<PAGE>
Filed Pursuant to Rule 424(B)(5)
Registration No. 333-38409
-------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT IS SUBJECT TO COMPLETION +
+PURSUANT TO RULE 424 UNDER THE SECURITIES ACT OF 1933. A REGISTRATION +
+STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE +
+SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 415 UNDER THE SECURITIES +
+ACT OF 1933. A FINAL PROSPECTUS SUPPLEMENT WILL BE DELIVERED TO PURCHASERS OF +
+THESE SECURITIES. THIS PROSPECTUS SUPPLEMENT AND PROSPECTUS SHALL NOT +
+CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL +
+THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--DATED MARCH 11, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 11, 1998)
- --------------------------------------------------------------------------------
2,500,000 Shares
[LOGO OF CRIIMI MAE
APPEARS HERE] CRIIMI MAE INC.
Common Stock
- --------------------------------------------------------------------------------
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)
acquiring non-investment grade subordinated securities backed by first mortgage
loans on multifamily properties and other commercial real estate ("Subordinated
CMBS") and (ii) originating, servicing, and securitizing commercial mortgage
loans and commercial mortgage backed securities ("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. As of December 31, 1997, CRIIMI
MAE's approximately $1.9 billion portfolio of assets included approximately
$1.1 billion of CMBS and approximately $605 million of interests in government
insured or guaranteed mortgages secured by multifamily housing complexes
located throughout the United States ("Government Insured Mortgage Assets").
LOGO
The 2,500,000 shares of common stock of the Company, par value $.01 per share
(the "Common Stock" or "Common Shares"), offered hereby (the "Offering") are
being sold by the Company. The Common Stock is listed on the New York Stock
Exchange (the "NYSE") under the symbol "CMM." The last reported sales price of
the Common Stock on the NYSE on March 11, 1998 was $15.625 per share. See
"Price Range of Common Shares and Dividends."
The shares of Common Stock are subject to certain restrictions on ownership
designed to preserve the Company's status as a REIT for federal income tax
purposes. See "Description of Capital Stock -- Common Shares -- Restrictions on
Ownership and Transfer" in the accompanying Prospectus.
SEE "RISK FACTORS" ON PAGES S-8 TO S-13 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $100,000.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 375,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $ , the total
Underwriting Discounts and Commissions will be $ and the total Proceeds
to Company will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the Underwriters, subject to delivery
by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares to the Underwriters is expected to be made through the facilities
of the Depository Trust Company, New York, New York, on or about March , 1998.
PRUDENTIAL SECURITIES INCORPORATED FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
March , 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OR THE
SERIES B PREFERRED STOCK, INCLUDING PURCHASES OF THE COMMON STOCK OR SERIES B
PREFERRED STOCK TO STABILIZE THEIR MARKET PRICES AND PURCHASES OF COMMON STOCK
TO COVER SOME OR ALL OF A SHORT POSITION AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE>
SUMMARY
The following information contained in this summary is qualified in its
entirety by, and should be read in conjunction with, the detailed information
and financial statements, including the notes thereto incorporated herein by
reference. Unless the context otherwise requires, references herein to CRIIMI
MAE or the Company include CRIIMI MAE Inc. and each of its subsidiaries. All
information in this Prospectus Supplement assumes that the Underwriters' over-
allotment option will not be exercised.
THE COMPANY
CRIIMI MAE is a fully integrated commercial mortgage company structured as a
self-administered real estate investment trust ("REIT") and is one of the
largest publicly traded REITs focused primarily on the commercial mortgage
backed securities ("CMBS") market. CRIIMI MAE's primary activities include (i)
acquiring non-investment grade subordinated securities backed by first mortgage
loans on multifamily properties and other commercial real estate ("Subordinated
CMBS") and (ii) originating, servicing and securitizing commercial mortgage
loans and CMBS. CRIIMI MAE believes that its focus on acquiring Subordinated
CMBS, together with its expertise in underwriting, servicing and originating
commercial mortgage loans, has enabled the Company to take advantage of the
rapid growth in the securitization of debt backed by commercial mortgage loans.
William B. Dockser, the Company's Chairman of the Board, and H. William
Willoughby, the Company's President, have led CRIIMI MAE since its formation in
1989. The Company currently has over 170 employees, and the eight members of
the Company's senior management average over 20 years of experience in a wide
range of real estate activities. During the year ended December 31, 1997, the
Company purchased CMBS with an aggregate face amount of approximately $803
million for an aggregate purchase price of approximately $554 million, and from
January 1, 1998 through March 11, 1998, the Company has purchased CMBS with an
aggregate face amount of approximately $171.2 million for an aggregate purchase
price of approximately $123.8 million. As of December 31, 1997, CRIIMI MAE's
approximately $1.9 billion portfolio of assets included approximately $1.1
billion of CMBS and approximately $605 million of interests in government
insured or guaranteed mortgages secured by multifamily housing complexes
located throughout the United States ("Government Insured Mortgage Assets").
When acquiring CMBS, CRIIMI MAE focuses on classes of CMBS that are rated
below investment grade by one or more rating agencies (i.e., equivalent to CMBS
rated BB or lower by Standard and Poor's Rating Services ("Standard and
Poor's")), including the most subordinate class of a CMBS issuance which
typically is not rated. Generally, the Company has purchased Subordinated CMBS
at a discount to face value. CRIIMI MAE generally acquires Subordinated CMBS in
privately negotiated transactions, which allows CRIIMI MAE to perform due
diligence on the mortgage loans underlying the CMBS as well as the underlying
real estate prior to consummating the purchase, thus mitigating certain risks
associated with purchasing Subordinated CMBS. See "CRIIMI MAE--Subordinated
CMBS Acquisitions."
The Company also originates commercial mortgage loans which it intends to
securitize by issuing CMBS backed by pools of such loans. In conjunction with
its securitizations, CRIIMI MAE will acquire and retain the mortgage loans on
its books. The Company will finance a portion of the loans by creating and
placing investment grade securities backed by such loans with investors through
securitizations. The Company will retain the balance of the cash flow
attributable to the loans after all debt service is paid. CRIIMI MAE believes
that its "No-Lock" loan origination program gives it a significant advantage in
negotiating new loans because it enables CRIIMI MAE to offer loans which do not
prohibit borrowers from prepaying their loans. CRIIMI MAE's origination
activities generate additional income for the Company in the form of
origination and servicing fees, increase the size of the Company's servicing
portfolio and, upon a successfully completed securitization, increase the
Company's portfolio of mortgage assets. The Company has four origination
offices located in Rockville, Maryland; Memphis, Tennessee; Boston,
Massachusetts; and San Francisco, California. The Company expects
S-3
<PAGE>
to open two additional origination offices in 1998. As of December 31, 1997,
CRIIMI MAE originated over $210 million of commercial mortgage loans under its
"No-Lock" program. Additionally, from January 1, 1998 through February 28,
1998, the Company originated approximately $82 million of commercial mortgage
loans. Substantially all of these mortgage loans, as well as those to be
originated in March 1998, will be included in the Company's anticipated
securitization during the second quarter of 1998. See "CRIIMI MAE--Loan
Origination Activities."
As of December 31, 1997, CRIIMI MAE's affiliate, CRIIMI MAE Services Limited
Partnership ("CMSLP"), was responsible for a variety of servicing functions on
a mortgage loan portfolio of approximately $16.5 billion of collateral
underlying CRIIMI MAE's CMBS and certain government insured mortgage loans and
other mortgage assets, as compared to approximately $6.4 billion as of December
31, 1996. These functions primarily include special servicing and other asset
monitoring services for substantially all of the collateral underlying CRIIMI
MAE's CMBS assets. Providing these services allows CRIIMI MAE to inspect and
monitor loan performance and manage any issues concerning such loans. In
addition, for a portion of its servicing portfolio, CRIIMI MAE performs master
servicing (on a pool of approximately $2.2 billion) and other loan servicing
which entails gathering data from other servicers or borrowers and reporting to
investor trustees. As of December 31, 1997, the weighted average fee earned
from servicing functions was approximately four basis points on the total
servicing portfolio of $16.5 billion. See "CRIIMI MAE--Mortgage Loan Servicing
Operations."
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:
. INCREASE SUBORDINATED CMBS PORTFOLIO. CRIIMI MAE intends to acquire
additional Subordinated CMBS for an aggregate purchase price of at least $600
million in 1998, which the Company believes is and will continue to be an
attractive real estate investment opportunity. 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. The Company also believes that CMBS
issuances in 1998 will exceed CMBS issuances in 1997, creating greater
investment opportunities for the Company.
. ORIGINATE COMMERCIAL MORTGAGE LOANS. From January 1, 1998 through February
28, 1998, the Company has originated approximately $82 million of commercial
mortgage loans. Since the inception of the Company's origination activities,
it has originated approximately $292 million of commercial mortgage loans.
CRIIMI MAE expects to originate at least $1 billion of mortgage loans during
1998. CRIIMI MAE will continue its efforts to originate and/or acquire
commercial mortgage loans which it intends to pool for securitization. In
conjunction with its securitizations, CRIIMI MAE will acquire and retain the
mortgage loans on its books. The Company will finance a portion of the loans
by creating and placing investment grade securities backed by such loans with
investors through securitizations. The Company will retain the balance of the
cash flow attributable to the loans after all debt service is paid. The
Company expects such securitizations to exceed $1 billion during 1998. CRIIMI
MAE will also serve as master and special servicer for these loan pools.
. EXPAND THE COMPANY'S SERVICING PORTFOLIO. Since the Company will retain the
servicing rights for the mortgage loans it originates, as well as perform
certain servicing functions in connection with its CMBS acquisitions, the
Company's servicing portfolio is expected to 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.
S-4
<PAGE>
. RESECURITIZE SUBORDINATED CMBS. CRIIMI MAE intends to periodically
resecuritize Subordinated CMBS. By resecuritizing a substantial portion of
the Subordinated CMBS in its portfolio, CRIIMI MAE believes it will better
match the maturities of its liabilities and assets as such resecuritization
transactions allow the Company to refinance floating-rate, recourse debt with
longer-term, fixed-rate non-recourse debt, and generate additional proceeds
to fund growth. During the second quarter of 1998, CRIIMI MAE intends to
resecuritize Subordinated CMBS with a face amount in excess of $1.5 billion,
match-fund approximately one-third of the face amount of the Subordinated
CMBS pledged, and generate excess proceeds to fund a portion of its 1998
business plan.
. ACCESS CAPITAL MARKETS. The Company expects to periodically access the
capital markets through a variety of sources in order to fund its business
plan. Such sources may include additional issuances of Common Stock,
preferred stock, including convertible preferred stock, and unsecured debt.
In addition, the Company intends to continue using long-term, fixed-rate debt
refinancings, repurchase agreements, unsecured working capital lines of
credit and other borrowings to fund a portion of its mortgage assets.
RECENT DEVELOPMENTS
During March 1998, the Company purchased Subordinated CMBS with a combined
face amount of approximately $171.2 million for a total purchase price of
approximately $123.8 million. These acquisitions related to Morgan Stanley
Capital I Inc., Commercial Mortgage Pass-Through Certificates, Series 1998-WF1,
with a face amount of approximately $93.1 million for a purchase price of
approximately $68.4 million and J.P. Morgan Commercial Mortgage Finance Corp.,
Mortgage Pass-Through Certificates, Series 1998-C6, with a face amount of
approximately $78.1 million for a purchase price of approximately $55.4
million.
On February 23, 1998, CRIIMI MAE issued and sold 150,000 shares of the
Company's Series C Cumulative Convertible Preferred Stock ("Series C Preferred
Stock") to an institutional investor upon the exercise of a put option that
CRIIMI MAE acquired from such institutional investor on March 19, 1997. Net
proceeds to the Company of approximately $14.5 million were used to repay
working capital lines, acquire Subordinated CMBS and fund commercial loan
originations.
In January 1998, CRIIMI MAE issued and sold publicly a total of 2,389,000
shares of the Company's Common Stock. Net proceeds to the Company of
approximately $34.1 million were used to repay certain outstanding borrowings
under the Company's working capital line of credit, acquire Subordinated CMBS
and fund commercial loan originations.
THE OFFERING
Common Stock Offered Hereby........... 2,500,000 shares
Common Stock to be Outstanding after 46,249,553 shares(1)
the Offering.........................
Use of Proceeds....................... Fund loan originations, purchase
Subordinated CMBS and/or repay
certain outstanding borrowings. See
"Use of Proceeds."
NYSE Symbol........................... CMM
- --------
(1) Excludes approximately 3.5 million Common Shares reserved for issuance upon
the exercise of options granted pursuant to CRIIMI MAE's stock option plans
and existing employment agreements, and an indeterminate number of Common
Shares issuable upon conversion of currently outstanding convertible
preferred stock of CRIIMI MAE.
Upon the closing of the Offering, CRIIMI MAE's directors and senior
management will beneficially own approximately 7.2% of the outstanding Common
Shares.
RISK FACTORS
Investors should consider the material risk factors involved in connection
with an investment in the Common Stock and the impact to investors from various
events which could adversely affect the Company's business. See "Risk Factors."
S-5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company as of and
for each of the years in the five-year period ended December 31, 1997 have been
derived from the consolidated financial statements of the Company, which have
been audited by Arthur Andersen LLP, independent public accountants. The
following selected financial data should be read in conjunction with, and are
qualified by reference to, the Company's financial statements and the related
notes thereto which are incorporated by reference herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Income:
Mortgage income............... $ 49,425 $56,912 $66,115 $ 67,043 $50,270
Income from Subordinated
CMBS......................... 79,670 41,713 11,105 976 --
Other income.................. 6,222 7,330 4,848 3,423 6,180
-------- ------- ------- -------- -------
Total income................ 135,317 105,955 82,068 71,442 56,450
-------- ------- ------- -------- -------
Expenses:
Interest expense.............. 77,919 63,079 49,853 39,245 28,008
Other operating expenses
(including fees to related
party)....................... 9,582 7,791 7,190 8,040 7,354
Amortization of assets
acquired in the Merger....... 2,878 2,882 1,435 -- --
Adjustment to hedges for
valuation and sales(1)....... 28 179 2,393 -- --
Termination of interest rate
swap......................... -- -- -- -- 4,890
Provision for settlement of
litigation................... -- -- (656) (557) 1,500
-------- ------- ------- -------- -------
Total expenses.............. 90,407 73,931 60,215 46,728 41,752
-------- ------- ------- -------- -------
Operating income................ 44,910 32,024 21,853 24,714 14,698
Net gains from mortgage
dispositions................... 17,343 9,601 1,502 12,999 7,358
Gain on sale of shares of
subsidiary..................... -- -- -- -- 3,281
Minority interests.............. (8,065) (6,386) (4,821) (11,703) (9,580)
-------- ------- ------- -------- -------
Net income...................... $ 54,188 $35,239 $18,534 $ 26,010 $15,757
-------- ------- ------- -------- -------
Preferred dividends............. (6,473) (3,526) -- -- --
-------- ------- ------- -------- -------
Net income available to common
shareholders................... $ 47,715 $31,713 $18,534 $ 26,010 $15,757
======== ======= ======= ======== =======
Earnings per share--Basic....... $ 1.29 $ 1.03 $ 0.65 $ 1.07 $ 0.78
======== ======= ======= ======== =======
Earnings per share--Diluted..... $ 1.25 $ 1.03 $ 0.65 $ 1.07 $ 0.78
======== ======= ======= ======== =======
Weighted average shares
outstanding--Basic............. 36,993 30,665 28,414 24,249 20,184
======== ======= ======= ======== =======
</TABLE>
S-6
<PAGE>
AS OF DECEMBER 31,
--------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Mortgage Assets:
Mortgages at fair
value and mortgage
security collateral,
at amortized cost.... $ 605,114 $ 691,110 $ 807,113 $857,589 $741,591
Subordinated CMBS..... 1,114,480 564,335 278,401 38,858 --
Other Assets.......... 153,711 111,800 117,789 58,603 67,110
---------- ---------- ---------- -------- --------
Total Assets........ 1,873,305 1,367,245 1,203,303 955,050 808,701
---------- ---------- ---------- -------- --------
Debt and Other
Liabilities:
Secured Debt:
Securitized Mortgage
Obligations(2)...... 696,425 732,222 645,261 -- --
Repurchase
Agreements-
Subordinated CMBS... 585,379 241,138 187,947 24,892 --
Other................ 3,250 8,898 21,228 602,356 479,045
---------- ---------- ---------- -------- --------
Total Secured Debt.. 1,285,054 982,258 854,436 627,248 479,045
Unsecured Debt........ 129,878 -- -- -- --
Other Liabilities..... 12,460 11,798 10,929 8,143 5,967
---------- ---------- ---------- -------- --------
Total Debt and Other
Liabilities........ 1,427,392 994,056 865,365 635,391 485,012
Minority Interest....... 932 26,518 52,234 69,617 108,400
Shareholders'
Equity(3).............. $ 444,981 $ 346,671 $ 285,704 $250,042 $215,289
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OTHER DATA:
Tax basis income
available to common
shareholders(4)........ $ 54,068 $ 39,007 $ 25,288 $ 29,606 $ 23,015
Tax basis income per
share(4)............... 1.45 1.27 0.89 1.17 1.14
- --------
(1) In connection with the 1995 refinancings of a significant portion of CRIIMI
MAE's short-term, floating-rate debt with long-term, fixed-rate debt, which
resulted in a closer match of the maturities of CRIIMI MAE's assets and
liabilities and reduced CRIIMI MAE's exposure to fluctuations in short-term
interest rates, CRIIMI MAE was required to adjust the carrying value of
certain interest rate caps to fair value for financial statement purposes.
Additionally, in connection with these refinancings, two interest rate caps
with a notional amount of $100 million were sold during 1995, resulting in
a loss, and a portion of the deferred financing fees was written off.
(2) Securitized Mortgage Obligations represent fixed rate debt with principal
amortization and maturities matched to a corresponding amount of assets.
Total collateral for such fixed rate debt was approximately $917.9 million,
$954.4 million and $674.3 million as of December 31, 1997, 1996 and 1995,
respectively. See "CRIIMI MAE--Financing Strategy--Repurchase Agreement and
Match Funding Financing."
(3) Includes net unrealized gains on certain mortgage assets and interest only
CMBS of approximately $1.1 million as of December 31, 1997, $8.9 million as
of December 31, 1996, $16.1 million as of December 31, 1995 and $10.3
million as of December 31, 1994 which are classified as available for sale.
(4) As further described in "Certain United States Federal Income Tax
Considerations," distributions to common stockholders are based on taxable
income. The differences between net income determined in accordance with
GAAP and taxable income are described in the Company's financial statements
and notes thereto, which are incorporated herein by reference.
S-7
<PAGE>
RISK FACTORS
Before investing in the shares of Common Stock offered hereby, prospective
investors should give special consideration to the information set forth
below, in addition to the information set forth elsewhere in this Prospectus
Supplement and in the accompanying Prospectus.
Certain statements included or incorporated by reference herein and in the
accompanying Prospectus constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and are subject to a number of risks and
uncertainties. Any such forward-looking statements contained or incorporated
by reference herein or in the accompanying Prospectus should not be relied
upon as predictions of future events. Certain such forward-looking statements
can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "are expected to," "will," "will allow," "will
continue," "will likely result," "should," "would be," "seeks,"
"approximately," "intends," "plans," "projects," "pro forma," "estimates" or
"anticipates" or similar expressions or the negative thereof or other
variations thereof or comparable terminology, or by discussions of strategy,
plans or intentions. In addition, all information included or incorporated by
reference herein or in the accompanying Prospectus with respect to projected
or future results of operations, financial condition, financial performance or
other financial or statistical matters constitute such forward-looking
statements. Such forward-looking statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and that may
be incapable of being realized. In that regard, the following factors, among
others and in addition to the matters discussed below under "Risk Factors" and
elsewhere in this Prospectus Supplement, the accompanying Prospectus and the
documents incorporated or deemed to be incorporated by reference herein or
therein, could cause actual results and other matters to differ materially
from those in such forward-looking statements: changes in interest rates;
changes in the availability of Subordinated CMBS for acquisition, the purchase
price for such assets and the extent of defaults and unrecoverable losses on
the mortgage loans underlying such Subordinated CMBS; changes in conditions in
the capital markets, including the availability of and terms of debt
financing; and changes in regional and national business and economic
conditions, including, without limitation, conditions affecting the market for
commercial real estate and inflation. As a result of the foregoing, no
assurance can be given as to future results of operations or financial
condition or as to any other matters covered by any such forward-looking
statements, and the Company wishes to caution prospective investors not to
rely on any such forward-looking statements. The Company does not undertake,
and specifically disclaims any obligation, to update any forward-looking
statements, which speak only as of the date made.
RISKS OF OWNING SUBORDINATED CMBS. The Subordinated CMBS tranches owned by
CRIIMI MAE provide credit support to the more senior tranches of the related
commercial securitization. Principal from the underlying mortgage loans
generally is allocated first to the senior tranches, with the most senior
tranche having a priority right to the cash flow from the mortgage loans until
its payment requirements are satisfied. Any remaining principal is allocated
generally among the other tranches in order of their relative seniority. In
the absence of defaults or interest shortfalls, all tranches receive interest.
To the extent there are defaults and unrecoverable losses on the underlying
mortgage loans, resulting in reduced cash flows, the most subordinate tranche
will be the first to bear this loss. To the extent there are losses in excess
of the most subordinate tranche's stated right to principal and interest, then
the remaining tranches will bear such losses in order of their relative
subordination. CRIIMI MAE owns the most subordinate tranches and therefore
will be first to bear any such losses.
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 include the prevailing
interest rates on the floating rate debt used to finance a portion of the
Subordinated CMBS, 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,
among other things, the general condition of the real estate market (including
competition for tenants and their related credit quality), the effect of the
rate of loan prepayments on the value of interest only strips and changes in
market rental rates.
S-8
<PAGE>
In addition, CRIIMI MAE's ability to achieve its stated goal to increase
recurring earnings through the acquisition of additional Subordinated CMBS is
subject to a number of assumptions that are currently subject to certain
business and economic uncertainties and contingencies, including, without
limitation, continued availability of a sufficient volume of Subordinated
CMBS, the availability of financing, higher purchase prices for Subordinated
CMBS and increased competition among purchasers of Subordinated CMBS. To the
extent the Company sustains losses relating to its Subordinated CMBS or is
unable to purchase sufficient levels of Subordinated CMBS to meet its business
objectives, the Company's financial results may be adversely affected. See
"The Portfolio--Subordinated CMBS."
IMPACT OF CHANGES IN INTEREST RATES. Fluctuations in interest rates will
affect the value of CRIIMI MAE's mortgage assets and could affect its
financial results through increased cost of funds on CRIIMI MAE's floating
rate debt. However, as of December 31, 1997, approximately 87% of CRIIMI MAE's
outstanding floating rate debt was hedged with interest rate cap agreements
that have a weighted average strike price of approximately 6.6%, which
partially limit the impact of rising interest rates on the Company's remaining
floating rate debt. When CRIIMI MAE's interest rate cap agreements expire, it
may have interest rate risk to the extent interest rates increase on any
floating rate borrowings unless the interest rate cap agreements are replaced
or other steps are taken to mitigate this risk. It is CRIIMI MAE's policy to
hedge at least 75% of its floating rate debt, although there can be no
assurance that it will be able to do so. As of December 31, 1997, the weighted
average remaining term for CRIIMI MAE's interest rate cap agreements was
approximately 1.9 years.
Changes in interest rates can have a variety of effects on CRIIMI MAE's
other lines of business. In particular, changes in interest rates may affect
the volume of loan originations and acquisitions and the value of the
Company's servicing portfolio. Such changes may also affect the Company's
ability to raise capital on acceptable terms, which may affect the Company's
ability to purchase additional Subordinated CMBS. During periods of declining
interest rates, the Company may experience an increase in loan originations
because of increased commercial real estate activity and, in particular,
refinancing activity. Increases in interest rates may adversely affect
refinancing activity, which could adversely affect the Company's origination
activities. Any adverse effect on the amount of loans originated will
adversely affect the Company's ability to securitize such loans through CMBS
issuances.
In addition, the value of the Company's servicing portfolio may be adversely
affected if mortgage interest rates decline and loan prepayments increase. In
periods of declining interest rates, the economic advantages to borrowers of
refinancing mortgage loans increase, and increases in the rate of mortgage
loan prepayments reduce the period during which CRIIMI MAE receives servicing
income from such loans. Interest rate changes can also adversely affect the
Company's ability to sell servicing rights to a third party as well as the
proceeds received from such sales.
SUBSTANTIAL LEVERAGE. CRIIMI MAE has significant debt service obligations.
As of December 31, 1997, the Company and its subsidiaries had total
indebtedness of approximately $1.4 billion, of which approximately
$1.3 billion was secured indebtedness of the Company and its subsidiaries. Of
the total secured indebtedness of the Company and its subsidiaries,
approximately $696.4 million was non-recourse indebtedness of the Company's
subsidiaries. See "Capitalization."
CRIIMI MAE may incur additional indebtedness in the future, subject to
certain limitations contained in the instruments governing its indebtedness.
CRIIMI MAE's ability to incur additional debt depends upon, among other
things, the amount of its unencumbered assets, which is linked to prevailing
interest rates, and changes in the credit quality of encumbered assets
underlying existing debt. 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
debt arrangements. From time to time, the Company has been required to fund
such additional collateral needs. In each instance and currently, the Company
has had adequate unencumbered assets to meet its operating, investing and
financing requirements, and management continually monitors the levels of
unencumbered assets. However, no assurance can be made that such levels of
unencumbered assets will continue to be available.
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ABILITY TO SERVICE DEBT. CRIIMI MAE's ability to satisfy its interest
payment obligations under its indebtedness will depend largely on its future
performance, which, in turn, is subject to prevailing economic conditions and
to financial, business and other factors beyond its control, including levels
of interest rates.
The Company's ability to achieve its strategic objectives depends not only
on its ability to borrow money in sufficient amounts and on favorable terms
but also on its ability to renew or replace on a continuous basis its maturing
short term borrowings. CRIIMI MAE's business strategy relies in part on short
term borrowings to fund acquisitions of long term mortgage assets, including
Subordinated CMBS. If CRIIMI MAE is unable to fund additional collateral needs
as discussed above, or renew or replace maturing borrowings, the Company could
be required to sell, under adverse market conditions, a portion of its
mortgage assets, and could incur losses as a result. Furthermore, a limited
secondary market for Subordinated CMBS currently exists and there can be no
assurance that one will fully develop, thereby limiting the Company's ability
to dispose of its Subordinated CMBS in such situations. Also, if CRIIMI MAE is
unable to complete additional resecuritizations or other refinancings of its
Subordinated CMBS, CRIIMI MAE would be required to rely more heavily on short
term borrowings, such as repurchase agreements or other sources of financing.
There can be no assurance, however, that such financing would be available on
terms acceptable to the Company, if at all.
NEED FOR ADDITIONAL FINANCING. The Company's ability to execute its business
strategy, including the acquisition of additional Subordinated CMBS and the
expansion of its servicing portfolio, loan origination and securitization
program, depends to a significant degree on its ability to obtain additional
indebtedness and equity 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 the perception in the
capital markets of the Company's business, results of operations, leverage,
financial condition and business prospects. Each of these factors is to a
large extent subject to economic, financial, competitive and other factors
beyond the Company's control. The Company's ability to repay its outstanding
indebtedness at maturity may depend on its ability to refinance such
indebtedness, which could be adversely affected if the Company does not have
access to the capital markets for the sale of additional debt or equity
securities through public offerings or private placements on terms reasonably
satisfactory to the Company.
MANAGEMENT OF GROWTH. Key elements of CRIIMI MAE's business strategy include
an expansion of its commercial loan origination and servicing businesses and
continued purchases of Subordinated CMBS. The rapid entry by the Company into
these business lines and the growth in its portfolio of Subordinated CMBS have
resulted, and will continue to result, in increased demands on the Company's
personnel and systems. CRIIMI MAE's ability to support, manage and control
continued growth is dependent upon, among other things, its ability to hire,
train, supervise and manage its workforce and to continue to develop the
skills necessary for CRIIMI MAE to compete successfully in these areas. There
can be no assurance that the Company will be able to successfully meet these
challenges. In addition, the Company's business is substantially dependent
upon certain key members of its senior management team. The loss of any such
officer may have an adverse effect on the Company.
Moreover, although the Company plans to devote substantial resources to the
expansion of its loan origination program, there can be no assurance that the
Company will succeed in expanding its loan originations or that the program
will provide any of the benefits anticipated by the Company.
CERTAIN COMMERCIAL LOAN ORIGINATION AND SERVICING RISKS. When borrowers are
delinquent in making monthly payments on commercial mortgage loans serviced by
the Company, the Company may be required to advance interest payments with
respect to such delinquent loans to the extent that the Company deems such
advances ultimately recoverable. These advances require funding from the
Company's capital resources but have priority of repayment from collections or
recoveries on the loans in the related pool in the succeeding month. In the
ordinary course of its business, the Company may be subject to claims made
against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees and officers of the Company (including its appraisers), incomplete
documentation and failures by the Company to comply with various laws and
regulations applicable to its business.
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RISKS OF SECURITIZATION. A principal element of CRIIMI MAE's business
strategy is its ability to securitize mortgage loans originated by the Company
and to resecuritize Subordinated CMBS in order to match the maturities of its
commercial mortgage assets with the liabilities secured by such assets.
Adverse changes in the secondary market for CMBS or changes in the interest
rate environment could impair CRIIMI MAE's ability to securitize its
commercial mortgage assets, which may adversely affect the Company's business
and operating results. Moreover, the Company's ability to securitize
commercial mortgage assets or resecuritize Subordinated CMBS is dependent
upon, among other things, the availability of sufficient assets for
securitization. If the Company is unable to accumulate sufficient commercial
mortgage assets or Subordinated CMBS, or if the Company is delayed in
accumulating such assets, the Company's securitization strategy may be
adversely affected.
RISKS OF HEDGING TRANSACTIONS. CRIIMI MAE has in the past and may in the
future enter into interest rate protection agreements used for hedging
purposes. While intended to reduce the effects of volatility in interest rate
movements, such transactions could cause CRIIMI MAE to recognize losses
depending on the terms of the instrument and the interest rate movement. There
can also be no assurance that the Company will be able to enter into hedging
transactions on terms which are acceptable to the Company.
COMPETITION. All of the business lines in which CRIIMI MAE operates are
highly competitive. Some of the Company's principal competitors in certain
business lines are substantially larger and better capitalized than the
Company. Because of these resources, these companies may be better able than
CRIIMI MAE to increase servicing and loan origination activities, to acquire
Subordinated CMBS, to pursue new business opportunities or to survive periods
of industry consolidation.
Acquisitions of Subordinated CMBS are often based on competitive bidding,
where there are dangers of bidding too low (which generates no business), as
well as of bidding too high (which could win the Subordinated CMBS at an
economically unattractive price). In addition, the increasing competition in
this business line and the tightening of interest rate spreads has caused the
Company to experience decreasing profit margins in its Subordinated CMBS
business in order to remain a competitive bidder for such assets.
The Company also encounters significant competition in its other business
lines. The commercial mortgage banking business is highly fragmented with
certain large national competitors and significant localized competition. In
addition, within the commercial loan origination and securitization business,
access to and the cost of capital are critical to the Company's ability to
compete. The Company must compete with numerous competitors, many of whom have
superior access to capital sources and can arrange or obtain lower cost
capital for customers.
FUTURE REVISIONS IN POLICIES AND STRATEGIES AT THE DISCRETION OF THE BOARD
OF DIRECTORS. CRIIMI MAE's Board of Directors has established the Company's
acquisition and operating policies and strategies. Any such policies or
strategies may be modified or waived by the Board of Directors without
stockholder consent.
INVESTMENT COMPANY ACT RISK. 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 are
Qualifying Interests, but such investments as of December 31, 1997 comprised
only approximately 32% of the Company's assets. As of December 31, 1997, CMBS
comprised approximately 59% of CRIIMI MAE's assets. 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
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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 or mortgage loans, which are Qualifying Interests or (ii)
modification of the Company's business plan to register as an investment
company would be required, 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 Company's senior unsecured 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 recission of
transactions undertaken during the period it was established that the Company
was an unregistered investment company.
CERTAIN TAX CONSIDERATIONS. REIT Status. CRIIMI MAE has qualified and
intends to continue to qualify as a REIT under Sections 856-860 of the U.S.
Internal Revenue Code of 1986, as amended (the "Code"). Although CRIIMI MAE
believes that it has operated and will continue to operate in such a manner,
no assurance can be given that the Company was organized or has operated, or
will be able to continue to operate, in a manner which will allow it to
qualify as a REIT. As a REIT, the Company does not pay taxes at the corporate
level. Qualification for treatment as a REIT requires the Company to satisfy
numerous requirements (some on an annual and others on a quarterly basis)
established under highly technical and complex Code provisions for which there
are only limited judicial and administrative interpretations, and involves the
determination of various factual matters and circumstances not entirely within
CRIIMI MAE's control. For example, to qualify as a REIT, at least 95% of
CRIIMI MAE's gross income in any year must be derived from qualifying sources,
and the Company must pay distributions to shareholders aggregating annually at
least 95% of its taxable income (determined without regard to the dividends
paid deduction and by excluding net capital gains). No assurance can be given
that legislation, new regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to
qualification as a REIT or the U.S. federal income tax consequences of such
qualification.
If CRIIMI MAE were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its shareholders. Moreover, unless entitled to relief under
certain statutory provisions, CRIIMI MAE also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would reduce the net earnings of the
Company available to meet debt service obligations because of the additional
tax liability to CRIIMI MAE for the years involved.
Even if CRIIMI MAE maintains its REIT status, it may be subject to certain
federal, state and local taxes on its income. For example, if CRIIMI MAE has
net income from a prohibited transaction, such income will be subject to a
100% tax. In addition, any net income from its servicing affiliate, CMSLP, is
subject to federal income tax at regular corporate tax rates.
Special Tax Considerations for Tax-Exempt and Non-U.S. Investors. CRIIMI MAE
has issued debt instruments that might cause CRIIMI MAE to be treated as a
taxable mortgage pool ("TMP") under
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section 7701(i) of the Code. As a result, a portion of the ordinary or capital
gains dividends received by tax-exempt and non-U.S. stockholders may be
characterized as "excess inclusion" income. In the case of tax-exempt
stockholders, any such excess inclusion income will be considered unrelated
business taxable income ("UBTI") under the Code. In the case of non-U.S.
stockholders, any such excess inclusion income will be subject to 30%
withholding (unless such income is effectively connected with a U.S. trade or
business) and such withholding will not be eligible for reduction under income
tax treaties. Similar considerations will apply to any tax-exempt entities or
non-U.S. investors owning interests in mutual funds that own Common Shares.
See "Certain United States Federal Income Tax Considerations--Taxation of Non-
U.S. Holders" and "--Taxation of Tax-Exempt Stockholders."
GENERAL ECONOMIC CONDITIONS. Periods of economic slowdown or recession,
rising interest rates or declining demand for real estate may adversely affect
certain segments of the Company's business. Such economic conditions could
reduce the value of mortgage loans and Subordinated CMBS and/or increase the
cost of capital invested by the Company, thereby adversely affecting the rate
of return realized from such assets. Economic downturns and rising interest
rates also may reduce the volume of loan originations and negatively affect
the Company's loan securitization activity.
In addition, periods of economic slowdown or recession, whether general,
regional or industry-related, may increase the risk of default on commercial
mortgage loans and, therefore, the risk of losses on the Company's
Subordinated CMBS backed by such loans, and may have an adverse effect on the
Company's business, financial condition and operating results. Such periods
may be accompanied by decreased demand for commercial mortgage loans,
resulting in declining values of commercial real estate securing outstanding
mortgage loans, which may weaken collateral coverage and increase the
possibility of losses in the event of default.
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CRIIMI MAE
THE COMPANY
CRIIMI MAE is a fully integrated commercial mortgage company structured as a
self-administered REIT and is one of the largest publicly traded REITs focused
primarily on the CMBS market. CRIIMI MAE's primary activities include (i)
acquiring non-investment grade Subordinated CMBS and (ii) originating,
servicing and securitizing commercial mortgage loans and CMBS. CRIIMI MAE
believes that its focus on acquiring Subordinated CMBS, together with its
expertise in underwriting, servicing and originating commercial mortgage
loans, has enabled the Company to take advantage of the rapid growth in the
securitization of debt backed by commercial mortgage loans. William B.
Dockser, the Company's Chairman of the Board, and H. William Willoughby, the
Company's President, have led CRIIMI MAE since its formation in 1989. The
Company currently has over 170 employees, and the eight members of the
Company's senior management average over 20 years of experience in a wide
range of real estate activities. During the year ended December 31, 1997, the
Company purchased CMBS with an aggregate face amount of approximately $803
million for an aggregate purchase price of approximately $554 million, and
from January 1, 1998 through March 11, 1998, the Company has purchased CMBS
with an aggregate face amount of approximately $171.2 million for an aggregate
purchase price of approximately $123.8 million. As of December 31, 1997,
CRIIMI MAE's approximately $1.9 billion portfolio of assets included
approximately $1.1 billion of CMBS and approximately $605 million of
Government Insured Mortgage Assets.
When acquiring CMBS, CRIIMI MAE focuses on classes of CMBS that are rated
below investment grade by one or more rating agencies (i.e., equivalent to
CMBS rated BB or lower by Standard and Poor's) including the most subordinate
class of a CMBS issuance which typically is not rated. Generally, the Company
has purchased Subordinated CMBS at a discount to face value. CRIIMI MAE
generally acquires Subordinated CMBS in privately negotiated transactions,
which allows CRIIMI MAE to perform due diligence on the mortgage loans
underlying the CMBS as well as the underlying real estate prior to
consummating the purchase, thus mitigating certain risks associated with
purchasing Subordinated CMBS. See "--Subordinated CMBS Acquisitions."
The Company also originates commercial mortgage loans which it intends to
securitize by issuing CMBS backed by pools of such loans. In conjunction with
its securitizations, CRIIMI MAE will acquire and retain the mortgage loans on
its books. The Company will finance a portion of the loans by creating and
placing investment grade securities backed by such loans with investors
through securitizations. The Company will retain the balance of the cash flow
attributable to the loans after all debt service is paid. CRIIMI MAE believes
that its "No-Lock" loan origination program gives it a significant advantage
in negotiating new loans because it enables CRIIMI MAE to offer loans which do
not prohibit borrowers from prepaying their loans. CRIIMI MAE's origination
activities generate additional income for the Company in the form of
origination and servicing fees, increase the size of the Company's servicing
portfolio and, upon a successfully completed securitization, increase the
Company's portfolio of mortgage assets. The Company has four origination
offices located in Rockville, Maryland; Memphis, Tennessee; Boston,
Massachusetts; and San Francisco, California. The Company expects to open two
additional origination offices in 1998. As of December 31, 1997, CRIIMI MAE
originated over $210 million of commercial mortgage loans under its "No-Lock"
program. Additionally, from January 1, 1998 through February 28, 1998, the
Company originated approximately $82 million of commercial mortgage loans.
Substantially all of these mortgage loans, as well as those to be originated
in March 1998, will be included in the Company's anticipated securitization
during the second quarter of 1998. See "--Loan Origination Activities."
As of December 31, 1997, CRIIMI MAE's affiliate, CMSLP, was responsible for
a variety of servicing functions on a mortgage loan portfolio of approximately
$16.5 billion of collateral underlying CRIIMI MAE's CMBS and certain
government insured mortgage loans and other mortgage assets, as compared to
approximately $6.4 billion as of December 31, 1996. These functions primarily
include special servicing and other asset monitoring services for
substantially all of the collateral underlying CRIIMI MAE's CMBS assets.
Providing these services allows CRIIMI MAE to inspect and monitor loan
performance and manage any issues concerning such loans. In addition, for a
portion of its servicing portfolio, CRIIMI MAE performs master servicing (on a
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pool of approximately $2.2 billion) and other loan servicing which entails
gathering data from other servicers or borrowers and reporting to investor
trustees. As of December 31, 1997, the weighted average fee earned from
servicing functions was approximately four basis points on the total servicing
portfolio of $16.5 billion. See "--Mortgage Loan Servicing Operations."
THE CMBS MARKET
Historically, traditional lenders, including commercial banks, insurance
companies and savings and loans, have been the primary holders of commercial
mortgages. The real estate market of the late 1980s and early 1990s created
business and regulatory pressure to reduce the real estate assets held on the
books of these institutions. The result has been tremendous movement of
commercial real estate debt from private institutional holders to the public
markets. Consequently, the supply of private sector multifamily and other CMBS
has increased dramatically over recent years and is expected to continue to
increase in the forseeable future. According to Commercial Mortgage Alert,
total 1997 CMBS issuances in the U.S. equaled approximately $44.3 billion
compared to approximately $30.0 billion and $19.0 billion in 1996 and 1995,
respectively.
CMBS are generally created by pooling commercial mortgage loans and
directing the cash flow from such mortgage loans to various classes or
tranches of securities (ranging from investment grade to non-rated) which have
certain priority rights to the cash flow. The first step in the process of
creating CMBS, origination, occurs when a financial institution lends money to
a borrower to refinance or to purchase a commercial real estate property, and
secures the loan with a first mortgage on the asset that the borrower owns or
purchases. Next, a pool of these commercial real estate backed mortgage loans
is accumulated, often by a large commercial bank or other financial
institution, from various loan originators, including loans which such
financial institution originated. One or more rating agencies analyze the
loans and the underlying real estate to determine their credit quality. The
mortgage loans are then deposited into an entity that is not subject to
taxation, often a real estate mortgage investment conduit ("REMIC").
Securities backed by the commercial mortgage loans (i.e., the CMBS) are then
issued by the REMIC. The CMBS are divided into specific classes or tranches
which are afforded certain priority rights to the cash flow from the
underlying mortgage loans. Each tranche is assigned a rating by one or more
rating agencies based on their assessment of the likelihood of the tranche
receiving its stated right to payment of principal. Also at the time of the
securitization, one or more entities are appointed as "servicers" for the pool
of mortgage loans, responsible for performing servicing duties which include
collecting payments, monitoring performance and working out or foreclosing on
defaulted loans. Depending on the extent of servicing duties, the servicer
receives a fee and other financial incentives. The CMBS are then sold to
investors either through public offerings or private placements.
SUBORDINATED CMBS ACQUISITIONS
CRIIMI MAE believes that purchasing Subordinated CMBS is and will continue
to be an attractive real estate investment opportunity for the Company. The
Company believes that there are a limited number of companies that have the
in-house expertise and capabilities of CRIIMI MAE to purchase large volumes of
Subordinated CMBS while mitigating certain risks associated with these
investments. The Company believes that its ability to re-underwrite the
underlying mortgage loans, monitor their performance and control workout and
foreclosure procedures provides the Company with competitive advantages which
enable it to mitigate certain risks associated with owning Subordinated CMBS.
The Company believes that during 1997 Subordinated CMBS comprised
approximately 12% of total CMBS issuances in the U.S. For the years ended
December 31, 1997, 1996 and 1995, CRIIMI MAE purchased Subordinated CMBS with
an aggregate face amount of approximately $803.0 million, $434.1 million and
$308.4 million, respectively. The Company believes that the supply of CMBS and
Subordinated CMBS will continue to grow as more commercial mortgage loans are
securitized.
When CRIIMI MAE determines to invest in a CMBS pool, it generally purchases
the tranches of CMBS that are rated below investment grade by one or more
rating agencies (i.e., equivalent to CMBS rated BB or lower by Standard and
Poor's) or are not rated. Subordinated CMBS are typically acquired by the
Company through private placements in the primary market. The Company has
purchased Subordinated CMBS in the secondary market, and may consider
additional secondary market purchases as they become available. Additionally,
from time to time, CRIIMI MAE purchases the interest only class in a CMBS
pool.
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In acquiring 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" a substantial portion of the mortgage loans in a prospective
CMBS pool, which entails a full review of the operating records, appraisals,
environmental studies, market studies and architectural and engineering
reports, as well as site visits at properties which represent a majority of
the portfolio. The Company then tests the projected financial performance of
the properties to determine their resiliency to a market downturn and applies
varying capitalization rates to assess collateral value. Further, CRIIMI MAE
will 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. CRIIMI MAE prices the portfolio based on estimates
of both the timing and magnitude of defaults and prepayments of loans within
the portfolio.
CRIIMI MAE's existing Subordinated CMBS holdings are generally secured by a
pool of first mortgage loans that CRIIMI MAE believes are diversified by
borrower, property type and geographic location. As of December 31, 1997,
approximately 50% of the CMBS (based on aggregate amortized cost) are rated
BB- or higher, 39% are B or B- and 11% are CCC or unrated. See "The
Portfolio--Subordinated CMBS."
LOAN ORIGINATION ACTIVITIES
CRIIMI MAE believes that the expansion of its commercial loan origination
activities is an important part of its business strategy. The Company's
origination activities are currently conducted by approximately 33 employees
located in origination offices in Boston, Massachusetts; Memphis, Tennessee;
Rockville, Maryland; and San Francisco, California. In addition to providing
additional income in the form of origination and servicing fees, the Company's
origination program is a source of commercial mortgage loans that the Company
intends to securitize by issuing CMBS backed by pools of such loans. In
connection with its securitizations, CRIIMI MAE will acquire and retain the
mortgage loans on its books. The Company will finance a portion of the loans
by creating and placing investment grade securities with investors. The
Company will retain the balance of the cash flow attributable to the loans
after all debt service is paid. Accordingly, the Company expects that its loan
originations will enhance its ability to increase income from investments in
commercial mortgage assets, including Subordinated CMBS, and expand its
servicing portfolio. From January 1, 1998 through February 28, 1998, the
Company has originated approximately $82 million of commercial mortgage loans.
The Company has entered into a $300.0 million loan origination program
agreement with Citicorp Real Estate, Inc. ("Citicorp"), which the Company
expects to increase to $600 million. Under the program, CRIIMI MAE originates
loans on behalf of Citicorp and retains the right to acquire such loans upon
accumulating a sufficient principal amount of loans to execute a
securitization. Upon execution, CRIIMI MAE will fund a portion of each
mortgage loan originated under the program. In June 1997, the Company expanded
its commercial mortgage origination capabilities with the launch of its fixed
rate, "No-Lock" loan program. Unlike most commercial mortgage loans originated
for the CMBS market which contain "lock-out" clauses (i.e., provisions which
prohibit prepayment of a loan for a specified period after the loan is
originated), the Company's program allows borrowers the flexibility to prepay
loans at any time by paying a prepayment penalty. The Company believes that
its "No-Lock" program is a strategic advantage and will further enhance its
origination activities.
MORTGAGE LOAN SERVICING OPERATIONS
CRIIMI MAE's servicing operations enable the Company to actively monitor and
manage the performance of its mortgage assets and provide CRIIMI MAE with an
additional source of income. CRIIMI MAE continues to increase its mortgage
servicing income by acquiring servicing rights in connection with purchases of
Subordinated CMBS and by originating commercial mortgage loans for its own
portfolio. As of December 31, 1997, CRIIMI MAE performed various servicing
functions for $16.5 billion of commercial mortgage loans, including acting as
master servicer for approximately $2.2 billion of such loans.
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CRIIMI MAE's servicing activities include the following:
Special Servicing
A special servicer typically provides asset management and resolution
services with respect to nonperforming or underperforming loans within a pool
of mortgage loans. CRIIMI MAE conducts its servicing operations through its
affiliate, CMSLP. CMSLP has been approved to act as a special servicer by
Moody's Investors Service, Inc., Standard and Poor's, Fitch IBCA, Inc.
("Fitch") and Duff & Phelps Credit Rating Co., the four major rating agencies
that rate CMBS. The special servicer function provides CRIIMI MAE with the
authority to deal directly with any borrower that fails to perform under
certain terms of its mortgage loan, including the failure to make payments,
and to manage any loan workouts and foreclosures. CRIIMI MAE will not purchase
Subordinated CMBS unless it can secure the special servicing rights to the
mortgage loans underlying the portfolio. As of December 31, 1997, CRIIMI MAE
was authorized to act, if necessary, as the special servicer with respect to
3,557 commercial mortgage loans in the aggregate principal amount of
approximately $16.3 billion, including all of the mortgage loans underlying
its Subordinated CMBS portfolio.
Since 1994, CMSLP, in its capacity as special servicer for CMBS, has
resolved 22 defaulted or specially serviced loans with an aggregate unpaid
principal balance of approximately $108 million. Of these resolutions, 11 were
negotiated workouts which returned the loans to performing status, and the
other 11 were dispositions that recovered 100% of the principal balance.
However, one of these dispositions involved a foreclosure sale of a loan to
CRIIMI MAE at the loan's face value. As of March 1, 1998, CRIIMI MAE has not
incurred a loss of principal on any CMBS loans which have been specially
serviced by CMSLP.
Master Servicing
A master servicer typically provides administrative and reporting services
to the trustee with respect to a particular issuance of CMBS. Mortgage loans
underlying CMBS generally are serviced by a number of primary servicers. Under
most master servicing arrangements, the primary servicers retain principal
responsibility for administering the mortgage loans and the master servicer
acts as an intermediary in overseeing the work of the primary servicers,
monitoring their compliance with the standards of the issuer of the related
CMBS and consolidating the servicers' respective periodic accounting reports
for transmission to the trustee. CRIIMI MAE has been approved as a master
servicer by Standard and Poor's and Fitch. The master servicer function
provides the Company with greater control over the mortgage assets underlying
its Subordinated CMBS, including the authority to (i) collect monthly
principal and interest payments (either from a primary servicer or directly
from borrowers) on loans comprising a CMBS pool and remit such amounts to the
pool trustee, (ii) oversee the performance of sub-servicers and (iii) report
to trustees. For these duties, the master servicer is usually paid a fee and
can earn float income on the deposits it holds. In addition to this float and
fee income, the master servicer has more direct and regular contact with
borrowers than would be typical for a special servicer. The Company
anticipates expanding this line of business through the acquisition of
additional CMBS and through its own loan origination program. CRIIMI MAE was
awarded master servicing assignments in 1997 on three CMBS portfolios
aggregating approximately $2.2 billion.
Direct (or Primary) Servicing
Direct (or primary) servicers typically collect loan payments directly from
the borrower (including tax and insurance escrows and replacement reserves).
The loan payments are remitted to the master servicer or the trustee for the
CMBS or portfolio owner, usually on a fixed date each month. The direct
servicer is usually paid a fee to perform these services, and is eligible to
earn float income on the deposits held. In addition to this fee and float
income, the direct servicer has more direct and regular contact with
borrowers, which facilitates the process of ongoing loan management and
surveillance. As a direct servicer, CRIIMI MAE also has an advantage in
originating loans as borrowers seek to refinance their loans at maturity. As
of December 31, 1997, CRIIMI MAE was a direct servicer for approximately 466
loans totaling approximately $2.4 billion (of which 323 loans and $1.4
billion, respectively, were CMBS).
S-17
<PAGE>
Loan Management
In certain cases, CRIIMI MAE acts as loan manager, in which capacity CRIIMI
MAE monitors the ongoing performance of properties securing the mortgage loans
underlying its Subordinated CMBS portfolio through its continuous review of
property level operating statements and site inspections. This role allows the
Company to identify and resolve potential issues that could result in losses.
As of December 31, 1997, CRIIMI MAE performed these duties with respect to
approximately $14.2 billion of mortgage loans underlying CMBS pools in which
the Company owns Subordinated CMBS.
FINANCING STRATEGY
General
As of December 31, 1997, the Company's total consolidated debt was
approximately $1.4 billion, of which approximately $696.4 million (or
approximately 49%) is fixed rate debt having maturities that match those of
the Company's mortgage assets securing such debt ("match funding") and
approximately $718.5 million (or approximately 51%) is floating rate and fixed
rate debt which is not match-funded. CRIIMI MAE's fixed rate debt has
effective interest rates averaging approximately 7.6% as of December 31, 1997.
As of December 31, 1997, approximately 87% of the Company's floating rate debt
is hedged by interest rate cap agreements with caps ranging from 6.1% to 7.0%.
It is CRIIMI MAE's policy to hedge at least 75% of its floating rate debt,
although there can be no assurance that the Company will be able to do so in
the future. See "Risk Factors--Impact of Changes in Interest Rates."
Repurchase Agreement and Match Funding Financing
In general, CRIIMI MAE initially funds approximately 62% of the aggregate
purchase price of Subordinated CMBS with short term, floating rate, secured
debt, primarily repurchase agreement financing. CRIIMI MAE's long term
strategy is to refinance a significant portion of this debt with fixed rate,
non-recourse match-funded debt, which significantly reduces its exposure to
interest rate risk. CRIIMI MAE effects such refinancing by pooling its
Subordinated CMBS and issuing CMBS backed by such assets. The CMBS issued in
such resecuritizations are fixed rate obligations with maturities that match
the Subordinated CMBS backing the new CMBS. In certain cases, these
refinancings may also increase the amount of borrowings available to the
Company due to the increased collateral value of the new CMBS relative to the
underlying Subordinated CMBS due to the seasoning of the pooled mortgage loans
and diversification that occurs when such underlying Subordinated CMBS are
pooled. The Company generally uses the net proceeds from such
resecuritizations to temporarily reduce the amount of its floating rate debt,
including borrowings under the Company's repurchase agreements and to purchase
additional CMBS.
During the first half of 1998, CRIIMI MAE intends to pool and resecuritize a
significant portion of its Subordinated CMBS portfolio and thus refinance a
portion of its floating rate debt. This resecuritization is expected to be
similar to CRIIMI MAE's resecuritization transaction in December 1996, which
match funded $142.0 million of floating rate debt with fixed rate, match-
funded debt. The Company intends to periodically enter into similar
resecuritizations or refinancings after accumulating a sufficient pool of
Subordinated CMBS.
In addition, CRIIMI MAE has incurred unsecured debt, including the Company's
senior unsecured notes, to fund Subordinated CMBS acquisitions and loan
originations. As of December 31, 1997, the Company's total consolidated
unsecured debt was approximately $130 million.
S-18
<PAGE>
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:
. INCREASE SUBORDINATED CMBS PORTFOLIO. CRIIMI MAE intends to acquire
additional Subordinated CMBS for an aggregate purchase price of at least
$600 million in 1998, which the Company believes is and will continue to be
an attractive real estate investment opportunity. 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. The Company also believes that CMBS
issuances in 1998 will exceed CMBS issuances in 1997, creating greater
investment opportunities for the Company.
. ORIGINATE COMMERCIAL MORTGAGE LOANS. From January 1, 1998 through February
28, 1998, the Company has originated approximately $82 million of commercial
mortgage loans. Since the inception of the Company's origination activities,
it has originated approximately $292 million of commercial mortgage loans.
CRIIMI MAE expects to originate at least $1 billion of mortgage loans during
1998. CRIIMI MAE will continue its efforts to originate and/or acquire
commercial mortgage loans which it intends to pool for securitization. In
conjunction with its securitizations, CRIIMI MAE will acquire and retain the
mortgage loans on its books. The Company will finance a portion of the loans
by creating and placing investment grade securities backed by such loans
with investors through securitizations. The Company will retain the balance
of the cash flow attributable to the loans after all debt service is paid.
The Company expects such securitizations to exceed $1 billion during 1998.
CRIIMI MAE will also serve as master and special servicer for these loan
pools.
. EXPAND THE COMPANY'S SERVICING PORTFOLIO. Since the Company will retain the
servicing rights for the mortgage loans it originates, as well as perform
certain servicing functions in connection with its CMBS acquisitions, the
Company's servicing portfolio is expected to 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.
. RESECURITIZE SUBORDINATED CMBS. CRIIMI MAE intends to periodically
resecuritize Subordinated CMBS. By resecuritizing a substantial portion of
the Subordinated CMBS in its portfolio, CRIIMI MAE believes it will better
match the maturities of its liabilities and assets as such resecuritization
transactions allow the Company to refinance floating-rate, recourse debt
with longer-term, fixed-rate non-recourse debt, and generate additional
proceeds to fund growth. During the second quarter of 1998, CRIIMI MAE
intends to resecuritize Subordinated CMBS with a face amount in excess of
$1.5 billion, match-fund approximately one-third of the face amount of the
Subordinated CMBS pledged, and generate excess proceeds to fund a portion of
its 1998 business plan.
. ACCESS CAPITAL MARKETS. The Company expects to periodically access the
capital markets through a variety of sources in order to fund its business
plan. Such sources may include additional issuances of Common Stock,
preferred stock, including convertible preferred stock, and unsecured debt.
In addition, the Company intends to continue using long-term, fixed-rate
debt refinancings, repurchase agreements, unsecured working capital lines of
credit and other borrowings to fund a portion of its mortgage assets.
S-19
<PAGE>
THE PORTFOLIO
SUBORDINATED CMBS
As of December 31, 1997, CRIIMI MAE owned CMBS ranging from AAA to unrated
with a total carrying amount of approximately $1.11 billion (representing
approximately 59% of the Company's total consolidated assets) which includes
CMBS with an aggregate amortized cost of approximately $1.08 billion and
interest only strips with an aggregate fair value of approximately
$35.4 million, as set forth in the tables below.
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF OF TOTAL
TRANCHE FACE TOTAL FACE AMORTIZED AMORTIZED
RATING AMOUNT AMOUNT FAIR VALUE(1) COST COST
------- ------------- ------------- ------------- ------------- ----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
AA- ..... $ 5.7 0.3% $ 5.7 $ 5.6 0.5%
BBB...... 4.0 0.3 4.3 4.0 0.4
BB+...... 9.1 0.5 9.1 8.6 0.8
BB....... 532.0 33.4 502.0 445.0 41.2
BB- ..... 105.0 6.6 88.2 89.8 8.3
B........ 524.0 32.9 393.5 357.4 33.2
B- ...... 85.7 5.4 48.2 44.6 4.1
CCC...... 27.5 1.7 10.3 10.9 1.0
Unrated.. 301.6 18.9 128.9 113.2 10.5
-------- ----- -------- -------- -----
Total... $1,594.6 100.0% $1,190.2 $1,079.1 100.0%
======== ===== ======== ======== =====
</TABLE>
- --------
(1) The estimated fair values of Subordinated CMBS are based upon the dealer's
quoted market prices or an average of dealer market quotes for the
Company's other Subordinated CMBS.
The aggregate investment by the underlying rating of the interest only CMBS
held by CRIIMI MAE is as follows:
<TABLE>
<CAPTION>
CURRENT
ESTIMATED PERCENTAGE
UNLEVERAGED OF TOTAL
SECURITY YIELD TO NOTIONAL AMORTIZED AMORTIZED
RATING MATURITY AMOUNT(1) FAIR VALUE(2) COST COST
-------- ----------- ------------- ------------- ------------- ----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
AAA........ 7.7% $40.9 $ 7.2 $ 7.2 20.7%
B.......... 10.4 38.7 28.2 27.5 79.3
----- ----- ----- -----
Total... $79.6 $35.4 $34.7 100.0%
===== ===== ===== =====
</TABLE>
- --------
(1) The notional amounts of interest only CMBS are calculated based on the
principal amount from which the pass-through rates are allocated.
(2) The estimated fair values of interest only CMBS are based on the dealer's
quoted market prices.
S-20
<PAGE>
As of December 31, 1997, the mortgage loans underlying CRIIMI MAE's
Subordinated CMBS portfolio were secured by properties of the types and at the
locations identified below:
<TABLE>
<CAPTION>
PROPERTY TYPE PERCENTAGE(1) GEOGRAPHIC LOCATION PERCENTAGE(1)
- ------------- ------------- ------------------- -------------
<S> <C> <C> <C>
Multifamily............... 37% Texas..................... 15%
Retail.................... 28 California................ 14
Hotel..................... 14 Florida................... 9
Office.................... 10 Other(2).................. 62
Other(2).................. 11 ---
--- Total................... 100%
Total................... 100% ===
===
</TABLE>
- --------
(1) Based on a percentage of the total unpaid face principal balance of the
underlying loans.
(2) No other individual state makes up more than 5% of the total.
S-21
<PAGE>
The following table summarizes information relating to CRIIMI MAE's
Subordinated CMBS on an aggregate basis by pool:
<TABLE>
<CAPTION>
ORIGINAL 12/31/97
ANTICIPATED ANTICIPATED
UNLEVERAGED UNLEVERAGED
YIELD TO YIELD TO
MATURITY(1)(3) MATURITY(2)(3)
-------------- --------------
<S> <C> <C>
POOL(5)
Mortgage Capital Funding, Inc.
Series 1993-C1(4)............................... 13.0% 14.2%
Series 1994-MC1................................. 13.9 13.9
Series 1995-MC1................................. 12.2 12.1
Series 1997-MC1................................. 10.2 10.2
Series 1997 MC2................................. 9.8 9.8
Nomura Asset Securities
Series 1994-C3.................................. 12.1 12.1
Lehman Pass-Through Securities Inc.
Series 1994-A................................... 11.5 11.4
Structured Mortgage Securities Corp.
Series 1995-M1.................................. 12.4 12.4
Fannie Mae Multifamily REMIC
Series 1996-M1.................................. 11.7 11.6
LB Commercial Conduit
Series 1995-C2.................................. 11.2 11.2
Series 1996-C2.................................. 11.9 11.9
DLJ Mortgage Acceptance Corp.
Series 1995-CF2................................. 11.0 11.0
Series 1996-CF2................................. 11.8 11.7
Series 1997-CF2 9.5 9.5
Asset Securitization Corp.
Series 1995-D1.................................. 11.5 11.5
Series 1995-MDIV................................ 9.6 9.6
Series 1996-D2.................................. 12.4 12.3
Series 1996-D3.................................. 11.9 11.8
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C3.................................. 11.1 11.0
Series 1996-C1.................................. 8.8 8.8
Series 1996-C2.................................. 11.9 11.9
Series 1997-C1.................................. 9.5 9.5
Series 1997-C2.................................. 9.9 9.9
First Union Commercial Securities, Inc.
Series 1997-C1.................................. 11.3 11.3
Series 1997-C2.................................. 10.0 10.0
Morgan Stanley Capital, Inc.
Series 1997-WF1................................. 10.2 10.2
Commercial Mortgage Acceptance Corp.
Series 1997-MC1................................. 8.9 8.9
Weighted average unleveraged yield to
maturity..................................... 10.7% 10.7%
</TABLE>
- --------
(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) Changes in the December 31, 1997 anticipated yield to maturity from that
originally anticipated are primarily the result of changes in prepayment
assumptions relating to mortgage collateral.
(3) Represents the estimated weighted average unleveraged yield over the
expected average life of the Company's Subordinated CMBS portfolio as of
the date of acquisition and December 31, 1997, respectively.
(4) In July 1997, Fitch upgraded the ratings of Mortgage Capital Funding
Inc.'s Series 1993-C1 Class D and Class E tranches from BBB and BB to AA-
and BB+, respectively.
(5) As of December 31, 1997 CRIIMI MAE serviced a total CMBS pool of $16.1
billion. Approximately 0.54% of the total CMBS pool has been transferred
to CMSLP as the special servicer; approximately 0.45% of the total CMBS
pool is specially serviced due to payment default and the remainder is
specially serviced due to non-payment default.
S-22
<PAGE>
GOVERNMENT INSURED MORTGAGE ASSETS
Prior to focusing primarily on the acquisition of Subordinated CMBS, CRIIMI
MAE acquired Government Insured Mortgage Assets directly and indirectly
through its subsidiaries. As of December 31, 1997, CRIIMI MAE directly and
indirectly owned approximately $605 million of Government Insured Mortgage
Assets (representing approximately 32% of the Company's total consolidated
assets) with weighted average effective interest rates ranging from
approximately 7.2% to 8.4% and weighted average remaining terms ranging from
29 to 34 years. Approximately 97% of these mortgage assets have been
securitized as part of the Company's strategy to refinance floating rate debt
with fixed rate match-funded debt. CRIIMI MAE does not currently intend to
purchase additional Government Insured Mortgage Assets. CRIIMI MAE also owns
general partnership interests in four publicly traded partnerships that own
primarily Government Insured Mortgage Assets (the "AIM Funds"). As of December
31, 1997, the AIM Funds had total invested assets of approximately $473
million. The Company's interests in the AIM Funds represent a pro rata share
of net income from the AIM Funds' assets, which ranges from 2.9% to 4.9% of
net income, plus annual subadvisory fees equal to approximately 0.28% of total
invested assets.
S-23
<PAGE>
USE OF PROCEEDS
The net proceeds to CRIIMI MAE from this Offering are estimated to be
approximately $37.1 million based upon the last reported sales price on the
NYSE of $15.625 per share on March 11, 1998. The Company expects that the net
proceeds will be used to fund loan originations, purchase Subordinated CMBS
and/or repay certain outstanding borrowings. Pending application, net proceeds
from the Offering may be invested in short term, interest bearing investment
grade marketable securities.
PRICE RANGE OF COMMON SHARES AND DIVIDENDS
The Common Shares are listed on the NYSE under the symbol "CMM." The table
below sets forth the high and the low closing sales prices per Common Share as
reported on the NYSE and the amount of cash dividends paid per Common Share
during the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
---- ---- ---------
<S> <C> <C> <C>
Year Ended December 31, 1996:
1st Quarter............................ $10 1/2 $ 8 5/8 $0.30
2nd Quarter............................ 11 10 0.30
3rd Quarter............................ 11 1/8 10 1/4 0.30
4th Quarter............................ 13 1/8 10 3/4 0.32
Year Ended December 31, 1997:
1st Quarter............................ $18 1/8 $12 3/4 $0.35
2nd Quarter............................ 16 5/8 13 7/8 0.35
3rd Quarter............................ 17 9/16 15 11/16 0.35
4th Quarter............................ 16 1/2 13 7/8 0.37
Year Ending December 31, 1998:
1st Quarter (through March 11, 1998)... $16 $14 7/8 N/A
</TABLE>
The last reported sales price of the Common Shares on the NYSE on March 11,
1998 was $15.625 per share. CRIIMI MAE intends to continue to pay quarterly
dividends to holders of Common Shares. As of February 28, 1998, there were
approximately 34,000 holders of record of Common Shares. Future dividends will
be at the discretion of the Board of Directors and will depend on the actual
cash available for distribution, the Company's financial condition, capital
requirements, credit agreement restrictions, the distribution requirements
under the REIT provisions of the Code, and such other factors as CRIIMI MAE's
Board of Directors deems relevant. See "Risk Factors--Certain Tax
Considerations."
S-24
<PAGE>
CAPITALIZATION
The following table sets forth CRIIMI MAE's capitalization on an historical
basis and on an as adjusted basis as of December 31, 1997, assuming (i) the
sale of the 2,500,000 shares of Common Stock in the Offering, the sale of
2,389,000 shares of Common Stock in January, 1998 and the sale of 150,000
shares of Series C Preferred Stock on February 23, 1998, and (ii) the
application of the estimated net proceeds therefrom as if the Offering and
such sales of Common Stock and Preferred Stock had occurred on December 31,
1997. See "Summary-Recent Developments" and "Use of Proceeds." The information
set forth in the table should be read in conjunction with the Company's
financial statements and notes thereto, which are incorporated by reference
into the accompanying Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
HISTORICAL AS ADJUSTED(2)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Secured Debt:
Securitized mortgage obligations(1).............. $ 696,425 $ 696,425
Repurchase agreements-Subordinated CMBS.......... 585,379 666,079(3)
Other............................................ 3,250 3,250
---------- ----------
Total Secured Debt............................. 1,285,054 1,365,754
Senior Notes....................................... 99,878 99,878
Other.............................................. 30,000 30,000
---------- ----------
Total Debt..................................... 1,414,932 1,495,632
Minority interests in consolidated subsidiary...... 932 932
Stockholders' Equity:
Convertible preferred stock...................... 18 20
Common Shares.................................... 407 456
Net unrealized gains on mortgage assets and
interest only strips............................ 1,083 1,083
Additional paid in capital....................... 448,524 534,180
Less treasury stock, at cost--538,635 shares..... (5,051) (5,051)
---------- ----------
Total stockholders' equity..................... 444,981 530,688
---------- ----------
Total capitalization........................... $1,860,845 $2,027,252
========== ==========
</TABLE>
- --------
(1) Securitized mortgage obligations represent fixed rate debt with principal
amortization and maturities that are matched to a corresponding amount of
assets. The obligations consist of a $235.8 million FHLMC Funding Note, a
$145.5 million FNMA Funding Note, $178.0 million of CMOs and $137.1
million of securitized CMBS obligations.
(2) Reflects the issuance of 2,500,000 Common Shares in the Offering resulting
in estimated net proceeds of approximately $37.1 million, the issuance of
2,389,000 Common Shares in January 1998 resulting in net proceeds of
approximately $34.1 million and the issuance of 150,000 shares of Series C
Preferred Stock on February 23, 1998 resulting in net proceeds of
approximately $14.5 million.
(3) A portion of the proceeds from the sale of 2,389,000 shares of Common
Stock in January 1998 and from the sale of 150,000 shares of Series C
Preferred Stock on February 23, 1998 was used to fund the capital portions
of Subordinated CMBS purchases. Such purchases resulted in additional
repurchase agreement debt of approximately $80.7 million. The Company may
incur additional indebtedness in the form of repurchase agreements in
conjunction with the net proceeds from this Offering to acquire additional
Subordinated CMBS.
S-25
<PAGE>
MANAGEMENT
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
William B. Dockser............... Chairman of the Board of Directors
H. William Willoughby............ Director, President and Secretary
Garrett G. Carlson, Sr........... Director
Larry H. Dale.................... Director
G. Richard Dunnells.............. Director
Robert J. Merrick................ Director
Frederick J. Burchill............ Executive Vice President
Cynthia O. Azzara................ Chief Financial Officer, Senior Vice President
and Treasurer
Brian L. Hanson.................. Group Vice President
Douglas L. Cooper................ Vice President and Chief Underwriter
Donald R. Drew................... Senior Vice President
David B. Iannarone............... Vice President and General Counsel
</TABLE>
William B. Dockser, age 61, has been Chairman of the Board of CRIIMI MAE
since 1989. Mr. Dockser also serves as Chairman of the Board for C.R.I., Inc.,
the former advisor to CRIIMI MAE, which currently oversees an approximately $5
billion real estate portfolio. Prior to forming C.R.I., Inc. in 1974, he
served as President of Kaufman Broad Asset Management, Inc., an affiliate of
Kaufman and Broad, Inc., which managed a number of publicly held limited
partnerships created to invest in low and moderate income multifamily
apartment complexes. For a period of 2 1/2 years prior to joining Kaufman and
Broad, he served in various positions in the U.S. Department of Housing and
Urban Development, culminating in the post of Deputy FHA Commissioner and
Deputy Assistant Secretary for Housing Production and Mortgage Credit, where
he was responsible for all federally insured housing production programs.
Before coming to Washington, D.C., Mr. Dockser was a practicing attorney in
Boston and also was a special Assistant Attorney General for the Commonwealth
of Massachusetts. He holds a Bachelor of Laws degree from Yale University Law
School and a Bachelor of Arts degree from Harvard University. Mr. Dockser is
also currently a director of CRIIMI MAE Financial Corporation.
H. William Willoughby, age 51, President of CRIIMI MAE, is also President
and co-founder of CRI since its inception in 1974. Mr. Willoughby is
principally responsible for the structuring and oversight of investment
vehicles and acquisition programs. Prior to joining CRI in 1974, he was Vice
President of Shelter Corporation of America and a number of its subsidiaries,
dealing principally with real estate development and equity financing. Before
joining Shelter Corporation, he was a senior tax accountant with Arthur
Andersen & Company. He holds a Juris Doctor, a Master of Business
Administration and a Bachelor of Science in Business Administration from the
University of South Dakota. Mr. Willoughby is also currently a director of
CRIIMI MAE Financial Corporation.
Garrett G. Carlson, Sr., age 61, has been a Director of CRIIMI MAE since
1989. Mr. Carlson has been President of Can-American Realty Corp. and Canadian
Financial Corp. since 1979 and 1974, respectively. He also served as Chairman
of the Board of SCA Holdings, Inc. from 1983 to 1985. He was also Vice
Chairman of Shelter Development Corporation Ltd., from 1983 to 1995 and
President of Garrett Real Estate Development since 1982.
Larry H. Dale, age 51, has been a Director of CRIIMI MAE since 1996. Mr.
Dale is also a Managing Director and Member of the Board of Directors of
Newman and Associates. He also served as Senior Adviser to the Fannie Mae
Housing Investment Fund in 1996, Executive Director of Fannie Mae's National
Housing Impact Division from 1991 to 1996 and Senior Vice President-marketing
and mortgage-backed securities and Senior Vice President-multifamily finance
and housing initiatives for Fannie Mae from 1987 to 1991. Mr. Dale also served
as a Vice President of Newman and Associates from 1984 to 1987, and President
of Mid-City Financial
S-26
<PAGE>
Corporation from 1981 to 1983. Mr. Dale was employed by the U.S. Department of
Housing and Urban Development from 1971 to 1981, including service as deputy
to the Assistant Secretary for Housing/FHA Commissioner from 1979 to 1981.
G. Richard Dunnells, age 60, has been a Director of CRIIMI MAE since 1991.
Mr. Dunnells has been a partner of the Washington, D.C. office of the law firm
of Holland & Knight since January 1994. He was Senior Partner of the
Washington, D.C. law firm of Dunnells & Duvall from 1973 to 1993, and was
Chairman of such firm from 1989 to 1993. Mr. Dunnells served as Special
Assistant to the Under-Secretary and Deputy Assistant Secretary for Housing
Management with the U.S. Department of Housing and Urban Development from 1969
to 1973 and served on the President's Commission on Housing from 1981 to 1982.
Robert J. Merrick, age 52, has been a Director of CRIIMI MAE since May 1997.
Mr. Merrick has served as Executive Vice President since 1985 and Chief Credit
Officer since 1985 of Signet Banking Corporation, where he also serves as
Chairman of the Credit Policy committee and as a member of the Asset and
Liability committee and the Management committee. From 1980 to 1984, Mr.
Merrick served as Credit Officer of Virginia Banking Corporation, an affiliate
of Signet Bank/Virginia. From 1976 to 1980 Mr. Merrick was Senior Vice
President of Bank of Virginia.
Frederick J. Burchill, age 49, has served as Executive Vice President of
CRIIMI MAE since 1989. Mr. Burchill is responsible for mergers and
acquisitions as well as the development of new capital markets programs. Prior
to his employment at CRIIMI MAE, Mr. Burchill was the Senior Vice President of
Development for CRI, Inc. and also spent two years as a Project Manager at the
Virginia Housing Development Authority. Mr. Burchill earned a Masters of Urban
and Regional Planning degree from Virginia Commonwealth University and a B.A.
degree from the University of Richmond.
Cynthia O. Azzara, age 38, has served as Chief Financial Officer of CRIIMI
MAE since 1994, Senior Vice President since 1995 and Treasurer since 1997. Ms.
Azzara is responsible for financial and treasury matters of CRIIMI MAE as well
as equity and debt placements in the capital markets. From 1989 to 1994, she
served as Vice President/Controller of CRI public funds. From 1985 to 1989,
she held positions at CRI as manager of financial reporting and assistant
controller. Before joining CRI in 1985, Ms. Azzara was controller for a
consulting company and was a staff accountant for a regional CPA firm in
Virginia. Ms. Azzara is a certified public accountant and holds a B.B.A. in
accounting from James Madison University, magna cum laude.
Brian L. Hanson, age 36, has served as Group Vice President of CRIIMI MAE
since March 1996. Mr. Hanson has been active in the commercial mortgage
business for more than 13 years. He joined CRIIMI MAE early in 1996 and heads
the loan administration department, responsible for servicing and replacement
reserve management for a $10 billion commercial mortgage portfolio. Prior to
CRIIMI MAE, Mr. Hanson served as Chief Operating Officer, Director of Asset
Operations and Portfolio Director for JCF Partners, Lanham, MD. In this
capacity, he directed asset management and operation for a $1 billion real
estate portfolio, including assets of the Resolution Trust Corporation and
private clients. His responsibilities included bulk acquisition and sales,
loan and credit committees. Prior to joining JCF in 1991, Mr. Hanson was Vice
President of Secondary Marketing for a $500 million financial institution and
its wholly owned mortgage banking subsidiary. Mr. Hanson earned a B.A. in
Mathematics from Washington & Lee University.
Douglas L. Cooper, age 36, serves as Vice President and Chief Underwriter of
CRIIMI MAE. Mr. Cooper joined CRIIMI MAE in 1996 and is responsible for
analysis of commercial mortgage-backed security acquisitions and underwriting
new loan originations. During the eight years prior to joining CRIIMI MAE, Mr.
Cooper served with NationsBank in a series of commercial real estate lending
positions with increasing responsibility, culminating in the role of Senior
Credit Policy Officer for the Real Estate Banking Group. From 1986 to 1988,
Mr. Cooper was an Assistant Vice President with First American Bank, N.A.,
focusing on new business for the Commercial Real Estate Department. From 1984
to 1986, he was a commercial real estate loan
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officer with Suburban Bank. Mr. Cooper earned a B.S. in Business
Administration from West Virginia Wesleyan College.
Donald R. Drew, age 40, has served as Senior Vice President of CRIIMI MAE
since April 1997. Mr. Drew has been active in commercial real estate,
particularly finance, for more than 18 years. He joined CRIIMI MAE in April
1997 and heads the loan origination operation, including the "No-Lock"
Program, pricing, and application processing. Prior to CRIIMI MAE, Mr. Drew
served for four years as a Vice President in the lending division of First
Union National Bank of Virginia, focusing on revenue generation and business
development. Before that, he served for two years with First American Metro
Corporation, first as Vice President then as Senior Vice President. From 1987
through 1990, he served with commercial real estate investor and developer
Aldre, Inc., Rockville, Maryland, in a series of increasingly responsible
positions ranging from Vice President of Acquisition and Finance to Chief
Operating Officer. From 1980 to 1987, he served with Sovran Bank/Maryland (now
NationsBank), in a variety of commercial real estate finance positions. Mr.
Drew earned an M.B.A. from the American University and a B.S. in accounting
from Shepherd College.
David B. Iannarone, age 37, has served as General Counsel of CRIIMI MAE
since 1996. Mr. Iannarone is responsible for all corporate legal affairs,
including management of structured finance transactions. From 1991 to 1996, he
served with the Federal Deposit Insurance Corporation/Resolution Trust
Corporation as Counsel-Securities and Finance, handling various securitization
transactions and portfolio sales of non-performing loans and real estate. From
1989 to 1991, Mr. Iannarone served with Citibank, N.A. as assistant vice
president and counsel, where he handled legal affairs for a range of loan
originations, troubled loan restructurings, swaps and other transactions. He
served with Kaye, Scholer, Fierman, Hays & Handlers as an Associate in the
Corporate and Banking Department from 1986 to 1989. Mr. Iannarone received an
LL.M. from the Georgetown University Law Center, a J.D. from the University of
Villanova School of Law, and a B.A. from Trinity College.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion is a summary of certain U.S. federal income
and estate tax consequences of the ownership and disposition of the Common
Shares applicable to holders of such Common Shares who acquire and own such
Common Shares as capital assets within the meaning of Section 1221 of the
Code. For purposes of this discussion, a "Non-U.S. Holder" is a person other
than (i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States or under the laws of the
United States or of any state, or (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source; or
(iv) a trust with respect to the administration of which a court within the
United States is able to exercise primary supervision and one or more United
States persons have the authority to control all substantial decisions of the
trust. For purposes of the withholding tax on dividends discussed below, a
non-resident fiduciary of an estate or trust will be considered a Non-U.S.
Holder.
This discussion does not consider specific facts and circumstances that may
be relevant to a particular holder's tax position (including the fact that, in
the case of a Non-U.S. Holder that is a partnership, the U.S. tax consequences
of holding and disposing of Common Shares may be affected by certain
determinations made at the partner level), and does not consider U.S. state
and local or non-U.S. tax consequences. In addition, this discussion does not
discuss all of the aspects of United States federal income taxation that may
be relevant to a prospective stockholder in light of such stockholder's
particular circumstances or to certain types of stockholders (including, but
not limited to, insurance companies; certain tax-exempt entities; financial
institutions; broker/dealers; foreign corporations; and employees and
affiliates acquiring stock options) some of whom could be subject to special
treatment under United States federal income tax laws. Furthermore, the
following discussion is based on provisions of the Code and administrative and
judicial interpretations, all of which are subject to change, possibly on a
retroactive basis.
EACH PROSPECTIVE HOLDER OF COMMON SHARES IS URGED TO CONSULT A TAX ADVISOR
WITH RESPECT TO THE U.S. FEDERAL TAX CONSEQUENCES OF PURCHASING, HOLDING AND
DISPOSING COMMON SHARES, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER
THE LAWS OF ANY U.S. STATE, LOCALITY OR OTHER U.S. OR NON-U.S. TAXING
JURISDICTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
GENERAL CONSIDERATIONS
CRIIMI MAE believes that it has qualified and intends to continue to qualify
as a REIT under the Code. Qualification for treatment as a REIT requires
CRIIMI MAE to meet certain criteria including certain requirements regarding
the nature of its ownership, assets, income and distributions of taxable
income. A REIT generally is not subject to federal income tax on that portion
of its ordinary income or capital gains that is distributed currently to
stockholders. CRIIMI MAE has distributed and intends to continue to distribute
substantially all of its taxable income to stockholders and to meet
distribution requirements to continue to qualify as a REIT. CRIIMI MAE will
generally be subject to federal income tax at normal corporate rates on its
undistributed income and to a 4% excise tax under the Code on the amount, if
any, by which 85% of its REIT taxable income (including accrued but unpaid
interest income) and 95% of any net capital gain exceed the amount actually
distributed to its stockholders during the year (or declared as a dividend
during October, November or December of a calendar year, if distributed during
the following January as ordinary income dividends). CRIIMI MAE also may be
subject to the corporate "alternative minimum tax" on its items of preference.
Accrued income for each quarter is generally received within 30 days after the
end of the quarter. CRIIMI MAE is not aware of any present circumstances that
would cause it to fail to qualify as a REIT, nor does it anticipate any such
circumstances in the reasonably foreseeable future. If the U.S. Internal
Revenue Service ("IRS") successfully challenged the tax status of CRIIMI MAE
as a REIT, CRIIMI MAE's earnings would become subject to federal income tax
(including any applicable minimum tax) at corporate rates. As a result, CRIIMI
MAE's failure to qualify as a REIT would significantly reduce the cash
available for distribution to its stockholders. Unless entitled to relief
under the specific statutory provisions, CRIIMI MAE also will be disqualified
from taxation as a REIT for the four taxable years following the year during
which qualification was lost. It is not possible to state whether in all
circumstances CRIIMI MAE would be entitled to such statutory relief.
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QUALIFICATION AS A REIT
The Code imposes a number of technical requirements on REITs. Among these
are requirements that CRIIMI MAE be managed by one or more trustees or
directors, that beneficial ownership be held by at least one hundred (100)
persons, that CRIIMI MAE not be treated as closely held when attribution rules
are applied, that ownership of CRIIMI MAE be evidenced by transferrable
shares, and that CRIIMI MAE otherwise be taxable as a domestic corporation. In
addition, the Code strictly limits CRIIMI MAE in the assets it may own, the
sources from which it may earn income, and the distributions it may make to
stockholders.
Assets Requirements. CRIIMI MAE is subject to a number of limitations on the
assets it may hold. First, at least seventy-five percent (75%) of the value of
CRIIMI MAE's assets must consist of real estate assets (including shares in
other REITs), cash and cash items (including receivables) and government
securities. Second, the value of any one issuer's securities owned by CRIIMI
MAE may not exceed five percent (5%) of the value of CRIIMI MAE's total assets
unless those securities qualify as real estate assets (including shares of
another REIT) or government securities. Third, CRIIMI MAE may not own more
than ten percent (10%) of any single issuer's outstanding voting securities
unless those securities qualify as real estate assets.
CRIIMI MAE believes that substantially all of its assets, other than its
ownership interest in CRIIMI MAE Services, Inc. (the "Services Corporation"),
are real estate assets or government securities. Because CRIIMI MAE owns only
nonvoting preferred stock of the Services Corporation, CRIIMI MAE will not be
considered to own more than ten percent (10%) of the voting securities of the
Services Corporation or any other single issuer's outstanding voting
securities, other than securities which qualify as real estate assets. CRIIMI
MAE does not believe that its ownership of nonvoting preferred stock of the
Services Corporation or the ownership structure of CMSLP will cause CRIIMI MAE
to be treated as owning voting securities of the Services Corporation. CRIIMI
MAE also believes that the aggregate value of the securities of any single
issuer (other than issuers whose securities qualify as real estate assets or
government securities) held by CRIIMI MAE have been and will continue to be
less than five percent (5%) of CRIIMI MAE's total assets.
Clinton Administration's Proposed Changes to REIT Asset Test. The Clinton
Administration's budget proposal which was announced on February 2, 1998
includes a proposal to amend the 10% voting securities test. The proposal
would require a REIT to own no more than 10% of the vote or value of all
classes of stock of any corporation (except for qualified REIT subsidiaries or
corporations that qualify as REITs). Corporations (referred to herein as
"subsidiary corporations") existing prior to the effective date of the
proposal generally would be "grandfathered"; i.e., the REIT would be subject
to the existing 10% voting securities test (described above) with respect to
grandfathered subsidiary corporations. However, such grandfathered status
would terminate with respect to a subsidiary corporation if the subsidiary
corporation engaged in a new trade or business or acquired substantial new
assets.
Because CRIIMI MAE owns 100% of the nonvoting stock of the Services
Corporation, CRIIMI MAE would not satisfy the proposed 10% value limitation
with respect to that corporation. However, the Services Corporation should
qualify as a grandfathered subsidiary corporation as the proposal is currently
drafted. If Services Corporation were to engage in new trades or businesses or
were to acquire substantial new assets, or if CRIIMI MAE were to make capital
contributions to the Services Corporation, then its grandfathered status would
be terminated and CRIIMI MAE would fail to qualify as a REIT. Moreover, CRIIMI
MAE would not be able to own more than 10% of the vote or value of any
subsidiary corporation formed or acquired after the effective date of the
proposal. Thus, the proposal, if enacted, may materially impede the ability of
CRIIMI MAE to engage in new third-party management or similar activities. If
the above proposal is enacted into law, CRIIMI MAE intends to implement a
strategy that will allow it to remain subject to the current 10% voting
securities test with respect to the Services Corporation while, to the extent
possible, continuing to service its existing and future mortgage portfolio. As
part of this strategy, CRIIMI MAE would monitor the activities of and capital
contributions to the Services Corporation to ensure compliance with the
proposal.
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A second proposed provision would tax immediately the built-in gains of C
corporations merging into REITs in tax-free reorganizations. Under current
law, C corporations can defer a portion of this tax. Accordingly, if enacted
as currently drafted, this provision could impede CRIIMI MAE's ability to
acquire additional properties through mergers with C corporations.
Income Requirements. CRIIMI MAE also is subject to a series of limitations
on the income it may earn. Among these limitations are the requirements that
(i) at least seventy-five percent (75%) of CRIIMI MAE's gross income derive
from rents from real property, mortgage interest, gain from sale of real
property not held primarily for sale, dividends from other REITs, gain from
the sale of REIT shares, refunds and abatements of real property taxes, income
and gain from foreclosure property, commitment and certain other fees,
qualified temporary investment income, and gain from the sale of certain other
property; and (ii) at least ninety-five percent (95%) of CRIIMI MAE's gross
income be derived from the foregoing items plus other dividends, interest and
gain from the sale or other disposition of stocks and securities.
Distribution Requirements. CRIIMI MAE also must comply with certain
distribution rules. Specifically, the deduction for dividends paid (computed
without regard to capital gain dividends) for the taxable year must equal or
exceed the sum of (i) ninety-five percent (95%) of CRIIMI MAE's taxable income
(computed without regard to distributions and excluding net capital gain), and
(ii) ninety-five percent (95%) of the excess of net income from foreclosure
property over the tax on such income; minus any excess noncash income.
Furthermore, a distribution by CRIIMI MAE will qualify for the dividends paid
deduction only if such dividend is not "preferential" (i.e., each holder of
Capital Shares must receive the same distribution per share).
To protect CRIIMI MAE's qualification as a REIT under the Code, CRIIMI MAE's
articles of incorporation provide that no person or persons acting as a group
(defined to include partnerships, corporations, trusts and other entities),
with the exceptions of CRI or its affiliates, shall at any time directly or
indirectly acquire ownership of more than 9.8% of the outstanding Common
Shares.
Swidler & Berlin, Chartered has acted as tax counsel to CRIIMI MAE in
connection with the offering of Common Shares. In the opinion of Swidler &
Berlin, Chartered, commencing with CRIIMI MAE's taxable year ending December
31, 1989, CRIIMI MAE has been organized in conformity with the requirements
for qualification as a REIT, and its proposed method of operation has enabled
it, and will enable it, to meet the requirements for qualification and
taxation as a REIT under the Code. It must be emphasized that such opinion is
based on various assumptions and is conditioned upon certain representations
made by CRIIMI MAE as to factual matters related to the organization and
operation of CRIIMI MAE. In addition, such opinion is based upon the factual
representations of CRIIMI MAE concerning its business and assets as set forth
in this Prospectus Supplement and the accompanying Prospectus. Moreover, such
qualification and taxation as a REIT depends upon CRIIMI MAE's ability to meet
(through actual annual operating results, distribution levels and diversity of
stock ownership) the various qualification tests imposed under the Code
discussed below, the results of which have not been and will not be reviewed
by Swidler & Berlin, Chartered. Accordingly, no assurance can be given that
the actual results of CRIIMI MAE's operation for any particular taxable year
have satisfied or will satisfy such requirements. Further, the anticipated tax
treatment described in this Prospectus Supplement and in the accompanying
Prospectus may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time.
INCOME TAX CONSEQUENCES TO CRIIMI MAE
A REIT generally is not subject to United States federal income tax on that
portion of its ordinary income and capital gains that is distributed currently
to stockholders. CRIIMI MAE has historically distributed substantially all of
its taxable income to stockholders. CRIIMI MAE intends to continue to
distribute a level of taxable income necessary to qualify as a REIT. CRIIMI
MAE will generally be subject to federal income tax at normal corporate rates
on its undistributed income and to a four percent (4%) excise tax under the
Code on the amount, if any, by which the sum of eight-five percent (85%) of
its REIT taxable income (including accrued but unpaid interest income),
ninety-five percent (95%) of any net capital gain, and any undistributed
taxable income
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from prior periods exceed the amount actually distributed to its stockholders
during the year (or declared as a dividend during October, November or
December of a calendar year, if distributed during the following January as
ordinary income dividends).
CRIIMI MAE is not aware of any present circumstances that would cause it to
fail to qualify as a REIT, nor does it anticipate any such circumstances in
the reasonably foreseeable future. If the U.S. Internal Revenue Service
("IRS") successfully challenged the tax status of CRIIMI MAE as a REIT, CRIIMI
MAE's earnings would become subject to federal income tax (including any
applicable minimum tax) at regular corporate rates. Distributions to
stockholders in any year in which CRIIMI MAE fails to qualify would not be
deductible by CRIIMI MAE, nor would they be required to be made. In such
event, to the extent of current and accumulated earnings and profits, all
distributions to stockholders will be taxable to them as ordinary income, and,
subject to certain limitations of the Code, corporate distributees might be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, CRIIMI MAE also would be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all
circumstances CRIIMI MAE would be entitled to such statutory relief.
CRIIMI MAE derives a portion of its income from CRIIMI MAE Management,
Inc.'s interest as a seventy-three percent (73%) limited partner in CMSLP and
CRIIMI MAE's ownership of non-voting preferred stock of the Services
Corporation, which is the twenty-seven percent (27%) general partner in CMSLP.
The income derived via CRIIMI MAE's indirect seventy-three percent (73%)
limited partnership interest in CMSLP will have the same character as it does
in the hands of CMSLP and will not qualify under either the 95% or 75% gross
income tests.
The income derived by the Services Corporation through its general
partnership interest in CMSLP will be subject to corporate income taxes. To
the extent the Services Corporation pays dividends to CRIIMI MAE, such
dividends will be qualified income for purposes of the 95% gross income test,
but not for purposes of the 75% gross income test. Payments of interest on
certain installment notes payable by the Services Corporation to CRIIMI MAE
Management, Inc. will reduce the taxable income of the Services Corporation
and will be qualified REIT income for CRIIMI MAE for the purposes of the 95%
gross income test, but not for purposes of the 75% gross income test. CRIIMI
MAE believes that the amount of non-qualifying gross income estimated to be
allocated to CRIIMI MAE in future years as a result of its indirect
partnership interest in CMSLP will be less than five percent (5%) of CRIIMI
MAE's aggregate gross income in each year.
Any gain realized by CRIIMI MAE on the sale of any property (including
mortgage loans and mortgage-backed securities) held as inventory or other
property held primarily for sale to customers in the ordinary course of
business will be treated as income from prohibited transactions that is
subject to a one hundred percent (100%) penalty tax. Any such prohibited
transactions also could have an adverse effect upon CRIIMI MAE'S ability to
satisfy the income tests for qualification as a REIT. Under existing law,
whether property is held as inventory or primarily for sale to customers in
the ordinary course of a trade or business is a question of fact that depends
upon the facts and circumstances with respect to the particular transaction.
CRIIMI MAE does not believe that its assets qualify as inventory or other
property held primarily for sale to customers in the ordinary course of
business and, accordingly, does not believe that income from the sale of such
assets will be treated as income from prohibited transactions.
If CRIIMI MAE (as expected) has "excess inclusion" income (attributable to
its interest, if any, in a residual interest in a real estate mortgage
investment conduit ("REMIC")) or if all or a portion of CRIIMI MAE or its
subsidiaries are treated as a TMP under section 770(i) of the Code, and a
"disqualified organization" (generally, tax-exempt entities not subject to tax
on unrelated business income, including governmental organizations) holds
Common Shares, CRIIMI MAE will be taxed at the highest corporate income tax
rate on the amount of excess inclusion income for the taxable year allocable
to the Common Shares held by such disqualified organization. If Common Shares
are held by a pass-through entity (such as a REIT or mutual fund) and the
shares of such pass-through entity are held by a disqualified organization,
then such pass-through entity,
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rather than CRIIMI MAE, will be subject to tax. Pass-through entities
contemplating the purchase of the Common Shares offered hereby are urged to
consult with their own tax advisor concerning the tax consequences of holding
Common Shares.
With respect to any asset (a "Built-In Gain Asset") acquired by CRIIMI MAE
from a corporation which is or has been a C corporation (i.e., generally a
corporation subject to full corporate-level tax) in a transaction in which the
basis of the Built-In Gain Asset in the hands of CRIIMI MAE is determined by
reference to the basis of the asset in the hands of the C corporation, if
CRIIMI MAE recognized gain on the disposition of such asset during the ten
year period (the "Recognition Period") beginning on the date on which such
asset was acquired by CRIIMI MAE, then, to the extent of the Built-In Gain
(i.e., the excess of (a) the fair market value of such asset over (b) CRIIMI
MAE's adjusted basis in such asset, determined as of beginning of the
Recognition Period), such gain will be subject to tax at the highest regular
corporate rate pursuant to Treasury Regulations that have not yet been
promulgated. The results described above with respect to the recognition of
Built-In Gain assume that CRIIMI MAE will make an election pursuant to IRS
Notice 88-19. CRIIMI MAE does not believe that it presently owns any
significant amount of Built-In Gain Assets.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As long as CRIIMI MAE qualifies as a REIT, distributions made to CRIIMI
MAE's taxable domestic stockholders out of current or accumulated earnings and
profits, as determined for federal income tax purposes, and not designated as
capital gain dividends, will be taken into account by such stockholders as
ordinary income and will not be eligible for the dividends received deduction
for stockholders that are corporations. Distributions that are properly
designated by CRIIMI MAE as capital gain dividends will be taxable to taxable
stockholders as long-term capital gain (to the extent that capital gains
dividends do not exceed CRIIMI MAE's actual net capital gain for the taxable
year) without regard to the period for which such taxable stockholders have
held their Common Shares. Corporate stockholders, however, may be required to
treat up to 20% of certain capital gain dividends as ordinary income.
On November 10, 1997, the IRS issued IRS Notice 97-64, which provides
generally that a REIT such as CRIIMI MAE may classify portions of its
designated capital gains dividend as a distribution attributable to either the
20%, 25%, or 28% long-term capital gain group. (If no designation is made, the
entire designated capital gain dividend will be treated as a 28% rate gain
distribution. For a discussion of the 20%, 25%, and 28% tax rates applicable
to individuals, see "--Recent Legislation" below.) CRIIMI MAE must determine
the maximum amount that it may designate as 20% and 25% rate capital gain
dividends by performing the computation required by the Code as if CRIIMI MAE
were an individual whose ordinary income were subject to a marginal tax rate
of at least 28%. The Notice further provides that designations made by CRIIMI
MAE only will be effective to the extent that they comply with Revenue Ruling
89-81, which requires that distributions made to different classes of shares
be composed proportionately of dividends of a particular type. (The long-term
capital gain rate preference only applies to non-corporate stockholders.)
To the extent that CRIIMI MAE makes distributions in excess of current and
accumulated earnings and profits as determined for federal income tax
purposes, these distributions are treated first as a tax-free return of
capital to the stockholder, reducing the tax basis of a stockholder's Common
Shares by the amount of such distribution (but not below zero), with
distributions in excess of the stockholder's tax basis taxable as gain from
the sale or exchange of Common Shares. In addition, any dividend declared by
CRIIMI MAE in October, November or December of any year and payable to a
stockholder of record on a specific date in any such month shall be treated as
both paid by CRIIMI MAE and received by the stockholder on December 31 of such
year, provided that the dividend is actually paid by CRIIMI MAE during January
of the following calendar year. Stockholders may not include in their
individual income tax returns any net operating losses or capital losses of
CRIIMI MAE.
CRIIMI MAE has issued and intends in the future to issue, debt instruments
which might cause CRIIMI MAE or its subsidiaries to be treated as a TMP under
section 7701(i) of the Code. If CRIIMI MAE or any of its subsidiaries is
treated as a TMP, some portion of the ordinary or capital gain dividends
received by a stockholder
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may be considered excess inclusion income. If a portion of the ordinary or
capital gain dividends received by a stockholder from CRIIMI MAE is designated
as excess inclusion income, the taxable income of that stockholder shall in no
event be less than its allocable excess inclusion income, regardless of its
other items of income or deduction. In addition, if a mutual fund is a
stockholder of CRIIMI MAE, the mutual fund's investors who are Non-U.S.
Holders or tax-exempt entities will encounter, with respect to their indirect
share of any excess inclusion income, the same consequences as described below
under "--Taxation of Non-U.S. Holders" and "--Taxation of Tax-Exempt
Stockholders."
Given the size of the debt issuances described in the preceding paragraph,
to the extent CRIIMI MAE or any of its subsidiaries is treated as a TMP,
significant amounts of excess inclusion income will result. Domestic holders
are urged to consult with tax counsel concerning the impact such excess
inclusion income will have on their tax situations.
In general, any loss upon a sale or exchange of Common Shares by a
stockholder who has held such Common Shares for six months or less (after
applying certain holding period rules) will be treated as a long-term capital
loss, to the extent of distributions from CRIIMI MAE required to be treated by
such stockholder as long-term capital gains. For stockholders who are
individuals, trusts and estates, the long-term capital loss will be
apportioned among the applicable long-term capital gain groups to the extent
that distributions received by such stockholder were previously so treated.
RECENT LEGISLATION
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act"), for CRIIMI
MAE'S taxable years commencing on or after January 1, 1998, CRIIMI MAE may
elect to require holders of Common Shares to include CRIIMI MAE's
undistributed net capital gains in their income. If CRIIMI MAE makes such an
election, holders of Common Shares will (i) include in their income as long-
term capital gains their proportionate share of such undistributed capital
gains and (ii) be deemed to have paid their proportionated share of the tax
paid by CRIIMI MAE on such undistributed capital gains and thereby receive a
credit or refund for such amount. A holder of Common Shares will increase the
basis in its Common Shares by the difference between the amount of capital
gains included in its income and the amount of the tax it is deemed to have
paid. The earnings and profits of CRIIMI MAE will be adjusted appropriately.
The 1997 Act, however, did not change the 4% excise tax imposed on the CRIIMI
MAE upon a failure to make certain required distributions.
The 1997 Act contains certain changes to the taxation of capital gains of
individuals, trusts and estates. Subject to certain exceptions, for
individuals, trusts and estates, the maximum rate of tax on the net capital
gain from a sale or exchange occurring after July 28, 1997 of a capital asset
held for more than 18 months has been reduced from 28% to 20%. The maximum
rate has been reduced to 18% for capital assets acquired after December 21,
2000 and held for more than five years. The maximum rate for capital assets
held for more than one year but not more than 18 months remains at 28%. The
1997 Act also provides a maximum rate of 25% for "unrecognized section 1250
gain" for individuals, trusts and estates, special rules for "qualified 5-year
gain," and other changes to prior law. The 1997 Act provides the IRS with
authority to issue regulations that could, among other things, apply these
rates on a look-through basis in the case of "pass-through" entities such as
CRIIMI MAE. See "--Taxation of Taxable Domestic Stockholders" above for
reference to Notice 97-64. The taxation of capital gains of corporations was
not changed by the 1997 Act.
TAXATION OF NON-U.S. HOLDERS
In general, distributions to a Non-U.S. Holder of Common Shares which are
not attributable to gain from the sale or exchange of United States real
property interests and are not designated by CRIIMI MAE as capital gain
dividends will be treated as dividends of ordinary income (to the extent of
earnings and profits for U.S. federal income tax purposes). Such distributions
ordinarily will be subject to withholding of U.S. federal income tax at a 30%
rate, unless such rate is reduced by an applicable income tax treaty.
Dividends that are effectively connected with such holder's conduct of a trade
or business in the United States or, if a tax treaty applies, attributable to
a permanent establishment in the United States ("U.S. trade or business
income") generally are subject to U.S. federal income tax at regular rates
(and, in the case of a Non-U.S. Holder that is a corporation,
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<PAGE>
under certain circumstances may be subject to an additional "branch profits
tax" at a 30% rate or such lower rate as may be applicable under an income tax
treaty), but are not generally subject to the 30% withholding tax if the Non-
U.S. Holder files the appropriate form with the payor.
To determine the applicability of a tax treaty providing for a lower rate of
withholding, dividends paid to an address in a foreign country are presumed
under current Treasury Regulations to be paid to a resident of that country,
unless the payor has definite knowledge that such presumption is not warranted
or an applicable tax treaty (or United States Treasury Regulations thereunder)
requires some other method for determining a Non-U.S. Holder's residence.
However, under new regulations adopted by the U.S. Treasury on October 6,
1997, dividends paid after December 31, 1998 to a Non-U.S. Holder could be
subject to backup withholding at a 31 percent rate unless certain
documentation procedures are complied with. Under current regulations, CRIIMI
MAE must report annually to the IRS and to each Non-U.S. Holder the amount of
dividends paid to, and the tax withheld with respect to, each Non-U.S. Holder.
These reporting requirements apply regardless of whether withholding was
reduced or eliminated by an applicable tax treaty. Copies of these information
returns also may be made available under the provisions of a specific treaty
or agreement with the tax authorities of the country in which the Non-U.S.
Holder resides.
Distributions by CRIIMI MAE which are not dividends out of earnings and
profits (as determined for U.S. federal income tax purposes) should not be
subject to U.S. withholding tax. Such distributions are treated first as a
tax-free return of capital to the Non-U.S. Holder, reducing the tax basis of
the Non-U.S. Holder's Common Shares by the amount of such distribution (but
not below zero), with distributions in excess of the Non-U.S. Holder's tax
basis taxable (to the same extent described below) as a sale or exchange of
Common Shares, the tax treatment of which is described below. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that CRIIMI MAE will be required to withhold 10% of any distribution
in excess of CRIIMI MAE's current and accumulated earnings and profits.
Consequently, although CRIIMI MAE intends to withhold at a rate of 30% on the
entire amount of any distribution (or a lower applicable treaty rate), to the
extent that CRIIMI MAE does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or a lower applicable treaty rate)
will be subject to withholding at a rate of 10%. If it cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the entire amount of
the distribution will be subject to withholding at the rate applicable to
dividends. However, the Non-U.S. Holder may seek a refund of such amounts from
the IRS if it is subsequently determined that such distribution was, in fact,
in excess of current and accumulated earnings and profits of CRIIMI MAE and
the amount withheld exceeds the Non-U.S. Holder's tax liability. CRIIMI MAE
does not expect to pay dividends in excess of current and accumulated earnings
and profits.
The 1997 Act allows CRIIMI MAE to elect to retain and pay income tax on net
long-term capital gains it received during the tax year. If CRIIMI MAE makes
this election, CRIIMI MAE stockholders must include in income as long-term
capital gains their proportionate share of the undistributed long-term capital
gains as designated by CRIIMI MAE. The stockholder is deemed to have paid the
stockholder's share of the tax, which is credited or refunded to the
stockholder. The basis of the stockholder's shares would be increased by the
amount of the undistributed long-term capital gains (less the amount of
capital gains tax paid by CRIIMI MAE) included in the stockholder's long-term
capital gains.
As discussed above, CRIIMI MAE and its subsidiaries have issued, and in the
future intend to issue, debt instruments that might cause CRIIMI MAE or its
subsidiaries to be treated as a TMP under section 7701(i) of the Code. If
CRIIMI MAE or any of its subsidiaries is treated as a TMP, some portion of the
ordinary or capital gain dividends received by a stockholder may be considered
excess inclusion income. If a portion of the ordinary or capital gain
dividends received by a Non-U.S. Holder of Common Shares from CRIIMI MAE is
designated as excess inclusion income, any such excess inclusion income will
be subject to 30% withholding (unless such income is effectively connected
with a U.S. trade or business) and such withholding would not be eligible for
reduction under income tax treaties.
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<PAGE>
Given the size of the debt issuances described in the preceding paragraph,
to the extent CRIIMI MAE or any of its subsidiaries is treated as a TMP,
significant amounts of excess inclusion income will result. Non-U.S. Holders
of Common Shares are urged to consult with tax counsel concerning the impact
such excess inclusion income will have on their tax situations.
Under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"),
for as long as CRIIMI MAE qualifies as a REIT, a distribution made by CRIIMI
MAE to a Non-U.S. Holder that is attributable to gains from the sale or
exchange of U.S. real property interests generally will be taxable as U.S.
trade or business income. Therefore, Non-U.S. Holders generally will be taxed
at the capital gain rates applicable to U.S. Holders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). Distributions subject to FIRPTA also may be
subject to a 30% branch profits tax in the hands of a corporate Non-U.S.
Holder (unless reduced or eliminated by treaty). In addition, CRIIMI MAE will
be required to withhold U.S. tax equal to 35% of the amount of dividends that
could have been designated as capital gain dividends, but such requirement
apparently is limited to the amount of such gain that is attributable to the
sale or exchange of U.S. real property interests. The amount so withheld is
creditable against the U.S. federal income tax liability of such Non-U.S.
Holder and a refund may be available if the amount withheld exceeds the U.S.
federal income tax liability of the Non-U.S. Holder. CRIIMI MAE believes that
any gains on its mortgage investments would not be subject to FIRPTA because
such mortgages merely secure a debt and CRIIMI MAE will not be entitled to a
direct or indirect right to share in the appreciation in the value of, or in
the gross or net proceeds or profits generated by, the underlying real
property.
If CRIIMI MAE is a "domestically controlled REIT," a sale of Common Shares
by a Non-U.S. Holder generally will not be subject to U.S. taxation under
FIRPTA. A REIT is a domestically controlled REIT if, at all times during a
specified testing period, less than 50% in value of its shares is held
directly or indirectly by Non-U.S. Holders. CRIIMI MAE is currently, and
anticipates continuing to be, a domestically controlled REIT. Therefore, it
anticipates that a Non-U.S. Holder's sale of Common Shares will not be subject
to taxation under FIRPTA. Because the Common Shares will be publicly traded,
however, no assurance can be given that CRIIMI MAE will continue to be a
domestically controlled REIT.
If CRIIMI MAE does not constitute a domestically controlled REIT, a Non-U.S.
Holder's sale of Common Shares nevertheless generally will not be subject to
tax under FIRPTA provided that either (i) CRIIMI MAE is not a "United States
real property holding corporation" (which is defined in the Code generally as
any corporation if the net fair market value of its U.S. real property
interests accounts for 50% or more of the net fair market value of its assets
at any time during the 5-year period prior to such sale), or (ii) the shares
are "regularly traded" (as defined by applicable Treasury regulations) on an
established securities market (e.g., the New York Stock Exchange, on which the
Common Shares are listed), and the selling Non-U.S. Holder held 5% or less of
CRIIMI MAE's outstanding shares at all times during a specified testing
period.
If gain on the sale of the Common Shares by a non-U.S. Holder is subject to
taxation under FIRPTA, the income would be taxable as U.S. trade or business
income (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals) and the
purchaser of Common Shares could be required to withhold 10% of the purchase
price and remit such amount to the IRS.
If FIRPTA does not apply to the sale of the Common Shares, a Non-U.S. Holder
that owns the Common Shares as a capital asset nonetheless will be subject to
U.S. federal income tax on any gain realized on the sale of Common Shares if
(i) such gain is U.S. trade or business income, (ii) in the case of gain
realized by an individual Non-U.S. Holder, such Non-U.S. Holder is present in
the United States for 183 days or more during the year of such sale and
certain other conditions are met, or (iii) the Non-U.S. Holder is taxed under
rules applicable to certain U.S. expatriates.
In general, an individual who is a Non-U.S. Holder for U.S. estate tax
purposes will incur liability for U.S. federal estate tax if the fair market
value of the property included in such individual's taxable estate for U.S.
federal estate tax purposes exceeds the statutory threshold amount. For these
purposes, Common Shares owned
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or treated as owned by an individual who is a Non-U.S. Holder (for U.S. estate
tax purposes) at the time of death will be included in the individual's
taxable estate for U.S. federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employee pension trust do not constitute
unrelated business taxable income ("UBTI"). Revenue rulings, however, are
interpretive in nature and are subject to revocation or modification by the
IRS. Based upon the ruling and the analysis therein, distributions by CRIIMI
MAE to a stockholder that is a tax-exempt entity also should not constitute
UBTI, provided that the tax-exempt entity has not financed the acquisition of
its Common Shares with "acquisition indebtedness" within the meaning of the
Code, and that the Common Shares are not otherwise used in an unrelated trade
or business of the tax-exempt entity.
Legislation effective for taxable years beginning on or after January 1,
1994, requires certain pension trust stockholders owning more than 10 percent
(by value) of the outstanding shares of a REIT to treat a percentage of
dividends received from the REIT as UBTI under certain circumstances. Pension
trust stockholders should consult their own tax advisors concerning the effect
of such legislation on their investment in the Common Shares.
CRIIMI MAE has issued, and intends to issue in the future, debt instruments
which might cause CRIIMI MAE to be considered a TMP under section 7701 (i) of
the Code. If CRIIMI MAE or any of its subsidiaries is treated as a TMP, a
portion of the ordinary or capital gain dividends received by a tax-exempt
stockholder may be considered excess inclusion income. If a portion of the
ordinary or capital gain dividends received by a tax-exempt stockholder is
designated as excess inclusion income, such amount will be considered UBTI.
Additionally, the UBTI of a tax-exempt stockholder shall in no event be less
than its allocable share of excess inclusion income, regardless of its other
items of income or deduction.
Given the size of the debt issuances described in the preceding paragraph,
to the extent CRIIMI MAE or any of its subsidiaries is treated as a TMP,
significant amounts of excess inclusion income will result. Tax-exempt holders
are urged to consult with tax counsel concerning the impact such excess
inclusion income will have on their tax situations.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Payments in respect of dividends or proceeds from the sale or other
disposition of Common Shares may be subject to information reporting to the
IRS and to a 31% U.S. backup withholding tax. Backup withholding generally
will not apply, however, to a holder who furnishes a correct taxpayer
identification number and makes any other required certification or who is
otherwise exempt from backup withholding. In addition, backup withholding
generally will not apply to dividends paid on Common Shares to a Non-U.S.
Holder outside of the United States. Backup withholding is not an additional
tax. Rather, the amount of any backup withholding with respect to a payment to
a stockholder will be allowed as a credit against such stockholder's federal
income tax liability and may entitle such stockholder to a refund, provided
that the required information is furnished to the IRS. Accordingly,
stockholders should consult their own tax advisors with respect to any such
information reporting and backup withholding requirements, including their
potential for qualification for exemption therefrom.
On October 6, 1997, the Treasury Department issued final rules with respect
to withholding tax on income paid to Non-U.S. Holders and related matters (the
"New Withholding Regulations"). The New Withholding Regulations will generally
be effective for payments made after December 31, 1998, subject to certain
transition rules. The New Withholding Regulations modify the requirements
imposed on a Non-U.S. Holder and certain intermediaries for establishing the
recipient's status as a Non-U.S. Holder eligible for exemption from
withholding and backup withholding. In particular, the New Withholding
Regulations impose more stringent conditions on the ability of financial
intermediaries acting for a Non-U.S. Holder to provide certifications on
behalf of the Non-U.S.
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<PAGE>
Holder, which may include entering into an agreement with the IRS to audit
certain documentation with respect to such certifications. Non-U.S. Holders
that are subject to withholding are urged to consult their own tax advisors
with respect to the New Withholding Regulations.
THE FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. PROSPECTIVE PURCHASERS OF THE COMMON SHARES ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE PRECISE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF THE
COMMON SHARES.
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<PAGE>
UNDERWRITING
Prudential Securities Incorporated and Friedman, Billings, Ramsey & Co.,
Inc. (the "Underwriters"), have agreed, subject to the terms and conditions
contained in the related underwriting agreement between the Company and the
Underwriters (the " Underwriting Agreement") to purchase from the Company the
number of shares of Common Stock set forth below opposite their respective
names.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated.................................
Friedman, Billings, Ramsey & Co., Inc..............................
---------
Total........................................................... 2,500,000
=========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are
purchased.
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock to the public initially at the public offering price
set forth on the cover page of this Prospectus Supplement, that the
Underwriters may allow to selected dealers a concession of $ per share, and
that such dealers may re-allow a concession of $ per share to certain other
dealers. After the public offering, the public offering price and the
concessions may be changed by the Underwriters.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 375,000 additional shares
of Common Stock at the public offering price, less the underwriting discounts
and commissions, as set forth on the cover page of this Prospectus Supplement.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of shares of Common Stock offered hereby.
To the extent such option to purchase is exercised, the Underwriters will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares of Common Stock as the number set
forth next to such Underwriter's name in the preceding table bears to
2,500,000.
The Company has agreed to indemnify the Underwriters against and contribute
to any losses arising out of certain liabilities, including liabilities under
the Securities Act.
CRIIMI MAE and certain of its officers, directors and affiliates have agreed
not to, directly or indirectly, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase, or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of
any option to purchase or other sale or disposition) of any Common Shares, or
any securities exercisable or exchangeable for Common Shares or rights to
purchase Common Shares (except for issuances by CRIIMI MAE pursuant to stock
option or dividend reinvestment and certain other agreements) for a period of
45 days after the date of this Prospectus Supplement without the prior written
consent of Prudential Securities Incorporated on behalf of the Underwriters
subject to shares of Series C Cumulative Convertible Preferred Stock issued
under an agreement with an institutional investor through June 1998.
Prudential Securities Incorporated may, in its sole discretion, release all or
any portion of the shares subject to such lock-up agreements.
In connection with the Offering, the Underwriters and their respective
affiliates may engage in transactions that stabilize, maintain or otherwise
affect the market price of the Common Shares and the Series B Preferred Stock.
Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase Common Shares and the Series B Preferred Stock for the
purpose of stabilizing it's market price. The Underwriters may also create a
short position for the account of the Underwriters by selling more Common
Shares in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase Common Shares in the open
market following completion of the Offering to cover all or a portion of such
short position. The Underwriters may also cover all or a portion of such short
position, up to 375,000 shares, by exercising the Underwriters'
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<PAGE>
over-allotment option referred to above. In addition, Prudential Securities
Incorporated, on behalf of the Underwriters, may impose "penalty bids" whereby
it may reclaim from an Underwriter for the account of the other Underwriters,
the selling concession with respect to Common Shares that are distributed in
the Offering but subsequently purchased for the account of the Underwriters in
the open market. Any of the transactions described in this paragraph may
result in the maintenance of the price of the Common Shares at a level above
that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required and, if they are
undertaken, they may be discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the Common Stock pursuant to this Prospectus
Supplement and certain legal matters set forth in "Certain United States
Federal Income Tax Considerations" will be passed upon for CRIIMI MAE by
Swidler & Berlin, Chartered, Washington, D.C. Certain legal matters will be
passed upon for the Underwriters by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The consolidated financial statements of CRIIMI MAE as of December 31, 1997
and 1996 and for the years ended December 31, 1997, 1996 and 1995 incorporated
by reference in this Prospectus Supplement and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving said reports.
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<PAGE>
PROSPECTUS
CRIIMI MAE INC.
$264,915,000
DEBT SECURITIES, PREFERRED SHARES, COMMON SHARES AND WARRANTS
CRIIMI MAE Inc. ("CRIIMI MAE") may from time to time offer in one or more
series its debt securities (the "Debt Securities"), shares of its preferred
stock, par value $.01 per share (the "Preferred Shares"), shares of its common
stock, par value $.01 per share (the "Common Shares"), and warrants to
purchase Preferred Shares or Common Shares (the "Warrants"), with an aggregate
public offering price of up to $264,915,000 (or its foreign currency
equivalent based on the exchange rate at the time of sale) in amounts, at
prices and on terms to be determined at the time of offering. The Debt
Securities, Preferred Shares, Common Shares and Warrants (collectively, the
"Securities") may be offered, separately or together, in separate series in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Debt Securities, the
specific title, ranking, aggregate principal amount, currency, form (which may
be registered or bearer, or certificated or global), authorized denominations,
maturity, rate (or manner of calculation thereof) and time of payment of
interest, terms for redemption at the option of CRIIMI MAE or repayment at the
option of the holder, terms for sinking fund payments, terms for conversion
into Preferred Shares or Common Shares, covenants and any initial public
offering price; (ii) in the case of Preferred Shares, the specific title and
stated value, any dividend, liquidation, redemption, conversion, voting and
other rights, and any initial public offering price; (iii) in the case of
Common Shares, any public offering price; and (iv) in the case of Warrants,
the number and terms thereof, the designation and number or amount of
Preferred Shares or Common Shares issuable upon their exercise, the exercise
price, the terms of the offering and sale thereof and, where applicable, the
duration and detachability thereof. In addition, such specific terms may
include limitations on direct or beneficial ownership and restrictions on
transfer of the Securities, in each case as may be appropriate to preserve the
status of CRIIMI MAE as a real estate investment trust ("REIT") for federal
income tax purposes. See "Certain United States Federal Income Tax
Considerations."
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities
covered by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by CRIIMI MAE, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their
names, and any applicable purchase price, fee, commission or discount
arrangement between or among them, will be set forth, or will be calculable
from the information set forth, in the applicable Prospectus Supplement. See
"Plan of Distribution." No Securities may be sold without delivery of the
applicable Prospectus Supplement describing the method and terms of the
offering of such Securities.
CRIIMI MAE's Common Shares, and shares of its Series B Cumulative
Convertible Preferred Stock, par value $.01 per share (the "Series B Preferred
Shares"), are traded on the New York Stock Exchange (the "NYSE") under the
symbol "CMM" and "CMM-PrB," respectively.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
----------------
THE DATE OF THIS PROSPECTUS IS MARCH 11, 1998.
<PAGE>
AVAILABLE INFORMATION
CRIIMI MAE and certain of its subsidiaries are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC" or
"Commission"). Reports, proxy statements and other information filed by CRIIMI
MAE can be inspected and copied at the SEC's Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C. 20549 and the SEC's Regional Offices at 7 World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and copies of such material can
be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy
material and other information concerning CRIIMI MAE may be inspected at the
NYSE, 20 Broad Street, New York, New York 10005 or reviewed through the
Commission's Electronic Data Gathering Analysis and Retrieval System, which is
publicly available through the Commission's Web site (http://www.sec.gov).
This Prospectus constitutes part of a Registration Statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement")
filed by CRIIMI MAE with the SEC under the Securities Act of 1933, as amended
(the "Securities Act"). This Prospectus does not contain all of the
information included in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Reference is
made to the Registration Statement for further information with respect to
CRIIMI MAE and the Securities. Statements contained in this Prospectus and any
accompanying Prospectus Supplement concerning the provisions or contents of
any contract, agreement or any other document referred to herein are not
necessarily complete. With respect to each such contract, agreement or
document filed as an exhibit to the Registration Statement, reference is made
to such exhibit for a more complete description of the matters involved, and
each such statement shall be deemed qualified in its entirety by such
reference to the copy of the applicable document filed with the Commission.
The Registration Statement including the exhibits and schedules thereto, may
be inspected without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. and copies of it or any part thereof may be
obtained from such office, upon payment of the fees prescribed by the
Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by CRIIMI MAE with the SEC (File
No. 1-10360) are incorporated herein by reference (collectively, the
"Incorporated Information"):
1. Annual Report on Form 10-K for the year December 31, 1997.
2. Definitive Proxy Statements dated March 26, 1997, April 28, 1995 and
April 6, 1993.
3. Form 8-K, as filed with the SEC on June 30, 1995.
4. Form 8-A, as filed with the SEC on October 16, 1989.
5. Form 8-B, as filed with the SEC on October 27, 1993.
The Prospectus should be read in conjunction with the Incorporated
Information and any applicable Prospectus Supplement, which are incorporated
by reference into the Prospectus. All documents filed by CRIIMI
2
<PAGE>
MAE pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after
the date of this Prospectus and prior to the termination of the offering of
the Securities offered hereby shall be deemed to be incorporated by reference
in this Prospectus from the date of filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
CRIIMI MAE will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus has been delivered, on the
written or oral request of any such person, a copy of any or all of the
documents referred to above which have been or may be incorporated in this
Prospectus by reference, other than exhibits to such documents, unless such
exhibits are specifically incorporated by reference. Requests for such copies
should be directed to CRIIMI MAE's principal executive offices: CRIIMI MAE
Inc., Investor Services, 11200 Rockville Pike, Rockville, Maryland 20852, or
telephone (301) 816-2300 or toll-free (800) 266-0535.
3
<PAGE>
CRIIMI MAE
CRIIMI MAE is a full service commercial mortgage company structured as a
self-administered real estate investment trust ("REIT"). CRIIMI MAE's
portfolio of assets consists primarily of non-investment grade subordinated
securities backed by first mortgage loans on multifamily and other commercial
real estate ("Subordinated CMBS") and interests in government insured or
guaranteed mortgages secured by multifamily housing complexes located
throughout the United States. CRIIMI MAE believes that its concentration on
acquiring Subordinated CMBS and originating commercial mortgage loans for its
own securitization program, together with its expertise as an underwriter and
servicer, enable CRIIMI MAE to take advantage of the rapid growth in the
securitization of debt backed by income-producing commercial real estate.
CRIIMI MAE is one of the largest publicly traded REITs focused primarily on
the acquisition of Subordinated CMBS. In addition, CRIIMI MAE provides certain
servicing functions, including acting as the special servicer for the
commercial mortgage loans underlying its Subordinated CMBS portfolio, with
respect to commercial mortgage assets.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement for any
offering of Securities, CRIIMI MAE intends to use the majority of the net
proceeds from the sale of Securities (i) to acquire additional mortgage
assets, primarily Subordinated CMBSs, (ii) to sponsor and/or participate in
collateralized mortgage obligation programs, and (iii) for other general
corporate purposes, including working capital. Pending their use for the
foregoing purposes, the net proceeds may be invested in short term, interest-
bearing accounts and/or used to pay down debt on a temporary basis.
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
The following table sets forth CRIIMI MAE's consolidated ratios of (i)
earnings to fixed charges and (ii) earnings to combined fixed charges and
preferred stock dividends for the periods shown:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges................ 1.48 1.66 1.35 1.56 1.70
Ratio of earnings to combined fixed charges and
preferred stock dividends*....................... 1.48 1.66 1.35 1.47 1.57
</TABLE>
- --------
* Prior to the offering of Series A Cumulative Convertible Preferred Stock on
July 1, 1996, CRIIMI MAE did not have any issued or outstanding Preferred
Shares.
For purposes of computing these ratios, earnings consist of CRIIMI MAE's
consolidated net income, plus fixed charges, extraordinary items, loss from
investment in limited partnerships and dividends on Preferred Shares. Fixed
charges and Preferred Share dividends consist of gross interest cost,
including amortization of debt cost, discount or premium and adjustment to
hedges for valuation and sales, and dividends on Preferred Shares.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities are to be issued under one or more trust indentures
(each, an "Indenture") between CRIIMI MAE and one or more trustees (each, a
"Trustee"). The form of the Subordinated Indenture (as defined
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below) and the form of the Senior Indenture (as defined below) have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
The Indentures are subject to and governed by the Trust Indenture Act of 1939,
as amended (the "TIA"). The statements made under this heading relating to the
Debt Securities and the Indentures, as modified or superseded by any
applicable Prospectus Supplement, are summaries of the provisions thereof and
do not purport to be complete and are qualified in their entirety by reference
to the Indentures and such Debt Securities. If Debt Securities are to be
issued, a description of their terms (as well as the form of Debt Securities)
will be filed by CRIIMI MAE as an exhibit to a current report on Form 8-K and
incorporated herein by reference.
When issued, the Debt Securities will be direct obligations of CRIIMI MAE
and may be either senior Debt Securities ("Senior Debt Securities") or
subordinated Debt Securities ("Subordinated Debt Securities"). The
indebtedness represented by Subordinated Debt Securities, as set forth below
under "--Subordination," will be subordinate in right of payment to Senior
Debt Securities and other senior indebtedness of CRIIMI MAE. In addition to
the terms of the Indenture and any specific, express terms of the Debt
Securities described below, the issuance of the Debt Securities will be
limited by, and subject to certain terms of, CRIIMI MAE's existing financing
facilities. Senior Debt Securities and Subordinated Debt Securities will be
issued pursuant to separate indentures (respectively, a "Senior Indenture" and
a "Subordinated Indenture"), in each case between the Company and a Trustee.
TERMS
The applicable Indenture may provide that the Debt Securities may be issued
without limit as to aggregate principal amount, in one or more series, in each
case as established from time to time in or pursuant to authority granted by a
resolution of the Board of Directors of CRIIMI MAE (the "Board") or as
established in one or more indentures supplemental to such Indenture. All Debt
Securities of one series need not be issued at the same time and, unless
otherwise provided, a series may be reopened, without the consent of the
holders of the Debt Securities of such series, for issuances of additional
Debt Securities of such series.
The applicable Indenture may also provide that there may be more than one
Trustee thereunder, each with respect to one or more series of Debt
Securities. Any Trustee under the applicable Indenture may resign or be
removed with respect to one or more series of Debt Securities, and a successor
Trustee may be appointed to act with respect to such series. In the event that
two or more persons are acting as Trustee with respect to different series of
Debt Securities, each such Trustee shall be a Trustee of a trust under the
applicable Indenture separate and apart from the trust administered by any
other Trustee, and, except as otherwise indicated therein, any action
described therein to be taken by the Trustee may be taken by each such Trustee
with respect to, and only with respect to, the one or more series of Debt
Securities for which it is Trustee under the applicable Indenture.
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities being offered for the specific terms thereof, including:
(1) the title of such Debt Securities and whether such Debt Securities
are Senior Debt Securities or Subordinated Debt Securities;
(2) the aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) the percentage of the principal amount at which such Debt Securities
will be issued and, if other than the principal amount thereof, the portion
of the principal amount thereof payable upon declaration of acceleration of
the maturity thereof, or (if applicable) the portion of the principal
amount of such Debt Securities that is convertible into Common Shares
and/or Preferred Shares, or the method by which any such portion shall be
determined;
(4) if convertible, in connection with the preservation of CRIIMI MAE's
status as a REIT, any applicable limitations on the ownership or
transferability of the Common Shares and/or Preferred Shares into which
such Debt Securities are convertible;
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<PAGE>
(5) the date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable;
(6) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt Securities
will bear interest, if any;
(7) the date or dates, or the method for determining such date or dates,
from which any such interest will accrue, the interest payment dates on
which any such interest will be payable, the regular record dates for such
interest payment dates, or the method by which such dates shall be
determined, the persons to whom such interest shall be payable, and the
basis upon which interest shall be calculated if other than that of a 360-
day year of twelve 30-day months;
(8) the place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, where such Debt
Securities may be surrendered for conversion or registration of transfer or
exchange and where notices or demands to or upon CRIIMI MAE in respect of
such Debt Securities and the applicable Indenture may be served;
(9) the period or periods within which, the price or prices at which and
the other terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the option of CRIIMI MAE, if CRIIMI MAE
is to have such an option;
(10) the obligation, if any, of CRIIMI MAE to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous provision or
at the option of a holder thereof, and the period or periods within which,
the price or prices at which and the other terms and conditions upon which
such Debt Securities will be redeemed, repaid or purchased, as a whole or
in part, pursuant to such obligation;
(11) if other than U.S. dollars, the currency or currencies in which such
Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(12) whether the amount of payments of principal of (and premium, if any)
or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not be, based on a currency, currencies, currency unit
or units or composite currency or currencies) and the manner in which such
amounts shall be determined;
(13) whether such Debt Securities will be issued in the form of one or
more global securities and whether such global securities are to be
issuable in a temporary global form or permanent global form;
(14) any additions to, modifications of or deletions from the terms of
such Debt Securities with respect to the events of default or covenants set
forth in the applicable Indenture;
(15) any provision for collateral security for repayment of such Debt
Securities;
(16) whether such Debt Securities will be issued in certificated or book-
entry form;
(17) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;
(18) the applicability, if any, of the defeasance and covenant defeasance
provisions of the applicable Indenture;
(19) the terms, if any, upon which such Debt Securities may be
convertible into Common Shares and/or Preferred Shares and the terms and
conditions upon which such conversion will be effected, including, without
limitation, the initial conversion price or rate and the conversion period;
(20) whether and under what circumstances CRIIMI MAE will pay additional
amounts on such Debt Securities in respect of any tax, assessment or
governmental charge and, if so, whether CRIIMI MAE will have the option to
redeem such Debt Securities in lieu of making such payment; and
(21) any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
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<PAGE>
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities") or that the principal amount thereof
payable at their stated maturity may be more or less than the principal amount
thereof at original issuance ("Indexed Securities"). Special U.S. federal
income tax, accounting and other considerations applicable to Original Issue
Discount Securities or Indexed Securities will be described in the applicable
Prospectus Supplement.
Except as may be set forth in any Prospectus Supplement, the Debt Securities
will not contain any provisions that would limit the ability of CRIIMI MAE to
incur indebtedness or that would afford holders of Debt Securities protection
in the event of a highly leveraged or similar transaction involving CRIIMI MAE
or in the event of a change of control. Restrictions on ownership and
transfers of CRIIMI MAE's Common Shares and Preferred Shares are designed to
preserve its status as a REIT and, therefore, may act to prevent or hinder a
change of control. See "Description of Capital Stock." Reference is made to
the applicable Prospectus Supplement for information with respect to any
deletions from, modifications of, or additions to, the events of default or
covenants of CRIIMI MAE that are described below, including any addition of a
covenant or other provision providing event risk or similar protection.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of
Debt Securities will be payable at the corporate trust office of the Trustee;
provided that, at the option of CRIIMI MAE, payment of interest may be made by
check mailed to the address of the person entitled thereto as it appears in
the register to be maintained by the Trustee or by wire transfer of funds to
such person at an account maintained within the United States.
Any interest not punctually paid or duly provided for on any interest
payment date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder thereof on the applicable record
date and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
applicable Trustee, notice whereof shall be given to each holder of such Debt
Security not less than 10 days prior to such Special Record Date, or may be
paid at any time in any other lawful manner, all as more completely described
in the applicable Indenture.
Subject to certain limitations imposed upon Debt Securities issued in book-
entry form, the Debt Securities of any series will be exchangeable for other
Debt Securities of the same series and of a like aggregate principal amount
and tenor of different authorized denominations upon surrender of such Debt
Securities at the corporate trust office of the applicable Trustee. In
addition, subject to certain limitations imposed upon Debt Securities issued
in book-entry form, the Debt Securities of any series may be surrendered for
conversion or registration of transfer thereof at the corporate trust office
of the applicable Trustee. Every Debt Security tendered for conversion,
registration of transfer or exchange shall be duly endorsed or accompanied by
a written instrument of transfer. No service charge will be made for any
registration of transfer or exchange of any Debt Securities, but CRIIMI MAE
may require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith. If the applicable Prospectus
Supplement refers to any transfer agent (in addition to the applicable
Trustee) initially designated by CRIIMI MAE with respect to any series of Debt
Securities, CRIIMI MAE may at any time rescind the designation of any such
transfer agent or approve a change in the location through which any such
transfer agent acts, except that CRIIMI MAE will be required to maintain a
transfer agent in each place of payment for such series of Debt Securities.
CRIIMI MAE may at any time designate additional transfer agents with respect
to any series of Debt Securities.
7
<PAGE>
To protect CRIIMI MAE's status as a REIT, CRIIMI MAE may refuse to effect a
transfer of Debt Securities if, as a result of such transfer, any person would
beneficially own, either directly or indirectly, more than 9.8% of CRIIMI
MAE's outstanding capital stock. Neither CRIIMI MAE nor any Trustee shall be
required to (i) issue, register the transfer of or exchange Debt Securities of
any series during a period beginning at the opening of business 15 days before
any selection of Debt Securities of that series to be redeemed and ending at
the close of business on the day of mailing of the relevant notice of
redemption; (ii) register the transfer of or exchange any Debt Security, or
portion thereof, called for redemption, except the unredeemed portion of any
Debt Security being redeemed in part; or (iii) for Debt Securities repayable
at the option of the holder, issue, register the transfer of or exchange any
Debt Security that has been surrendered for repayment at the option of the
holder, except the portion, if any, of such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE
Each Indenture will provide that CRIIMI MAE may consolidate with, or sell,
lease or convey all or substantially all of its assets to, or merge with or
into, any other corporation or trust or other entity provided that (a) either
CRIIMI MAE shall be the continuing corporation, or the successor corporation
(if other than CRIIMI MAE) formed by or resulting from any such consolidation
or merger or which shall have received the transfer of such assets and shall
be an entity organized and existing under the laws of the United States or a
state thereof and the successor entity shall expressly assume payment of the
principal of (and premium, if any) and interest on all of the Debt Securities
and the due and punctual performance and observance of all of the covenants
and conditions contained in the applicable Indenture; (b) immediately after
giving effect to such transaction and treating any indebtedness that becomes
an obligation of CRIIMI MAE or any subsidiary as a result thereof as having
been incurred by CRIIMI MAE or such subsidiary at the time of such
transaction, no event of default under the applicable Indenture, and no event
which, after notice or the lapse of time, or both, would become such an event
of default, shall have occurred and be continuing; and (c) an officers'
certificate and legal opinion covering such conditions shall be delivered to
each Trustee.
CERTAIN COVENANTS
Existence. Except as permitted under "--Merger, Consolidation or Sale,"
CRIIMI MAE will do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence, rights (charter and
statutory) and franchises; provided, however, that CRIIMI MAE shall not be
required to preserve any right or franchise if it determines that the
preservation thereof is no longer desirable in the conduct of its business and
that the loss thereof is not disadvantageous in any material respect to the
holders of the Debt Securities.
Maintenance of Properties. CRIIMI MAE will cause all of its material
properties used or useful in the conduct of its business or the business of
any subsidiary to be maintained and kept in good condition, repair and working
order and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of CRIIMI MAE may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; provided, however, that CRIIMI MAE and its
subsidiaries shall not be prevented from discontinuing the operation and
maintenance of any such properties if such discontinuance is in the judgment
of CRIIMI MAE desirable in the conduct of its business and not disadvantageous
in any material respect to the holders of the Debt Securities.
Payment of Taxes and Other Claims. CRIIMI MAE will pay or discharge or cause
to be paid or discharged, before the same shall become delinquent, (i) all
taxes, assessments and governmental charges levied or imposed upon it or any
subsidiary or upon the income, profits or property of CRIIMI MAE or any
subsidiary, and (ii) all lawful claims for labor, materials and supplies
which, if unpaid, might by law become a lien upon the property of CRIIMI MAE
or any subsidiary; provided, however, that CRIIMI MAE shall not be required to
pay or discharge or cause to be paid or discharged any such tax, assessment,
charge or claim whose amount, applicability or validity is being contested in
good faith by appropriate proceedings.
Additional Covenants. Any additional covenants of CRIIMI MAE with respect to
any series of Debt Securities will be set forth in the Prospectus Supplement
relating thereto.
8
<PAGE>
EVENTS OF DEFAULT, NOTICE AND WAIVER
Each Indenture will describe specific "Events of Default" with respect to
any series of Debt Securities issued thereunder. Such "Events of Default" are
likely to include (with grace and cure periods): (a) default for 30 days in
the payment of any installment of interest on any Debt Security of such
series; (b) default in the payment of the principal of (or premium, if any,
on) any Debt Security of such series when due and payable, at maturity, upon
redemption or otherwise which continues for five business days; (c) default in
making any sinking fund payment as required for any Debt Security of such
series which continues for five business days; (d) default in the performance
or breach of any other covenant or warranty of CRIIMI MAE contained in the
applicable Indenture (other than a covenant added to such Indenture solely for
the benefit of a series of Debt Securities issued thereunder other than such
series), continued for 60 days after written notice as provided in the
applicable Indenture; (e) a default not being contested in good faith by
CRIIMI MAE under any bond, debenture, note or other evidence of indebtedness
for money borrowed by CRIIMI MAE (including obligations under leases required
to be capitalized on the balance sheet of the lessee under generally accepted
accounting principles but not including any indebtedness or obligations for
which recourse is limited to property purchased) in an aggregate principal
amount in excess of $10,000,000 or under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any indebtedness for money borrowed by CRIIMI MAE (including such leases but
not including such indebtedness or obligations for which recourse is limited
to property purchased) in an aggregate principal amount in excess of
$10,000,000 by CRIIMI MAE, whether such indebtedness now exists or shall
hereafter be created which default shall have resulted in such indebtedness
becoming or being declared due and payable prior to the date on which it would
otherwise have become due and payable or such obligations being accelerated,
without such acceleration having been rescinded or annulled; (f) certain
events of bankruptcy, insolvency or reorganization, or court appointment of a
receiver, liquidator or trustee of CRIIMI MAE or any Significant Subsidiary or
either of its properties; and (g) any other Event of Default provided with
respect to a particular series of Debt Securities. The term "Significant
Subsidiary" means each significant subsidiary (as defined in Regulation S-X
promulgated under the Securities Act) of CRIIMI MAE.
If an Event of Default under an Indenture with respect to Debt Securities of
any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the outstanding Debt Securities of that series may declare
the principal amount (or, if the Debt Securities of that series are Original
Issue Discount Securities or Indexed Securities, such portion of the principal
amount as may be specified in the terms thereof) of all the Debt Securities of
that series to be due and payable immediately by written notice thereof to
CRIIMI MAE (and to the applicable Trustee if given by the holders). However,
at any time after such a declaration of acceleration with respect to Debt
Securities of such series (or of all Debt Securities then outstanding under
the applicable Indenture, as the case may be) has been made, but before a
judgment or decree for payment of the money due has been obtained by the
applicable Trustee, the holders of not less than a majority in principal
amount of outstanding Debt Securities of such series (or of all Debt
Securities then outstanding under the applicable Indenture, as the case may
be) may rescind and annul such declaration and its consequences if (a) CRIIMI
MAE shall have paid or deposited with the applicable Trustee all required
payments of the principal of (and premium, if any) and interest on the Debt
Securities of such series (or of all Debt Securities then outstanding under
the applicable Indenture, as the case may be), plus certain fees, expenses,
disbursements and advances of the applicable Trustee and (b) all Events of
Default, other than the non-payment of accelerated principal (or specified
portion thereof), with respect to Debt Securities of such series (or of all
Debt Securities then outstanding under the applicable Indenture, as the case
may be) have been cured or waived as provided in the applicable Indenture.
Each Indenture will also provide that the holders of not less than a majority
in principal amount of the outstanding Debt Securities of any series (or of
all Debt Securities then outstanding under the applicable Indenture, as the
case may be) may waive any past default with respect to such series and its
consequences, except a default (x) in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series or (y) in
respect of a covenant or provision contained in the applicable Indenture that
cannot be modified or amended without the consent of the holder of each
outstanding Debt Security affected thereby.
The applicable Trustee will be required to give notice to the holders of
Debt Securities within 90 days of a default under the applicable Indenture
unless such default shall have been cured or waived; provided, however,
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<PAGE>
that such Trustee may withhold notice to the holders of any series of Debt
Securities of any default with respect to such series (except a default in the
payment of the principal of (or premium, if any) or interest on any Debt
Security of such series or in the payment of any sinking fund installment in
respect of any Debt Security of such series) if designated officers of such
Trustee consider such withholding to be in the interest of such holders.
The right of any holder to institute a proceeding with respect to an
Indenture will be subject to certain conditions precedent including notice and
indemnity to the applicable Trustee, but the holder has an absolute right to
receipt of principal of (and premium, if any) and interest on such holder's
Debt Security on or after the respective due dates expressed in the Debt
Security, and to institute suit for the enforcement of any such payments.
Subject to provisions in the Indenture relating to its duties in case of
default, no Trustee will be under an obligation to exercise any of its rights
or powers under such Indenture at the request or direction of any holders of
any series of Debt Securities then outstanding under such Indenture, unless
such holders shall have offered to the applicable Trustee thereunder
reasonable security or indemnity. The holders of not less than a majority in
aggregate principal amount of the outstanding Debt Securities of any series
(or of all Debt Securities then outstanding under the applicable Indenture, as
the case may be) shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the applicable Trustee,
or of exercising any trust or power conferred upon such Trustee. However, each
Trustee may refuse to follow any direction which is in conflict with any law
or the applicable Indenture, which may involve such Trustee in personal
liability or which may be unduly prejudicial to the holders of Debt Securities
of such series not joining therein.
Within 120 days after the close of each fiscal year, CRIIMI MAE will be
required to deliver to each Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the applicable Indenture and, if so, specifying each such
default and the nature and status thereof.
MODIFICATION OF THE INDENTURE
Modifications and amendments of an Indenture may be made only with the
consent of the holders of not less than a majority in aggregate principal
amount of all outstanding Debt Securities issued under the Indenture which are
affected by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of the holder of each such
Debt Security affected thereby, (a) change the stated maturity of the
principal of, or any installment of interest (or premium, if any) on, any such
Debt Security; (b) reduce the principal amount of, or the rate or amount of
interest on, or any premium payable on redemption of, any such Debt Security,
or reduce the amount of principal of an Original Issue Discount Security that
would be due and payable upon declaration of acceleration of the maturity
thereof or would be provable in bankruptcy, or adversely affect any right of
repayment of the holder of any such Debt Security; (c) change the place of
payment, or the coin or currency, for payment of principal of, premium, if
any, or interest on any such Debt Security; (d) impair the right to institute
suit for the enforcement of any payment on or with respect to any such Debt
Security; (e) reduce the above-stated percentage of outstanding Debt
Securities of any series necessary to modify or amend the Indenture, to waive
compliance with certain provisions thereof or certain defaults and
consequences thereunder or to reduce the quorum or voting requirements set
forth in the Indenture; or (f) modify any of the foregoing provisions or any
of the provisions relating to the waiver of certain past defaults or certain
covenants, except to increase the required percentage to effect such action or
to provide that certain other provisions may not be modified or waived without
the consent of the holder of such Debt Security.
The holders of not less than a majority in principal amount of outstanding
Debt Securities issued under an Indenture have the right to waive compliance
by CRIIMI MAE with certain covenants in such Indenture.
Modifications and amendments of an Indenture may be made by CRIIMI MAE and
the respective Trustee thereunder without the consent of any holder of Debt
Securities for any of the following purposes: (i) to evidence the succession
of another person to CRIIMI MAE as obligor under such Indenture; (ii) to add
to the covenants of CRIIMI MAE for the benefit of the holders of all or any
series of Debt Securities or to surrender any right or power conferred upon
CRIIMI MAE in such Indenture; (iii) to add Events of Default for the benefit
of the
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holders of all or any series of Debt Securities; (iv) to add or change any
provisions of the Indenture to facilitate the issuance of, or to liberalize
certain terms of, Debt Securities in bearer form, or to permit or facilitate
the issuance of Debt Securities in uncertificated form, provided that such
action shall not adversely affect the interests of the holders of the Debt
Securities of any series in any material respect; (v) to change or eliminate
any provisions of the Indenture, provided that any such change or elimination
shall become effective only when there are no Debt Securities outstanding of
any series created prior thereto which are entitled to the benefit of such
provision; (vi) to secure the Debt Securities; (vii) to establish the form or
terms of Debt Securities of any series, including the provisions and
procedures, if applicable, for the conversion of such Debt Securities into
Common Shares and/or Preferred Shares; (viii) to provide for the acceptance of
appointment by a successor Trustee or facilitate the administration of the
trusts under the Indenture by more than one Trustee; (ix) to cure any
ambiguity, defect or inconsistency in the Indenture, provided that such action
shall not adversely affect the interests of holders of Debt Securities of any
series issued under such Indenture in any material respect; or (x) to
supplement any of the provisions of the Indenture to the extent necessary to
permit or facilitate defeasance and discharge of any series of such Debt
Securities, provided that such action shall not adversely affect the interests
of the holders of the Debt Securities of any series in any material respect.
Each Indenture will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have
given any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security
that shall be deemed to be outstanding shall be the amount of the principal
thereof that would be due and payable as of the date of such determination
upon declaration of acceleration of the maturity thereof, (ii) the principal
amount of a Debt Security denominated in a foreign currency that shall be
deemed outstanding shall be the U.S. dollar equivalent, determined on the
issue date for such Debt Security, of the principal amount (or, in the case of
an Original Issue Discount Security, the U.S. dollar equivalent on the issue
date of such Debt Security of the amount determined as provided in (i) above),
(iii) the principal amount of an Indexed Security that shall be deemed
outstanding shall be the principal face amount of such Indexed Security at
original issuance, unless otherwise provided with respect to such Indexed
Security pursuant to the Indenture, and (iv) Debt Securities owned by CRIIMI
MAE or any other obligor upon the Debt Securities or any affiliate of CRIIMI
MAE or of such other obligor shall be disregarded.
Each Indenture will contain provisions for convening meetings of the holders
of Debt Securities of a series. A meeting may be called at any time by the
applicable Trustee, and also, upon request, by CRIIMI MAE or the holders of at
least 25% in principal amount of the outstanding Debt Securities of such
series, in any such case upon notice given as provided in the applicable
Indenture. Except for any consent that must be given by the holder of each
Debt Security affected by certain modifications and amendments of the
Indenture, any resolution presented at a meeting or adjourned meeting duly
reconvened at which a quorum is present may be adopted by the affirmative vote
of the holders of a majority in principal amount of the outstanding Debt
Securities of that series; provided, however, that, except as referred to
above, any resolution with respect to any request, demand, authorization,
direction, notice, consent, waiver or other action that may be made, given or
taken by the holders of a specified percentage, which is less than a majority,
in principal amount of the outstanding Debt Securities of a series may be
adopted at a meeting or adjourned meeting duly reconvened at which a quorum is
present by the affirmative vote of the holders of such specified percentage in
principal amount of the outstanding Debt Securities of that series. Any
resolution passed or decision taken at any meeting of holders of Debt
Securities of any series duly held in accordance with the applicable Indenture
will be binding on all holders of Debt Securities of that series. The quorum
at any meeting called to adopt a resolution, and at any reconvened meeting,
will be persons holding or representing a majority in principal amount of the
outstanding Debt Securities of a series; provided, however, that if any action
is to be taken at such meeting with respect to a consent or waiver which may
be given by the holders of not less than a specified percentage in principal
amount of the outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the outstanding
Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of holders of Debt Securities of any series with respect to any
request, demand, authorization, direction, notice, consent, waiver or
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other action that the applicable Indenture expressly provides may be made,
given or taken by the holders of a specified percentage in principal amount of
all outstanding Debt Securities affected thereby, or of the holders of such
series and one or more additional series: (i) there shall be no minimum quorum
requirement for such meeting and (ii) the principal amount of the outstanding
Debt Securities of such series that vote in favor of such request, demand,
authorization, direction, notice, consent, waiver or other action shall be
taken into account in determining whether such request, demand, authorization,
direction, notice, consent, waiver or other action has been made, given or
taken under the Indenture.
SUBORDINATION
Upon any distribution to creditors of the Company in a liquidation,
dissolution or reorganization, the payment of the principal of and interest on
any Subordinated Debt Securities will be subordinated to the extent provided
in the applicable Indenture in right of payment to the prior payment in full
of all Senior Debt Securities and other senior indebtedness. No payment of
principal or interest will be permitted to be made on Subordinated Debt
Securities at any time if a default in Senior Debt Securities exists that
permits the holders of such Senior Debt Securities to accelerate their
maturity and the default is the subject of judicial proceedings or the Company
receives notice of the default. After all Senior Debt Securities are paid in
full and until the Subordinated Debt Securities are paid in full, holders of
Subordinated Debt Securities will be subrogated to the right of holders of
Senior Debt Securities to the extent that distributions otherwise payable to
holders of Subordinated Debt Securities have been applied to the payment of
Senior Debt Securities. By reason of such subordination, in the event of a
distribution of assets upon insolvency, certain general creditors of the
Company may recover more, ratably, than holders of Subordinated Debt
Securities. If this Prospectus is being delivered in connection with a series
of Subordinated Debt Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will contain the approximate
amount of Senior Debt Securities outstanding as of the end of the Company's
most recent fiscal quarter.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Under the Indentures, CRIIMI MAE may be permitted to discharge certain
obligations to holders of any series of Debt Securities issued thereunder that
have not already been delivered to the applicable Trustee for cancellation and
that either have become due and payable or will become due and payable within
one year (or scheduled for redemption within one year) by irrevocably
depositing with the applicable Trustee, in trust, funds in such currency or
currencies, currency unit or units or composite currency or currencies in
which such Debt Securities are payable in an amount sufficient to pay the
entire indebtedness on such Debt Securities in respect of principal (and
premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the stated maturity or
redemption date, as the case may be.
Each Indenture will provide that, under certain circumstances, CRIIMI MAE
may elect either (a) to defease and be discharged from any and all obligations
with respect to such Debt Securities (except for the obligation to pay
additional amounts, if any, upon the occurrence of certain events of tax,
assessment or governmental charge with respect to payments on such Debt
Securities and the obligations to register the transfer or exchange of such
Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen
Debt Securities, to maintain an office or agency in respect of such Debt
Securities and to hold moneys for payment in trust) ("defeasance") or (b) to
be released from its obligations with respect to such Debt Securities under
the applicable Indenture or, under certain circumstances, its obligations with
respect to any other covenant, and any omission to comply with such
obligations shall not constitute a default or an Event of Default with respect
to such Debt Securities ("covenant defeasance"), in either case upon the
irrevocable deposit by CRIIMI MAE with the applicable Trustee, in trust, of an
amount, in such currency or currencies, currency unit or units or composite
currency or currencies in which such Debt Securities are payable at stated
maturity, or Government Obligations (as defined below), or both, applicable to
such Debt Securities which through the scheduled payment of principal and
interest in accordance with their terms will provide money in an amount
sufficient to pay the principal of (and premium, if any) and interest on such
Debt Securities, and any mandatory sinking fund or analogous payments thereon,
on the scheduled due dates therefor.
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Such a trust may be established only if, among other things, CRIIMI MAE has
delivered to the applicable Trustee an opinion of counsel (as specified in
each Indenture) to the effect that the holders of such Debt Securities will
not recognize income, gain or loss for U.S. federal income tax purposes as a
result of such defeasance or covenant defeasance and will be subject to U.S.
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance or covenant defeasance
had not occurred, and such opinion of counsel, in the case of defeasance, must
refer to and be based upon a ruling of the Internal Revenue Service or a
change in applicable U.S. federal income tax law occurring after the date of
the Indenture.
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations
of a person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or such government which
issued the foreign currency in which the Debt Securities of such series are
payable, the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America or such other
government, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and shall also include a depository receipt
issued by a bank or trust company as custodian with respect to any such
Government Obligation or a specific payment of interest on or principal of any
such Government Obligation held by such custodian for the account of the
holder of a depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to
the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if after
CRIIMI MAE has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any
series, (a) the holder of a Debt Security of such series is entitled to, and
does, elect pursuant to the Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security, or
(b) a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security shall be deemed to have been,
and will be, fully discharged and satisfied through the payment of the
principal of (and premium, if any) and interest on such Debt Security as they
become due out of the proceeds yielded by converting the amount so deposited
in respect of such Debt Security into the currency, currency unit or composite
currency in which such Debt Security becomes payable as a result of such
election or such cessation of usage based on the applicable market exchange
rate. "Conversion Event" means the cessation of use of (i) a currency,
currency unit or composite currency both by the government of the country
which issued such currency and for the settlement of transactions by a central
bank or other public institutions of or within the international banking
community, (ii) the European Currency Unit ("ECU") both within the European
Monetary System established by the Resolution of December 5, 1978 of the
council of the European Economic Community, European Coal and Steel Community
and the European Atomic Energy Community (collectively, the "European
Communities") and for the settlement of transactions by public institutions of
or within the European Communities or (iii) any currency unit or composite
currency other than the ECU for the purposes for which it was established.
Unless otherwise provided in the applicable Prospectus Supplement, all
payments of principal of (and premium, if any) and interest on any Debt
Security that is payable in a foreign currency that ceases to be used by its
government of issuance shall be made in U.S. dollars.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications of the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Shares or Preferred Shares will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will
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include whether such Debt Securities are convertible into Common Shares and/or
Preferred Shares, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option
of the holders or CRIIMI MAE, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such Debt Securities.
To protect CRIIMI MAE's status as a REIT, CRIIMI MAE may refuse to effect a
conversion of the Debt Securities if, as a result of such conversion, any
person would beneficially own, either directly or indirectly, more than 9.8%
of CRIIMI MAE's outstanding capital stock. See "Description of Capital Stock--
Common Shares--Restrictions on Ownership and Transfer."
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of CRIIMI MAE comprises 60 million Common
Shares and 25 million Preferred Shares.
PREFERRED SHARES
General. The following description of the Preferred Shares sets forth
certain general terms and provisions of the Preferred Shares to which any
Prospectus Supplement may relate. The statements below describing the
Preferred Shares are in all respects subject to and qualified in their
entirety by reference to the applicable provisions of CRIIMI MAE's Articles of
Incorporation, as amended (the "Articles of Incorporation") and Bylaws and
applicable articles supplementary relating to any offering of Preferred Shares
("Articles Supplementary"). If Preferred Shares are to be issued, a
description of the terms of such Preferred Shares (as well as the form of
Preferred Share certificate) will be filed by CRIIMI MAE as an exhibit to a
current report on Form 8-K and incorporated by reference.
Terms. Subject to the limitations prescribed by the Articles of
Incorporation, the Board is authorized to fix the number of shares
constituting each series of Preferred Shares and the designations and powers,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, including such provisions
as may be desired concerning voting, redemption, dividends, dissolution or the
distribution of assets, conversion or exchange, and such other subjects or
matters as may be fixed by resolution of the Board. The Preferred Shares will,
when issued, be fully paid and nonassessable by CRIIMI MAE and will have no
preemptive rights.
Reference is made to the Prospectus Supplement relating to the Preferred
Shares offered thereby for specific terms, including:
(1) The title and stated value of such Preferred Shares;
(2) The number of such Preferred Shares offered, the liquidation
preference per share and the offering price of such Preferred Shares;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Shares;
(4) The date from which dividends on such Preferred Shares shall
accumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Shares;
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(6) The provision for a sinking fund, if any, for such Preferred Shares;
(7) The provision for redemption, if applicable, of such Preferred
Shares;
(8) Any listing of such Preferred Shares on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred
Shares will be convertible into Common Shares, including the conversion
price (or manner of calculation thereof);
(10) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Shares;
(11) A discussion of federal income tax considerations applicable to such
Preferred Shares;
(12) The relative ranking and preferences of such Preferred Shares as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of CRIIMI MAE;
(13) Any limitations on issuance of any series of Preferred Shares
ranking senior to or on a parity with such series of Preferred Shares as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of CRIIMI MAE; and
(14) Any limitations on direct or beneficial ownership and restrictions
on transfer, in each case as may be appropriate to preserve the status of
CRIIMI MAE as a REIT.
Rank. Unless otherwise specified in the Prospectus Supplement, the Preferred
Shares will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of CRIIMI MAE, rank (i) senior to all classes or
series of Common Shares and to all equity securities ranking junior to such
Preferred Shares with respect to dividend rights or rights upon liquidation,
dissolution or winding up of CRIIMI MAE; (ii) on a parity with all equity
securities issued by CRIIMI MAE the terms of which specifically provide that
such equity securities rank on a parity with the Preferred Shares with respect
to dividend rights or rights upon liquidation, dissolution or winding up of
CRIIMI MAE; and (iii) junior to all equity securities issued by CRIIMI MAE the
terms of which specifically provide that such equity securities rank senior to
the Preferred Shares with respect to dividend rights or rights upon
liquidation, dissolution or winding up of CRIIMI MAE. The term "equity
securities" does not include convertible debt securities.
Dividends. Holders of the Preferred Shares of each series will be entitled
to receive, when, as and if declared by the Board, out of assets of CRIIMI MAE
legally available for payment, cash dividends at such rates and on such dates
as will be set forth in the applicable Prospectus Supplement. Each such
dividend shall be payable to holders of record as they appear on the share
transfer books of CRIIMI MAE on such record dates as shall be fixed by the
Board.
Dividends on any series of the Preferred Shares may be cumulative or non-
cumulative, as provided in the applicable Prospectus Supplement. Dividends, if
cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board fails to declare a dividend
payable on a dividend payment date on any series of the Preferred Shares for
which dividends are noncumulative, then the holders of such series of the
Preferred Shares will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and CRIIMI MAE will have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
If Preferred Shares of any series are outstanding, full dividends will not
be declared or paid or set apart for payment on the Preferred Shares of any
other series ranking, as to dividends, on a parity with the Preferred Shares
of such series, and no dividends will be declared or paid or set apart for
payment on the Preferred Shares of any other series ranking, as to dividends,
junior to the Preferred Shares of such series for any period unless (i) if
such series of Preferred Shares has a cumulative dividend, full cumulative
dividends have been or contemporaneously are declared and paid or declared and
a sum sufficient for the payment thereof set apart for such payment on the
Preferred Shares of such series for all past dividend periods and the then
current dividend period or (ii) if such series of Preferred Shares does not
have a cumulative dividend, full dividends for the then current dividend
period have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for such payment on the
Preferred Shares of such series. When dividends are
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not paid in full (or a sum sufficient for such full payment is not so set
apart) upon Preferred Shares of any series and the shares of any other series
of Preferred Shares ranking on a parity as to dividends with the Preferred
Shares of such series, all dividends declared upon Preferred Shares of such
series and any other series of Preferred Shares ranking on a parity as to
dividends with such Preferred Shares shall be declared pro rata so that the
amount of dividends declared per Preferred Share of such series and such other
series of Preferred Shares shall in all cases bear to each other the same
ratio that accrued dividends per share on the Preferred Shares of such series
(which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods if such Preferred Shares do not have a cumulative
dividend) and such other series of Preferred Shares bear to each other.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Shares has a cumulative dividend, full cumulative
dividends on the Preferred Shares of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for all past dividend periods and
the then current dividend period and (ii) if such series of Preferred Shares
does not have a cumulative dividend, full dividends on the Preferred Shares of
such series have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for payment for the
then current dividend period, no dividends (other than in Common Shares or
other capital shares ranking junior to the Preferred Shares of such series as
to dividends and upon liquidation) shall be declared or paid or set aside for
payment or other distribution shall be declared or made upon the Common
Shares, or any other capital shares of CRIIMI MAE ranking junior to or on a
parity with the Preferred Shares of such series as to dividends or upon
liquidation, nor shall any Common Shares, or any other capital shares of
CRIIMI MAE ranking junior to or on a parity with the Preferred Shares of such
series as to dividends or upon liquidation be redeemed, purchased or otherwise
acquired for any consideration (or any moneys be paid to or made available for
a sinking fund for the redemption of any such shares) by CRIIMI MAE (except by
conversion into or exchange for other capital shares of CRIIMI MAE ranking
junior to the Preferred Shares of such series as to dividends and upon
liquidation).
Any dividend payment made on shares of a series of Preferred Shares shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series which remains payable.
Redemption. If so provided in the applicable Prospectus Supplement, the
Preferred Shares will be subject to mandatory redemption or redemption at the
option of CRIIMI MAE, as a whole or in part, in each case upon the terms, at
the times and at the redemption prices set forth in such Prospectus
Supplement.
The Prospectus Supplement relating to a series of Preferred Shares that is
subject to mandatory redemption will specify the number of such Preferred
Shares that shall be redeemed by CRIIMI MAE in each year commencing after a
date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon
(which shall not, if such Preferred Shares do not have a cumulative dividend,
include any accumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in
cash or other property, as specified in the applicable Prospectus Supplement.
If the redemption price for Preferred Shares of any series is payable only
from the net proceeds of the issuance of capital shares of CRIIMI MAE, the
terms of such Preferred Shares may provide that, if no such capital shares
shall have been issued or to the extent the net proceeds from any issuance are
insufficient to pay in full the aggregate redemption price then due, such
Preferred Shares shall automatically and mandatorily be converted into the
applicable capital shares of CRIIMI MAE pursuant to conversion provisions
specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred Shares
has a cumulative dividend, full cumulative dividends on all shares of any
series of Preferred Shares shall have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof set apart
for payment for all past dividend periods and the then current dividend period
and (ii) if such series of Preferred Shares does not have a cumulative
dividend, full dividends on the Preferred Shares of any series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for the then
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current dividend period, no shares of any series of Preferred Shares shall be
redeemed (unless all outstanding Preferred Shares of such series are
simultaneously redeemed) or directly or indirectly purchased or acquired
(except by conversion into or exchange for capital shares of CRIIMI MAE
ranking junior to the Preferred Shares of such series as to dividends and upon
liquidation); provided, however, that the foregoing shall not prevent the
purchase or acquisition of Preferred Shares of such series to preserve the
REIT status of CRIIMI MAE or pursuant to a purchase or exchange offer made on
comparable terms to holders of all outstanding Preferred Shares of such
series.
If fewer than all of the outstanding Preferred Shares of any series are to
be redeemed, the number of shares to be redeemed will be determined by the
Board and such shares may be redeemed pro rata from the holders of record of
such shares in proportion to the number of such shares held by such holders
(with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by the Board.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Shares
of any series to be redeemed at the address shown on the share transfer books
of CRIIMI MAE. Each notice shall state: (i) the redemption date; (ii) the
number of shares and series of the Preferred Shares to be redeemed; (iii) the
redemption price; (iv) the place or places where certificates for such
Preferred Shares are to be surrendered for payment of the redemption price;
(v) that dividends on the shares to be redeemed will cease to accrue on such
redemption date; and (vi) the date upon which the holder's conversion rights,
if any, as to such shares shall terminate. If fewer than all the Preferred
Shares of any series are to be redeemed, the notice mailed to each such holder
thereof shall also specify the number of Preferred Shares to be redeemed from
each such holder. If notice of redemption of any Preferred Shares has been
given and if the funds necessary for such redemption have been set aside by
CRIIMI MAE in trust for the benefit of the holders of any Preferred Shares so
called for redemption, then from and after the redemption date dividends will
cease to accrue on such Preferred Shares, such Preferred Shares shall no
longer be deemed outstanding and all rights of the holders of such shares will
terminate, except the right to receive the redemption price. Any moneys so
deposited which remain unclaimed by the holders of the Preferred Shares at the
end of two years after the redemption date will be returned by such bank or
trust company to CRIIMI MAE.
Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of CRIIMI MAE, then, before any
distribution or payment shall be made to the holders of any Common Shares or
any other class or series of capital shares of CRIIMI MAE ranking junior to
the Preferred Shares in the distribution of assets upon any liquidation,
dissolution or winding up of CRIIMI MAE, the holders of each series of
Preferred Shares shall be entitled to receive out of assets of CRIIMI MAE
legally available for distribution to stockholders, liquidating distributions
in the amount of the liquidation preference per share (set forth in the
applicable Prospectus Supplement), plus an amount equal to all dividends
accrued and unpaid thereon (which shall not include any accumulation in
respect of unpaid dividends for prior dividend periods if such Preferred
Shares do not have a cumulative dividend). After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of
Preferred Shares will have no right or claim to any of the remaining assets of
CRIIMI MAE. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the available assets of CRIIMI MAE are
insufficient to pay the amount of the liquidating distributions on all
outstanding Preferred Shares and the corresponding amounts payable on all
shares of other classes or series of capital shares of CRIIMI MAE ranking on a
parity with the Preferred Shares in the distribution of assets upon
liquidation, dissolution or winding up, then the holders of the Preferred
Shares and all other such classes or series of capital shares shall share
ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Shares, the remaining assets of CRIIMI MAE shall be distributed
among the holders of any other classes or series of capital shares ranking
junior to the Preferred Shares upon liquidation, dissolution or winding up,
according to their respective rights and preferences and in each case
according to their respective number of shares. For such purposes, the
consolidation or merger of CRIIMI MAE with or into any other corporation,
trust or entity, or the sale, lease or
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conveyance of all or substantially all of the property or business of CRIIMI
MAE, shall not be deemed to constitute a liquidation, dissolution or winding
up of CRIIMI MAE.
Voting Rights. Holders of the Preferred Shares will not have any voting
rights, except as set forth below or as otherwise from time to time required
by law or as indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Shares, so long as any
Preferred Shares remain outstanding, CRIIMI MAE will not, without the
affirmative vote or consent of the holders of at least a majority of the
shares of each series of Preferred Shares outstanding at the time, given in
person or by proxy, either in writing or at a meeting (such series voting
separately as a class), (i) authorize or create, or increase the authorized or
issued amount of, any class or series of capital shares ranking prior to such
series of Preferred Shares with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized capital shares of CRIIMI MAE into any such shares,
or create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares; or (ii) amend, alter or
repeal the provisions of CRIIMI MAE's Articles of Incorporation or the
Articles Supplementary for such series of Preferred Shares, whether by merger,
consolidation or otherwise (each, an "Event"), so as to materially and
adversely affect any right, preference, privilege or voting power of such
series of Preferred Shares or the holders thereof; provided, however, with
respect to the occurrence of any of the Events set forth in (ii) above, so
long as the Preferred Shares remain outstanding with the terms thereof
materially unchanged, taking into account that upon the occurrence of an
Event, CRIIMI MAE may not be the surviving entity, the occurrence of any such
Event shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting power of holders of Preferred Shares, and
provided further that (x) any increase in the amount of the authorized Common
Shares or Preferred Shares or the authorization, creation or issuance of any
other series of Preferred Shares or any other class or series of capital
shares, or (y) any increase in the amount of authorized shares of such series
or any other series of Preferred Shares or any other class or series of
capital shares, in each case ranking on a parity with or junior to the
Preferred Shares of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not
be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Shares shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
Conversion Rights. The terms and conditions, if any, upon which any series
of Preferred Shares are convertible into Common Shares will be set forth in
the applicable Prospectus Supplement relating thereto. Such terms will include
the number of Common Shares into which the Preferred Shares are convertible,
the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the
holders of the Preferred Shares or CRIIMI MAE, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such Preferred Shares.
Restrictions on Ownership and Transfer. As discussed below under "--Common
Shares--Restrictions on Ownership and Transfer," for CRIIMI MAE to qualify as
a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), not
more than 50% in value of its outstanding capital shares may be owned,
directly or constructively, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of a taxable year. To
assist CRIIMI MAE in meeting this requirement, CRIIMI MAE may take certain
actions to limit the beneficial ownership, directly or indirectly, by a single
person of more than 9.8% of CRIIMI MAE's outstanding capital stock, including
any Preferred Shares of CRIIMI MAE. Therefore, the Articles Supplementary for
each series of Preferred Shares may contain certain provisions restricting the
ownership and transfer of the Preferred Shares. The applicable Prospectus
Supplement will specify any additional ownership limitation relating to a
series of Preferred Shares.
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COMMON SHARES
The following description of the Common Shares is summarized from relevant
portions of CRIIMI MAE's Articles of Incorporation and Bylaws, as amended. A
more complete description of the Common Shares may be obtained by reference to
such documents and to the documents incorporated by reference in this
Prospectus. The following statements are qualified in their entirety by such
reference.
General. Stockholders are entitled to one vote for each Common Share held on
all matters presented for a vote to stockholders. The Board serves in
staggered three-year terms. Directors may be removed only for cause, upon the
affirmative vote of holders of a majority of the Common Shares voting together
as a single class. Except as otherwise provided in the Articles of
Incorporation, in meetings where a quorum is present, a majority of the votes
cast by stockholders is required to adopt a provision. Stockholders are
entitled to receive all assets available for distribution to the stockholders,
subject to any preferential rights of the holders of any Preferred Shares. The
Common Shares, when issued, will be fully paid and nonassessable and will not
be subject to redemption, except as provided in the Articles of Incorporation,
nor will they have any preference, conversion, exchange, preemptive or
cumulative voting rights.
The transfer agent and register for the Common Shares is Registrar and
Transfer Company.
Restrictions on Ownership and Transfer. The Code provides that a corporation
may not qualify as a REIT if more than 50% in value of the shares of the
corporation are owned, directly or indirectly, by five or fewer individuals,
which for this purpose includes pension funds and certain other tax-exempt
entities. Provisions of the Articles of Incorporation, intended to prevent
concentrated ownership of the capital stock of CRIIMI MAE that might
jeopardize its qualification as a REIT, authorize the Board to refuse to
effect a transfer of shares of capital stock of CRIIMI MAE to any person who
as a result would own in excess of 9.8% of the outstanding shares of capital
stock of CRIIMI MAE ("Excess Shares") and to redeem such Excess Shares.
DESCRIPTION OF WARRANTS
CRIIMI MAE may issue Warrants for the purchase of Preferred Shares or Common
Shares. Warrants may be issued independently or together with any Debt
Securities, Preferred Shares or Common Shares, offered by any Prospectus
Supplement and may be attached to or separate from such Debt Securities,
Preferred Shares or Common Shares. Each series of Warrants will be issued
under a separate warrant agreement (a "Warrant Agreement") to be entered into
between CRIIMI MAE and a bank or trust company, as warrant agent (the "Warrant
Agent"), all as set forth in the Prospectus Supplement relating to the
particular issue of Warrants. The Warrant Agent will act solely as an agent of
CRIIMI MAE in connection with the Warrants and will not assume any obligation
or relationship of agency or trust for or with any holders of Warrants or
beneficial owners of Warrants. If Warrants are to be issued, a copy of the
form of Warrant Agreement will be filed by CRIIMI MAE as an exhibit to a
current report on Form 8-K and incorporated herein by reference. The following
summary of certain provisions of the form of Warrant Agreement does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the applicable Warrant Agreement.
General. If Warrants are offered, the related Prospectus Supplement will
describe the Warrant Agreement and the terms of the Warrants, including the
following: (i) the title of such Warrants; (ii) the aggregate number of such
Warrants; (iii) the price or prices at which such Warrants will be issued;
(iv) the currencies in which the price or prices of such Warrants may be
payable; (v) the designation, amount and terms of the Preferred Shares and/or
Common Shares purchasable upon exercise of such Warrants; (vi) the designation
and terms of the Debt Securities, Preferred Shares and/or Common Shares, if
any, with which such Warrants are issued and the number of such Warrants
issued with each such Security; (vii) if applicable, the date on and after
which such Warrants and the Preferred Shares and/or Common Shares purchasable
upon exercise of such Warrants will be separately transferable; (viii) the
price or prices at which and the currency or currencies in which the Preferred
Shares and/or Common Shares purchasable upon exercise of such Warrants may be
purchased; (ix) the date on which the right to exercise such Warrants shall
commence and the date on which such right shall expire; (x) the minimum and
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maximum amount of such Warrants which may be exercised at any one time; (xi)
information with respect to book-entry procedures, if any; (xii) a discussion
of certain United States federal income tax considerations; and (xiii) any
other material terms of such Warrants, including terms, procedures and
limitations relating to exchange or exercise of such Warrants.
Exercise. Prior to the exercise of any Warrants to purchase Preferred Shares
and/or Common Shares, holders of such Warrants will not have any of the rights
of holders of Preferred Shares or Common Shares, as the case may be,
purchasable upon such exercise, including the right to receive payments of
dividends, if any, on the Preferred Shares or Common Shares purchasable upon
such exercise, or to exercise any applicable right to vote.
Each Warrant will entitle the holder to purchase Preferred Shares and/or
Common Shares at such exercise price as shall in each case be set forth in, or
calculable from, the Prospectus Supplement relating to the Warrants. Warrants
may be exercised at any time up to 5:00 P.M. New York time on the expiration
date set forth in the Prospectus Supplement relating to such Warrants. After
the close of business on the expiration date (or such later date to which such
expiration date may be extended by CRIIMI MAE), unexercised Warrants will
become void.
Restrictions on Ownership and Transfer. As discussed above under "--Common
Shares--Restrictions on Ownership and Transfer," for CRIIMI MAE to qualify as
a REIT under the Code, not more than 50% in value of its outstanding capital
shares may be owned, directly or constructively, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year. To assist CRIIMI MAE in meeting this requirement, CRIIMI MAE may
take certain actions to limit the beneficial ownership, directly or
indirectly, by a single person of more than 9.8% of CRIIMI MAE's outstanding
capital stock. An individual or entity that owns Warrants to acquire Common
Shares and/or Preferred Shares will be deemed to own such Common Shares or
Preferred Shares for purposes of meeting the ownership requirement. Therefore,
the terms of any Warrant Agreement entered into in connection with the
issuance of Warrants may contain certain provisions restricting the ownership
and transfer of the Warrants. The applicable Prospectus Supplement will
specify any additional ownership limitation relating to the Warrants.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain United States federal income tax
considerations to CRIIMI MAE is based on current law, is for general
information only, and is not tax advice. The tax treatment of a holder of any
of the Securities will vary depending upon the terms of the specific
Securities acquired by such holder, as well as such holder's particular
situation, and this discussion does not attempt to address any aspects of
United States federal income taxation relating to holders of Securities.
Certain United States federal income tax considerations relevant to holders of
the Securities will be provided in the applicable Prospectus Supplement
relating thereto.
This discussion does not consider specific facts and circumstances that may
be relevant to a particular holder's tax position, and does not consider U.S.
state and local or non-U.S. tax consequences. Furthermore, the following
discussion is based on provisions of the Code and administrative and judicial
interpretations, all of which are subject to change, possibly on a retroactive
basis.
EACH INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT, AS
WELL AS HIS OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OF THE
ACQUISITION, OWNERSHIP AND SALE OF THE SECURITIES, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION,
OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
CRIIMI MAE has qualified, and intends to continue to qualify, as a REIT
under the Code. Qualification for treatment as a REIT requires CRIIMI MAE to
meet certain criteria including certain requirements regarding the
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nature of its ownership, assets, income and distributions of taxable income. A
REIT generally is not subject to federal income tax on that portion of its
ordinary income or capital gains that is distributed currently to
stockholders. CRIIMI MAE has distributed and intends to continue to distribute
substantially all of its taxable income to stockholders and to meet
distribution requirements to continue to qualify as a REIT. CRIIMI MAE will
generally be subject to federal income tax at normal corporate rates on its
undistributed income and to a 4% excise tax under the Code on the amount, if
any, by which 85% of its REIT taxable income (including accrued but unpaid
interest income) and 95% of any net capital gain exceed the amount actually
distributed to its stockholders during the year (or declared as a dividend
during October, November or December of a calendar year, if distributed during
the following January as ordinary income dividends). Accrued income for the
last month of each quarter is generally received within 30 days after the end
of the quarter. CRIIMI MAE is not aware of any present circumstances that
would cause it to fail to qualify as a REIT, nor does it anticipate any such
circumstances in the reasonably foreseeable future. If the U.S. Internal
Revenue Service ("IRS") successfully challenged the tax status of CRIIMI MAE
as a REIT, CRIIMI MAE's earnings would become subject to federal income tax
(including any applicable minimum tax) at corporate rates.
To assist in maintaining CRIIMI MAE's qualification as a REIT under the
Code, CRIIMI MAE's Articles of Incorporation provide that no person or persons
acting as a group (defined to include partnerships, corporations, trusts and
other entities), with the exception of C.R.I., Inc. or its affiliates, shall
at any time directly or indirectly acquire ownership of more than 9.8% of the
outstanding shares of CRIIMI MAE's capital stock.
PLAN OF DISTRIBUTION
CRIIMI MAE may sell Securities to or through one or more underwriters, and
also may sell Securities directly to other purchasers or through agents. The
distribution of the Securities may be effected from time to time in one or
more transactions, at a fixed price or prices which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. If underwriters are used in the sale of
Securities, the Securities will be acquired by the underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions. If the Securities are sold through one or
more agents, as designated by CRIIMI MAE from time to time, any such agent
will be acting on a best efforts basis for the period of its appointment.
In connection with the sale of Securities, underwriters may receive
compensation from CRIIMI MAE or from purchasers of Securities, for whom they
may act as agents, in the form of discounts, concessions, or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions, or commissions
from the underwriters (which may be all or a portion of the discount to be
received by such underwriter from CRIIMI MAE) and/or commissions from the
purchasers for whom they may act as agents. Underwriters, dealers, and agents
that participate in the distribution of Securities may be deemed to be
underwriters, and any discounts or commissions they receive from CRIIMI MAE,
and any profit on the resale of Securities they realize may be deemed to be
underwriting discounts and commissions, under the Securities Act. Any such
underwriter or agent will be identified, and any such compensation received
from CRIIMI MAE will be described, in the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each series
of Securities will be a new issue with no established trading market, other
than the Common Shares which are listed on the NYSE. Any Common Shares sold
pursuant to a Prospectus Supplement are expected to be listed on such
exchange, subject to official notice of issuance. CRIIMI MAE may elect to list
any series of Debt Securities, Preferred Shares or Warrants on a securities
exchange, but is not obligated to do so. It is possible that one or more
underwriters may make a market in a series of Securities, but will not be
obligated to do so and may discontinue any market making at any time without
notice. Therefore, no assurance can be given as to the liquidity of the
trading market for any Securities (other than Common Shares).
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Under agreements CRIIMI MAE may enter into, underwriters, dealers, and
agents who participate in the distribution of Securities may be entitled to
indemnification by CRIIMI MAE against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, or be customers of, CRIIMI MAE in the ordinary course of
business. In connection with any particular issue of Debt Securities, CRIIMI
MAE may enter into hedging transactions with an underwriter, dealer or agent
participating in such transaction or an affiliate thereof.
If so indicated in the Prospectus Supplement, CRIIMI MAE will authorize
underwriters or other persons acting as CRIIMI MAE's agents to solicit offers
by certain institutions to purchase Securities from CRIIMI MAE pursuant to
contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but in all cases such institutions must be
approved by CRIIMI MAE. The obligations of any purchaser under any such
contract will be subject to the condition that the purchase of the Securities
shall not at the time of delivery be prohibited under the laws of the
jurisdiction to which such purchaser is subject. The underwriters and such
other agents will not have any responsibility in respect of the validity or
performance of such contracts.
LEGAL MATTERS
Certain matters relating to the validity of the Securities will be passed
upon for CRIIMI MAE by Swidler & Berlin, Chartered, Washington, D.C.
EXPERTS
The financial statements included in CRIIMI MAE's Annual Report on Form 10-K
incorporated herein by reference, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and have been incorporated by reference herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR IN-
CORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRE-
SENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR
THE UNDERWRITERS. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PRO-
SPECTUS CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DO THEY
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SHARES OF COMMON STOCK OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Summary.................................................................. S-3
Selected Consolidated Financial Data..................................... S-6
Risk Factors............................................................. S-8
CRIIMI MAE............................................................... S-14
The Portfolio............................................................ S-20
Use of Proceeds.......................................................... S-24
Price Range of Common Shares and Dividends............................... S-24
Capitalization........................................................... S-25
Management............................................................... S-26
Certain United States Federal Income Tax Considerations.................. S-29
Underwriting............................................................. S-39
Legal Matters............................................................ S-40
Experts.................................................................. S-40
PROSPECTUS
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
CRIIMI MAE............................................................... 4
Use of Proceeds.......................................................... 4
Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed
Charges and Preferred Stock Dividends................................... 4
Description of Debt Securities........................................... 4
Description of Capital Stock............................................. 14
Description of Warrants.................................................. 19
Certain United States Federal Income Tax Considerations.................. 20
Plan of Distribution..................................................... 21
Legal Matters............................................................ 22
Experts.................................................................. 22
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2,500,000 Shares
[LOGO OF CRIIMI MAE APPEARS HERE]
Common Stock
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PROSPECTUS SUPPLEMENT
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PRUDENTIAL SECURITIES INCORPORATED
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
March , 1998
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