to
make use of such Mortgaged Property for the intended purposes therefor, (3)
leases and subleases pertaining to such Mortgaged Property which the
originator or CRIIMI MAE did not require to be subordinated to the lien of
such Mortgage, and (4) other matters to which like properties are commonly
subject which do not or will not, individually or in the aggregate,
materially and adversely (A) affect the value of such Mortgaged Property as
security for such Mortgage Loan, or (B) interfere with the related
Borrower's ability to make required principal and interest payments or to
make use of such Mortgaged Property for the intended purposes therefor.
(x) No Modification, Release or Satisfaction. With respect to a
Section 1.06 Loan, neither the related Mortgage nor the related Note
(including any amendments or supplements thereto included in the related
mortgage file) has been impaired, waived, modified, altered, satisfied,
canceled, subordinated or rescinded in any material respect, and the
related Mortgaged Property has not been released from the lien of such
Mortgage and the related Borrower has not been released from its
obligations under such Mortgage, in whole or in any part, in each such
event in a manner which would materially interfere with the benefits of the
security intended to be provided by such Mortgage. No instrument has been
executed that would effect any waiver, modification, alteration,
satisfaction, cancellation, subordination, rescission or release of such
Note or Mortgage or any related Mortgage Loan Document, with the exception
of the written instruments (1) which are a part of the related Mortgage
File, and (2) which have been recorded if necessary to protect the
interests of the related Mortgagee.
(xi) No Taxes or Assessments Delinquent. Based upon the
applicable laws, rules and regulations of the taxing authorities having
jurisdiction over the related Mortgaged Property (excluding any related
personal property), no tax or governmental assessment, or if payable in
installments, no installment thereof, which became due and owing prior to
the Closing Date in respect of such Mortgaged Property and which, if left
unpaid, would be, or might become, a lien on such Mortgaged Property having
priority over the related Mortgage, has become delinquent such that (a)
such tax, assessment or installment has commenced to accrue interest or
penalties, or (b) any such taxing authority may commence proceedings to
collect such tax, assessment or installment, as applicable.
(xii) Escrow Deposits. As of the closing date: (a) the
related escrow account(s), if any, contains all escrow deposits and other
escrow payments required by the terms of the related Mortgage Loan
Documents (inclusive of any applicable grace or cure period) to be held by
the seller or the Mortgagee as of the Closing Date; and (b) in the case of
Section 1.06 Loans, the seller is transferring all amounts on deposit in
the related escrow account(s) on the Closing Date to PSCC. To the extent
not being transferred to PSCC, all escrow deposits and other escrow
payments required under the related Note, the related Mortgage and any
other related Mortgage Loan Documents have been applied in accordance with
their intended purposes by the seller or its agent.
(xiii) No Third Party Advances. The seller of any Section
1.06 Loan has not, directly or indirectly, advanced funds, induced or
solicited any payment from a Person other than the related Borrower, or,
received any payment from a Person other than such Borrower, for the
payment of any amount required under the related Note or the related
Mortgage, except for interest accruing from the date of such Note or the
date of disbursement of the proceeds of such Mortgage Loan, whichever is
later, to the date which precedes by 30 days the first due date under such
Note.
(xiv) No Condemnation or Damages. To CRIIMI MAE's knowledge,
no proceedings for the total or partial condemnation of the related
Mortgaged Property (1) have occurred or (2) are pending or threatened other
than, in each such case, proceedings as to partial condemnation which do
not materially and adversely affect the value of such Mortgaged Property as
security for such Mortgage Loan. Such Mortgaged Property is being used for
the purpose(s) set forth in the commitment letter executed by the related
Borrower (or an affiliate thereof) in connection with the origination of
such Mortgage Loan and, to CRIIMI MAE's knowledge, is in good repair and
free of any damage, waste or defective condition that would materially and
adversely affect the value of such Mortgaged Property as security for such
Mortgage Loan or the use for which such Mortgaged Property was intended at
the time of origination of such Mortgage Loan.
(xv) No Mechanics' Liens. As of the Closing Date for such
Mortgage Loan, the related Mortgaged Property (excluding any related
personal property) is free and clear of any mechanics' and materialmen's
liens or liens in the nature thereof, and no rights are outstanding that,
under law, could give rise to any such liens, if any of such liens are or
may be prior to, or equal with, the lien of the related Mortgage, except
those which are insured against by the related lender's title insurance
policy referred to in Section 2.02(B)(xix) below.
(xvi) Title Survey: Improvements. (1) The related Mortgage
File includes an as-built survey, a survey recertification, a site plan, a
recorded plat or the like with respect to the related Mortgaged Property
which satisfied the requirements of the related title insurance company for
deletion of the standard general exceptions for encroachments, boundary and
other survey matters and for easements not shown by the public records from
the related title insurance policy, except with respect to any of the
Mortgaged Properties located in the State of Texas where the exception for
"shortages in area" and easements not shown by the public records could not
be deleted and is customarily accepted by prudent commercial mortgage
lenders in such jurisdiction. Except for encroachments and similar matters
which do not materially and adversely affect the value of such Mortgaged
Property as security for such Mortgage Loan, (i) none of the improvements
which were included for the purpose of determining the appraised value of
such Mortgaged Property in the related appraisal (the "Appraised Value") at
the time of the origination of such Mortgage Loan lies outside the
boundaries and building restriction lines of such Mortgaged Property, and
(ii) no improvements on adjoining properties materially encroach upon such
Mortgaged Property so as to materially and adversely affect the value of
such Mortgaged Property as security for such Mortgage Loan.
(xvii) Title. In the case of a Section 1.06 Loan, the seller
identified by CRIIMI MAE is the sole owner and beneficial holder of such
Mortgage Loan, has full right and authority to sell and assign such
Mortgage Loan hereunder, is the sole mortgagee or beneficiary of record
under the related Mortgage and is transferring such Mortgage Loan to PSCC
free and clear of any and all liens, encumbrances, participation interests,
pledges, charges or security interests of any nature encumbering such
Mortgage Loan.
(xviii) Compliance with Laws. To CRIIMI MAE'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 related Borrower at the time of origination of such
Mortgage Loan, a representation or opinion obtained from the seller or
Borrower or other information acceptable to CRIIMI MAE at the time of such
purchase), (1) no improvements located on or forming a part of the related
Mortgaged Property are in violation of any applicable zoning and building
laws or ordinances, (2) the related Mortgaged Property complies with all
other laws and regulations pertaining to the use and occupancy thereof,
excluding Environmental Laws (as defined and addressed in Sections
2.01(A)(xxxii) and 2.01(A)(xxxiii) below), and all applicable insurance
requirements, (3) the Borrower has obtained all inspections, licenses,
permits, authorizations, and certificates necessary for such compliance,
including, but not limited to, certificates of occupancy, and (4) no
governmental authority has issued any notification that such Mortgaged
Property violates or does not comply with such laws or regulations or is
being used, operated or occupied unlawfully or that such Borrower has
failed to obtain such inspections, licenses or certificates, except (in the
case of any of clauses (1), (2), (3) or (4)) for such violation or
non-compliance (A) which does not materially and adversely affect the value
of such Mortgaged Property as security for such Mortgage Loan or the use
for which such Mortgaged Property was intended at the time of origination
of such Mortgage Loan, (B) which is specifically addressed by the appraiser
in the determination of the related Appraised Value, or (C) for which an
escrow account held for the lender has been established in an amount
sufficient to pay for the estimated costs to correct such violations or
non-compliance.
(xix) Title Insurance. The lien of the related Mortgage is
insured by an ALTA lender's title insurance policy or, if an ALTA lender's
title insurance policy is unavailable, another state-approved form of
lender's title insurance policy issued in an amount not less than the
stated principal amount of such Mortgage Loan (after all advances of
principal) insuring PSCC and its successors and assigns that the related
Mortgage is a valid first lien on the related Mortgaged Property, subject
only to exceptions described in Section 2.01(B)(ix) above (or, if such a
title insurance policy has not yet been issued in respect of any Mortgage
Loan, such a policy will be issued and 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 such Mortgage Loan). Such title insurance policy is (or, when
issued, will be) in full force and effect, and upon payment of any required
additional premium, issuance or endorsement and delivery of the related
Note to PSCC and recording of the related Mortgage or Assignment of
Mortgage in favor of PSCC in the applicable real estate records, such title
insurance policy will inure to the benefit of PSCC. Such title insurance
policy (1) does not contain the standard general exceptions for
encroachments, boundary or other survey matters and for easements not shown
by the public records, other than such exceptions as are customarily
accepted by prudent commercial mortgage lenders in the related
jurisdiction, and (2) contains only such exceptions for boundary,
encroachments and survey matters as are customarily accepted by prudent
commercial mortgage lenders. CRIIMI MAE will not take, or omit to take,
any action, and to CRIIMI MAE's knowledge, no other person has taken, or
omitted to take, any action, that would materially impair the coverage
benefits of any such title insurance policy. No Seller of any Section 1.06
Loan has made any claim under such title insurance policy.
(xx) Appraisal. CRIIMI MAE has obtained (or, in the case of a
Section 1.06 Loan, the related Mortgage Loan file contains an appraisal of
the related Mortgaged Property by an MAI-certified appraiser duly appointed
by CRIIMI MAE (or, in the case of a Section 1.06 Loan, by the seller
thereof) who had no interest, direct or indirect in such Mortgaged Property
or in any loan made on the security thereof, whose compensation under the
terms of the appraiser's engagement was not (directly or indirectly) based
upon the approval or disapproval of such Mortgage Loan (other than a
reduction of such compensation due to an early termination of the
engagement). Such appraisal satisfies the underwriting requirements of
this Agreement. The market value used by CRIIMI MAE in calculating the
loan-to-value ratio of such Mortgage Loan was not greater than the
appraised value as set forth in the appraisal.
(xxi) Insurance Related to Mortgaged Property. The related
Mortgaged Property is insured by (a) a fire and extended perils insurance
policy providing coverage on a full replacement cost basis in an amount not
less than the lesser of (1) the full replacement cost of all improvements
to such Mortgaged Property and (2) the outstanding principal balance of
such Mortgage Loan, but in any event in an amount sufficient to avoid the
operation of any co-insurance provisions contained in such insurance
policy, which policy contains a standard mortgagee clause naming mortgagee
and its successors as additional insureds; (b) an insurance policy
providing business interruption or rental continuation coverage in an
amount not less than 12 months of operations of such Mortgaged Property;
(c) a comprehensive general liability insurance policy in an amount not
less than $1 million per occurrence; and (d) if any material improvement on
such 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, a flood insurance policy
providing coverage in an amount not less than the lesser of (A) the stated
principal amount of the related Note, and (B) the maximum amount of
insurance available under the Flood Disaster Protection Act of 1973, as
amended. Each such 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, and no such notice has been received by any person. With
respect to each such insurance policy, either the seller or CRIIMI MAE has
received a certificate of insurance or similar document dated within the
last 12 months to the effect that such policy is in full force and effect.
(xxii) UCC Financing Statements. One or more Uniform
Commercial Code financing statements covering all furniture, fixtures,
equipment and other personal property (1) which are collateral under the
related Mortgage or under a security or similar agreement executed and
delivered in connection with such Mortgage Loan, and (2) in which a
security interest can be perfected by the filing of Uniform Commercial Code
financing statement(s) under applicable law have been filed or recorded (or
have been sent for filing or recording) in all Uniform Commercial Code
filing offices necessary to the perfection under applicable law, of a
security interest in such furniture, fixtures, equipment and other personal
property.
(xxiii) Default, Breach and Acceleration. With respect to each
Section 1.06 Loan, there is no monetary default, breach, violation or event
of acceleration under the related Mortgage or note and no event (other than
failure to make payments due but not yet delinquent) which, with the
passage of time or notice and the expiration of any grace or cure period,
would constitute a monetary default, breach, violation or event of
accelaration and, to CRIIMI MAE's knowledge, there is no non-monetary
default, breach, violation or event of acceleration existing under the
related Mortgage or the related Note and no event 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
thereunder. CRIIMI MAE has no knowledge that the related Borrower under
any Mortgage Loan is a debtor in any state or federal bankruptcy or
insolvency proceeding.
(xxiv) Customary Provisions. The related Note and the related
Mortgage contain customary and enforceable provisions such as to render the
rights and remedies of the holder thereof adequate for the practical
realization against the related Mortgaged Property of the benefits of the
security, including, but not limited to, judicial or, if applicable,
nonjudicial foreclosure.
(xxv) Access Routes. Surveys, title insurance reports, the
title insurance policy and other relevant documents contained in the
related Mortgage File indicate that (1) the Borrower has (or, in the case
of a Section 1.06 Loan, at the time of origination of such Mortgage Loan,
the Borrower had and on the closing date continues to have) sufficient
rights with respect to amenities, ingress and egress and similar matters
identified in the appraisal of the related Mortgaged Property as being
critical to the Appraised Value thereof, and (2) such Mortgaged Property is
receiving (or, in the case of a Section 1.06 Loan, at the time of
origination was receiving and on the closing date, continues to receive)
adequate services from public or private water, sewer and other utilities,
none of which is subject to revocation as a result of a foreclosure or
change in ownership of an adjacent property.
(xxvi) Mortgage Loans Secured by Ground Lease but Not Fee
Interest. With respect to each Mortgage Loan that is secured in whole or
in part by the interest of the related Borrower as lessee under a ground
lease of all or a portion of the related Mortgaged Property (a "Ground
Lease"), but the related fee interest in the portion of such Mortgaged
Property covered by such Ground Lease (the "Fee Interest") is not subject
or subordinate to the lien of the related Mortgage, CRIIMI MAE hereby
represents and warrants that:
(1) to CRIIMI MAE's knowledge: (A) such Ground Lease is in full
force and effect, (B) such Ground Lease or a memorandum thereof has been
recorded in the applicable real estate records, (C) such Ground Lease does
not prohibit the interest of the related lessee thereunder from being
encumbered by the related Mortgage, or a separate written agreement
permitting such encumbrance has been obtained, and (D) there have been no
material changes in the terms of such Ground Lease except as set forth in
written instruments which are part of the related Mortgage File;
(2) except as may be indicated in the related title insurance
policy or commitment, the related lessee's leasehold interest in the
portion of the related Mortgaged Property covered by such Ground Lease is
not subject to any liens or encumbrances superior to, or of equal priority
with, the related Mortgage;
(3) the related lessee's interest in such Ground Lease may be
transferred to PSCC and its successors and assigns through foreclosure of
the related 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 related lessor
(or, if any such consent is required, either (A) it has been obtained prior
to the Closing Date, or (B) it is not to be unreasonably withheld) provided
that such Ground Lease has not been terminated and all amounts owed
thereunder have been paid;
(4) the related lessor is required to give notice of any default
under such Ground Lease by the related lessee to the mortgagee either under
the terms of such Ground Lease (the related lessor having received notice
of the related Mortgage) or under the terms of a separate written
agreement;
(5) a mortgagee is entitled, under the terms of such Ground
Lease or a separate written agreement, to receive notice of any default by
the related lessee under such Ground Lease, and after any such notice is
entitled to the time provided to the related lessee under such Ground Lease
to cure such default;
(6) the currently effective term of such Ground Lease (excluding
any extension or renewal which is not binding on the lessor thereunder)
extends not less than 10 years beyond the Maturity Date of the related
Mortgage Loan;
(7) such Ground Lease does not impose any restrictions on
subletting which CRIIMI MAE considers to be commercially unreasonable at
the time of its origination of such Mortgage Loan;
(8) the lessee has not received any notice that (A) the related
lessor under such Ground Lease is asserting a default by the related lessee
or an event of default thereunder, or (B) any event has occurred which,
with the passage of time, the giving of notice, or both (other than rental
or other payments being due, but not yet delinquent), would result in a
default or an event of default under the terms of such Ground Lease;
(9) the related lessor has agreed in a writing which is included
in the related Mortgage File that such Ground Lease may not be amended,
modified, cancelled or terminated without the prior written consent of the
mortgagee and that any such action without such consent is not binding upon
the mortgagee; and
(10) under the terms of such Ground Lease and the related
Mortgage, any related insurance proceeds or condemnation award (other than
in respect of a total or substantially total loss or taking) will be
applied either to the repair or restoration of all or part of the related
Mortgaged Property covered by such Ground Lease, with the mortgagee or a
trustee appointed by it having the right to hold and disburse such proceeds
as such repair or restoration progresses, or to the payment of the
outstanding principal balance of or accrued interest on such Mortgage Loan.
(xxvii) Mortgage Loans Secured by Both Ground Lease and Fee
Interest. With respect to each Mortgage Loan that is secured in whole or
in part by the interest of the related Borrower as lessee under a Ground
Lease of all or a portion of the related Mortgaged Property, and as to
which the related Fee Interest is subject or subordinate to the lien of the
related Mortgage, CRIIMI MAE hereby represents and warrants that (1) such
fact is set forth in the Mortgage file or the underwriting memorandum, and
(2):
(A) such Fee Interest is subject or subordinated of record to
such Mortgage; and such Mortgage does not by its terms provide that it will
be subordinated to the lien of any other mortgage or encumbrance upon such
Fee Interest; and
(B) except as disclosed in writing in the related Mortgage File
and as approved in writing by the originator or CRIIMI MAE, upon occurrence
of a default under the terms of such Mortgage by the related Borrower, any
right of the related lessor to cure such default (granted to such lessor
under any agreement binding upon the originator or as successors and
assigns) would entitle such lessor, prior to acceleration of the maturity
of such Mortgage Loan and the commencement of foreclosure of such Mortgage,
to be given notice of such default and (I) no more than 30 days after such
notice, to cure any default in the payment of principal or interest or
other monetary default under such Mortgage, and (II) no more than 60 days
after such notice, to cure any other default or, alternatively, to commence
proceedings to recover possession of such Mortgaged Property plus a
reasonable opportunity to cure such default after such lessor's recovery of
possession if such lessor pursues such proceedings in good faith and with
due diligence.
(xxviii) Deed of Trust. With respect to any related Mortgage
that is a deed of trust or trust deed, a trustee, duly qualified under
applicable law to serve as such, either has been properly designated and
currently so serves or may be substituted in accordance with applicable
law. Except in connection with a trustee's sale after default by the
related Borrower or in connection with the release of the related Mortgaged
Property following the payment of such Mortgage Loan in full, no fees or
expenses are or will be payable by the mortgagee to such trustee.
(xxix) Cross-Security. Except as disclosed in the related
underwriting memorandum, the related Mortgaged Property is not collateral
or security for the payment or performance, of any other obligations owed
to any Person other than, the mortgagee thereunder, except for security
interests in personal property and fixtures.
(xxx) Assignment of Leases, Rents and Profits. Unless the
related Mortgaged Property is occupied by the related Borrower, the related
Mortgage Loan Documents contain the provisions of an Assignment of Leases,
Rents and Profits or include a separate Assignment of Leases, Rents and
Profits. Any related Assignment of Leases, Rents and Profits incorporated
within the related 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 due under the related leases, if any.
(xxxi) Qualified Mortgage (1) Such Mortgage Loan is
principally secured by an interest in real property and either (A) the fair
market value of such real property was at least equal to 80% of the
adjusted issue price of such Mortgage Loan on the date of origination or,
if such Mortgage Loan has been "significantly modified" within the meaning
of Section 1001 of the Code, on the date of such modification (unless such
modification may be disregarded under Treas. Reg. Sec. 1.860G-2(b)(3)), or
(B) substantially all of the proceeds of such Mortgage Loan were used to
acquire or improve or protect an interest in real property that, at
origination, was the only security for such Mortgage Loan; (2) except as
disclosed in the related underwriting memorandum such Mortgage Loan
contains no equity participation by the lender, and neither the related
Note nor the related Mortgage provides for any contingent or additional
interest in the form of participation in the cash flow or proceeds realized
on disposition of the related Mortgaged Property; and (3) such Mortgage
Loan is a "qualified mortgage" as defined in, and for purposes of, Section
860G of the Code.
(xxxii) Environmental Assessment. (1) In connection with the
origination of such Mortgage Loan, a Phase I Environmental Report and, if
recommended by the Phase I Environmental Report, a Phase II Environmental
Report were obtained with respect to the related Mortgaged Property from an
independent environmental engineer or consultant; and (2) such
Environmental Report(s) did not indicate the existence of conditions or
circumstances respecting such Mortgaged Property that would (A) constitute
or result in a material violation of any applicable Environmental Law, (B)
impose any material constraint on the operation of such Mortgaged Property
or require material change in the use thereof, or (C) require clean-up,
remedial action or other response with respect to Hazardous Materials on or
affecting such Mortgaged Property under any applicable Environmental Law,
with the exception of conditions or circumstances (I) which such
Environmental Report(s) indicated could be cleaned up, remediated or
brought into compliance with applicable Environmental Law by the taking of
certain actions, and (II) either (a) for which a hold-back or other escrow
of funds not less than the costs of taking such clean-up, remediation or
compliance actions as estimated in such Environmental Report(s) has been
created to be held by the mortgagee or an escrow agent until such clean-up,
remediation or compliance actions have been taken, or (b) for which an
environmental insurance policy (which policy shall be issued by an
insurance company which is duly qualified as such under the laws of the
states in which the Mortgaged Properties insured by such company are
located, duly authorized and licensed insuch states to transact the
applicable insurance business and write the insurance provided, and whose
claims-paying ability with respect to hazard and flood insurance is rated
A:V or better (or the equivalent in any successor rating system) by Best's
Key Rating Guide) in an amount satisfactory to CRIIMI MAE has been obtained
by the related Borrower or an indemnity for such costs has been obtained
from a potentially culpable party, or (c) such clean up, remediation or
compliance actions in compliance with applicable Environmental Law have
been completed prior to the closing of such Mortgage Loan. For purposes of
this Agreement, the term "Environmental Law" shall mean any environmental
law, ordinance, rule, regulation or order of a federal, state or local
governmental authority, including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(42 U.S.C. 9601 et seq.) ("CERCLA"), the Hazardous Material Transportation
Act, as amended (49 U.S.C. 1801 et seq.), the Resource Conservation and
Recovery Act, as amended (42 U.S.C. 6901 et seq.), the Federal Water
Pollution Control Act, as amended (33 U.S.C. 1251 et seq.), the Clean Air
Act, as amended (42 U.S.C. 7401 et seq.) and the regulations promulgated
pursuant thereto. To CRIIMI MAE's knowledge, neither the borrower nor, in
the case of a Section 1.06 Loan, the seller, has taken any action which
would cause either such Mortgaged Property to become subject to liability
under CERCLA.
(xxxiii) Notice of Environmental Problem. Other than with
respect to any conditions identified in the Phase I and/or Phase II
Environmental Reports referred to in Section (xxxi) above, neither the
borrower nor the seller of a Section 1.06 Loan: (1) has received actual
notice from any federal, state or other governmental authority of (A) any
failure of the related Mortgaged Property to comply with any applicable
Environmental Laws, or (B) any known or threatened release of Hazardous
Materials on or from such Mortgaged Property in violation of Environmental
Laws; or (2) has received actual notice from the related Borrower that (A)
such Borrower has received any such notice from any such governmental
authority, (B) such Mortgaged Property fails to comply with Environmental
Laws, or (C) has received actual notice that there is any known or
threatened release of Hazardous Materials on or from such Mortgaged
Property in violation of Environmental Laws; or (3) has any actual
knowledge that (A) the related Mortgaged Property fails to materially or
significantly comply with any applicable Environmental Law or (B) there has
been any known or threatened material or significant release of Hazardous
Materials on or from such Mortgaged Property in violation of any applicable
Environmental Law.
(xxxiv) Recourse. Except as set forth in the related
underwriting memorandum, the related Mortgage Loan Documents contain
standard provisions providing for recourse against the related Borrower for
damages sustained in connection with the Borrower's fraud, intentional
misrepresentation, or misappropriation of any tenant security deposits or
rent. Except as set forth in the related underwriting memorandum, the
related Mortgage Loan Documents contain provisions pursuant to which the
related Borrower has agreed to indemnify the mortgagee for damages
resulting from violations of Environmental Laws.
(xxxv) Leases. With respect to each Mortgage Loan: (1) prior
to either the origination of such Mortgage Loan or the purchase of such
Mortgage Loan by PSCC, the originator or CRIIMI MAE as applicable, obtained
tenant estoppel certificates from all tenants whose leases covered more
than 10% of the net leasable area of the related Mortgaged Property; and
based upon such tenant estoppel certificates, no defaults with respect to
any such lease existed as of the date of the related tenant estoppel
certificate; and (2) neither CRIIMI MAE nor the Originator has received any
notice of the existence of any default under any such lease or of the
existence of any condition which, but for the passage of time or the giving
of notice, or both, would result in such a default.
(xxxvi) Environmental Compliance. One or more of the related
Mortgage Loan Documents contains either a representation, warranty or
covenant that the related Borrower will not use, cause or permit to exist
on the related Mortgaged Property any Hazardous Materials in violation of
Environmental Law or an indemnity with respect to any such violation in
favor of the mortgagee.
(xxxvii) Inspection. Either the originator, the seller of a
Section 1.06 Loan or CRIIMI MAE has inspected the related Mortgaged
Property or caused such Mortgaged Property to be inspected within the last
12 months.
(xxxviii) Subordinate Debt. Except as has been specifically
disclosed in writing to PSCC on or before the closing date, the related
Mortgage contains a provision for the acceleration of the payment of the
unpaid principal balance of such Mortgage Loan in the event that the
related Borrower encumbers the related Mortgaged Property without the prior
written consent of the mortgagee thereunder.
(xxxix) Common Ownership. No two properties securing a
Mortgage Loan are directly or indirectly under common ownership except to
the extent that such common ownership and the ownership structure has been
specifically disclosed in writing to PSCC.
(xl) Operating or Financial Statement. The related Mortgage Loan
Documents require the related Borrower to furnish to the mortgagee at least
annually an operating statement with respect to the related Mortgaged
Property or, in the case of a borrower-occupied Mortgaged Property, a
financial statement with respect to the related Borrower.
Each representation and warranty of CRIIMI MAE set forth in Section
2.01(A) or 2.01(B) of this Agreement, to the extent related to the
enforceability of any instrument, agreement or other document or as to offsets,
defenses, counterclaims or rights of rescission related to such enforceability,
including, without limitation, the representations set forth above in Sections
2.01(B)(vii) and 2.01(B)(xxiii), is qualified to the extent that (1) enforcement
may be limited (A) by bankruptcy, insolvency, reorganization or other similar
laws affecting enforcement of creditors' rights generally, (B) by general
principles of equity (regardless of whether such enforcement is considered in a
proceeding in equity or at law), and (C) by any applicable anti-deficiency law
or statute; and (2) such instrument, agreement or other document may contain
certain provisions which may be unenforceable in accordance with their terms, in
whole or in part, but the unenforceability of such provisions will not (subject
to the qualification in clause (1), above) (A) cause the related Note or
Mortgage to be void, (B) invalidate the related Borrower's obligation to pay
interest at the stated interest rate of such Note on, and repay the principal
of, the related Mortgage Loan in accordance with the payment terms of such Note,
such Mortgage and other written agreements delivered to CRIIMI MAE in connection
therewith, (C) invalidate the obligation of any related guarantor to pay
guaranteed obligations with respect to interest at the stated interest rate of
such Note on, and the principal of, such Mortgage Loan in accordance with the
payment terms of such guarantor's written guaranty, (D) impair the mortgagee's
right to accelerate and demand payment of the interest at the stated interest
rate of such Note on, and principal of, such Mortgage Loan upon the occurrence
of a legally enforceable default, or (E) impair the mortgagee's right to realize
against such Mortgaged Property by judicial or, if applicable, nonjudicial
foreclosure. Each representation made "to the knowledge" of CRIIMI MAE shall
refer to such knowledge of CRIIMI MAE after due inquiry by such personnel of
CRIIMI MAE whose positions and responsibilities would require such inquiry in
the course of their duties.
(C) In connection with the closing and funding of a Mortgage Loan or the
closing of the purchase of a Section 1.06 Loan, the issuance of a notice of
borrowing or wire transfer instructions by CRIIMI MAE to PSCC shall constitute
an affirmation by CRIIMI MAE that the representations and warranties of CRIIMI
MAE set forth in Section 2.01(A)(ix) and Section 2.01(B) are true and correct in
all material respects on the closing date with respect to the Mortgage Loan to
be funded or acquired.<PAGE>
Section II.02 Representations and Warranties of PSI and
PSCC.
(A) PSI and PSCC, each solely for itself, hereby represents and
warrants to CRIIMI MAE and its successors and assigns as provided in this
Agreement that:
(i) Due Organization; Qualification. It is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware, is duly qualified to transact business as a foreign
corporation, in good standing in each state in which the nature of its
business or property owned by it requires such foreign qualification.
(ii) Authority. It has the full power, authority and legal right to
execute and deliver this Agreement (and all agreements executed and
delivered by it in connection herewith) and to perform all transactions
contemplated by this Agreement (and all agreements executed and delivered
by it in connection herewith). It has duly authorized the execution,
delivery and performance of this Agreement (and all agreements executed and
delivered by it in connection herewith), and has duly executed and
delivered this Agreement (and all agreements executed and delivered by it
in connection herewith). This Agreement (and each agreement executed and
delivered by it in connection herewith) constitutes its legal, valid and
binding obligation enforceable in accordance with its terms, except as such
enforcement may be limited by bankruptcy, insolvency, reorganization,
receivership, moratorium or other laws relating to or affecting the rights
of creditors generally and by general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or at
law).
(iii) No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and
conditions of this Agreement, will (a) conflict with or result in a breach
of any of the terms, conditions or provisions of its certificate of
incorporation, as amended, or other organization documents or any agreement
or instrument to which it is now a party or by which it (or any of its
properties) is bound, or constitute a default or result in an acceleration
of indebtedness under any of the foregoing; (b) conflict with or result in
a breach of any legal restriction if compliance therewith is necessary (1)
to ensure the enforceability of this Agreement, or (2) for it to perform
its duties and obligations under this Agreement (or any agreement executed
and delivered by it in connection herewith); (c) result in the violation of
any law, rule, regulation, order, judgment or decree to which it or its
property is subject if compliance therewith is necessary (1) to ensure the
enforceability of this Agreement, or (2) for it to perform its duties and
obligations under this Agreement (or any agreement executed and delivered
by it in connection herewith); or (d) result in the creation or imposition
of any lien, charge or encumbrance that would have a material adverse
effect upon any of its properties pursuant to the terms of any mortgage,
contract, deed of trust or other instrument.
(iv) Solvency. It is solvent and the execution, delivery and
performance of this Agreement (1) will not cause it to become insolvent,
and (2) is not intended by it to hinder, delay or defraud any of its
creditors.
(v) No Consent Required. No consent, approval, authorization or
order of, or registration or filing with, or notice to, any court or
governmental agency or body having jurisdiction or regulatory authority
over it is required for (a) its execution and delivery of this Agreement
(and each agreement executed and delivered by it in connection herewith)
(b) the consummation by it of the transactions contemplated by this
Agreement (and each agreement executed and delivered by it in connection
herewith) or, to the extent so required, such consent, approval,
authorization, order, registration, filing or notice has been obtained,
made or given (as applicable), except that (x) it may not be duly qualified
to transact business as a foreign corporation or licensed in one or more
states if such qualification or licensing is not necessary for it to
perform its duties and obligations under this Agreement (or any agreement
executed and delivered by it in connection herewith), and (y) it makes no
representation with respect to any required registration under the
Securities Act or any state securities or blue sky law in connection with a
Securitization.
(vi) Ability to Perform. It does not believe, nor does it have any
reason or cause to believe, that it cannot perform each and every covenant
of it contained in this Agreement (or any agreement executed and delivered
by it in connection herewith).
(vii) No Litigation Pending. There are no actions, suits or
proceedings pending or to its knowledge threatened against it which draw
into question the validity of this Agreement or which (if decided adversely
to it), either in any one instance or in the aggregate, would result in any
material adverse change in its business, operations, or financial condition
or would impair materially its ability to perform its duties and
obligations under this Agreement (or any agreement executed and delivered
by it in connection herewith).
(viii) No Brokers. It has (A) not dealt with any Person (other
than one or more of its affiliates) that may be entitled, by reason of any
act or omission by it to any commission or compensation in connection with
this Agreement or the transactions contemplated hereby.
(ix) No Default. It is not in default or breach of any agreement or
instrument to which it is now a party or by which it (or any of its
properties) is bound which breach or default would materially and adversely
affect the ability of it to perform its obligations under this Agreement.
ARTICLE III.
HAIRCUT PAYMENTS
Section III.01 Haircut Payments
(A) Concurrently with the closing of (i) each Mortgage Loan
originated by CRIIMI MAE or by PSCC for the Facility and (ii) each purchase of a
Section 1.06 Loan in the secondary market for the Facility, CRIIMI MAE agrees to
deposit with PSCC an amount, in cash, equal to five (5%) percent of the Loan
Amount of such Mortgage Loan (the "Initial Haircut Payment"). PSCC shall remit
each Initial Haircut Payment on the date received to an interest-bearing money
market account held at PSI in the name of PSCC (the "Haircut Funds Account").
PSI shall not be responsible for any losses resulting from such investment or
for obtaining any specific level or percentage of earnings. Each Initial
Haircut Payment made by CRIIMI MAE shall constitute the purchase price for the
option granted to CRIIMI MAE pursuant to Section 5.01 of this Agreement to
purchase the Mortgage Loan with respect to which such Initial Haircut Payment
was made. Upon exercise of such Option, the aggregate amount of such payments,
together with any earnings on the Haircut Funds Account (collectively, the
"Haircut Funds") not previously paid to CRIIMI MAE pursuant to Section 3.01(C)
shall by applied against the purchase price for the Mortgage Loans in accordance
with the provisions of Article V of this Agreement. If CRIIMI MAE does not
exercise such Option, PSCC shall retain the Haircut Funds in accordance with
Article V.
(B) PSI shall have sole dominion and control over the Haircut Funds
Account subject to the terms of this Agreement. Except as otherwise expressly
provided in this Agreement, none of CRIIMI MAE, PSI or PSCC shall grant or
permit any liens or claims to arise with respect to the Haircut Funds Account.
(C) Except as otherwise provided in this Agreement, all investment
earnings on amounts on deposit in the Haircut Funds Account shall be added to
and become a part of the Haircut Funds Account. On each December 1st during the
Term of this Agreement, and provided that no Event of Default shall have
occurred and be continuing and CRIIMI MAE is then otherwise in compliance with
the terms and conditions hereof, PSI shall pay to CRIIMI MAE an amount equal to
the excess, if any, of the aggregate amount then on deposit in the Haircut Funds
Account over an amount equal to 5% of the greater of the aggregate Market Value
and the aggregate par value of Mortgage Loans funded through the Facility
through such December 1st (the "Haircut Earnings Payment").
(D) For tax purposes, notwithstanding anything contained herein, all
investment earnings on funds in the Haircut Funds Account shall be deemed to be
income of CRIIMI MAE and CRIIMI MAE shall indemnify and hold PSI and PSCC
harmless from and against any tax liability resulting therefrom, which
indemnification shall survive the expiration or earlier termination of this
Agreement.
(E) If at any time the amount of Haircut Funds (including investment
earnings thereon) shall be less than 5% of the sum of (i) the aggregate par
value of all Mortgage Loans originated by CRIIMI MAE through the Facility, plus
(ii) the aggregate purchase price of all Section 1.06 Loans purchased by PSCC
through the Facility, in each case through the date of determination, CRIIMI MAE
shall make an additional payment to the Haircut Funds Account in an amount
sufficient to cause the value of the Haircut Funds to be equal to 5% of such
sum.
ARTICLE IV.
MORTGAGE LOAN FACILITY DURING AGGREGATION PERIOD
Section IV.01 Loan Facility during Aggregation Period. All Mortgage Loans in
the Facility funded or purchased by PSCC shall be held in the name of PSCC by
the Custodian on its behalf pursuant to the Custodial Agreement in accordance
with the terms and conditions contained herein and therein until the earlier to
occur of (i) the first anniversary of the funding date of the first Mortgage
Loan acquired through the Facility, and (ii) the date on which the sum of the
aggregate principal amount of Mortgage Loans funded or acquired through the
Facility held by PMCC plus the aggregate principal amount of PMCC Loans
originated pursuant to the PMCC Agreement equals $1 billion (or such smaller
amount as PSI and CRIIMI MAE mutually agree is sufficient for a Securitization)
(the period from the Effective Date until the earlier of the dates described in
the preceding clause (i) and (ii) being the "Aggregation Period").
Notwithstanding anything to the contrary, it is expressly understood that
effective as of 30 days prior to the Termination Date, PSCC shall have no
further obligation to fund or purchase any additional Mortgage Loans through the
Facility pursuant to any new commitment letters or extension of the term of any
then existing commitment letters.
Section IV.02 Hedging During Aggregation Period. PSI shall be responsible, in
accordance with the procedures set forth herein, for executing an interest rate
hedge with respect to each of the Mortgage Loans acquired through the Facility
during the Aggregation Period. Prior to executing any hedge, or modifying an
existing hedge, PSI shall discuss its hedging strategy with CRIIMI MAE and
provide any supporting analyses as reasonably requested by CRIIMI MAE. PSI
shall provide monthly hedge position reports in reasonable detail to CRIIMI MAE,
and shall provide such additional information relating to such hedge positions
as CRIIMI MAE may reasonably request.
Section IV.03 Servicing of Mortgage Loans During Aggregation Period. During the
Aggregation Period, CRIIMI MAE Services shall service the Mortgage Loans in the
Facility for a monthly servicing fee equal to the excess of the aggregate amount
of interest earned on the Mortgage Loans during each month over the Notional
Amount for such month. The "Notional Amount" for any month shall be the sum of
(i) the aggregate amount of interest which would have been earned on the
Mortgage Loans during such month if the interest rate on each of the Mortgage
Loans were 1.00% in excess of the 30-day LIBOR rate, as in effect from time to
time, and (ii) the aggregate amount of hedging costs incurred with respect to
Mortgage Loans in the Facility during such month. In computing the Notional
Amount for any month, any change in the 30-day LIBOR rate shall be taken into
account as of the effective date of such change. CRIIMI MAE Services shall
service the Mortgage Loans during the Aggregation Period pursuant to an Interim
Servicing Agreement on terms mutually agreeable to CRIIMI MAE, PSI and PSCC (the
"Interim Servicing Agreement"). The payment and performance of the obligations
of CRIIMI MAE Services under the Interim Servicing Agreement shall be guaranteed
to PSI and PSCC pursuant to the terms of a Guaranty, the form of which is
attached hereto as Exhibit B (the "Guaranty") and which shall be executed
contemporaneously with the execution and delivery of the Interim Servicing
Agreement. Anything in this Agreement to the contrary notwithstanding, it shall
be a condition to PSCC's obligation to fund or purchase any Mortgage Loan
originated by CRIIMI MAE pursuant to this Agreement that the parties shall have
entered into the Interim Servicing Agreement and the Guaranty. After the
consummation of the Securitization, and subject to the consent of the Rating
Agencies, CRIIMI MAE Services shall continue to service each Mortgage Loan in
the Facility.
Section IV.04 Mortgage Loan Defaults During Aggregation Period. In the event a
Borrower shall default in the payment of any amount due under a Mortgage Loan
during the Aggregation Period and such default shall continue beyond any grace
period provided in the related Mortgage, CRIIMI MAE or CRIIMI MAE Services shall
cause an appraisal of the related Mortgaged Property to be conducted. If such
appraisal values the Mortgaged Property at less than 110% of the then
outstanding principal balance of the Mortgage Loan, CRIIMI MAE shall, within
five (5) business days of its receipt of such appraisal, either (i) deposit with
PSCC additional collateral for such Mortgage Loan acceptable to PSCC, or (ii)
purchase such Mortgage Loan at a purchase price equal to the sum of: (a) the
outstanding principal balance of and accrued interest on such Mortgage Loan (or,
for any Section 1.06 Loan, the purchase price paid by PSCC, reduced by any
amortization of the principal balance of such Section 1.06 Loan after the date
of acquisition), (b) the costs incurred by PSI and PSCC in connection with the
establishment and maintenance of the hedge position with respect to the Mortgage
Loan, net of any gains and including any losses associated with the hedge
position or in connection with a rate lock of the Mortgage Loan and (c) any
other amounts due PSI or PSCC hereunder or under the Servicing Agreement,
including, without limitation, unreimbursed servicing advances and servicing
advances reimbursed to the Servicer by PSCC or PSI prior to such purchase. If
CRIIMI MAE shall not have concluded one of the actions required by the preceding
clauses (i) and (ii), PSCC may, but shall not be obligated to sell the Mortgage
Loan on such terms and conditions as it shall determine and, if the net proceeds
of such sale are less than the then outstanding principal balance of the
Mortgage Loan plus the costs of the related hedge position, than PSCC may
withdraw and pay to itself from the Haircut Funds Account the amount of any such
shortfall. If such appraisal values the Mortgaged Property at 110% of the then
outstanding principal balance of the Mortgage Loan or more, then PSCC and CRIIMI
MAE shall, by mutual agreement, determine the action to be taken by CRIIMI MAE
Services, as special servicer, with respect to such Mortgage Loan. The
foregoing notwithstanding, if PSCC determines, in good faith after receipt of
the appraisal and consideration of the advice of CRIIMI MAE Services, as special
servicer, that a material risk exists that the value of such Mortgage Loan could
decline below the outstanding principal balance thereof, PSCC may take such
action as it reasonably determines to be appropriate with respect to such
Mortgage Loan including, without limitation, the sale of other disposition of
such Mortgage Loan on such terms as PSCC determines to be appropriate under the
circumstances.<PAGE>
ARTICLE V.
CRIIMI MAE ACQUISITION OF LOANS
Section V.01 CRIIMI MAE's Option to Purchase Mortgage Loans. PSCC hereby
grants to CRIIMI MAE an option (the "Option") to purchase all (but not less than
all) of the Mortgage Loans acquired through the Facility from PSCC in accordance
with the terms hereof. The Option shall be exercisable for a 30-day period
commencing upon the earlier to occur of: (i) the last day of the Aggregation
Period referred to in Section 4.01 or (ii) a date mutually agreeable to the
parties to this Agreement (the "Exercise Period"), provided, however, that (a)
the Option may be exercised only if CRIIMI MAE contemporaneously exercises the
option to purchase the PMCC Loans contained in the PMCC Agreement; and (b)
except as may otherwise be agreed by PSI and PSCC, the Option may be exercised
only in connection with a Securitization, the closing date of which shall also
be the closing date of CRIIMI MAE's purchase of the Pooled Loans. The foregoing
notwithstanding, if (x) the Option shall become exercisable pursuant to the
operation of clause (ii) of Section 4.01 and (y) PSI, PSCC and CRIIMI MAE agree
that conditions in the CMBS market are unfavorable for the Securitization, the
Exercise Period may be extended for a mutually agreeable period (but not later
than the expiration of the Term of this Agreement). In the event CRIIMI MAE
elects to extend the Term of this Agreement pursuant to Section 8.01, the
commencement date of the Exercise Period shall be similarly extended. The
purchase price of the Mortgage Loans (the "Purchase Price") shall be equal to
the sum of: (i) the outstanding principal balance of and accrued interest on the
Mortgage Loans (or, for any Section 1.06 Loan, the purchase price paid by PSCC,
reduced by any amortization of the principal balance of such Section 1.06 Loan
after the date of acquisition), (ii) the costs incurred by PSI and PSCC in
connection with the establishment and maintenance of hedge positions with
respect to the Mortgage Loans, net of any gains and including any losses
associated with the hedge positions or in connection with rate locks of the
Mortgage Loans and (iii) any other amounts due PSI or PSCC hereunder or under
the Servicing Agreement, including, without limitation, unreimbursed servicing
advances and servicing advances reimbursed to the Servicer by PSI or PSCC during
the Aggregation Period. The Purchase Price for the Mortgage Loans and the PMCC
Loans shall be paid, (i) to the extent available, by the payment to PSCC or
PMCC, as the case may be, of the net proceeds of the Securitization; and (ii) by
crediting against the Purchase Price the Haircut Funds (after deduction and
payment to PSCC of any amounts payable to it pursuant to Section 4.04 hereof).
The remaining balance of the Purchase Price shall be paid from other funds of
CRIIMI MAE, including funds obtained through the Securities Repurchase Facility
provided for in Article VI.
Section V.02 Securitization. (A) PSI, PSCC and CRIIMI MAE will act in good
faith in connection with the Securitization, to negotiate and execute the
following agreements:
(i) if required, one or more loan sale agreements (each, a
"Mortgage Loan Sale Agreement") between PSCC and CRIIMI MAE (or a
subsidiary of CRIIMI MAE) or between PMCC and CRIIMI MAE or such
subsidiary, as the case may be, for such Securitization providing for,
among other things,
(a) the sale of the Mortgage Loans and the PMCC Loans;
(b) the payment of the costs and expenses of the
transaction by CRIIMI MAE (or, if Loans held by a third party are
included in the Securitization, by CRIIMI MAE and such third party);
(c) the making of representations and warranties by PSCC,
CRIIMI MAE and PMCC reasonably satisfactory to PSI and satisfactory to
the Rating Agencies in connection with such Securitization, provided
that (I) any such representations and warranties made by PMCC with
respect to the PMCC Loans shall be limited to corporate matters
comparable to the representations and warranties contained in Section
2.02(A) and such additional representations and warranties as are
provided for in the PMCC Agreement; (II) the representations and
warranties to be made by PSCC shall be limited to corporate matters
comparable to the representations and warranties contained in
Section 2.02(A), ownership of the Mortgage Loans and matters relating
to Mortgage Loans funded through the Facility that arose during the
Aggregation Period; (III) none of PMCC, PSCC, or PSI shall be deemed
to have made or be required to make any representations or warranties
with respect to a particular Mortgage Loan or PMCC Loan, as the case
may be, if and to the extent CRIIMI MAE or CRIIMI MAE Services as
servicer under the Interim Servicing Agreement becomes aware such
representation and warranty is incorrect during the term of this
Agreement or the Interim Servicing Agreement, and (IV) if the Rating
Agencies require additional or different representations and
warranties in connection with such Securitization, CRIIMI MAE will
make such additional or different representations and warranties to
the extent that the truth and correctness of such representations and
warranties can be substantiated through reasonable due diligence
efforts and expenditures; and
(d) CRIIMI MAE providing PSI, its officers, directors,
affiliates and controlling persons with a reasonable and customary
"10b-5" indemnity reasonably satisfactory to PSI with respect to any
disclosure document delivered in connection with such transaction but
excluding (i) any portion thereof with respect to PSI, its plan of
distribution of the related CMBSs and the structure of the related
CMBSs (consisting principally of the descriptions of the priority of,
and allocation of distributions and losses to, the CMBS's, yield and
detrimental tables) such information, the "PSI Information"); and (ii)
information relating to Mortgage Loans and related Mortgage Properties
that were not originated or underwritten by CRIIMI MAE through the
Facility or are not then being serviced by CRIIMI MAE; and
(e) PSI providing CRIIMI MAE and its officers, directors,
affiliates and controlling persons a reasonable and customary "10b-5"
indemnity reasonably satisfactory to CRIIMI MAE with respect to the
PSI Information;
(ii) if the CMBSs are to be issued by or through a Securitization
Trust, as defined below, a pooling and servicing agreement (each, a
"Pooling and Servicing Agreement") among CRIIMI MAE and or a subsidiary
(which need not be a wholly-owned subsidiary) of CRIIMI MAE, as depositor,
CRIIMI MAE Services, as master servicer and special servicer, and a trustee
(the "Trustee"), to be on substantially the same terms as Rating Agencies
allow for conduit securitizations, providing for, among other things, the
deposit of the Pooled Loans into a trust (a "Securitization Trust"), the
issuance of one or more classes of mortgage pass-through certificates
("Certificates") evidencing beneficial ownership interests in the
Securitization Trust, and the servicing and special servicing of the Pooled
Loans deposited into the Securitization Trust, with such modifications as
the Rating Agencies may require and the parties thereto shall otherwise
agree;
(iii) if the CMBSs are to be issued other than through to a
Securitization Trust, a trust indenture (the "Indenture") providing for the
issuance of the CMBSs and the pledge of the Pooled Loans to the trustee
under the Indenture (the "Indenture Trustee") as collateral security for
the obligations of the issuer of the CMBSs, to be on substantially the same
terms as Rating Agencies allow in similar securitizations and otherwise
containing provisions customarily set forth in trust indentures for the
issuance of CMBSs including, if the CMBSs are to be registered under the
Securities Act, provisions required for the qualification of the Indenture
under the Trust Indenture Act of 1939, as amended;
(iv) if the CMBSs are to be issued under an Indenture, a
servicing agreement (the "Servicing Agreement") between CRIIMI MAE and
CRIIMI MAE Services as servicer, master servicer and special servicer, to
be on substantially the same terms as Rating Agencies allow in similar CMBS
securitizations and (if the Indenture Trustee is not a party thereto)
assigned to the Indenture Trustee as additional collateral security under
the Indenture; and
(v) an underwriting agreement (the "Underwriting Agreement")
between CRIIMI MAE and PSI relating to the sale of any publicly-offered
CMBSs, a purchase agreement (the "Purchase Agreement") between CRIIMI MAE
and PSI, as dealer, with respect to any privately-offered CMBSs with
respect to which PSI has elected to act as principal, and a private
placement agency agreement ("Placement Agreement") between CRIIMI MAE and
PSI, as broker, with respect to any privately offered CMBSs with respect to
which PSI has elected to act as placement agent, each in connection with
the sale of any privately-offered CMBSs, providing for underwriting,
purchase or placement fees, as applicable. The underwriting, purchase or
placement fee (collectively "Underwriting Fee" shall be equal to (a) 0.625%
of the face amount of investment grade rated CMBSs and (b) a mutually
agreeable Underwriting Fee with respect to any non-investment grade rated
CMBSs (except that no Underwriting Fee shall be payable with respect to any
Certificates retained by CRIIMI MAE); and
(B) PSI agrees that there may be one co-manager of the Securitization
who shall receive an allocation of approximately 25% of the investment grade
rated CMBSs, provided, that the co-manager shall not receive any Underwriting
Fee with respect to any securities allocated to it that are not sold during the
offering period at the price fixed for such securities on the pricing date for
the securities.
Section V.03 Purchase Without Securitization through PSI.
(A) If CRIIMI MAE exercises the Option and consummates a
Securitization in a transaction in which PSI is not the lead manager, CRIIMI MAE
shall pay PSI an amount equal to 0.625% of the aggregate face amount of the
investment grade related Securities issued in such Securitization (the "Breakup
Fee").
(B) If CRIIMI MAE exercises the Option and acquires the Mortgage
Loans and/or the PMCC Loans but does not consummate a Securitization, the
Breakup Fee shall be computed be reference to the aggregate face amount of
investment grade rated securities which could have been issued in a
Securitization (which amount shall be estimated by PSI in good faith using the
average of the preliminary subordination levels received from two Rating
Agencies and shall be conclusive, absent manifest error or unfairness, as
against CRIIMI MAE), and:
(i) If CRIIMI MAE sells any Mortgage Loans and/or PMCC Loans in
a bulk sale or other whole loan transaction or series of transactions,
CRIIMI MAE shall pay to PSI the lesser of (a) the net profits received in
such transaction or series of transactions and (b) the Breakup Fee
(computed pursuant to Section 5.03(B) with respect to the sold loans), and
(ii) If CRIIMI MAE retains any Mortgage Loans and/or PMCC Loans,
CRIIMI MAE shall pay PSI the Breakup Fee (computed pursuant to Section
5.03(B) with respect to the retained loans).
Section V.04 Failure to Exercise Option. In the event that CRIIMI MAE does
not exercise the Option (and, in the case of the initial Term, does not exercise
its right to extend the Term) prior to the expiration of the 30-day period
following the Aggregation Period, the Option shall expire with respect to those
Mortgage Loans originated through the Facility. Upon such expiration, the
Mortgage Loans and the Haircut Funds shall be retained by \PSCC and PSI, and the
Facility shall terminate, but only with respect to such retained Mortgage Loans.
Section V.05 Other Securitizations. As long as this Agreement is in effect,
CRIIMI MAE shall use its best efforts to cause PSI to be designated a co-manager
of underwritten offerings of commercial mortgage-backed securities of CRIIMI MAE
and its subsidiaries and of securitizations in addition to the Securitization
contemplated by this Agreement.
ARTICLE VI.
SECURITIES REPURCHASE FACILITY
Section VI.01 Acquisition of Securities. In connection with a Securitization
effected through a Pooling and Servicing Agreement, CRIIMI MAE may cause it's
subsidiary referred to in Section 5.02(A)(ii) (the "SubCert Purchaser") to
purchase Certificates issued by the Securitization Trust at the market price
therefor as determined by PSI in its reasonable judgment. PSCC agrees to
provide financing pursuant to a Securities Repurchase Agreement (the "Repurchase
Agreement") for the purchase of any such Certificates that are rated "AAA"
through "B-" by at least one nationally recognized Rating Agency. The
Repurchase Agreement shall be entered into on PSI's standard form of repurchase
agreement, which shall be revised to the extent appropriate to reflect the
financing thereunder of Certificates rated lower than investment grade, and
shall otherwise be on terms and conditions mutually agreeable to CRIIMI MAE, PSI
and PSCC. The lender under the Repurchase Agreement may be PSCC, PSI, or
another of their affiliates.
Section VI.02 Other Credit Facility. In the event the Securitization is
effected in manner such that CRIIMI MAE or a subsidiary retains ownership of the
Pooled Loans, PSI and PSCC may elect to finance the portion of the Purchase
Price for the Mortgage Loans in excess of the sum of (i) the proceeds of the
issuance of investment grade rated CMBSs and (ii) the Haircut Funds. Any such
financing shall be effected pursuant to a credit agreement on terms and
conditions mutually agreeable to CRIIMI MAE, PSI and PSCC.
ARTICLE VII.
DEFAULT
Section VII.01 Default by CRIIMI MAE; Rights and Remedies.
(A) It shall be an event of default hereunder (an "Event of Default")
if:
(i) CRIIMI MAE shall fail to pay any amount due to PSI or PSCC
hereunder, or CRIIMI MAE Services shall fail to pay any amount due to PSCC
under the Interim Servicing Agreement and, in either such case, such
default shall continue for a period of 5 days after written demand is made
for such payment;
(ii) CRIIMI MAE shall fail to perform any other covenant or
obligation required to be performed by it hereunder, or CRIIMI MAE Services
shall fail to perform any other covenant or obligation required to be
performed by it under the Interim Servicing Agreement and, in any such
case, such failure shall continue for a period of 30 days after written
notice thereof to CRIIMI MAE or CRIIMI MAE Services from PSI or PSCC; or
(iii) any representation or warranty of CRIIMI MAE shall have
been untrue or incomplete in any material respect when made or when
reaffirmed pursuant to Section 2.01(C), and CRIIMI MAE shall fail to cure
any such misrepresentation within a period of 30 days after notice thereof
to CRIIMI MAE by PSI or PSCC.
The parties hereto agree that during the continuance of any Event of Default
hereunder PSI or PSCC may, without notice to CRIIMI MAE or any other party,
elect to terminate this Agreement, terminate the Option, or exercise any other
remedies available to them under this Agreement and under applicable law,
including without limitation, the right to apply all or part of the Haircut
Funds towards the obligations of CRIIMI MAE hereunder or to the reimbursement to
PSI or PSCC of any damages or losses suffered or incurred by them as a result of
such Event of Default, as well as the right to sue for specific performance.
Nothing contained herein shall be deemed to impose on CRIIMI MAE any liability
under any Mortgage Loan or Mortgage Loan document, provided that the foregoing
exculpation shall not limit or reduce CRIIMI MAE's obligations under this
Section 7.01 or Section 8.03. Nothing contained herein shall be deemed to
modify the provisions of Section 5.01 with respect to the rights and obligations
of the parties in the event CRIIMI MAE fails to exercise the Option to purchase
the Mortgage Loans pursuant to the terms of this Agreement.
(B) In the event (i) CRIIMI MAE shall admit in writing its inability
to pay its debts as they become due, file a petition under any applicable
bankruptcy, insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its obligations or
cease operations of its business; (ii) a decree or order in an involuntary case
under any present or future federal or state bankruptcy, insolvency or similar
law shall have been entered against CRIIMI MAE and such decree or order shall
remain in force undischarged or unstayed for a period of sixty (60) days or
more; or (iii) CRIIMI MAE shall consent to the appointment of a conservator,
receiver or liquidator in any insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceeding relating to CRIIMI MAE or its
properties (collectively, a "Bankruptcy Event") then PSI and PSCC shall have no
further obligations or fund any additional Mortgage Loans through the Facility
and PSI and PSCC shall have the right, at their sole option, to terminate this
Agreement and to remove all Mortgage Loans in the Facility from the terms of
this Agreement, thereby terminating any and all of CRIIMI MAE's rights and
obligations concerning such Mortgage Loans, including, without limitation,
CRIIMI MAE's Option to acquire the Mortgage Loans in conjunction with a
Securitization or otherwise. In such event PSCC shall retain the Mortgage Loans
and all amounts held in the Haircut Funds Account.
(C) Except as otherwise expressly provided in this Agreement, all
rights and remedies under this Agreement are distinct and cumulative, not only
as to each other, but as to any rights and remedies afforded by law or equity
and may be exercised together, separately and successively, for the benefit of
PSI, PSCC and their respective successors and assigns.
Section VII.02 Failure to Perform by PSI or PSCC. In the event that PSI or PSCC
shall fail to perform any covenant or obligation required to be performed by it
hereunder and, in any such case, such failure shall continue for a period of 30
days after written notice thereof to PSI or PSCC from CRIIMI MAE, CRIIMI MAE
shall be entitled to exercise any rights or remedies available to it under this
Agreement and under applicable law.
ARTICLE VIII.
MISCELLANEOUS
Section VIII.01 Term of Agreement; Survival; Exclusivity.
(A) Subject to Section 8.01(B), the term of this Agreement (the
"Term") shall commence on the Effective Date and terminate on the date (the
"Termination Date") that is the earlier to occur of (i) expiration of the 13-
month period following the funding, or closing of the purchase, as the case may
be, of the first Mortgage Loan originated by CRIIMI MAE hereunder without
exercise of the Option by CRIIMI MAE; and (ii) such earlier date that PSI and
PSCC may elect to terminate this Agreement upon the occurrence and during the
continuance of an Event of Default hereunder or upon the occurrence of any
Bankruptcy Event.
(B) CRIIMI MAE shall have a one-time right, upon payment of a fee
(the "Extension Fee") equal to one percent (1%) of the then applicable maximum
amount of the Facility, to extend the Term for a period of six months. Any such
extension shall be effective upon delivery of written notice by CRIIMI MAE to
PSCC and PSI of CRIIMI MAE's election to extend the Term, contemporaneously with
a wire transfer of the Extension Fee in immediately available funds.
(C) The parties agree that for the period from the Effective Date
through the end of the Aggregation Period, all Mortgage Loans having an initial
principal amount (or, in the case of Section 1.06 Loans, an outstanding
principal balance) of $30 million or more that are identified by CRIIMI MAE and
meet the criteria of Eligible Loans shall, notwithstanding any other agreements,
contracts or arrangements CRIIMI MAE may have with third parties, be offered
first to PSCC for review in accordance with Section 1.02 herein.
Notwithstanding the foregoing, (i) this arrangement shall not apply with respect
to loans originated by CRIIMI MAE for the AIM funds and any already existing
CRIIMI MAE or CRI affiliate, and (ii) the preceding sentence shall not apply to
any pool of Mortgage Loans if CRIIMI MAE, in the exercise of its reasonable
discretion, determines that the underwriting characteristics of such loan pool
are such that the loan pool is better suited for acquisition by Citicorp Real
Estate, Inc. ("CRE") pursuant to the Amended and Restated Mortgage Loan
Origination Program Agreement between CRIIMI MAE and CRE. If PSCC declines to
include any Mortgage Loan offered by CRIIMI MAE in the Facility, such mortgage
loan may be dealt with freely by CRIIMI MAE. The parties agree that only
Mortgage Loans underwritten by CRIIMI MAE or originated by PSI or by PSCC shall
be included in the Facility. Notwithstanding the foregoing, nothing herein
shall be deemed to restrict in any manner the ability of PSI, PSCC, or any of
their respective affiliates to make, originate or purchase Eligible Loans or
other Mortgage Loans in transactions unrelated to this Agreement.
(D) Notwithstanding anything contained herein, the obligations
representations and warranties of CRIIMI MAE, PSI and PSCC under this Agreement
shall commence on the Effective Date.
Section VIII.02 Costs and Expenses.
(A) Facility Costs. Except as otherwise specifically provided
herein, CRIIMI MAE shall pay all costs incurred in connection with establishment
and maintenance of the Facility including the costs of identifying, originating
and underwriting the Mortgage Loans (including the costs of any environmental
reports), Mortgage Loan closing costs not paid by Borrowers, the fees and
expenses of the Custodian under the Custodial Agreement, and the reasonable fees
and expenses of counsel to PSCC in connection with the establishment of the
Facility. PSCC shall pay all costs incurred by PSCC related to its funding the
Mortgage Loans. Notwithstanding anything to the contrary in this Agreement, in
the event of the acquisition of any Section 1.06 Loans through the Facility, the
costs and expenses related to such acquisition including, without limitation,
underwriting costs, third-party reports and reviews and legal fees and
disbursements, shall be paid as agreed upon by the parties prior to entering
into any such acquisition. All servicing fees and expenses related to the
Mortgage Loans shall be paid in accordance with the terms of the Servicing
Agreement.
(B) Securitization Costs. CRIIMI MAE shall pay all expenses in
connection with a Securitization, including printing costs in connection with
the preparation of a disclosure document, accounting costs, registration and
filing fees, legal fees and expenses incurred by the issuer and by the
underwriters, dealers or placement agents, as the case may be, and up-front and
surveillance fees and legal expenses of at least two Rating Agencies (or such
greater or lesser number of Rating Agencies as is consistent with then current
market practices in the securitization of mortgage loans). In connection with
the retention of underwriters' counsel for a Securitization, PSI agrees to use
its best efforts to obtain capped estimates of legal fees from at least two law
firms, provided, that the final determination of underwriters' counsel shall be
made by PSI, in its sole discretion.
Section VIII.03 Indemnification. CRIIMI MAE shall indemnify and hold
harmless each of PSI, PSCC, each affiliate thereof, and their respective
officers, directors and controlling persons within the meaning of Section 15 of
the Securities Act and Section 20 of the Securities Exchange Act of 1934, as
amended (collectively, the "Indemnified Persons") from and against all losses,
damages, penalties, fines, legal expenses, judgments, amounts paid in settlement
and any other costs, fees and expenses (collectively, "Losses") that the
Indemnified Persons may sustain arising from or in any way related to (i) CRIIMI
MAE's failure to perform, keep or observe any of its obligations, covenants,
representations or warranties under this Agreement, (ii) any breach or non-
performance of any of the representations and warranties made or reaffirmed by
CRIIMI MAE in or pursuant to Section 2.01 of this Agreement; (iii) changes in
the Market Value of Mortgage Loans acquired by PSCC through the Facility, other
than any such Losses incurred resulting from the gross negligence or willful
misconduct of any Indemnified Person; (iv) any change in the Market Value of the
hedge position with respect to the Mortgage Loans, other than any such Losses
incurred resulting from the gross negligence or willful misconduct of any
Indemnified Person; and (v) any Lender liability claims against any Indemnified
Person, other than any such claims resulting from the willful acts or omissions
of any Indemnified Person. The obligations of CRIIMI MAE under this Section
8.03 shall survive the expiration or other termination of this Agreement. This
Section 8.03 shall not apply to expand or enlarge the rights and remedies of
PSCC and PSI in the event CRIIMI MAE is not in default in the performance of its
obligations hereunder but elects not to exercise the Option, which rights and
remedies are as set forth in Section 5.04.
Section VIII.04 Notices. Whenever it is provided in this Agreement that
notice, demand, request or other communication shall be given to or served upon
one of the parties hereto by another, any such notice, demand, request or
communication shall be in writing and shall be delivered (i) personally to the
recipient at the address listed below, (ii) by certified or registered mail,
return receipt requested, (iii) by overnight commercial courier service, or (iv)
by fax to the fax number indicated below.
If to CRIIMI MAE, at the following address:
CRIIMI MAE Inc.
The CRI Building
11200 Rockville Pike
Rockville, Maryland 20852
Attn: Frederick Burchill, EVP
Telephone: (301) 816-2300
Fax: (301) 255-0620
with a copy to:
CRIIMI MAE Inc.
The CRI Building
11200 Rockville Pike
Rockville, Maryland 20852
Attn: General Counsel
Telephone: (301) 816-2300
Fax: (301) 231-0334
If to PSI or PSCC, at the following address:
Prudential Securities, Incorporated
One New York Plaza, 18th Floor
New York, New York 10292-2018
Attn: F. Fuller O'Connor, Jr., Managing Director
Investment Banking
Telephone: (212) 778-3720
Fax: (212) 778-3194<PAGE>
with a copy to:
Prudential Securities, Incorporated
One Seaport Plaza, 30th Floor
New York, New York 10292
Attn.: Fred Robustelli, Esq.
Law Department
Telephone: (212) 214-6813
Fax: (212) 214-7938
and to:
Prudential Securities Incorporated
One Seaport Plaza, 27th Floor
New York, New York 10292
Attn: James Bozza
Telephone: (212) 214-7444
Fax: (212) 214-7678
Such notice, demand, request or communication shall be deemed delivered on the
next day in case of methods (i), (iii) and (iv) and on the third (3rd) day in
the case of method (ii). Either party may at any time give notice in writing to
the other party of a change of its address or fax number for purposes of this
Section.
Section VIII.05 No Joint Venture. CRIIMI MAE and PSI and PSCC are not
partners or joint venturers with each other, and nothing herein shall be
construed so as to make them such or impose any liability as such on either of
them. Each party shall perform its obligations hereunder as an independent
contractor.
Section VIII.06 Actions Through Affiliates. CRIIMI MAE agrees that any
action or performance stated to be taken or performed by PSI or PSCC hereunder
may in their discretion be taken or performed by any affiliate of either of
them, and such action or performance shall be in satisfaction of any obligation
hereunder as fully as if taken by PSI or PSCC, as applicable. PSI and PSCC
agree that any action or performance stated to be taken or performed by CRIIMI
MAE hereunder may in CRIIMI MAE'S discretion be taken or performed by any entity
in which CRIIMI MAE owns a majority interest, and such action or performance
shall be in satisfaction of any obligation hereunder as fully as if taken by
CRIIMI MAE. Performance by any such affiliate shall not release a party from
its obligations hereunder.
Section VIII.07 PSI's and PSCC's Discretion. Unless otherwise explicitly
stated herein, any action, consent or waiver to be taken, granted, or given
hereunder in PSI's or PSCC's discretion or otherwise optionally by either of
them shall be taken by them in their reasonable discretion, unless exercise of
their sole discretion is provided for, in which case any such action, consent or
waiver may be taken, granted or given for any reason or for no reason, and
without any duty to any person.
Section VIII.08 Counterparts. This Agreement may be executed in
counterparts by the parties hereto, and all such counterparts shall constitute
one and the same instrument.
Section VIII.09 Trial by Jury Waived. EACH PARTY HERETO HEREBY WAIVES TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY OUT OF, UNDER OR IN CONNECTION
WITH THIS AGREEMENT (INCLUDING ANY AGREEMENTS ENTERED INTO IN CONNECTION
HEREWITH) OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREUNDER. EACH PARTY HERETO
(A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY PARTY HERETO HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT IT WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENDORSE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT
HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THIS
WAIVER.
Section 8.10 Governing Law.This Agreement shall be construed in accordance
with and governed by the laws of the State of New York.
Section 8.11 Amendments; Waivers; Assignment; Sale of Participations.
(A) No amendment or waiver hereto shall be effective unless
evidenced by a writing executed by the parties hereto. Any waiver shall be
limited to the particular terms of such waiver. No act, course of dealing or
waiver shall be deemed to constitute an amendment hereto. This Agreement may not
be assigned by either party hereto without the prior written consent of the
other party which may be withheld in its sole discretion.
(B) PSCC shall have the right at any time, either directly or
through an agent, subject to the terms of the Loan Documents, to sell or grant
participations to any person in all or any part of the Mortgage Loans made or
acquired by it hereunder or in any commitment made with respect thereto, or in
any obligations owed to it under any such Mortgage Loan or Loans. Any such
participation shall be subject to the Option granted to CRIIMI MAE pursuant to
Section 5.01. As between PSCC and CRIIMI MAE, PSCC shall not be relieved of any
of its obligations hereunder as the result of the sale or grant or any
participations in all or part of any Mortgage Loan or Loans or in any such
related obligations. The sale of any such participation shall not entitle the
holder thereof, other than an affiliate of PSCC, to require CRIIMI MAE to take
or omit to take any action hereunder.
Section 8.12 Press Releases. None of PSI, PSCC nor CRIIMI MAE nor any of
their respective affiliates or subsidiaries shall issue any press release or
make any other formal public announcement related to this Agreement or the
transactions contemplated hereby unless such press release or announcement shall
have been approved in advance by the other party to this Agreement. This
provision shall not preclude either party from publicly disclosing any facts
with respect to the transactions contemplated by this Agreement if such
disclosure is required by law.
Section 8.13 Entire Agreement. This Agreement, taken together with the
Exhibits and schedules hereto set forth the entire agreement between the parties
with respect to the subject matter thereof, and such agreements supersede and
replace any agreement or understanding that may have existed between the parties
prior to the date hereof in respect of such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
PRUDENTIAL SECURITIES INCORPORATED
By: /s/ Peter Riemenschneider
Name: Peter Riemenschneider
Title: Managing Director
PRUDENTIAL SECURITIES CREDIT CORP.
By: /s/ [illegible]
Name:____________________________
Title:____________________________
CRIIMI MAE INC.
By: /s/ Donald R. Drew
Name: Donald R. Drew
Title: Senior Vice President
TABLE OF CONTENTS
Page
----
ARTICLE I.
LOAN ORIGINATION. . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.01 Mortgage Loan Origination by CRIIMI MAE. . . . 2
Section 1.02 Underwriting of Mortgage Loans . . . . . . . . 3
Section 1.03 Mortgage Loan Commitment; Rate Lock;
Documentation and Closing. . . . . . . . . . 5
Section 1.04 Origination Fees . . . . . . . . . . . . . . . 7
Section 1.05 Custodial Arrangements . . . . . . . . . . . . 8
Section 1.06 Secondary Market Mortgage Loan Acquisitions. . 8
Section 1.07 Maximum Facility Size. . . . . . . . . . . . . 8
ARTICLE II.
REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . 9
Section 2.01 Representations and Warranties of
CRIIMI MAE . . . . . . . . . . . . . . . . . 9
Section 2.02 Representations and Warranties of PSI
and PSCC . . . . . . . . . . . . . . . . . . 24
ARTICLE III.
HAIRCUT PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . 26
Section 3.01 Haircut Payments . . . . . . . . . . . . . . . 26
ARTICLE IV.
MORTGAGE LOAN FACILITY DURING AGGREGATION PERIOD. . . . . . . 28
Section 4.01 Loan Facility during Aggregation Period. . . . 28
Section 4.02 Hedging During Aggregation Period. . . . . . . 28
Section 4.03 Servicing of Mortgage Loans During Aggregation
Period . . . . . . . . . . . . . . . . . . . 28
Section 4.04 Mortgage Loan Defaults During Aggregation
Period . . . . . . . . . . . . . . . . . . . 29
ARTICLE V.
CRIIMI MAE ACQUISITION OF LOANS . . . . . . . . . . . . . . . 30
Section 5.01 CRIIMI MAE's Option to Purchase Mortgage
Loans. . . . . . . . . . . . . . . . . . . . 30
Section 5.02 Securitization . . . . . . . . . . . . . . . . 31
Section 5.03 Purchase Without Securitization through
PSI. . . . . . . . . . . . . . . . . . . . . 33
Section 5.04 Failure to Exercise Option . . . . . . . . . . 34
Section 5.05 Other Securitizations. . . . . . . . . . . . . 34
ARTICLE VI.
SECURITIES REPURCHASE FACILITY. . . . . . . . . . . . . . . . 34
Section 6.01 Acquisition of Securities. . . . . . . . . . . 34
Section 6.02 Other Credit Facility. . . . . . . . . . . . . 34
ARTICLE VII.
DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 7.01 Default by CRIIMI MAE; Rights and Remedies . . 35
Section 7.02 Failure to Perform by PSI or PSCC. . . . . . . 36
ARTICLE VIII.
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 8.01 Term of Agreement; Survival; Exclusivity . . . 36
Section 8.02 Costs and Expenses . . . . . . . . . . . . . . 37
Section 8.03 Indemnification. . . . . . . . . . . . . . . . 38
Section 8.04 Notices. . . . . . . . . . . . . . . . . . . . 38
Section 8.05 No Joint Venture . . . . . . . . . . . . . . . 40
Section 8.06 Actions Through Affiliates . . . . . . . . . . 40
Section 8.07 PSI's and PSCC's Discretion. . . . . . . . . . 40
Section 8.08 Counterparts . . . . . . . . . . . . . . . . . 40
Section 8.09 Trial by Jury Waived . . . . . . . . . . . . . 40
Section 8.10 Governing Law. . . . . . . . . . . . . . . . . 41
Section 8.11 Amendments; Waivers; Assignment; Sale of
Participations . . . . . . . . . . . . . . . 41
Section 8.12 Press Releases . . . . . . . . . . . . . . . . 41
Section 8.13 Entire Agreement . . . . . . . . . . . . . . . 41
INDEX OF DEFINED TERMS
Definition Section
Advance 6.01(A)(iii)
Aggregation Period 4.01
Agreement Preamble
Appraised Value 2.01(A)(xvii)
Bankruptcy Event 6.01(B)
Breakup Fee 5.03(A)
CERCLA 2.01(A)(xxxi)
Certificates 5.02(A)(ii)
CMBS Recital C
CRIIMI MAE Preamble
CRIIMI MAE Services Recital C
Custodial Agreement 1.05
Custodian 1.05
Effective Date Preamble
Eligible Loan 1.01(A)
Environmental Law 2.01(A)(xxxi)
Event of Default 7.01(A)
Exercise Period 5.01
Extension Fee
8.01(B)
Facility Recital A
Fee Interest 2.01(A)(xxv)
Ground Lease 2.01(A)(xxv)
Guaranty 4.03
Haircut Earnings Payment 3.01(C)
Haircut Funds 3.01(A)
Haircut Funds Account 3.01(A)
Indemnified Persons 8.03
Indenture 5.03(A)(iii)
Indenture Trustee 5.03(A)(iii)
Initial Haircut Payment 3.01(A)
Interim Servicing Agreement 4.03
Loan Amount 1.03(G)
Loan Documents 1.05
Losses 8.03
Market Value 1.03(G)
Mortgage Loan Recital A
Mortgage Loan Sale Agreement 5.02(A)(i)
Mortgaged Property 1.01(A)
Notional Amount 4.03
Option 5.01
Placement Agreement 5.02(A)(v)
PMCC Recital B
PMCC Agreement Recital B
PMCC Loan Documents 1.03(C)
PMCC Loans Recital C
Pooled Loans Recital C
Pooling and Servicing Agreement 5.02(A)(ii)
PPT 1.03(A)
PSCC Preamble
PSI Preamble
PSI Information 5.02(A)(i)
Purchase Price 5.01
Rate Lock 1.03(B)
Rating Agency 1.01
Section 1.06 Loan 1.06
Securities Act 2.01(A)(v)
Securities Purchase Agreement 5.02(A)(v)
Securitization Recital C
Securitization Trust 5.02(A)(ii)
Servicing Agreement 5.02(A)(iv)
SubCert Purchaser 6.01(A)
Term 8.01(A)
Termination Date 8.01(A)
Trustee 5.02(A)(ii)
Underwriting Agreement 5.02(A)(v)
Underwriting Fee 5.02(A)(v)
