<PAGE>1
Registration No. 33-97994
As filed with the Securities and Exchange Commission on February 10, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST UNION COMMERCIAL MORTGAGE SECURITIES, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1643598
(State or other (I.R.S. Employer
jurisdiction Identification
of incorporation) No.)
One First Union Center
Charlotte, North Carolina 28228-0600
(704) 374-6161
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
Marion A. Cowell, Jr., Esq.
Executive Vice President, Secretary and General Counsel
First Union Corporation
One First Union Center
Charlotte, North Carolina 28228-0013
(704) 374-6828
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
with copies to:
Richard C. Sammis, Esq. Michael Durrer, Esq.
Willkie Farr & Gallagher Kilpatrick Stockton, LLP
One Citicorp Center 3500 One First Union Center
153 East 53rd Street 301 South College Street
New York, New York 10022 Charlotte, North Carolina 28202-
(212) 821-8000 6001
(704) 338-5000
Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement,
determined in light of market and other conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<PAGE>2
CALCULATION OF REGISTRATION FEE
<TABLE> <CAPTION>
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities to be Amount to be Aggregate Price Aggregate Offering Registration
Registered Registered(1)(2) per Unit*(3) Price*(3) Fee(1)
<S> <C> <C> <C> <C>
Commercial Mortgage Pass-Through $1,000,000 100% $1,000,000 $344.83
Certificates . . . . . . . . . . . . . . .
</TABLE>
(1) The registration fee in the amount of $344.83 for the registration
of $1,000,000 of Commercial Mortgage Pass-Through Certificates was
previously paid in connection with the October 11, 1995 filing of
the Registration Statement and such amounts are being shown solely
for purposes of the registration described below in footnote (2).
(2) There are also being registered hereunder an indeterminate amount of
Certificates that may be sold by Registrant or any affiliate of
Registrant, including First Union Capital Markets Corp., in
furtherance of market-making activities in the Certificates and in
connection with which it is necessary under the federal securities
laws to deliver a market-making prospectus.
(3) Estimated solely for purposes of determining the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>3
SUBJECT TO COMPLETION, DATED FEBRUARY 10, 1997
Commercial Mortgage Pass-Through Certificates
(Issuable in Series)
First Union Commercial Mortgage Securities, Inc.
Depositor
This Prospectus describes the commercial mortgage pass-through
certificates (the "Offered Certificates") offered hereby and by the
supplements hereto (each, a "Prospectus Supplement"), which will be offered
from time to time in series. The Offered Certificates of each series,
together with any other commercial mortgage pass-through certificates of such
series not offered hereby, are collectively referred to herein as the
"Certificates".
In the aggregate, the Certificates of each series of Certificates will
represent the entire beneficial ownership interest in a trust fund (with
respect to any series, the "Trust Fund") consisting primarily of a segregated
pool of one or more of various types of multifamily or commercial mortgage
loans (the "Mortgage Loans"), mortgage-backed securities ("CMBS") that
evidence interests in, or that are secured by pledges of, one or more of
various types of multifamily or commercial mortgage loans or a combination of
Mortgage Loans and CMBS (collectively, "Mortgage Assets"). Mortgage Loans (or
mortgage loans underlying a CMBS) may be secured by first or junior, recourse
or non-recourse liens and may be delinquent or non-performing as of the date
Certificates of a series are issued, if so specified in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, the Trust
Fund for a series of Certificates may include letters of credit, insurance
policies, guarantees, reserve funds or other types of credit support, or any
combination thereof (with respect to any series, collectively, "Credit
Support"), and currency or interest rate exchange agreements and other
financial assets, or any combination thereof (with respect to any series,
collectively, "Cash Flow Agreements"). See "Description of the Trust Funds",
"Description of the Certificates" and "Description of Credit Support".
(cover continued on next page)
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING ON PAGE 22
UNDER THE CAPTION "RISK FACTORS" HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
THE CERTIFICATES WILL REPRESENT INTERESTS IN THE RELATED TRUST FUND ONLY
AND WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF FIRST UNION COMMERCIAL
MORTGAGE SECURITIES, INC. OR ANY AFFILIATE THEREOF, INCLUDING WITHOUT
LIMITATION, FIRST UNION NATIONAL BANK OF NORTH CAROLINA. A CERTIFICATE IS NOT
A DEPOSIT AND NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AGENCY.
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.
Prior to issuance there will have been no market for the Certificates of
any series and there can be no assurance that a secondary market for any
Offered Certificates will develop or that, if it does develop, it will
continue. See "Risk Factors". This Prospectus may not be used to consummate
sales of the Offered Certificates of any series unless accompanied by the
Prospectus Supplement for such series.
The Offered Certificates of any series may be offered through one or
more different methods such as offerings through underwriters,
including First Union Capital Markets Corp., an affiliate of the
Depositor, acting as principals for their own account or as agents, as
more fully described under "Method of Distribution" herein and in the
related Prospectus Supplement.
[ ], 199[ ]
<PAGE>4
(cover continued)
Each series of Certificates will consist of one or more classes of
Certificates, and such class or classes (including classes of Offered
Certificates) may (i) provide for the accrual of interest thereon based on a
fixed, variable or adjustable rate; (ii) be senior or subordinate to one or
more other classes of Certificates in entitlement to certain distributions on
the Certificates; (iii) be entitled to distributions of principal, with
disproportionately small, nominal or no distributions of interest; (iv) be
entitled to distributions of interest, with disproportionately small, nominal
or no distributions of principal; (v) provide for distributions of principal
and/or interest that commence only following the occurrence of certain events,
such as the retirement of one or more other classes of Certificates of such
series; (vi) provide for distributions of principal to be made, from time to
time or for designated periods, at a rate that is faster (and, in some cases,
substantially faster) or slower (and, in some cases, substantially slower)
than the rate at which payments or other collections of principal are received
on the Mortgage Assets in the related Trust Fund; or (vii) provide for
distributions of principal to be made, subject to available funds, based on a
specified principal payment schedule or other methodology. See "Description
of the Certificates".
Distributions in respect of the Certificates will be made on a monthly,
quarterly or other periodic basis as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
such distributions will be made only from the assets of the related Trust
Fund.
This Prospectus and related Prospectus Supplements may be used by the
Depositor, First Union Capital Markets Corp., an affiliate of the Depositor,
and any other affiliate of the Depositor when required under the federal
securities laws in connection with offers and sales of Offered Certificates in
furtherance of market-making activities in Offered Certificates. First Union
Capital Markets Corp. or any such other affiliate may act as principal or
agent in such transactions. Such sales will be made at prices related to
prevailing market prices at the time of sale or otherwise.
No Certificates of any series will represent an obligation of or interest
in the Depositor or any of its affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
Certificates of any series nor the assets in the related Trust Fund will be
guaranteed or insured by any governmental agency or instrumentality or by any
other person, unless otherwise provided in the related Prospectus Supplement.
The assets in each Trust Fund will be held in trust for the benefit of the
holders of the related series of Certificates (the "Certificateholders")
pursuant to a Pooling Agreement, as more fully described herein.
The yield on each class of Certificates of a series will be affected by,
among other things, the rate of payment of principal (including prepayments,
repurchases and defaults) on the Mortgage Assets in the related Trust Fund and
the timing of receipt of such payments as described herein and in the related
Prospectus Supplement. See "Yield and Maturity Considerations". A Trust Fund
may be subject to early termination under the circumstances described herein
and in the related Prospectus Supplement. See "Description of the
Certificates".
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" (a "REMIC") for federal
income tax purposes. See "Certain Federal Income Tax Consequences" herein.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is
in addition to the obligation of dealers to deliver a Prospectus and
Prospectus Supplement when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>5
PROSPECTUS SUPPLEMENT
As more particularly described herein, each Prospectus Supplement will,
among other things, set forth, as and to the extent appropriate: (i) a
description of the class or classes of Offered Certificates of the related
series, including the aggregate principal amount of each such class (the
"Certificate Balance"), the rate at which interest will accrue from time to
time, if at all, with respect to each such class (the "Pass-Through Rate") or
the method of determining such rate; (ii) information with respect to any
other classes of Certificates of the same series not offered thereby; (iii)
the respective dates on which distributions are to be made to
Certificateholders; (iv) information as to the assets constituting the related
Trust Fund, including the general characteristics of the assets included
therein, including the Mortgage Assets and any Credit Support and Cash Flow
Agreements (with respect to the Certificates of any series, the "Trust
Assets"); (v) the circumstances, if any, under which the related Trust Fund
may be subject to early termination; (vi) additional information with respect
to the method of distribution of such Offered Certificates; (vii) whether one
or more REMIC elections will be made, and the designation of the "regular
interests" and "residual interests" in each REMIC to be created; (viii) the
initial percentage ownership interest in the related Trust Fund to be
evidenced by each class of Certificates of such series; (ix) information
concerning the trustee (as to any series, the "Trustee") of the related Trust
Fund; (x) information concerning the master servicer (as to any series, the
"Master Servicer") and any special servicer (as to any series, the "Special
Servicer") engaged to administer the related Mortgage Assets; (xi) information
as to the nature and extent of any subordination in entitlement to
distributions of any class of Certificates of such series; and (xii) whether
such Offered Certificates will be initially issued in definitive or book-entry
form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Offered Certificates. This Prospectus and the Prospectus
Supplement relating to the Offered Certificates of each series contain
summaries of the material terms of the documents referred to herein and
therein, but do not contain all of the information set forth in the
Registration Statement pursuant to the rules and regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits
can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices
located as follows: Chicago Regional Office, Northwest Atrium Center, 500 West
Madison Street, 14th Floor, Chicago, Illinois 60661; and New York Regional
Office, Seven World Trade Center, Suite 1300, New York, New York 10048. The
Commission also maintains a Web site that contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the Commission. The site may be accesed at
http:/www.sec.gov.
No person has been authorized to give any information or to make any
representation not contained in this Prospectus and any related Prospectus
Supplement and, if given or made, such information or representation must not
be relied upon. This Prospectus and any related Prospectus Supplement do not
constitute an offer to sell or a solicitation of an offer to buy any
securities other than the Offered Certificates, or an offer of the Offered
Certificates to any person in any state or other jurisdiction in which such
offer would be unlawful. The delivery of this Prospectus at any time does not
imply that information herein is correct as of any time subsequent to its
date; however, if any material change occurs while this Prospectus is required
by law to be delivered, this Prospectus will be amended or supplemented
accordingly.
The related Master Servicer or Trustee will be required to mail to
holders of the Offered Certificates of each series periodic unaudited reports
concerning the related Trust Fund. If beneficial interests in a class of
Offered Certificates are being held and transferred in book-entry format
through the facilities of The Depository Trust Company ("DTC") as described
herein, then, unless otherwise provided in the related Prospectus Supplement,
such reports will be sent on behalf of the related Trust Fund to a nominee of
DTC as the registered holder of the Offered
<PAGE>6
Certificates. The means by which notices and other communications are
conveyed by DTC to its participating organizations, and directly or indirectly
through such participating organizations to the beneficial owners of the
applicable Offered Certificates, will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time. See "Description of the Certificates Reports to
Certificateholders" and " Book-Entry Registration and Definitive Certificates"
and "Description of the Pooling Agreements Evidence as to Compliance". The
Depositor will file or cause to be filed with the Commission such periodic
reports with respect to each Trust Fund as are required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the Commission thereunder.
To the extent described in the related Prospectus Supplement, some or all
of the Mortgage Loans may be secured by an assignment of the lessors' (i.e.,
the related Mortgagors') rights in one or more bond-type or credit-type net
leases (each, a "Lease") of the related Mortgaged Property. Unless otherwise
specified in the related Prospectus Supplement, no series of Certificates will
represent interests in or obligations of any lessee (each, a "Lessee") under a
Lease. If indicated, however, in the Prospectus Supplement for a given
series, a significant or the sole source of payments on the Mortgage Loans in
such series, and, therefore, of distributions on such Certificates, will be
rental payments due from the Lessees under the Leases. Under such
circumstances, prospective investors in the related series of Certificates may
wish to consider publicly available information, if any, concerning the
Lessees. Reference should be made to the related Prospectus Supplement for
information concerning the Lessees and whether any such Lessees are subject to
the periodic reporting requirements of the Exchange Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to
the termination of an offering of Offered Certificates evidencing interests
therein. The Depositor, upon request, will provide or cause to be provided
without charge to each person to whom this Prospectus is delivered in
connection with the offering of one or more classes of Offered Certificates, a
copy of any or all documents or reports incorporated herein by reference, in
each case to the extent such documents or reports relate to one or more of
such Offered Certificates, other than the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests to the Depositor should be directed in writing to its principal
executive office at One First Union Center, Charlotte, North Carolina 28228-
0013, Attention: Secretary, or by telephone at 704-374-6161. The Depositor
has determined that its financial statements will not be material to the
offering of any Offered Certificates.
<PAGE>7
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 3
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . . . . . . . 4
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . 10
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Limited Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . 22
Limited Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Prepayments; Average Life of Certificates; Yields . . . . . . . . . 23
Limited Nature of Ratings . . . . . . . . . . . . . . . . . . . . . 24
Risks Associated with Mortgage Loans and Mortgaged Properties . . . 24
Risks Associated with Certain Mortgage Loans and Related Leases . . 25
Balloon Payments; Borrower Default . . . . . . . . . . . . . . . . . 26
Junior Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . 26
Credit Support Limitations . . . . . . . . . . . . . . . . . . . . . 27
Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Leases and Rents . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Environmental Risks . . . . . . . . . . . . . . . . . . . . . . . . 28
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . 28
Certain Federal Tax Considerations Regarding REMIC Residual
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 28
Book-Entry Registration . . . . . . . . . . . . . . . . . . . . . . 29
Delinquent and Non-Performing Mortgage Loans . . . . . . . . . . . . 29
DESCRIPTION OF THE TRUST FUNDS . . . . . . . . . . . . . . . . . . . . . 29
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Mortgage Loans-Leases . . . . . . . . . . . . . . . . . . . . . . . 30
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Default and Loss Considerations with Respect to the Mortgage
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Payment Provisions of the Mortgage Loans . . . . . . . . . . . 33
Mortgage Loan Information in Prospectus Supplements . . . . . . 33
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Certificate Accounts . . . . . . . . . . . . . . . . . . . . . . . . 35
Credit Support . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Cash Flow Agreements . . . . . . . . . . . . . . . . . . . . . . . . 35
YIELD AND MATURITY CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . 36
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . 36
Payment Delays . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Certain Shortfalls in Collections of Interest . . . . . . . . . . . 36
Yield and Prepayment Considerations . . . . . . . . . . . . . . . . 37
Weighted Average Life and Maturity . . . . . . . . . . . . . . . . . 38
Controlled Amortization Classes and Companion Classes . . . . . . . 39
Other Factors Affecting Yield, Weighted Average Life and Maturity . 40
Balloon Payments; Extensions of Maturity . . . . . . . . . . . 40
<PAGE>8
Negative Amortization . . . . . . . . . . . . . . . . . . . . . 40
Foreclosures and Payment Plans . . . . . . . . . . . . . . . . 40
Losses and Shortfalls on the Mortgage Assets . . . . . . . . . 41
Additional Certificate Amortization . . . . . . . . . . . . . . 41
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
DESCRIPTION OF THE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . 42
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Distributions of Interest on the Certificates . . . . . . . . . . . 43
Distributions of Certificate Principal . . . . . . . . . . . . . . . 44
Distributions on the Certificates in Respect of Prepayment Premiums
or in Respect of Equity
Participations . . . . . . . . . . . . . . . . . . . . . . . . 45
Allocation of Losses and Shortfalls . . . . . . . . . . . . . . . . 45
Advances in Respect of Delinquencies . . . . . . . . . . . . . . . . 45
Reports to Certificateholders . . . . . . . . . . . . . . . . . . . 46
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Book-Entry Registration and Definitive Certificates . . . . . . . . 49
DESCRIPTION OF THE POOLING AGREEMENTS . . . . . . . . . . . . . . . . . . 50
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Assignment of Mortgage Assets; Repurchases . . . . . . . . . . . . . 51
Representations and Warranties; Repurchases . . . . . . . . . . . . 52
Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . 53
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Collection and Other Servicing Procedures . . . . . . . . . . . . . 56
Modifications, Waivers and Amendments of Mortgage Loans . . . . . . 56
Sub-Servicers . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Special Servicers . . . . . . . . . . . . . . . . . . . . . . . . . 57
Realization Upon Defaulted Mortgage Loans . . . . . . . . . . . . . 57
Hazard Insurance Policies . . . . . . . . . . . . . . . . . . . . . 59
Due-on-Sale and Due-on-Encumbrance Provisions . . . . . . . . . . . 60
Servicing Compensation and Payment of Expenses . . . . . . . . . . . 60
Evidence as to Compliance . . . . . . . . . . . . . . . . . . . . . 61
Certain Matters Regarding the Master Servicer and the Depositor . . 61
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . 62
Rights Upon Event of Default . . . . . . . . . . . . . . . . . . . . 62
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
List of Certificateholders . . . . . . . . . . . . . . . . . . . . . 64
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Duties of the Trustee . . . . . . . . . . . . . . . . . . . . . . . 64
<PAGE>9
Certain Matters Regarding the Trustee . . . . . . . . . . . . . . . 64
Resignation and Removal of the Trustee . . . . . . . . . . . . . . . 64
DESCRIPTION OF CREDIT SUPPORT . . . . . . . . . . . . . . . . . . . . . . 65
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Subordinate Certificates . . . . . . . . . . . . . . . . . . . . . . 65
Cross-Support Provisions . . . . . . . . . . . . . . . . . . . . . . 66
Insurance or Guarantees with Respect to Mortgage Loans . . . . . . . 66
Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Certificate Insurance and Surety Bonds . . . . . . . . . . . . . . . 66
Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Credit Support with Respect to CMBS . . . . . . . . . . . . . . . . 67
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND LEASES . . . . . . . . . . . 67
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Types of Mortgage Instruments . . . . . . . . . . . . . . . . . . . 68
Leases and Rents . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Personalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . . . . 69
Junior Mortgages; Rights of Senior Lenders . . . . . . . . . . 70
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Judicial Foreclosure . . . . . . . . . . . . . . . . . . . . . 71
Non-Judicial Foreclosure/Power of Sale . . . . . . . . . . . . 72
Equitable Limitations on Enforceability of Certain Provisions . 72
Public Sale . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Rights of Redemption . . . . . . . . . . . . . . . . . . . . . 73
Anti-Deficiency Legislation . . . . . . . . . . . . . . . . . . 74
Leasehold Risks . . . . . . . . . . . . . . . . . . . . . . . . 74
Regulated Healthcare Facilities . . . . . . . . . . . . . . . . 74
Cross-Collateralization . . . . . . . . . . . . . . . . . . . . 74
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . . 75
Bankruptcy Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Environmental Considerations . . . . . . . . . . . . . . . . . . . . 76
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Superlien Laws . . . . . . . . . . . . . . . . . . . . . . . . 77
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Certain Other State Laws . . . . . . . . . . . . . . . . . . . 77
Additional Considerations . . . . . . . . . . . . . . . . . . . 78
Due-on-Sale and Due-on-Encumbrance . . . . . . . . . . . . . . . . . 78
Subordinate Financing . . . . . . . . . . . . . . . . . . . . . . . 78
Default Interest and Limitations on Prepayments . . . . . . . . . . 79
Applicability of Usury Laws . . . . . . . . . . . . . . . . . . . . 79
Soldiers' and Sailors' Civil Relief Act of 1940 . . . . . . . . . . 79
Americans with Disabilities Act . . . . . . . . . . . . . . . . . . 80
Forfeitures in Drug and RICO Proceedings . . . . . . . . . . . . . . 80
<PAGE>10
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . 80
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
REMICs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Classification of REMICs . . . . . . . . . . . . . . . . . . . 81
Characterization of Investments in REMIC Certificates . . . . . 82
Tiered REMIC Structures . . . . . . . . . . . . . . . . . . . . 82
Taxation of Owners of REMIC Regular Certificates . . . . . . . 82
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Original Issue Discount . . . . . . . . . . . . . . . . . . . . 83
Market Discount . . . . . . . . . . . . . . . . . . . . . . . . 85
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Realized Losses . . . . . . . . . . . . . . . . . . . . . . . . 87
Taxation of Owners of REMIC Residual Certificates . . . . . . . 87
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Taxable Income of the REMIC . . . . . . . . . . . . . . . . . . 88
Basis Rules, Net Losses and Distributions. . . . . . . . . . . 89
Excess Inclusions . . . . . . . . . . . . . . . . . . . . . . . 90
Noneconomic REMIC Residual Certificates . . . . . . . . . . . . 91
Mark-to-Market Rules . . . . . . . . . . . . . . . . . . . . . 92
Possible Pass-Through of Miscellaneous Itemized Deductions . . 93
Sales of REMIC Certificates . . . . . . . . . . . . . . . . . . 93
Prohibited Transactions Tax and Other Taxes . . . . . . . . . . 94
Tax and Restrictions on Transfers of REMIC Residual
Certificates to Certain Organizations . . . . . . . . . . 95
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Reporting and Other Administrative Matters . . . . . . . . . . 96
Backup Withholding with Respect to REMIC Certificates . . . . . 97
Foreign Investors in REMIC Certificates . . . . . . . . . . . . 97
Grantor Trust Funds . . . . . . . . . . . . . . . . . . . . . . . . 98
Classification of Grantor Trust Funds . . . . . . . . . . . . . 98
Characterization of Investments in Grantor Trust Certificates . . . 98
Grantor Trust Fractional Interest Certificates . . . . . . . . 98
Grantor Trust Strip Certificates . . . . . . . . . . . . . . . 98
Taxation of Owners of Grantor Trust Fractional Interest
Certificates . . . . . . . . . . . . . . . . . . . . . . . 99
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
If Stripped Bond Rules Apply . . . . . . . . . . . . . . . . . 99
If Stripped Bond Rules Do Not Apply . . . . . . . . . . . . . . 101
Market Discount . . . . . . . . . . . . . . . . . . . . . . . . 103
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Taxation of Owners of Grantor Trust Strip Certificates . . . . 104
Possible Application of Contingent Payment Rules . . . . . . . 105
Sales of Grantor Trust Certificates . . . . . . . . . . . . . . 106
Grantor Trust Reporting . . . . . . . . . . . . . . . . . . . . 106
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . 107
Foreign Investor . . . . . . . . . . . . . . . . . . . . . . . 107
STATE AND OTHER TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . 107
<PAGE>11
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 107
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Plan Asset Regulations . . . . . . . . . . . . . . . . . . . . 108
Prohibited Transaction Exemptions . . . . . . . . . . . . . . . . . 108
LEGAL INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
METHOD OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . 112
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 113
RATING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
INDEX OF PRINCIPAL DEFINITIONS . . . . . . . . . . . . . . . . . . . . . 115
<PAGE>12
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the more detailed information appearing elsewhere
in this Prospectus and by reference to the information with respect to each
series of Certificates contained in the Prospectus Supplement to be prepared
and delivered in connection with the offering of Offered Certificates of such
series. An Index of Principal Definitions is included at the end of this
Prospectus.
Title of Certificates . Commercial Mortgage Pass-Through Certificates,
issuable in series (the "Certificates").
Depositor . . . . . . . First Union Commercial Mortgage Securities, Inc., a
wholly owned subsidiary of First Union National
Bank of North Carolina. See "The Depositor".
Master Servicer . . . . The master servicer (the "Master Servicer"), if
any, for a series of Certificates will be named
in the related Prospectus Supplement and may be
an affiliate of the Depositor. See "Description
of the Pooling Agreements Collection and
Other Servicing Procedures".
Special Servicer . . . The special servicer (the "Special Servicer"), if
any, for a series of Certificates will be
named, or the circumstances under which a
Special Servicer will be appointed will be
described, in the related Prospectus
Supplement. See "Description of the Pooling
Agreements Special Servicers".
Trustee . . . . . . . . The trustee (the "Trustee") for each series of
Certificates will be named in the related
Prospectus Supplement. See "Description of the
Pooling Agreements The Trustee".
The Trust Assets . . . Each series of Certificates will represent in the
aggregate the entire beneficial ownership
interest in a Trust Fund consisting primarily of:
A. Mortgage Assets The Mortgage Assets with respect to each series of
Certificates will, in general, consist of a pool
of mortgage loans (collectively, the
"Mortgage Loans") secured by first or junior
liens on, or security interests in, or
installment contracts for the sale of, fee
simple or leasehold interests in, (i)
residential properties consisting of five or more
rental or cooperatively owned dwelling units
("Multifamily Properties") or (ii) office
buildings, shopping centers, retail stores,
hotels or motels, nursing homes, hospitals or
other health-care related facilities, mobile home
parks, warehouse facilities, mini-warehouse
facilities or self-storage facilities, industrial
plants, mixed use or other types of income-
producing properties or unimproved land
("Commercial
<PAGE>13
Properties"), (iii) CMBS, or (iv) participations
in, or any combination of, the foregoing. If so
specified in the related Prospectus Supplement
and if permitted by applicable law, a Trust
Fund may include (i) Multifamily Properties or
Commercial Properties acquired by foreclosure or
by deed-in-lieu of foreclosure ("REO Property")
and (ii) Mortgage Loans secured by liens on real
estate projects under construction. If so
specified in the related Prospectus Supplement,
some Mortgage Loans may be delinquent or
non-performing as of the date of their deposit
into the related Trust Fund. The Mortgage Loans
will not be guaranteed or insured by the
Depositor, any of its affiliates or, unless
otherwise specified in the Prospectus Supplement,
by any governmental agency or instrumentality or
other person.
To the extent described in the related Prospectus
Supplement, some or all of the Mortgage Loans
may also be secured by an assignment of one or
more leases (a "Lease Assignment"), including
bond-type or credit-type net leases (each, a
"Lease") of one or more lessees (each, a
"Lessee") of all or a portion of the related
Mortgaged Properties (as defined herein).
Unless otherwise specified in the related
Prospectus Supplement, a significant or the
sole source of payments on certain Mortgage
Loans will be the rental payments due under
the related Leases. In certain
circumstances, with respect to Commercial
Properties, the material terms and conditions of
the related Leases may be set forth in the
related Prospectus Supplement. See "Description
of the Trust Funds Mortgage Loans Leases" and
"Risk Factors Limited Assets" herein.
Unless otherwise provided in the related Prospectus
Supplement, the Mortgaged Properties may be
located in any one of the 50 states, the District
of Columbia or the Commonwealth of Puerto Rico.
Unless otherwise provided in the related
Prospectus Supplement, all Mortgage Loans will
have individual principal balances at origination
of not less than $100,000 and original terms to
maturity of not more than 40 years.
As and to the extent described in the related
Prospectus Supplement, a Mortgage Loan (i) may
provide for no accrual of interest or for accrual
of interest thereon at an interest rate (a
"Mortgage Rate") that is fixed over its term or
that adjusts from time to time, or that may be
converted at the borrower's election from an
adjustable to a fixed Mortgage Rate, or from a
fixed to an adjustable Mortgage Rate, (ii) may
provide for the formula, index or other
<PAGE>14
method by which the Mortgage Rate will be
calculated, (iii) may provide for level payments
to maturity or for payments that adjust from
time to time to accommodate changes in the
Mortgage Rate or to reflect the occurrence of
certain events, and may permit negative
amortization or accelerated amortization, (iv)
may be fully amortizing over its term to
maturity, or may provide for little or no
amortization over its term and thus require a
balloon payment on its stated maturity date,
(v) may contain a prohibition on prepayment or
require payment of a premium or a yield
maintenance penalty in connection with a
prepayment and (vi) may provide for payments of
principal, interest or both, on due dates that
occur monthly or quarterly or at such other
interval as is specified in the related
Prospectus Supplement. See "Description of the
Trust Funds Mortgage Loans".
If and to the extent specified in the related
Prospectus Supplement, the Mortgage Assets that
constitute a particular Trust Fund may also
include or consist solely of (i) private
mortgage participations, mortgage pass-through
certificates or other mortgage-backed
securities or (ii) certificates insured or
guaranteed by the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal National
Mortgage Association ("FNMA"), the
Governmental National Mortgage Association
("GNMA") or the Federal Agricultural Mortgage
Corporation ("FAMC") (collectively, the mortgage-
backed securities referred to in clauses (i) and
(ii), "CMBS"), provided that each CMBS will
evidence an interest in, or will be secured by a
pledge of, one or more mortgage loans that
conform to the descriptions of the Mortgage Loans
contained herein. See "Description of the Trust
Funds CMBS".
Each Mortgage Asset will be selected by the
Depositor for inclusion in a Trust Fund from
among those purchased, either directly or
indirectly, from a prior holder thereof (a
"Mortgage Asset Seller"), which prior holder
may or may not be the originator of such
Mortgage Loan or the issuer of such CMBS and
may be an affiliate of the Depositor, all as
more particularly described in the related
Prospectus Supplement.
B. Certificate Account Each Trust Fund will include one or more accounts
(collectively, the "Certificate Account")
established and maintained on behalf of the
Certificateholders into which the person or
persons designated in the related Prospectus
Supplement will, to the extent described herein
and in such Prospectus Supplement, deposit all
payments and collections received
<PAGE>15
or advanced with respect to the Mortgage Assets
and other assets in the Trust Fund. A
Certificate Account may be maintained as an
interest bearing or a non-interest bearing
account, and funds held therein may be held as
cash or invested in certain short-term, investment
grade obligations, in each case as described in
the related Prospectus Supplement. See
"Description of the Trust Funds Certi-ficate
Accounts" and "Description of the
Pooling Agreements Certificate Account".
C. Credit Support If so provided in the related Prospectus
Supplement, partial or full protection against
certain defaults and losses on the Mortgage
Assets in the related Trust Fund may be provided
to one or more classes of Certificates of the
related series in the form of subordination of one
or more other classes of Certificates of such
series, which other classes may include one or
more classes of Offered Certificates, or by one
or more other types of credit support, such as
overcollateralization, a letter of credit,
insurance policy, guarantee, reserve fund or
another type of credit support, or a combination
thereof (any such coverage with respect to the
Certificates of any series, "Credit Support").
The amount and types of any Credit Support, the
identification of the entity providing it (if
applicable) and related information will be
set forth in the related Prospectus Supplement.
The Prospectus Supplement for any series of
Certificates evidencing an interest in a Trust
Fund that includes CMBS will describe in the same
fashion any similar forms of credit support that
are provided by or with respect to, or are
included as part of the trust fund evidenced by
or providing security for, such CMBS to the
extent information is available and deemed
material. The type, characteristic and amount
of Credit Support will be determined based on the
characteristics of the Mortgage Assets and other
factors and will be established, in part, on the
basis of requirements of each Rating Agency
rating the Certificates of such series. If so
specified in the related Prospectus
Supplement, any such Credit Support may apply
only in the event of certain types of losses or
delinquencies and the protection against losses
or delinquencies provided by such Credit Support
will be limited. See "Risk Factors Credit
Support Limitations", "Description of the Trust
Funds Credit Support" and "Description of Credit
Support".
D. Cash Flow Agreements If so provided in the related Prospectus
Supplement, a Trust Fund may include guaranteed
investment contracts pursuant to which moneys
held in the funds and accounts established for
the related series will be invested at a
specified rate.
<PAGE>16
The Trust Fund may also include certain other
agreements, such as interest rate exchange
agreements, interest rate cap or floor
agreements, currency exchange agreements or
similar agreements designed to reduce the
effects of interest rate or currency exchange rate
fluctuations on the Mortgage Assets or on one or
more classes of Certificates. The principal
terms of any such guaranteed investment contract
or other agreement (any such agreement, a "Cash
Flow Agreement"), including, without limitation,
provisions relating to the timing, manner and
amount of payments thereunder and provisions
relating to the termination thereof, will be
described in the Prospectus Supplement for the
related series. In addition, the related
Prospectus Supplement will contain certain
information that pertains to the obligor under
any such Cash Flow Agreement. The Prospectus
Supplement for any series of Certificates
evidencing an interest in a Trust Fund that
includes CMBS will describe in the same fashion
any Cash Flow Agreements that are included as
part of the trust fund evidenced by or
providing security for such CMBS to the
extent information is available and deemed
material. See "Description of the Trust Funds
Cash Flow Agreements".
Description of Certificates Each series of Certificates will be issued
pursuant to a pooling and servicing agreement
or other agreement specified in the related
Prospectus Supplement (in either case, a
"Pooling Agreement") and will represent in the
aggregate the entire beneficial ownership
interest in the related Trust Fund.
Each series of Certificates may consist of one or
more classes of Certificates, and such class or
classes (including classes of Offered
Certificates) may (i) be senior (collectively,
"Senior Certificates") or subordinate
(collectively, "Subordinate Certificates") to one
or more other classes of Certificates in
entitlement to certain distributions on the
Certificates; (ii) be entitled to distributions
of principal, with disproportionately small,
nominal or no distributions of interest
(collectively, "Stripped Principal
Certificates"); (iii) be entitled to
distributions of interest, with
disproportionately small, nominal or no
distributions of principal (collectively,
"Stripped Interest Certificates"); (iv) provide
for distributions of principal and/or interest
that commence only after the occurrence of
certain events, such as the retirement of one or
more other classes of Certificates of such
series; (v) provide for distributions of
principal to be made, from time to time, or for
designated periods, at a rate that is faster
(and, in some cases, substantially faster) or
slower (and, in some cases,
<PAGE>17
substantially slower) than the rate at which
payments or other collections of principal are
received on the Mortgage Assets in the related
Trust Fund; (vi) provide for distributions of
principal to be made, subject to available funds,
based on a specified principal payment schedule
or other methodology; and/or (vii) provide for
distributions based on a combination of two
or more components thereof with one or more of
the characteristics described in this paragraph,
including a Stripped Principal Certificate
component and a Stripped Interest Certificate
component, to the extent of available funds, in
each case as described in the related Prospectus
Supplement. Any such classes may include
classes of Offered Certificates. With respect
to Certificates with two or more components,
references herein to Certificate Balance,
notional amount and Pass-Through Rate refer to the
principal balance, if any, notional amount, if
any, and the Pass-Through Rate, if any, for any
such component.
Each class of Certificates, other than certain
classes of Stripped Interest Certificates and
certain REMIC Residual Certificates (as defined
below), will have a stated principal amount (a
"Certificate Balance"), and each class of
Certificates, other than certain classes of
Stripped Principal Certificates and certain
REMIC Residual Certificates, will accrue
interest on its Certificate Balance or, in
the case of certain classes of Stripped Interest
Certificates, on a notional amount ("Notional
Amount"), based on a fixed, variable or
adjustable interest rate (a "Pass-Through
Rate"). The related Prospectus Supplement will
specify the Certificate Balance, Notional Amount
and Pass-Through Rate for each class of Offered
Certificates, as applicable, or, in the case of
a variable or adjustable Pass- Through Rate,
the method for determining the Pass-Through
Rate.
The Certificates will not be guaranteed or insured
by the Depositor or any of its affiliates,
by any governmental agency or instrumentality or
by any other person, unless otherwise provided
in the related Prospectus Supplement. See
"Risk Factors Limited Assets" and "Description of
the Certificates".
Distributions of Interest on the
Certificates . . . . Interest on each class of Offered Certificates
(other than certain classes of Stripped
Principal Certificates and Stripped Interest
Certificates and certain REMIC Residual
Certificates) of each series will accrue at the
applicable Pass-Through Rate on the Certificate
Balance or, in the case of certain classes of
Stripped Interest Certificates, the
<PAGE>18
Notional Amount thereof outstanding from time to
time and will be distributed to
Certificateholders as provided in the related
Prospectus Supplement (each of the specified
dates on which distributions are to be made, a
"Distribution Date"). Distributions of interest
with respect to one or more classes of
Certificates (collectively, "Accrual
Certificates") may not commence until the
occurrence of certain events, such as the
retirement of one or more other classes of
Certificates, and interest accrued with respect
to a class of Accrual Certificates prior to the
occurrence of such an event will either be added
to the Certificate Balance thereof or otherwise
deferred. Distributions of interest with respect
to one or more classes of Certificates may be
reduced to the extent of certain
delinquencies, losses and other contingencies
described herein and in the related
Prospectus Supplement. See "Risk Factors
Prepayments; Average Life of Certificates;
Yields", "Yield and Maturity Considerations",
and "Description of the Certificates
Distributions of Interest on the Certificates".
Distributions of Certificate
Principal . . . . . . Each class of the Certificates of each series
(other than certain classes of Stripped Interest
Certificates and/or REMIC Residual
Certificates) will have a Certificate Balance
which, as of any date, will represent the
maximum amount that the holders thereof are then
entitled to receive in respect of principal
from future cash flow on the Mortgage Assets
in the related Trust Fund. Unless otherwise
specified in the related Prospectus Supplement,
the initial aggregate Certificate Balance of all
classes of a series of Certificates will not
exceed the outstanding principal balance of the
related Mortgage Assets as of a specified date
(the "Cut-off Date"), after application of
scheduled payments due on or before such date,
whether or not received. As and to the
extent described in the related Prospectus
Supplement, distributions of principal with
respect to each series of Certificates will be
made on each Distribution Date to the holders of
the class or classes of Certificates of such
series entitled thereto until the Certificate
Balances of such Certificates have been reduced
to zero. Distributions of principal with respect
to one or more classes of Certificates (i) may be
made at a rate that is faster (and, in some
cases, substantially faster) than the rate at
which payments or other collections of principal
are received on the Mortgage Assets in the
related Trust Fund; (ii) may not commence until
the occurrence of certain events, such as the
retirement of one or more other classes of
Certificates of the same series, or may be made
at a rate that is slower (and, in some cases,
substantially slower) than the rate at
<PAGE>19
which payments or other collections of principal
are received on the Mortgage Assets in the
related Trust Fund; (iii) may be made, subject
to available funds, based on a specified
principal payment schedule for any such class, a
"Controlled Amortization Class"); and (iv) may be
contingent on the specified principal payment
schedule for a Controlled Amortization Class of
the same series and the rate at which payments
and other collections of principal on the
Mortgage Assets in the related Trust Fund are
received (any such class, a "Companion Class").
Unless otherwise specified in the related
Prospectus Supplement, distributions of principal
of any class of Certificates will be made on a
pro rata basis among all of the Certificates of
such class. See "Description of the Certificates
Distributions of Certificate Principal".
Advances . . . . . . . If and to the extent provided in the related
Prospectus Supplement, the Master Servicer
and/or another specified person will be
obligated to make, or have the option of making,
certain advances with respect to delinquent
scheduled payments of principal and/or interest
on the Mortgage Loans in the related Trust
Fund. Any such advances made with respect to a
particular Mortgage Loan will be reimbursable
from subsequent recoveries in respect of such
Mortgage Loan and otherwise to the extent
described herein and in the related Prospectus
Supplement. If and to the extent provided in
the Prospectus Supplement for a series of
Certificates, the Master Servicer or other
specified person will be entitled to receive
interest on its advances for the period that
they are outstanding, payable from amounts in the
related Trust Fund. See "Description of the
Certificates Advances in Respect of
Delinquencies". If a Trust Fund includes CMBS,
any comparable advancing obligation of a party to
the related Pooling Agreement, or of a party to
the related CMBS Agreement, will be described in
the related Prospectus Supplement.
Termination . . . . . . If so specified in the related Prospectus
Supplement, a series of Certificates will be
subject to optional early termination by means of
the repurchase of the Mortgage Assets in the
related Trust Fund by the party or parties
specified therein, under the circumstances and in
the manner set forth therein. If so provided in
the related Prospectus Supplement, upon the
reduction of the Certificate Balance of a
specified class or classes of Certificates by a
specified percentage or amount, a party specified
therein may be authorized or required to solicit
bids for the purchase of all of the Mortgage
Assets of the Trust Fund, or of a sufficient
portion of such Mortgage Assets to retire such
class or
<PAGE>20
classes, under the circumstances and in the
manner set forth therein. Further, if so
provided in the related Prospectus Supplement,
certain classes of Certificates may be purchased
by a party or parties specified therein under
similar or other conditions as described
therein. See "Description of the Certificates
Termination".
Registration of Book-Entry
Certificates . . . . If so provided in the related Prospectus
Supplement, one or more classes of the Offered
Certificates of any series will be offered in
book-entry format (collectively, "Book-Entry
Certificates") through the facilities of DTC.
Each class of Book-Entry Certificates will be
initially represented by one or more Certificates
registered in the name of a nominee of DTC. No
person acquiring an interest in a class of
Book-Entry Certificates (a "Certificate Owner")
will be entitled to receive a Certificate of
such class in fully registered, definitive form
(a "Definitive Certificate"), except under the
limited circumstances described herein.
See "Risk Factors Book-Entry Registration"
and "Description of the Certificates-Book
Entry Registration and Definitive
Certificates".
Tax Status of the Certificates The Certificates of each series will constitute
either (i) "regular interests" ("REMIC Regular
Certificates") and "residual interests"
("REMIC Residual Certificates") in a Trust Fund,
or a designated portion thereof, treated as
a REMIC under Sections 860A through 860G of
the Internal Revenue Code of 1986 (the
"Code"), or (ii) interests ("Grantor Trust
Certificates") in a Trust Fund treated as a
grantor trust under applicable provisions of the
Code.
A. REMIC . . . . . REMIC Regular Certificates generally will be
treated as debt obligations of the applicable
REMIC for federal income tax purposes. In
general, to the extent the assets and income of
the REMIC are treated as qualifying assets and
income under the following sections of the Code,
REMIC Regular Certificates owned by a real estate
investment trust will be treated as "real estate
assets" for purposes of Section 856(c)(5)(A) of
the Code and interest income therefrom will be
treated as "interest on obligations secured by
mortgages on real property" for purposes of
Section 856(c)(3)(B) of the Code. In addition,
REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section
860G(a)(3) of the Code. Moreover, if 95% or more
of the assets and the income of the REMIC
qualify for any of the foregoing
treatments, the REMIC Regular Certificates will
qualify for the foregoing treatments in their
entirety. However, REMIC Regular Certificates
owned by a thrift
<PAGE>21
institution will constitute assets described in
Section 7701(a)(19)(C) of the Code only if so
specified in the related Prospectus Supplement.
If so specified in the related Prospectus
Supplement, certain of the REMIC Regular
Certificates may be issued with original issue
discount. See "Certain Federal Income Tax
Conse-quences REMICs Taxation of Owners of
REMIC Regular Certificates".
REMIC Residual Certificates generally will be
treated as representing an interest in qualifying
assets and income to the same extent described
above for institutions subject to Sections
856(c)(5)(A) and 856(c)(3)(B) of the Code, but
not for purposes of Section 7701(a)(19)(C) of the
Code unless otherwise stated in the related
Prospectus Supplement. A portion (or, in certain
cases, all) of the income from REMIC Residual
Certificates (i) may not be offset by any losses
from other activities of the holder of such REMIC
Residual Certificates, (ii) may be treated as
unrelated business taxable income for holders of
REMIC Residual Certificates that are subject to
tax on unrelated business taxable income (as
defined in Section 511 of the Code), and (iii)
may be subject to foreign withholding rules. See
"Certain Federal Income Tax Consequences -
REMICs Taxation of Owners of REMIC Residual
Certificates".
B. Grantor Trust . Unless otherwise provided in the related Prospectus
Supplement, Grantor Trust Certificates may be
either Certificates that have a Certificate
Balance and a Pass-Through Rate or that are
Stripped Principal Certificates (collectively,
"Grantor Trust Fractional Interest
Certificates"), or may be Stripped Interest
Certificates. Holders of Grantor Trust
Fractional Interest Certificates generally will
be treated as owning an interest in qualifying
assets and income under Sections 856(c)(5)(A),
856(c)(3)(B) and 860G(a)(3) of the Code, but will
not be so treated for purposes of Section
7701(a)(19)(C) of the Code unless otherwise
stated in the related Prospectus Supplement.
It is unclear whether Stripped Interest
Certificates will be treated as representing an
ownership interest in qualifying assets and
income under Sections 856(c)(5)(A) and
856(c)(3)(B) of the Code, although the policy
considerations underlying those Sections suggest
that such treatment should be available.
However, such Certificates will not be treated
as representing an ownership interest in
assets described in Section 7701(a)(19)(C) of
the Code unless otherwise stated
<PAGE>22
in the related Prospectus Supplement. The
taxation of holders of Stripped Interest
Certificates is uncertain in various
respects, including in particular the method
such holders should use to recover their purchase
price and to report their income with
respect to such Stripped Interest
Certificates. See "Certain Federal Income Tax
Conse-quences Grantor Trust Funds".
Investors are advised to consult their tax advisors
with respect to the taxation of holders of
Stripped Interest Certificates and to review
"Certain Federal Income Tax Consequences" herein
and in the related Prospectus Supplement.
ERISA Considerations . Fiduciaries of employee benefit plans and certain
other retirement plans and arrangements,
including individual retirement accounts,
annuities, Keogh plans, and collective
investment funds and separate accounts in
which such plans, accounts, annuities or
arrangements are invested, that are subject to
the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or Section 4975
of the Code, should carefully review with their
legal advisors whether the purchase or holding of
Offered Certificates could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA or
Section 4975 of the Code. See "ERISA
Considerations" herein and in the related
Prospectus Supplement.
Legal Investment . . . The Offered Certificates of any series will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 only if so specified in
the related Prospectus Supplement. Investors
whose investment authority is subject to legal
restrictions should consult their own legal
advisors to determine whether and to what
extent the Offered Certificates constitute
legal investments for them. See "Legal
Investment" herein and in the related
Prospectus Supplement.
<PAGE>23
Rating . . . . . . . . At their respective dates of issuance, each class
of Offered Certificates will be rated not
lower than investment grade by one or more
nationally recognized statistical rating agencies
requested by the Depositor to rate the Offered
Certificates (each, a "Rating Agency"). See
"Rating" herein and in the related Prospectus
Supplement.
<PAGE>24
RISK FACTORS
In considering an investment in the Offered Certificates of any series,
investors should consider, among other things, the following factors and any
other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. In general, to the extent that the factors discussed
below pertain to or are influenced by the characteristics or behavior of
Mortgage Loans included in a particular Trust Fund, they would similarly
pertain to and be influenced by the characteristics or behavior of the
mortgage loans underlying any CMBS included in such Trust Fund.
Limited Liquidity
There can be no assurance that a secondary market for the Offered
Certificates of any series will develop or, if it does develop, that it will
provide holders with liquidity of investment or will continue for as long as
such Certificates remain outstanding. Furthermore, because, among other
things, the timing of receipt of payments with respect to a pool of
multifamily or commercial mortgage loans may be substantially more difficult
to predict than that of a pool of single family mortgage loans, any such
secondary market that does develop may provide less liquidity to investors
than any comparable market for securities that evidence interests in single-
family mortgage loans.
The primary source of continuing information regarding the Offered
Certificates of any series, including information regarding the status of the
related Mortgage Assets and any Credit Support for such Certificates, will be
the periodic reports to Certificateholders delivered pursuant to the related
Pooling Agreement as described herein under the heading "Description of the
Certificates Reports to Certificateholders". There can be no assurance that
any additional continuing information regarding the Offered Certificates of
any series will be available through any other source, and the limited nature
of such information may adversely affect the liquidity thereof, even if a
secondary market for such Certificates does develop.
Except to the extent described herein and in the related Prospectus
Supplement, Certificateholders will have no redemption rights, and the Offered
Certificates of each series are subject to early retirement only under certain
specified circumstances described herein and in the related Prospectus
Supplement. See "Description of the Certificates Termination".
Limited Assets
Unless otherwise specified in the related Prospectus Supplement, neither
the Offered Certificates of any series nor the Mortgage Assets in the related
Trust Fund will be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other
person; and no Offered Certificate of any series will represent a claim
against or security interest in the Trust Funds for any other series.
Accordingly, if the related Trust Fund has insufficient assets to make
payments on such Certificates, no other assets will be available for payment
of the deficiency. Additionally, certain amounts on deposit from time to time
remaining in certain funds or accounts constituting part of a Trust Fund,
including the Certificate Account and any accounts maintained as Credit
Support, may be withdrawn under certain conditions that will be described in
the related Prospectus Supplement, for purposes other than the payment of
principal of or interest on the related series of Certificates. If so
provided in the Prospectus Supplement for a series of Certificates consisting
of one or more classes of Subordinate Certificates, on any Distribution Date
in respect of which losses or shortfalls in collections on the Mortgage Assets
have been incurred, the amount of such losses or shortfalls will be done first
by one or more classes of the Subordinate Certificates and, thereafter, by the
remaining classes of Certificates in the priority and manner and subject to
the limitations specified in such Prospectus Supplement.
<PAGE>25
Prepayments; Average Life of Certificates; Yields
For a number of reasons, including the difficulty of predicting the rate
of prepayments on the Mortgage Loans in a particular Trust Fund, the amount
and timing of distributions of principal and/or interest on the Offered
Certificates of the related series may be highly unpredictable. Prepayments
on the Mortgage Loans in any Trust Fund will result in a faster rate of
principal payments on one or more classes of the related Certificates than if
payments on such Mortgage Loans were made as scheduled. Thus, the prepayment
experience on the Mortgage Loans may affect the average life of each class of
such Certificates, including a class of Offered Certificates. The rate of
principal payments on pools of mortgage loans varies among pools and from time
to time is influenced by a variety of economic, demographic, geographic,
social, tax, legal and other factors. For example, if prevailing interest
rates fall significantly below the Mortgage Rates borne by the Mortgage Loans
included in a Trust Fund, principal prepayments are likely to be higher than
if prevailing rates remain at or above the rates borne by those Mortgage
Loans. Conversely, if prevailing interest rates rise significantly above the
Mortgage Rates borne by the Mortgage Loans included in a Trust Fund, principal
prepayments thereon are likely to be lower than if prevailing interest rates
remain at or below the rates borne by those Mortgage Loans. There can be no
assurance as to the rate of prepayments on the Mortgage Loans in any Trust
Fund or that such rate will conform to any model described herein or in any
Prospectus Supplement. As a result, depending on the anticipated rate of
prepayment for the Mortgage Loans in any Trust Fund, the retirement of any
class of Certificates of the related series could occur significantly earlier
or later than expected.
The extent to which prepayments on the Mortgage Loans in any Trust Fund
ultimately affect the average life of any class of Certificates of the related
series will depend on the terms of such Certificates. A class of
Certificates, including a class of Offered Certificates, may provide that on
any Distribution Date the holders of such Certificates are entitled to a pro
rata share of the prepayments (including prepayments occasioned by defaults)
on the Mortgage Loans in the related Trust Fund that are distributable on such
date, to a disproportionately large share (which, in some cases, may be all)
of such prepayments, or to a disproportionately small share (which, in some
cases, may be none) of such prepayments. A class of Certificates that
entitles the holders thereof to a disproportionately large share of
prepayments enhances the risk of early retirement of such class ("call risk")
if the rate of prepayment is faster than anticipated; while a class of
Certificates that entitles the holders thereof to a disproportionately small
share of prepayments enhances the risk of an extended average life of such
class ("extension risk") if the rate of prepayment is slower than anticipated.
As and to the extent described in the related Prospectus Supplement, the
respective entitlements of the various classes of Certificateholders of any
series to receive payments (and, in particular, prepayments) of principal of
the Mortgage Loans in the related Trust Fund may vary based on the occurrence
of certain events (e.g., the retirement of one or more classes of Certificates
of such series) or subject to certain contingencies (e.g., prepayment and
default rates with respect to such Mortgage Loans).
A series of Certificates may include one or more Controlled Amortization
Classes that will be entitled to receive principal distributions according to
a specified principal payment schedule. Although prepayment risk cannot be
eliminated entirely for any class of Certificates, it can be reduced
substantially in the case of a Controlled Amortization Class so long as the
actual rate of prepayments on the Mortgage Loans in the related Trust Fund
remains relatively constant at the rate, or within the range of rates, of
prepayment used to establish the specific principal payment schedule for such
Certificates. However, the reduction of prepayment risk afforded to a
Controlled Amortization Class comes at the expense of one or more Companion
Classes of the same series, any of which Companion Classes may also be a class
of Offered Certificates. In general, and as more specifically described in
the related Prospectus Supplement, a Companion Class will entitle the holders
thereof to a disproportionately large share of prepayments on the Mortgage
Loans in the related Trust Fund when the rate of prepayment is relatively
fast, and to a disproportionately small share of those prepayments when the
rate of prepayment is relatively slow, and thus absorbs some (but not all) of
the "call risk" and/or "extension risk" that
<PAGE>26
would otherwise affect the related Controlled Amortization Class if all
payments of principal of the Mortgage Loans were allocated on a pro rata
basis.
A series of Certificates may also include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Mortgage Loans in the related Trust Fund and, where the
amount of interest payable with respect to a class is disproportionately
large, as compared to the amount of principal, as with certain classes of
Stripped Interest Certificates, a holder might fail to recoup its original
investment under some prepayment scenarios. An investor should consider, in
the case of any Offered Certificate purchased at a discount, the risk that a
slower than anticipated rate of principal payments on the Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of any Offered Certificate purchased at a premium, the
risk that a faster than anticipated rate of principal payments could result in
an actual yield to such investor that is lower than the anticipated yield.
See "Yield and Maturity Considerations" herein and, if applicable, in the
related Prospectus Supplement.
Limited Nature of Ratings
Any rating assigned by a Rating Agency to a class of Offered Certificates
will reflect only its assessment of the likelihood that holders of
Certificates of such class will receive payments to which such
Certificateholders are entitled under the related Pooling Agreement. Such
rating will not constitute an assessment of the likelihood that principal
prepayments (including those caused by defaults) on the related Mortgage Loans
will be made, the degree to which the rate of such prepayments might differ
from that originally anticipated or the likelihood of early optional
termination of the related Trust Fund. Such rating will not address the
possibility that prepayments on the related Mortgage Loans at a higher or
lower rate than anticipated by an investor may cause such investor to
experience a lower than anticipated yield or that an investor that purchases
an Offered Certificate at a significant premium might fail to recoup its
initial investment under certain prepayment scenarios.
The amount, type and nature of Credit Support, if any, provided with
respect to a series of Certificates will be determined on the basis of
criteria established by each Rating Agency rating classes of the Certificates
of such series. Those criteria are sometimes based upon an actuarial analysis
of the behavior of mortgage loans in a larger group. However, there can be no
assurance that the historical data supporting any such actuarial analysis will
accurately reflect future experience, or that the data derived from a large
pool of mortgage loans will accurately predict the delinquency, foreclosure or
loss experience of any particular pool of Mortgage Loans. In other cases,
such criteria may be based upon determinations of the values of the Mortgaged
Properties that provide security for the Mortgage Loans. However, no
assurance can be given that those values will not decline in the future. See
"Description of Credit Support" and "Rating".
Risks Associated with Mortgage Loans and Mortgaged Properties
Mortgage loans made on the security of multifamily or commercial property
may entail risks of delinquency and foreclosure, and risks of loss in the
event thereof, that are greater than similar risks associated with loans made
on the security of single-family property. See "Description of the Trust
Funds Mortgage Loans-Leases". The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an income -
producing property is directly related to the net operating income derived
from such property. If the net operating income of the property is reduced
(for example, if rental or occupancy rates decline or real estate tax rates or
other operating expenses increase), the borrower's ability to repay the loan
may be impaired. A number of the Mortgage Loans may be secured by liens on
owner-occupied Mortgaged Properties or on Mortgaged Properties leased to a
single tenant. Accordingly, a decline in the financial condition
<PAGE>27
of the borrower or single tenant, as applicable, may have a disproportionately
greater effect on the net operating income from such Mortgaged Properties than
would be the case with respect to Mortgaged Properties with multiple tenants.
Furthermore, the value of any Mortgaged Property may be adversely affected by
risks generally incident to interests in real property, including changes in
general or local economic conditions and/or specific industry segments;
declines in real estate values; declines in rental or occupancy rates;
increases in interest rates, real estate tax rates and other operating
expenses; changes in governmental rules, regulations and fiscal policies,
including environmental legislation, acts of God; and other factors beyond the
control of a Master Servicer.
In addition, additional risk may be presented by the type and use of a
particular Mortgaged Property. For instance, Mortgaged Properties that
operate as hospitals and nursing homes may present special risks to lenders
due to the significant governmental regulation of the ownership, operation,
maintenance and financing of health care institutions. In particular,
required licenses for hospitals and nursing homes are generally
nontransferable; thus it may be impossible for a person acquiring such a
property through foreclosure to operate the property as a hospital or a
nursing home. Hotel and motel properties are often operated pursuant to
franchise, management or operating agreements which may be terminable by the
franchiser or operator. Termination of such agreements may be available to
the franchises or operator under a variety of circumstances, including
foreclosure. Moreover, the transferability of a hotel's operating, liquor and
other licenses upon a transfer of the hotel, whether through purchase or
foreclosure, is subject to local law requirements.
It is anticipated that some or all of the Mortgage Loans included in any
Trust Fund will be nonrecourse loans or loans for which recourse may be
restricted or unenforceable. As to those Mortgage Loans, recourse in the
event of borrower default will be limited to the specific real property and
other assets, if any, that were pledged to secure the Mortgage Loan. However,
even with respect to those Mortgage Loans that provide for recourse against
the borrower and its assets generally, there can be no assurance that
enforcement of such recourse provisions will be practicable, or that the
assets of the borrower will be sufficient to permit a recovery in respect of a
defaulted Mortgage Loan in excess of the liquidation value of the related
Mortgaged Property.
Further, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans in a particular Trust Fund will generally be greater
than for pools of single-family loans because Mortgage Loans in a Trust Fund
will generally consist of a smaller number of higher balance loans than would
a pool of single-family loans of comparable aggregate unpaid principal
balance.
Risks Associated with Certain Mortgage Loans and Related Leases
If so described in the related Prospectus Supplement, the borrower under
a Mortgage Loan may be an entity created by the owner or purchaser of the
related Mortgaged Property solely to own or purchase such property, in part to
isolate the property from the debts and liabilities of such owner or
purchaser. Unless otherwise specified, each such Mortgage Loan will represent
a nonrecourse obligation of the related borrower secured by the lien of the
related Mortgage and the related Lease Assignments. In the case of Commercial
Properties, the value of a property that is not itself an operating business
generally will be derived from rental payments under Leases of all or portions
of the property. Whether or not such loans are recourse or nonrecourse
obligations, it is not expected that the borrowers of Mortgage Loans secured
by Commercial Properties will have any significant assets other than the
Commercial Properties and any related Leases, which will be pledged to the
Trustee under the related Pooling Agreement. Therefore, the payment of
amounts due on any such Mortgage Loans, and, consequently, the payment of
principal of and interest on the related Certificates, will depend primarily
or solely on rental payments by the Lessees. Such rental payments will, in
turn, depend on continued occupancy by, and/or the creditworthiness of, such
Lessees, which in either case may be adversely affected by a general economic
downturn or an adverse change in their financial condition. Moreover, to the
extent a Commercial Property was designed for the needs of a specific type of
tenant (e.g., a nursing home, hotel or motel), the value of such property in
the event of a default by the
<PAGE>28
Lessee or the early termination of such Lease may be adversely affected
because of difficulty in re-leasing the property to a suitable substitute
lessee or, if re-leasing to such a substitute is not possible, because of the
cost of altering the property for another more marketable use. As a result,
without the benefit of the Lessee's continued support of the Commercial
Property, and absent significant amortization of the Mortgage Loan, if such
loan is foreclosed on and the Commercial Property liquidated following a Lease
default, the net proceeds might be insufficient to cover the outstanding
principal and interest owing on such Mortgage Loan, thereby increasing the
risk that holders of the Certificates will suffer some loss.
The performance of a Mortgage Loan secured by an income-producing
property leased (pursuant to general commercial-typeleases rather than credit-
or bond-type leases) by the Mortgagor to Lessees as well as the liquidation
value of such property may be dependent upon the business operated by such
Lessees in connection with such property, the creditworthiness of such Lessees
or both; the risks associated with such loans may be offset by the number of
Lessees or, if applicable, a diversity of types of business operated by such
Lessees.
Balloon Payments; Borrower Default
Certain of the Mortgage Loans included in a Trust Fund may not be fully
amortizing (or may not amortize at all) over their terms to maturity and,
thus, will require substantial principal payments (that is, balloon payments)
at their stated maturity. Mortgage Loans of this type involve a greater
degree of risk than self-amortizing loans because the ability of a borrower to
make a balloon payment typically will depend upon its ability either to fully
refinance the loan or to sell the related Mortgaged Property at a price
sufficient to permit the borrower to make the balloon payment. The ability of
a borrower to accomplish either of these goals will be affected by a number of
factors, including the value of the related Mortgaged Property, the level of
available mortgage rates at the time of sale or refinancing, the borrower's
equity in the related Mortgaged Property, the financial condition and
operating history of the borrower and the related Mortgaged Property, tax
laws, rent control laws (with respect to certain residential properties),
Medicaid and Medicare reimbursement rates (with respect to hospitals and
nursing homes), prevailing general economic conditions and the availability of
credit for loans secured by commercial or multifamily, as the case may be,
real properties generally. In addition, a Master Servicer or a Special
Servicer may receive a workout fee based on receipts from or proceeds of such
Mortgage Loans.
If and to the extent specified in the related Prospectus Supplement, in
order to maximize recoveries on defaulted Mortgage Loans, the Master Servicer
or a Special Servicer will be permitted (within prescribed limits) to extend
and modify Mortgage Loans that are in default or as to which a payment default
is imminent. While a Master Servicer generally will be required to determine
that any such extension or modification is reasonably likely to produce a
greater recovery on a present value basis than liquidation, there can be no
assurance that any such extension or modification will in fact increase the
present value of receipts from or proceeds of the affected Mortgage Loans.
Junior Mortgage Loans
To the extent specified in the related Prospectus Supplement, certain of
the Mortgage Loans may be secured primarily by junior mortgages. In the case
of liquidation, Mortgage Loans secured by junior mortgages are entitled to
satisfaction from proceeds that remain from the sale of the related Mortgaged
Property after the mortgage loans senior to such Mortgage Loans have been
satisfied. If there are not sufficient funds to satisfy such junior Mortgage
Loans and senior mortgage loans, the junior Mortgage Loans would suffer a loss
and, accordingly, one or more classes of Certificates would bear such loss.
Therefore, any risks of deficiencies associated with first Mortgage Loans will
be greater with respect to junior Mortgage Loans. See " Risks Associated with
Mortgage Loans and Mortgaged Properties".
<PAGE>29
Credit Support Limitations
The Prospectus Supplement for the Offered Certificates of each series
will describe any Credit Support provided with respect thereto. Use of Credit
Support will be subject to the conditions and limitations described herein and
in the related Prospectus Supplement. Moreover, such Credit Support may not
cover all potential losses or risks; for example, Credit Support may or may
not cover fraud or negligence by a mortgage loan originator or other parties.
A series of Certificates may include one or more classes of Subordinate
Certificates (which may include Offered Certificates), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce
the risk to holders of Senior Certificates of delinquent distributions or
ultimate losses, the amount of subordination will be limited and may decline
under certain circumstances. In addition, if principal payments on one or
more classes of Certificates of a series are made in a specified order of
priority, any limits with respect to the aggregate amount of claims under any
related Credit Support may be exhausted before the principal of the lower
priority classes of Certificates of such series has been fully repaid. As a
result, the impact of losses and shortfalls experienced with respect to the
Mortgage Assets may fall primarily upon those classes of Certificates having a
lower priority of payment. Moreover, if a form of Credit Support covers more
than one series of Certificates, holders of Certificates of one series will be
subject to the risk that such Credit Support will be exhausted by the claims
of the holders of Certificates of one or more other series.
The amount of any applicable Credit Support supporting one or more
classes of Offered Certificates, including the subordination of one or more
classes of Certificates, will be determined on the basis of criteria
established by each Rating Agency rating such classes of Certificates based on
an assumed level of defaults, delinquencies and losses on the underlying
Mortgage Assets and other factors. There can, however, be no assurance that
the loss experience on the related Mortgage Assets will not exceed such
assumed levels. See " Limited Nature of Ratings", "Description of the
Certificates" and "Description of Credit Support".
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. The Master
Servicer will generally be permitted to reduce, terminate or substitute all or
a portion of the credit enhancement for any series of Certificates if the
applicable Rating Agency indicates that the then-current rating thereof will
not be adversely affected. The rating of any series of Certificates by any
applicable Rating Agency may be lowered following the initial issuance thereof
as a result of the downgrading of the obligations of any applicable credit
support provider, or as a result of losses on the related Mortgage Assets
substantially in excess of the levels contemplated by such Rating Agency at
the time of its initial rating analysis. None of the Depositor, the Master
Servicer or any of their affiliates will have any obligation to replace or
supplement any credit enhancement, or to take any other action to maintain any
rating of any series of Certificates.
Enforceability
Mortgages may contain a due-on-sale clause, which permits the lender to
accelerate the maturity of the Mortgage Loan if the borrower sells, transfers
or conveys the related Mortgaged Property or its interest in the Mortgaged
Property. Mortgages may also include a debt-acceleration clause, which
permits the lender to accelerate the debt upon a monetary or non-monetary
default of the borrower. Such clauses are not always enforceable. The courts
of all states will enforce clauses providing for acceleration in the event of
a material payment default. The equity courts of any state, however, may
refuse the foreclosure of a mortgage or deed of trust when an acceleration of
the indebtedness would be inequitable or unjust or the circumstances would
render the acceleration unconscionable.
<PAGE>30
Leases and Rents
The Mortgage Loans included in any Trust Fund typically will be secured
by an assignment of leases and rents pursuant to which the borrower assigns to
the lender its right, title and interest as landlord under the leases of the
related Mortgaged Property, and the income derived therefrom, as further
security for the related Mortgage Loan, while retaining a license to collect
rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect rents. Some state
laws may require that the lender take possession of the Mortgaged Property and
obtain a judicial appointment of a receiver before becoming entitled to
collect the rents. In addition, if bankruptcy or similar proceedings are
commenced by or in respect of the borrower, the lender's ability to collect
the rents may be adversely affected. See "Certain Legal Aspects of Mortgage
Loans and Leases Leases and Rents".
Environmental Risks
Under the laws of certain states, contamination of real property may give
rise to a lien on the property to assure the costs of cleanup. In several
states, such a lien has priority over an existing mortgage lien on such
property. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), a lender may be liable, as an "owner" or "operator", for costs of
addressing releases or threatened releases of hazardous substances at a
property, if agents or employees of the lender have become sufficiently
involved in the operations of the borrower, regardless of whether or not the
environmental damage or threat was caused by the borrower or a prior owner. A
lender also risks such liability on foreclosure of the mortgage. In addition,
liabilities imposed upon a borrower by CERCLA or other environmental laws may
adversely affect a borrower's ability to repay a loan. See "Certain Legal
Aspects of Mortgage Loans and Leases Environmental Considerations". If a
Trust Fund includes Mortgage Loans and the related Prospectus Supplement does
not otherwise specify, the related Pooling Agreement will contain provisions
generally to the effect that the Master Servicer, acting on behalf of the
Trust Fund, may not acquire title to a Mortgaged Property or assume control of
its operation unless the Master Servicer, based upon a report prepared by a
person who regularly conducts environmental audits, has made the determination
that it is appropriate to do so, as described under "Description of the
Pooling Agreements Realization Upon Defaulted Mortgage Loans". These
provisions are designed to reduce substantially the risk of liability for
costs associated with remediation of a hazardous environmental condition, but
there can be no assurance in a given case that those risks can be eliminated
entirely. Moreover, it is likely that any recourse against the person
preparing the environmental report, and such person's ability to satisfy a
judgment, will be limited.
ERISA Considerations
Generally, ERISA applies to investments made by employee benefit plans
and transactions involving the assets of such plans. Due to the complexity of
regulations that govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under
ERISA of acquisition, ownership and disposition of the Offered Certificates of
any series. See "ERISA Considerations".
Certain Federal Tax Considerations Regarding REMIC Residual Certificates
Holders of REMIC Residual Certificates will be required to report on
their federal income tax returns as ordinary income their pro rata share of
the taxable income of the REMIC, regardless of the amount or timing of their
receipt of cash payments, as described under "Certain Federal Income Tax
Consequences REMICs". Accordingly, under certain circumstances, holders of
Offered Certificates that constitute REMIC Residual Certificates may have
taxable income and tax liabilities arising from such investment during a
taxable year in excess of the cash received during such period. The
requirement that holders of REMIC Residual Certificates report their
<PAGE>31
pro rata share of the taxable income and net loss of the REMIC will continue
until the Certificate Balances of all classes of Certificates of the related
series have been reduced to zero, even though holders of REMIC Residual
Certificates have received full payment of their stated interest and
principal. A portion (or, in certain circumstances, all) of such
Certificateholder's share of the REMIC taxable income may be treated as
"excess inclusion" income to such holder, which (i) generally will not be
subject to offset by losses from other activities, (ii) for a tax-exempt
holder, will be treated as unrelated business taxable income and (iii) for a
foreign holder, will not qualify for exemption from withholding tax.
Individual holders of REMIC Residual Certificates may be limited in their
ability to deduct servicing fees and other expenses of the REMIC. In
addition, REMIC Residual Certificates are subject to certain restrictions on
transfer. Because of the special tax treatment of REMIC Residual
Certificates, the taxable income arising in a given year on a REMIC Residual
Certificate will not be equal to the taxable income associated with investment
in a corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on a REMIC
Residual Certificate may be significantly less than that of a corporate bond
or stripped instrument having similar cash flow characteristics.
Book-Entry Registration
If so provided in the related Prospectus Supplement, one or more classes
of the Offered Certificates of any series will be issued as Book-Entry
Certificates. Each class of Book-Entry Certificates will be initially
represented by one or more Certificates registered in the name of a nominee
for DTC. As a result, unless and until corresponding Definitive Certificates
are issued, the Certificate Owners with respect to any class of Book-Entry
Certificates will be able to exercise the rights of Certificateholders only
indirectly through DTC and its participating organizations ("Participants").
In addition, the access of Certificate Owners to information regarding the
Book-Entry Certificates in which they hold interests may be limited. The
means by which notices and other communications are conveyed by DTC to its
Participants, and directly and indirectly through such Participants to
Certificate Owners, will be governed by arrangements among them, subject to
any statutory or regulatory requirements as may be in effect from time to
time. Furthermore, as described herein, Certificate Owners may experience
delays in the receipt of payments on the Book-Entry Certificates, and the
ability of any Certificate Owner to pledge or otherwise take actions with
respect to its interest in the Book-Entry Certificates may be limited due to
the lack of a physical certificate evidencing such interest. See "Description
of the Certificates Book-Entry Registration and Definitive Certificates".
Delinquent and Non-Performing Mortgage Loans
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular series of Certificates may include Mortgage Loans that are past due
or are non-performing as of the date they are deposited in the Trust Fund. If
so specified in the related Prospectus Supplement, the servicing of such
Mortgage Loans will be performed by a Special Servicer. Credit Support
provided with respect to a particular series of Certificates may not cover all
losses related to such delinquent or nonperforming Mortgage Loans, and
investors should consider the risk that the inclusion of such Mortgage Loans
in the Trust Fund may adversely affect the rate of defaults and prepayments on
the Mortgage Loans in the Trust Fund and the yield on the Offered Certificates
of such series. See "Description of the Trust Funds Mortgage Loans General".
DESCRIPTION OF THE TRUST FUNDS
General
The primary assets of each Trust Fund will consist of (i) multifamily and
or commercial mortgage loans (the "Mortgage Loans"), (ii) mortgage
participations, pass-through certificates or other mortgage-backed securities
("CMBS") that evidence interests in, or that are secured by pledges of, one or
more of various types of multifamily
<PAGE>32
or commercial mortgage loans, or (iii) a combination of Mortgage Loans and
CMBS (collectively, "Mortgage Assets"). Each Trust Fund will be established
by First Union Commercial Mortgage Securities, Inc. (the "Depositor"). Each
Mortgage Asset will be selected by the Depositor for inclusion in a Trust Fund
from among those purchased, either directly or indirectly, from a prior holder
thereof (a "Mortgage Asset Seller"), which prior holder may or may not be the
originator of such Mortgage Loan or the issuer of such CMBS and may be an
affiliate of the Depositor. The Mortgage Assets will not be guaranteed or
insured by the Depositor or any of its affiliates or, unless otherwise
provided in the related Prospectus Supplement, by any governmental agency or
instrumentality or by any other person. The discussion below under the
heading " Mortgage Loans", unless otherwise noted, applies equally to mortgage
loans underlying any CMBS included in a particular Trust Fund.
Mortgage Loans-Leases
General. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments ("mortgages") that create first or junior liens on, or installment
contracts for the sale of, fee simple or leasehold interests in properties
(the "Mortgaged Properties") consisting of (i) residential properties
consisting of five or more rental or cooperatively owned dwelling units in
high-rise, mid-rise or garden apartment buildings or other residential
structures ("Multifamily Properties") or (ii) office buildings, retail stores,
hotels or motels, nursing homes, hospitals or other health care-related
facilities, mobile home parks, warehouse facilities, mini-warehouse
facilities, self-storage facilities, industrial plants, mixed use or other
types of income-producing properties or unimproved land ("Commercial
Properties"). The Multifamily Properties may include mixed commercial and
residential structures and may include apartment buildings owned by private
cooperative housing corporations ("Cooperatives"). Unless otherwise specified
in the related Prospectus Supplement, each Mortgage will create a first
priority mortgage lien on a Mortgaged Property. A Mortgage may create a lien
on a borrower's leasehold estate in a property; however, unless otherwise
specified in the related Prospectus Supplement, the term of any such leasehold
will exceed the term of the Mortgage Note by at least two years. Each
Mortgage Loan will have been originated by a person (the "Originator") other
than the Depositor.
If so specified in the related Prospectus Supplement, Mortgage Assets for
a series of Certificates may include Mortgage Loans made on the security of
real estate projects under construction. In that case, the related Prospectus
Supplement will describe the procedures and timing for making disbursements
from construction reserve funds as portions of the related real estate project
are completed. In addition, the Mortgage Assets for a particular series of
Certificates may include Mortgage Loans that are delinquent or non-performing
as of the date such Certificates are issued. In that case, the related
Prospectus Supplement will set forth, as to each such Mortgage Loan, available
information as to the period of such delinquency or non-performance, any
forbearance arrangement then in effect, the condition of the related Mortgaged
Property and the ability of the Mortgaged Property to generate income to
service the mortgage debt.
Leases. To the extent specified in the related Prospectus Supplement,
the Commercial Properties may be leased to Lessees that respectively occupy
all or a portion of such properties. Pursuant to a Lease Assignment, the
related borrower may assign its right, title and interest as lessor under each
Lease and the income derived therefrom to the related mortgagee, while
retaining a license to collect the rents for so long as there is no default.
If the borrower defaults, the license terminates and the mortgagee or its
agent is entitled to collect the rents from the related Lessee or Lessees for
application to the monetary obligations of the borrower. State law may limit
or restrict the enforcement of the Lease Assignments by a mortgagee until it
takes possession of the related Mortgaged Property and/or a receiver is
appointed. See "Certain Legal Aspects of the Mortgage Loans and Leases Leases
and Rents." Alternatively, to the extent specified in the related Prospectus
Supplement, the borrower and the mortgagee may agree that payments under
Leases are to be made directly to the Master Servicer or the Special Servicer.
<PAGE>33
To the extent described in the related Prospectus Supplement, the Leases,
which may include "bond-type" or "credit-type" leases, may require the Lessees
to pay rent that is sufficient in the aggregate to cover all scheduled
payments of principal and interest on the related Mortgage Loans and, in
certain cases, their pro rata share of the operating expenses, insurance
premiums and real estate taxes associated with the Mortgaged Properties. A
"bond-type" lease is a lease between a lessor and a lessee for a specified
period of time with specified rent payments that are at least sufficient to
repay the related note(s). A bond-type lease requires the lessee to perform
all obligations related to the leased premises; also, no matter what occurs
with regard to the leased premises, the lessee is obligated to continue to pay
its rent. A "credit-type" lease is a lease between a lessor and a lessee for
a specified period of time with specified rent payments at least sufficient to
repay the related note(s). A credit-type lease requires the lessee to perform
most of the obligations related to the leased premises, excluding only a few
landlord duties which remain the responsibility of the borrower/lessor.
Certain of the Leases (including credit-type leases) may require the borrower
to bear costs associated with structural repairs and/or the maintenance of the
exterior or other portions of the Mortgaged Property or provide for certain
limits on the aggregate amount of operating expenses, insurance premiums,
taxes and other expenses that the Lessees are required to pay. If so
specified in the related Prospectus Supplement, under certain circumstances
the Lessees may be permitted to set off their rental obligations against the
obligations of the borrower under the Leases. In those cases where payments
under the Leases (net of any operating expenses payable by the borrowers) are
insufficient to pay all of the scheduled principal and interest on the related
Mortgage Loans, the borrowers must rely on other income or sources generated
by the related Mortgaged Property to make payments on the related Mortgage
Loan. To the extent specified in the related Prospectus Supplement, some
Commercial Properties may be leased entirely to one Lessee. This would
generally be the case in bond-type leases and credit-type leases. In such
cases, absent the availability of other funds, the borrower must rely entirely
on rent paid by such Lessee in order for the borrower to pay all of the
scheduled principal and interest on the related Mortgage Loan. To the extent
specified in the related Prospectus Supplement, certain of the Leases (not
including bond-type leases) may expire prior to the stated maturity of the
related Mortgage Loan. In such cases, upon expiration of the Leases the
Borrower will have to look to alternative sources of income, including rent
payment by any new Lessees or proceeds from the sale or refinancing of the
Mortgaged Property, to cover the payments of principal and interest due on
such Mortgage Loans unless the Lease is renewed. As specified in the related
Prospectus Supplement, certain of the Leases may provide that upon the
occurrence of a casualty affecting a Mortgaged Property, the Lessee will have
the right to terminate its Lease, unless the borrower, as lessor, is able to
cause the Mortgaged Property to be restored within a specified period of time.
Certain Leases may provide that it is the lessor's responsibility, while other
Leases provide that it is the Lessee's responsibility, to restore the
Mortgaged Property after a casualty to its original condition. Certain Leases
may provide a right of termination to the related Lessee if a taking of a
material or specified percentage of the leased space in the Mortgage Property
occurs, or if the ingress or egress to the leased space has been materially
impaired.
Default and Loss Considerations with Respect to the Mortgage Loans.
Mortgage loans secured by liens on income-producing properties are
substantially different from loans made on the security of owner-occupied
single-family homes. The repayment of a loan secured by a lien on an income -
producing property is typically dependent upon the successful operation of
such property (that is, its ability to generate income.) Moreover, some or
all of the Mortgage Loans included in a particular Trust Fund may be non-
recourse loans, which means that, absent special facts, recourse in the case
of default will be limited to the Mortgaged Property and such other assets, if
any, that were pledged to secure repayment of the Mortgage Loan.
Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important measure of the risk of
default on such a loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan at any given
time is the ratio of (i) the Net Operating Income of the related Mortgaged
Property for a twelve-month period to (ii) the annualized scheduled payments
on the Mortgage Loan and on any other loan that is secured by a lien on the
Mortgaged Property prior to the lien of the related Mortgage. Unless
otherwise defined in the related Prospectus Supplement, "Net Operating
<PAGE>34
Income" means, for any given period, the total operating revenues derived from
a Mortgaged Property during such period, minus the total operating expenses
incurred in respect of such Mortgaged Property during such period other than
(i) non-cash items such as depreciation and amortization, (ii) capital
expenditures and (iii) debt service on loans (including the related Mortgage
Loan) secured by liens on the Mortgaged Property. The Net Operating Income of
a Mortgaged Property will fluctuate over time and may or may not be sufficient
to cover debt service on the related Mortgage Loan at any given time. An
insufficiency of Net Operating Income can be compounded or solely caused by an
ARM Loan, a Mortgage Loan that carries an adjustable Mortgage Rate. As the
primary source of the operating revenues of a non-owner occupied income-
producing property, rental income (and maintenance payments from tenant-
stockholders of a Cooperative) may be affected by the condition of the
applicable real estate market and/or area economy. In addition, properties
typically leased, occupied or used on a short-term basis, such as certain
health care-related facilities, hotels and motels, and miniwarehouse and self-
storage facilities, tend to be affected more rapidly by changes in market or
business conditions than do properties typically leased for longer periods,
such as warehouses, retail stores, office buildings and industrial plants.
Commercial Properties may be owner-occupied or leased to a single tenant.
Thus, the Net Operating Income of such a Mortgaged Property may depend
substantially on the financial condition of the borrower or the single tenant,
and Mortgage Loans secured by liens on such properties may pose greater risks
than loans secured by liens on Multifamily Properties or on multitenant
Commercial Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or changes in governmental rules, regulations and
fiscal policies may also affect the risk of default on a Mortgage Loan. As
may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the Lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses. However,
the existence of such "net of expense" provisions will result in stable Net
Operating Income to the borrower/landlord only to the extent that the Lessee
is able to absorb operating expense increases while continuing to make rent
payments. See " Leases" above.
While the duration of leases and the existence of any "net of expense"
provisions are often viewed as the primary considerations in evaluating the
credit risk of mortgage loans secured by certain income-producing properties,
such risk may be affected equally or to a greater extent by changes in
government regulation of the operator of the property. Examples of the latter
include mortgage loans secured by health care-related facilities, the income
from which and the operating expenses of which are subject to state and/or
federal regulations, such as Medicare and Medicaid, and multifamily properties
and mobile home parks, which may be subject to state or local rent control
regulation and, in certain cases, restrictions on changes in use of the
property. Low- and moderate-income housing in particular may be subject to
legal limitations and regulations but, because of such regulations, may also
be less sensitive to fluctuations in market rents generally.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a
measure of risk of loss if a property must be liquidated following a default.
Unless otherwise defined in the related Prospectus Supplement, the "Loan-to-
Value Ratio" of a Mortgage Loan at any given time is the ratio (expressed as a
percentage) of (i) the then outstanding principal balance of the Mortgage Loan
and the outstanding principal balance of any loan secured by a lien on the
related Mortgaged Property prior to the lien of the related Mortgage, to (ii)
the Value of such Mortgaged Property. The "Value" of a Mortgaged Property, is
generally its fair market value determined in an appraisal obtained by the
originator at the origination of such loan. The lower the Loan-to-Value
Ratio, the greater the percentage of the borrower's equity in a Mortgaged
Property, and thus the greater the cushion provided to the lender against loss
on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure
of the risk of liquidation loss in a pool of Mortgage Loans. For example, the
value of a Mortgaged Property as of the date of initial issuance of
<PAGE>35
the related series of Certificates may be less than the Value determined at
loan origination, and will likely continue to fluctuate from time to time
based upon changes in economic conditions and the real estate market.
Moreover, even when current, an appraisal is not necessarily a reliable
estimate of value. Appraised values of income-producing properties are
generally based on the market comparison method (recent resale value of
comparable properties at the date of the appraisal), the cost replacement
method (the cost of replacing the property at such date), the income
capitalization method (a projection of value based upon the property's
projected net cash flow), or upon a selection from or interpolation of the
values derived from such methods. Each of these appraisal methods can present
analytical difficulties. It is often difficult to find truly comparable
properties that have recently been sold; the replacement cost of a property
may have little to do with its current market value; and income capitalization
is inherently based on inexact projections of income and expense and the
selection of an appropriate capitalization rate. Where more than one of these
appraisal methods are used and provide significantly different results, an
accurate determination of value and, correspondingly, a reliable analysis of
default and loss risks, is even more difficult.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish loans secured by liens on income-
producing real estate from single-family mortgage loans, there is no assurance
that all of such factors will in fact have been prudently considered by the
Originators of the Mortgage Loans, or that, for a particular Mortgage Loan,
they are complete or relevant. See "Risk Factors Risks Associated with
Mortgage Loans and Mortgaged Properties" and " Balloon Payments; Borrower
Default".
Payment Provisions of the Mortgage Loans. Unless otherwise specified in
the related Prospectus Supplement, all of the Mortgage Loans will have had
original terms to maturity of not more than 40 years and will provide for
scheduled payments of principal, interest or both, to be made on specified
dates that occur monthly or quarterly or at such other interval as is
specified in the Prospectus Supplement. A Mortgage Loan (i) may provide for
no accrual of interest or for accrual of interest thereon at an interest rate
(a "Mortgage Rate") that is fixed over its term or that adjusts from time to
time, or that may be converted at the borrower's election from an adjustable
to a fixed Mortgage Rate, or from a fixed to an adjustable Mortgage Rate, (ii)
may provide for the formula, index or other method by which the Mortgage Rate
will be calculated, (iii) may provide for level payments to maturity or for
payments that adjust from time to time to accommodate changes in the Mortgage
Rate or to reflect the occurrence of certain events, and may permit negative
amortization or accelerated amortization, (iv) may be fully amortizing over
its term to maturity, or may provide for little or no amortization over its
term and thus require a balloon payment on its stated maturity date, and (v)
may contain a prohibition on prepayment (the period of such prohibition, a
"Lockout Period") or require payment of a premium or a yield maintenance
penalty (a "Prepayment Premium") in connection with a prepayment, in each case
as described in the related Prospectus Supplement. A Mortgage Loan may also
contain a provision that entitles the lender to a share of profits realized
from the operation or disposition of the Mortgaged Property (an "Equity
Participation"), as described in the related Prospectus Supplement. If
holders of any class or classes of Offered Certificates of a series will be
entitled to all or a portion of an Equity Participation, the related
Prospectus Supplement will describe the Equity Participation and the method or
methods by which distributions in respect thereof will be made to such
holders.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans
which will generally be current as of a date specified in the related
Prospectus Supplement and which, to the extent then applicable and
specifically known to the Depositor, will include the following: (i) the
aggregate outstanding principal balance and the largest, smallest and average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-
off Date, (ii) the type or types of property that provide security for
repayment of the Mortgage Loans, (iii) the original and remaining terms to
maturity of the Mortgage Loans, and the seasoning of the Mortgage Loans, (iv)
the earliest and latest origination date and maturity date and weighted
average original and remaining terms to maturity of the Mortgage Loans, (v)
the original Loan-to-Value Ratios of the Mortgage Loans, (vi) the Mortgage
Rates or range of Mortgage Rates and the weighted average Mortgage Rate
carried by the Mortgage Loans, (vii) the geographic distribution of the
Mortgaged Properties on a
<PAGE>36
state-by-state basis, (viii) information with respect to the prepayment
provisions, if any, of the Mortgage Loans, (ix) with respect to Mortgage Loans
with adjustable Mortgage Rates ("ARM Loans"), the index or indices upon which
such adjustments are based, the adjustment dates, the range of gross margins
and the weighted average gross margin, and any limits on Mortgage Rate
adjustments at the time of any adjustment and over the life of the ARM Loan,
(x) Debt Service Coverage Ratios either at origination or as of a more recent
date (or both) and (xi) information regarding the payment characteristics of
the Mortgage Loans, including without limitation balloon payment and other
amortization provisions. In appropriate cases, the related Prospectus
Supplement will also contain certain information available to the Depositor
that pertains to the provisions of leases and the nature of tenants of the
Mortgaged Properties. If the Depositor is unable to tabulate the specific
information described above at the time Offered Certificates of a series are
initially offered, more general information of the nature described above will
be provided in the related Prospectus Supplement, and specific information
will be set forth in a report which will be available to purchasers of those
Certificates at or before the initial issuance thereof and will be filed as
part of a Current Report on Form 8-K with the Commission within 15 days
following such issuance.
CMBS
CMBS may include (i) private (that is, not guaranteed or insured by the
United States or any agency or instrumentality thereof) mortgage
participations, mortgage pass-through certificates or other mortgage-backed
securities or (ii) certificates insured or guaranteed by FHLMC, FNMA, GNMA or
FAMC, provided that each CMBS will evidence an interest in, or will be secured
by a pledge of, mortgage loans that conform to the descriptions of the
Mortgage Loans contained herein.
Any CMBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar
agreement (a "CMBS Agreement"). The issuer (the "CMBS Issuer") of the CMBS
and/or the servicer (the "CMBS Servicer") of the underlying mortgage loans
will have entered into the CMBS Agreement, generally with a trustee (the "CMBS
Trustee") or, in the alternative, with the original purchaser or purchasers of
the CMBS.
The CMBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the CMBS will be made by the CMBS Servicer or the CMBS Trustee on
the dates specified in the related Prospectus Supplement. The CMBS Issuer or
the CMBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the CMBS after a certain date or under other circumstances
specified in the related Prospectus Supplement.
Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the CMBS. The type, characteristics and amount
of such credit support, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any Rating Agency that may
have assigned a rating to the CMBS, or by the initial purchasers of the CMBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in CMBS will specify, to the extent available and deemed material,
(i) the aggregate approximate initial and outstanding principal amount and
type of the CMBS to be included in the Trust Fund, (ii) the original and
remaining term to stated maturity of the CMBS, if applicable, (iii) the pass-
through or bond rate of the CMBS or the formula for determining such rates,
(iv) the payment characteristics of the CMBS, (v) the CMBS Issuer, CMBS
Servicer and CMBS Trustee, as applicable, (vi) a description of the credit
support, if any, (vii) the circumstances under which the related underlying
mortgage loans, or the CMBS themselves, may be purchased prior to their
maturity, (viii) the terms on which mortgage loans may be substituted for
those originally underlying the CMBS, (ix) the servicing fees payable under
<PAGE>37
the CMBS Agreement, (x) the type of information in respect of the underlying
mortgage loans described under " Mortgage Loans Leases Mortgage Loan
Information in Prospectus Supplements" and (xi) the characteristics of any
cash flow agreements that relate to the CMBS.
Certificate Accounts
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which the person or persons designated in the related
Prospectus Supplement will, to the extent described herein and in such
Prospectus Supplement, deposit all payments and collections received or
advanced with respect to the Mortgage Assets and other assets in the Trust
Fund. A Certificate Account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement.
Credit Support
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Mortgage Assets in the
related Trust Fund may be provided to one or more classes of Certificates in
the related series in the form of subordination of one or more other classes
of Certificates in such series or by one or more other types of credit
support, such as overcollateralization, a letter of credit, insurance policy,
guarantee or reserve fund, among others, or by a combination thereof (any such
coverage with respect to the Certificates of any series, "Credit Support").
The amount and types of Credit Support, the identity of the entity providing
it (if applicable) and related information with respect to each type of Credit
Support, if any, will be set forth in the Prospectus Supplement for the
Offered Certificates of each series. The Prospectus Supplement for any series
of Certificates evidencing an interest in a Trust Fund that includes CMBS will
describe in the same fashion any similar forms of credit support that are
provided by or with respect to, or are included as part of the trust fund
evidenced by or providing security for, such CMBS to the extent information is
available and deemed material. The type, characteristic and amount of Credit
Support will be determined based on the characteristics of the Mortgage Assets
and other factors and will be established, in part, on the basis of
requirements of each Rating Agency rating the Certificates of such series. If
so specified in the related Prospectus Supplement, any such Credit Support may
apply only in the event of certain types of losses or delinquencies and the
protection against losses or delinquencies provided by such Credit Support
will be limited. See "Risk Factors Credit Support Limitations" and
"Description of Credit Support".
Cash Flow Agreements
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements,
such as interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements or similar agreements designed to
reduce the effects of interest rate or currency exchange rate fluctuations on
the Mortgage Assets on one or more classes of Certificates. The principal
terms of any such guaranteed investment contract or other agreement (any such
agreement, a "Cash Flow Agreement"), and the identity of the Cash Flow
Agreement obligor, will be described in the related Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes CMBS will describe in the same fashion
any cash flow agreements that are included as part of the trust fund evidenced
by or providing security for such CMBS to the extent information is available
and deemed material.
<PAGE>38
YIELD AND MATURITY CONSIDERATIONS
General
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate and the amount and
timing of distributions on the Certificate. See "Risk Factors Prepayments;
Average Life of Certificates; Yields". The following discussion contemplates
a Trust Fund that consists solely of Mortgage Loans. While the
characteristics and behavior of mortgage loans underlying CMBS can generally
be expected to have the same effect on the yield to maturity and/or weighted
average life of a Class of Certificates as will the characteristics and
behavior of comparable Mortgage Loans, the effect may differ due to the
payment characteristics of the CMBS. If a Trust Fund includes CMBS, the
related Prospectus Supplement will discuss the effect that the CMBS payment
characteristics may have on the yield to maturity and weighted average lives
of the Offered Certificates offered thereby.
Pass-Through Rate
The Certificates of any class within a series may have a fixed, variable
or adjustable Pass-Through Rate, which may or may not be based upon the
interest rates borne by the Mortgage Loans in the related Trust Fund. The
Prospectus Supplement with respect to the Offered Certificates of any series
will specify the Pass-Through Rate for each class of such Certificates or, in
the case of a class of Offered Certificates with a variable or adjustable
Pass-Through Rate, the method of determining the Pass-Through Rate; the
effect, if any, of the prepayment of any Mortgage Loan on the Pass-Through
Rate of one or more classes of Offered Certificates; and whether the
distributions of interest on the Offered Certificates of any class will be
dependent, in whole or in part, on the performance of any obligor under a Cash
Flow Agreement.
Payment Delays
With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the Mortgage Loans in the related
Trust Fund are due and the Distribution Date on which such payments are passed
through to Certificateholders. That delay will effectively reduce the yield
that would otherwise be produced if payments on such Mortgage Loans were
distributed to Certificateholders on or near the date they were due.
Certain Shortfalls in Collections of Interest
When a principal prepayment in full or in part is made on a Mortgage
Loan, the borrower is generally charged interest only for the period from the
Due Date of the preceding scheduled payment up to the date of such prepayment,
instead of for the full accrual period, that is, the period from the Due Date
of the preceding scheduled payment up to the Due Date for the next scheduled
payment. However, interest accrued on any series of Certificates and
distributable thereon on any Distribution Date will generally correspond to
interest accrued on the principal balance of Mortgage Loans for their
respective full accrual periods. Consequently, if a prepayment on any
Mortgage Loan is distributable to Certificateholders on a particular
Distribution Date, but such prepayment is not accompanied by interest thereon
for the full accrual period, the interest charged to the borrower (net of
servicing and administrative fees) may be less (such shortfall, a "Prepayment
Interest Shortfall") than the corresponding amount of interest accrued and
otherwise payable on the Certificates of the related series. If and to the
extent that any such shortfall is allocated to a class of Offered
Certificates, the yield thereon will be adversely affected. The Prospectus
Supplement for a series of Certificates will describe the manner in which any
such shortfalls will be allocated among the classes of such Certificates. If
so specified in the related Prospectus Supplement, the Master Servicer will be
required to apply some or all of its servicing compensation for the
corresponding period to offset
<PAGE>39
the amount of any such shortfalls. The related Prospectus Supplement will
also describe any other amounts available to offset such shortfalls. See
"Description of the Pooling Agreements Servicing Compensation and Payment of
Expenses".
Yield and Prepayment Considerations
A Certificate's yield to maturity will be affected by the rate of
principal payments on the Mortgage Loans in the related Trust Fund and the
allocation thereof to reduce the principal balance (or Notional Amount, if
applicable) of such Certificate. The rate of principal payments on the
Mortgage Loans will in turn be affected by the amortization schedules thereof
(which, in the case of ARM Loans, will change periodically to accommodate
adjustments to their Mortgage Rates), the dates on which any balloon payments
are due, and the rate of principal prepayments thereon (including for this
purpose, prepayments resulting from liquidations of Mortgage Loans due to
defaults, casualties or condemnations affecting the Mortgaged Properties, or
purchases of Mortgage Loans out of the Trust Fund). Because the rate of
principal prepayments on the Mortgage Loans in any Trust Fund will depend on
future events and a variety of factors (as discussed more fully below), it is
impossible to predict with assurance.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend
upon the degree to which they are purchased at a discount or premium and when,
and to what degree, payments of principal on the Mortgage Loans in the related
Trust Fund are in turn distributed on such Certificates (or, in the case of a
class of Stripped Interest Certificates, result in the reduction of the
Notional Amount thereof). Further, an investor should consider, in the case
of any Offered Certificate purchased at a discount, the risk that a slower
than anticipated rate of principal payments on the Mortgage Loans in the
related Trust Fund could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any Offered Certificate
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield to such investor that is
lower than the anticipated yield. In general, the earlier a prepayment of
principal on the Mortgage Loans is distributed on an Offered Certificate
purchased at a discount or premium (or, if applicable, is allocated in
reduction of the Notional Amount thereof), the greater will be the effect on
the investor's yield to maturity. As a result, the effect on such investor's
yield of principal payments (to the extent distributable in reduction of the
principal balance or Notional Amount of such investor's Offered Certificates)
occurring at a rate higher (or lower) than the rate anticipated by the
investor during any particular period would not be fully offset by a
subsequent like reduction (or increase) in the rate of principal payments.
A class of Certificates, including a class of Offered Certificates, may
provide that on any Distribution Date the holders of such Certificates are
entitled to a pro rata share of the prepayments (including prepayments
occasioned by defaults) on the Mortgage Loans in the related Trust Fund that
are distributable on such date, to a disproportionately large share (which, in
some cases, may be all) of such prepayments, or to a disproportionately small
share (which, in some cases, may be none) of such prepayments. As and to the
extent described in the related Prospectus Supplement, the respective
entitlements of the various classes of Certificateholders of any series to
receive payments (and, in particular, prepayments) of principal of the
Mortgage Loans in the related Trust Fund may vary based on the occurrence of
certain events (e.g., the retirement of one or more classes of Certificates of
such series) or subject to certain contingencies (e.g., prepayment and default
rates with respect to such Mortgage Loans).
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or all
of the Mortgage Assets in the related Trust Fund or (ii) equal the Certificate
Balances of one or more of the other classes of Certificates of the same
series. Accordingly, the yield on such Stripped Interest Certificates will be
directly related to the amortization of such Mortgage Assets or such classes
of Certificates, as the case may be. Thus, if a class of Certificates of any
series consists of Stripped Interest
<PAGE>40
Certificates or Stripped Principal Certificates, a lower than anticipated rate
of principal prepayments on the Mortgage Loans in the related Trust Fund will
negatively affect the yield to investors in Stripped Principal Certificates,
and a higher than anticipated rate of principal prepayments on such Mortgage
Loans will negatively affect the yield to investors in Stripped Interest
Certificates.
The Depositor is not aware of any relevant publicly available or
authoritative statistics with respect to the historical prepayment experience
of a large group of multifamily or commercial mortgage loans. However, the
extent of prepayments of principal of the Mortgage Loans in any Trust Fund may
be affected by a number of factors, including, without limitation, the
availability of mortgage credit, the relative economic vitality of the area in
which the Mortgaged Properties are located, the quality of management of the
Mortgaged Properties, the servicing of the Mortgage Loans, possible changes in
tax laws and other opportunities for investment. In addition, the rate of
principal payments on the Mortgage Loans in any Trust Fund may be affected by
the existence of Lockout Periods and requirements that principal prepayments
be accompanied by Prepayment Premiums, and by the extent to which such
provisions may be practicably enforced.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as prevailing market interest rates decline, even
borrowers with ARM Loans that have experienced a corresponding interest rate
decline may have an increased incentive to refinance for purposes of either
(i) converting to a fixed rate loan and thereby "locking in" such rate or (ii)
taking advantage of the initial "teaser rate" (a mortgage interest rate below
what it would otherwise be if the applicable index and gross margin were
applied) on another adjustable rate mortgage loan.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
The Depositor will make no representation as to the particular factors that
will affect the prepayment of the Mortgage Loans in any Trust Fund, as to the
relative importance of such factors, as to the percentage of the principal
balance of such Mortgage Loans that will be paid as of any date or as to the
overall rate of prepayment on such Mortgage Loans.
Weighted Average Life and Maturity
The rate at which principal payments are received on the Mortgage Loans
in any Trust Fund will affect the ultimate maturity and the weighted average
life of one or more classes of the Certificates of such series. Weighted
average life refers to the average amount of time that will elapse from the
date of issuance of an instrument until each dollar of the principal amount of
such instrument is repaid to the investor.
The weighted average life and maturity of a class of Certificates of any
series will be influenced by the rate at which principal on the related
Mortgage Loans, whether in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes voluntary prepayments,
liquidations due to default and purchases of Mortgage Loans out of the related
Trust Fund), is paid to such class. Prepayment rates on loans are commonly
measured relative to a prepayment standard or model, such as the Constant
Prepayment Rate ("CPR") prepayment model or the Standard Prepayment Assumption
("SPA") prepayment model. CPR represents an assumed constant rate of
prepayment each month (expressed as an annual percentage) relative to the then
outstanding principal balance of a pool of loans for the life of such loans.
SPA represents an assumed variable rate of prepayment each month (expressed as
an annual percentage) relative to the then outstanding principal balance of a
pool of loans, with
<PAGE>41
different prepayment assumptions often expressed as percentages of SPA. For
example, a prepayment assumption of 100% of SPA assumes prepayment rates of
0.2% per annum of the then outstanding principal balance of such loans in the
first month of the life of the loans and an additional 0.2% per annum in each
month thereafter until the 30th month. Beginning in the 30th month, and in
each month thereafter during the life of the loans, 100% of SPA assumes a
constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of loans. Moreover, the
CPR and SPA models were developed based upon historical prepayment experience
for single-family loans. Thus, it is unlikely that the prepayment experience
of the Mortgage Loans included in any Trust Fund will conform to any
particular level of CPR or SPA.
The Prospectus Supplement with respect to each series of Certificates
will contain tables, if applicable, setting forth the projected weighted
average life of each class of Offered Certificates of such series and the
percentage of the initial Certificate Balance of each such class that would be
outstanding on specified Distribution Dates based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
related Mortgage Loans are made at rates corresponding to various percentages
of CPR or SPA, or at such other rates specified in such Prospectus Supplement.
Such tables and assumptions will illustrate the sensitivity of the weighted
average lives of the Certificates to various assumed prepayment rates and will
not be intended to predict, or to provide information that will enable
investors to predict, the actual weighted average lives of the Certificates.
Controlled Amortization Classes and Companion Classes
A series of Certificates may include one or more Controlled Amortization
Classes that are designed to provide increased protection against prepayment
risk by transferring that risk to one or more Companion Classes. Unless
otherwise specified in the related Prospectus Supplement, each Controlled
Amortization Class will either be a Planned Amortization Class (a "PAC") or a
Targeted Amortization Class (a "TAC"). In general, distributions of principal
on a PAC are made in accordance with a specified amortization schedule so long
as prepayments on the underlying Mortgage Loans occur within a specified range
of constant prepayment rates and, as described below, so long as one or more
Companion Classes remain to absorb excess cash flows and make up for
shortfalls. For example, if the rate of prepayments is significantly higher
than expected, the excess prepayments may retire the Companion Classes much
earlier than expected, thus leaving the PAC without further prepayment
protection. A TAC is similar to a PAC, but a TAC structure generally does not
draw on Companion Classes to make up cash flow shortfalls, and will generally
not provide protection to the TAC against the risk that prepayments occur more
slowly than expected.
In general, the reduction of prepayment risk afforded to a Controlled
Amortization Class comes at the expense of one or more Companion Classes of
the same series (any of which may also be a class of Offered Certificates)
which absorb a disproportionate share of the overall prepayment risk of a
given structure. As more particularly described in the related Prospectus
Supplement, the holders of a Companion Class will receive a disproportionately
large share of prepayments when the rate of prepayment exceeds the rate
assumed in structuring the Controlled Amortization Class, and (in the case of
a Companion Class that supports a PAC) a disproportionately small share of
prepayments (or no prepayments) when the rate of prepayment falls below that
assumed rate. Thus, as and to the extent described in the related Prospectus
Supplement, a Companion Class will absorb a disproportionate share of the risk
that a relatively fast rate of prepayments will result in the early retirement
of the investment, that is, "call risk", and, if applicable, the risk that a
relatively slow rate of prepayments will extend the average life of the
investment, that is, "extension risk" that would otherwise be allocated to the
related Controlled Amortization Class. Accordingly, Companion Classes can
exhibit significant average life variability.
<PAGE>42
Other Factors Affecting Yield, Weighted Average Life and Maturity
Balloon Payments; Extensions of Maturity. Some or all of the Mortgage
Loans included in a particular Trust Fund may require that balloon payments be
made at maturity. Because the ability of a borrower to make a balloon payment
typically will depend upon its ability either to refinance the loan or to sell
the related Mortgaged Property, there is a risk that Mortgage Loans that
require balloon payments may default at maturity, or that the maturity of such
a Mortgage Loan may be extended in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things,
bankruptcy of the borrower or adverse conditions in the market where the
property is located. In order to minimize losses on defaulted Mortgage Loans,
the Master Servicer or a Special Servicer, to the extent and under the
circumstances set forth herein and in the related Prospectus Supplement, may
be authorized to modify Mortgage Loans that are in default or as to which a
payment default is imminent. Any defaulted balloon payment or modification
that extends the maturity of a Mortgage Loan may delay distributions of
principal on a class of Offered Certificates and thereby extend the weighted
average life of such Certificates and, if such Certificates were purchased at
a discount, reduce the yield thereon.
Negative Amortization. The weighted average life of a class of
Certificates can be affected by Mortgage Loans that permit negative
amortization. In general, such Mortgage Loans by their terms limit the amount
by which scheduled payments may adjust in response to changes in Mortgage
Rates and/or provide that scheduled payment amounts will adjust less
frequently than the Mortgage Rates. Accordingly, during a period of rising
interest rates, the scheduled payment on a Mortgage Loan that permits negative
amortization may be less than the amount necessary to amortize the loan fully
over its remaining amortization schedule and pay interest at the then
applicable Mortgage Rate. In that case, the Mortgage Loan balance would
amortize more slowly than necessary to repay it over such schedule and, if the
amount of scheduled payment were less than the amount necessary to pay current
interest at the applicable Mortgage Rate, the loan balance would negatively
amortize to the extent of the amount of the interest shortfall. Conversely,
during a period of declining interest rates, the scheduled payment on such a
Mortgage Loan may exceed the amount necessary to amortize the loan fully over
its remaining amortization schedule and pay interest at the then applicable
Mortgage Rate. In that case, the excess would be applied to principal,
thereby resulting in amortization at a rate faster than necessary to repay the
Mortgage Loan balance over such schedule.
A slower or negative rate of Mortgage Loan amortization would
correspondingly be reflected in a slower or negative rate of amortization for
one or more classes of Certificates of the related series. Accordingly, the
weighted average lives of Mortgage Loans that permit negative amortization
(and that of the classes of Certificates to which any such negative
amortization would be allocated or which would bear the effects of a slower
rate of amortization on such Mortgage Loans) may increase as a result of such
feature. A faster rate of Mortgage Loan amortization will shorten the
weighted average life of such Mortgage Loans and, correspondingly, the
weighted average lives of those classes of Certificates then entitled to a
portion of the principal payments on such Mortgage Loans. The related
Prospectus Supplement will describe, if applicable, the manner in which
negative amortization in respect of the Mortgage Loans in any Trust Fund is
allocated among the respective classes of Certificates of the related series.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance
with their terms will affect the weighted average lives of those Mortgage
Loans and, accordingly, the weighted average lives of and yields on the
Certificates of the related series. Servicing decisions made with respect to
the Mortgage Loans, including the use of payment plans prior to a demand for
acceleration and the restructuring of Mortgage Loans in bankruptcy
proceedings, may also have an effect upon the payment patterns of particular
Mortgage Loans and thus the weighted average lives of and yields on the
Certificates of the related series.
<PAGE>43
Losses and Shortfalls on the Mortgage Assets. The yield to holders of
the Offered Certificates of any series will directly depend on the extent to
which such holders are required to bear the effects of any losses or
shortfalls in collections arising out of defaults on the Mortgage Loans in the
related Trust Find and the timing of such losses and shortfalls. In general,
the earlier that any such loss or shortfall occurs, the greater will be the
negative effect on yield for any class of Certificates that is required to
bear the effects thereof.
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated
among the respective classes of Certificates of the related series in the
priority and manner, and subject to the limitations, specified in the related
Prospectus Supplement. As described in the related Prospectus Supplement,
such allocations may result in reductions in the entitlements to interest
and/or Certificate Balances of one or more such classes of Certificates, or
may be effected simply by a prioritization of payments among such classes of
Certificates. The yield to maturity on a class of Subordinate Certificates
may be extremely sensitive to losses and shortfalls in collections on the
Mortgage Loans in the related Trust Fund.
Additional Certificate Amortization. In addition to entitling the
holders thereof to a specified portion (which may range from none to all) of
the principal payments received on the Mortgage Assets in the related Trust
Fund, one or more classes of Certificates of any series, including one or more
classes of Offered Certificates of such series, may provide for distributions
of principal thereof from (i) amounts attributable to interest accrued but not
currently distributable on one or more classes of Accrual Certificates, (ii)
Excess Funds or (iii) any other amounts described in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
"Excess Funds" will, in general, represent that portion of the amounts
distributable in respect of the Certificates of any series on any Distribution
Date that represent (i) interest received or advanced on the Mortgage Assets
in the related Trust Fund that is in excess of the interest currently
distributable on the Certificates of such series, as well as any interest
accrued but not currently distributable on any Accrual Certificates of such
series or (ii) Prepayment Premiums, payments from Equity Participations or any
other amounts received on the Mortgage Assets in the related Trust Fund that
do not constitute interest thereon or principal thereof.
The amortization of any class of Certificates out of the sources
described in the preceding paragraph would shorten the weighted average life
of such Certificates and, if such Certificates were purchased at a premium,
reduce the yield thereon. The related Prospectus Supplement will discuss the
relevant factors to be considered in determining whether distributions of
principal of any class of Certificates out of such sources would have any
material effect on the rate at which such Certificates are amortized.
THE DEPOSITOR
First Union Commercial Mortgage Securities, Inc., the Depositor, is a
North Carolina corporation organized on August 17, 1988 as a wholly owned
subsidiary of First Union National Bank of North Carolina, which is a
subsidiary of First Union Corporation, a North Carolina corporation registered
as a bank holding company under the Bank Holding Company Act of 1956, as
amended. The Depositor maintains its principal office at 301 South College
St., Charlotte, N.C. 28228-0600. Its telephone number is 704-374-6161. There
can be no assurance that the Depositor will have any significant assets.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of any
series will be applied by the Depositor to the purchase of Trust Assets or
will be used by the Depositor for general corporate purposes. The Depositor
expects to sell the Certificates from time to time, but the timing and amount
of offerings of Certificates
<PAGE>44
will depend on a number of factors, including the volume of Mortgage Assets
acquired by the Depositor, prevailing interest rates, availability of funds
and general market conditions.
DESCRIPTION OF THE CERTIFICATES
General
In the aggregate, the Certificates of each series of Certificates will
represent the entire beneficial ownership interest in the Trust Fund created
pursuant to the related Pooling Agreement. Each series of Certificates may
consist of one or more classes of Certificates (including classes of Offered
Certificates), and such class or classes may (i) provide for the accrual of
interest thereon at a fixed, variable or adjustable rate; (ii) be senior
(collectively, "Senior Certificates") or subordinate (collectively,
"Subordinate Certificates") to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) be entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest (collectively, "Stripped Principal Certificates");
(iv) be entitled to distributions of interest, with disproportionately small,
nominal or no distributions of principal (collectively "Stripped Interest
Certificates"); (v) provide for distributions of principal and/or interest
thereon that commence only after the occurrence of certain events such as the
retirement of one or more other classes of Certificates of such series; (vi)
provide for distributions of principal to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases,
substantially faster) or slower (and, in some cases, substantially slower)
than the rate at which payments or other collections of principal are received
on the Mortgage Assets in the related Trust Fund; (vii) provide for
distributions of principal to be made, subject to available funds, based on a
specified principal payment schedule or other methodology; and/or (viii)
provide for distributions based on a combination of two or more components
thereof with one or more of the characteristics described in this paragraph,
including a Stripped Principal Certificate component and a Stripped Interest
Certificate component, to the extent of available funds, in each case as
described in the related Prospectus Supplement. Any such classes may include
classes of Offered Certificates. With respect to Certificates with two or
more components, references herein to Certificate Balance, Notional Amount and
Pass-Through Rate refer to the principal balance, if any, Notional Amount, if
any, and the Pass-Through Rate, if any, for any such component.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the Certificate Balances or, in case of
Stripped Interest Certificates or REMIC Residual Certificates, Notional
Amounts or percentage interests specified in the related Prospectus
Supplement. As provided in the related Prospectus Supplement, one or more
classes of Offered Certificates of any series may be issued in fully
registered, definitive form (such Certificates, "Definitive Certificates") or
may be offered in book-entry format (such Certificates, "Book-Entry
Certificates") through the facilities of DTC. The Offered Certificates of
each series (if issued as Definitive Certificates) may be transferred or
exchanged, subject to any restrictions on transfer described in the related
Prospectus Supplement, at the location specified in the related Prospectus
Supplement, without the payment of any service charge, other than any tax or
other governmental charge payable in connection therewith. Interests in a
class of Book-Entry Certificates will be transferred on the book-entry records
of DTC and its participating organizations. See "Risk Factors Limited
Liquidity", " Limited Assets" and " Book-Entry Registration".
Distributions
Distributions on the Certificates of each series will be made by or on
behalf of the related Trustee or Master Servicer on each Distribution Date as
specified in the related Prospectus Supplement from the Available Distribution
Amount for such series and such Distribution Date. Unless otherwise provided
in the related Prospectus Supplement, the "Available Distribution Amount" for
any series of Certificates and any Distribution Date will refer to the total
of all payments or other collections (or advances in lieu thereof) on, under
or in respect of the Mortgage
<PAGE>45
Assets and any other assets included in the related Trust Fund that are
available for distribution to the Certificateholders of such series on such
date. The particular components of the Available Distribution Amount for any
series on each Distribution Date will be more specifically described in the
related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the
persons in whose names such Certificates are registered at the close of
business on the last business day of the month preceding the month in which
the applicable Distribution Date occurs (the "Record Date"), and the amount of
each distribution will be determined as of the close of business on the date
(the "Determination Date") specified in the related Prospectus Supplement.
All distributions with respect to each class of Certificates on each
Distribution Date will be allocated pro rata among the outstanding
Certificates in such class. Payments will be made either by wire transfer in
immediately available funds to the account of a Certificateholder at a bank or
other entity having appropriate facilities therefor, if such Certificateholder
has provided the Trustee or other person required to make such payments with
wiring instructions (which may be provided in the form of a standing order
applicable to all subsequent distributions) no later than the date specified
in the related Prospectus Supplement (and, if so provided in the related
Prospectus Supplement, such Certificateholder holds Certificates in the
requisite amount or denomination specified therein), or by check mailed to the
address of such Certificateholder as it appears on the Certificate Register;
provided, however, that the final distribution in retirement of any class of
Certificates (whether Definitive Certificates or Book-Entry Certificates) will
be made only upon presentation and surrender of such Certificates at the
location specified in the notice to Certificateholders of such final
distribution.
Distributions of Interest on the Certificates
Each class of Certificates of each series (other than certain classes of
Stripped Principal Certificates and certain REMIC Residual Certificates that
have no Pass-Through Rate) may have a different Pass-Through Rate, which may
be fixed, variable or adjustable. The related Prospectus Supplement will
specify the Pass-Through Rate or, in the case of a variable or adjustable
Pass-Through Rate, the method for determining the Pass-Through Rate, for each
class. Unless otherwise specified in the related Prospectus Supplement,
interest on the Certificates of each series will be calculated on the basis of
a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Certificates of any class
(other than any class of Certificates that will be entitled to distributions
of accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement ("Accrual
Certificates"), and other than any class of Stripped Principal Certificates or
REMIC Residual Certificates that is not entitled to any distributions of
interest) will be made on each Distribution Date based on the Accrued
Certificate Interest for such class and such Distribution Date, subject to the
sufficiency of the portion of the Available Distribution Amount allocable to
such class on such Distribution Date. Prior to the time interest is
distributable on any class of Accrual Certificates, the amount of Accrued
Certificate Interest otherwise distributable on such class will be added to
the Certificate Balance thereof on each Distribution Date. With respect to
each class of Certificates (other than certain classes of Stripped Interest
Certificates and REMIC Residual Certificates), "Accrued Certificate Interest"
for each Distribution Date will be equal to interest at the applicable Pass-
Through Rate accrued for a specified period (generally the period between
Distribution Dates) on the outstanding Certificate Balance thereof immediately
prior to such Distribution Date. Unless otherwise provided in the related
Prospectus Supplement, Accrued Certificate Interest for each Distribution Date
on Stripped Interest Certificates will be similarly calculated except that it
will accrue on a notional amount (a "Notional Amount") that is either (i)
based on the principal balances of some or all of the Mortgage Assets in the
related Trust Fund or (ii) equal to the Certificate Balances of one or more
other classes of Certificates of the same series. Reference to a Notional
Amount with respect to a class of Stripped Interest Certificates is solely for
convenience in making certain calculations and does not represent the right to
receive any distributions of principal. If so specified in the related
Prospectus Supplement, the amount of Accrued Certificate Interest that is
<PAGE>46
otherwise distributable on (or, in the case of Accrual Certificates, that may
otherwise be added to the Certificate Balance of) one or more classes of the
Certificates of a series will be reduced to the extent that any Prepayment
Interest Shortfalls, as described under "Yield and Maturity
Considerations Certain Shortfalls in Collections of Interest", exceed the
amount of any sums (including, if and to the extent specified in the related
Prospectus Supplement, the Master Servicer's servicing compensation) that are
applied to offset such shortfalls. The particular manner in which such
shortfalls will be allocated among some or all of the classes of Certificates
of that series will be specified in the related Prospectus Supplement. The
related Prospectus Supplement will also describe the extent to which the
amount of Accrued Certificate Interest that is otherwise distributable on (or,
in the case of Accrual Certificates, that may otherwise be added to the
Certificate Balance of) a class of Offered Certificates may be reduced as a
result of any other contingencies, including delinquencies, losses and
deferred interest on or in respect of the Mortgage Assets in the related Trust
Fund. Unless otherwise provided in the related Prospectus Supplement, any
reduction in the amount of Accrued Certificate Interest otherwise
distributable on a class of Certificates by reason of the allocation to such
class of a portion of any deferred interest on or in respect of the Mortgage
Assets in the related Trust Fund will result in a corresponding increase in
the Certificate Balance of such class. See "Risk Factors Prepayments; Average
Life of Certificates; Yields" and "Yield and Maturity Considerations".
Distributions of Certificate Principal
Each class of Certificates of each series (other than certain classes of
Stripped Interest Certificates of REMIC Residual Certificates) will have a
Certificate Balance which, at any time, will equal the then maximum amount
that the holders of Certificates of such class will be entitled to receive in
respect of principal out of the future cash flow on the Mortgage Assets and
other assets included in the related Trust Fund. The outstanding Certificate
Balance of a class of Certificates will be reduced by distributions of
principal made thereon from time to time and, if so provided in the related
Prospectus Supplement, further by any losses incurred in respect of the
related Mortgage Assets allocated thereto from time to time. In turn, the
outstanding Certificate Balance of a class of Certificates may be increased as
a result of any deferred interest on or in respect of the related Mortgage
Assets that is allocated thereto from time to time, and will be increased, in
the case of a class of Accrual Certificates prior to the Distribution Date on
which distributions of interest thereon are required to commence, by the
amount of any Accrued Certificate Interest in respect thereof (reduced as
described above). Unless otherwise provided in the related Prospectus
Supplement, the initial aggregate Certificate Balance of all classes of a
series of Certificates will not be greater than the aggregate outstanding
principal balance of the related Mortgage Assets as of the applicable Cut-off
Date, after application of scheduled payments due on or before such date,
whether or not received. As and to the extent described in the related
Prospectus Supplement, distributions of principal with respect to a series of
Certificates will be made on each Distribution Date to the holders of the
class or classes of Certificates of such series entitled thereto until the
Certificate Balances of such Certificates have been reduced to zero.
Distributions of principal with respect to one or more classes of Certificates
may be made at a rate that is faster (and, in some cases, substantially
faster) than the rate at which payments or other collections of principal are
received on the Mortgage Assets in the related Trust Fund, may not commence
until the occurrence of certain events, such as the retirement of one or more
other classes of Certificates of the same series, or may be made at a rate
that is slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on such Mortgage
Assets. In addition, distributions of principal with respect to one or more
classes of Certificates (each such class, a "Controlled Amortization Class")
may be made, subject to available funds, based on a specified principal
payment schedule and, with respect to one or more classes of Certificates
(each such class, a "Companion Class"), may be contingent on the specified
principal payment schedule for a Controlled Amortization Class of the same
series and the rate at which payments and other collections of principal on
the Mortgage Assets in the related Trust Fund are received. Unless otherwise
specified in the related Prospectus Supplement, distributions of principal of
any class of Certificates will be made on a pro rata basis among all of the
Certificates of such class.
<PAGE>47
Distributions on the Certificates in Respect of Prepayment Premiums or in
Respect of Equity
Participations
If so provided in the related Prospectus Supplement, Prepayment Premiums
or payments in respect of Equity Participations received on or in connection
with the Mortgage Assets in any Trust Fund will be distributed on each
Distribution Date to the holders of the class of Certificates of the related
series entitled thereto in accordance with the provisions described in such
Prospectus Supplement.
Allocation of Losses and Shortfalls
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated
among the respective classes of Certificates of the related series in the
priority and manner, and subject to the limitations, specified in the related
Prospectus Supplement. As described in the related Prospectus Supplement,
such allocations may result in reductions in the entitlements to interest
and/or in the Certificate Balances of one or more such classes of
Certificates, or may be effected simply by a prioritization of payments among
such classes of Certificates.
Advances in Respect of Delinquencies
If and to the extent provided in the related Prospectus Supplement, the
related Master Servicer and/or another specified person (including a provider
of Credit Support) may be obligated to advance, or have the option of
advancing, on or before each Distribution Date, from its or their own funds or
from excess funds held in the related Certificate Account that are not part of
the Available Distribution Amount for the related series of Certificates for
such Distribution Date, an amount up to the aggregate of any payments of
principal (other than any balloon payments) and interest that were due on or
in respect of such Mortgage Loans during the related Due Period and were
delinquent on the related Determination Date. Unless otherwise provided in
the related Prospectus Supplement, a "Due Period" is the period between
Distribution Dates, and scheduled payments on the Mortgage Loans in any Trust
Fund that became due during a given Due Period will, to the extent received by
the related Determination Date or advanced by the related Master Servicer or
other specified person, be distributed on the Distribution Date next
succeeding such Determination Date.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses.
Accordingly, all advances made from the advancing person's own funds will be
reimbursable out of related recoveries on the Mortgage Loans (including
amounts received under any instrument of Credit Support) respecting which such
advances were made (as to any Mortgage Loan, "Related Proceeds") and such
other specific sources as may be identified in the related Prospectus
Supplement, including in the case of a series that includes one or more
classes of Subordinate Certificates, collections on other Mortgage Loans in
the related Trust Fund that would otherwise be distributable to the holders of
one or more classes of such Subordinate Certificates. No advance will be
required to be made by the Master Servicer or by any other person if, in the
good faith judgment of the Master Servicer or such other person, such advance
would not be recoverable from Related Proceeds or another specifically
identified source (any such advance, a "Nonrecoverable Advance"); and, if
previously made by a Master Servicer or another person, a Nonrecoverable
Advance will be reimbursable from any amounts in the related Certificate
Account prior to any distributions being made to the related series of
Certificateholders.
If advances have been made from excess funds in a Certificate Account,
the Master Servicer or other person that advanced such funds will be required
to replace such funds in the Certificate Account on any future Distribution
Date to the extent that funds then in the Certificate Account are insufficient
to permit full distributions
<PAGE>48
to Certificateholders on such date. If so specified in the related Prospectus
Supplement, the obligation of a Master Servicer or other specified person to
make advances may be secured by a cash advance reserve fund or a surety bond.
If applicable, information regarding the characteristics of, and the identity
of any obligor on, any such surety bond will be set forth in the related
Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement,
any entity making advances will be entitled to receive interest thereon for
the period that such advances are outstanding at the rate specified in such
Prospectus Supplement, and such entity will be entitled to payment of such
interest periodically from general collections on the Mortgage Loans in the
related Trust Fund prior to any payment to Certificateholders or as otherwise
provided in the related Pooling Agreement and described in such Prospectus
Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes CMBS will describe any comparable
advancing obligation of a party to the related Pooling Agreement or of a party
to the related CMBS Agreement.
Reports to Certificateholders
On each Distribution Date, together with the distribution to the holders
of each class of the Offered Certificates of a series, a Master Servicer or
Trustee, as provided in the related Prospectus Supplement, will forward to
each such holder, a statement (a "Distribution Date Statement") that, unless
otherwise provided in the related Prospectus Supplement, will set forth, among
other things, in each case to the extent applicable:
(i) the amount of such distribution to holders of Certificates of
such class that was applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of Certificates of
such class that is allocable to Accrued Certificate Interest;
(iii) the amount, if any, of such distribution to holders of
Certificates of such class that is allocable to (A) Prepayment Premiums
and (B) payments on account of Equity Participations;
(iv) the amount of servicing compensation received by the related
Master Servicer (and, if payable directly out of the related Trust Fund,
by any Special Servicer and any Sub-Servicer (as defined herein)) and
such other customary information as such Master Servicer or the related
Trustee, as the case may be, deems necessary, or desirable, or that a
Certificateholder reasonably requests, to enable Certificateholders to
prepare their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of
business on such Distribution Date;
(vi) the aggregate principal balance of the related Mortgage Loans
on, or as of a specified date shortly prior to, such Distribution Date;
(vii) the number and aggregate principal balance of any Mortgage
Loans in respect of which (A) one scheduled payment is delinquent, (B)
two scheduled payments are delinquent, (C) three or more scheduled
payments are delinquent and (D) foreclosure proceedings have been
commenced;
(viii) with respect to each Mortgage Loan that is delinquent in
respect of three or more scheduled payments, (A) the loan number thereof,
(B) the unpaid balance thereof, (C) whether the
<PAGE>49
delinquency is in respect of any balloon payment, (D) the aggregate amount of
unreimbursed servicing expenses and unreimbursed advances in respect thereof,
(E) if applicable, the aggregate amount of any interest accrued and payable to
the related Master Servicer, a Special Servicer and/or any other entity on
related servicing expenses and related advances, (F) whether a notice of
acceleration has been sent to the borrower and, if so, the date of such notice
and (G) a brief description of the status of any foreclosure proceedings or
negotiations with the borrower;
(ix) with respect to any Mortgage Loan liquidated during the related
Prepayment Period (that is, the specified period, generally equal in
length to the time period between Distribution Dates, during which
prepayments and other unscheduled collections on the Mortgage Loans in
the related Trust Fund must be received in order to be distributed on a
particular Distribution Date (the "Prepayment Period")) in connection
with a default thereon or by reason of being purchased out of the related
Trust Fund, (A) the loan number thereof, (B) the manner in which it was
liquidated, (C) the aggregate amount of Liquidation Proceeds received,
(D) the portion of such Liquidation Proceeds payable or reimbursable to
the related Master Servicer or a Special Servicer in respect of such
Mortgage Loan and (E) the amount of any loss to Certificateholders;
(x) with respect to each Mortgaged Property acquired through
foreclosure, deed-in-lieu of foreclosure or otherwise ("REO Property")
and included in the related Trust Fund as of the end of the related Due
Period or Prepayment Period, as applicable, (A) the loan number of the
related Mortgage Loan, (B) the date of acquisition, (C) the principal
balance of the related Mortgage Loan (calculated as if such Mortgage Loan
were still outstanding taking into account certain limited modifications
to the terms thereof specified in the related Pooling Agreement), (D) the
aggregate amount of unreimbursed servicing expenses and unreimbursed
advances in respect thereof and (E) if applicable, the aggregate amount
of interest accrued and payable to the related Master Servicer, a Special
Servicer and/or any other entity on related servicing expenses and
related advances;
(xi) with respect to any REO Property sold during the related
Prepayment Period, (A) the loan number of the related Mortgage Loan, (B)
the aggregate amount of sales proceeds, (C) the portion of such sales
proceeds payable or reimbursable to the related Master Servicer or a
Special Servicer in respect of such REO Property or the related Mortgage
Loan and (D) the amount of any loss to Certificateholders in respect of
the related Mortgage Loan;
(xii) the Certificate Balance or Notional Amount, as the case
may be, of each class of Certificates (including any class of
Certificates not offered hereby) at the close of business on such
Distribution Date, separately identifying any reduction in such
Certificate Balance due to the allocation of any losses in respect of the
related Mortgage Loans and any increase in the Certificate Balance of a
class of Accrual Certificates in the event that Accrued Certificate
Interest has been added to such balance;
(xiii) the aggregate amount of principal prepayments made on the
Mortgage Loans during the related Prepayment Period;
(xiv) the amount deposited in or withdrawn from any reserve fund
on such Distribution Date, and the amount remaining on deposit in such
reserve fund as of the close of business on such Distribution Date;
(xv) the amount of any Accrued Certificate Interest due but not paid
on such class of Offered Certificates at the close of business on such
Distribution Date;
<PAGE>50
(xvi) if such class of Offered Certificates has a variable Pass-
Through Rate or an adjustable Pass-Through Rate, the Pass-Through Rate
applicable thereto for such Distribution Date and, if determinable, for
the next succeeding Distribution Date; and
(xvii) if the related Trust Fund includes one or more instruments
of Credit Support, such as a letter of credit, an insurance policy and/or
a surety bond, the amount of coverage under each such instrument as of
the close of business on such Distribution Date.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts will be expressed as a dollar amount per minimum
denomination of the relevant class of Offered Certificates or per a specified
portion of such minimum denomination. The Prospectus Supplement for each
series of Offered Certificates will describe any additional information to be
included in reports to the holders of such Certificates.
Within a reasonable period of time after the end of each calendar year,
the related Master Servicer or Trustee, as the case may be, will be required
to furnish to each person who at any time during the calendar year was a
holder of an Offered Certificate a statement containing the information set
forth in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Certificateholder.
Such obligation will be deemed to have been satisfied to the extent that
substantially comparable information is provided pursuant to any requirements
of the Code as are from time to time in force. See, however, "Description of
the Certificates Book-Entry Registration and Definitive Certificates".
If the Trust Fund for a series of Certificates includes CMBS, the ability
of the related Master Servicer or Trustee, as the case may be, to include in
any Distribution Date Statement information regarding the mortgage loans
underlying such CMBS will depend on the reports received with respect to such
CMBS. In such cases, the related Prospectus Supplement will describe the
loan-specific information to be included in the Distribution Date Statements
that will be forwarded to the holders of the Offered Certificates of that
series in connection with distributions made to them.
Voting Rights
The Voting Rights evidenced by each series of Certificates will be
allocated among the respective classes of such series in the manner described
in the related Prospectus Supplement.
Certificateholders will generally have a right to vote only with respect
to required consents to certain amendments to the related Pooling Agreement
and as otherwise specified in the related Prospectus Supplement. See
"Description of the Pooling Agreements Amendment". The holders of specified
amounts of Certificates of a particular series will have the collective right
to remove the related Trustee and also to cause the removal of the related
Master Servicer in the case of an Event of Default on the part of the Master
Servicer. See "Description of the Pooling Agreements Events of Default",
" Rights Upon Event of Default" and " Resignation and Removal of the Trustee".
Termination
The obligations created by the Pooling Agreement for each series of
Certificates will terminate upon the payment (or provision for payment) to
Certificateholders of that series of all amounts held in the related
Certificate Account, or otherwise by the related Master Servicer or Trustee or
by a Special Servicer, and required to be paid to such Certificateholders
pursuant to such Pooling Agreement following the earlier of (i) the final
payment or other liquidation of the last Mortgage Asset subject thereto or the
disposition of all property acquired upon foreclosure of any Mortgage Loan
subject thereto and (ii) the purchase of all of the assets of the related
Trust Fund by the party
<PAGE>51
entitled to effect such termination, under the circumstances and in the manner
that will be described in the related Prospectus Supplement. Written notice
of termination of a Pooling Agreement will be given to each Certificateholder
of the related series, and the final distribution will be made only upon
presentation and surrender of the Certificates of such series at the location
to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates will be subject to optional early termination through the
repurchase of the assets in the related Trust Fund by a party that will be
specified therein, under the circumstances and in the manner set forth
therein. If so provided in the related Prospectus Supplement, upon the
reduction of the Certificate Balance of a specified class or classes of
Certificates by a specified percentage or amount, a party identified therein
will be authorized or required to solicit bids for the purchase of all the
assets of the related Trust Fund, or of a sufficient portion of such assets to
retire such class or classes, under the circumstances and in the manner set
forth therein. Further, if so provided in the related Prospectus Supplement,
certain classes of Certificates may be purchased by a party or parties
specified therein under similar or other conditions as described therein.
Book-Entry Registration and Definitive Certificates
If so provided in the related Prospectus Supplement, one or more classes
of the Offered Certificates of any series will be offered in book-entry format
through the facilities of The Depository Trust Company, and each such class
will be represented by one or more global Certificates registered in the name
of DTC or its nominee.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking corporation" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC holds securities that its Participants deposit with DTC. DTC also
facilitates the settlement among Participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book entry changes in their accounts, thereby eliminating the
need for physical movement of securities certificates. "Direct Participants",
which maintain accounts with DTC, include securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations. DTC is owned by a number of its Direct Participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Access to the DTC system
also is available to others such as securities brokers and dealers, banks and
trust companies that clear through or maintain a custodial relationship with a
Direct Participant, either directly or indirectly ("Indirect Participants").
The rules applicable to DTC and its Participants are on file with the
Commission.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through Direct Participants, which will receive a credit for the Book-Entry
Certificates on DTC's records. The ownership interest of each actual
purchaser of a Book-Entry Certificate (a "Certificate Owner") will in turn be
recorded on the records of Direct and Indirect Participants. Certificate
Owners will not receive written confirmation from DTC of their purchases, but
Certificate Owners are expected to receive written confirmations providing
details of such transactions, as well as periodic statements of their
holdings, from the Direct or Indirect Participant through which each
Certificate Owner entered into the transaction. Transfers of ownership
interest in the Book-Entry Certificates will be accomplished by entries made
on the books of Participants acting on behalf of Certificate Owners.
Certificate Owners will not receive certificates representing their ownership
interests in the Book-Entry Certificates, except in the event that use of the
book-entry system for the Book-Entry Certificates of any series is
discontinued as described below.
<PAGE>52
DTC will not know the identity of actual Certificate Owners of the Book-
Entry Certificates; DTC's records reflect only the identity of the Direct
Participants to whose accounts such Certificates are credited. The
Participants will remain responsible for keeping account of their holdings on
behalf of their customers. Notices and other communications conveyed by DTC
to Direct Participants, by Direct Participants to Indirect Participants, and
by Direct Participants and Indirect Participants to Certificate Owners will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Distributions on the Book-Entry Certificates will be made to DTC. DTC's
practice is to credit Direct Participants' accounts on the related
Distribution Date in accordance with their respective holdings shown on DTC's
records unless DTC has reason to believe that it will not receive payment on
such date. Disbursement of such distributions by Participants to Certificate
Owners will be governed by standing instructions and customary practices, as
is the case with securities held for the accounts of customers in bearer form
or registered in "street name", and will be the responsibility of each such
Participant (and not of DTC, the Depositor or any Trustee or Master Servicer),
subject to any statutory or regulatory requirements as may be in effect from
time to time. Under a book-entry system, Certificate Owners may receive
payments after the related Distribution Date.
Unless otherwise provided in the related Prospectus Supplement, the only
"Certificateholder"(as such term is used in the related Pooling Agreement) of
a Book-Entry Certificate will be the nominee of DTC, and the Certificate
Owners will not be recognized as Certificateholders under the Pooling
Agreement. Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Pooling Agreement only indirectly through
the Participants who in turn will exercise their rights through DTC. The
Depositor is informed that DTC will take action permitted to be taken by a
Certificateholder under a Pooling Agreement only at the direction of one or
more Participants to whose account with DTC interests in the Book-Entry
Certificates are credited.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain Certificate Owners, the ability of
a Certificate Owner to pledge its interest in Book-Entry Certificates to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of its interest in Book-Entry Certificates, may be
limited due to the lack of a physical certificate evidencing such interest.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued as Definitive
Certificates to Certificate Owners or their nominees, rather than to DTC or
its nominee, only if (i) the Depositor advises the Trustee in writing that DTC
is no longer willing or able to properly discharge its responsibilities as
depository with respect to such Certificates and the Depositor is unable to
locate a qualified successor or (ii) the Depositor, at its option, elects to
terminate the book-entry system through DTC with respect to such Certificates.
Upon the occurrence of either of the events described in the preceding
sentence, DTC will be required to notify all Participants of the availability
through DTC of Definitive Certificates. Upon surrender by DTC of the
certificate or certificates representing a class of Book-Entry Certificates,
together with instructions for reregistration, the Trustee or other designated
party will be required to issue to the Certificate Owners identified in such
instructions the Definitive Certificates to which they are entitled, and
thereafter the holders of such Definitive Certificates will be recognized as
Certificateholders under the related Pooling Agreement.
DESCRIPTION OF THE POOLING AGREEMENTS
General
The Certificates of each series will be issued pursuant to a pooling and
servicing agreement or other agreement specified in the related Prospectus
Supplement (in either case, a "Pooling Agreement"). In general, the parties
to a Pooling Agreement will include the Depositor, the Trustee, the Master
Servicer and, in some cases, a Special Servicer appointed as of the date of
the Pooling Agreement. However, a Pooling Agreement that relates
<PAGE>53
to a Trust Fund that consists solely of CMBS may not include a Master Servicer
or other servicer as a party. All parties to each Pooling Agreement under
which Certificates of a series are issued will be identified in the related
Prospectus Supplement.
A form of a Pooling and Servicing Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. However,
the provisions of each Pooling Agreement will vary depending upon the nature
of the Certificates to be issued thereunder and the nature of the related
Trust Fund. The following summaries describe certain provisions that may
appear in a Pooling Agreement under which Certificates that evidence interests
in Mortgage Loans will be issued. The Prospectus Supplement for a series of
Certificates will describe any provision of the related Pooling Agreement that
materially differs from the description thereof contained in this Prospectus
and, if the related Trust Fund includes CMBS, will summarize all of the
material provisions of the related Pooling Agreement. The summaries herein do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Pooling Agreement for
each series of Certificates and the description of such provisions in the
related Prospectus Supplement. As used herein with respect to any series, the
term "Certificate" refers to all of the Certificates of that series, whether
or not offered hereby and by the related Prospectus Supplement, unless the
context otherwise requires. The Depositor will provide a copy of the Pooling
Agreement (without exhibits) that relates to any series of Certificates
without charge upon written request of a holder of a Certificate of such
series addressed to First Union Commercial Mortgage Securities, Inc., One
First Union Center, Charlotte, N.C. 28288-0166, Attention: Securitization
Services.
Assignment of Mortgage Assets; Repurchases
At the time of issuance of any series of Certificates, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Mortgage Loans
to be included in the related Trust Fund, together with, unless otherwise
specified in the related Prospectus Supplement, all principal and interest to
be received on or with respect to such Mortgage Loans after the Cut-off Date,
other than principal and interest due on or before the Cut-off Date. The
Trustee will, concurrently with such assignment, deliver the Certificates to
or at the direction of the Depositor in exchange for the Mortgage Loans and
the other assets to be included in the Trust Fund for such series. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
related Pooling Agreement. Such schedule generally will include detailed
information that pertains to each Mortgage Loan included in the related Trust
Fund, which information will typically include the address of the related
Mortgaged Property and type of such property; the Mortgage Rate and, if
applicable, the applicable index, gross margin, adjustment date and any rate
cap information; the original and remaining term to maturity; the original
amortization term; the original and outstanding principal balance; and the
Loan-to-Value Ratio and Debt Service Coverage Ratio as of the date indicated.
With respect to each Mortgage Loan to be included in a Trust Fund, the
Depositor will deliver (or cause to be delivered) to the related Trustee (or
to a custodian appointed by the Trustee) certain loan documents which, unless
otherwise specified in the related Prospectus Supplement, will include the
original Mortgage Note endorsed, without recourse, to the order of the
Trustee, the original Mortgage (or a certified copy thereof) with evidence of
recording indicated thereon and an assignment of the Mortgage to the Trustee
in recordable form. Unless otherwise provided in the related Prospectus
Supplement, the related Pooling Agreement will require that the Depositor or
other party thereto promptly cause each such assignment of Mortgage to be
recorded in the appropriate public office for real property records.
The related Trustee (or the custodian appointed by the Trustee) will be
required to review the Mortgage Loan documents within a specified period of
days after receipt thereof, and the Trustee (or the custodian) will hold such
documents in trust for the benefit of the Certificateholders of the related
series. Unless otherwise specified in the related Prospectus Supplement, if
any such document is found to be missing or defective, in either case such
<PAGE>54
that interests of the Certificateholders are materially and adversely
affected, the Trustee (or such custodian) will be required to notify the
Master Servicer and the Depositor, and the Master Servicer will be required to
notify the relevant Mortgage Asset Seller. In that case, and if the Mortgage
Asset Seller cannot deliver the document or cure the defect within a specified
number of days after receipt of such notice, then unless otherwise specified
in the related Prospectus Supplement, the Mortgage Asset Seller will be
obligated to replace the related Mortgage Loan or repurchase it from the
Trustee at a price that will be specified in the related Prospectus
Supplement.
If so provided in the related Prospectus Supplement, the Depositor will,
as to some or all of the Mortgage Loans, assign or cause to be assigned to the
Trustee the related Lease Assignments. In certain cases, the Trustee, or
Master Servicer, as applicable, may collect all moneys under the related
Leases and distribute amounts, if any, required under the Lease for the
payment of maintenance, insurance and taxes, to the extent specified in the
related Lease agreement. The Trustee, or if so specified in the Prospectus
Supplement, the Master Servicer, as agent for the Trustee, may hold the Lease
in trust for the benefit of the Certificateholders.
With respect to each CMBS in certificate form, the Depositor will deliver
or cause to be delivered to the Trustee (or the custodian) the original
certificate or other definitive evidence of such CMBS together with bond power
or other instruments, certifications or documents required to transfer fully
such CMBS to the Trustee for the benefit of the Certificateholders. With
respect to each CMBS in uncertificated or book-entry form or held through a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, the Depositor and the Trustee will cause such CMBS to be registered
directly or on the books of such clearing corporation or of a financial
intermediary in the name of the Trustee for the benefit of the
Certificateholders. Unless otherwise provided in the related Prospectus
Supplement, the related Pooling Agreement will require that either the
Depositor or the Trustee promptly cause any CMBS in certificated form not
registered in the name of the Trustee to be reregistered, with the applicable
persons, in the name of the Trustee.
Representations and Warranties; Repurchases
Unless otherwise provided in the related Prospectus Supplement, the
Depositor will, with respect to each Mortgage Loan in the related Trust Fund,
make or assign certain representations and warranties, (the person making such
representations and warranties, the "Warranting Party") covering, by way of
example: (i) the accuracy of the information set forth for such Mortgage Loan
on the schedule of Mortgage Loans appearing as an exhibit to the related
Pooling Agreement; (ii) the enforceability of the related Mortgage Note and
Mortgage and the existence of title insurance insuring the lien priority of
the related Mortgage; (iii) the Warranting Party's title to the Mortgage Loan
and the authority of the Warranting Party to sell the Mortgage Loan; and (iv)
the payment status of the Mortgage Loan. Each Warranting Party will be
identified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will provide that the Master Servicer and/or Trustee will be
required to notify promptly any Warranting Party of any breach of any
representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the related
Certificateholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which it was notified of such breach,
then, unless otherwise provided in the related Prospectus Supplement, it will
be obligated to repurchase such Mortgage Loan from the Trustee within a
specified period at a price that will be specified in the related Prospectus
Supplement. If so provided in the Prospectus Supplement for a series of
Certificates, a Warranting Party, in lieu of repurchasing a Mortgage Loan as
to which a breach has occurred, will have the option, exercisable upon certain
conditions and/or within a specified period after initial issuance of such
series of Certificates, to replace such Mortgage Loan with one or more other
mortgage loans, in accordance with standards that will be described in the
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, this repurchase or substitution obligation will constitute the
sole remedy available to holders of Certificates of any series for a breach of
representation and warranty by a Warranting Party.
<PAGE>55
Moreover, neither the Depositor (unless it is the Warranting Party) nor the
Master Servicer will be obligated to purchase or replace a Mortgage Loan if a
Warranting Party defaults on its obligation to do so.
Unless otherwise provided in the related Prospectus Supplement, the
Warranting Party will, with respect to a Trust Fund that includes CMBS, make
or assign certain representations or warranties, as of a specified date, with
respect to such CMBS, covering (i) the accuracy of the information set forth
therefor on the schedule of Mortgage Assets appearing as an exhibit to the
related Pooling Agreement and (ii) the authority of the Warranting Party to
sell such Mortgage Assets.
The dates as of which representations and warranties have been made by a
Warranting Party will be specified in the related Prospectus Supplement. In
some cases, such representations and warranties will have been made as of a
date prior to the date upon which the related series of Certificates is
issued, and thus may not address events that may occur following the date as
of which they were made. However, the Depositor will not include any Mortgage
Loan in the Trust Fund for any series of Certificates if anything has come to
the Depositor's attention that would cause it to believe that the
representations and warranties made in respect of such Mortgage Loan will not
be accurate in all material respects as of such date of issuance.
Certificate Account
General. The Master Servicer and/or the Trustee will, as to each Trust
Fund, establish and maintain or cause to be established and maintained
Certificate Accounts for the collection of payments on the related Mortgage
Loans, which will be established so as to comply with the standards of each
Rating Agency that has rated any one or more classes of Certificates of the
related series. As described in the related Prospectus Supplement, a
Certificate Account may be maintained either as an interest-bearing or a non-
interest-bearing account, and the funds held therein may be held as cash or
invested in United States government securities and other investment grade
obligations specified in the related Pooling Agreement ("Permitted
Investments"). Unless otherwise provided in the related Prospectus
Supplement, any interest or other income earned on funds in the Certificate
Account will be paid to the related Master Servicer or Trustee as additional
compensation. If permitted by such Rating Agency or Agencies and so specified
in the related Prospectus Supplement, a Certificate Account may contain funds
relating to more than one series of mortgage pass-through certificates and may
contain other funds representing payments on mortgage loans owned by the
related Master Servicer or serviced by it on behalf of others.
Deposits. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, the related Master Servicer,
Trustee or Special Servicer will be required to deposit or cause to be
deposited in the Certificate Account for each Trust Fund within a certain
period following receipt (in the case of collections and payments), the
following payments and collections received, or advances made, by the Master
Servicer, the Trustee or any Special Servicer subsequent to the Cut-off Date
(other than payments due on or before the Cut-off Date):
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans,
including any default interest collected, in each case net of any portion
thereof retained by the Master Servicer, any Special Servicer or Sub-
Servicer as its servicing compensation or as compensation to the Trustee;
(iii) all proceeds received under any hazard, title or other
insurance policy that provides coverage with respect to a Mortgaged
Property or the related Mortgage Loan (other than proceeds applied to the
restoration of the property or released to the related borrower in
accordance with the customary
<PAGE>56
servicing practices of the Master Servicer (or, if applicable, a Special
Servicer) and/or the terms and conditions of the related Mortgage
(collectively, "Insurance Proceeds") and all other amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans or
property acquired in respect thereof, by foreclosure or otherwise
("Liquidation Proceeds"), together with the net operating income (less
reasonable reserves for future expenses) derived from the operation of any
Mortgaged Properties acquired by the Trust Fund through foreclosure or
otherwise;
(iv) any amounts paid under any instrument or drawn from any fund
that constitutes Credit Support for the related series of Certificates as
described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Certificates Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds Cash Flow Agreements";
(vii) all proceeds of the purchase of any Mortgage Loan, or
property acquired in respect thereof, by the Depositor, any Mortgage
Asset Seller or any other specified person as described under
" Assignment of Mortgage Assets; Repurchases" and " Representations and
Warranties; Repurchases", all proceeds of the purchase of any defaulted
Mortgage Loan as described under " Realization Upon Defaulted Mortgage
Loans", and all proceeds of any Mortgage Asset purchased as described
under "Description of the Certificates Termination" (all of the
foregoing, also, "Liquidation Proceeds");
(viii) any amounts paid by the Master Servicer to cover
Prepayment Interest Shortfalls arising out of the prepayment of Mortgage
Loans as described under " Servicing Compensation and Payment of
Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or a Special Servicer, any
payments on account of modification or assumption fees, late payment
charges, Prepayment Premiums or Equity Participations on the Mortgage
Loans;
(x) all payments required to be deposited in the Certificate
Account with respect to any deductible clause in any blanket insurance
policy described under " Hazard Insurance Policies";
(xi) any amount required to be deposited by the Master Servicer or
the Trustee in connection with losses realized on investments for the
benefit of the Master Servicer or the Trustee, as the case may be, of
funds held in the Certificate Account; and
(xii) any other amounts required to be deposited in the
Certificate Account as provided in the related Pooling Agreement and
described in the related Prospectus Supplement.
Withdrawals. Unless otherwise provided in the related Pooling Agreement
and described in the related Prospectus Supplement, a Master Servicer, Trustee
or Special Servicer may make withdrawals from the Certificate Account for each
Trust Fund for any of the following purposes:
(i) to make distributions to the Certificateholders on each
Distribution Date;
(ii) to reimburse the Master Servicer or any other specified person
for unreimbursed amounts advanced by it as described under "Description
of the Certificates Advances in Respect of Delinquencies",
<PAGE>57
such reimbursement to be made out of amounts received which were identified
and applied by the Master Servicer as late collections of interest (net of
related servicing fees) on and principal of the particular Mortgage Loans with
respect to which the advances were made or out of amounts drawn under any form
of Credit Support with respect to such Mortgage Loans;
(iii) to reimburse the Master Servicer or a Special Servicer for
unpaid servicing fees earned by it and certain unreimbursed servicing
expenses incurred by it with respect to Mortgage Loans in the Trust Fund
and properties acquired in respect thereof, such reimbursement to be made
out of amounts that represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Mortgage Loans and properties, and net income
collected on the particular properties, with respect to which such fees
were earned or such expenses were incurred or out of amounts drawn under
any form of Credit Support with respect to such Mortgage Loans and
properties;
(iv) to reimburse the Master Servicer or any other specified person
for any advances described in clause (ii) above made by it and any
servicing expenses referred to in clause (iii) above incurred by it
which, in the good faith judgment of the Master Servicer or such other
person, will not be recoverable from the amounts described in clauses
(ii) and (iii), respectively, such reimbursement to be made from amounts
collected on other Mortgage Loans in the related Trust Fund or, if and to
the extent so provided by the related Pooling Agreement and described in
the related Prospectus Supplement, only from that portion of amounts
collected on such other Mortgage Loans that is otherwise distributable on
one or more classes of Subordinate Certificates of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay the Master Servicer, a Special Servicer or another
specified entity (including a provider of Credit Support) interest
accrued on the advances described in clause (ii) above made by it and the
servicing expenses described in clause (iii) above incurred by it while
such remain outstanding and unreimbursed;
(vi) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Mortgaged
Properties that constitute security for defaulted Mortgage Loans, and for
any containment, clean-up or remediation of hazardous wastes and
materials present on such Mortgaged Properties, as described under
" Realization Upon Defaulted Mortgage Loans";
(vii) to reimburse the Master Servicer, the Depositor, or any of
their respective directors, officers, employees and agents, as the case
may be, for certain expenses, costs and liabilities incurred thereby, as
and to the extent described under " Certain Matters Regarding the Master
Servicer and the Depositor";
(viii) if and to the extent described in the related Prospectus
Supplement, to pay the fees of the Trustee;
(ix) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under
" Certain Matters Regarding the Trustee";
(x) to pay the Master Servicer or the Trustee, as additional
compensation, interest and investment income earned in respect of amounts
held in the Certificate Account;
<PAGE>58
(xi) to pay (generally from related income) for costs incurred in
connection with the operation, management and maintenance of any
Mortgaged Property acquired by the Trust Fund by foreclosure or
otherwise;
(xii) if one or more elections have been made to treat the Trust
Fund or designated portions thereof as a REMIC, to pay any federal, state
or local taxes imposed on the Trust Fund or its assets or transactions,
as and to the extent described under "Certain Federal Income Tax
Consequences REMICS Taxation of Owners of REMIC Residual
Certificates Prohibited Transactions Tax and Other Taxes";
(xiii) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price for
a defaulted Mortgage Loan or a property acquired in respect thereof in
connection with the liquidation of such Mortgage Loan or property;
(xiv) to pay for the cost of various opinions of counsel
obtained pursuant to the related Pooling Agreement for the benefit of
Certificateholders;
(xv) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xvi) to clear and terminate the Certificate Account upon the
termination of the Trust Fund.
Collection and Other Servicing Procedures
The Master Servicer for any mortgage pool, directly or through Sub-
Servicers, will be required to make reasonable efforts to collect all
scheduled Mortgage Loan payments and will be required to follow such
collection procedures as it would follow with respect to mortgage loans that
are comparable to such Mortgage Loans and held for its own account, provided
such procedures are consistent with (i) the terms of the related Pooling
Agreement and any related instrument of Credit Support included in the related
Trust Fund, (ii) applicable law and (iii) the servicing standard specified in
the Pooling Agreement and in the related Prospectus Supplement (the "Servicing
Standard").
The Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining escrow or
impound accounts for payment of taxes, insurance premiums and similar items,
or otherwise monitoring the timely payment of those items; attempting to
collect delinquent payments; supervising foreclosures; conducting property
inspections on a periodic or other basis; managing REO Properties; and
maintaining servicing records relating to the Mortgage Loans. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will be responsible for filing and settling claims in respect of particular
Mortgage Loans under any applicable instrument of Credit Support. See
"Description of Credit Support".
Modifications, Waivers and Amendments of Mortgage Loans
A Master Servicer may agree to modify, waive or amend any term of any
Mortgage Loan serviced by it in a manner consistent with the Servicing
Standard; provided that, unless otherwise set forth in the related Prospectus
Supplement, the modification, waiver or amendment will not (i) affect the
amount or timing of any scheduled payments of principal or interest on the
Mortgage Loan or (ii) in the judgment of the Master Servicer, materially
impair the security for the Mortgage Loan or reduce the likelihood of timely
payment of amounts due thereon. Unless otherwise provided in the related
Prospectus Supplement, a Master Servicer also may agree to any other
modification, waiver or amendment if, in its judgment (x) a material default
on the Mortgage Loan has
<PAGE>59
occurred or a payment default is imminent and (y) such modification, waiver or
amendment is reasonably likely to produce a greater recovery with respect to
the Mortgage Loan on a present value basis than would liquidation.
Sub-Servicers
A Master Servicer may delegate its servicing obligations in respect of
the Mortgage Loans serviced by it to one or more third-party servicers (each,
a "Sub-Servicer"), but the Master Servicer will remain liable for such
obligations under the related Pooling Agreement unless otherwise provided in
the related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, each sub-servicing agreement between a Master Servicer
and a Sub-Servicer (a "Sub-Servicing Agreement") must provide that, if for any
reason the Master Servicer is no longer acting in such capacity, the Trustee
or any successor Master Servicer may assume the Master Servicer's rights and
obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any Sub-
Servicer, irrespective of whether the Master Servicer's compensation pursuant
to the related Pooling Agreement is sufficient to pay such fees. Each Sub-
Servicer will be reimbursed by the Master Servicer for certain expenditures
which it makes, generally to the same extent the Master Servicer would be
reimbursed under a Pooling Agreement. See " Certificate Account" and
" Servicing Compensation and Payment of Expenses".
Special Servicers
If and to the extent specified in the related Prospectus Supplement, a
special servicer (the "Special Servicer") may be a party to the related
Pooling Agreement or may be appointed by the Master Servicer or another
specified party to perform certain specified duties (for example, the
servicing of defaulted Mortgage Loans) in respect of the servicing of the
related Mortgage Loans. The Master Servicer will be liable for the
performance of a Special Servicer only if, and to the extent, set forth in
such Prospectus Supplement.
Realization Upon Defaulted Mortgage Loans
A borrower's failure to make required Mortgage Loan payments may mean
that operating income is insufficient to service the mortgage debt, or may
reflect the diversion of that income from the servicing of the mortgage debt.
In addition, a borrower that is unable to make Mortgage Loan payments may also
be unable to make timely payment of taxes and to otherwise maintain and insure
the related Mortgaged Property. In general, the related Master Servicer will
be required to monitor any Mortgage Loan that is in default, evaluate whether
the causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property,
initiate corrective action in cooperation with the borrower if cure is likely,
inspect the related Mortgaged Property and take such other actions as are
consistent with the Servicing Standard. A significant period of time may
elapse before the Master Servicer is able to assess the success of any such
corrective action or the need for additional initiatives.
The time within which the Master Servicer can make the initial
determination of appropriate action, evaluate the success of corrective
action, develop additional initiatives, institute foreclosure proceedings and
actually foreclose (or accept a deed to a Mortgaged Property in lieu of
foreclosure) on behalf of the Certificateholders may vary considerably
depending on the particular Mortgage Loan, the Mortgaged Property, the
borrower, the presence of an acceptable party to assume the Mortgage Loan and
the laws of the jurisdiction in which the Mortgaged Property is located. If a
borrower files a bankruptcy petition, the Master Servicer may not be permitted
to accelerate the maturity of the related Mortgage Loan or to foreclose on the
Mortgaged Property for a considerable period of time. See "Certain Legal
Aspects of Mortgage Loans and Leases".
<PAGE>60
A Pooling Agreement may grant to the Master Servicer, a Special Servicer,
a provider of Credit Support and/or the holder or holders of certain classes
of Certificates of the related series a right of first refusal to purchase
from the Trust Fund, at a predetermined purchase price (which, if insufficient
to fully fund the entitlements of Certificateholders to principal and interest
thereon, will be specified in the related Prospectus Supplement), any Mortgage
Loan as to which a specified number of scheduled payments are delinquent. In
addition, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer may offer to sell any defaulted Mortgage Loan if and when the
Master Servicer determines, consistent with the Servicing Standard, that such
a sale would produce a greater recovery on a present value basis than would
liquidation of the related Mortgaged Property. Unless otherwise provided in
the related Prospectus Supplement, the related Pooling Agreement will require
that the Master Servicer accept the highest cash bid received from any person
(including itself, an affiliate of the Master Servicer or any
Certificateholder) that constitutes a fair price for such defaulted Mortgage
Loan. In the absence of any bid determined in accordance with the related
Pooling Agreement to be fair, the Master Servicer will generally be required
to proceed with respect to such defaulted Mortgage Loan as described below.
If a default on a Mortgage Loan has occurred or, in the Master Servicer's
judgment, is imminent, the Master Servicer, on behalf of the Trustee, may at
any time institute foreclosure proceedings, exercise any power of sale
contained in the related Mortgage, obtain a deed in lieu of foreclosure, or
otherwise acquire title to the related Mortgaged Property, by operation of law
or otherwise, if such action is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer may not, however, acquire title to any Mortgaged Property or take any
other action that would cause the Trustee, for the benefit of
Certificateholders of the related series, or any other specified person to be
considered to hold title to, to be a "mortgagee-in-possession" of, or to be an
"owner" or an "operator" of such Mortgaged Property within the meaning of
certain federal environmental laws, unless the Master Servicer has previously
determined, based on a report prepared by a person who regularly conducts
environmental audits (which report will be an expense of the Trust Fund),
that:
(i) either the Mortgaged Property is in compliance with
applicable environmental laws and regulations or, if not, that taking
such actions as are necessary to bring the Mortgaged Property into
compliance therewith is reasonably likely to produce a greater recovery
on a present value basis than not taking such actions; and
(ii) either there are no circumstances or conditions present at
the Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, cleanup or remediation
could be required under any applicable environmental laws and regulations
or, if such circumstances or conditions are present for which any such
action could be required, taking such actions with respect to the
Mortgaged Property is reasonably likely to produce a greater recovery on
a present value basis than not taking such actions. See "Certain Legal
Aspects of Mortgage Loans and Leases Environmental Considerations".
Unless otherwise provided in the related Prospectus Supplement, if title
to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Master Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property within two years of acquisition,
unless (i) the Internal Revenue Service grants an extension of time to sell
such property or (ii) the Trustee receives an opinion of independent counsel
to the effect that the holding of the property by the Trust Fund for more than
two years after its acquisition will not result in the imposition of a tax on
the Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the
Code at any time that any Certificate is outstanding. Subject to the
foregoing, the Master Servicer will generally be required to solicit bids for
any Mortgaged Property so acquired in such a manner as will be reasonably
likely to realize a fair price for such property. If the Trust Fund acquires
title to any Mortgaged Property, the Master Servicer, on behalf of the Trust
Fund, may retain an independent contractor to manage and
<PAGE>61
operate such property. The retention of an independent contractor, however,
will not relieve the Master Servicer of its obligation to manage such
Mortgaged Property in a manner consistent with the Servicing Standard.
If Liquidation Proceeds collected with respect to a defaulted Mortgage
Loan are less than the outstanding principal balance of the defaulted Mortgage
Loan plus interest accrued thereon plus the aggregate amount of reimbursable
expenses incurred by the Master Servicer with respect to such Mortgage Loan,
the Trust Fund will realize a loss in the amount of such difference. The
Master Servicer will be entitled to reimburse itself from the Liquidation
Proceeds recovered on any defaulted Mortgage Loan (prior to the distribution
of such Liquidation Proceeds to Certificateholders), amounts that represent
unpaid servicing compensation in respect of the Mortgage Loan, unreimbursed
servicing expenses incurred with respect to the Mortgage Loan and any
unreimbursed advances of delinquent payments made with respect to the Mortgage
Loan.
If any Mortgaged Property suffers damage that the proceeds, if any, of
the related hazard insurance policy are insufficient to fully restore, the
Master Servicer will not be required to expend its own funds to restore the
damaged property unless (and to the extent not otherwise provided in the
related Prospectus Supplement) it determines (i) that such restoration will
increase the proceeds to Certificateholders on liquidation of the Mortgage
Loan after reimbursement of the Master Servicer for its expenses and (ii) that
such expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
Hazard Insurance Policies
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will require the related Master Servicer to cause each
Mortgage Loan borrower to maintain a hazard insurance policy that provides for
such coverage as is required under the related Mortgage or, if the Mortgage
permits the holder thereof to dictate to the borrower the insurance coverage
to be maintained on the related Mortgaged Property, such coverage as is
consistent with the requirements of the Servicing Standard. Unless otherwise
specified in the related Prospectus Supplement, such coverage generally will
be in an amount equal to the lesser of the principal balance owing on such
Mortgage Loan and the replacement cost of the Mortgaged Property, but in
either case not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy. The ability of
the Master Servicer to assure that hazard insurance proceeds are appropriately
applied may be dependent upon its being named as an additional insured under
any hazard insurance policy and under any other insurance policy referred to
below, or upon the extent to which information concerning covered losses is
furnished by borrowers. All amounts collected by the Master Servicer under
any such policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the borrower in accordance with the
Master Servicer's normal servicing procedures and/or to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
related Certificate Account. The Pooling Agreement may provide that the
Master Servicer may satisfy its obligation to cause each borrower to maintain
such a hazard insurance policy by maintaining a blanket policy insuring
against hazard losses on all of the Mortgage Loans in the related Trust Fund.
If such blanket policy contains a deductible clause, the Master Servicer will
be required, in the event of a casualty covered by such blanket policy, to
deposit in the related Certificate Account all sums that would have been
deposited therein but for such deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the Mortgaged Properties will be underwritten
by different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
<PAGE>62
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds of
risks.
The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at
all times to carry insurance of a specified percentage (generally 80% to 90%)
of the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clauses generally provide that the
insurer's liability in the event of partial loss does not exceed the lesser of
(i) the replacement cost of the improvements less physical depreciation and
(ii) such proportion of the loss as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such improvements.
Due-on-Sale and Due-on-Encumbrance Provisions
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale
or other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage
Loan upon the creation of any other lien or encumbrance upon the Mortgaged
Property. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will determine whether to exercise any right the Trustee may
have under any such provision in a manner consistent with the Servicing
Standard. Unless otherwise specified in the related Prospectus Supplement,
the Master Servicer will be entitled to retain as additional servicing
compensation any fee collected in connection with the permitted transfer of a
Mortgaged Property. See "Certain Legal Aspects of Mortgage Loans and
Leases Due-on-Sale and Due-onEncumbrance".
Servicing Compensation and Payment of Expenses
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a portion of the
interest payments on each Mortgage Loan in the related Trust Fund. Since that
compensation is generally based on a percentage of the principal balance of
each such Mortgage Loan outstanding from time to time, it will decrease in
accordance with the amortization of the Mortgage Loans. The Prospectus
Supplement with respect to a series of Certificates may provide that, as
additional compensation, the Master Servicer may retain all or a portion of
late payment charges, Prepayment Premiums, modification fees and other fees
collected from borrowers and any interest or other income that may be earned
on funds held in the Certificate Account. Any Sub-Servicer will receive a
portion of the Master Servicer's compensation as its sub-servicing
compensation.
In addition to amounts payable to any Sub-Servicer, a Master Servicer may
be required, to the extent provided in the related Prospectus Supplement, to
pay from amounts that represent its servicing compensation certain expenses
incurred in connection with the administration of the related Trust Fund,
including, without limitation, payment of the fees and disbursements of
independent accountants and payment of expenses incurred in connection with
distributions and reports to Certificateholders. Certain other expenses,
including certain expenses related to Mortgage Loan defaults and liquidations
and, to the extent so provided in the related Prospectus Supplement, interest
on such expenses at the rate specified therein, and the fees of the Trustee
and any Special Servicer, may be required to be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing
compensation otherwise payable to it in respect of any period to Prepayment
Interest Shortfalls. See "Yield and Maturity Considerations Certain
Shortfalls in Collections of Interest".
<PAGE>63
Evidence as to Compliance
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will require that, on or before a specified date in each
year, the Master Servicer cause a firm of independent public accountants to
furnish a statement to the Trustee to the effect that, based on an examination
by such firm conducted substantially in compliance with either the Uniform
Single Audit Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC, the servicing by or on behalf of the Master Servicer of
mortgage loans under pooling and servicing agreements substantially similar to
each other (which may include the related Pooling Agreement) was conducted
through the preceding calendar year or other specified twelve-month period in
compliance with the terms of such agreements except for any significant
exceptions or errors in records that, in the opinion of such firm, either the
Audit Program for Mortgages serviced for FHLMC or paragraph 4 of the Uniform
Single Audit Program for Mortgage Bankers, as the case may be, requires it to
report. Each Pooling Agreement will also provide for delivery to the Trustee,
on or before a specified date in each year, of a statement signed by one or
more officers of the Master Servicer to the effect that the Master Servicer
has fulfilled its material obligations under the Pooling Agreement throughout
the preceding calendar year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies of
the annual accountants' statement and the statement of officers of a Master
Servicer will be made available to Certificateholders without charge upon
written request to the Master Servicer.
Certain Matters Regarding the Master Servicer and the Depositor
The Master Servicer under a Pooling Agreement may be an affiliate of the
Depositor and may have other normal business relationships with the Depositor
or the Depositor's affiliates. Unless otherwise specified in the Prospectus
Supplement for a series of Certificates, the related Pooling Agreement will
permit the Master Servicer to resign from its obligations thereunder only upon
a determination that such obligations are no longer permissible under
applicable law or are in material conflict by reason of applicable law with
any other activities carried on by it at the date of the Pooling Agreement.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Master Servicer's obligations and duties under the
Pooling Agreement. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will also be required to maintain a fidelity
bond and errors and omissions policy that provides coverage against losses
that may be sustained as a result of an officer's or employee's
misappropriation of funds, errors and omissions or negligence, subject to
certain limitations as to amount of coverage, deductible amounts, conditions,
exclusions and exceptions.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will further provide that none of the Master Servicer, the
Depositor and any director, officer, employee or agent of either of them will
be under any liability to the related Trust Fund or Certificateholders for any
action taken, or not taken, in good faith pursuant to the Pooling Agreement or
for errors in judgment; provided, however, that none of the Master Servicer,
the Depositor and any such person will be protected against any breach of a
representation, warranty or covenant made in such Pooling Agreement, or
against any expense or liability that such person is specifically required to
bear pursuant to the terms of such Pooling Agreement, or against any liability
that would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of such obligations and duties. Unless otherwise
specified in the related Prospectus Supplement, each Pooling Agreement will
further provide that the Master Servicer, the Depositor and any director,
officer, employee or agent of either of them will be entitled to
indemnification by the related Trust Fund against any loss, liability or
expense incurred in connection with any legal action that relates to the
Pooling Agreement or the related series of Certificates; provided, however,
that such indemnification will not extend to any loss, liability or expense
(i) that such person is specifically required to bear pursuant to the terms of
such agreement, or is incidental to the performance of obligations and duties
thereunder
<PAGE>64
and is not reimbursable pursuant to the Pooling Agreement; (ii) incurred in
connection with any breach of a representation, warranty or covenant made in
the Pooling Agreement; (iii) incurred by reason of misfeasance, bad faith or
gross negligence in the performance of obligations or duties under the Pooling
Agreement, or by reason of reckless disregard of such obligations or duties;
or (iv) incurred in connection with any violation of any state or federal
securities law. In addition, each Pooling Agreement will provide that neither
the Master Servicer nor the Depositor will be under any obligation to appear
in, prosecute or defend any legal action that is not incidental to its
respective responsibilities under the Pooling Agreement and that in its
opinion may involve it in any expense or liability. However, each of the
Master Servicer and the Depositor will be permitted, in the exercise of its
discretion, to undertake any such action that it may deem necessary or
desirable with respect to the enforcement and/or protection of the rights and
duties of the parties to the Pooling Agreement and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action, and any liability resulting therefrom, will be expenses, costs
and liabilities of the Certificateholders, and the Master Servicer or the
Depositor, as the case may be, will be entitled to charge the related
Certificate Account therefor.
Any person into which the Master Servicer or the Depositor may be merged
or consolidated, or any person resulting from any merger or consolidation to
which the Master Servicer or the Depositor is a party, or any person
succeeding to the business of the Master Servicer or the Depositor, will be
the successor of the Master Servicer or the Depositor, as the case may be,
under the related Pooling Agreement.
Events of Default
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, "Events of Default" under the related Pooling Agreement will
include (i) any failure by the Master Servicer to distribute or cause to be
distributed to Certificateholders, or to remit to the Trustee for distribution
to Certificateholders in a timely manner, any amount required to be so
distributed or remitted, which failure continues unremedied for five days
after written notice of such failure has been given to the Master Servicer by
the Trustee or the Depositor, or to the Master Servicer, the Depositor and the
Trustee by Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series); (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any of its other covenants or
obligations under the Pooling Agreement which continues unremedied for 60 days
after written notice of such failure has been given to the Master Servicer by
the Trustee or the Depositor, or to the Master Servicer, the Depositor and the
Trustee by Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series; and (iii) certain events of insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings in
respect of or relating to the Master Servicer and certain actions by or on
behalf of the Master Servicer indicating its insolvency or inability to pay
its obligations. Material variations to the foregoing Events of Default
(other than to add thereto or shorten cure periods or eliminate notice
requirements) will be specified in the related Prospectus Supplement.
Rights Upon Event of Default
So long as an Event of Default under a Pooling Agreement remains
unremedied, the Depositor or the Trustee will be authorized, and at the
direction of Certificateholders entitled to not less than 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series, the Trustee will be required, to terminate all of the
rights and obligations of the Master Servicer as master servicer under the
Pooling Agreement, whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Pooling Agreement (except that if the Master Servicer is required to make
advances in respect of Mortgage Loan delinquencies, but the Trustee is
prohibited by law from obligating itself to do so, or if the related
Prospectus Supplement so specifies, the Trustee will not be obligated to make
such advances) and will be entitled to similar compensation arrangements.
Unless otherwise specified in the related Prospectus Supplement,
<PAGE>65
if the Trustee is unwilling or unable so to act, it may (or, at the written
request of Certificateholders entitled to at least 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series, it will be required to) appoint, or petition a court
of competent jurisdiction to appoint, a loan servicing institution that
(unless otherwise provided in the related Prospectus Supplement) is acceptable
to each Rating Agency that assigned ratings to the Offered Certificates of
such series to act as successor to the Master Servicer under the Pooling
Agreement. Pending such appointment, the Trustee will be obligated to act in
such capacity.
No Certificateholder will have the right under any Pooling Agreement to
institute any proceeding with respect thereto unless such holder previously
has given to the Trustee written notice of default and unless
Certificateholders entitled to at least 25% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights for the
related series shall have made written request upon the Trustee to institute
such proceeding in its own name as Trustee thereunder and shall have offered
to the Trustee reasonable indemnity, and the Trustee for 60 days (or such
other period specified in the related Prospectus Supplement) shall have
neglected or refused to institute any such proceeding. The Trustee, however,
will be under no obligation to exercise any of the trusts or powers vested in
it by any Pooling Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
Certificates of the related series, unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
Amendment
Each Pooling Agreement may be amended by the parties thereto, without the
consent of any of the holders of the related Certificates, (i) to cure any
ambiguity, (ii) to correct a defective provision therein or to correct, modify
or supplement any provision therein that may be inconsistent with any other
provision therein, (iii) to add any other provisions with respect to matters
or questions arising under the Pooling Agreement that are not inconsistent
with the provisions thereof, (iv) to comply with any requirements imposed by
the Code or (v) for any other purpose; provided that such amendment (other
than an amendment for the purpose specified in clause (iv) above) may not (as
evidenced by an opinion of counsel to such effect satisfactory to the Trustee)
adversely affect in any material respect the interests of any such holder.
Unless otherwise specified in the related Prospectus Supplement, each Pooling
Agreement may also be amended for any purpose by the parties, with the consent
of Certificateholders entitled to at least 51% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights for the
related series allocated to the affected classes; provided, however, that
unless otherwise specified in the related Prospectus Supplement, no such
amendment may (x) reduce in any manner the amount of, or delay the timing of,
payments received or advanced on Mortgage Loans that are required to be
distributed in respect of any Certificate without the consent of the holder of
such Certificate, (y) adversely affect in any material respect the interests
of the holders of any class of Certificates, in a manner other than as
described in clause (x), without the consent of the holders of all
Certificates of such class or (z) modify the provisions of the Pooling
Agreement described in this paragraph without the consent of the holders of
all Certificates of the related series. However, unless otherwise specified
in the related Prospectus Supplement, the Trustee will be prohibited from
consenting to any amendment of a Pooling Agreement pursuant to which a REMIC
election is to be or has been made unless the Trustee shall first have
received an opinion of counsel to the effect that such amendment will not
result in the imposition of a tax on the related Trust Fund or cause the
related Trust Fund to fail to qualify as a REMIC at any time that the related
Certificates are outstanding.
<PAGE>66
List of Certificateholders
Upon written request of any Certificateholder of record made for purposes
of communicating with other holders of Certificates of the same series with
respect to their rights under the related Pooling Agreement, the Trustee or
other specified person will afford such Certificateholder access, during
normal business hours, to the most recent list of Certificateholders of that
series then maintained by such person.
The Trustee
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Depositor and its affiliates and with any
Master Servicer and its affiliates.
Duties of the Trustee
The Trustee for a series of Certificates will make no representation as
to the validity or sufficiency of the related Pooling Agreement, the
Certificates or any Mortgage Loan or related document and will not be
accountable for the use or application by or on behalf of any Master Servicer
of any funds paid to the Master Servicer or any Special Servicer in respect of
the Certificates or the Mortgage Loans, or any funds deposited into or
withdrawn from the Certificate Account or any other account by or on behalf of
the Master Servicer or any Special Servicer. If no Event of Default has
occurred and is continuing, the Trustee will be required to perform only those
duties specifically required under the related Pooling Agreement. However,
upon receipt of any of the various certificates, reports or other instruments
required to be furnished to it pursuant to the Pooling Agreement, the Trustee
will be required to examine such documents and to determine whether they
conform to the requirements of the Pooling Agreement.
Certain Matters Regarding the Trustee
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for a series of Certificates will be entitled to indemnification, from
amounts held in the related Certificate Account, for any loss, liability or
expense incurred by the Trustee in connection with the Trustee's acceptance or
administration of its trusts under the related Pooling Agreement; provided,
however, that such indemnification will not extend to any loss, liability or
expense that constitutes a specific liability imposed on the Trustee pursuant
to the Pooling Agreement, or to any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or negligence on the part of the
Trustee in the performance of its obligations and duties thereunder, or by
reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein. As and to the extent described in the related Prospectus
Supplement, the fees and normal disbursements of any Trustee may be the
expense of the related Master Servicer or other specified person or may be
required to be borne by the related Trust Fund.
Resignation and Removal of the Trustee
The Trustee for a series of Certificates will be permitted at any time to
resign from its obligations and duties under the related Pooling Agreement by
giving written notice thereof to the Depositor. Upon receiving such notice of
resignation, the Depositor (or such other person as may be specified in the
related Prospectus Supplement) will be required to use its best efforts to
promptly appoint a successor trustee. If no successor trustee shall have
accepted an appointment within a specified period after the giving of such
notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction to appoint a successor trustee.
<PAGE>67
If at any time the Trustee ceases to be eligible to continue as such
under the related Pooling Agreement, or if at any time the Trustee becomes
incapable of acting, or if certain events of (or proceedings in respect of)
bankruptcy or insolvency occur with respect to the Trustee, the Depositor will
be authorized to remove the Trustee and appoint a successor trustee. In
addition, holders of the Certificates of any series entitled to at least 51%
(or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights for such series may at any time (with or without cause)
remove the Trustee and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee will not become effective until acceptance of appointment by the
successor trustee.
DESCRIPTION OF CREDIT SUPPORT
General
Credit Support may be provided with respect to one or more classes of the
Certificates of any series, or with respect to the related Mortgage Assets.
Credit Support may be in the form of overcollateralization, a letter of
credit, the subordination of one or more classes of Certificates, the use of a
pool insurance policy or guarantee insurance, the establishment of one or more
reserve funds or another method of Credit Support described in the related
Prospectus Supplement, or any combination of the foregoing. If so provided in
the related Prospectus Supplement, any form of Credit Support may provide
credit enhancement for more than one series of Certificates to the extent
described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Certificates, the Credit Support will not provide protection against
all risks of loss and will not guarantee payment to Certificateholders of all
amounts to which they are entitled under the related Pooling Agreement. If
losses or shortfalls occur that exceed the amount covered by the Credit
Support or that are not covered by the Credit Support, Certificateholders will
bear their allocable share of deficiencies. Moreover, if a form of Credit
Support covers more than one series of Certificates, holders of Certificates
of one series will be subject to the risk that such Credit Support will be
exhausted by the claims of the holders of Certificates of one or more other
series before the former receive their intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature and
amount of coverage under such Credit Support, (ii) any conditions to payment
thereunder not otherwise described herein, (iii) the conditions (if any) under
which the amount of coverage under such Credit Support may be reduced and
under which such Credit Support may be terminated or replaced and (iv) the
material provisions relating to such Credit Support. Additionally, the
related Prospectus Supplement will set forth certain information with respect
to the obligor under any instrument of Credit Support, generally including (w)
a brief description of its principal business activities, (x) its principal
place of business, place of incorporation and the jurisdiction under which it
is chartered or licensed to do business, (y) if applicable, the identity of
the regulatory agencies that exercise primary jurisdiction over the conduct of
its business and (z) its total assets, and its stockholders' equity or
policyholders' surplus, if applicable, as of a date that will be specified in
the Prospectus Supplement. See "Risk Factors Credit Support Limitations".
Subordinate Certificates
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate Account
on any Distribution Date will be
<PAGE>68
subordinated to the corresponding rights of the holders of Senior
Certificates. If so provided in the related Prospectus Supplement, the
subordination of a class may apply only in the event of (or may be limited to)
certain types of losses or shortfalls. The related Prospectus Supplement will
set forth information concerning the amount of subordination provided by a
class or classes of Subordinate Certificates in a series, the circumstances
under which such subordination will be available and the manner in which the
amount of subordination will be made available.
Cross-Support Provisions
If the Mortgage Assets in any Trust Fund are divided into separate
groups, each supporting a separate class or classes of Certificates of a
series, Credit Support may be provided by cross-support provisions requiring
that distributions be made on Senior Certificates evidencing interests in one
group of Mortgage Assets prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage Assets within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such
provisions.
Insurance or Guarantees with Respect to Mortgage Loans
If so provided in the Prospectus Supplement for a series of Certificates,
Mortgage Loans included in the related Trust Fund will be covered for certain
default risks by insurance policies or guarantees. To the extent material, a
copy of each such instrument will accompany the Current Report on Form 8-K to
be filed with the Commission within 15 days of issuance of the Certificates of
the related series.
Letter of Credit
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or financial institution specified in such Prospectus Supplement (the
"L/C Bank"). Under a letter of credit, the L/C Bank will be obligated to
honor draws thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, generally equal to a percentage specified in
the related Prospectus Supplement of the aggregate principal balance of the
Mortgage Assets on the related Cut-off Date or of the initial aggregate
Certificate Balance of one or more classes of Certificates. If so specified
in the related Prospectus Supplement, the letter of credit may permit draws
only in the event of certain types of losses and shortfalls. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder and may otherwise be reduced as
described in the related Prospectus Supplement. The obligations of the L/C
Bank under the letter of credit for each series of Certificates will expire at
the earlier of the date specified in the related Prospectus Supplement or the
termination of the Trust Fund. A copy of any such letter of credit will
accompany the Current Report on Form 8-K to be filed with the Commission
within 15 days of issuance of the Certificates of the related series.
Certificate Insurance and Surety Bonds
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies and/or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest and/or full distributions of
principal on the basis of a schedule of principal distributions set forth in
or determined in the manner specified in the related Prospectus Supplement. A
copy of any such instrument will accompany the Current Report on Form 8-K to
be filed with the Commission within 15 days of issuance of the Certificates of
the related series.
<PAGE>69
Reserve Funds
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered (to the extent of available funds) by one or
more reserve funds in which cash, a letter of credit, Permitted Investments, a
demand note or a combination thereof will be deposited, in the amounts
specified in such Prospectus Supplement. If so specified in the related
Prospectus Supplement, the reserve fund for a series may also be funded over
time by a specified amount of the collections received on the related Mortgage
Assets.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. If
so specified in the related Prospectus Supplement, reserve funds may be
established to provide protection only against certain types of losses and
shortfalls. Following each Distribution Date, amounts in a reserve fund in
excess of any amount required to be maintained therein may be released from
the reserve fund under the conditions and to the extent specified in the
related Prospectus Supplement.
If so specified in the related Prospectus Supplement, amounts deposited
in any reserve fund will be invested in Permitted Investments. Unless
otherwise specified in the related Prospectus Supplement, any reinvestment
income or other gain from such investments will be credited to the related
reserve fund for such series, and any loss resulting from such investments
will be charged to such reserve fund. However, such income may be payable to
any related Master Servicer or another service provider as additional
compensation for its services. The reserve fund, if any, for a series will
not be a part of the Trust Fund unless otherwise specified in the related
Prospectus Supplement.
Credit Support with Respect to CMBS
If so provided in the Prospectus Supplement for a series of Certificates,
any CMBS included in the related Trust Fund and/or the related underlying
mortgage loans may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement for any series of
Certificates evidencing an interest in a Trust Fund that includes CMBS will
describe to the extent information is available and deemed material, any
similar forms of Credit Support that are provided by or with respect to, or
are included as part of the trust fund evidenced by or providing security for,
such CMBS. The type, characteristic and amount of Credit Support will be
determined based on the characteristics of the Mortgage Assets and other
factors and will be established, in part, on the basis of requirements of each
Rating Agency rating the Certificates of such series. If so specified in the
related Prospectus Supplement, any such Credit Support may apply only in the
event of certain types of losses or delinquencies and the protection against
losses or delinquencies provided by such Credit Support will be limited.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND LEASES
The following discussion contains general summaries of certain legal
aspects of loans secured by commercial and multifamily residential properties.
Because such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete, to
reflect the laws of any particular state, or to encompass the laws of all
states in which the security for the Mortgage Loans (or mortgage loans
underlying any CMBS) is situated. Accordingly, the summaries are qualified in
their entirety by reference to the applicable laws of those states. See
"Description of the Trust Funds Mortgage Loans Leases". For purposes of the
following discussion, "Mortgage Loan" includes a mortgage loan underlying a
CMBS.
<PAGE>70
General
Each Mortgage Loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the
prevailing practice and law in the state in which the related Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages". A mortgage creates a lien
upon, or grants a title interest in, the real property covered thereby, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on the terms of the mortgage and, in some cases, on the
terms of separate subordination agreements or intercreditor agreements with
others that hold interests in the real property, the knowledge of the parties
to the mortgage and, generally, the order of recordation of the mortgage in
the appropriate public recording office. However, the lien of a recorded
mortgage will generally be subordinate to later-arising liens for real estate
taxes and assessments and other charges imposed under governmental police
powers. Additionally, in some states, mechanic's and materialman's liens have
priority over mortgage liens.
The mortgagee's authority under a mortgage, the trustee's authority under
a deed of trust and the grantee's authority under a deed to secure debt are
governed by the express provisions of the related instrument, the law of the
state in which the real property is located, certain federal laws (including,
without limitation, the Soldiers' and Sailors' Civil Relief Act of 1940) and,
in some deed of trust transactions, the directions of the beneficiary.
Types of Mortgage Instruments
There are two parties to a mortgage: a mortgagor (the borrower and
usually the owner of the subject property) and a mortgagee (the lender). In a
mortgage, the mortgagor grants a lien on the subject property in favor of the
mortgagee. A deed of trust is a three-party instrument, among a trustor (the
equivalent of a borrower), a trustee to whom the real property is conveyed,
and a beneficiary (the lender) for whose benefit the conveyance is made.
Under a deed of trust, the trustor grants the property to the trustee, in
trust, irrevocably until the debt is paid, and generally with a power of sale.
A deed to secure debt typically has two parties. The borrower, or grantor,
conveys title to the real property to the grantee, or lender, generally with a
power of sale, until such time as the debt is repaid. In a case where the
borrower is a land trust, there would be an additional party to a mortgage
instrument because legal title to the property is held by a land trustee under
a land trust agreement for the benefit of the borrower. At origination of a
mortgage loan involving a land trust, the borrower generally executes a
separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the
express provisions of the related instrument, the law of the state in which
the real property is located, certain federal laws and, in some deed of trust
transactions, the directions of the beneficiary. References herein and in any
Prospectus Supplement to "mortgage" shall include a mortgage, a deed of trust
or a deed to secure debt, as the case may be.
Leases and Rents
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease
and the income derived therefrom, while (unless rents are to be paid directly
to the lender) retaining a revocable license to collect the rents for so long
as there is no default. If the borrower defaults, the license terminates and
the lender is entitled to collect the rents. Local law may require that the
lender take possession of the property and/or obtain a court-appointed
receiver before becoming entitled to collect the rents.
<PAGE>71
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the rates are generally pledged by the
borrower as additional security for the loan. In general, the lender must
file financing statements in order to perfect its security interest in the
rates and must file continuation statements, generally every five years, to
maintain perfection of such security interest. Even if the lender's security
interest in room rates is perfected under the UCC, it will generally be
required to commence a foreclosure action or otherwise take possession of the
property in order to collect the room rates following a default. See
" Bankruptcy Laws".
Personalty
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the
borrower and not previously pledged) may constitute a significant portion of
the property's value as security. The creation and enforcement of liens on
personal property are governed by the UCC. Accordingly, if a borrower pledges
personal property as security for a mortgage loan, the lender generally must
file UCC financing statements in order to perfect its security interest
therein, and must file continuation statements, generally every five years, to
maintain that perfection.
Cooperative Loans
If specified in the related Prospectus Supplement, the Mortgage Loans may
consist of loans secured by "blanket mortgages" on the property owned by
cooperative housing corporations (each a "Cooperative"). If specified in the
related Prospectus Supplement, the Mortgage Loans may consist of cooperative
apartment loans ("Cooperative Loans") secured by security interests in shares
issued by Cooperatives and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
Cooperatives' buildings. The security agreement will create a lien upon, or
grant a title interest in, the property which it covers, the priority of which
will depend on the terms of the particular security agreement as well as the
order of recordation of the agreement in the appropriate recording office.
Such a lien or title interest is not prior to the lien for real estate taxes
and assessments and other charges imposed under governmental police powers.
A Cooperative generally owns in fee or has a leasehold interest in land
and owns in fee or leases the building or buildings thereon and all separate
dwelling units in the buildings. The Cooperative is owned by tenant-
stockholders who, through ownership of stock or shares in the corporation,
receive proprietary lease or occupancy agreements which confer exclusive
rights to occupy specific units. Generally, a tenant-stockholder of a
Cooperative must make a monthly payment to the Cooperative representing such
tenant-stockholder's pro rata share of the Cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other
governmental impositions and hazard and liability insurance. If there is a
blanket mortgage or mortgages on the Cooperative apartment building or
underlying land, as is generally the case, or an underlying lease of the land,
as is the case in some instances, the Cooperative, as property mortgagor, or
lessee, as the case may be, is also responsible for meeting these mortgage or
rental obligations. A blanket mortgage is ordinarily incurred by the
Cooperative in connection with either the construction or purchase of the
Cooperative's apartment building or obtaining of capital by the Cooperative.
The interest of the occupant under proprietary leases or occupancy agreements
as to which that Cooperative is the landlord are generally subordinate to the
interest of the holder of a blanket mortgage and to the interest of the holder
of a land lease. If the Cooperative is unable to meet the payment obligations
(i) arising under a blanket mortgage, the mortgagee holding a blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements, or (ii) arising under its land lease, the
holder of the landlord's interest under the land lease could terminate it and
all subordinate proprietary leases and occupancy agreements. Also, a blanket
mortgage on a Cooperative may provide financing
<PAGE>72
in the form of a mortgage that does not fully amortize, with a significant
portion of principal being due in one final payment at maturity. The
inability of the Cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability
of the Cooperative to extend its term, or, in the alternative, to purchase the
land, could lead to termination of the Cooperatives' interest in the property
and termination of all proprietary leases and occupancy agreements. Upon
foreclosure of a blanket mortgage on a Cooperative, the lender would normally
be required to take the Mortgaged Property subject to state and local
regulations that afford tenants who are not shareholders various rent control
and other protections. A foreclosure by the holder of a blanket mortgage or
the termination of the underlying lease could eliminate or significantly
diminish the value of any collateral held by a party who financed the purchase
of cooperative shares by an individual tenant stockholder.
An ownership interest in a Cooperative and accompanying occupancy rights
are financed through a cooperative share loan evidenced by a promissory note
and secured by an assignment of and a security interest in the occupancy
agreement or proprietary lease and a security interest in the related
cooperative shares. The lender generally takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy
agreement and the cooperative shares are filed in the appropriate state and
local offices to perfect the lender's interest in its collateral. Subject to
the limitations discussed below, upon default of the tenant-stockholder, the
lender may sue for judgment on the promissory note, dispose of the collateral
at a public or private sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and
the pledge of cooperative shares. See " Foreclosure Cooperative Loans" below.
Junior Mortgages; Rights of Senior Lenders
Some of the Mortgage Loans included in a Trust Fund may be secured by
mortgage instruments that are subordinate to mortgage instruments held by
other lenders. The rights of the Trust Fund (and therefore the
Certificateholders), as holder of a junior mortgage instrument, are
subordinate to those of the senior lender, including the prior rights of the
senior lender to receive rents, hazard insurance and condemnation proceeds and
to cause the Mortgaged Property to be sold upon borrower's default and thereby
extinguish the Trust Fund's junior lien unless the Master Servicer or Special
Servicer asserts its subordinate interest in a property in a foreclosure
litigation or satisfies the defaulted senior loan. As discussed more fully
below, in many states a junior lender may satisfy a defaulted senior loan in
full, adding the amounts expended to the balance due on the junior loan.
Absent a provision in the senior mortgage instrument, no notice of default is
required to be given to the junior lender.
The form of the mortgage instrument used by many institutional lenders
confers on the lender the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and (subject to any limits imposed by applicable
state law) to apply such proceeds and awards to any indebtedness secured by
the mortgage instrument in such order as the lender may determine. Thus, if
improvements on a property are damaged or destroyed by fire or other casualty,
or if the property is taken by condemnation, the holder of the senior mortgage
instrument will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with
the condemnation and to apply the same to the senior indebtedness.
Accordingly, only the proceeds in excess of the amount of senior indebtedness
will be available to be applied to the indebtedness secured by a junior
mortgage instrument.
The form of mortgage instrument used by many institutional lenders
typically contains a "future advance" clause, which provides, in general, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage instrument. While
such a claus is valid under the laws of most states, the priority of any
advance made under the clause depends, in some states, on whether the advance
was an "obligatory" or an "optional" advance. If the lender is obligated to
advance the additional amounts,
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the advance may be entitled to receive the same priority as the amounts
advanced at origination, notwithstanding that intervening junior liens may
have been recorded between the date of recording of the senior mortgage
instrument and the date of the future advance, and notwithstanding that the
senior lender had actual knowledge of such intervening junior liens at the
time of the advance. Where the senior lender is not obligated to advance the
additional amounts and has actual knowledge of the intervening junior liens,
the advance may be subordinate to such intervening junior liens. Priority of
advances under a "future advance" clause rests, in many other states, on state
law giving priority to all advances made under the loan agreement up to a
"credit limit" amount stated in the recorded mortgage.
Another provision typically found in the form of mortgage instrument used
by many institutional lenders permits the lender to itself perform certain
obligations of the borrower (for example, the obligations to pay when due all
taxes and assessments on the property and, when due, all encumbrances, charges
and liens on the property that are senior to the lien of the mortgage
instrument, to maintain hazard insurance on the property, and to maintain and
repair the property) upon a failure of the borrower to do so, with all sums so
expended by the lender becoming part of the indebtedness secured by the
mortgage instrument.
The form of mortgage instrument used by many institutional lenders
typically requires the borrower to obtain the consent of the lender in respect
of actions affecting the mortgaged property, including the execution of new
leases and the termination or modification of existing leases, the performance
of alterations to buildings forming a part of the mortgaged property and the
execution of management and leasing agreements for the mortgaged property.
Tenants will often refuse to execute leases unless the lender executes a
written agreement with the tenant not to disturb the tenant's possession of
its premises in the event of a foreclosure. A senior lender may refuse to
consent to matters approved by a junior lender, with the result that the value
of the security for the junior mortgage instrument is diminished.
Foreclosure
General. Foreclosure is a legal procedure that allows the lender to seek
to recover its mortgage debt by enforcing its rights and available legal
remedies under the mortgage in respect of the mortgaged property. If the
borrower defaults in payment or performance of its obligations under the note
or mortgage, the lender has the right to institute foreclosure proceedings to
sell the real property at public auction to satisfy the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale usually granted in
the mortgage instrument. Other foreclosure procedures are available in some
states, but they are either infrequently used or available only in limited
circumstances.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed, and
sometimes requires years to complete. Moreover, the filing by or against the
borrower-mortgagor of a bankruptcy petition would impose an automatic stay on
such proceedings and could further delay a foreclosure sale.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in
a court having jurisdiction over the mortgaged property. Generally, the
action is initiated by the service of legal pleadings upon all parties having
a subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating proper defendants. As
stated above, if the lender's right to foreclose is contested by any
defendant, the legal proceedings may be time-consuming. In addition, judicial
foreclosure is a proceeding in equity and, therefore, equitable defenses may
be raised against the foreclosure. Upon successful
<PAGE>74
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other officer to conduct a
public sale of the mortgaged property, the proceeds of which are used to
satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Non-Judicial Foreclosure/Power of Sale. Foreclosure of a deed of trust
is generally accomplished by a non-judicial trustee's sale pursuant to a power
of sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument if applicable law so
permits. A power of sale under a deed of trust or mortgage allows a non-
judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon default by the
borrower and after notice of sale is given in accordance with the terms of the
mortgage and applicable state law. In some states, prior to such sale, the
trustee under the deed of trust must record a notice of default and notice of
sale and send a copy to the borrower and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A
notice of sale must be posted in a public place and, in most states, published
for a specified period of time in one or more newspapers. The borrower or a
junior lienholder may then have the right, during a reinstatement period
required in some states, to cure the default by paying the entire actual
amount in arrears (without regard to the acceleration of the indebtedness),
plus the lender's expenses incurred in enforcing the obligation. In other
states, the borrower or the junior lienholder is not provided a period to
reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. In addition to such cure rights, in most
jurisdictions, the borrower-mortgagor or a subordinate lienholder can seek to
enjoin the non-judicial foreclosure by commencing a court proceeding.
Generally, state law governs the procedure for public sale, the parties
entitled to notice, the method of giving notice and the applicable time
periods.
Both judicial and non-judicial foreclosures may result in the termination
of leases at the mortgaged property, which in turn could result in the
reduction in the income for such property. Some of the factors that will
determine whether or not a lease will be terminated by a foreclosure are: the
provisions of applicable state law, the priority of the mortgage vis-a-vis the
lease in question, the terms of the lease and the terms of any subordination,
non-disturbance and attornment agreement between the tenant under the lease
and the mortgagee.
Equitable Limitations on Enforceability of Certain Provisions. United
States courts have traditionally imposed general equitable principles to limit
the remedies available to lenders in foreclosure actions. These principles
are generally designed to relieve borrowers from the effects of mortgage
defaults perceived as harsh or unfair. Relying on such principles, a court
may alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative actions to determine the cause of
the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose in the case of a non-monetary default, such as a failure
to adequately maintain the mortgaged property or placing a subordinate
mortgage or other encumbrance upon the mortgaged property. Finally, some
courts have addressed the issue of whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that a
borrower receive notice in addition to statutorily prescribed minimum notice.
For the most part, these cases have upheld the reasonableness of the notice
provisions or have found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to trigger
constitutional protections.
Public Sale. A third party may be unwilling to purchase a mortgaged
property at a public sale for a number of reasons, including the difficulty in
determining the exact status of title to the property (due to, among other
things, redemption rights that may exist) and because of the possibility that
physical deterioration of the property may have occurred during the
foreclosure proceedings. Potential buyers may also be reluctant to purchase
<PAGE>75
property at a foreclosure sale as a result of the 1980 decision of the United
States Court of Appeals for the Fifth Circuit in Durrett v. Washington
National Insurance Company. The court in Durrett held that even a non-
collusive, regularly conducted foreclosure sale was a fraudulent transfer
under Section 67d of the former Bankruptcy Act (Section 548 of the current
Bankruptcy Code, Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. 101-
1330 (the "Bankruptcy Code")) and, therefore, could be rescinded in favor of
the bankrupt's estate, if (i) the foreclosure sale was held while the debtor
was insolvent and not more than one year prior to the filing of the bankruptcy
petition and (ii) the price paid for the foreclosed property did not represent
"fair consideration" ("reasonably equivalent value" under the Bankruptcy
Code). Although the reasoning and result of Durrett were rejected by the
United States Supreme Court in May 1994, the case could nonetheless be
persuasive to a court applying a state fraudulent conveyance law with
provisions similar to those construed in Durrett. For these reasons, it is
common for the lender to purchase the mortgaged property for an amount equal
to the secured indebtedness and accrued and unpaid interest plus the expenses
of foreclosure, in which event the borrower's debt will be extinguished.
Thereafter, subject to the borrower's right in some states to remain in
possession during a redemption period, the lender will become the owner of the
property and have both the benefits and burdens of ownership, including the
obligation to pay debt service on any senior mortgages, to pay taxes, to
obtain casualty insurance and to make such repairs as are necessary to render
the property suitable for sale. The costs involved in a foreclosure process
can often be quite expensive; such costs may include, depending on the
jurisdiction involved, legal fees, court administration fees, referee fees and
transfer taxes or fees. The costs of operating and maintaining a commercial
or multifamily residential property may be significant and may be greater than
the income derived from that property. The lender also will commonly obtain
the services of a real estate broker and pay the broker's commission in
connection with the sale or lease of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal
the lender's investment in the property. Moreover, because of the expenses
associated with acquiring, owning and selling a mortgaged property, a lender
could realize an overall loss on a mortgage loan even if the mortgaged
property is sold at foreclosure, or resold after it is acquired through
foreclosure, for an amount equal to the full outstanding principal amount of
the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness, including penalty fees and court costs,
or face foreclosure.
Rights of Redemption. The purposes of a foreclosure action are to enable
the lender to realize upon its security and to bar the borrower, and all
persons who have interests in the property that are subordinate to that of the
foreclosing lender, from exercise of their "equity of redemption". The
doctrine of equity of redemption provides that, until the property encumbered
by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having interests that are subordinate
to that of the foreclosing lender have an equity of redemption and may redeem
the property by paying the entire debt with interest. Those having an equity
of redemption must generally be made parties and joined in the foreclosure
proceeding in order for their equity of redemption to be terminated.
The equity of redemption is a common-law (non-statutory) right which
should be distinguished from post-sale statutory rights of redemption. In
some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property. In some states, statutory redemption
may occur only upon payment of the foreclosure sale price. In other states,
redemption may be permitted if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property because the exercise of
a right of redemption would defeat the title of any purchaser through a
foreclosure. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until
<PAGE>76
the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Anti-Deficiency Legislation. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be limited
to the Mortgaged Property and such other assets, if any, that were pledged to
secure the Mortgage Loan. However, even if a mortgage loan by its terms
provides for recourse to the borrower's other assets, a lender's ability to
realize upon those assets may be limited by state law. For example, in some
states a lender cannot obtain a deficiency judgment against the borrower
following a non-judicial foreclosure. A deficiency judgment is a personal
judgment against the former borrower equal to the difference between the net
amount realized upon the public sale of the real property and the amount due
to the lender. Other statutes may require the lender to exhaust the security
afforded under a mortgage before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of those states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the security. Consequently, lenders in those
states where such an election of remedy provision exists will usually proceed
first against the security. Finally, other statutory provisions, designed to
protect borrowers from exposure to large deficiency judgments that might
result from bidding at below-market values at the foreclosure sale, limit any
deficiency judgment to the excess of the outstanding debt over the judicially
determined fair market value of the property at the time of the sale.
Leasehold Risks. Mortgage Loans may be secured by a mortgage on the
borrower's leasehold interest in a ground lease. Leasehold mortgage loans are
subject to certain risks not associated with mortgage loans secured by a lien
on the fee estate of the borrower. The most significant of these risks is
that if the borrower's leasehold were to be terminated upon a lease default or
the bankruptcy of the lessee or the lessor, the leasehold mortgagee would lose
its security. This risk may be substantially lessened if the ground lease
contains provisions protective of the leasehold mortgagee, such as a provision
that requires the ground lessor to give the leasehold mortgagee notices of
lessee defaults and an opportunity to cure them, a provision that permits the
leasehold estate to be assigned to and by the leasehold mortgagee or the
purchaser at a foreclosure sale, a provision that gives the leasehold
mortgagee the right to enter into a new ground lease with the ground lessor on
the same terms and conditions as the old ground lease or a provision that
prohibits the ground lessee/borrower from treating the ground lease as
terminated in the event of the ground lessor's bankruptcy and rejection of the
ground lease by the trustee for the debtor/ground lessor. Certain mortgage
loans, however, may be secured by liens on ground leases that do not contain
these provisions.
Regulated Healthcare Facilities. A Mortgage Loan may be secured by a
mortgage on a nursing home or other regulated healthcare facility. In most
jurisdictions, a license (which is nontransferable and may not be assigned or
pledged) granted by the appropriate state regulatory authority is required to
operate a regulated healthcare facility. Accordingly, the ability of a person
acquiring this type of property upon a foreclosure sale to take possession of
and operate the same as a regulated healthcare facility may be prohibited by
applicable law. Notwithstanding the foregoing, however, in certain
jurisdictions the person acquiring this type of property at a foreclosure sale
may have the right to terminate the use of the same as a regulated health care
facility and convert it to another lawful purpose.
Cross-Collateralization. Certain of the Mortgage Loans may be secured by
more than one mortgage covering Mortgaged Properties located in more than one
state. Because of various state laws governing foreclosure or the exercise of
a power of sale and because, in general, foreclosure actions are brought in
state court and the courts of one state cannot exercise jurisdiction over
property in another state, it may be necessary upon a default under a cross-
collateralized Mortgage Loan to foreclose on the related Mortgaged Properties
in a particular order rather than simultaneously in order to ensure that the
lien of the mortgages is not impaired or released.
<PAGE>77
Cooperative Loans. The cooperative shares owned by the tenant-
stockholder and pledged to the lender are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's Certificate of
Incorporation and By-laws, as well as the proprietary lease or occupancy
agreement, and may be cancelled by the Cooperative for failure by the tenant-
stockholder to pay rent or other obligations or charges owed by such tenant-
stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or
occupancy agreement generally permit the Cooperative to terminate such lease
or agreement in the event an obligor fails to make payments or defaults in the
performance of covenants required thereunder. Typically, the lender and the
Cooperative enter into a recognition agreement which establishes the rights
and obligations of both parties in the event of a default by the tenant-
stockholder. A default under the proprietary lease or occupancy agreement
will usually constitute a default under the security agreement between the
lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or the occupancy
agreement is terminated, the Cooperative will recognize the lender's lien
against proceeds from the sale of the Cooperative apartment, subject, however,
to the Cooperative's right to sums due under such proprietary lease or
occupancy agreement. The total amount owed to the Cooperative by the tenant-
stockholder, which the lender generally cannot restrict and does not monitor,
could reduce the value of the collateral below the outstanding principal
balance of the Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements also provide that in the event of a foreclosure on
a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the tenant-
stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by
a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires
that a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to
the usual practice of banks selling similar collateral will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy
the indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the Cooperatives to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the tenant-
stockholder is generally responsible for the deficiency.
Bankruptcy Laws
Operation of the Bankruptcy Code and related state laws may interfere
with or affect the ability of a lender to realize upon collateral and/or to
enforce a deficiency judgment. For example, under the Bankruptcy Code,
virtually all actions (including foreclosure actions and deficiency judgment
proceedings) to collect a debt are automatically stayed upon the filing of the
bankruptcy petition and, often, no interest or principal payments are made
during the course of the bankruptcy case. The delay and the consequences
thereof caused by the automatic stay can be significant. Also, under the
Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a
junior lienor would stay the senior lender from proceeding with any
foreclosure action.
<PAGE>78
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender's second claim are met, the amount and
terms of a mortgage loan secured by a lien on property of the debtor may be
modified under certain circumstances. For example, if the loan is
undersecured, the outstanding amount of the loan which would remain secured
may be reduced to the then-current value of the property (with a corresponding
partial reduction of the amount of lender's security interest) pursuant to a
confirmed plan, thus leaving the lender a general unsecured creditor for the
difference between such value and the outstanding balance of the loan. Other
modifications may include the reduction in the amount of each scheduled
payment by means of a reduction in the rate of interest and/or an alteration
of the repayment schedule (with or without affecting the unpaid principal
balance of the loan), and/or by an extension (or shortening) of the term to
maturity. Some bankruptcy courts have approved plans, based on the particular
facts of the reorganization case, that effected the cure of a mortgage loan
default by paying arrearages over a number of years. Also, a bankruptcy court
may permit a debtor, through its rehabilitative plan, to reinstate a loan
mortgage payment schedule even if the lender has obtained a final judgment of
foreclosure prior to the filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's
assignment of rents and leases related to the mortgaged property. Under
Section 362 of the Bankruptcy Code, the lender will be stayed from enforcing
the assignment, and the legal proceedings necessary to resolve the issue could
be time-consuming, with resulting delays in the lender's receipt of the rents.
However, the Bankruptcy Code has recently been amended to provide that a
lender's perfected pre-petition security interest in leases, rents and hotel
revenues continues in the post-petition leases, rents and hotel revenues,
unless a bankruptcy court orders to the contrary "based on the equities of the
case." Thus, unless a court orders otherwise, revenues from a mortgaged
property generated after the date the bankruptcy petition is filed will
constitute "cash collateral" under the Bankruptcy Code. Debtors may only use
cash collateral upon obtaining the lender's consent or a prior court order
finding that the lender's interest in the mortgaged properties and the cash
collateral is "adequately protected" as such term is defined and interpreted
under the Bankruptcy Code.
If a borrower's ability to make payment on a mortgage loan is dependent
on its receipt of rent payments under a lease of the related property, that
ability may be impaired by the commencement of a bankruptcy proceeding
relating to a lessee under such lease. Under the Bankruptcy Code, the filing
of a petition in bankruptcy by or on behalf of a lessee results in a stay in
bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a
summary eviction order with respect to a default under the lease that occurred
prior to the filing of the lessee's petition. In addition, the Bankruptcy
Code generally provides that a trustee or debtor-in-possession may, subject to
approval of the court, (i) assume the lease and retain it or assign it to a
third party or (ii) reject the lease. If the lease is assumed, the trustee or
debtor-in-possession (or assignee, if applicable) must cure any defaults under
the lease, compensate the lessor for its losses and provide the lessor with
"adequate assurance" of future performance. Such remedies may be
insufficient, and any assurances provided to the lessor may, in fact, be
inadequate. If the lease is rejected, the lessor will be treated as an
unsecured creditor with respect to its claim for damages for termination of
the lease. The Bankruptcy Code also limits a lessor's damages for lease
rejection to the rent reserved by the lease (without regard to acceleration)
for the greater of one year, or 15%, not to exceed three years, of the
remaining term of the lease.
Environmental Considerations
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties
that are or have been used for industrial, manufacturing, military, disposal
or certain commercial activity. Such environmental risks include the possible
diminution of the value of a contaminated property or, as discussed below,
potential liability for clean-up costs or other remedial actions that could
exceed the value of the property or the amount of the lender's loan. In
certain circumstances, a lender may
<PAGE>79
decide to abandon a contaminated mortgaged property as collateral for its loan
rather than foreclose and risk liability for clean-up costs.
Superlien Laws. Under the laws of many states, contamination on a
property may give rise to a lien on the property for clean-up costs. In
several states, such a lien has priority over all existing liens, including
those of existing mortgages. In these states, the lien of a mortgage may lose
its priority to such a "superlien".
CERCLA. The federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for
the costs of clean-up. Excluded from CERCLA's definition of "owner" or
"operator," however, is a lender that, "without participating in the
management" of the facility, holds indicia of ownership primarily to protect
his security interest in the facility. This so-called secured creditor
exemption is intended to provide a lender protection from liability under
CERCLA as an owner or operator of contaminated property. The secured creditor
exemption, however, does not necessarily protect a lender from liability for
cleanup of hazardous substances in every situation. A secured lender may be
liable as an "owner" or "operator" of a contaminated mortgaged property if
agents or employees of the lender are deemed to have participated in the
management of such mortgaged property or the operations of the borrower. Such
liability may exist even if the lender did not cause or contribute to the
contamination and regardless of whether the lender has actually taken
possession of a mortgaged property through foreclosure, deed in lieu of
foreclosure or otherwise. Moreover, such liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan.
In addition, lenders may face potential liability for remediation of
releases of petroleum or hazardous substances from underground sotrage tanks
under Subtitle I of the Federal Resource Conservation and Recovery Act
("RCRA"), if they are deemed to be the "owners" or "operators" of facilities
in which they have a security interest or upon which they have foreclosed.
The Federal Asset Conservation, Lender Liability and Deposit Insurance
Protection Act of 1996 (the "Lender Liability Act") seeks to clarify the
actions a lender may take without incurring liability as an "owner" or
"operator" of contaminated property or underground petroleum storage tanks.
The Lender Liability Act amends CERCLA and RCRA to provide guidance on actions
that do or do not constitute "participation in management."
Importantly, the Lender Liability Act does not, among other things: (1)
completely eliminate potential liability to lenders under CERCLA or RCRA, (2)
reduce credit risks associated with lending to borrowers having significant
environmental liabilities or potential liabilities, (3) eliminate
environmental risks associated with taking possession of contaminated property
or underground storage tanks or assuming control of the operations thereof, or
(4) affect liabilities or potential liabilities under state environemental
laws.
Certain Other State Laws. Many states have statutes similar to CERCLA
and RCRA, and not all of those statutes provide for a secured creditor
exemption.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender
that becomes the owner of a property through foreclosure, deed in lieu of
foreclosure or otherwise, may be required to clean up the contamination before
selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury, or damage to property) related to
hazardous environmental conditions on a property. While it may be more
difficult to hold a lender liable in such cases,
<PAGE>80
unanticipated or uninsured liabilities of the borrower may jeopardize the
borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable,
it can bring an action for contribution against other potentially liable
parties, but such parties may be without substantial assets. Accordingly, it
is possible that such costs could become a liability of the Trust Fund and
occasion a loss to the Certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in
the related Prospectus Supplement, the Pooling and Servicing Agreement will
provide that the Master Servicer, acting on behalf of the Trustee, may not
take possession of a Mortgaged Property or take over its operation unless the
Master Servicer, based solely on a report (as to environmental matters)
prepared by a person who regularly conducts environmental site assessments,
has made the determination that it is appropriate to do so, as described under
"Description of the Pooling Agreements Realization Upon Defaulted Mortgage
Loans."
If a lender forecloses on a mortgage secured by a property, the
operations of which are subject to environmental laws and regulations, the
lender may be required to operate the property in accordance with those laws
and regulations. Such compliance may entail substantial expense, especially
in the case of industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers
(including prospective buyers at a foreclosure sale or following foreclosure).
Such disclosure may decrease the amount that prospective buyers are willing to
pay for the affected property, sometimes substantially, and thereby decrease
the ability of the lender to recoup its investment in a loan upon foreclosure.
Due-on-Sale and Due-on-Encumbrance
Certain of the Mortgage Loans may contain "due-on-sale" and "due-on-
encumbrance" clauses that purport to permit the lender to accelerate the
maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such
clauses in many states. By virtue, however, of the Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn Act"), effective October 15,
1982 (which purports to preempt state laws that prohibit the enforcement of
due-on-sale clauses by providing, among other matters, that "due-on-sale"
clauses in certain loans made after the effective date of the Garn Act are
enforceable, within certain limitations as set forth in the Garn Act and the
regulations promulgated thereunder), a Master Servicer may nevertheless have
the right to accelerate the maturity of a Mortgage Loan that contains a "due-
on-sale" provision upon transfer of an interest in the property, regardless of
the Master Servicer's ability to demonstrate that a sale threatens its
legitimate security interest.
Subordinate Financing
Certain of the Mortgage Loans may not restrict the ability of the
borrower to use the Mortgaged Property as security for one or more additional
loans. Where a borrower encumbers a mortgaged property with one or more
junior liens, the senior lender is subjected to additional risk. First, the
borrower may have difficulty servicing and repaying multiple loans. Moreover,
if the subordinate financing permits recourse to the borrower (as is
frequently the case) and the senior loan does not, a borrower may have more
incentive to repay sums due on the subordinate loan. Second, acts of the
senior lender that prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to
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an increase in the principal amount of or the interest rate payable on the
senior loan, the senior lender may lose its priority to the extent any
existing junior lender is harmed or the borrower is additionally burdened.
Third, if the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of
a junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender
may collect from a borrower as an additional charge if the loan is prepaid.
In addition, the enforceability of provisions that provide for prepayment fees
or penalties upon an involuntary prepayment is unclear under the laws of many
states.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply
to certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
law or constitutional provision that expressly rejects application of the
federal law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or
other charges.
No Mortgage Loan originated in any state in which application of Title V
has been expressly rejected or a provision limiting discount points or other
charges has been adopted will (if originated after that rejection or adoption)
be eligible for inclusion in a Trust Fund unless (i) such Mortgage Loan
provides for such interest rate, discount points and charges as are permitted
in such state or (ii) such Mortgage Loan provides that the terms thereof are
to be construed in accordance with the laws of another state under which such
interest rate, discount points and charges would not be usurious and the
borrower's counsel has rendered an opinion that such choice of law provision
would be given effect.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a borrower who enters military service after
the origination of such borrower's mortgage loan (including a borrower who was
in reserve status and is called to active duty after origination of the
Mortgage Loan), may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender. The Relief
Act applies to individuals who are members of the Army, Navy, Air Force,
Marines, National Guard, Reserves, Coast Guard and officers of the U.S. Public
Health Service assigned to duty with the military. Because the Relief Act
applies to individuals who enter military service (including reservists who
are called to active duty) after origination of the related mortgage loan, no
information can be provided as to the number of loans with individuals as
borrowers that may be affected by the Relief Act. Application of the Relief
Act would adversely affect, for an indeterminate period of time, the ability
of any servicer to collect full amounts of interest on certain of the Mortgage
Loans. Any shortfalls in interest collections resulting from the application
of the Relief Act would result in a reduction of the amounts distributable
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to the holders of the related series of Certificates, and would not be covered
by advances or, unless otherwise specified in the related Prospectus
Supplement, any form of Credit Support provided in connection with such
Certificates. In addition, the Relief Act imposes limitations that would
impair the ability of the servicer to foreclose on an affected Mortgage Loan
during the borrower's period of active duty status and, under certain
circumstances, during an additional three-month period thereafter.
Americans with Disabilities Act
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers that are
structural in nature from existing places of public accommodation to the
extent "readily achievable". In addition, under the ADA, alterations to a
place of public accommodation or a commercial facility are to be made so that,
to the maximum extent feasible, such altered portions are readily accessible
to and usable by disabled individuals. The "readily achievable" standard
takes into account, among other factors, the financial resources of the
affected site, owner, landlord or other applicable person. The requirements
of the ADA may also be imposed on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Since the "readily achievable"
standard may vary depending on the financial condition of the owner or
landlord, a foreclosing lender who is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of drug-
related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property", including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of Offered
Certificates. This discussion is directed solely to Certificateholders that
hold the Certificates as capital assets within the meaning of Section 1221 of
the Internal Revenue Code of 1986 (the "Code") and it does not purport to
discuss all federal income tax consequences that may be applicable to
particular categories of investors, some of which (such as banks, insurance
companies and foreign investors) may be subject to special rules. Further,
the authorities on which this discussion, and the opinion referred to below,
are based are subject to change or differing interpretations, which could
apply retroactively. Taxpayers and preparers of tax returns (including those
filed by any REMIC or other issuer) should be aware that under applicable
Treasury regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice (i) is given with
respect to the consequences of contemplated actions and (ii) is directly
relevant to the
<PAGE>83
determination of an entry on a tax return. Accordingly, taxpayers should
consult their own tax advisors and tax return preparers regarding the
preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed herein. In addition to the federal income tax
consequences described herein, potential investors should consider the state
and local tax consequences, if any, of the purchase, ownership and disposition
of Offered Certificates. See "State and Other Tax Consequences".
Certificateholders are advised to consult their own tax advisors concerning
the federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of Offered Certificates.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or
a portion thereof, that the Master Servicer or the Trustee will elect to have
treated as a real estate mortgage investment conduit ("REMIC") under Sections
860A through 860G (the "REMIC Provisions") of the Code and (ii) certificates
("Grantor Trust Certificates") representing interests in a Trust Fund
("Grantor Trust Fund") as to which no such election will be made. The
Prospectus Supplement for each series of Certificates will indicate whether a
REMIC election (or elections) will be made for the related Trust Fund and, if
such an election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC. For purposes of this tax discussion,
references to a "Certificateholder" or a "holder" are to the beneficial owner
of a Certificate.
The following discussion is limited in applicability to Offered
Certificates. Moreover, this discussion applies only to the extent that
Mortgage Assets held by a Trust Fund consist solely of Mortgage Loans. To the
extent that other Mortgage Assets, including REMIC certificates and mortgage
pass-through certificates, are to be held by a Trust Fund, the tax
consequences associated with the inclusion of such assets will be disclosed in
the related Prospectus Supplement. In addition, if Cash Flow Agreements,
other than guaranteed investment contracts, are included in a Trust Fund, the
tax consequences associated with such Cash Flow Agreements also will be
disclosed in the related Prospectus Supplement. See "Description of the Trust
Funds Cash Flow Agreements".
Furthermore, the following discussion is based in part upon the rules
governing original issue discount that are set forth in Sections 1271-1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations
do not adequately address certain issues relevant to, and in some instances
provide that they are not applicable to, securities such as the Certificates.
REMICs
Classification of REMICs. It is the opinion of Willkie Farr & Gallagher,
counsel to the Depositor, that upon the issuance of each series of REMIC
Certificates, assuming compliance with all provisions of the related Pooling
Agreement and based upon the law on the date hereof, for federal income tax
purposes the related Trust Fund (or each applicable portion thereof) will
qualify as a REMIC and the REMIC Certificates offered with respect thereto
will be considered to evidence ownership of "regular interests" ("REMIC
Regular Certificates") or "residual interests" ("REMIC Residual Certificates")
in that REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In that event, such entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below.
Although the Code authorizes the Treasury Department to issue regulations
providing relief in the event of an inadvertent termination of REMIC status,
no such regulations have been issued. Any such relief, moreover, may be
accompanied by sanctions, such as the imposition of a corporate tax on all or
a portion of the Trust Fund's income for the period during which the
requirements for such status are not satisfied. The Pooling Agreement with
<PAGE>84
respect to each REMIC will include provisions designed to maintain the Trust
Fund's status as a REMIC under the REMIC Provisions. It is not anticipated
that the status of any Trust Fund as a REMIC will be terminated.
Characterization of Investments in REMIC Certificates. In general,
unless otherwise provided in the related Prospectus Supplement, the REMIC
Certificates will be "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code and assets described in Section 7701(a)(19)(C) of the
Code in the same proportion that the assets of the REMIC underlying such
Certificates would be so treated. However, to the extent that the REMIC
assets constitute mortgages on property not used for residential or certain
other prescribed purposes, the REMIC Certificates will not be treated as
assets qualifying under Section 7701(a)(19)(C)(v) of the Code. Moreover, if
95% or more of the assets of the REMIC qualify for any of the foregoing
treatments at all times during a calendar year, the REMIC Certificates will
qualify for the corresponding status in their entirety for that calendar year.
Interest (including original issue discount) on the REMIC Regular Certificates
and income allocated to the class of REMIC Residual Certificates will be
interest described in Section 856(c)(3)(B) of the Code to the extent that such
Certificates are treated as "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code. In addition, the REMIC Regular Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3) of the Code.
The determination as to the percentage of the REMIC's assets that constitute
assets described in the foregoing sections of the Code will be made with
respect to each calendar quarter based on the average adjusted basis of each
category of the assets held by the REMIC during such calendar quarter. The
Master Servicer or the Trustee will report those determinations to
Certificateholders in the manner and at the times required by the applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Loans for purposes of all of
the foregoing sections. In addition, in some instances Mortgage Loans may not
be treated entirely as assets described in the foregoing sections. If so, the
related Prospectus Supplement will describe those Mortgage Loans that may not
be so treated. The REMIC Regulations do provide, however, that payments on
Mortgage Loans held pending distribution are considered part of the Mortgage
Loans for purposes of Section 856(c)(5)(A) of the Code.
Tiered REMIC Structures. For certain series of REMIC Certificates, two
or more separate elections may be made to treat designated portions of the
related Trust Fund as REMICs ("Tiered REMICs") for federal income tax
purposes. Upon the issuance of any such series of REMIC Certificates, counsel
to the Depositor will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the related Pooling Agreement, the
Tiered REMICs will each qualify as a REMIC and the REMIC Certificates issued
by the Tiered REMICs, respectively, will be considered to evidence ownership
of REMIC Regular Certificates or REMIC Residual Certificates in the related
REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code,
and "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code, and whether the income on such Certificates is
interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs will
be treated as one REMIC.
Taxation of Owners of REMIC Regular Certificates
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC or
its assets. Moreover, holders of REMIC Regular Certificates that otherwise
report income under a cash method
<PAGE>85
of accounting will be required to report income with respect to REMIC Regular
Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. Any holders of REMIC Regular Certificates issued with original
issue discount generally will be required to include original issue discount
in income as it accrues, in accordance with the method described below, in
advance of the receipt of the cash attributable to such income. In addition,
Section 1272(a)(6) of the Code provides special rules applicable to REMIC
Regular Certificates and certain other debt instruments issued with original
issue discount. Regulations have not been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner
prescribed in Treasury regulations; as noted above, those regulations have not
been issued. The Conference Committee Report accompanying the Tax Reform Act
of 1986 (the "Committee Report") indicates that the regulations will provide
that the prepayment assumption used with respect to a REMIC Regular
Certificate must be the same as that used in pricing the initial offering of
such REMIC Regular Certificate. The prepayment assumption (the "Prepayment
Assumption") used in reporting original issue discount for each series of
REMIC Regular Certificates will be consistent with this standard and will be
disclosed in the related Prospectus Supplement. However, neither the
Depositor nor any other person will make any representation that the Mortgage
Loans will in fact prepay at a rate conforming to the Prepayment Assumption or
at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will
be the excess of its stated redemption price at maturity over its issue price.
The issue price of a particular class of REMIC Regular Certificates will be
the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold (excluding sales to bond houses, brokers
and underwriters). If less than a substantial amount of a particular class of
REMIC Regular Certificates is sold for cash on or prior to the date of their
initial issuance (the "Closing Date"), the issue price for such class will be
the fair market value of such class on the Closing Date. Under the OID
Regulations, the stated redemption price of a REMIC Regular Certificate is
equal to the total of all payments to be made on such Certificate other than
"qualified stated interest". "Qualified stated interest" includes interest
that is unconditionally payable at least annually at a single fixed rate, at a
"qualified floating rate", or at an "objective rate", a combination of a
single fixed rate and one or more "qualified floating rates" or one "qualified
inverse floating rate", or a combination of "qualified floating rates" that
does not operate in a manner that accelerates or defers interest payments on
such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and
the timing of the inclusion thereof will vary according to the characteristics
of such REMIC Regular Certificates. If the original issue discount rules
apply to such Certificates, the related Prospectus Supplement will describe
the manner in which such rules will be applied with respect to those
Certificates in preparing information returns to the Certificateholders and
the Internal Revenue Service (the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the
first interest payment with respect to such Certificates to be made more than
one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" (as defined below) for original issue discount is each monthly period
that ends on a Distribution Date, in some cases, as a consequence of this
"long first accrual period", some or all interest payments may be required to
be included in the stated redemption price of the REMIC Regular Certificate
and accounted for as original issue discount. Because interest on REMIC
Regular Certificates must in any event be accounted for under an accrual
method, applying this analysis
<PAGE>86
would result in only a slight difference in the timing of the inclusion in
income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing
Date, a portion of the purchase price paid for a REMIC Regular Certificate
will reflect such accrued interest. In such cases, information returns
provided to the Certificateholders and the IRS will be based on the position
that the portion of the purchase price paid for the interest accrued with
respect to periods prior to the Closing Date is treated as part of the overall
cost of such REMIC Regular Certificate (and not as a separate asset the cost
of which is recovered entirely out of interest received on the next
Distribution Date) and that portion of the interest paid on the first
Distribution Date in excess of interest accrued for a number of days
corresponding to the number of days from the Closing Date to the first
Distribution Date should be included in the stated redemption price of such
REMIC Regular Certificate. However, the OID Regulations state that all or
some portion of such accrued interest may be treated as a separate asset the
cost of which is recovered entirely out of interest paid on the first
Distribution Date. It is unclear how an election to do so would be made under
the OID Regulations and whether such an election could be made unilaterally by
a Certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to
be de minimis if it is less than 0.25% of the stated redemption price of the
REMIC Regular Certificate multiplied by its weighted average life. For this
purpose, the weighted average life of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which
is the amount of the payment, and the denominator of which is the stated
redemption price at maturity of such REMIC Regular Certificate. Under the OID
Regulations, original issue discount of only a de minimis amount (other than
de minimis original discount attributable to a so-called "teaser" interest
rate or an initial interest holiday) will be included in income as each
payment of stated principal is made, based on the product of the total amount
of such de minimis original issue discount and a fraction, the numerator of
which is the amount of such principal payment and the denominator of which is
the outstanding stated principal amount of the REMIC Regular Certificate. The
OID Regulations also would permit a Certificateholder to elect to accrue de
minimis original issue discount into income currently based on a constant
yield method. See " Taxation of Owners of REMIC Regular Certificates Market
Discount" for a description of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of
a de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for
each day during its taxable year on which it held such REMIC Regular
Certificate, including the purchase date but excluding the disposition date.
In the case of an original holder of a REMIC Regular Certificate, the daily
portions of original issue discount will be determined as follows.
As to each "accrual period", that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that
corresponds to a Distribution Date and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the Closing Date), a calculation will be made of the portion of the
original issue discount that accrued during such accrual period. The portion
of original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (a) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate, if any, in future periods and (b) the distributions made
on such REMIC Regular Certificate during the accrual period of amounts
included in the stated redemption price, over (ii) the adjusted issue price of
such REMIC Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence will be calculated (x) assuming that distributions on the REMIC
<PAGE>87
Regular Certificate will be received in future periods based on the Mortgage
Loans being prepaid at a rate equal to the Prepayment Assumption and (y) using
a discount rate equal to the original yield to maturity of the Certificate.
For these purposes, the original yield to maturity of the Certificate will be
calculated based on its issue price and assuming that distributions on the
Certificate will be made in all accrual periods based on the Mortgage Loans
being prepaid at a rate equal to the Prepayment Assumption. The adjusted
issue price of a REMIC Regular Certificate at the beginning of any accrual
period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
of amounts included in the stated redemption price. The original issue
discount accruing during any accrual period, computed as described above, will
be allocated ratably to each day during the accrual period to determine the
daily portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of
any original issue discount with respect to such Certificate. However, each
such daily portion will be reduced, if such cost is in excess of its "adjusted
issue price", in proportion to the ratio such excess bears to the aggregate
original issue discount remaining to be accrued on such REMIC Regular
Certificate. The adjusted issue price of a REMIC Regular Certificate on any
given day equals the sum of (i) the adjusted issue price (or, in the case of
the first accrual period, the issue price) of such Certificate at the
beginning of the accrual period which includes such day and (ii) the daily
portions of original issue discount for all days during such accrual period
prior to such day.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price, will recognize gain upon receipt of each
distribution representing stated redemption price. In particular, under
Section 1276 of the Code such a Certificateholder generally will be required
to allocate the portion of each such distribution representing stated
redemption price first to accrued market discount not previously included in
income, and to recognize ordinary income to that extent. A Certificateholder
may elect to include market discount in income currently as it accrues rather
than including it on a deferred basis in accordance with the foregoing. If
made, such election will apply to all market discount bonds acquired by such
Certificateholder on or after the first day of the first taxable year to which
such election applies. In addition, the OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were made with respect
to a REMIC Regular Certificate with market discount, the Certificateholder
would be deemed to have made an election to currently include market discount
in income with respect to all other debt instruments having market discount
that such Certificateholder acquires during the taxable year of the election
or thereafter, and possibly previously acquired instruments. Similarly, a
Certificateholder that made this election for a Certificate that is acquired
at a premium would be deemed to have made an election to amortize bond premium
with respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See " Taxation of Owners of REMIC Regular
Certificates Premium". Each of these elections to accrue interest, discount
and premium with respect to a Certificate on a constant yield method or as
interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if
such market discount is less than 0.25% of the remaining stated redemption
price of such REMIC Regular Certificate multiplied by the number of complete
years to maturity remaining after the date of its purchase. In interpreting a
similar rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and
<PAGE>88
it is likely that the same rule will be applied with respect to market
discount, presumably taking into account the Prepayment Assumption. If market
discount is treated as de minimis under this rule, it appears that the actual
discount would be treated in a manner similar to original issue discount of a
de minimis amount. See " Taxation of Owners of REMIC Regular
Certificates Original Issue Discount". Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than
one installment. Until regulations are issued by the Treasury Department,
certain rules described in the Committee Report apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates should accrue, at the Certificateholder's option: (i) on the
basis of a constant yield method; (ii) in the case of a REMIC Regular
Certificate issued without original issue discount, in an amount that bears
the same ratio to the total remaining market discount as the stated interest
paid in the accrual period bears to the total amount of stated interest
remaining to be paid on the REMIC Regular Certificate as of the beginning of
the accrual period or (iii) in the case of a REMIC Regular Certificate issued
with original issue discount, in an amount that bears the same ratio to the
total remaining market discount as the original issue discount accrued in the
accrual period bears to the total original issue discount remaining on the
REMIC Regular Certificate at the beginning of the accrual period. Moreover,
the Prepayment Assumption used in calculating the accrual of original issue
discount is also used in calculating the accrual of market discount. Because
the regulations referred to in this paragraph have not been issued, it is not
possible to predict what effect such regulations might have on the tax
treatment of a REMIC Regular Certificate purchased at a discount in the
secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if
it were original issue discount. Moreover, in any event a holder of a REMIC
Regular Certificate generally will be required to treat a portion of any gain
on the sale or exchange of such Certificate as ordinary income to the extent
of the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year
or thereafter, the interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest)
greater than its remaining stated redemption price will be considered to be
purchased at a premium. The holder of such a REMIC Regular Certificate may
elect under Section 171 of the Code to amortize such premium under the
constant yield method over the life of the Certificate. If made, such an
election will apply to all debt instruments having amortizable bond premium
that the holder owns or subsequently acquires. Amortizable premium will be
treated as an offset to interest income on the related debt instrument, rather
than as a separate interest deduction. The OID Regulations also permit
Certificateholders to elect to include all interest, discount and premium in
income based on a constant yield method, further treating the
Certificateholder as having made the election to amortize premium generally.
See " Taxation of Owners of REMIC Regular
<PAGE>89
Certificates Market Discount". The Committee Report states that the same
rules that apply to accrual of market discount (which rules will require use
of a Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have original
issue discount) will also apply in amortizing bond premium under Section 171
of the Code.
Realized Losses. Under Section 166 of the Code, both corporate holders
of the REMIC Regular Certificates and noncorporate holders of the REMIC
Regular Certificates that acquire such Certificates in connection with a trade
or business should be allowed to deduct, as ordinary losses, any losses
sustained during a taxable year in which their Certificates become wholly or
partially worthless as the result of one or more realized losses on the
Residential Loans. However, it appears that a noncorporate holder that does
not acquire a REMIC Regular Certificate in connection with a trade or business
will not be entitled to deduct a loss under Section 166 of the Code until such
holder's Certificate becomes wholly worthless (i.e., until its outstanding
principal balance has been reduced to zero) and that the loss will be
characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Residential Loans or the underlying Certificates until it
can be established that any such reduction ultimately will not be recoverable.
As a result, the amount of taxable income reported in any period by the holder
of a REMIC Regular Certificate could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a
REMIC Regular Certificate eventually will recognize a loss or reduction in
income attributable to previously accrued and included income that as the
result of a realized loss ultimately will not be realized, the law is unclear
with respect to the timing and character of such loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates
General. As residual interests, the REMIC Residual Certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes
as direct ownership interests in the Mortgage Loans or as debt instruments
issued by the REMIC.
An original holder of a REMIC Residual Certificate generally will be
required to report its daily portion of the taxable income or, subject to the
limitations noted in this discussion, the net loss of the REMIC for each day
during a calendar quarter that such holder owned such REMIC Residual
Certificate. For this purpose, the taxable income or net loss of the REMIC
will be allocated to each day in the calendar quarter ratably using a "30 days
per month/90 days per quarter/360 days per year" convention unless otherwise
disclosed in the related Prospectus Supplement. The daily amounts so
allocated will then be allocated among the REMIC Residual Certificateholders
in proportion to their respective ownership interests on such day. Any amount
included in the gross income or allowed as a loss of any REMIC Residual
Certificateholder by virtue of this paragraph will be treated as ordinary
income or loss. The taxable income of the REMIC will be determined under the
rules described below in " Taxable Income of the REMIC" and will be taxable to
the REMIC Residual Certificateholders without regard to the timing or amount
of cash distributions by the REMIC. Ordinary income derived from REMIC
Residual Certificates will be "portfolio income" for purposes of the taxation
of taxpayers subject to limitations under Section 469 of the Code on the
deductibility of "passive losses".
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC
Residual Certificate. Those daily amounts generally will equal the amounts of
taxable income or net loss determined as described above. The Committee
Report indicates that certain modifications of the general rules may be made,
by regulations, legislation
<PAGE>90
or otherwise, to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations,
however, do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be
taken into account in determining the income of such holder for federal income
tax purposes. Although it appears likely that any such payment would be
includible in income immediately upon its receipt, the IRS might assert that
such payment should be included in income over time according to an
amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of such payments, holders of REMIC
Residual Certificates should consult their tax advisors concerning the
treatment of such payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess
inclusions", residual interests without "significant value" and "noneconomic"
residual interests discussed below. The fact that the tax liability
associated with the income allocated to REMIC Residual Certificateholders may
exceed the cash distribution received by such REMIC Residual
Certificateholders for the corresponding period may significantly adversely
affect such REMIC Residual Certificateholders' after-tax rate of return.
Taxable Income of the REMIC. The taxable income of the REMIC will equal
the income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses
to REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered
hereby), amortization of any premium on the Mortgage Loans, bad debt losses
with respect to the Mortgage Loans and, except as described below, for
servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC
Certificates offered hereby will be determined in the manner described above
under " Taxation of Owners of REMIC Regular Certificates Original Issue
Discount". The issue price of a REMIC Certificate received in exchange for an
interest in the Mortgage Loans or other property will equal the fair market
value of such interests in the Mortgage Loans or other property. Accordingly,
if one or more classes of REMIC Certificates are retained initially rather
than sold, the Master Servicer or the Trustee may be required to estimate the
fair market value of such interests in order to determine the basis of the
REMIC in the Mortgage Loans and other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC
Regular Certificates (that is, under the constant yield method taking into
account the Prepayment Assumption). However, a REMIC that acquires loans at a
market discount must include such market discount in income currently, as it
accrues, on a constant interest basis. See " Taxation of Owners of REMIC
Regular Certificates" above, which describes a method for accruing
<PAGE>91
such discount income that is analogous to that required to be used by a REMIC
as to Mortgage Loans with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated
redemption price. Any such discount will be includible in the income of the
REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will elect under Section 171 of the Code to amortize any
premium on the Mortgage Loans. Premium on any Mortgage Loan to which such
election applies may be amortized under a constant yield method, presumably
taking into account a Prepayment Assumption. Further, such an election would
not apply to any Mortgage Loan originated on or before September 27, 1985.
Instead, premium on such a Mortgage Loan should be allocated among the
principal payments thereon and be deductible by the REMIC as those payments
become due or upon the prepayment of such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose
as described above under " Taxation of Owners of REMIC Regular
Certificates Original Issue Discount", except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including
any other class of REMIC Certificates constituting "regular interests" in the
REMIC not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess
of the stated redemption price of such class (such excess, "Issue Premium"),
the net amount of interest deductions that are allowed the REMIC in each
taxable year with respect to the REMIC Regular Certificates of such class will
be reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under " Taxation of Owners of REMIC Regular
Certificates Original Issue Discount".
As a general rule, the taxable income of a REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item
of income, gain, loss or deduction allocable to a prohibited transaction will
be taken into account. See " Prohibited Transactions Tax and Other Taxes"
below. Further, the limitation on miscellaneous itemized deductions imposed
on individuals by Section 67 of the Code (which allows such deductions only to
the extent they exceed in the aggregate two percent of the taxpayer's adjusted
gross income) will not be applied at the REMIC level so that the REMIC will be
allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be
allocated as a separate item to the holders of REMIC Certificates, subject to
the limitation of Section 67 of the Code. See " Possible Pass-Through of
Miscellaneous Itemized Deductions". If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such excess will be the net
loss for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made,
and by net losses allocated, to such REMIC Residual Certificateholder.
<PAGE>92
A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without
regard to such net loss). Any loss that is not currently deductible by reason
of this limitation may be carried forward indefinitely to future calendar
quarters and, subject to the same limitation, may be used only to offset
income from the REMIC Residual Certificate. The ability of REMIC Residual
Certificateholders to deduct net losses may be subject to additional
limitations under the Code, as to which REMIC Residual Certificateholders
should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a
distribution on a REMIC Residual Certificate exceeds such adjusted basis, it
will be treated as gain from the sale of such REMIC Residual Certificate.
Holders of certain REMIC Residual Certificates may be entitled to
distributions early in the term of the related REMIC under circumstances in
which their bases in such REMIC Residual Certificates will not be sufficiently
large that such distributions will be treated as nontaxable returns of
capital. Their bases in such REMIC Residual Certificates will initially equal
the amount paid for such REMIC Residual Certificates and will be increased by
their allocable shares of taxable income of the Trust Fund. However. such
bases increases may not occur until the end of the calendar quarter, or
perhaps the end of the calendar year, with respect to which such REMIC taxable
income is allocated to the REMIC Residual Certificateholders. To the extent
such REMIC Residual Certificateholders' initial bases are less than the
distributions to such REMIC Residual Certificateholders, and increases in such
initial bases either occur after such distributions or (together with their
initial bases) are less than the amount of such distributions, gain will be
recognized to such REMIC Residual Certificateholders on such distributions and
will be treated as gain from the sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover
its basis through distributions, through the deduction of any net losses of
the REMIC or upon the sale of its REMIC Residual Certificate. See " Sales of
REMIC Certificates". For a discussion of possible modifications of these
rules that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see " Taxation of Owners of REMIC
Residual Certificates General".
Excess Inclusions. Any "excess inclusions" with respect to a REMIC
Residual Certificate will, with an exception discussed below for certain REMIC
Residual Certificates held by thrift institutions, be subject to federal
income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
sum of the daily portions of REMIC taxable income allocable to such REMIC
Residual Certificate over (ii) the sum of the "daily accruals" (as defined
below) for each day during such quarter that such REMIC Residual Certificate
was held by such REMIC Residual Certificateholder. The daily accruals of a
REMIC Residual Certificateholder will be determined by allocating to each day
during a calendar quarter its ratable portion of the product of the "adjusted
issue price" of the REMIC Residual Certificate at the beginning of the
calendar quarter and 120% of the "long-term Federal rate" in effect on the
Closing Date. For this purpose, the adjusted issue price of a REMIC Residual
Certificate as of the beginning of any calendar quarter will be equal to the
issue price of the REMIC Residual Certificate, increased by the sum of the
daily accruals for all prior quarters and decreased (but not below zero) by
any distributions made with respect to such REMIC Residual Certificate before
the beginning of such quarter. The issue price of a REMIC Residual
Certificate is the initial offering price to the public (excluding bond houses
and brokers) at which a substantial amount of the REMIC Residual Certificates
<PAGE>93
were sold. The "long-term Federal rate" is an average of current yields on
Treasury securities with a remaining term of greater than nine years, computed
and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not
be permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, " Foreign
Investors in REMIC Certificates" below.
As an exception to the general rules described above, thrift institutions
are allowed to offset their excess inclusions with unrelated deductions,
losses or loss carryovers, but only if the REMIC Residual Certificates are
considered to have "significant value". The REMIC Regulations provide that in
order to be treated as having significant value, the REMIC Residual
Certificates must have an aggregate issue price, at least equal to two percent
of the aggregate issue prices of all of the related REMIC's Regular and
Residual Certificates. In addition, based on the Prepayment Assumption, the
anticipated weighted average life of the REMIC Residual Certificates must
equal or exceed 20% of the anticipated weighted average life of the REMIC,
based on the Prepayment Assumption and on any required or permitted cleanup
calls or required liquidation provided for in the REMIC's organizational
documents. Although it has not done so, the Treasury also has authority to
issue regulations that would treat the entire amount of income accruing on a
REMIC Residual Certificate as an excess inclusion if the REMIC Residual
Certificates are considered not to have "significant value". The related
Prospectus Supplement will disclose whether offered REMIC Residual
Certificates may be considered to have "significant value" under the REMIC
Regulations; provided, however, that any disclosure that a REMIC Residual
Certificate will have "significant value" will be based upon certain
assumptions. and the Depositor will make no representation that a REMIC
Residual Certificate will have "significant value" for purposes of the above-
described rules. The above-described exception for thrift institutions
applies only to those residual interests held directly by, and deductions,
losses and loss carryovers incurred by, such institutions (and not by other
members of an affiliated group of corporations filing a consolidated income
tax return) or by certain wholly owned direct subsidiaries of such
institutions formed or operated exclusively in connection with the
organization and operation of one or more REMICs.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of
the Code, excluding any net capital gain), will be allocated among the
shareholders of such trust in proportion to the dividends received by such
shareholders from such trust, and any amount so allocated will be treated as
an excess inclusion with respect to a REMIC Residual Certificate as if held
directly by such shareholder. Treasury regulations yet to be issued could
apply a similar rule to regulated investment companies, common trust funds and
certain cooperatives; the REMIC Regulations currently do not address this
subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was
to enable the transferor to impede the assessment or collection of tax". If
such transfer is disregarded, the purported transferor will continue to remain
liable for any taxes due with respect to the income on such "noneconomic"
REMIC Residual Certificate. The REMIC Regulations provide that a REMIC
Residual Certificate is noneconomic unless, based on the Prepayment Assumption
and on any required or permitted cleanup calls, or required liquidation
provided for in the REMIC's organizational documents, (i) the present value of
the expected future distributions (discounted using the "applicable Federal
rate" for obligations whose term ends on the close of the last quarter in
which excess inclusions are expected to accrue with respect to the REMIC
Residual Certificate, which rate is computed and published monthly by the IRS)
on the REMIC Residual Certificate equals
<PAGE>94
at least the present value of the expected tax on the anticipated excess
inclusions and (ii) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or
after the time the taxes accrue on the anticipated excess inclusions in an
amount sufficient to satisfy the accrued taxes. Accordingly, all transfers of
REMIC Residual Certificates that may constitute noneconomic residual interests
will be subject to certain restrictions under the terms of the related Pooling
Agreement that are intended to reduce the possibility of any such transfer
being disregarded. Such restrictions will require each party to a transfer to
provide an affidavit that no purpose of such transfer is to impede the
assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee, as to which the transferor
is also required to make a reasonable investigation to determine such
transferee's historic payment of its debts and ability to continue to pay its
debts as they come due in the future. Prior to purchasing a REMIC Residual
Certificate, prospective purchasers should consider the possibility that a
purported transfer of such REMIC Residual Certificate by such a purchaser to
another purchaser at some future date may be disregarded in accordance with
the above-described rules which would result in the retention of tax liability
by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a
REMIC Residual Certificate will not be considered "noneconomic" for purposes
of the above-described rules. See " Taxation of Owners of REMIC Residual
Certificates Foreign Investors in REMIC Certificates" below for additional
restrictions applicable to transfers of certain REMIC Residual Certificates to
foreign persons.
Mark-to-Market Rules. Prospective purchasers of a REMIC Residual
Certificate should be aware that on December 28, 1993, the IRS released
temporary regulations under Code Section 475 (the "Temporary Mark-to-Market
Regulations") relating to the requirement that a securities dealer mark to
market securities held for sale to customers. This mark-to-market requirement
applies to all securities owned by a dealer except to the extent that the
dealer has specifically identified a security as held for investment. The
Temporary Mark-to-Market Regulations provide that for purposes of this mark-
to-market requirement, a "negative value" REMIC Residual Certificate is not
treated as a security and thus may not be marked to market. In general, a
REMIC Residual Certificate has negative value if, as of the date a taxpayer
acquires the REMIC Residual Certificate, the present value of the tax
liabilities associated with holding the REMIC Residual Certificate exceeds the
sum of (i) the present value of the expected future distributions on the REMIC
Residual Certificate, and (ii) the present value of the anticipated tax
savings associated with holding the REMIC Residual Certificate as the REMIC
generates losses. The amounts and present values of the anticipated tax
liabilities, expected future distributions and anticipated tax savings are all
to be determined using (x) the prepayments and reinvestment assumptions
adopted under Section 1272(a)(6) of the Code, or that would have been adopted
had the REMIC's regular interests been issued with original issue discount,
(y) any required or permitted cleanup calls, or required qualified
liquidation, provided for in the REMIC's organizational documents and (z) a
discount rate equal to the "applicable Federal rate" (as specified in Section
1274(d)(1) of the Code) that would apply to a debt instrument issued on the
date of acquisition of the REMIC Residual Certificate. The Temporary Mark-to-
Market Regulations apply to taxable years ending on or after December 31,
1993. Furthermore, the Temporary Mark-to-Market Regulations provide the IRS
with the authority to treat any REMIC Residual Certificate having
substantially the same economic effect as a "negative value" residual interest
as a "negative value" residual interest. On January 3, 1995, the IRS released
proposed regulations under Section 475 of the Code (the "Proposed Mark-to-
Market Regulations"). The Proposed Mark-to-Market Regulations provide that
any residual interest (regardless of whether it has negative value) that is
acquired on or after January 4, 1995 is not a "security" for the purposes of
Section 475 of the Code, and thus is not subject to the mark-to-market rules.
Prospective purchasers of a REMIC Residual Certificate should consult their
tax advisors regarding the possible application of the Temporary Mark-to-
Market Regulations and the Proposed Mark-to-Market Regulations.
<PAGE>95
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate
or trust, or a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, (i) an amount equal to such individual's,
estate's or trust's share of such fees and expenses will be added to the gross
income of such holder and (ii) such individual's, estate's or trust's share of
such fees and expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code, which permits
such deductions only to the extent they exceed in the aggregate two percent of
a taxpayer's adjusted gross income. In addition, Section 68 of the Code
provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (x) three percent of the excess of the individual's
adjusted gross income over such amount or (y) 80% of the amount of itemized
deductions otherwise allowable for the taxable year. The amount of additional
taxable income reportable by REMIC Certificateholders that are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a REMIC Certificate that is an individual, estate or trust, or a
"pass-through entity" beneficially owned by one or more individuals, estates
or trusts, no deduction will be allowed for such holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of such fees and other deductions will be
included in such holder's gross income. Accordingly, such REMIC Certificates
may not be appropriate investments for individuals, estates or trusts, or
pass-through entities beneficially owned by one or more individuals, estates
or trusts. Such prospective investors should carefully consult with their own
tax advisors prior to making an investment in such Certificates.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC
Certificate. The adjusted basis of a REMIC Regular Certificate generally will
equal the cost of such REMIC Regular Certificate to such Certificateholder,
increased by income reported by such Certificateholder with respect to such
REMIC Regular Certificate (including original issue discount and market
discount income) and reduced (but not below zero) by distributions on such
REMIC Regular Certificate received by such Certificateholder and by any
amortized premium. The adjusted basis of a REMIC Residual Certificate will be
determined as described under " Basis Rules, Net Losses and Distributions".
Except as provided in the following two paragraphs, any such gain or loss will
be capital gain or loss, provided such REMIC Certificate is held as a capital
asset (generally, property held for investment) within the meaning of Section
1221 of the Code. The Code as of the date of this Prospectus provides for a
top marginal tax rate of 39.6% for individuals and a maximum marginal rate for
long-term capital gains of individuals of 28%. No such rate differential
exists for corporations. In addition, the distinction between a capital gain
or loss and ordinary income or loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been
includible in the seller's income with respect to such REMIC Regular
Certificate assuming that income had accrued thereon at a rate equal to 110%
of the "applicable Federal rate" (generally, a rate based on an average of
current yields on Treasury securities having a maturity comparable to that of
the Certificate based on the application of the Prepayment Assumption to such
Certificate, which rate is computed and published monthly by the IRS),
determined as of the date of purchase of such REMIC Regular Certificate, over
(ii) the amount of ordinary income actually
<PAGE>96
includible in the seller's income prior to such sale. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who
purchased such REMIC Regular Certificate at a market discount will be taxable
as ordinary income in an amount not exceeding the portion of such discount
that accrued during the period such REMIC Certificate was held by such holder,
reduced by any market discount included in income under the rules described
above under " Taxation of Owners of REMIC Regular Certificates Market
Discount" and " Premium".
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the
sale of a REMIC Certificate by a bank or thrift institution to which such
section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the
extent that such Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time value
of the taxpayer's net investment in such transaction. The amount of gain so
realized in a conversion transaction that is recharacterized as ordinary
income generally will not exceed the amount of interest that would have
accrued on the taxpayer's net investment at 120% of the appropriate
"applicable Federal rate" (which rate is computed and published monthly by the
IRS) at the time the taxpayer enters into the conversion transaction, subject
to appropriate reduction for prior inclusion of interest and other ordinary
income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires a REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale"
rules of Section 1091 of the Code. In that event, any loss realized by the
REMIC Residual Certificateholder on the sale will not be deductible, but
instead will be added to such REMIC Residual Certificateholder's adjusted
basis in the newly acquired asset.
Prohibited Transactions Tax and Other Taxes. The Code imposes a tax on
REMICs equal to 100% of the net income derived from "prohibited transactions"
(a "Prohibited Transactions Tax"). In general, subject to certain specified
exceptions, a prohibited transaction means the disposition of a Mortgage Loan,
the receipt of income from a source other than a Mortgage Loan or certain
other permitted investments, the receipt of compensation for services, or gain
from the disposition of an asset purchased with the payments on the Mortgage
Loans for temporary investment pending distribution on the REMIC Certificates.
It is not anticipated that the REMIC will engage in any prohibited
transactions in which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax
on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling Agreement will include provisions designed
to prevent the acceptance of any contributions that would be subject to such
tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property", determined by reference to the
rules applicable to real estate investment trusts. "Net income
<PAGE>97
from foreclosure property" generally means gain from the sale of a foreclosure
property that is inventory property and gross income from foreclosure property
other than qualifying rents and other qualifying income for a real estate
investment trust. Unless otherwise disclosed in the related Prospectus
Supplement, it is not anticipated that any REMIC will recognize "net income
from foreclosure property" subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is
not anticipated that any material state or local income or franchise tax will
be imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne
by the related Master Servicer, Special Servicer or Trustee in any case out of
its own funds, provided that such person has sufficient assets to do so, and
provided further that such tax arises out of a breach of such person's
obligations under the related Pooling Agreement and in respect of compliance
with applicable laws and regulations. Any such tax not borne by a Master
Servicer, Special Servicer or Trustee will be charged against the related
Trust Fund resulting in a reduction in amounts payable to holders of the
related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to
Certain Organizations. If a REMIC Residual Certificate is transferred to a
"disqualified organization" (as defined below), a tax would be imposed in an
amount (determined under the REMIC Regulations) equal to the product of (i)
the present value (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) of the
total anticipated excess inclusions with respect to such REMIC Residual
Certificate for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The anticipated excess
inclusions must be determined as of the date that the REMIC Residual
Certificate is transferred and must be based on events that have occurred up
to the time of such transfer, the Prepayment Assumption and any required or
permitted cleanup calls or required liquidation provided for in the REMIC's
organizational documents. Such a tax generally would be imposed on the
transferor of the REMIC Residual Certificate, except that where such transfer
is through an agent for a disqualified organization, the tax would instead be
imposed on such agent. However, a transferor of a REMIC Residual Certificate
would in no event be liable for such tax with respect to a transfer if the
transferee furnishes to the transferor an affidavit that the transferee is not
a disqualified organization and, as of the time of the transfer, the
transferor does not have actual knowledge that such affidavit is false.
Moreover, an entity will not qualify as a REMIC unless there are reasonable
arrangements designed to ensure that (x) residual interests in such entity are
not held by disqualified organizations and (y) information necessary for the
application of the tax described herein will be made available. Restrictions
on the transfer of REMIC Residual Certificates and certain other provisions
that are intended to meet this requirement will be included in the Pooling
Agreement, and will be discussed more fully in any Prospectus Supplement
relating to the offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the
amount of excess inclusions on the REMIC Residual Certificate that are
allocable to the interest in the pass-through entity held by such disqualified
organization and (ii) the highest marginal federal income tax rate imposed on
corporations. A pass-through entity will not be subject to this tax for any
period, however, if each record holder of an interest in such pass-through
entity furnishes to such pass-through entity (x) such holder's social security
number and a statement under penalty of perjury that such social security
number is that of the record holder or (y) a statement under penalty of
perjury that such record holder is not a disqualified organization.
<PAGE>98
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government,
any international organization, or any agency or instrumentality of the
foregoing (but would not include instrumentalities described in Section
168(h)(2)(D) of the Code or the FHLMC), (ii) any organization (other than a
cooperative described in Section 521 of the Code) that is exempt from federal
income tax, unless it is subject to the tax imposed by Section 511 of the Code
or (iii) any organization described in Section 1381(a)(2)(C) of the Code. For
these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
Termination. A REMIC will terminate immediately after the Distribution
Date following receipt by the REMIC of the final payment in respect of the
Mortgage Loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last distribution on a REMIC
Regular Certificate will be treated as a payment in retirement of a debt
instrument. In the case of a REMIC Residual Certificate, if the last
distribution on such REMIC Residual Certificate is less than the REMIC
Residual Certificateholder's adjusted basis in such REMIC Residual
Certificate, such REMIC Residual Certificateholder should (but may not) be
treated as realizing a loss equal to the amount of such difference, and such
loss may be treated as a capital loss.
Reporting and Other Administrative Matters. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related Prospectus Supplement, either the
Trustee or the Master Servicer generally will hold at least a nominal amount
of REMIC Residual Certificates, will file REMIC federal income tax returns on
behalf of the related REMIC, and will be designated as and will act as the
"tax matters person" with respect to the REMIC in all respects.
As the tax matters person, the Trustee or the Master Servicer, as the
case may be, will, subject to certain notice requirements and various
restrictions and limitations, generally have the authority to act on behalf of
the REMIC and the REMIC Residual Certificateholders in connection with the
administrative and judicial review of items of income, deduction, gain or loss
of the REMIC, as well as the REMIC's classification. REMIC Residual
Certificateholders will generally be required to report such REMIC items
consistently with their treatment on the related REMIC's tax return and may in
some circumstances be bound by a settlement agreement between the Trustee or
the Master Servicer, as the case may be, as tax matters person, and the IRS
concerning any such REMIC item. Adjustments made to the REMIC tax return may
require a REMIC Residual Certificateholder to make corresponding adjustments
on its return, and an audit of the REMIC's tax return, or the adjustments
resulting from such an audit, could result in an audit of a REMIC Residual
Certificateholder's return. No REMIC will be registered as a tax shelter
pursuant to Section 6111 of the Code because it is not anticipated that any
REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a REMIC Residual Certificate as a nominee
for another person may be required to furnish to the related REMIC, in a
manner to be provided in Treasury regulations, the name and address of such
person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information
reports generally are required to be sent to individual holders of REMIC
Regular Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals
will be provided interest and original issue discount income information and
the information set forth in the following paragraph upon request in
accordance with the requirements of the applicable regulations. The
information must be provided by the later of 30 days after the end of the
quarter for which the information was requested, or two weeks after the
receipt of the request. The REMIC must also comply with rules requiring a
REMIC Regular Certificate issued with original issue discount to disclose on
its face the amount of original issue
<PAGE>99
discount and the issue date, and requiring such information to be reported to
the IRS. Reporting with respect to the REMIC Residual Certificates, including
income, excess, inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets will be made as required under
the Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular
Certificate at the beginning of each accrual period. In addition, the reports
will include information required by regulations with respect to computing the
accrual of any market discount. Because exact computation of the accrual of
market discount on a constant yield method would require information relating
to the holder's purchase price that the REMIC may not have, such regulations
only require that information pertaining to the appropriate proportionate
method of accruing market discount be provided. See " Taxation of Owners of
REMIC Regular Certificates Market Discount".
The responsibility for complying with the foregoing reporting rules will
be borne by either the Trustee or the Master Servicer, unless otherwise stated
in the related Prospectus Supplement.
Backup Withholding with Respect to REMIC Certificates. Payments of
interest and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the "backup withholding tax" under Section
3406 of the Code at a rate of 31% if recipients of such payments fail to
furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient
would be allowed as a credit against such recipient's federal income tax.
Furthermore, certain penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
Foreign Investors in REMIC Certificates. A REMIC Regular
Certificateholder that is not a "United States person" (as defined below) and
is not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC
Regular Certificate will not, unless otherwise disclosed in the related
Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States
person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in, or under the laws of, the
United States or any political subdivision thereof, or an estate or trust
whose income from sources without the United States is includible in gross
income for United States federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States.
It is possible that the IRS may assert that the foregoing tax exemption should
not apply with respect to a REMIC Regular Certificate held by a REMIC Residual
Certificateholder that owns directly or indirectly a 10% or greater interest
in the REMIC Residual Certificates. If the holder does not qualify for
exemption, distributions of interest, including distributions in respect of
accrued original issue discount, to such holder may be subject to a tax rate
of 30%, subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a nonresident alien individual and would not be
subject to United States estate taxes. However, Certificateholders who are
non-resident alien individuals should consult their tax advisors concerning
this question.
<PAGE>100
Unless otherwise stated in the related Prospectus Supplement, transfers
of REMIC Residual Certificates to investors that are not United States persons
will be prohibited under the related Pooling Agreement.
Grantor Trust Funds
Classification of Grantor Trust Funds. With respect to each series of
Grantor Trust Certificates, counsel to the Depositor will deliver its opinion
to the effect that, assuming compliance with all provisions of the related
Pooling Agreement, the related Grantor Trust Fund will be classified as a
grantor trust under subpart E, part I of subchapter J of the Code and not as a
partnership or an association taxable as a corporation. Accordingly, each
holder of a Grantor Trust Certificate generally will be treated as the owner
of an interest in the Mortgage Loans included in the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor
Trust Fractional Interest Certificate". A Grantor Trust Certificate
representing ownership of all or a portion of the difference between interest
paid on the Mortgage Loans constituting the related Grantor Trust Fund (net of
normal administration fees and any spread) and interest paid to the holders of
Grantor Trust Fractional Interest Certificates issued with respect to such
Grantor Trust Fund will be referred to as a "Grantor Trust Strip Certificate".
A Grantor Trust Strip Certificate may also evidence a nominal ownership
interest in the principal of the Mortgage Loans constituting the related
Grantor Trust Fund.
Characterization of Investments in Grantor Trust Certificates
Grantor Trust Fractional Interest Certificates. In the case of Grantor
Trust Fractional Interest Certificates, unless otherwise disclosed in the
related Prospectus Supplement, counsel to the Depositor will deliver an
opinion that, in general, Grantor Trust Fractional Interest Certificates will
represent interests in (i) assets described in Section 7701(a)(19)(C) of the
Code; (ii) "obligation[s] (including any participation or certificate of
beneficial ownership therein) which . . . [are] principally secured by an
interest in real property" within the meaning of Section 860G(a)(3)(A) of the
Code; and (iii) "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code. In addition, counsel to the Depositor will deliver
an opinion that interest on Grantor Trust Fractional Interest Certificates
will to the same extent be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the
meaning of Section 856(c)(3)(B) of the Code.
Grantor Trust Strip Certificates. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of
Mortgage Loans that are assets described in Section 7701(a)(19)(C) of the
Code and "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code, and the interest on which is "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, it is unclear whether the Grantor Trust Strip Certificates, and the
income therefrom, will be so characterized. However, the policies underlying
such sections (namely, to encourage or require investments in mortgage loans
by thrift institutions and real estate investment trusts) may suggest that
such characterization is appropriate. Counsel to the Depositor will not
deliver any opinion on these questions. Prospective purchasers to which such
characterization of an investment in Grantor Trust Strip Certificates is
material should consult their tax advisors regarding whether the Grantor Trust
Strip Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including
any participation or certificate of beneficial ownership therein) which . . .
[are] principally secured by an interest in real property" within the meaning
of Section 860G(a)(3)(A) of the Code.
<PAGE>101
Taxation of Owners of Grantor Trust Fractional Interest Certificates
General. Holders of a particular series of Grantor Trust Fractional
Interest Certificates generally will be required to report on their federal
income tax returns their shares of the entire income from the Mortgage Loans
(including amounts used to pay reasonable servicing fees and other expenses)
and will be entitled to deduct their shares of any such reasonable servicing
fees and other expenses. Because of stripped interests, market or original
issue discount, or premium, the amount includible in income on account of a
Grantor Trust Fractional Interest Certificate may differ significantly from
the amount distributable thereon representing interest on the Mortgage Loans.
Under Section 67 of the Code. an individual, estate or trust holding a Grantor
Trust Fractional Interest Certificate, directly or through certain pass-
through entities, will be allowed a deduction for such reasonable servicing
fees and expenses only to the extent that the aggregate of such holder's
miscellaneous itemized deductions exceeds two percent of such holder's
adjusted gross income. In addition, Section 68 of the Code provides that the
amount of itemized deductions otherwise allowable for an individual whose
adjusted gross income exceeds a specified amount will be reduced by the lesser
of (i) three percent of the excess of the individual's adjusted gross income
over such amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
reportable by holders of Grantor Trust Fractional Interest Certificates who
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Further, Certificateholders (other than corporations)
subject to the alternative minimum tax may not deduct miscellaneous itemized
deductions in determining their alternative minimum taxable income. Although
it is not entirely clear, it appears that in transactions in which multiple
classes of Grantor Trust Certificates (including Grantor Trust Strip
Certificates) are issued, such fees and expenses should be allocated among the
classes of Grantor Trust Certificates using a method that recognizes that each
such class benefits from the related services. In the absence of statutory or
administrative clarification as to the method to be used, it currently is
intended to base information returns or reports to the IRS and
Certificateholders on a method that allocates such expenses among classes of
Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates
or (ii) the Depositor or any of its affiliates retains (for its own account or
for purposes of resale) a right to receive a specified portion of the interest
payable on a Mortgage Asset. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon.
For purposes of determining what constitutes reasonable servicing fees for
various types of mortgages the IRS has established certain "safe harbors".
The servicing fees paid with respect to the Mortgage Loans for certain series
of Grantor Trust Certificates may be higher than the "safe harbors" and,
accordingly, may not constitute reasonable servicing compensation. The
related Prospectus Supplement will include information regarding servicing
fees paid to a Master Servicer, a Special Servicer, any Sub-Servicer or their
respective affiliates necessary to determine whether the preceding "safe
harbor" rules apply.
If Stripped Bond Rules Apply. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding
de minimis market discount. See " Taxation of Owners of Grantor Trust
Fractional Interest Certificates Market Discount". Under the stripped bond
rules, the holder of a Grantor Trust Fractional Interest Certificate (whether
a cash or accrual method taxpayer) will be required to report interest income
from its Grantor Trust Fractional Interest Certificate for each month in an
amount equal to the income that accrues on such Certificate in that month
calculated under a constant yield method, in accordance with the rules of the
Code relating to original issue discount.
<PAGE>102
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be
the sum of all payments to be made on such Certificate, other than "qualified
stated interest", if any, as well as such Certificate's share of reasonable
servicing fees and other expenses. See " Taxation of Owners of Grantor Trust
Fractional Interest Certificates If Stripped Bond Rules Do Not Apply" for a
definition of "qualified stated interest". In general, the amount of such
income that accrues in any month would equal the product of such holder's
adjusted basis in such Grantor Trust Fractional Interest Certificate at the
beginning of such month (see " Sales of Grantor Trust Certificates") and the
yield of such Grantor Trust Fractional Interest Certificate to such holder.
Such yield would be computed at the rate (compounded based on the regular
interval between payment dates) that, if used to discount the holder's share
of future payments on the Mortgage Loans, would cause the present value of
those future payments to equal the price at which the holder purchased such
Certificate. In computing yield under the stripped bond rules, a
Certificateholder's share of future payments on the Mortgage Loans will not
include any payments made in respect of any spread or any other ownership
interest in the Mortgage Loans retained by the Depositor, a Master Servicer, a
Special Servicer, any Sub-Servicer or their respective affiliates, but will
include such Certificateholder's share of any reasonable servicing fees and
other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to
the prepayment assumption, with respect to certain categories of debt
instruments, and regulations could be adopted applying those provisions to the
Grantor Trust Fractional Interest Certificates. It is unclear whether those
provisions would be applicable to the Grantor Trust Fractional Interest
Certificates or whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain,
if a prepayment assumption is used, whether the assumed prepayment rate would
be determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their own tax advisors
concerning reporting original issue discount in general and, in particular,
whether a prepayment assumption should be used in reporting original issue
discount with respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the Mortgage Loans allocable to
such Certificate, the use of a prepayment assumption generally would not have
any significant effect on the yield used in calculating accruals of interest
income. In the case, however, of a Grantor Trust Fractional Interest
Certificate acquired at a discount or premium (that is, at a price less than
or greater than such principal amount, respectively), the use of a reasonable
prepayment assumption would increase or decrease such yield, and thus
accelerate or decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a discount or a premium generally will recognize ordinary income
or loss equal to the difference between the portion of the prepaid principal
amount of the Mortgage Loan that is allocable to such Certificate and the
portion of the adjusted basis of such Certificate that is allocable to such
Certificateholder's interest in the Mortgage Loan. If a prepayment assumption
is used, it appears that no separate item of income or loss should be
recognized upon a prepayment. Instead, a prepayment should be treated as a
partial payment of the stated redemption price of the Grantor Trust Fractional
Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See " Taxation of Owners of REMIC Regular Certificates Original
Issue Discount". It is unclear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
<PAGE>103
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Stripped Bond Prepayment Assumption") that will be
disclosed in the related Prospectus Supplement and on a constant yield
computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor any other person will make
any representation that the Mortgage Loans will in fact prepay at a rate
conforming to such Stripped Bond Prepayment Assumption or any other rate and
Certificateholders should bear in mind that the use of a representative
initial offering price will mean that such information returns or reports,
even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial Certificateholders of each series who bought
at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are
to be treated as market discount bonds and, accordingly, any purchaser of such
a bond is to account for any discount on the bond as market discount rather
than original issue discount. This treatment only applies, however, if
immediately after the most recent disposition of the bond by a person
stripping one or more coupons from the bond and disposing of the bond or
coupon (i) there is no original issue discount (or only a de minimis amount of
original issue discount) or (ii) the annual stated rate of interest payable on
the original bond is no more than one percentage point lower than the gross
interest rate payable on the original mortgage loan (before subtracting any
servicing fee or any stripped coupon). If interest payable on a Grantor Trust
Fractional Interest Certificate is more than one percentage point lower than
the gross interest rate payable on the Mortgage Loans, the related Prospectus
Supplement will disclose that fact. If the original issue discount or market
discount on a Grantor Trust Fractional Interest Certificate determined under
the stripped bond rules is less than 0.25% of the stated redemption price
multiplied by the weighted average maturity of the Mortgage Loans, then such
original issue discount or market discount will be considered to be de
minimis. Original issue discount or market discount of only a de minimis
amount will be included in income in the same manner as de minimis original
issue discount and market discount described in " If Stripped Bond Rules Do
Not Apply" and " Market Discount".
If Stripped Bond Rules Do Not Apply. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required
to report its share of the interest income on the Mortgage Loans in accordance
with such Certificateholder's normal method of accounting. The original issue
discount rules will apply to a Grantor Trust Fractional Interest Certificate
to the extent it evidences an interest in Mortgage Loans issued with original
issue discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and
their issue price. Under the OID Regulations, the stated redemption price is
equal to the total of all payments to be made on such Mortgage Loan other than
"qualified stated interest". "Qualified stated interest" includes interest
that is unconditionally payable at least annually at a single fixed rate, at a
"qualified floating rate", or at an "objective rate", a combination of a
single fixed rate and one or more "qualified floating rates" or one "qualified
inverse floating rate", or a combination of "qualified floating rates" that
does not operate in a manner that accelerates or defers interest payments on
such Mortgage Loan. In general, the issue price of a Mortgage Loan will be
the amount received by the borrower from the lender under the terms of the
Mortgage Loan, less any "points" paid by the borrower, and the stated
redemption price of a Mortgage Loan will equal its principal amount, unless
the Mortgage Loan provides for an initial below-market rate of interest or the
acceleration or the deferral of interest payments.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which
such rules will be applied with respect to those Mortgage Loans in preparing
information returns to the Certificateholders and the IRS.
<PAGE>104
Notwithstanding the general definition of original issue discount,
original issue discount will be considered to be de minimis if such original
issue discount is less than 0.25% of the stated redemption price multiplied by
the weighted average maturity of the Mortgage Loan. For this purpose, the
weighted average maturity of the Mortgage Loan will be computed as the sum of
the amounts determined, as to each payment included in the stated redemption
price of such Mortgage Loan, by multiplying (i) the number of complete years
(rounding down for partial years) from the issue date until such payment is
expected to be made by (ii) a fraction, the numerator of which is the amount
of the payment and the denominator of which is the stated redemption price of
the Mortgage Loan. Under the OID Regulations, original issue discount of only
a de minimis amount (other than de minimis original issue discount
attributable to a so-called "teaser" rate or initial interest holiday) will be
included in income as each payment of stated principal price is made, based on
the product of the total amount of such de minimis original issue discount and
a fraction, the numerator of which is the amount of each such payment and the
denominator of which is the outstanding stated principal amount of the
Mortgage Loan. The OID Regulations also permit a Certificateholder to elect
to accrue de minimis original issue discount into income currently based on a
constant yield method. See " Market Discount" below.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In
the absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code
may require that a prepayment assumption be made in computing yield with
respect to all mortgage-backed securities. Certificateholders are advised to
consult their own tax advisors concerning whether a prepayment assumption
should be used in reporting original issue discount with respect to Grantor
Trust Fractional Interest Certificates. Certificateholders should refer to
the related Prospectus Supplement with respect to each series to determine
whether and in what manner the original issue discount rules will apply to
Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less
than such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will
also be required to include in gross income such Certificate's daily portions
of any original issue discount with respect to such Mortgage Loans. However,
each such daily portion will be reduced, if the cost of such Grantor Trust
Fractional Interest Certificate to such purchaser is in excess of such
Certificate's allocable portion of the aggregate "adjusted issue prices" of
the Mortgage Loans held in the related Trust Fund, approximately in proportion
to the ratio such excess bears to such Certificate's allocable portion of the
aggregate original issue discount remaining to be accrued on such Mortgage
Loans. The adjusted issue price of a Mortgage Loan on any given day equals
the sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Mortgage Loan at the beginning of the accrual
period that includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day. The
adjusted issue price of a Mortgage Loan at the beginning of any accrual period
will equal the issue price of such Mortgage Loan, increased by the aggregate
amount of original issue discount with respect to such Mortgage Loan that
accrued in prior accrual periods, and reduced by the amount of any payments
made on such Mortgage Loan in prior accrual periods of amounts included in its
stated redemption price.
Unless otherwise provided in the related Prospectus Supplement, the
Trustee or Master Servicer, as applicable, will provide to any holder of a
Grantor Trust Fractional Interest Certificate such information as such holder
may reasonably request from time to time with respect to original issue
discount accruing on Grantor Trust Fractional Interest Certificates. See
" Grantor Trust Reporting" below.
<PAGE>105
Market Discount. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a Certificateholder may be subject to
the market discount rules of Sections 1276 through 1278 of the Code to the
extent an interest in a Mortgage Loan is considered to have been purchased at
a "market discount", that is, in the case of a Mortgage Loan issued without
original issue discount, at a purchase price less than its remaining stated
redemption price (as defined above), or in the case of a Mortgage Loan issued
with original issue discount, at a purchase price less than its adjusted issue
price (as defined above). If market discount is in excess of a de minimis
amount (as described below), the holder generally will be required to include
in income in each month the amount of such discount that has accrued (under
the rules described in the next paragraph) through such month that has not
previously been included in income, but limited, in the case of the portion of
such discount that is allocable to any Mortgage Loan, to the payment of stated
redemption price on such Mortgage Loan that is received by (or, in the case of
accrual basis Certificateholders, due to) the Trust Fund in that month. A
Certificateholder may elect to include market discount in income currently as
it accrues (under a constant yield method based on the yield of the
Certificate to such holder) rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder during or after the
first taxable year to which such election applies. In addition, the OID
Regulations would permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium
in income as interest, based on a constant yield method. If such an election
were made with respect to a Mortgage Loan with market discount, the
Certificateholder would be deemed to have made an election to currently
include market discount in income with respect to all other debt instruments
having market discount that such Certificateholder acquires during the taxable
year of the election and thereafter and, possibly, previously acquired
instruments. Similarly, a Certificateholder that made this election for a
Certificate acquired at a premium would be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See " Taxation of
Owners of REMIC Regular Certificates Premium". Each of these elections to
accrue interest, discount and premium with respect to a Certificate on a
constant yield method or as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury Department to
issue regulations providing for the method for accruing market discount on
debt instruments, the principal of which is payable in more than one
installment. Until such time as regulations are issued by the Treasury
Department, certain rules described in the Committee Report apply. Under
those rules, in each accrual period market discount on the Mortgage Loans
should accrue, at the Certificateholder's option: (i) on the basis of a
constant yield method, (ii) in the case of a Mortgage Loan issued without
original issue discount, in an amount that bears the same ratio to the total
remaining market discount as the stated interest paid in the accrual period
bears to the total stated interest remaining to be paid on the Mortgage Loan
as of the beginning of the accrual period or (iii) in the case of a Mortgage
Loan issued with original issue discount, in an amount that bears the same
ratio to the total remaining market discount as the original issue discount
accrued in the accrual period bears to the total original issue discount
remaining at the beginning of the accrual period. The prepayment assumption,
if any, used in calculating the accrual of original issue discount is to be
used in calculating the accrual of market discount. The effect of using a
prepayment assumption could be to accelerate the reporting of such discount
income. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect such regulations might have
on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount
would be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be
considered to be de minimis if it is less than 0.25% of the stated redemption
price of the Mortgage Loans multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue
<PAGE>106
discount on obligations payable in installments, the OID Regulations refer to
the weighted average maturity of obligations, and it is likely that the same
rule will be applied with respect to market discount, presumably taking into
account the prepayment assumption used, if any. The effect of using a
prepayment assumption could be to accelerate the reporting of such discount
income. If market discount is treated as de minimis under the foregoing rule,
it appears that actual discount would be treated in a manner similar to
original issue discount of a de minimis amount. See " If Stripped Bond Rules
Do Not Apply".
Further, under the rules described in " Taxation of Owners of REMIC
Regular Certificates Market Discount", any discount that is not original issue
discount and exceeds a de minimis amount may require the deferral of interest
expense deductions attributable to accrued market discount not yet includible
in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the Mortgage Loans.
Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to
Mortgage Loans for which an amortization election is not made, should be
allocated among the payments of stated redemption price on the Mortgage Loan
and be allowed as a deduction as such payments are made (or, for a
Certificateholder using the accrual method of accounting, when such payments
of stated redemption price are due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium
is not subject to amortization using a prepayment assumption and a Mortgage
Loan prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a premium should recognize a loss, equal to the
difference between the portion of the prepaid principal amount of the Mortgage
Loan that is allocable to the Certificate and the portion of the adjusted
basis of the Certificate that is allocable to the Mortgage Loan. If a
prepayment assumption is used to amortize such premium, it appears that such a
loss would be unavailable. Instead, if a prepayment assumption is used, a
prepayment should be treated as a partial payment of the stated redemption
price of the Grantor Trust Fractional Interest Certificate and accounted for
under a method similar to that described for taking account of original issue
discount on REMIC Regular Certificates. See " Taxation of Owners of REMIC
Regular Certificates Original Issue Discount". It is unclear whether any
other adjustments would be required to reflect differences between the
prepayment assumption used, if any, and the actual rate of prepayments.
Taxation of Owners of Grantor Trust Strip Certificates. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust
Strip Certificates. Except as described above in " If Stripped Bond Rules
Apply", no regulations or published rulings under Section 1286 of the Code
have been issued and some uncertainty exists as to how it will be applied to
securities such as the Grantor Trust Strip Certificates. Accordingly, holders
of Grantor Trust Strip Certificates should consult their own tax advisors
concerning the method to be used in reporting income or loss with respect to
such Certificates.
The OID Regulations do not apply to "stripped coupons", although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under " Possible Application of Contingent Payment Rules" below and
assumes that the holder of a Grantor Trust Strip Certificate will not own any
Grantor Trust Fractional Interest Certificates.
<PAGE>107
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of
Grantor Trust Strip Certificates would include as interest income in each
month an amount equal to the product of such holder's adjusted basis in such
Grantor Trust Strip Certificate at the beginning of such month and the yield
of such Grantor Trust Strip Certificate to such holder. Such yield would be
calculated based on the price paid for that Grantor Trust Strip Certificate by
its holder and the payments remaining to be made thereon at the time of the
purchase, plus an allocable portion of the servicing fees and expenses to be
paid with respect to the Mortgage Loans. See "-If Stripped Bond Rules Apply"
above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be
made in the amount and rate of accrual of such discount when prepayments do
not conform to such prepayment assumption. Regulations could be adopted
applying those provisions to the Grantor Trust Strip Certificates. It is
unclear whether those provisions would be applicable to the Grantor Trust
Strip Certificates or whether use of a prepayment assumption may be required
or permitted in the absence of such regulations. It is also uncertain, if a
prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Strip Certificate or, with respect to any subsequent holder, at the time
of purchase of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than
if yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Stripped Bond
Prepayment Assumption disclosed in the related Prospectus Supplement and on a
constant yield computed using a representative initial offering price for each
class of Certificates. However, neither the Depositor nor any other person
will make any representation that the Mortgage Loans will in fact prepay at a
rate conforming to the Stripped Bond Prepayment Assumption or at any other
rate and Certificateholders should bear in mind that the use of a
representative initial offering price will mean that such information returns
or reports, even if otherwise. accepted as accurate by the IRS, will, in any
event be accurate only as to the initial Certificateholders of each series who
bought at that price. Prospective purchasers of the Grantor Trust Strip
Certificates should consult their own tax advisors regarding the use of the
Stripped Bond Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Stripped Bond Prepayment Assumption. However, if a Grantor Trust
Strip Certificate is treated as an interest in discrete Mortgage Loans, or if
the Stripped Bond Prepayment Assumption is not used, then when a Mortgage Loan
is prepaid, the holder of a Grantor Trust Strip Certificate should be able to
recognize a loss equal to the portion of the adjusted issue price of the
Grantor Trust Strip Certificate that is allocable to such Mortgage Loan.
Possible Application of Contingent Payment Rules. The coupon stripping
rules' general treatment of stripped coupons is to regard them as newly issued
debt instruments in the hands of each purchaser. To the extent that payments
on the Grantor Trust Strip Certificates would cease if the Mortgage Loans were
prepaid in full, the Grantor Trust Strip Certificates could be considered to
be debt instruments providing for contingent payments. Under the OID
Regulations, debt instruments providing for contingent payments are not
subject to the same rules as debt instruments providing for noncontingent
payments. Final regulations have been promulgated with respect to contingent
payment debt instruments. However, like the OID Regulations, such regulations
do not specifically
<PAGE>108
address securities, such as the Grantor Trust Strip Certificates, that are
subject to the stripped bond rules of Section 1286 of the Code.
Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust
Strip Certificates.
Sales of Grantor Trust Certificates. Any gain or loss, equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange
of a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any
income reported by the seller (including original issue discount and market
discount income) and reduced (but not below zero) by any previously reported
losses, any amortized premium and by any distributions with respect to such
Grantor Trust Certificate. The Code as of the date of this Prospectus
provides a top marginal tax rate of 39.6% for individuals and a maximum
marginal rate for long-term capital gains of individuals of 28%. No such rate
differential exists for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary
income to the extent that the Grantor Trust Certificate is held as part of a
"conversion transaction" within the meaning of Section 1258 of the Code. A
conversion transaction generally is one in which the taxpayer has taken two or
more positions in the same or similar property that reduce or eliminate market
risk, if substantially all of the taxpayer's return is attributable to the
time value of the taxpayer's net investment in such transaction. The amount
of gain realized in a conversion transaction that is recharacterized as
ordinary income generally will not exceed the amount of interest that would
have accrued on the taxpayer's net investment at 120% of the appropriate
"applicable Federal rate" (which rate is computed and published monthly by the
IRS) at the time the taxpayer enters into the conversion transaction, subject
to appropriate reduction for prior inclusion of interest and other ordinary
income items from the transaction. Finally, a taxpayer may elect to have net
capital gain taxed at ordinary income rates rather than capital gains rates in
order to include such net capital gain in total net investment income for that
taxable year, for purposes of the rule that limits the deduction of interest
on indebtedness incurred to purchase or carry property held for investment to
a taxpayer's net investment income.
Grantor Trust Reporting. Unless otherwise provided in the related
Prospectus Supplement, the Trustee or Master Servicer, as applicable, will
furnish to each holder of a Grantor Trust Certificate, with each distribution,
a statement setting forth the amount of such distribution allocable to
principal on the underlying Mortgage Loans and to interest thereon at the
related Pass-Through Rate. In addition, within a reasonable time after the
end of each calendar year, the Trustee or Master Servicer, as applicable, will
furnish to each Certificateholder during such year such customary factual
information as the Depositor or the reporting party deems necessary or
desirable to enable holders of Grantor Trust Certificates to prepare their tax
returns and will furnish comparable information to the IRS as and when
required by law to do so. Because the rules for accruing discount and
amortizing premium with respect to the Grantor Trust Certificates are
uncertain in various respects, there is no assurance the IRS will agree with
the Trustee's or Master Servicer's, as the case may be, information reports of
such items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only
as to the initial Certificateholders that bought their Certificates at the
representative initial offering price used in preparing such reports.
<PAGE>109
Backup Withholding. In general, the rules described in " Taxation of
Owners of REMIC Residual Certificates Backup Withholding with Respect to REMIC
Certificates" will also apply to Grantor Trust Certificates.
Foreign Investor. In general, the discussion with respect to REMIC
Regular Certificates in " Taxation of Owners of REMIC Residual
Certificates Foreign Investors in REMIC Certificates" applies to Grantor Trust
Certificates except that Grantor Trust Certificates will, unless otherwise
disclosed in the related Prospectus Supplement, be eligible for exemption from
United States withholding tax, subject to the conditions described in such
discussion, only to the extent the related Mortgage Loans were originated
after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a Certificateholder's trade or business in the United States, such
Grantor Trust Certificate will not be subject to United States estate taxes in
the estate of a non-resident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences", potential investors should consider the
state and local tax consequences of the acquisition, ownership and disposition
of the Offered Certificates. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Offered
Certificates.
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on employee benefit plans,
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, medical savings accounts, Keogh plans and
collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code (all of which
are hereinafter referred to as "Plans"), and on persons who are fiduciaries
with respect to Plans, in connection with the investment of Plan assets.
Certain employee benefit plans, such as governmental plans (as defined in
ERISA Section 3(32)), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA) are not
subject to ERISA requirements. Accordingly, assets of such plans may be
invested in Offered Certificates without regard to the ERISA considerations
described below, subject to the provisions of other applicable federal and
state law. Any such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, ERISA and the Code prohibit a
broad range of transactions involving assets of a Plan and persons ("Parties-
in-Interest") who have certain specified relationships to the Plan, unless a
statutory or administrative exemption is available. Certain Parties-in-
Interest that participate in a prohibited transaction may be subject to an
excise tax imposed pursuant to Section 4975 of the Code, unless a statutory or
administrative exemption is available. These prohibited transactions
generally are set forth in Section 406 of ERISA and Section 4975 of the Code.
<PAGE>110
Plan Asset Regulations. A Plan's investment in Offered Certificates may
cause the Trust Assets to be deemed Plan assets. Section 2510.3-101 of the
regulations of the United States Department of Labor (the "DOL") provides that
when a Plan acquires an equity interest in an entity, the Plan's assets
include both such equity interest and an undivided interest in each of the
underlying assets of the entity, unless certain exceptions not applicable to
this discussion apply, or unless the equity participation in the entity by
"benefit plan investors" (that is, Plans and certain employee benefit plans
not subject to ERISA) is not "significant". For this purpose, in general,
equity participation in a Trust Fund will be "significant" on any date if,
immediately after the most recent acquisition of any Certificate, 25% or more
of any class of Certificates is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides
investment advice with respect to such assets for a fee, is a fiduciary of the
investing Plan. If the Trust Assets constitute Plan assets, then any party
exercising management or discretionary control regarding those assets, such as
a Master Servicer, a Special Servicer or any Sub-Servicer, may be deemed to be
a Plan "fiduciary" with respect to the investing Plan, and thus subject to the
fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code. In addition, if the Trust Assets constitute Plan assets,
the purchase of Certificates by a Plan, as well as the operation of the Trust
Fund, may constitute or involve a prohibited transaction under ERISA and the
Code.
Prohibited Transaction Exemptions
First Union Corporation ("First Union") has received from the DOL an
individual prohibited transaction exemption (the "Exemption"), which generally
exempts from the application of the prohibited transaction provisions of
Sections 406(a) and (b) and 407(a) of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
mortgage pools and the purchase, sale and holding of mortgage pass-through
certificates underwritten by an Underwriter (as hereinafter defined), provided
that certain conditions set forth in the Exemption application are satisfied.
For purposes of this Section, "ERISA Considerations", the term "Underwriter"
includes (i) First Union, (ii) any person directly or indirectly, through one
or more intermediaries, controlling, controlled by or under common control
with First Union, and (iii) any member of the underwriting syndicate or
selling group of which First Union or a person described in (ii) is a manager
or co-manager with respect to a class of Certificates. See "Method of
Distribution."
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Offered
Certificates to be eligible for exemptive relief under the Exemption:
First, the acquisition of Offered Certificates by a Plan must be on
terms that are at least as favorable to the Plan as they would be in an
arm's-length transaction with an unrelated party.
Second, the Offered Certificates must evidence rights and interests
which are not subordinated to the rights and interests evidenced by other
Certificates of the same trust.
Third, the Offered Certificates at the time of acquisition by the
Plan must be rated in one of the three highest generic rating categories
by Standard & Poor's Corporation ("Standard & Poor's"), Moody's Investors
Service, Inc. ("Moody's"), Duff & Phelps, Inc. ("Duff & Phelps") or Fitch
Investors Service, Inc. ("Fitch").
<PAGE>111
Fourth, the Trustee cannot be an affiliate of any other member of
the "Restricted Group", which consists of any Underwriter, the Depositor,
the Trustee, the Master Servicer, the Special Servicer, any Sub-Servicer,
the provider of any Credit Support and any obligor with respect to
Mortgage Assets (including mortgage loans underlying a CMBS not issued by
FNMA, FHLMC or GNMA) constituting more than 5% of the aggregate
unamortized principal balance of the Mortgage Assets in the related Trust
Fund as of the date of initial issuance of the Certificates.
Fifth, the sum of all payments made to and retained by the
Underwriter(s) must represent not more than reasonable compensation for
underwriting or placing the Certificates; the sum of all payments made to
and retained by the Depositor pursuant to the assignment of the Mortgage
Assets to the related Trust Fund must represent not more than the fair
market value of such obligations; and the sum of all payments made to and
retained by the Master Servicer and any Sub-Servicer must represent not
more than reasonable compensation for such person's services under the
related Pooling Agreement and reimbursement of such person's reasonable
expenses in connection therewith.
Sixth, the investing Plan must be an accredited investor as defined
in Rule 501(a)(1) of Regulation D of the Commission under the Securities
Act.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type
that have been included in other investment pools; (ii) certificates in such
other investment pools must have been rated in one of the three highest
categories of Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least
one year prior to the Plan's acquisition of Certificates; and (iii)
certificates in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to any Plan's
acquisition of Certificates.
It is not clear whether certain Offered Certificates would constitute
"certificates" for purposes of the Exemption, including but not limited to,
(i) Certificates evidencing an interest in Mortgage Loans secured by liens on
real estate projects under construction, (ii) Certificates evidencing an
interest in a Trust Fund including Cash Flow Agreements or (iii) subordinated
Classes of Certificates.
If the general conditions set forth in the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (A) through (D)
of the Code) in connection with (i) the direct or indirect sale, exchange or
transfer of Offered Certificates acquired by a Plan upon issuance from the
Depositor or Underwriter when the Depositor, Underwriter, Master Servicer,
Special Servicer, Sub-Servicer, Trustee, provider of Credit Support, or
obligor with respect to Mortgage Assets is a "Party in Interest" under ERISA
with respect to the investing Plan, (ii) the direct or indirect acquisition or
disposition in the secondary market of Offered Certificates by a Plan and
(iii) the holding of Offered Certificates by a Plan. However, no exemption is
provided from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of
ERISA for the acquisition or holding of a Certificate on behalf of an
"Excluded Plan" by any person who has discretionary authority or renders
investment advice with respect to the assets of such Excluded Plan. For this
purpose, an Excluded Plan is a Plan sponsored by any member of the Restricted
Group.
If certain specific conditions set forth in the Exemption are also
satisfied, the Exemption may provide an exemption from the restrictions
imposed by Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the
Code in connection with (i) the direct or indirect sale, exchange or transfer
of Offered Certificates in the initial issuance of Offered Certificates
between the Depositor or an Underwriter and a Plan (other than an Excluded
Plan) when the person who has discretionary authority or renders investment
advice with respect to the investment of the Plan's assets in such
Certificates is (a)
<PAGE>112
an obligor with respect to 5% or less of the fair market value of the Mortgage
Assets (including mortgage loans underlying a CMBS not issued by FNMA, FHLMC
or GNMA) in the related Trust Fund or (b) an affiliate of such a person, (ii)
the direct or indirect acquisition or disposition in the secondary market of
Offered Certificates by such Plan and (iii) the holding of Offered
Certificates by such Plan.
Further, if certain specific conditions set forth in the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions
imposed by Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed
by Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the
Code, for transactions in connection with the servicing, management and
operation of the Trust Assets. The Depositor expects that the specific
conditions set forth in the Exemption that are required for this purpose will
be satisfied with respect to the Certificates so that the Exemption would
provide an exemption from the restrictions imposed by Sections 406(a) and (b)
of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Section 4975(c) of the Code) for transactions in
connection with the servicing, management and operation of the pools of
Mortgage Assets, provided that the general conditions set forth in the
Exemption are satisfied.
The Exemption also provides an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1) (A) through (D) of the
Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party in Interest with respect to an investing Plan
by virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Offered Certificates.
Before purchasing an Offered Certificate, a fiduciary of a Plan should
itself confirm (i) that the Offered Certificates constitute "certificates" for
purposes of the Exemption and (ii) that the specific and general conditions
and the other requirements set forth in the Exemption would be satisfied. In
addition to making its own determination as to the availability of the
exemptive relief that may be provided in the Exemption the Plan fiduciary
should consider its general fiduciary obligations under ERISA in determining
whether to purchase any Offered Certificates on behalf of a Plan.
The DOL recently issued a Prohibited Transaction Class Exemption 95-60
(the "Class Exemption"), which exempts from the application of the prohibited
transactions provisions of Sections 406(a), 406(b) and 407(a) of ERISA and
Section 4975 of the Code transactions in connection with the servicing,
management and operation of a trust in which an insurance company general
account has an interest as a result of its acquisition of certificates issued
by the trust, provided that certain conditions are satisfied. Insurance
company general accounts are allowed to purchase, in reliance on the Class
Exemption, classes of Certificates that (i) are subordinated to other classes
of Certificates and/or (ii) have not received a rating at the time of the
acquisition in one of the three highest rating categories from Standard &
Poor's, Moody's, Duff & Phelps or Fitch. In addition to the foregoing Class
Exemption, certain insurance company general accounts, which support policies
issued by any insurer on or before December 31, 1998 to or for the benefit of
employee benefit plans, are allowed to purchase Certificates in reliance upon
regulations to be promulgated by the DOL pursuant to Section 1460 of the Small
Business Job Protection Act of 1996. If such policies satisfy the Section
1460 regulations, then the insurer will be deemed in compliance with ERISA's
fiduciary requirements and prohibited transaction rules with respect to those
assets of the insurer's general account which support such policies.
Any fiduciary of a Plan that proposes to cause the Plan to purchase
Offered Certificates should consult with its counsel with respect to the
potential applicability of ERISA and the Code to such investment and the
availability of (and scope of relief provided by) the Exemption or any other
prohibited transaction exemption in connection therewith. The Prospectus
Supplement with respect to a series of Certificates may contain additional
information regarding the application of the Exemption or any other exemption,
with respect to the Certificates offered thereby. In addition, any Plan
fiduciary that proposes to cause a Plan to purchase Stripped Interest
Certificates should consider the federal income tax consequences of such
investment.
<PAGE>113
LEGAL INVESTMENT
The Offered Certificates of any series will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") only if so specified in the related Prospectus Supplement.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and
to what extent the Offered Certificates constitute legal investments for them.
Generally, only classes of Offered Certificates that (i) are rated in one
of the two highest rating categories by one or more Rating Agencies and (ii)
are part of a series evidencing interests in a Trust Fund consisting of loans
directly secured by a first lien on a single parcel of real estate upon which
is located a dwelling or mixed residential and commercial structure, such as
certain multifamily loans, and originated by types of Originators specified in
SMMEA, will be "mortgage related securities" for purposes of SMMEA. "Mortgage
related securities" are legal investments to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute, legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, insurance companies and pension funds created pursuant to or
existing under the laws of the United States or of any state, the authorized
investments of which are subject to state regulation). Under SMMEA, if a
state enacted legislation prior to October 3, 1991 that specifically limits
the legal investment authority of any such entities with respect to "mortgage
related securities", Offered Certificates would constitute legal investments
for entities subject to such legislation only to the extent provided in such
legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as
the applicable federal regulatory authority may prescribe.
Pursuant to final implementing regulations under the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Rielge Act") and the
terms of the Riegle Act, a modification of the definition of "mortgage related
securities" became effective in November 1996 to include among the types of
loans to which such securities may relate loans directly secured by a first
lien on "one or more parcels of real estate upon which is located one or more
commercial structures". The regulations also imposed on national banks
purchasing "mortgage related securities" the requirement that the securities
be fully secured by interests in a pool of loans to numerous obligors. In
addition, the related legislative history of the Riegle Act indicates that
this expanded definition includes multifamily loans secured by more than one
parcel of real estate upon which is located more than one structure. Until
September 23, 2001 any state may enact legislation limiting the extent to
which "commercial mortgage related securities" would constitute legal
investments under that state's laws.
All depository institutions considering an investment in the Offered
Certificates of any series should review the Federal Financial Institutions
Examination Council's Supervisory Policy Statement on the Selection of
Securities Dealers and Unsuitable Investment Practices (to the extent adopted
by their respective regulatory authorities), setting forth, in relevant part,
certain investment practices deemed to be unsuitable for an institution's
investment portfolio, as well as guidelines for investing in certain types of
mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited
<PAGE>114
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not
"interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Certificates or
to purchase Offered Certificates representing more than a specified percentage
of the investor's assets. Investors should consult their own legal advisors
in determining whether and to what extent the Offered Certificates constitute
legal investments for such investors.
METHOD OF DISTRIBUTION
The Offered Certificates offered hereby and by the Prospectus Supplements
hereto will be offered in series. The distribution of the Offered
Certificates may be effected from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of
commitment therefor. The Prospectus Supplement for the Offered Certificates
of each series will, as to each class of such Certificates, set forth the
method of the offering, either the initial public offering price or the method
by which the price at which the Certificates of such class will be sold to the
public can be determined, the amount of any underwriting discounts,
concessions and commissions to underwriters, any discounts or commissions to
be allowed to dealers and the proceeds of the offering to the Depositor.
If so specified in the related Prospectus Supplement, the Offered
Certificates of a series will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting
agreement, by First Union Capital Markets Corp. acting as underwriter with
other underwriters, if any, named therein. Alternatively, the Prospectus
Supplement may specify that Offered Certificates will be distributed by First
Union Capital Markets Corp. acting as agent. If First Union Capital Markets
Corp. acts as agent in the sale of Offered Certificates, First Union Capital
Markets Corp. will receive a selling commission with respect to such Offered
Certificates, depending on market conditions, expressed as a percentage of the
aggregate Certificate Balance or Notional Amount of such Offered Certificates
as of the date of issuance. The exact percentage for each series of
Certificates will be disclosed in the related Prospectus Supplement. To the
extent that First Union Capital Markets Corp. elects to purchase Offered
Certificates as principal, First Union Capital Markets Corp. may realize
losses or profits based upon the difference between its purchase price and the
sales price. The Prospectus Supplement with respect to any Series offered
other than through underwriters will contain information regarding the nature
of such offering and any agreements to be entered into between the Depositor
and purchasers of Offered Certificates of such series.
This Prospectus and related Prospectus Supplements may be used by the
Depositor, First Union Capital Markets Corp., an affiliate of the Depositor,
and any other affiliate of the Depositor when required under the federal
securities laws in connection with offers and sales of Offered Certificates in
furtherance of market-making activities in Offered Certificates. First Union
Capital Markets Corp. or any such other affiliate may act as principal or
agent in such transactions. Such sales will be made at prices related to
prevailing market prices at the time of sale or otherwise.
The Depositor will agree to indemnify First Union Capital Markets Corp.
and any underwriters and their respective controlling persons against certain
civil liabilities, including liabilities under the Securities Act, or will
contribute to payments that any such person may be required to make in respect
thereof.
In the ordinary course of business, First Union Capital Markets Corp. and
the Depositor may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the
Depositor's mortgage loans pending the sale of such mortgage loans or
interests therein, including the Certificates.
<PAGE>115
The Depositor anticipates that the Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the Securities
Act in connection with reoffers and sales by them of Offered Certificates.
Certificateholders should consult with their legal advisors in this regard
prior to any such reoffer or sale.
As to each series of Certificates, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any class of Certificates not offered hereby may be initially retained by the
Depositor, and may be sold by the Depositor at any time to one or more
institutional investors.
Underwriters or agents and their associates may be customers of
(including borrowers from), engage in transactions with, and/or perform
services for the Depositor, its affiliates, and the Trustee in the ordinary
course of business.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series, including
certain federal income tax consequences, will be passed upon for the Depositor
by Willkie Farr & Gallagher, New York, New York and for First Union Capital
Markets Corp. by Kilpatrick Stockton, LLP, Charlotte, North Carolina.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates, and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by at least one Rating Agency.
Ratings on commercial mortgage pass-through certificates address the
likelihood of receipt by the holders thereof of all collections on the
underlying mortgage assets to which such holders are entitled. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying mortgage assets and the credit
quality of the guarantor, if any. Ratings on commercial mortgage pass-through
certificates do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which such prepayments might
differ from those originally anticipated. As a result, Certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
Stripped Interest Certificates in extreme cases might fail to recoup their
initial investments.
There can be no assurance that any rating agency not requested to rate
the Offered Certificates will not nonetheless issue a rating to any or all
Classes thereof and, if so, what such rating or ratings would be. A rating
assigned to any Class of Offered Certificates by a rating agency that has not
been requested by the Depositor to do so may be lower than the rating assigned
thereto by one or more of the Rating Agencies.
<PAGE>116
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently
of any other security rating.
<PAGE>117
INDEX OF PRINCIPAL DEFINITIONS
Page
Accrual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 16, 43
Accrued Certificate Interest . . . . . . . . . . . . . . . . . . . . . . . 43
ADA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
ARM Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Available Distribution Amount . . . . . . . . . . . . . . . . . . . . . . . 42
Bond-type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Book-Entry Certificates . . . . . . . . . . . . . . . . . . . . . . . . 18, 42
Cash Flow Agreement . . . . . . . . . . . . . . . . . . . . . . . . 1, 14, 35
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 10, 51
Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 35
Certificate Balance . . . . . . . . . . . . . . . . . . . . . . . . 3, 15, 44
Certificate Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 49
Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 12, 29
CMBS Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
CMBS Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
CMBS Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
CMBS Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 80
Commercial Properties . . . . . . . . . . . . . . . . . . . . . . . . . 10, 30
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Companion Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 44
Contributions Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Controlled Amortization Class . . . . . . . . . . . . . . . . . . . . . 17, 44
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
CPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Credit Support . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 13, 35
Credit-type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Cut-off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Debt Service Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . 31
Definitive Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Definitive Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Direct Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Distribution Date Statement . . . . . . . . . . . . . . . . . . . . . . . . 46
DOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Due Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Equity Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
<PAGE>118
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 107
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Excess Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
FAMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
FHLMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
First Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
FNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Garn Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
GNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Grantor Trust Certificates . . . . . . . . . . . . . . . . . . . . . . 18, 81
Grantor Trust Fractional Interest Certificates . . . . . . . . . . . . 19, 98
Grantor Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Grantor Trust Strip Certificate . . . . . . . . . . . . . . . . . . . . . . 98
Indirect Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Issue Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
L/C Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 11
Lease Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Lender Liability Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 11
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Lock-out Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 10
Mortgage Asset Seller . . . . . . . . . . . . . . . . . . . . . . . . . 12, 30
Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 30
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 10, 29
Mortgage Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 33
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Multifamily Properties . . . . . . . . . . . . . . . . . . . . . . . . 10, 30
Net Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Nonrecoverable Advance . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Notional Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 43
Offered Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Originator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
PAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 15
Permitted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Pooling Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 50
<PAGE>119
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Prepayment Interest Shortfall . . . . . . . . . . . . . . . . . . . . . . . 36
Prepayment Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Prepayment Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Prohibited Transactions Tax . . . . . . . . . . . . . . . . . . . . . . . . 94
Proposed Mark-to-Market Regulations . . . . . . . . . . . . . . . . . . . . 92
Prospectus Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Rating Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
RCRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Related Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 81
REMIC Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
REMIC Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
REMIC Regular Certificates . . . . . . . . . . . . . . . . . . . . . . 18, 81
REMIC Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
REMIC Residual Certificates . . . . . . . . . . . . . . . . . . . . . . 18, 81
REO Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 47
Riegle Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
RICO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Senior Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 42
Servicing Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
SPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Special Servicer . . . . . . . . . . . . . . . . . . . . . . . . . 3, 10, 57
Stripped Bond Prepayment Assumption . . . . . . . . . . . . . . . . . . . 101
Stripped Interest Certificates . . . . . . . . . . . . . . . . . . . . 14, 42
Stripped Principal Certificates . . . . . . . . . . . . . . . . . . . . 14, 42
Sub-Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Sub-Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Subordinate Certificates . . . . . . . . . . . . . . . . . . . . . . . 14, 42
TAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Temporary Mark-to-Market Regulations . . . . . . . . . . . . . . . . . . . 92
Tiered REMICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Title V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Trust Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 10
UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Warranting Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
<PAGE>120
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>121
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following sets forth the estimated expenses and costs expected to be
incurred in connection with the issuance and distribution of the Certificates
being registered hereby.
Registration Fee . . . . . . . . . . . . . . . . .
$344.83
Rating Agency Fees . . . . . . . . . . . . . . . . *
Printing and Engraving Expenses . . . . . . . . . *
Accounting Fees and Expenses . . . . . . . . . . . *
Legal Fees and Expenses . . . . . . . . . . . . . *
Blue Sky and Legal Investment Fees and Expenses . *
Trustee Fees and Expenses . . . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . . *
Total . . . . . . . . . . . . . . . . . . . . . . $344.83
____________________
*To be provided by amendment.
Item 15. Indemnification of Directors and Officers.
The Pooling and Servicing Agreements will provide that no director,
officer, employee or agent of the Registrant is liable to the Trust Fund or
the Certificateholders, except for any liability which would otherwise be
imposed by reason of misfeasance, bad faith or negligence in the performance
of duties under such Pooling and Servicing Agreements, or by reason of
reckless disregard of such duties. The Pooling and Servicing Agreements will
further provide that, with the exceptions stated above, a director, officer,
employee or agent of the Registrant is entitled to be indemnified and held
harmless by the Trust Fund against any loss, liability or expense incurred in
connection with legal action relating to such Pooling and Servicing Agreements
and related Certificates, other than any loss, liability or expense: (i)
specifically required to be borne thereby pursuant to the terms of such
Pooling and Servicing Agreements, or otherwise incidental to the performance
of obligations and duties thereunder; and (ii) incurred in connection with any
violation of any state or federal securities law.
Sections 55-8-50 through 55-8-58 of the revised North Carolina Business
Corporation Act (the "NCBCA") contain specific provisions relating to
indemnification of directors and officers of North Carolina corporations. In
general, the statute provides that (i) a corporation must indemnify a director
or officer who is wholly successful in his defense of a proceeding to which he
is a party because of his status as such, unless limited by the articles of
incorporation, and (ii) a corporation may indemnify a director or officer if
he is not wholly successful in such defense, if it is determined as provided
in the statute that the director or officer meets a certain standard of
conduct, provided when a director or officer is liable to the corporation, the
corporation may not indemnify him. The statute also permits a director or
officer of a corporation who is a party to a proceeding to apply to the courts
for indemnification, unless the articles of incorporation provide otherwise,
and the court may order indemnification
<PAGE>122
under certain circumstances set forth in the statute. The statute further
provides that a corporation may in its articles of incorporation, by contract
or by resolution provide indemnification in addition to that provided by the
statute, subject to certain conditions set forth in the statute.
The Articles of Incorporation of the Registrant provide that the personal
liability of each director of the corporation is eliminated to the fullest
extent permitted by the provisions of the NCBCA, as presently in effect or as
amended. No amendment, modification or repeal of this provision of the
Articles of Incorporation shall adversely affect any right or protection of a
director that exists at the time of such amendment, modification or repeal.
The Registrant maintains directors and officers liability insurance,
which provides coverage of up to $80,000,000, subject to certain deductible
amounts. In general, the policy insures (i) the Registrant's directors and
certain officers against loss by reason of any of their wrongful acts, and/or
(ii) the Registrant against loss arising from claims against the directors and
officers by reason of their wrongful acts, all subject to the terms and
conditions contained in the policy.
Under agreements which may be entered into by the Registrant, certain
controlling persons, directors and officers of the Registrant may be entitled
to indemnification by underwriters and agents who participate in the
distribution of Certificates covered by the Registration Statement against
certain liabilities, including liabilities under the Securities Act.
Item 16. Exhibits.
Exhibits--
1(a)-- Form of Underwriting Agreement.+
3(a)-- Amended and Restated Articles of Incorporation.+
3(b)-- Amended and Restated By-Laws.+
4(a)-- Form of Pooling and Servicing Agreement.*
5(a)-- Opinion of Willkie Farr & Gallagher with respect to legality.+
5(b)-- Opinion of Senior Vice President and Deputy General Counsel of
First Union National Bank of North Carolina.+
8(a)-- Opinion of Willkie Farr & Gallagher (included with Exhibit
5(a)).+
23(a)-- Consent of Willkie Farr & Gallagher (included as part of
Exhibit 5(a) and Exhibit 8(a)).+
23(b)-- Consent of Senior Vice President and Deputy General Counsel of
First Union National Bank of North Carolina (included
as part of Exhibit 5(b)).
24(a)-- Power of Attorney.+
__________________
* Previously filed.
+ Filed herewith.
Item 17. Undertakings.
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
<PAGE>123
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of the prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in this registration statement;
provided however, that paragraphs (A)(1)(i) and (A)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
B. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
C. The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
D. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
E. The Registrant reasonably believes that the security rating requirement
for the eligibility of this Form S-3 will be met at the time of sale for each
series of Certificates.
<PAGE>124
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Amendment No. 2 to the Registration Statement on Form S-3 (No. 33-
97994) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Charlotte, State of North Carolina, on February 10,
1997.
First Union Commercial Mortgage Securities, Inc.
By: /s/ Brian E. Simpson
Brian E. Simpson
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement on Form S-3 (No. 33-97994) has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE> <CAPTION>
Signature Capacity Date
<S> <C> <C>
/s/ Brian E. Simpson President and Director February 10, 1997
Brian E. Simpson
* Senior Vice President and Treasurer February 10, 1997
James H. Hatch (Chief Financial Officer and Chief
Accounting Officer)
* Director February 10, 1997
Wayne K. Brown
* Director February 10, 1997
Michael H. Greco
</TABLE>
*By: /s/ Brian E. Simpson
Brian E. Simpson
Attorney-in-Fact
<PAGE>125
No dealer, salesperson or other
person has been authorized to give
any information or to make any
representations not contained in
this Prospectus Supplement and the
accompanying Prospectus and, if
given or made, such information or
representation must not be relied
upon as having been authorized by
the Depositor or by the First Union Commercial Mortgage
Underwriter. This Prospectus Securities, Inc.
Supplement and the accompanying (Depositor)
Prospectus do not constitute an
offer to sell, or a solicitation of
an offer to buy, the securities
offered hereby to anyone in any
jurisdiction in which the person
making such offer or solicitation
is not qualified to do so or to
anyone to whom it is unlawful to
make any such offer or $___________
solicitation. Neither the delivery Commercial Mortgage Pass-Through
of this Prospectus Supplement and Certificates
the accompanying Prospectus nor any Series 199[ ]-CMBS-[ ]
sale made hereunder shall, under
any circumstances, create an
implication that information herein
or therein is correct as of anytime
since the date of this Prospectus
Supplement or the accompanying
Prospectus.
TABLE OF CONTENTS PROSPECTUS SUPPLEMENT
Prospectus Supplement
Page
Summary of Prospectus Supplement
. . . . . . . . . . . . . . . S-6
Risk Factors . . . . . . . . S-22
Description of the Mortgage Pool
. . . . . . . . . . . . . . . S-25
Servicing of the Mortgage Loans [ ], 199[ ]
. . . . . . . . . . . . . . . S-40
Description of the Certificates
. . . . . . . . . . . . . . . S-44
Yield and Maturity Considerations
. . . . . . . . . . . . . . . S-55
Use of Proceeds . . . . . . . S-60
Certain Federal Income Tax
Consequences . . . . . . S-60
ERISA Considerations . . . . S-62
Legal Investment . . . . . . S-64
Method of Distribution . . . S-65
Legal Matters . . . . . . . . S-66
Rating . . . . . . . . . . . S-66
Index of Principal Definitions S-67
Annex A . . . . . . . . . . . S-69
Prospectus
Prospectus Supplement . . . . 3
Available Information . . . . 3
Incorporation of Certain
Information by Reference 4
Summary of Prospectus . . . . 10
Risk Factors . . . . . . . . 22
Description of the Trust Funds 29
Yield and Maturity Considerations
. . . . . . . . . . . . . . . 36
The Depositor . . . . . . . . 41
Use of Proceeds . . . . . . . 41
Description of the Certificates
. . . . . . . . . . . . . . . 42
Description of the Pooling
Agreements . . . . . . . . . 50
Description of Credit Support 65
Certain Legal Aspects of Mortgage
Loans and Leases . . . . . . 67
Certain Federal Income Tax
Consequences . . . . . . . . 80
State and Other Tax Consequences
. . . . . . . . . . . . . . . 107
ERISA Considerations . . . . 107
Legal Investment . . . . . . 111
Method of Distribution . . . 112
Legal Matters . . . . . . . . 113
Financial Information . . . . 113
Rating . . . . . . . . . . . 113
Index of Principal Definitions 115
<PAGE>1
PROSPECTUS SUPPLEMENT
(To Prospectus dated ________, 199[ ])
SUBJECT TO COMPLETION, DATED [ ], 199[ ]
$___________
First Union Commercial Mortgage Securities, Inc.
(Depositor)
Commercial Mortgage Pass-Through Certificates
Series 199[ ]-CMBS-[ ]
___________________
The Series 199[ ]-CMBS-[ ] Commercial Mortgage Pass-Through
Certificates (the "Certificates") will consist of [ ] classes
(each, a "Class") of Certificates, [ ] of which Classes (the
Certificates of such Classes, collectively, the "Offered
Certificates") are offered hereby and are designated as the Class [ ]
Certificates, the Class [ ] Certificates, the Class [ ] Certificates
and the Class [ ] Certificates, and [ ] of which Classes (the
Certificates of such Classes, collectively, the "Private
Certificates") are not offered hereby. As and to the extent described
herein, the Private Certificates will be subordinate to the Offered
Certificates; the Class [ ], Class [ ] and Class [ ] Certificates
will be subordinate to the Class [ ] Certificates; the Class [ ] and
Class [ ] Certificates will be subordinate to the Class [ ]
Certificates; and the Class [ ] Certificates will be subordinate to
the Class [ ] Certificates.
___________________
(cover continued on next page)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-22 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE
23 OF THE PROSPECTUS.
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR OR ANY OF ITS
AFFILIATES, INCLUDING WITHOUT LIMITATION FIRST UNION NATIONAL BANK OF
NORTH CAROLINA. A CERTIFICATE IS NOT A DEPOSIT AND NEITHER THE
OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED
BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
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 ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL
___________________
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Initial Certificate % of Initial Pool Initial Pass-
Class Balance Balance Through Rate(1)
</TABLE>
(1) The Pass-Through Rates for the Class [ ], Class [ ], Class [ ] and
Class [ ] Certificates are variable and subject to change as described
herein.
The Offered Certificates will be purchased by
__________________________________________ (in such capacity, the
"Underwriter") from the Depositor and will be offered by the Underwriter from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of
the Offered Certificates, after deducting expenses payable by the Depositor,
will be approximately [ ]% of the initial aggregate Certificate Balance
of the Offered Certificates, plus accrued interest.
The Offered Certificates are offered by the Underwriter subject to prior
sale, withdrawal, cancellation or modifications of the offer without notice,
to receipt and acceptance by the Underwriter and to certain additional
conditions. It is expected that the Class [ ] Certificates will be delivered
in book-entry form through the Same-Day Funds Settlement System of The
Depository Trust Company and that the other Classes of Offered Certificates
will be delivered in definitive form at the offices of the Underwriter at
______________________________________ on or about ___________, 199[ ] (the
"Delivery Date"), against payment therefor in immediately available funds.
___________________
The date of this Prospectus Supplement is _________, 199[ ].
<PAGE>2
(cover continued)
It is a condition to their issuance that the Class [ ] Certificates be
rated not lower than "[ ]" by [ ], that the Class [ ]
Certificates be rated not lower than "[ ]" by [
], that the Class [ ] Certificates be rated not lower than "[ ]" by [
], and that the Class [ ] Certificates be rated not lower
than "[ ]" by [ ]. See "Description of the
Certificates", "Risk Factors The Certificates" and "Rating" herein.
The Certificates (together with the right to receive Prepayment Premiums,
which right is not offered hereby) will represent in the aggregate the entire
beneficial ownership interest in a trust fund (the "Trust Fund"), to be
established by First Union Commercial Mortgage Securities, Inc. (the
"Depositor"), that will consist primarily of a segregated pool (the "Mortgage
Pool") of [first] [junior] priority, multifamily and commercial mortgage loans
(the "Mortgage Loans"). As of ______, 199[ ] (the "Cut-off Date"), the
Mortgage Loans had an aggregate principal balance (the "Initial Pool Balance")
of approximately [$ ], after application of all payments of principal
due on or before such date, whether or not received. [ ] of
the Mortgage Loans (the "Fixed Rate Loans"), which represent [ ]% of the
Initial Pool Balance, bear interest at fixed annualized rates ("Mortgage
Rates"), and [ ] of the Mortgage Loans (the "ARM Loans"), which
represent [ ]% of the Initial Pool Balance, bear interest at Mortgage Rates
that are subject to periodic adjustment. [ ] of the Mortgage
Loans, which represent [ ]% of the Initial Pool Balance, provide for
monthly payments of principal and interest ("Monthly Payments") based on
amortization schedules that are significantly longer than their terms, thereby
leaving substantial principal amounts (each, a "Balloon Payment") due and
payable on their respective maturity dates. The Depositor will acquire the
Mortgage Loans from First Union National Bank of North Carolina (the "Mortgage
Loan Seller"), which originated the Mortgage Loans, and will transfer the
Mortgage Loans, without recourse, to the Trustee in exchange for the
Certificates.
Distributions of interest on and principal of the Certificates will be
made, to the extent of available funds, on the [ ]th day of each month or,
if any such [ ]th day is not a business day, then on the next succeeding
business day, commencing ________, 199[ ] (each, a "Distribution Date"). As
more fully described herein, distributions allocable to interest accrued on
each Class of offered Certificates will be made on each Distribution Date
based on the pass-through rate (the "Pass-Through Rate") then applicable to
such Class and the stated principal amount (the "Certificate Balance") of such
Class outstanding immediately prior to such Distribution Date. The Pass-
Through Rate for each Class of Offered Certificates applicable to the first
Distribution Date is set forth on the previous page. After the initial
Distribution Date, the Pass-Through Rate for each Class of Offered
Certificates will equal from time to time the weighted average of, subject to
certain adjustments described herein, the Net Mortgage Rates on the Mortgage
Loans. The Net Mortgage Rate for any Mortgage Loan will generally equal its
Mortgage Rate, minus [ ] basis points. The initial Certificate Balance
of each Class of Offered Certificates is set forth on the previous page.
Distributions allocable to principal of the Offered Certificates will be made
in the amounts and in accordance with the priorities described herein. Such
distributions will be made sequentially, that is, solely in respect of the
Class [ ] Certificates until they are retired, then in respect of the Class
[ ] Certificates until they are retired, and so on in respect of each of the
other Classes of Certificates with Certificate Balances in alphabetical order
of Class designation. See "Description of the Certificates Distributions"
herein.
The yield to maturity on each Class of Offered Certificates will depend
on, among other things, the rate and timing of principal payments (including
by reason of prepayments, defaults and liquidations) on the Mortgage Loans
that are applied in reduction of the Certificate Balance of such Class, and on
the changes to the Pass-Through Rate thereof as described herein. Any delay
in collection of a Balloon Payment due at the maturity of a Mortgage Loan will
likely extend the weighted average life of the Class or Classes of Offered
Certificates entitled to distributions in respect of principal as of the date
such payment was due. See "Description of the
<PAGE>3
(cover continued)
Certificates Certificate Balances" and " Distributions", "Yield and Maturity
Consideration and "Servicing of the Mortgage Loans Modifications, Waivers and
Amendments" herein, and "Yield and Maturity Considerations" and "Risk
Factors Prepayments; Average Life of Certificates; Yields" in the Prospectus.
As described herein, an election will be made to treat the Trust Fund
(exclusive of the right to any Prepayment Premium collected from any borrower)
as a "real estate mortgage investment conduit" ("REMIC") for income tax
purposes. The Offered Certificates will constitute "regular interests" in the
REMIC. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
The Underwriter intends to make a secondary market in the Offered
Certificates, but has no obligation to do so. There is currently no secondary
market for the Offered Certificates, and there can be no assurance that such a
market will develop or, if it does develop, that it will continue. See "Risk
Factors The Certificates Limited Liquidity" herein.
THE PROSPECTUS THAT ACCOMPANIES THIS PROSPECTUS SUPPLEMENT CONTAINS IMPORTANT
INFORMATION REGARDING THIS OFFERING THAT IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THE PROSPECTUS AND THIS
PROSPECTUS SUPPLEMENT IN FULL TO OBTAIN MATERIAL INFORMATION CONCERNING THE
OFFERED CERTIFICATES. SALES OF THE OFFERED CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THE PROSPECTUS AND THIS
PROSPECTUS SUPPLEMENT.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
UNTIL ________________,199[ ], ALL DEALERS EFFECTING TRANSACTIONS IN THE
OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>4
TABLE OF CONTENTS
SUMMARY OF PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . S-6
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
The Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Limited Liquidity . . . . . . . . . . . . . . . . . . . . . . . S-22
Certain Yield and Maturity Considerations . . . . . . . . . . . S-22
The Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . S-23
Risks of Multifamily and Commercial Lending . . . . . . . . . . S-23
Limited Recourse . . . . . . . . . . . . . . . . . . . . . . . S-23
Environmental Law Considerations . . . . . . . . . . . . . . . S-23
Geographic Concentration . . . . . . . . . . . . . . . . . . . S-24
Concentration of Mortgage Loans and Related Borrowers . . . . . S-24
Balloon Payments . . . . . . . . . . . . . . . . . . . . . . . S-24
Adjustable Rate Loans . . . . . . . . . . . . . . . . . . . . . S-25
Potential Conflict of Interest . . . . . . . . . . . . . . . . S-25
DESCRIPTION OF THE MORTGAGE POOL . . . . . . . . . . . . . . . . . . . . S-25
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Mortgage Loan History . . . . . . . . . . . . . . . . . . . . . . . S-26
Certain Terms and Conditions of the Mortgage Loans . . . . . . . . . S-26
Mortgage Rates; Calculations of Interest . . . . . . . . . . . S-26
Due Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . S-26
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . S-26
Prepayment Provisions . . . . . . . . . . . . . . . . . . . . . S-26
Non-recourse Obligations . . . . . . . . . . . . . . . . . . . S-27
"Due-on-Sale" and "Due-on-Encumbrance" Provisions . . . . . . . S-27
Additional Mortgage Loan Information . . . . . . . . . . . . . . . . S-27
The Mortgage Pool . . . . . . . . . . . . . . . . . . . . . . . S-27
Property Inspections; Environmental Assessments . . . . . . . . S-36
Borrower Concentration . . . . . . . . . . . . . . . . . . . . S-36
Condominium Loans . . . . . . . . . . . . . . . . . . . . . . . S-36
The Mortgage Loan Seller . . . . . . . . . . . . . . . . . . . . . . S-37
Assignment of the Mortgage Loans; Repurchases . . . . . . . . . . . S-37
Representations and Warranties; Repurchases . . . . . . . . . . . . S-38
Changes in Mortgage Pool Characteristics . . . . . . . . . . . . . . S-39
SERVICING OF THE MORTGAGE LOANS . . . . . . . . . . . . . . . . . . . . . S-40
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
The Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . S-41
The Special Servicer . . . . . . . . . . . . . . . . . . . . . . . . S-41
Servicing and Other Compensation and Payment of Expenses . . . . . . S-41
Modifications, Waivers and Amendments . . . . . . . . . . . . . . . S-43
Inspections; Collection of Operating Information . . . . . . . . . . S-44
DESCRIPTION OF THE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . S-44
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
Registration; Denominations . . . . . . . . . . . . . . . . . . . . S-45
Certificate Balances . . . . . . . . . . . . . . . . . . . . . . . . S-45
Pass-Through Rates . . . . . . . . . . . . . . . . . . . . . . . . . S-46
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
<PAGE>5
The Available Distribution Amount . . . . . . . . . . . . . . . S-47
Application of the Available Distribution Amount . . . . . . . S-48
Distributable Certificate Interest . . . . . . . . . . . . . . S-49
Principal Distribution Amount . . . . . . . . . . . . . . . . . S-49
Treatment of REO Properties . . . . . . . . . . . . . . . . . . S-50
Prepayment Premiums . . . . . . . . . . . . . . . . . . . . . . S-51
Subordination; Allocation of Losses and Certain Expenses . . . . . . S-51
P&I Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-52
Reports to Certificateholders; Available Information . . . . . . . . S-53
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . S-54
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-54
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-55
YIELD AND MATURITY CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . S-55
Yield Considerations . . . . . . . . . . . . . . . . . . . . . . . . S-55
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-55
Pass-Through Rates . . . . . . . . . . . . . . . . . . . . . . S-55
Rate and Timing of Principal Payments . . . . . . . . . . . . . S-55
Losses and Shortfalls . . . . . . . . . . . . . . . . . . . . . S-56
Certain Relevant Factors . . . . . . . . . . . . . . . . . . . S-56
Delay in Payment of Distributions . . . . . . . . . . . . . . . S-57
Unpaid Distributable Certificate Interest . . . . . . . . . . . S-57
Weighted Average Life . . . . . . . . . . . . . . . . . . . . . . . S-57
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . S-60
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
LEGAL INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-64
METHOD OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . S-65
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
RATING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-66
INDEX OF PRINCIPAL DEFINITIONS . . . . . . . . . . . . . . . . . . . . . S-67
ANNEX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-69
<PAGE>6
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Certain capitalized terms used in this Summary may
be defined elsewhere in this Prospectus Supplement or in the Prospectus. An
"Index of Principal Definitions" is included at the end of both this
Prospectus Supplement and the Prospectus. Terms that are used but not defined
in this Prospectus Supplement will have the meanings specified in the
Prospectus. All percentages of the Mortgage Loans, or of any specified group
of Mortgage Loans, referred to herein without further description are
approximate percentages by aggregate Cut-off Date Balance. References to
percentages of Mortgaged Properties are references to the percentages of the
Initial Pool Balance represented by the aggregate Cut-off Date Balance of the
related Mortgage Loans.
Title of Certificates ... Commercial Mortgage Pass-Through Certificates,
Series 199[ ] CMBS-[ ] (the "Certificates"), to
be issued, in [ ] classes (each, a "Class") to
be designated as: (i) the Class [ ], Class [ ],
Class [ ] and Class [ ] Certificates
[(collectively, the "REMIC Regular
Certificates")]; and (ii) the Class R
Certificates. Only the Class [ ], Class [ ],
Class [ ] and Class [ ] Certificates
(collectively, the "Offered Certificates") are
offered hereby.
The Class [ ] and Class R Certificates
(collectively, the "Private Certificates") have
not been registered under the Securities Act of
1933, as amended, and are not offered hereby.
Accordingly, information herein regarding the
terms of the Private Certificates is provided
solely because of its potential relevance to a
prospective purchaser of an Offered Certificate.
Depositor . . . . . . . First Union Commercial Mortgage Securities, Inc.,
a North Carolina corporation. The Depositor is a
wholly owned subsidiary of First Union National
Bank of North Carolina, the Mortgage Loan Seller.
Neither the Depositor nor any of its affiliates
has insured or guaranteed the Offered
Certificates. See "The Depositor" in the
Prospectus.
Master Servicer . . . . [ ], a [ ] corporation
and a wholly owned subsidiary of [
]. See "Servicing of the Mortgage Loans The
Master Servicer" and " Servicing and Other
Compensation and Payment of Expenses" herein.
Special Servicer . . . [ ], a [ ] corporation.
See "Servicing of the Mortgage Loans - The
Special Servicer" and " Servicing and Other
Compensation and Payment of Expenses" herein.
Trustee . . . . . . . . [ ], a [
] banking corporation.
Mortgage Loan Seller . First Union National Bank of North Carolina, a
national banking association, which is a
subsidiary of First Union Corporation, a North
Carolina corporation registered as a bank holding
company
<PAGE>7
under the Bank Holding Company Act of 1956, as
amended. See "Description of the Mortgage Pool
The Mortgage Loan Seller" herein.
Cut-off Date . . . . . [ ].
Delivery Date . . . . . On or about [ ].
Registration; Denominations The Class [ ] Certificates will be issued in
book-entry format in denominations of $1,000
principal amount and in integral multiples
thereof. The Class [ ], Class [ ] and Class
[ ] Certificates will be issued in fully
registered, certificated form in denominations
of $100,000 principal amount and in integral
multiples of $1,000 in excess thereof, with one
Certificate of each such Class evidencing an
additional amount equal to the remainder of the
initial Certificate Balance of such Class. See
"Description of the Certificates - Registration;
Denominations" herein and "Description of the
Certificates - Book-Entry Registration and
Definitive Certificates" in the Prospectus.
The Mortgage Pool . . . The Mortgage Pool will consist of [ ] Mortgage
Loans with an aggregate Cut-off Date Balance (the
"Initial Pool Balance") of [$ ].
The Cut-off Date Balances (that is, in each case,
its unpaid principal balance as of the Cut-off
Date, after application of all payments of
principal due on or before such date, whether or
not received) of the Mortgage Loans range from [$
] to [$ ], and the Mortgage Loans have
an average Cut-off Date Balance of [$
]. The Mortgage Loans are not insured or
guaranteed by the United States, any governmental
agency or instrumentality or any private mortgage
insurer. All numerical information provided
herein with respect to the Mortgage Loans is
provided on an approximate basis.
Each Mortgage Loan is secured by a [first]
[junior] mortgage lien on the borrower's fee
simple (or in [ ] cases, leasehold) estate in
a parcel of real property (each, a "Mortgaged
Property") constituting, in the case of [ ]
Mortgaged Properties, Multifamily Properties and
in the case of [ ] Mortgaged Properties,
Commercial Properties. [ ] of the
Mortgaged Properties, or [ ]%, are located in [
]. The remaining Mortgaged Properties
are located in [ ] ([ ] Mortgaged
Properties, or [ ]%), [ ] ([ ] Mortgaged
Properties, or [ ]%), [ ] ([ ]
Mortgaged Properties, or [ ]% and throughout [
] other states. See "Description of the Mortgage
Pool - Additional Mortgage Loan
Information" herein.
[ ] of the Mortgage Loans, or [ ]%
(the "Fixed Rate Loans"), bear interest at
annualized rates ("Mortgage Rates") that remain
fixed for their remaining loan terms. [ ]
of the
<PAGE>8
Mortgage Loans, or [ ]% (the "Step Rate Loans"),
bear interest at Mortgage Rates that, in general,
will increase one to four times over their
remaining loan terms pursuant to a fixed schedule.
The remaining [ ] Mortgage Loans (the "ARM Loans"),
which represent [ ]% of the Initial Pool Balance,
bear interest at Mortgage Rates that adjust
periodically (monthly, semi-annually or every [ ]
years, in response to changes in the [ ] average
cost of funds (the "[ ] Index") of [ ]. See
"Description of the Mortgage Pool - Certain Terms
and Conditions of the Mortgage Loans" herein.
All but [ ] of the Mortgage Loans provide
for Monthly Payments based on amortization
schedules significantly longer than their terms
to maturity. As a result, such Mortgage Loans
("Balloon Loans") will have substantial principal
amounts due and payable (each such amount, a
"Balloon Payment") on their respective maturity
dates, unless prepaid prior thereto. Balloon
Loans generally involve a greater risk of default
than self-amortizing loans because the ability of
a borrower to make a Balloon Payment typically
will depend upon its ability to fully refinance
the loan or to sell the related Mortgaged
Property at a price sufficient to permit the
borrower to make the Balloon Payment. Moreover,
and whether or not losses are ultimately
sustained, any delay in the collection of a
Balloon Payment that would otherwise be
distributable in respect of a Class of Offered
Certificates will likely extend the weighted
average life of such Class. See "Risk
Factors - The Mortgage Loans - Balloon
Payments" herein and "Risk Factors - Balloon
Payments; Borrower Default" in the Prospectus.
[ ] of the Mortgage Loans, or [ ]%,
currently restrict or prohibit voluntary
principal prepayments. Those Mortgage Loans
either (i) permit voluntary principal payments
provided that the prepayment is accompanied by an
additional amount (a "Prepayment Premium") in
excess of the amount prepaid ([ ] Mortgage
Loans, or [ ]%), or (ii) currently prohibit
voluntary prepayments of principal for a period
(a "Lock-out Period") ending on a date (a "Lock-
out Expiration Date") specified in the related
Mortgage Note, and, in general, impose Prepayment
Premiums in connection with prepayments made
thereafter ([ ] Mortgage Loans, or [ ]%). The
remaining Mortgage Loans permit voluntary
prepayments of principal without material
restriction. In general, Prepayment Premiums are
calculated as a percentage of the amount prepaid,
which percentage generally declines, in nearly
all cases to 0%, over the loan term. See
"Description of the Mortgage Pool Certain Terms
and Conditions of the Mortgage Loans" and
" Additional Mortgage Loan Information" herein.
Prepayment Premiums, if collected, will not be
distributed in respect of any Class of
Certificates. See "Description of the
Certificates - Distributions - Prepayment
<PAGE>9
Premiums" herein. However, the ability of the
Master Servicer and the Special Servicer to waive
or modify the terms of any Mortgage Loan relating
to the payment of a Prepayment Premium is limited
as described herein.
As of the Cut-off Date, the Mortgage Loans had
the following additional characteristics (all
weighted averages set forth below being based on
the Cut-off Date Balances of the respective
Mortgage Loans):
(i) Mortgage Rates ranging from [ ]% per
annum to [ ]% per annum, and a
weighted average Mortgage Rate of [
]% per annum;
(ii) remaining terms to scheduled maturity
ranging from [ ] months to [ ]
months, and a weighted average remaining
term to scheduled maturity of [ ]
months;
(iii) remaining amortization terms ranging from [
] months to [ ] months, and a weighted
average remaining amortization term of [
] months; and
(iv) Debt Service Coverage Ratios (calculated as
described under "Description of the
Mortgage Pool Additional Mortgage Loan
Information" herein) ranging from [ ]%
to [ ]%, and a weighted average Debt
Service Coverage Ratio of [ ]%.
For information regarding the loan-to-value
ratios of the Mortgage Loans, see "Description of
the Mortgage Pool Additional Mortgage Loan
Information" and "Risk Factors The Mortgage
Loans Risks of Multifamily and Commercial
Lending" herein.
On or prior to the Delivery Date, the Depositor
will acquire the Mortgage Loans from the Mortgage
Loan Seller pursuant to an agreement between the
Depositor and the Mortgage Loan Seller (the
"Mortgage Loan Purchase Agreement"). In the
Mortgage Loan Purchase Agreement, the Mortgage
Loan Seller will make certain representations and
warranties to the Depositor regarding the
characteristics of the Mortgage Loans and, as
more particularly described herein, will agree to
cure any material breach thereof or, in the
absence of such a cure, to repurchase the
affected Mortgage Loan. In connection with the
assignment of its interests in the Mortgage Loans
to the Trustee, the Depositor will also assign
its rights under the Mortgage Loan Purchase
Agreement insofar as they relate to or arise out
of, the Mortgage Loan Seller's representations
and warranties regarding
<PAGE>10
the Mortgage Loans. See "Description of the
Mortgage Pool Representations and Warranties;
Repurchases" herein.
Description of the The Certificates will be issued pursuant
Certificates to a Pooling and Servicing Agreement, to be
dated as of the Cut- off Date, among the
Depositor, the Master Servicer, the Special
Servicer and the Trustee (the "Pooling and
Servicing Agreement"), and (together with the
right to receive Prepayment Premiums) will
represent in the aggregate the entire
beneficial ownership interest in a trust fund
(the "Trust Fund") consisting of the Mortgage
Pool and certain related assets.
A. Certificate Upon initial issuance, the Class [ ]
Balances Certificates will have a Certificate Balance
of [$ ], which will represent
approximately [ ]% of the Initial Pool
Balance; the Class [ ] Certificates will
have a Certificate Balance of [$ ], which
will represent approximately [ ]% of the
Initial Pool Balance; the Class [ ] Certificates
will have a Certificate Balance of [$ ], which
will represent approximately [ ]% of the Initial
Pool Balance; the Class [ ] Certificates will
have a Certificate Balance of [$
], which will represent approximately [ ]%
of the Initial Pool Balance; and the Class [ ],
Class [ ] and Class [ ] Certificates will have an
aggregate Certificate Balance of [$ ], which
will represent approximately [ ]%
of the Initial Pool Balance. The "Certificate
Balance" of any Class of REMIC Regular
Certificates outstanding at any time represents
the maximum amount that the holders thereof are
entitled to receive as distributions
allocable to principal from the cash flow on the
Mortgage Loans and other assets in the Trust
Fund. As more particularly described herein,
the Certificate Balance of any such Class of
Certificates will be reduced on each Distribution
Date by any distributions of principal actually
made on such Class of Certificates on such
Distribution Date, and further by any losses
on the Mortgage Loans (herein referred to
as "Realized Losses") and certain Trust Fund
expenses (herein referred to as "Additional
Trust Fund Expenses") actually allocated to such
Class of Certificates on such Distribution Date.
The Class R Certificates will not have
a Certificate Balance and will represent the
right to receive certain limited amounts not
otherwise payable as principal of and interest on
the REMIC Regular Certificates. See
"Description of the Certificates - Certificate
Balances" herein.
B. Pass-Through Rates The Pass-Through Rates applicable to the Class [
] Certificates, Class [ ] Certificates, Class
[ ] Certificates and Class [ ]
Certificates for the initial Distribution Date
will equal [ ]%, [ ]%, [ ]%, and [ ]%,
respectively per annum. With respect to any
Distribution Date subsequent to the initial
Distribution Date, the Pass-Through Rate for
each such Class of Offered
<PAGE>11
Certificates will equal the Weighted Average
Net Mortgage Rate for such Distribution Date.
The Pass-Through Rate applicable to each Class of
Private Certificates (other than the Class R
Certificates) for each Distribution Date will
equal the Weighted Average Net Mortgage Rate for
such Distribution Date. The Class R Certificates
will have no specified Pass-Through Rate.
The "Weighted Average Net Mortgage Rate" for each
Distribution Date is the weighted average of the
Net Mortgage Rates for the Mortgage Loans as of
the commencement of the one-month period that
constitutes the "Collection Period" for such
Distribution Date, weighted on the basis of their
respective Stated Principal Balances outstanding
immediately prior to such Distribution Date. The
"Net Mortgage Rate" for each Mortgage Loan will
generally equal the Mortgage Rate in effect for
such Mortgage Loan from time to time, minus [
] basis points; provided that the Net Mortgage
Rate for any Mortgage Loan will not reflect any
adjustments to the Mortgage Rate thereon in
connection with a bankruptcy or similar
proceeding involving the related borrower or a
modification of such Mortgage Rate agreed to by
the Master Servicer and/or the Special Servicer
as described herein under "Servicing of the
Mortgage Loans Modifications, Waivers and
Amendments". A "basis point" is 1/100th of a
percentage point. The "Stated Principal Balance"
of each Mortgage Loan outstanding at any time
represents the principal balance of such Mortgage
Loan ultimately due and payable to the
Certificateholders and will generally be equal to
the Cut-off Date Balance thereof, reduced to not
less than zero) on each Distribution Date by (i)
any payments or other collections (or advances in
lieu thereof) of principal of such Mortgage Loan
that are distributed on the Certificates on such
date and (ii) the principal portion of any
Realized Loss incurred in respect of such
Mortgage Loan during the related Collection
Period. See "Description of the
Certificates Pass-Through Rates" herein.
C. Distributions . Distributions on the Certificates will be made by
the Master Servicer, to the extent of available
funds, on the [ ]th day of each month or, if
any such [ ]th day is not a business day, then
on the next succeeding business day, commencing [
], 199[ ] (each, a "Distribution
Date"), to the holders of the Certificates (the
"Certificateholders") that were holders of record
as of the close of business on the last business
day of the month preceding the month of each such
distribution (each, a "Record Date").
Notwithstanding the above, the final distribution
on any Certificate will be made after due notice
by the Master Servicer of the pendency of such
distribution and only upon presentation and
surrender of such Certificate at the location to
be specified in such notice. The total of all
payments or other collections (or
<PAGE>12
advances in lieu thereof) on or in respect of the
Mortgage Loans (other than Prepayment Premiums)
that are available for distribution to
Certificateholders on any Distribution Date is
herein referred to as the "Available Distribution
Amount" for such date. See "Description of the
Certificates Distributions The Available
Distribution Amount" herein.
On each Distribution Date, for so long as any
Class of Offered Certificates remains
outstanding, the Master Servicer will (except as
otherwise described under "Description of the
Certificates Termination" herein) apply the
Available Distribution Amount for such date for
the following purposes and in the following order
of priority, in each case to the extent of
remaining available funds:
(1) to distributions of interest to the holders
of the Class [ ] Certificates in an amount
equal to all Distributable Certificate
Interest in respect of the Class [ ]
Certificates for such Distribution Date
and, to the extent not previously paid, for
all prior Distribution Dates;
(2) to distributions of principal to the
holders of the Class [ ] Certificates in
an amount (not to exceed the then
outstanding Certificate Balance of such
Class of Certificates) equal to the
Principal Distribution Amount for such
Distribution Date;
(3) to distributions to the holders of the
Class [ ] Certificates to reimburse such
holders for all Realized Losses and
Additional Trust Fund Expenses, if any,
previously allocated to such Class of
Certificates and for which no reimbursement
has previously been received;
(4) to distributions of interest to the holders
of the Class [ ] Certificates in an amount
equal to all Distributable Certificate
Interest in respect of the Class [ ]
Certificates for such Distribution Date
and, to the extent not previously paid, for
all prior Distribution Dates;
(5) if the Class [ ] Certificates have been
retired, to distributions of principal to
the holders of the Class [ ] Certificates
in an amount (not to exceed the then
outstanding Certificate Balance of such
Class of Certificates) equal to the
Principal Distribution Amount for such
Distribution Date, less any portion thereof
distributed in retirement of the Class [ ]
Certificates;
<PAGE>13
(6) to distributions to the holders of the
Class [ ] Certificates to reimburse such
holders for all Realized Losses and
Additional Trust Fund Expenses, if any,
previously allocated to such Class of
Certificates and for which no reimbursement
has previously been received;
(7) to distributions of interest to the holders
of the Class [ ] Certificates in an amount
equal to all Distributable Certificate
Interest in respect of such Class of
Certificates for such Distribution Date
and, to the extent not previously paid, for
all prior Distribution Dates;
(8) if the Class [ ] and Class [ ]
Certificates have been retired, to
distributions of principal to the holders
of the Class [ ] Certificates in an amount
(not to exceed the then outstanding
Certificate Balance of such Class of
Certificates) equal to the Principal
Distribution Amount for such Distribution
Date, less any portion thereof distributed
in retirement of the Class [ ] and/or
Class [ ] Certificates;
(9) to distributions to the holders of the
Class [ ] Certificates to reimburse such
holders for all Realized Losses and
Additional Trust Fund Expenses, if any,
previously allocated to such Class of
Certificates and for which no reimbursement
has previously been received;
(10) to distributions of interest to the holders
of the Class [ ] Certificates in an amount
equal to all Distributable Certificate
Interest in respect of such Class of
Certificates for such Distribution Date
and, to the extent not previously paid, for
all prior Distribution Dates;
(11) if the Class [ ], Class [ ] and Class
[ ] Certificates have been retired, to
distributions of principal to the holders
of the Class D Certificates in an amount
(not to exceed the then outstanding
Certificate Balance of such Class of
Certificates) equal to the Principal
Distribution Amount for such Distribution
Date, less any portion thereof distributed
in retirement of the Class [ ], Class [ ]
and/or Class [ ] Certificates;
(12) to distributions to the holders of the
Class [ ] Certificates to reimburse such
holders for all Realized Losses and
Additional Trust Fund Expenses, if any,
previously allocated to such Class of
Certificates and
<PAGE>14
for which no reimbursement has previously
been received, and
(13) to distributions to the holders of the
respective Classes of Private Certificates
as described herein. See "Description of
the Certificates Distributions
Application of the Available Distribution
Amount" herein.
The "Distributable Certificate Interest" in
respect of any Class of REMIC Regular
Certificates for any Distribution Date will
generally equal 30 days' interest at the
applicable Pass-Through Rate accrued on the
Certificate Balance of such Class of Certificates
outstanding immediately prior to such
Distribution Date, reduced (to not less than
zero) by such Class' allocable share (in each
case, calculated as described herein) of any Net
Aggregate Prepayment Interest Shortfall (as
described below) for such Distribution Date. See
"Servicing of the Mortgage Loans Servicing and
Other Compensation and Payment of Expenses" and
"Description of the Certificates Distributions
Distributable Certificate Interest" herein.
The "Principal Distribution Amount" for any
Distribution Date will generally equal the
aggregate of the following: (a) the aggregate of
the principal portions of all Scheduled Payments
(other than Balloon Payments) and any Assumed
Scheduled Payments due or deemed due on or in
respect of the Mortgage Loans for their
respective Due Dates occurring during the related
Collection Period; (b) the aggregate of all
principal prepayments received on the Mortgage
Loans during the related Collection Period;
(c) with respect to any Mortgage Loan as to which
the related stated maturity date occurred during
or prior to the related Collection Period, any
payment of principal made by or on behalf of the
related Borrower during the related Collection
Period, net of any portion of such payment that
represents a recovery of the principal portion of
any Scheduled Payment (other than a Balloon
Payment) due, or the principal portion of any
Assumed Scheduled Payment deemed due, in respect
of such Mortgage Loan on a Due Date during or
prior to the related Collection Period and not
previously recovered; (d) the aggregate of all
liquidation proceeds and insurance proceeds that
were received on or in respect of Mortgage Loans
during the related Collection Period and that
were identified and applied by the Master
Servicer as recoveries of principal, in each case
net of any portion of such amounts that
represents a recovery of the principal portion of
any Scheduled Payment (other than a Balloon
Payment) due, or of the principal portion of any
Assumed Scheduled Payment deemed due, in respect
of the related Mortgage Loan on a Due Date during
or prior to the related Collection Period and not
previously recovered; and (e) if such
Distribution Date is subsequent to the
<PAGE>15
initial Distribution Date, the excess, if any,
of the Principal Distribution Amount for the
immediately preceding Distribution Date, over
the aggregate distributions of principal made on
the Certificates on such immediately preceding
Distribution Date.
The "Scheduled Payment" due on any Mortgage Loan
on any related Due Date will be the amount of the
Monthly Payment that would have been due thereon
on such date, without regard to any waiver,
modification or amendment of such Mortgage Loan
granted or agreed to by the Master Servicer
and/or Special Servicer or otherwise resulting in
connection with a bankruptcy or similar
proceeding involving the related borrower, and
assuming that each prior Scheduled Payment has
been made in a timely manner. The "Assumed
Scheduled Payment" is an amount deemed due in
respect of any Balloon Loan that is delinquent in
respect of its Balloon Payment beyond the first
Determination Date that follows its stated
maturity date. The Assumed Scheduled Payment
deemed due on any such Balloon Loan on its stated
maturity date and on each successive related Due
Date that it remains or is deemed to remain
outstanding will equal the Scheduled Payment that
would have been due thereon on such date if the
related Balloon Payment had not come due but
rather such Mortgage Loan had continued to
amortize in accordance with such loan's
amortization schedule in effect prior to its
stated maturity date. The "Determination Date"
will be a specified date each month as of which
the Available Distribution Amount and the Master
Servicer's advancing obligation in respect of the
Distribution Date in such month will be
determined. See "Description of the
Certificates Distributions Principal Distri-
bution Amount" herein.
Reimbursements of previously allocated Realized
Losses and Additional Trust Fund Expenses will
not constitute distributions of principal for any
purpose and will not result in an additional
reduction in the Certificate Balance of the Class
of Certificates in respect of which any such
reimbursement is made.
Prepayment Premiums collected during the
Collection Period for any Distribution Date will
not constitute part of the Available Distribution
Amount for such Distribution Date. The right to
receive any such Prepayment Premiums will be
initially retained by the Depositor.
P&I Advances . . . . . Subject to a recoverability determination as
described herein, the Master Servicer will be
required to make advances (each, a "P&I Advance")
with respect to each Distribution Date. A P&I
Advance will be in an amount that is generally
equal to the aggregate of all Scheduled Payments
(other than Balloon Payments) and any Assumed
Scheduled Payments, net of related Servicing
Fees, due or deemed due, as the case may be, on
or in
<PAGE>16
respect of the Mortgage Loans during the related
Collection Period, in each case to the extent
that such amount was not paid by or on behalf
of the related borrower or otherwise collected
as of the close of business on the last day of
the related Collection Period.
As more fully described herein, the Master
Servicer will be entitled to interest on any P&I
Advances made by it and on certain reimbursable
servicing expenses incurred by it. Such interest
will accrue from the date any such P&I Advance is
made or such servicing expense is incurred at a
rate per annum equal to the "prime rate"
published in the "Money Rates" Section of The
Wall Street Journal, as such "prime rate" may
change from time to time (the "Master Servicer
Reimbursement Rate"), and will be paid,
contemporaneously with the reimbursement of such
P&I Advance or servicing expense, out of general
collections on the Mortgage Pool then on deposit
in the Certificate Account. See "Description of
the Certificates P&I Advances" and "Servicing of
the Mortgage Loans Servicing and Other
Compensation and Payment of Expenses" herein and
"Description of the Certificates Advances in
Respect of Delinquencies" and "Description of the
Pooling Agreements Certificate Account" in the
Prospectus.
Compensating Interest To the extent of its servicing
Payments compensation for the related Collection
Period, including Prepayment Interest Excesses
received during such Collection Period, the
Master Servicer is required to make a
non-reimbursable payment (a "Compen- sating
Interest Payment") with respect to each
Distribution Date to cover the aggregate of any
Prepayment Interest Shortfalls incurred
during such Collection Period. A
"Prepayment Interest Shortfall" is a shortfall in
the collection of a full month's interest
(net of related Servicing Fees) on any
Mortgage Loan by reason of a full or
partial principal prepayment made prior to its
Due Date in any Collection Period. A
"Prepayment Interest Excess" is a payment of
interest (net of related Servicing Fees) made
in connection with any full or partial prepayment
of a Mortgage Loan subsequent to its Due Date in
any Collection Period, which payment of interest
is intended to cover the period on and after
such Due Date. The "Net Aggregate Prepayment
Interest Shortfall" for any
Distribution Date will be the amount, if any, by
which (a) the aggregate of any Prepayment
Interest Shortfalls incurred during the related
Collection Period exceeds (b) any Compensating
Interest Payment made by the Master Servicer
with respect to such Distribution Date.
See "Servicing of the Mortgage Loans - Servicing
and Other Compensation and Payment of Expenses"
and "Description of the Certificates -
Distributions - Distributable Certificate
Interest" herein.
<PAGE>17
Subordination; Allocation of
Losses and Certain Expenses The rights of holders of the Class [ ], the
Class [ ], the Class [ ] and the Private
Certificates (collectively, the "Subordinate
Certificates") to receive distributions of
amounts collected or advanced on the Mortgage
Loans will, in each case, be subordinated, to
the extent described herein, to the rights of
holders of the Class [ ] Certificates and to
the rights of the holders of each other such
Class of Subordinate Certificates, if any, with
an earlier alphabetical Class designation. This
subordination is intended to enhance the
likelihood of timely receipt by the holders of
the Class [ ] Certificates of the full amount
of Distributable Certificate Interest payable in
respect of such Classes of Certificates on each
Distribution Date, and the ultimate receipt by
the holders of the Class [ ] Certificates of
principal equal to their entire Certificate
Balance. Similarly, but to decreasing degrees,
this subordination is also intended to enhance
the likelihood of timely receipt by the holders
of the Class [ ], Class [ ] and Class [ ]
Certificates of the full amount of Distributable
Certificate Interest payable in respect of such
Classes of Certificates on each Distribution
Date, and the ultimate receipt by the holders of
the Class [ ], Class [ ] and Class [ ]
Certificates of principal equal to their entire
respective Certificate Balances.
The protection afforded to the holders of the
Class [ ] Certificates by means of the
subordination of the Private Certificates, to the
holders of the Class [ ] Certificates by means
of the subordination of the Class [ ] and the
Private Certificates, to the holders of the Class
[ ] Certificates by means of the subordination
of the Class [ ], the Class [ ] and the Private
Certificates, and to the holders of the Class
[ ] Certificates by means of the subordination
of the Subordinate Certificates, will be
accomplished by the application of the Available
Distribution Amount on each Distribution Date in
the order described above in this Summary under
"Description of the Certificates Distri-butions".
No other form of Credit Support will be available
for the benefit of the holders of the Offered
Certificates.
On each Distribution Date, following all
distributions on the Certificates to be made on
such date, the aggregate of all Realized Losses
and Additional Trust Fund- Expenses, that have
been incurred since the Cut-off Date through the
end of the related Collection Period and have not
previously been allocated as described below will
be allocated to the respective Classes of REMIC
Regular Certificates (in each case in reduction
of its Certificate Balance), in reverse
alphabetical order of their Class designations,
but in the aggregate only to the extent that the
aggregate Certificate Balance of such Classes of
Certificates remaining outstanding after giving
effect to the distributions on
<PAGE>18
such Distribution Date exceeds the aggregate
Stated Principal Balance of the Mortgage Pool
expected to be outstanding immediately
following such Distribution Date. See
"Description of the Certificates Subordination;
Allocation of Losses and Certain Expenses" herein.
Treatment of REO Properties Notwithstanding that a Mortgaged Property may be
acquired on behalf of the Certificateholders
through foreclosure, deed in lieu of foreclosure
or otherwise (upon acquisition, an "REO
Property"), the related Mortgage Loan will be
treated, for purposes of determining
distributions on the Certificates, allocations
of Realized Losses and Additional Trust Fund
Expenses to the Certificates and the amount of
fees payable to the Master Servicer, the Special
Servicer and the Trustee under the Pooling and
Servicing Agreement, as having remained
outstanding until such REO Property is
liquidated. In connection therewith, operating
revenues and other proceeds derived from such
REO Property (exclusive of related operating
costs, including certain reimbursements payable
to the Special Servicer in connection with the
operation and disposition of such REO Property)
will be "applied" by the Master Servicer as
principal, interest and other amounts "due" on
such Mortgage Loan, and the Master Servicer will
make P&I Advances in respect of such Mortgage
Loan, in all cases as if such Mortgage Loan had
remained outstanding.
Optional Termination . . Each of the Depositor and the Master Servicer
will have an option to purchase all of the
Mortgage Loans and REO Properties, and thereby
effect termination of the Trust Fund and early
retirement of the then outstanding Certificates,
on any Distribution Date on which the remaining
aggregate Stated Principal Balance of the
Mortgage Pool is less than [ ]% of the Initial
Pool Balance. See "Description of the
Certificates Termi-nation" herein and in the
Prospectus.
Certain Investment The yield to maturity of an Offered Certificate
Considerations purchased at a discount or premium will be
affected by the rate of prepayments and other
unscheduled collections of principal on or in
respect of the Mortgage Loans and the allocation
thereof to reduce the principal balance of
such Certificate. An investor should consider,
in the case of any such Certificate purchased at a
discount, the risk that a slower than anticipated
rate of prepayments could result in a
lower than anticipated yield and, in the case
of any Offered Certificate purchased at a premium,
the risk that a faster than anticipated rate of
prepayments could result in a lower than
anticipated yield. See "Yield and Maturity
Considerations" herein and in the Prospectus.
In addition, insofar as an investor's initial
investment in any Offered Certificate is returned
in the form of payments of principal thereon,
there can be no assurance that such amounts
<PAGE>19
can be reinvested in comparable alternative
investments with comparable yields. Investors in
the Offered Certificates should consider that a
majority of the Mortgage Loans may be prepaid at
any time, subject, in certain cases, to the
payment of a Prepayment Premium. See "Description
of the Mortgage Pool" herein. Accordingly, the
rate of prepayments on the Mortgage Loans is
likely to be inversely related to the level of
prevailing market interest rates (and, presumably,
to the yields on comparable alternative
investments).
Certain Federal Income Tax
Consequences . . . . . An election will be made to treat the Trust Fund
(exclusive of the right to any Prepayment Premium
collected from any borrower) as a "real estate
mortgage investment conduit" (a "REMIC") for
federal income tax purposes. The assets of the
REMIC will consist of the Mortgage Loans, any REO
Properties acquired on behalf of the
Certificateholders and the Certificate Account
(see "Description of the Pooling
Agreements Certificate Account" in the
Prospectus). For federal income tax purposes,
(a) the Offered Certificates and the Class [
] Certificates will be the "regular
interests" in, and generally will be treated as
debt obligations of, the REMIC, and (b) the Class
R Certificates will be the sole class of
"residual interests" in the REMIC.
The Class [ ] Certificates will not,
and the Class [ ] Certificates will,
be treated as having been issued with original
issue discount for federal income tax reporting
purposes. The prepayment assumption that will be
used for purposes of computing the accrual of
original issue discount, market discount and
premium, if any, for federal income tax purposes
will be equal to a CPR of [ ]%. However, no
representation is made that the Mortgage Loans
will prepay at that rate or at any other rate.
The Offered Certificates will be treated as
"qualifying real property loans" within the
meaning of Section 593(d) of the Code and "real
estate assets" within the meaning of Section
856(c)(5)(A) of the Code. In addition, interest
(including original issue discount) on the
Offered Certificates will be interest described
in Section 856(c)(3)(B) of the Code. However,
the Offered Certificates will generally only be
considered assets described in Section
7701(a)(19)(C) of the Code to the extent that the
Mortgage Loans are secured by residential
property, and accordingly, an investment in the
Offered Certificates may not be suitable for
certain thrift institutions.
For further information regarding the federal
income tax consequences of investing in the
Offered Certificates, see "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
<PAGE>20
ERISA Considerations . . A fiduciary of any employee benefit plan or other
retirement arrangement subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the Code (a
"Plan") should review carefully with its legal
advisors whether the purchase or holding of
Offered Certificates could give rise to a
transaction that is prohibited or is not
otherwise permitted either under ERISA or Section
4975 of the Code or whether there exists any
statutory or administrative exemption applicable
to an investment therein.
First Union Corporation has received from the
U.S. Department of Labor (the "DOL") an
individual Prohibited Transaction Exemption that
generally exempts from the application of certain
of the prohibited transaction provisions of
Sections 406(a) and (b) and 407(a) of ERISA and
the excise taxes imposed on such prohibited
transactions by Section 4975(a) and (b) of the
Code, transactions relating to the purchase, sale
and holding of pass-through certificates under-
written by the Underwriter, provided that certain
conditions are satisfied.
The Prohibited Transaction Exemption generally
applies to the Class [ ] Certificates, but not
the other Classes of Offered Certificates. As a
result, no transfer of a Class [ ], Class [ ]
or Class [ ] Certificate or any interest therein
may be made to a Plan or to any person who is
directly or indirectly purchasing such
Certificate or interest therein on behalf of, as
named fiduciary of, as trustee of, or with assets
of a Plan, unless the prospective transferee (at
its own expense) provides the Certificate
Registrar (as identified herein) with a
certification and an opinion of counsel which
establish to the Certificate Registrar's
satisfaction that such transfer will not result
in a violation of Sections 406 and 407 of ERISA
or Section 4975 of the Code or result in the
imposition of an excise tax under Section 4975 of
the Code. See "ERISA Considerations" herein and
in the Prospectus.
Rating . . . . . . . . It is a condition of their issuance that the
Class [ ] Certificates be rated not lower than
"[ ]" by [ ], that the Class [ ]
Certificates be rated not lower than "[ ]" by
[ ], that the Class [ ] Certificates be rated
not lower than "[ ]" by [ ] and that the
Class [ ] Certificates be rated not lower than
"[ ]" by [ ]. A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time by the assigning rating organization. A
security rating does not address the frequency of
prepayments of Mortgage Loans or the
corresponding effect on yield to investors, See
"Rating" herein and "Risk Factors Limited Nature
of Ratings" in the Prospectus.
<PAGE>21
Legal Investment . . . The Class [ ] and Class [ ] Certificates will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as
they remain rated in one of the two highest
rating categories by one or more nationally
recognized statistical rating organizations, and
as such are legal investments for certain
entities to the extent provided in SMMEA. Such
investments, however, will be subject to general
regulatory considerations governing investment
practices under state and federal law.
Furthermore, certain states have recently enacted
legislation overriding the legal investment
provisions of SMMEA. The Class [ ] Certificates
and the Class [ ] will not constitute "mortgage
related securities" for purposes of SMMEA. As a
result, the appropriate characterization of the
Class [ ] Certificates and the Class [ ]
Certificates under various legal investment
restrictions, and thus and the Class [ ] the
ability of investors subject to these
restrictions to purchase Certificates of those
Classes, may be subject to significant
interpretative uncertainties. In addition, and
without regard to the applicability of SMMEA,
institutions whose investment activities are
subject to review by federal or state regulatory
authorities may be or may become subject to
restrictions on the investment by such
institutions in certain forms of mortgage backed
securities. Investors should consult their own
legal advisors to determine whether and to what
extent the Offered Certificates constitute legal
investments for them. See "Legal Investment"
herein and in the Prospectus.
<PAGE>22
RISK FACTORS
Prospective purchasers should consider, among other things, the following
factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with an investment in the Offered Certificates.
The Certificates
Limited Liquidity. There is currently no secondary market for the
Offered Certificates. While the Underwriter currently intends to make a
secondary market in the Offered Certificates, it is under no obligation to do
so. Accordingly, there can be no assurance that a secondary market for the
Offered Certificates will develop. Moreover, if a secondary market does
develop, there can be no assurance that it will provide holders of Offered
Certificates with liquidity of investment or that it will continue for the
life of the Offered Certificates. The Offered Certificates will not be listed
on any securities exchange.
Certain Yield and Maturity Considerations. The yield on any Offered
Certificate will depend on, among other things, the Pass-Through Rate in
effect from time to time for such Certificate. The Pass-Through Rate
applicable to each Class of Offered Certificates will be [fixed] [variable]
and for any Distribution Date will equal the Weighted Average Net Mortgage
Rate for such date. Accordingly, the yield on each Class of Offered
Certificates will be sensitive to changes in the relative composition of the
Mortgage Pool as a result of scheduled amortization, any voluntary prepayments
and any unscheduled collections of principal as a result of liquidations of
Mortgage Loans. To a lesser degree, that yield will be sensitive to changes
to the Mortgage Rates on the ARM Loans and the Step Rate Loans. See
"Description of the Certificates Pass-Through Rates" herein.
The yield on any Offered Certificate that is purchased at a discount or
premium, will also be affected by the rate and timing of principal payments
applied in reduction of the principal amount of such Certificate, which in
turn will be affected by (i) the rate and timing of principal payments and
collections on the Mortgage Loans, particularly unscheduled payments or
collections in the form of voluntary prepayments of principal or unscheduled
recoveries of principal due to defaults, whether before or after the scheduled
maturity date of the related Mortgage Loans, and (ii) by the order of priority
of distributions of principal in respect of the Certificates. The rate and
timing of unscheduled payments and collections of principal on the Mortgage
Loans is impossible to accurately predict and will be affected by a variety of
factors, including, without limitation, the level of prevailing interest
rates, restrictions on voluntary prepayments contained in the Mortgage Notes,
the availability of mortgage credit and economic, demographic, geographic, tax
and legal factors. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates on the Mortgage Loans, the Mortgage
Loans are likely to prepay at a higher rate than if prevailing rates remain at
or above those Mortgage Rates. As described herein, the Principal
Distribution Amount for each Distribution Date will be distributable entirely
in reduction of the Certificate Balance of the Class [ ] Certificates until
the Certificate Balance thereof is reduced to zero, and will thereafter be
distributable in its entirety to each remaining Class of REMIC Regular
Certificates, sequentially in alphabetical order of Class designation, until
the Certificate Balance of each such Class is, in turn, reduced to zero. See
"Description of the Certificates Distributions Application of the Available
Distribution Amount" herein. Accordingly, the actual rate of principal
payments on the Mortgage Loans may have different effects on the yields of the
respective Classes of Offered Certificates.
The yield on any Offered Certificate also will be affected by the rate
and timing of delinquencies and defaults on the Mortgage Loans, the severity
of ensuing losses and the extent to which such losses and related expenses are
applied in reduction of the principal amount of such Certificate or otherwise
reduce the amount of funds available for distribution to the holder of such
Certificate. As and to the extent described herein, the Private Certificates
are subordinate in right and time of payment to the Offered Certificates and
will bear shortfalls in collections and losses incurred in respect of the
Mortgage Loans prior to the Offered Certificates; and the Class [ ]
<PAGE>23
and Class [ ] Certificates are subordinate in right and time of payment to
the Class [ ] Certificates and will bear shortfalls in collections and losses
incurred in respect of the Mortgage Loans prior to the Class [ ] Certificates
and in reverse alphabetical order of Class designation. Realized Losses and
Additional Trust Fund Expenses will be allocated, as and to the extent
described herein, to the respective Classes of REMIC Regular Certificates, in
reverse alphabetical order of their Class designations. See "Description of
the Mortgage Pool", "Description of the Certificates Distributions" and
" Subordination; Allocation of Losses and Certain Expenses" and "Yield and
Maturity Considerations" herein and "Yield and Maturity Considerations" in the
Prospectus.
The Weighted Average Net Mortgage Rate that will be in effect from time
to time, the timing and amount of principal prepayments and other unscheduled
recoveries of principal, if any, that will be received on the Mortgage Loans,
and the rate and timing of delinquencies and defaults on the Mortgage Loans
and the severity of ensuing losses are all subject to substantial uncertainty.
Accordingly, the actual yield to maturity of an Offered Certificate cannot be
predicted with certainty.
The Mortgage Loans
Risks of Multifamily and Commercial Lending. The Mortgaged Properties
include real estate improved with multifamily dwellings and real estate
improved with commercial properties. Multifamily residential and commercial
lending is generally viewed as exposing a lender to a greater risk of loss
than lending on the security of single family residences. Multifamily
residential and commercial lending typically involves larger loans than single
family lending, and unlike loans made on the security of single family
residences, repayment of loans made on the security of income-producing real
property depends upon the ability of the related real estate project to
generate rental income sufficient to pay operating expenses, to make necessary
repairs and capital improvements and to pay debt service. If the cash flow
from the project is reduced (for example, if occupancy levels decline, if
tenants default or if rental rates fall), the borrower's ability to repay the
loan may be impaired and the resale value of the property may decline.
Successful operation of a multifamily or commercial real estate project
is dependent upon, among other things, economic conditions generally and in
the area of the project, the degree to which the project competes with other
projects in the area, operating costs and the performance of the management
agent. In some cases, that operation may be affected by circumstances outside
the control of the borrower or lender, such as the deterioration of the
surrounding neighborhood, the development of competitive projects, the
imposition of rent control or changes in tax laws. See "Risk Factors Risks
Associated with Mortgage Loans and Mortgaged Properties" in the Prospectus.
[ ] of the Multifamily Properties, or [ ]%, were last
appraised prior to [ ], [and the most recent professional appraisals of [
] Multifamily Properties, or [ ]%, are more than [ ] years old as of the
Cut-off Date. See "Description of the Mortgage Pool Additional Mortgage Loan
Information" herein.
Limited Recourse. The Mortgage Loans are not insured or guaranteed by
any governmental entity, private mortgage insurer or any other person. The
Depositor has not undertaken any evaluation of the significance of the
recourse provisions of any of a number of the Mortgage Loans that provide for
recourse against the related borrower or another person in the event of a
default. Accordingly, investors should consider all of the Mortgage Loans to
be non-recourse loans as to which recourse in the case of default will be
limited to the related Mortgaged Property.
Environmental Law Considerations. Contamination of real property may
give rise to a lien on that property to assure payment of the cost of clean-up
or, in certain circumstances, may result in liability to the lender for that
cost. Such contamination may also reduce the value of a property. A "phase
I" environmental site assessment was performed at each Mortgaged Property,
generally during the [ ] month period prior to the Cut-off Date, and in
<PAGE>24
no case prior to [ ]. In some cases, environmental testing in
addition to the "phase I" assessment was performed. No such assessment or
testing revealed any environmental condition or circumstance that the
Depositor considers material and adverse.
The Pooling and Servicing Agreement requires that the Special Servicer
obtain an environmental site assessment of a Mortgaged Property prior to
acquiring title thereto or assuming its operation. Such requirement
effectively precludes enforcement of the security for the related Mortgage
Note until a satisfactory environmental site assessment is obtained (or until
any required remedial action is thereafter taken), but will decrease the
likelihood that the Trust Fund will become liable for a material adverse
environmental condition at the Mortgaged Property. However, there can be no
assurance that the requirements of the Pooling and Servicing Agreement will
effectively insulate the Trust Fund from potential liability for a materially
adverse environmental condition at any Mortgaged Property. See "Description
of the Pooling Agreements Realization Upon Defaulted Mortgage Loans", "Risk
Factors Environmental Risks" and "Certain Legal Aspects of Mortgage Loans and
Leases Environmental Legislation" in the Prospectus.
Geographic Concentration . [ ] of the Mortgaged
Properties, or [ ]%, are located in [ ]. Significant
concentrations of Mortgaged Properties also exist in [ ]
and [ ]. See Annex A hereto. In general, that concentration
increases the exposure of the Mortgage Pool to any adverse economic or other
developments or acts of nature that may occur in those states or areas. In
recent periods, (along with other regions of the United States)
has experienced a significant downturn in the market value of real estate.
Concentration of Mortgage Loans and Related Borrowers. Several of the
Mortgage Loans have Cut-off Date Balances that are substantially higher than
the [$ ] average Cut-off Date Balance. The [ ] largest Mortgage
Loans, which, in the aggregate, represent approximately [ ]% of the Initial
Pool Balance, have Cut-off Date Balances that range from [$ ] to [$
] and an average Cut-off Date Balance of [$ ]. The [ ]
largest Mortgage Loans have Cut-off Date Balances that represent, in the
aggregate, approximately [ ]% of the Initial Pool Balance. There are also
several groups of Mortgage Loans where the borrowers are commonly-controlled
affiliated entities related through common ownership of partnership interests
and where, in general, the related Mortgaged Properties are commonly managed.
The [ ] largest of those groups, by aggregate Cut-off Date Balance of the
Mortgage Loans, represent [ ]%, and [ ]%, respectively, of the Initial
Pool Balance. See "Description of the Mortgage Pool Additional Mortgage Loan
Information Borrower Concentration" herein.
In general, concentrations in a mortgage pool of loans with larger-than-
average balances can result in losses that are more severe, relative to the
size of the pool, than would be the case if the aggregate balance of the pool
were more evenly distributed. Concentration of borrower representation in a
mortgage pool can also pose increased risks. For instance, Mortgaged
Properties that are owned by a group of related borrowers and are commonly
managed create the risk that property management errors or poor property
management could have a more widespread adverse affect on the Mortgage Pool
than would be the case absent such common management.
Balloon Payments. [ ] of the Mortgage Loans, or [ ]%, do not
fully amortize over their terms to maturity. Thus, each such Mortgage Loan
will have a substantial payment (that is, a Balloon Payment) due at its stated
maturity unless prepaid prior thereto. Loans with Balloon Payments involve a
greater risk to a lender than self-amortizing loans because the ability of a
borrower to make a Balloon Payment typically will depend upon its ability
either to fully refinance the loan or to sell the related mortgaged property
at a price sufficient to permit the borrower to make the Balloon Payment. See
"Risk Factors Balloon Payments; Borrower Default" in the Prospectus.
In order to maximize recoveries on defaulted Mortgage Loans, the Pooling
and Servicing Agreement permits the Special Servicer to extend and modify
Mortgage Loans that are in material default or as to which a
<PAGE>25
payment default (including the failure to make a Balloon Payment) is imminent;
subject, however, to the limitations described under "Servicing of the
Mortgage Loans Modifications, Waivers and Amendments" herein. There can be no
assurance, however, that any such extension or modification will increase the
present value of recoveries in a given case. Any delay in collection of a
Balloon Payment that would otherwise be distributable in respect of a Class of
Offered Certificates, whether such delay is due to borrower default or to
modification of the related Mortgage Loan by the Special Servicer will likely
extend the weighted average life of such Class of Offered Certificates. See
"Yield and Maturity Considerations" herein and in the Prospectus.
Adjustable Rate Loans. [ ] of the Mortgage Loans, or [ ]%, are Step
Rate Loans or ARM Loans. Particularly in the case of the [ ] Step Rate
Loans, which represent [ ]% of the Initial Pool Balance, if the increases to
the Mortgage Rates are not matched by increases in market rents, the related
borrowers may not be able to make the required Monthly Payments, in which case
those borrowers will likely either refinance their loans or default.
Accordingly, the stepped Mortgage Rate feature of those Mortgage Loans, as
well as the adjustable rate feature of the ARM Loans if such feature results
in future increases to the related Mortgage Rates, could result in a rate of
default on those loans that is higher than would be the case if their Mortgage
Rates remain fixed.
Potential Conflict of Interest. The Special Servicer is given
considerable latitude, consistent with the servicing standard described
herein, in determining to liquidate or modify defaulted Mortgage Loans. See
"Servicing of the Mortgage Loans Modifications, Waivers and Amendments"
herein. It is contemplated that the Special Servicer may purchase some or all
of the Certificates of one or more Classes of Private Certificates, and is not
prohibited from purchasing the Certificates of any Class. If the Special
Servicer becomes a Certificateholder, it may, as a result, have interests when
dealing with defaulted Mortgage Loans that are in conflict with those of the
holders of the other Classes of Certificates.
DESCRIPTION OF THE MORTGAGE POOL
General
The Mortgage Pool will consist of [ ] [first] [junior] priority mortgage
loans (the "Mortgage Loans") with an average Cut-off Date Balance of [$
] and an aggregate Cut-off Date Balance (the "Initial Pool Balance") of [$
]. All percentages of the Mortgage Loans, or of any specified group of
Mortgage Loans, referred to herein without further description are approximate
percentages by aggregate Cut-off Date Balance. References to percentages of
Mortgaged Properties are references to the percentages of the Initial Pool
Balance represented by the aggregate Cut-off Date Balance of the related
Mortgage Loans.
Each Mortgage Loan is evidenced by a promissory note (a "Mortgage Note")
and secured by a mortgage, deed of trust, deed to secure debt or other similar
security instrument (a "Mortgage") that creates a [first] [junior] mortgage
lien on a fee simple or, in [ ] cases, leasehold estate in a parcel of real
property (a "Mortgaged Property") improved with one or more multifamily
apartment or commercial buildings.
[ ] of the Mortgaged Properties, or [ ]%, are located in [ ].
The remaining Mortgaged Properties are located in [ ] ([ ] Mortgaged
Properties, or [ ]%), [ ] ([ ] Mortgaged Properties, or [ ]%), [
] ([ ] Mortgaged Properties, or [ ]%) and throughout [ ] other states.
<PAGE>26
Mortgage Loan History
[Description of Mortgage Loan History]
On or before the Delivery Date, the Depositor will acquire the Mortgage
Loans from the Mortgage Loan Seller. See " The Mortgage Loan Seller" herein.
Certain Terms and Conditions of the Mortgage Loans
Mortgage Rates; Calculations of Interest. All of the Mortgage Loans
accrue interest on the basis of a 360-day year consisting of twelve 30-day
months.
[ ] of the Mortgage Loans, or [ ]% (the "Fixed Rate Loans"),
bear interest at fixed annualized mortgage rates (the "Mortgage Rates"). The
Mortgage Rates of the Fixed Rate Loans range from [ ]% to [ ]% per annum,
and the Fixed Rate Loans have a weighted average Mortgage Rate of [ ]% per
annum. [ ] of the Mortgage Loans, or [ ]% (the "Step Rate Loans"),
provide for between one and four future stepped increases to their Mortgage
Rates pursuant to a fixed schedule, except that one of the Step Rate Mortgage
Loans, with a Cut-off Date Balance of $[ ], provides for an
adjustment to its Mortgage Rate at the commencement of each of the last two
years of its loan term to a rate per annum equal to [ ] basis points over
the most recently published [ ] Index. The Mortgage Rates which accrue on
the [ ] remaining Mortgage Loans (the "ARM Loans"), which collectively
represent [ ]% of the Initial Pool Balance, are subject to periodic adjustment
by adding a margin to the value of the [ ] Index in effect a specified number
of days prior to adjustment. See "Description of Certificates Certificate
Balances" and " Distributions Distributable Certificate Interest" herein.
Due Dates. [All] of the Mortgage Loans have Due Dates (that is, dates
upon which Monthly Payments first become due, without regard to grace periods)
that occur on the [ ] day of each month.
Amortization. All but [ ] of the Mortgage Loans provide for monthly
payments of principal based on amortization schedules significantly longer
than the remaining terms of such Mortgage Loans, thereby leaving substantial
principal amounts due and payable (each such payment, a "Balloon Payment") on
their respective maturity dates, unless prepaid prior thereto. See "Risk
Factors The Mortgage Loans Balloon Payments" herein.
Prepayment Provisions. [ ] of the Mortgage Loans, or [ ]%,
currently restrict or prohibit voluntary principal prepayment. Those Mortgage
Loans either (i) permit voluntary principal payments provided that the
prepayment is accompanied by an additional amount (a "Prepayment Premium") in
excess of the amount prepaid ([ ] Mortgage Loans, or [ ]%), or (ii)
currently prohibit voluntary prepayments of principal for a period (a "Lock-
out Period") ending on a date (a "Lock-out Expiration Date") specified in the
related Mortgage Note, and, in general, impose Prepayment Premiums in
connection with prepayments made thereafter ([ ] Mortgage Loans, or [ ]%).
In general, Prepayment Premiums are calculated as a percentage of the amount
prepaid, which percentage generally declines, in nearly all cases to 0%, over
the loan term. In the case of [ ] Mortgage Loans, or [ ]%, Prepayment
Premiums are calculated on the basis of a yield maintenance formula. See
"Description of the Mortgage Pool Additional Mortgage Loan Information"
herein. The remaining Mortgage Loans, or [ ]%, permit voluntary principal
prepayments in whole, and in some cases in part, without material restriction.
Prepayment Premiums collected will not be distributed to the holders of any
Class of Certificates.
Neither the Master Servicer nor the Special Servicer will be permitted to
waive or modify the terms of any Mortgage Loan prohibiting voluntary
prepayments during a Lock-out Period or requiring the payment of a Prepayment
Premium except under the circumstances described in "Servicing of the Mortgage
Loans Modifications, Waivers and Amendments" herein.
<PAGE>27
Non-recourse Obligations. Substantially all of the Mortgage Loans are
non-recourse obligations of the related borrower and, upon such borrower's
default in the payment of any amount due under any such Mortgage Loan, the
Master Servicer or the Special Servicer may look only to the related Mortgaged
Property for satisfaction of the borrower's obligations. In addition, in
those cases where recourse to a borrower or guarantor is purportedly
permitted, the Depositor has not undertaken an evaluation of the financial
condition of any such person, and prospective investors should thus consider
all of the Mortgage Loans to be non-recourse.
"Due-on-Sale" and "Due-on-Encumbrance" Provisions. Most of the Mortgages
contain "due-on-sale" clauses that permit the holder of the Mortgage to
accelerate the maturity of the related Mortgage Loan if the borrower sells or
otherwise transfers the related Mortgaged Property or prohibit the borrower
from doing so without the consent of the holder of the Mortgage. Most of the
Mortgages also contain "due-on-encumbrance" clauses that prohibit or restrict
junior financing of the related Mortgaged Property. The Master Servicer or
the Special Servicer will determine, in a manner consistent with the servicing
standard described herein under "Servicing of the Mortgage Loans General",
whether to exercise any right the holder of any Mortgage may have under any
such clause to accelerate payment of the related Mortgage Loan upon, or to
withhold its consent to, any transfer or further encumbrance of the related
Mortgaged Property.
Additional Mortgage Loan Information
The Mortgage Pool. For a detailed presentation of the characteristics of
the Mortgage Loans and the Mortgaged Properties, on an individual basis, see
Annex A hereto. Certain additional information regarding the Mortgage Loans
is contained herein under " Assignment of the Mortgage Loans; Repurchases" and
" Representations and Warranties; Repurchases", and in the Prospectus under
"Description of the Trust Funds" and "Certain Legal Aspects of Mortgage Loans
and Leases".
Each of the following tables sets forth certain characteristic of the
Mortgage Pool. For purposes of the tables:
(i) References to "Mortgage Rates" are references to Mortgage Rates in
effect as of the Cut-off Date.
(ii) References to "DSCR" are references to "Debt Service Coverage
Ratios". The "Debt Service Coverage Ratio" for any Mortgage Loan is the ratio
of the "199[ ] Net Operating Income" of the related Mortgaged Property to the
aggregate amount of debt service that will be payable under that Mortgage Loan
for the twelve-month period commencing [ ], 199[ ], assuming no adjustments
to the Mortgage Rate of any ARM Loan or Step Rate Loan following the Cut-off
Date. The "199[ ] Net Operating Income" for each Mortgaged Property is the
"net operating income" of such Mortgaged Property as set forth in full
calendar year 199[ ] unaudited operating statements submitted by the related
borrower, adjusted as described below. In general, "net operating income" is
the revenue derived from the use and operation of a Mortgaged Property
(consisting primarily of rental income), less operating expenses (such as
utilities, administrative expenses, repairs and maintenance, management fees
and advertising) and less fixed expenses (such as insurance and real estate
taxes). Net operating income does not reflect interest expenses and non-cash
items such as depreciation and amortization, and generally does not reflect
capital expenditures. In determining 199[ ] Net Operating Income for each
Mortgaged Property, the Depositor made adjustments to the net operating income
reported by the related borrower. In general, those adjustments included (a)
recharacterizing as capital expenditures certain items reported by borrowers
as operating expenses (thus increasing "net operating income") where the
Depositor determined that such recharacterization was appropriate, (b)
assuming a management fee of the greater of [ ]% of rental receipts and the
actual management fee reported by the borrowers, and (c) assuming a repair and
maintenance reserve expense (generally, and in no case less than, $[ ] per
year per unit). The operating statements obtained by the Depositor were in
all cases unaudited, and the Depositor did not verify their accuracy.
<PAGE>28
(iii) References to "Indicative Cut-off Date LTV" are references to
the ratio, expressed as a percentage, of the Cut-off Date Balance of a
Mortgage Loan to the corresponding "Indicative Value" of the related Mortgaged
Property. Because relatively few of the Mortgaged Properties were recently
appraised by independent professional appraisers, the fair market values of
the Mortgaged Properties shown on the most recent appraisals thereof will, in
many cases, be an unreliable indicator of their current market values. (Set
forth on Annex A is the appraised value of each Mortgaged Property shown on
the most recent appraisal thereof and the date of such appraisal.)
Accordingly, the Depositor made estimates of the current value (each, an
"Indicative Value") for each Mortgage Property based on an appraisal technique
commonly referred to as the "direct capitalization method." That method is one
method used by real estate professionals in estimating values in accordance
with the "income capitalization approach" to valuing income producing
properties. It converts an estimate of a single year's income expectancy (or,
in some cases, an average of several year's income expectancies) into an
indication of value by dividing the income estimate by an appropriate rate,
referred to as a "capitalization rate", or by multiplying the income estimate
by an appropriate factor. The lower the "capitalization rate," the higher the
estimate of value.
In determining the Indicative Values of each Mortgaged Property, the
Depositor used the property's 199[ ] Net Operating Income as the single year's
income estimate, and divided it by capitalization rates of [ ]%, [ ]%, [ ]%
and [ ]%. Several national organizations periodically survey real estate
investors for capitalization rate information. The range of capitalization
rates selected by the Depositor was based on reports of certain of those
surveys, conducted within the last year, which generally indicate an average
capitalization range of [ ]% to [ ]% for multifamily apartments. However,
that reported range was based on surveys where the sample of respondents was
not statistically significant, and the responses may not reflect market
experience that can be generalized and applied to the Mortgaged Properties.
The Depositor's estimates of Indicative Values for the Mortgaged
Properties should not be considered a substitute for an appraisal. An
appraisal would have reflected two other approaches to value (that is, the
"cost approach", which in general derives a value indication by estimating the
cost of acquiring a comparable site and constructing comparable improvements,
and the "sales comparison approach", which estimates value based on recent
sales prices of comparable properties). In addition, an appraiser would
generally be expected to select a capitalization rate for each property based
on several factors, including location, tenant quality, property condition,
strength of the local market, anticipated changes in future net income and
recent sales of comparable properties, while the capitalization rates selected
by the Depositor were applied to each Mortgaged Property without consideration
of the unique attributes of that property or its location. Also, an appraiser
might have made adjustments to the net operating income reported by the
borrowers that were not made by the Depositor in determining 199[ ] Net
Operating Income for each property. Accordingly, investors should not place
undue reliance on the Indicative Values estimated by the Depositor or the
Indicative Cut-off Date LTVs derived therefrom. The Depositor makes no
representation that any Indicative Value would approximate either the value
that would be determined in a current appraisal of the related Mortgaged
Property or the amount that would be realized upon a sale.
(iv) References to "Year Built" are references to the year that a
Mortgaged Property was originally constructed, without regard to any
renovations that may have occurred subsequently.
(v) References to "Occupancy Percentage" are references to the ratio
(expressed as a percentage) of (a) the actual rent payable, as disclosed in
the list of tenants furnished by the related borrower as of a specified date,
to (b) gross potential rent (based upon actual leases and asking rental rates
for vacant units, each as disclosed on such list of tenants). The majority of
those lists were reported to be as of a date not earlier than [ ] 199[ ]
and no list was reported to be as of a date earlier than [ ], 199[ ].
The weighted average date of those lists is [ ], 199[ ]. No such list
was audited or otherwise verified for accuracy.
<PAGE>29
(vi) References to "weighted averages" are references to averages
weighted on the basis of the Cut-off Date Balances of the related Mortgage
Loans.
The sum in any column of any of the following tables may not equal the
indicated total due to rounding.
<PAGE>30
MORTGAGE RATES
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
% by
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort.
Number of Date Date Mortgage Term Term
Range Loans Balance Balance Rate (Mo.) (Mo.) DSCR
----- --------- --------- --------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
--------------------------------------------------------------------------------------------------------------------------
Indicative Cut-off Date LTV
----------------------------------------------------------
Loan/ Loan/ Occupancy Year
([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) Unit Sq. Ft. Percentage Built
---------- ---------- ---------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
CUT-OFF DATE BALANCES
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
% by
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort.
Number of Date Date Mortgage Term Term
Range Loans Balance Balance Rate (Mo.) (Mo.) DSCR
----- --------- --------- --------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
--------------------------------------------------------------------------------------------------------------------------
Indicative Cut-off Date LTV
----------------------------------------------------------
Loan/ Loan/ Occupancy Year
([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) Unit Sq. Ft. Percentage Built
---------- ---------- ---------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>31
STATED REMAINING TERMS
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
% by
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort.
Number of Date Date Mortgage Term Term
Range Loans Balance Balance Rate (Mo.) (Mo.) DSCR
----- --------- --------- --------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
--------------------------------------------------------------------------------------------------------------------------
Indicative Cut-off Date LTV
----------------------------------------------------------
Loan/ Loan/ Occupancy Year
([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) Unit Sq. Ft. Percentage Built
---------- ---------- ---------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
DEBT SERVICE COVERAGE RATIOS
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
% by
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort.
Number of Date Date Mortgage Term Term
Range Loans Balance Balance Rate (Mo.) (Mo.) DSCR
----- --------- --------- --------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
--------------------------------------------------------------------------------------------------------------------------
Indicative Cut-off Date LTV
----------------------------------------------------------
Loan/ Loan/ Occupancy Year
([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) Unit Sq. Ft. Percentage Built
---------- ---------- ---------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
The following four tables set forth certain information regarding the
Mortgage Pool presented by the range of Indicative Cut-off Date LTVs of the
Mortgage Loans, with the related Indicative Values estimated utilizing the
specified capitalization rate. As discussed above, the Indicative Values of
the Mortgaged Properties are not necessarily a reliable substitute for fair
market value that would be determined by an independent professional
appraiser, and there can be no assurance that any Indicative Value represents
a fair approximation of the actual fair market value of the related Mortgaged
Property.
INDICATIVE CUT-OFF DATE LTVs ([ ]% CAP RATE)
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
% by
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort.
Number of Date Date Mortgage Term Term
Range Loans Balance Balance Rate (Mo.) (Mo.) DSCR
----- --------- --------- --------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
--------------------------------------------------------------------------------------------------------------------------
Indicative Cut-off Date LTV
----------------------------------------------------------
Loan/ Loan/ Occupancy Year
([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) Unit Sq. Ft. Percentage Built
---------- ---------- ---------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
INDICATIVE CUT-OFF DATE LTVs ([ ]% CAP RATE)
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
% by
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort.
Number of Date Date Mortgage Term Term
Range Loans Balance Balance Rate (Mo.) (Mo.) DSCR
----- --------- --------- --------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
--------------------------------------------------------------------------------------------------------------------------
Indicative Cut-off Date LTV
----------------------------------------------------------
Loan/ Loan/ Occupancy Year
([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) Unit Sq. Ft. Percentage Built
---------- ---------- ---------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>33
INDICATIVE CUT-OFF DATE LTVs ([ ]% CAP RATE)
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
% by
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort.
Number of Date Date Mortgage Term Term
Range Loans Balance Balance Rate (Mo.) (Mo.) DSCR
----- --------- --------- --------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
--------------------------------------------------------------------------------------------------------------------------
Indicative Cut-off Date LTV
----------------------------------------------------------
Loan/ Loan/ Occupancy Year
([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) Unit Sq. Ft. Percentage Built
---------- ---------- ---------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
INDICATIVE CUT-OFF DATE LTVs ([ ]% CAP RATE)
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
% by
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort.
Number of Date Date Mortgage Term Term
Range Loans Balance Balance Rate (Mo.) (Mo.) DSCR
----- --------- --------- --------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
--------------------------------------------------------------------------------------------------------------------------
Indicative Cut-off Date LTV
----------------------------------------------------------
Loan/ Loan/ Occupancy Year
([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) Unit Sq. Ft. Percentage Built
---------- ---------- ---------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>34
OCCUPANCY PERCENTAGES
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
% by
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort.
Number of Date Date Mortgage Term Term
Range Loans Balance Balance Rate (Mo.) (Mo.) DSCR
----- --------- --------- --------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
--------------------------------------------------------------------------------------------------------------------------
Indicative Cut-off Date LTV
----------------------------------------------------------
Loan/ Loan/ Occupancy Year
([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) Unit Sq. Ft. Percentage Built
---------- ---------- ---------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
STATES
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
% by
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort.
Number of Date Date Mortgage Term Term
State Loans Balance Balance Rate (Mo.) (Mo.) DSCR
------ --------- --------- --------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
--------------------------------------------------------------------------------------------------------------------------
Indicative Cut-off Date LTV
----------------------------------------------------------
Loan/ Loan/ Occupancy Year
([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) Unit Sq. Ft. Percentage Built
---------- ---------- ---------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>35
YEARS BUILT
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
% by
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort.
Number of Date Date Mortgage Term Term
Range Loans Balance Balance Rate (Mo.) (Mo.) DSCR
----- --------- --------- --------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
--------------------------------------------------------------------------------------------------------------------------
Indicative Cut-off Date LTV
----------------------------------------------------------
Loan/ Loan/ Occupancy Year
([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) Unit Sq. Ft. Percentage Built
---------- ---------- ---------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
PREPAYMENT RESTRICTIONS
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------
% by
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort.
Prepayment Number of Date Date Mortgage Term Term
Restrictions Loans Balance Balance Rate (Mo.) (Mo.) DSCR
------------ --------- --------- --------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
--------------------------------------------------------------------------------------------------------------------------
Indicative Cut-off Date LTV
----------------------------------------------------------
Loan/ Loan/ Occupancy Year
([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) Unit Sq. Ft. Percentage Built
---------- ---------- ---------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>36
The following table sets forth an analysis of the percentage of the
declining balance of the Mortgage Pool that, on [ ] of each of the years
indicated, will be within a period in which Principal Prepayments are
prohibited (that is, in a Lock-out Period) or in which Principal Prepayments
must be accompanied by the indicated Prepayment Premium. The table was
prepared generally on the basis of the assumptions used in preparing the
tables set forth under "Yield and Maturity Considerations Weighted Average
Life" herein, except that it was assumed in preparing the table that no
Mortgage Loan will be prepaid, voluntarily or involuntarily. Percentages in
the table have been rounded to the nearest whole percentage.
Prepayment Lock-out/Premium Analysis
<TABLE>
<CAPTION>
Percentage of Pool Balance by Prepayment Restriction Assuming No Prepayments
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lock-out/Prepayment Current 12 (mo.) 24 (mo.) 36 (mo.) 48 (mo.) 60 (mo.) 72 (mo.) 84 (mo.) 96 (mo.)
Premium Percentage [ ] -9[ ] [ ] -9[ ] [ ] -9[ ] [ ] -9[ ] [ ] -9[ ] [ ] -9[ ] [ ] -9[ ] [ ] -9[ ] [ ] -9[ ]
</TABLE>
The following table sets forth the respective years in which the Mortgage
Loans are scheduled to mature. Since [ ]% of the Mortgage Loans require
Balloon Payments to be made at maturity, the table provides an indication
(which does not account for any scheduled amortization, prepayments or
liquidations) of the concentration of Balloon Payments that will be due in
those years. See "Risk Factors The Mortgage Loans Balloon Payments" herein.
Years of Scheduled Maturity
<TABLE>
<CAPTION>
Percent by
Number of Aggregate Cut-off Aggregate Cut-off
Year Mortgage Loans Date Balance Date Balance
---- -------------- ----------------- -----------------
<S> <C> <C> <C>
</TABLE>
Property Inspections; Environmental Assessments. All of the Mortgaged
Properties were inspected by or on behalf of the Depositor within the [ ]
period preceding the Cut-off Date to assess, among other things, their general
condition. However, no Mortgaged Property was re-appraised by or on behalf of
the Depositor to assess its current value. A "phase I" environmental site
assessment was performed at each Mortgaged Property, generally during the
[ ] period prior to the Cut-off Date, but in no case prior to [ ],
199[ ]. In some cases, environmental testing in addition to the "phase I"
assessment, was performed. No such environmental assessment or testing
revealed any environmental condition or circumstance that the Depositor
considers material and adverse.
Borrower Concentration. [ ] Mortgaged Properties, or [ ]% (which
represent security for Mortgage Loans with an average Cut-off Date Balance of
$[ ]), are each owned by [ ]. See "Risk Factors The Mortgage
Loans Concentration of Mortgage Loans and Related Borrowers" herein.
Condominium Loans. [ ] of the Mortgage Loans, or [ ]% (the
"Condominium Loans"), are secured by liens on multifamily dwellings consisting
of condominium units. In each case, all or substantially all of the
<PAGE>37
condominium units are owned by the related borrower, which leases the
individual condominium units to tenants. In general, multifamily condominium
projects consist of land improved with one or more multifamily dwellings, but
each condominium dwelling unit is a separate real estate interest. That
interest consists of the fee simple ownership of the dwelling unit and a
tenancy in common with the other condominium unit owners in the common
elements of the property. Accordingly, each condominium unit in a project may
be leased, sold, mortgaged, or refinanced separately. [ ] of the
Condominium Loans, or [ ]% of the Initial Pool Balance, do not permit the
related borrowers to sell individual condominium units, and thus the related
Mortgaged Properties can be expected to operate like typical multifamily
projects. The remaining Condominium Loans, or [ ]% of the Initial Pool
Balance, permit the related borrowers to obtain a release of individual units
from the lien of the related Mortgage (and, accordingly, to sell those units)
upon the partial prepayment of the loan in an amount determined in accordance
with the related Mortgage, but in no case less than [ ]% of the portion of
the loan allocated to the units released. In the case of any such release,
security for the related Mortgage Loan will consist of the remaining
condominium units.
The Mortgage Loan Seller
On or prior to the Delivery Date, the Depositor will acquire the Mortgage
Loans from First Union National Bank of North Carolina (the "Mortgage Loan
Seller"), pursuant to an agreement between the Depositor and the Mortgage Loan
Seller (the "Mortgage Loan Purchase Agreement"). The Mortgage Loan Seller
will acquire the Mortgage Loans as described above under " Mortgage Loan
History".
Assignment of the Mortgage Loans; Repurchases
On or prior to the Delivery Date, the Depositor will transfer the
Mortgage Loans, without recourse, to the Trustee for the benefit of the
Certificateholders. In connection with such transfer, the Depositor will
require the Mortgage Loan Seller to deliver to the Trustee or to a document
custodian appointed by the Trustee (a "Custodian"), among other things, the
following documents with respect to each Mortgage Loan (collectively, as to
each Mortgage Loan, the "Mortgage File"):
(i) the original Mortgage Note, endorsed without recourse to the order of
Trustee or, if accompanied by a lost note affidavit, a certified copy of the
Mortgage Note;
(ii) the original or a copy of the Mortgage, together with originals or
certified copies of any intervening assignments of the Mortgage, in each case
with evidence of recording indicated thereon;
(iii) the original or a copy of any related assignment of leases (if such
item is a document separate from the Mortgage), together with originals or
copies of any intervening assignments of such document, in each case with
evidence of recording indicated thereon;
(iv) an assignment of the Mortgage in favor of the Trustee and in
recordable form;
(v) an assignment of any related assignment of leases (if such item is a
document separate from the Mortgage) in favor of the Trustee and in recordable
form;
(vi) originals or copies of all assumption, modification and substitution
agreements in those instances where the terms or provisions of the Mortgage or
Mortgage Note have been modified or the Mortgage Loan has been assumed; and
<PAGE>38
(vii) the original or copy of the lender's title insurance policy issued
on the date of the origination of such Mortgage Loan.
The Trustee or a Custodian on its behalf will be required to review each
Mortgage File within a specified period following its receipt thereof. If any
of the above-described documents is found during the course of such review to
be missing from any Mortgage File or defective, and in either case such
omission or defect materially and adversely affects the interests of the
Certificateholders, the Mortgage Loan Seller, if it cannot deliver the
document or cure the defect within a period of [ ] days following its receipt
of notice thereof, will be obligated pursuant to the Mortgage Loan Purchase
Agreement (the relevant rights under which will be assigned by the Depositor
to the Trustee) to repurchase the affected Mortgage Loan within such [ ]-day
period at a price (the "Purchase Price") generally equal to the sum of (i) the
unpaid principal balance of such Mortgage Loan, (ii) unpaid and uncapitalized
accrued interest on such Mortgage Loan (calculated at the Mortgage Rate) to
but not including the Due Date in the Collection Period in which the purchase
is to occur, and (iii) certain servicing expenses that are reimbursable to the
Servicer.
The Pooling and Servicing Agreement will require the Master Servicer
promptly (and in any event within [ ] days of the Delivery Date) to cause
each of the assignments described in clauses (iv) and (v) of the second
preceding paragraph to be submitted for recording in the real property records
of the jurisdiction in which the related Mortgaged Property is located. See
"Description of the Pooling Agreements Assignment of Mortgage Assets;
Repurchases" in the Prospectus.
Representations and Warranties; Repurchases
In the Mortgage Loan Purchase Agreement, the Mortgage Loan Seller will
represent and warrant with respect to each Mortgage Loan, as of the Cut-off
Date, or as of such other date specifically provided in the representation and
warranty, among other things, that:
(i) the information set forth in the schedule of Mortgage Loans (which
contains certain of the information set forth in Annex A) is true and correct
in all material respects;
(ii) the Mortgage Loan Seller owns the Mortgage Loan and is transferring
the Mortgage Loan free and clear of any and all liens, pledges, charges or
security interests;
(iii) the proceeds of the Mortgage Loan have been fully disbursed and
there is no requirement for future advances thereunder;
(iv) each of the related Mortgage Note, related Mortgage and other
agreements executed in connection therewith is the legal, valid and binding
obligation of the maker thereof, enforceable in accordance with its terms,
except as such enforcement may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally, and by general principles of equity (regardless of whether
such enforcement is considered in a proceeding, in equity or at law);
(v) the assignment of the related Mortgage to the Trustee on behalf of
the Certificateholders constitutes the legal, valid and binding assignment of
such Mortgage;
(vi) the related Mortgage is a valid and enforceable first or junior, as
the case may be, priority mortgage lien on the related Mortgaged Property,
having priority over all other liens or encumbrances except for (A) the lien
of current real estate taxes and assessments not yet due and payable, (B)
covenants, conditions and restrictions, rights of way, easements and other
matters that are of public record and/or are referred to in the related
lender's
<PAGE>39
title insurance policy, and such other liens set forth in the title report, to
which properties such as the Mortgaged Property are commonly subject and which
do not individually or in the aggregate, materially interfere with the
benefits of the security intended to be provided by the related Mortgage;
(vii) prior to the Cut-off Date, any delinquent taxes that had become due
and owing in respect the related Mortgaged Property were paid, or an escrow of
funds sufficient to cover such payment, had been established;
(viii) no scheduled payment of principal or interest is more than [ ]
days past due;
(ix) there is no proceeding known to the Mortgage Loan Seller to be
pending for the total or partial condemnation of the related Mortgaged
Property, and the Mortgaged Property is free and clear of any damage that
would materially and adversely affect its value as security for the Mortgage
Loan;
(x) the related Mortgaged Property is covered by a lender's title
insurance policy insuring that the related Mortgage is a valid first lien on
such Mortgaged Property, subject only to the exceptions stated therein; and
(xi) the Mortgage Loan Seller has no knowledge of any material and
adverse environmental condition or circumstance affecting any Mortgaged
Property that was not disclosed in the report of the related environmental
assessment described herein.
In the case of a breach of any of the foregoing representations and
warranties that materially and adversely affects the interests of the
Certificateholders, the Mortgage Loan Seller, if it cannot cure such breach
within a period of [ ] days following its receipt of notice thereof, will be
obligated pursuant to the Mortgage Loan Purchase Agreement (the relevant
rights under which will be assigned by the Depositor to the Trustee) to
repurchase the affected Mortgage Loan within such [ ]-day period at the
applicable Purchase Price.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any uncured breach of
the Mortgage Loan Seller's representations and warranties regarding the
Mortgage Loans. The Mortgage Loan Seller will be the sole Warranting Party in
respect of the Mortgage Loans, and neither the Depositor nor any of its other
affiliates will be obligated to repurchase any affected Mortgage Loan in
connection with a breach of the Mortgage Loan Seller's representations and
warranties if the Mortgage Loan Seller defaults on its obligation to do so.
However, the Depositor will not include any Mortgage Loan in the Mortgage Pool
if anything has come to the Depositor's attention that would cause it to
believe that the representations and warranties made by the Mortgage Loan
Seller regarding such Mortgage Loan will not be correct in all material
respects. See "Description of the Pooling Agreements Representations and
Warranties; Repurchases" in the Prospectus.
Changes in Mortgage Pool Characteristics
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued. Prior to the
issuance of the Offered Certificates, a Mortgage Loan may be removed from the
Mortgage Pool if the Depositor deems such removal necessary or appropriate or
if it is prepaid. A limited number of other Mortgage Loans may be included in
the Mortgage Pool prior to the issuance of the Offered Certificates, unless
including such Mortgage Loans would materially alter the characteristics of
the Mortgage Pool as described herein. The Depositor believes that the
information set forth herein will be representative of the characteristics of
the Mortgage Pool as it will be constituted at the time the Offered
Certificates are issued, although the range of Mortgage Rates, maturities and
certain other characteristics of the Mortgage Loans in the Mortgage Pool may
vary.
<PAGE>40
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date
and will be filed, together with the Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. If Mortgage Loans are removed from or
added to the Mortgage Pool as described in the preceding paragraph, such
removal or addition will be noted in the Form 8-K.
SERVICING OF THE MORTGAGE LOANS
General
The Master Servicer and the Special Servicer, either directly or through
sub-servicers, will each be required to service and administer the Mortgage
Loans during the time each is responsible for such servicing and
administration, on behalf of the Trustee and for the benefit of the
Certificateholders, in accordance with applicable law, the terms of the
Pooling and Servicing Agreement, the terms of the respective Mortgage Loans
and, to the extent consistent with the foregoing, in the same manner as would
prudent institutional mortgage lenders and loan servicers servicing mortgage
loans comparable to the Mortgage Loans in the jurisdictions where the
Mortgaged Properties are located, and with a view to the maximization of
timely recovery of principal and interest, but without regard to: (i) any
relationship that either of them or any affiliate of either of them may have
with the related borrower; (ii) the ownership of any Certificate by either of
them or any affiliate of either of them; (iii) the obligation, if any, of
either of them to make P&I Advances and advances to cover certain servicing
expenses; and (iv) their respective rights to receive compensation for their
services under the Pooling and Servicing Agreement or with respect to any
particular transaction.
The Master Servicer initially will be responsible for the servicing and
administration of the entire Mortgage Pool. With respect to any Mortgage Loan
as to which (i) the related Balloon Payment, if any, is [ ] or more days
past due or any other Monthly Payment is [ ] or more days past due, (ii) in
the judgment of the Master Servicer, there has occurred a default under the
Mortgage Loan that materially impairs the value of the related Mortgaged
Property, (iii) the related borrower has entered into or consented to
bankruptcy, appointment of a received or conservator or a similar insolvency
proceeding, or the borrower has become the subject of a decree or order for
such a proceeding which has remained in force undischarged or unstayed for a
period of [ ] or more days, (iv) the Master Servicer has received notice of
the foreclosure or proposed foreclosure of any other lien on the Mortgaged
Property, or (v) in the judgment of the Master Servicer, a default in the
making of a Monthly Payment (including a Balloon Payment) has occurred or is
likely to occur within [ ] days and is likely to remain unremedied for at
least [ ] days; and prior to acceleration of amounts due under the related
Mortgage Note or commencement of, any foreclosure or similar proceedings, the
Master Servicer will transfer its servicing responsibilities to the Special
Servicer, but will continue to receive payments on such Mortgage Loan
(including amounts collected by the Special Servicer), to make certain
calculations with respect to such Mortgage Loan, to make remittances and
prepare certain reports to the Certificateholders with respect to such
Mortgage Loan and to reimburse the Special Servicer for any reimbursable
servicing expenses incurred by the Special Servicer. If the related Mortgaged
Property is acquired in respect of any such Mortgage Loan (upon acquisition,
an "REO Property"), whether through foreclosure, deed-in-lieu of foreclosure
or otherwise, the Special Servicer will continue to be responsible for the
operation and management thereof. The Mortgage Loans serviced by the Special
Servicer are referred to herein as the "Specially Serviced Mortgage Loans"
and, together with any REO Properties, constitute the "Specially Serviced
Trust Fund Assets". The Master Servicer will have no responsibility for the
Special Servicer's performance of its duties under the Pooling and Servicing
Agreement.
<PAGE>41
If any Specially Serviced Mortgage Loan, in accordance with its original
terms or as modified in accordance with the Pooling and Servicing Agreement,
becomes a performing Mortgage Loan for at least [ ] days, the Special
Servicer will return servicing of such Mortgage Loan to the Master Servicer.
Set forth below, following the subsections captioned "The Master
Servicer" and "The Special Servicer", is a description of certain pertinent
provisions of the Pooling and Servicing Agreement relating to the servicing of
the Mortgage Loans. Reference is also made to the Prospectus, in particular
to the section captioned "Description of the Pooling Agreements", for
important additional information regarding the terms and conditions of the
Pooling and Servicing Agreement as they relate to the rights and obligations
of the Master Servicer and the Special Servicer thereunder. In general, the
Special Servicer possesses rights and obligations comparable to those of the
Master Servicer described in the Prospectus under "Description of the Pooling
Agreements Sub-Servicers; " Realization Upon Defaulted Mortgage Loans";
" Evidence as to Compliance"; and " Certain Matters Regarding the Master
Servicer and the Depositor".
The Master Servicer
[ ] will serve as the Master Servicer. [ ] is a [ ]
corporation and a wholly owned subsidiary of [ ] which is [ ]. The
offices of the Master Servicer that will be primarily responsible for
servicing and administering the Mortgage Pool are located at [
]. The Master Servicer currently has a real estate
loan servicing portfolio of approximately $[ ], including over [ ]
income property loans aggregating approximately $[ ].
The information set forth herein concerning the Master Servicer has been
provided by the Master Servicer, and neither the Depositor nor the Underwriter
makes any representation or warranty as to the accuracy or completeness of
such information.
The Special Servicer
[ ] will serve as the Special Servicer. [ ] is a [ ]
corporation and a wholly owned subsidiary of [ ]. Its principal
executive offices are located at [
].
[Description of Special Servicer]
The information set forth herein concerning the Special Servicer has been
provided by the Special Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Master Servicer in respect
of its master servicing activities will be the Master Servicing Fee. The
"Master Servicing Fee" will be payable monthly on a loan-by-loan basis from
amounts received in respect of interest on each Mortgage Loan (including any
Specially Serviced Mortgage Loan), will accrue at a rate equal to [ ]% per
annum, and will be computed on the basis of the same principal amount and for
the same period respecting which any related interest payment on the Mortgage
Loan is computed. As additional servicing compensation, the Master Servicer
will be entitled to retain all assumption fees and late payment charges
collected with respect to the Mortgage Loans that it services and, as and to
the extent described below, will be entitled to retain Prepayment Interest
Excesses collected from borrowers. In addition, the Master
<PAGE>42
Servicer is authorized to invest or direct the investment of funds held in the
Certificate Account in certain short term United States government securities
and other investment grade obligations, and the Master Servicer will be
entitled to retain any interest or other income earned on such funds.
If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Collection Period on a date that is prior to its Due Date in such
Collection Period, the amount of interest (net of related Servicing Fees) that
accrues on the amount of such principal prepayment will be less (such
shortfall, a "Prepayment Interest Shortfall") than the corresponding amount of
interest, accruing on the Certificates. If such a principal prepayment occurs
during any Collection Period after the Due Date for such Mortgage Loan in such
Collection Period, the amount of interest (net of related Servicing Fees) that
accrues on the amount of such principal prepayment will exceed (such excess, a
"Prepayment Interest Excess") the corresponding amount of interest accruing on
the Certificates. Any Prepayment Interest Excesses collected will be paid to
the Master Servicer as additional servicing compensation. However, with
respect to each Distribution Date, the Master Servicer will be required to
deposit into the Certificate Account (such deposit, a "Compensating Interest
Payment"), without any right of reimbursement therefor, an amount equal to the
lesser of (i) its servicing compensation for the related Collection Period,
including any Prepayment Interest Excesses received during such Collection
Period, and (ii) the aggregate of any Prepayment Interest Shortfalls
experienced during such Collection Period. Compensating Interest Payments
will not cover shortfalls in Mortgage Loan interest accruals that result from
any liquidation of a defaulted Mortgage Loan, or of any REO Property acquired
in respect thereof, that occurs during a Collection Period prior to the
related Due Date therein.
As and to the extent described herein under "Description of the
Certificates P&I Advances", the Master Servicer will be entitled to receive
interest on P&I Advances and on reimbursable servicing expenses incurred by it
or reimbursed by it to the Special Servicer, such interest to be paid,
contemporaneously with the reimbursement of the related P&I Advance, if any,
or servicing expense, from general collections on the Mortgage Loans then on
deposit in the Certificate Account.
The principal compensation to be paid to the Special Servicer in respect
of its special servicing activities will be the Special Servicing Fee
(together with the Master Servicing Fee, the "Servicing Fees") and, in
circumstances described herein, Modification Fees and Resolution Fees. As is
the case with the Master Servicing Fee, but only as to Specially Serviced
Mortgage Loans, the "Special Servicing Fee" will be payable monthly on a loan-
by-loan basis from amounts received in respect of interest on each Specially
Serviced Mortgage Loan, will accrue at a rate equal to [ ]% per annum, and
will be computed on the basis of the same principal amount and for the same
period respecting which any related interest payment on the related Specially
Serviced Mortgage Loan is computed. The Special Servicing Fee with respect to
any Specially Serviced Mortgage Loan will cease to accrue if such loan comes
current and the servicing thereof is returned to the Master Servicer
(whereupon it will become a "Corrected Mortgage Loan"). The Special Servicer
will be entitled to a "Modification Fee" with respect to each Corrected
Mortgage Loan (other than a Corrected Mortgage Loan that has previously become
a Corrected Mortgage Loan two or more times) if, during the time the Mortgage
Loan was most recently a Specially Serviced Loan (i) the stated maturity
thereof was extended, (ii) the amount of the Monthly Payment payable with
respect thereto was reduced for a period in excess of 12 consecutive months
following the date it became a Corrected Mortgage Loan, or (iii) any amount
due thereunder was forgiven following the Special Servicer's good faith
negotiations with the related borrower, in any event in connection with and in
furtherance of its becoming a Corrected Mortgage Loan. The Modification Fee
will equal [ ]% (or, if there was solely an extension of the stated maturity
of such Mortgage Loan, [ ]%) of the principal balance of the Mortgage Loan
at the time it became a Corrected Mortgage Loan, less the amount of any
modification fees collected by the Special Servicer from the related borrower.
The Special Servicer will be entitled to a "Resolution Fee" if it liquidates
any Specially Serviced Trust Fund Asset (other than by way of the sale thereof
to the Master Servicer or the Depositor or the purchase thereof by the Special
Servicer). The Resolution Fee will equal [ ]% of the related liquidation
proceeds. Any such Modification Fee or Resolution
<PAGE>43
Fee to which the Special Servicer shall become entitled will be payable to the
Special Servicer from general collections on deposit in the Certificate
Account.
As additional servicing compensation, the Special Servicer will be
entitled to retain all assumption and modification fees, to the extent not
applied to reduce any Modification Fee payable to it, and late payment charges
received on or with respect to the Specially Serviced Mortgage Loans.
Each of the Master Servicer and the Special Servicer generally will be
required to pay all expenses incurred by it in connection with its servicing
activities under the Pooling and Servicing Agreement, including the fees of
any sub-servicers retained by it, and will not be entitled to reimbursement
therefor except as expressly provided in the Pooling and Servicing Agreement,
however, each of the Master Servicer and the Special Servicer will be
permitted to pay certain of such expenses directly out of the Certificate
Account and at times without regard to the relationship between the expense
and the funds from which it is being paid. In addition, the Special Servicer
will be entitled to reimbursement from the Master Servicer for all out-of-
pocket expenses incurred by it in connection with modifying any Specially
Serviced Mortgage Loan or liquidating any Specially Serviced Trust Fund Asset.
See "Description of the Certificates Distributions" herein and "Description of
the Pooling Agreements Certificate Account" and " Servicing Compensation and
Payment of Expenses" in the Prospectus.
Modifications, Waivers and Amendments
The Pooling and Servicing Agreement will permit each of the Master
Servicer and the Special Servicer to modify, waive or amend any term of any
Mortgage Loan if it determines, in accordance with the servicing standard
described herein, that it is appropriate to do so and that such modification,
waiver or amendment will not (i) affect the amount or timing of any scheduled
payments of principal or interest on the Mortgage Loan, (ii) affect the
obligation of the related borrower to pay a Prepayment Premium or permit a
principal prepayment during any applicable Lock-out Period, (iii) except under
limited circumstances, result in a release of the lien of the related Mortgage
on any material portion of the related Mortgaged Property or (iv) in its
judgment, materially impair the security for the Mortgage Loan or reduce the
likelihood of timely payment of amounts due thereon.
The Special Servicer may agree to any otherwise prohibited modification,
waiver or amendment of the terms of a Mortgage Loan, but only if it has
determined that a material default on the Mortgage Loan has occurred or a
payment default is imminent, and that its agreement to such modification,
waiver or amendment is consistent with the servicing standard described
herein. In particular, the Special Servicer may, if it has made the foregoing
determinations, (i) reduce the amounts owing under any Mortgage Loan by
forgiving principal and/or accrued interest, (ii) reduce the amount of the
Monthly Payment on any Mortgage Loan, including by way of a reduction in the
related Mortgage Rate, and/or (iii) forbear in the enforcement of any right
granted under any Mortgage Note or Mortgage. However, the Special Servicer
will not be permitted to extend the date on which any Balloon Payment is
scheduled to be due for a period in excess of [ ] months beyond its scheduled
due date.
The Master Servicer and the Special Servicer will each be required to
notify the Trustee of any modification, waiver or amendment of any term of any
Mortgage Loan, and to deliver to the Trustee or the related Custodian, for
deposit in the related Mortgage File, an original counterpart of the agreement
related to such modification, waiver or amendment, promptly (and in any event
within [ ] business days) following the execution thereof. Copies of each
agreement whereby any such modification, waiver or amendment of any term of
any Mortgage Loan is effected are required to be available for review during
normal business hours at the offices of the Master Servicer. See "Description
of the Certificates Reports to Certificateholders; Available Information"
herein.
<PAGE>44
Inspections; Collection of Operating Information
The Special Servicer will be required to perform a physical inspection of
a Mortgaged Property as soon as practicable after the related Mortgage Loan
becomes a Specially Serviced Mortgage Loan. In addition, the Master Servicer
will be required to inspect each Mortgaged Property at least annually if, in a
given calendar year, the Special Servicer has not already done so. The Master
Servicer and the Special Servicer will each be required to prepare a written
report of each such inspection performed by it that describes the condition of
the Mortgaged Property and that specifies the existence with respect thereto
of any material vacancies, any sale, transfer or abandonment, or any material
change in its condition or value.
With respect to each Mortgage Loan, the Master Servicer or the Special
Servicer, depending on which of them is then obligated to service such
Mortgage Loan, is also required to use reasonable efforts to collect and
review the annual operating statements of the related Mortgaged Property.
Although most of the Mortgages obligate the related borrower to deliver annual
property operating statements, there can be no assurance that any operating
statements required to be delivered will in fact be delivered, nor is the
Master Servicer or the Special Servicer likely to have any practical means of
compelling such delivery in the case of an otherwise performing Mortgage Loan.
Copies of the inspection reports and operating statements referred to
above are required to be available for review by Certificateholders during
normal business hours at the offices of the Master Servicer. See "Description
of the Certificates Reports to Certificateholders; Available Information"
herein.
DESCRIPTION OF THE CERTIFICATES
General
The Depositor's Commercial Mortgage Pass-Through Certificates, Series
199[ ]-CMBS-[ ] (the "Certificates") will be issued pursuant to a Pooling and
Servicing Agreement, to be dated as of the Cut-off Date, among the Depositor,
the Master Servicer, the Special Servicer and the Trustee (the "Pooling and
Servicing Agreement"). The Certificates (together with the right to receive
Prepayment Premiums) will represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), the assets of which
include: (i) the Mortgage Loans and all payments under and proceeds of the
Mortgage Loans received or applicable to periods after the Cut-off Date
(exclusive of payments of principal and interest due on or before the Cut-off
Date); (ii) any Mortgaged Property acquired on behalf of the Trust Fund
through foreclosure, deed in lieu of foreclosure or otherwise; (iii) such
funds or assets as from time to time are deposited in the Certificate Account
(see "Description of the Pooling Agreements Certificate Account" in the
Prospectus); and (iv) certain rights, of the Depositor under the Mortgage Loan
Purchase Agreement relating to Mortgage Loan document delivery requirements
and the representations and warranties of the Mortgage Loan Seller regarding
the Mortgage Loans.
The Certificates will consist of [ ] classes (each, a "Class") to be
designated as: (i) the Class [ ] Certificates, the Class [ ] Certificates, the
Class [ ] Certificates, the Class [ ] Certificates, the Class [ ]
Certificates, the Class [ ] Certificates and the Class [ ] Certificates
(collectively, the "REMIC Regular Certificates"); and (ii) the Class R
Certificates.
Only the Class [ ], Class [ ], Class [ ] and Class [ ] Certificates
(collectively, the "Offered Certificates") are offered hereby. The Class [ ],
Class [ ], Class [ ], and Class R Certificates (collectively, the "Private
Certificates") have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and are not offered hereby. Accordingly,
information herein regarding the terms of the Private Certificates is provided
solely because of its potential relevance to a prospective purchaser of an
Offered Certificate.
<PAGE>45
Registration; Denominations
The Class [ ] Certificates will be issued in book-entry format through
the facilities of The Depository Trust Company ("DTC") in denominations of
$1,000 principal amount and in integral multiples thereof. The Class [ ],
Class [ ] and Class [ ] Certificates will be issued in fully registered,
certificated form in denominations of $100,000 principal amount and in
integral multiples of $1,000 in excess thereof, with one Certificate of each
such Class evidencing an additional amount equal to the remainder of the
initial Certificate Balance of such Class.
The Class [ ] Certificates will initially be represented by one or more
global Certificates registered in the name of the nominee of DTC. The
Depositor has been informed by DTC that DTC's nominee will be Cede & Co. No
beneficial owner of a Class [ ] Certificate (each, a "Class [ ] Certificate
Owner") will be entitled to receive a fully registered Certificate (a
"Definitive Certificate") representing its interest in the Class, except under
the limited circumstances described in the Prospectus under "Description of
the Certificates Book-Entry Registration and Definitive Certificates". Unless
and until Definitive Certificates are issued in respect of the Class [ ]
Certificates, beneficial ownership interests in such Class will be recorded
and transferred on the book-entry records of DTC and its participating
organizations (the "Participants"), and all references to actions by holders
of the Class [ ] Certificates will refer to actions taken by DTC upon
instructions received from the Class [ ] Certificate Owners through the
Participants in accordance with DTC procedures, and all references herein to
payments, notices, reports and statements to holders of the Class [ ]
Certificates will refer to payments, notices, reports and statements to DTC or
Cede & Co., as the registered holder thereof, for distribution to the Class [
] Certificate Owners through the Participants in accordance with DTC
procedures. The form of such payments and transfers may result in certain
delays in receipt of payments by an investor and may restrict an investor's
ability to pledge its securities. See "Description of the Certificates Book-
Entry Registration and Definitive Certificates" and "Risk Factors Book-Entry
Registration" in the Prospectus.
The Class [ ], Class [ ] and Class [ ] Certificates, subject to certain
restrictions on the transfer thereof to Plans (see "ERISA Considerations"
herein), may be transferred or exchanged at the offices of [
] located at [ ], without the payment of any
service charges, other than any tax or other governmental charge payable in
connection therewith. [ ] will initially serve as registrar (in
such capacity, the "Certificate Registrar") for purposes of recording and
otherwise providing for the registration of the Offered Certificates and of
transfers and exchanges of the Offered Certificates other than (unless
Definitive Certificates are issued in respect thereof) the Class [ ]
Certificates.
Certificate Balances
Upon initial issuance, the Offered Certificates will have the respective
Certificate Balances set forth in the following table. The "Certificate
Balance" of any Class of Certificates outstanding at any time represents the
maximum amount which the holders thereof are entitled to receive as
distributions allocable to principal from the cash flow on the Mortgage Loans
and the other assets in the Trust Fund. The Certificate Balance of any Class
of Certificates will be reduced on each Distribution Date by any distributions
of principal actually made on such Class of Certificates on such Distribution
Date, and further by any Realized Losses and Additional Trust Fund Expenses
actually allocated to such Class of Certificates on such Distribution Date.
In addition, if an ARM Loan that permits such to occur experiences negative
amortization on any of its Due Dates, then on the next succeeding Distribution
Date, the Certificate Balance of the then outstanding Class of REMIC Regular
Certificates with the latest alphabetical Class designation will be increased
by the amount of such negative amortization.
<PAGE>46
Initial Percent of
Class of Certificates Certificate Balance Initial Pool Balance
--------------------- ------------------- --------------------
[S] [C] [C]
Class [ ] Certificates [ ] [ ]%
Class [ ] Certificates [ ] [ ]%
Class [ ] Certificates [ ] [ ]%
Class [ ] Certificates [ ] [ ]%
Total [ ] [ ]%
Upon initial issuance, the Class [ ], Class [ ] and Class [ ]
Certificates will have an aggregate Certificate Balance of $[ ], which
represents the remaining portion of the Initial Pool Balance. The Class R
Certificates will not have a Certificate Balance and will represent the right
to receive on each Distribution Date any portion of the Available Distribution
Amount (as defined below) for such date that remains after the required
distributions therefrom have been made on all the other Classes of
Certificates.
Pass-Through Rates
The Pass-Through Rates applicable to the respective Classes of Offered
Certificates for the initial Distribution Date are set forth on the cover
page. The Pass-Through Rates for each Class of Offered Certificates for each
Distribution Date subsequent to the initial Distribution Date will, in each
case, equal the Weighted Average Net Mortgage Rate for such Distribution Date.
The Pass-Through Rate applicable to each Class of Private Certificates (other
than the Class R Certificates) for each Distribution Date will equal the
Weighted Average Net Mortgage Rate for such Distribution Date. The Class R
Certificates will have no specified Pass-Through Rate.
The "Weighted Average Net Mortgage Rate" for each Distribution Date is
the weighted average of the Net Mortgage Rates for the Mortgage Loans as of
the commencement of the related Collection Period, weighted on the basis of
their respective Stated Principal Balances outstanding immediately prior to
such Distribution Date. The "Net Mortgage Rate" for each Mortgage Loan will
generally equal the Mortgage Rate in effect for such Mortgage Loan from time
to time, minus [ ] basis points; provided that the Net Mortgage Rate for any
Mortgage Loan will not reflect any adjustments to the Mortgage Rate thereon in
connection with a bankruptcy or similar proceeding involving the related
borrower or a modification of such Mortgage Rate agreed to by the Master
Servicer and/or Special Servicer as described herein under "Servicing of the
Mortgage Loans Modifications, Waivers and Amendments". The "Stated Principal
Balance" of each Mortgage Loan outstanding at any time will generally be an
amount equal to the Cut-off Date Balance thereof, reduced (to not less than
zero) on each Distribution Date by (i) any payments or other collections (or
advances in lieu thereof) of principal of such Mortgage Loan that are
distributed on the Certificates on such Distribution Date and (ii) the
principal portion of any Realized Loss incurred in respect of such Mortgage
Loan during the related Collection Period.
The "Collection Period" for each Distribution Date will be the period
that begins immediately following the Determination Date in the month
preceding the month in which such Distribution Date occurs (or, in the case of
the initial Distribution Date, immediately following the Cutoff Date) and ends
on and includes the Determination Date in the same month as such Distribution
Date. The "Determination Date" will be a specified date each month as of
which the Available Distribution Amount and the Master Servicer's P&I Advance
obligation, if any, in respect of the Distribution Date in such month will be
determined.
<PAGE>47
Distributions
General. Distributions on the Certificates will be made by the Master
Servicer, to the extent of available funds, on the [ ]th day of each month
or, if any such [ ]th day is not a business day, then on the next succeeding
business day, commencing [ ], 199[ ] (each, a "Distribution Date"). All
such distributions (other than the final distribution on any Certificate) will
be made to the persons in whose names the Certificates are registered (the
"Certificateholders") at the close of business on each Record Date, which will
be the last business day of the month preceding the month in which the related
Distribution Date occurs. Each such distribution will be made by wire
transfer in immediately available funds to the account specified by the
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder has provided the Master Servicer with
wiring instructions no less than five business days prior to the related
Record Date (which wiring instructions may be in the form of a standing order
applicable to all subsequent distributions) and is the registered owner of
Certificates with an aggregate initial principal amount of at least
$5,000,000. Otherwise distributions will be made by mailed check. The final
distribution on any Certificate will be made in like manner, but only upon
presentation and surrender of such Certificate at the location that will be
specified in a notice of the pendency of such final distribution. All
distributions made with respect to a Class of Certificates will be allocated
pro rata among the outstanding Certificates of such Class based on their
respective percentage interests in such Class.
The Available Distribution Amount. The aggregate amount available for
distribution to Certificateholders on each Distribution Date (the "Available
Distribution Amount") will, in general, equal the sum of the following
amounts:
(a) the total amount of all cash received on the Mortgage Loans and
any REO Properties that is on deposit in the Certificate Account as of
the close of business on the related Determination Date, exclusive of any
portion thereof that represents one or more of the following:
(i) any Monthly Payments collected but due on a Due Date
subsequent to the related Collection Period,
(ii) any principal prepayments (together with related payments
of the interest thereon), Liquidation Proceeds (as defined in the
Prospectus), Insurance Proceeds (as defined in the Prospectus) and
other unscheduled recoveries received subsequent to the expiration
of the related Collection Period,
(iii) any Prepayment Premiums, and
(iv) all amounts in the Certificate Account that are due or
reimbursable to any person other than the Certificateholders;
(b) all P&I Advances, if any, made by the Master Servicer with
respect to such Distribution Date; and
(c) any Compensating Interest Payment made by the Master Servicer
to cover the aggregate of any Prepayment Interest Shortfalls incurred
during the related Collection Period. See " P&I Advances" and "Servicing
of the Mortgage Loans Servicing and Other Compensation and Payment of
Expenses" herein and "Description of the Pooling Agreements Certificate
Account" in the Prospectus.
Prepayment Premiums collected on the Mortgage Loans during the Collection
Period for any Distribution Date will not constitute part of the Available
Distribution Amount for such Distribution Date. The right to receive
<PAGE>48
any such Prepayment Premiums will be initially retained by the Depositor. See
" Distributions Prepayment Premiums" herein.
Application of the Available Distribution Amount. On each Distribution
Date, for so long as any Class of Offered Certificates is outstanding, the
Master Servicer will (except as otherwise described under " Termination"
below) apply amounts on deposit in the Certificate Account, to the extent of
the Available Distribution Amount, in the following order of priority:
(1) to distributions of interest to the holders of the Class [ ]
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class [ ] Certificates for such Distribution Date and,
to the extent not previously paid, for all prior Distribution Dates;
(2) to distributions of principal to the holders of the Class [ ]
Certificates in an amount (not to exceed the then outstanding Certificate
Balance of the Class [ ] Certificates) equal to the Principal
Distribution Amount for such Distribution Date;
(3) to distributions to the holders of the Class [ ] Certificates
to reimburse such holders for all Realized Losses and Additional Trust
Fund Expenses, if any, previously allocated to such Class of Certificates
and for which no reimbursement has previously been received;
(4) to distributions of interest to the holders of the Class [ ]
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class [ ] Certificates for such Distribution Date and,
to the extent not previously paid, for all prior Distribution Dates;
(5) if the Class [ ] Certificates have been retired, to
distributions of principal to the holders of the Class [ ] Certificates
in an amount (not to exceed the then outstanding Certificate Balance of
the Class [ ] Certificates) equal to the Principal Distribution Amount
for such Distribution Date, less any portion thereof distributed in
retirement of the Class [ ] Certificates on such Distribution Date;
(6) to distributions to the holders of the Class [ ] Certificates
to reimburse such holders for all Realized Losses and Additional Trust
Fund Expenses, if any, previously allocated to such Class of Certificates
and for which no reimbursement has previously been received;
(7) to distributions of interest to the holders of the Class [ ]
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class [ ] Certificates for such Distribution Date and,
to the extent not previously distributed, for all prior Distribution
Dates;
(8) if the Class [ ] and Class [ ] Certificates have been retired,
to distributions of principal to the holders of the Class [ ]
Certificates in an amount (not to exceed the then outstanding Certificate
Balance of the Class [ ] Certificates) equal to the Principal
Distribution Amount for such Distribution Date, less any portion thereof
distributed in retirement of the Class [ ] and/or Class [ ] Certificates
on such Distribution Date;
(9) to distributions to the holders of the Class [ ] Certificates
to reimburse such holders for all Realized Losses and Additional Trust
Fund Expenses, if any, previously allocated to such Class of Certificates
and for which no reimbursement has previously been received;
(10) to distributions of interest to the holders of the Class [ ]
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class [ ] Certificates for such Distribution Date and,
to the extent not previously distributed, for all prior Distribution
Dates;
<PAGE>49
(11) if the Class [ ], Class [ ] and Class [ ] Certificates have
been retired, to distributions of principal to the holders of the Class [
] Certificates in an amount (not to exceed the then outstanding
Certificate Balance of the Class [ ] Certificates) equal to the Principal
Distribution Amount for such Distribution Date, less any portion thereof
distributed in retirement of the Class [ ], Class [ ] and/or Class [ ]
Certificates on such Distribution Date;
(12) to distributions to the holders of the Class [ ] Certificates
to reimburse such holders for all Realized Losses and Additional Trust
Fund Expenses, if any, previously allocated to such Class of Certificates
and for which no reimbursement has previously been received;
(13) to distributions to the holders of the Class [ ] Certificates,
the holders of the Class [ ] Certificates and the holders of the Class [
] Certificates, in that order, in each case, first, in respect of
interest in an amount equal to all Distributable Certificate Interest in
respect of such Class of Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates, and
second, to reimburse the holders of such Class of Certificates for all
Realized Losses and Additional Trust Fund Expenses, if any, previously
allocated to such Class of Certificates and for which no reimbursement
has previously been received; and
(14) to distributions to the holders, of the Class R Certificates
in, an amount equal to the balance, if any, of the Available Distribution
Amount remaining after the distributions to be made on such Distribution
Date as described in clauses (1) through (13) above.
Following the retirement of all of the Offered Certificates, the
Principal Distribution Amount for each Distribution Date will be distributed
in respect of the remaining Classes of REMIC Regular Certificates, in
alphabetical order of Class designation, until each such Class is, in turn,
retired, as described in the Pooling and Servicing Agreement.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of REMIC Regular Certificates for each
Distribution Date represents that portion of the Accrued Certificate Interest
in respect of such Class of Certificates for such Distribution Date that is
net of such Class's allocable share (calculated as described below) of the
aggregate of any Prepayment Interest Shortfalls resulting from voluntary
principal prepayments made on the Mortgage Loans during the related Collection
Period that are not covered by the Master Servicer's Compensating Interest
Payment for such Distribution Date (the aggregate of such Prepayment Interest
Shortfalls that are not so covered, as to such Distribution Date, the "Net
Aggregate Prepayment Interest Shortfall").
The "Accrued Certificate Interest" in respect of each Class of REMIC
Regular Certificates for each Distribution Date is equal to 30 days' interest
at the Pass-Through Rate applicable to such Class of Certificates for such
Distribution Date accrued on the related Certificate Balance outstanding
immediately prior to such Distribution Date.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of REMIC Regular
Certificates will equal the product of (a) such Net Aggregate Prepayment
Interest Shortfall, multiplied by (b) a fraction, the numerator of which is
the Accrued Certificate Interest in respect of such Class of Certificates for
such Distribution Date, and the denominator of which is equal to the aggregate
Accrued Certificate Interest for all the REMIC Regular Certificates for such
Distribution Date.
Principal Distribution Amount. The "Principal Distribution Amount" for
each Distribution Date will generally equal the aggregate of the following:
<PAGE>50
(a) the aggregate of the principal portions of all Scheduled
Payments (other than Balloon Payments) due and any Assumed Scheduled
Payments deemed due on or in respect of the Mortgage Loans for their
respective Due Dates occurring during the related Collection Period;
(b) the aggregate of all principal prepayments received on the
Mortgage Loans during the related Collection Period;
(c) with respect to any Mortgage Loan as to which the related
stated maturity date occurred during or prior to the related Collection
Period, any payment of principal made by or on behalf of the related
borrower during the related Collection Period, net of any portion of such
payment that represents a recovery of the principal portion of any
Scheduled Payment (other than a Balloon Payment) due, or the principal
portion of any Assumed Scheduled Payment deemed due, in respect of such
Mortgage Loan on a Due Date during or prior to the related Collection
Period and not previously recovered;
(d) the aggregate of all Liquidation Proceeds and Insurance
Proceeds that were received on Mortgage Loans during the related
Collection Period and that were identified and applied by the Master
Servicer as recoveries of principal, in each case net of any portion of
such amounts that represents a recovery of the principal portion of any
Scheduled Payment (other than a Balloon Payment) due, or of the principal
portion of any Assumed Scheduled Payment deemed due, in respect of the
related Mortgage Loan on a Due Date during or prior to the related
Collection Period and not previously recovered; and
(e) if such Distribution Date is subsequent to the initial
Distribution Date, the excess, if any, of the Principal Distribution
Amount for the immediately preceding Distribution Date, over the
aggregate distributions of principal made on the Certificates on such
immediately preceding Distribution Date.
The "Scheduled Payment" due on any Mortgage Loan on any related Due Date
will be the amount of the Monthly Payment that would have been due thereon on
such date, without regard to any waiver, modification or amendment of such
Mortgage Loan granted or agreed to by the Master Servicer and/or Special
Servicer or otherwise resulting from a bankruptcy or similar proceeding
involving the related borrower, and assuming that each prior Scheduled Payment
has been made in a timely manner. The "Assumed Scheduled Payment" is an
amount deemed due in respect of any Balloon Loan that is delinquent in respect
of its Balloon Payment beyond the first Determination Date that follows its
stated maturity date. The Assumed Scheduled Payment deemed due on any such
Balloon Loan on its stated maturity date and on each successive related Due
Date that it remains or is deemed to remain outstanding will equal the
Scheduled Payment that would have been due thereon on such date if the related
Balloon Payment had not come due but rather such Mortgage Loan had continued
to amortize in accordance with such loan's amortization schedule in effect
prior to its stated maturity date.
Distributions of the Principal Distribution Amount will constitute the
only distributions of principal on the Certificates. Reimbursements of
previously allocated Realized Losses and Additional Trust Fund Expenses will
not constitute distributions of principal for any purpose and will not result
in an additional reduction in the Certificate Balance of the Class of
Certificates in respect of which any such reimbursement is made.
Treatment of REO Properties. Notwithstanding that any Mortgaged Property
may be acquired as part of the Trust Fund through foreclosure, deed in lieu of
foreclosure or otherwise, the related Mortgage Loan will be treated as having
remained outstanding until such REO Property is liquidated for purposes of
determining distributions on the Certificates, allocations of Realized Losses
and Additional Trust Fund Expenses to the Certificates, and the amount of
Servicing Fees and Trustee's fees payable under the Pooling and Servicing
Agreement. In connection therewith, operating revenues and other proceeds
derived from such REO Property (exclusive of related operating costs) will be
"applied" by the Master Servicer as principal, interest and other
<PAGE>51
amounts "due" on such Mortgage Loan, and the Master Servicer will make P&I
Advances, if any, in respect of such Mortgage Loan, in all cases as if such
Mortgage Loan had remained outstanding.
Prepayment Premiums. Any Prepayment Premiums collected on the Mortgage
Loans during any Collection Period will not be distributed on the related
Distribution Date to the holders of any Class of Certificates. Rather, the
right to any such Prepayment Premiums, which may be evidenced by a certificate
representing an interest in the Trust Fund and which will not be subordinated
to any Class of Certificates, will be initially retained by the Depositor and
may be sold by the Depositor at any time in accordance with the terms of the
Pooling and Servicing Agreement.
Subordination; Allocation of Losses and Certain Expenses
The rights of holders of the Class [ ] Certificates, the Class [ ]
Certificates, the Class [ ] Certificates and each Class of the Private
Certificates (collectively, the "Subordinate Certificates") to receive
distributions of amounts collected or advanced on the Mortgage Loans will be
subordinated, to the extent described herein, to the rights of holders of the
Class [ ] Certificates, and to the rights of the holders of each other such
Class of Subordinate Certificates with an earlier alphabetical Class
designation. This subordination is intended to enhance the likelihood of
timely receipt by the holders of the Class [ ] Certificates of the full amount
of all Distributable Certificate Interest payable in respect of the Class [ ]
Certificates on each Distribution Date, and the ultimate receipt by the
holders of the Class [ ] Certificates of principal in an amount equal to the
entire Certificate Balance of the Class [ ] Certificates. Similarly, but to
decreasing degrees, this subordination is also intended to enhance the
likelihood of timely receipt by the holders of the Class [ ] Certificates,
the holders of the Class [ ] Certificates and the holders of the Class [ ]
Certificates of the full amount of Distributable Certificate Interest payable
in respect of such Classes of Certificates on each Distribution Date, and the
ultimate receipt by the holders of the Class [ ] Certificates, the holders
of the Class [ ] Certificates and the holders of the Class [ ] Certificates
of principal equal to, in each case, the entire Certificate Balance of such
Class of Certificates. The protection afforded to the holders of the Class [
] Certificates by means of the subordination of the Private Certificates, to
the holders of the Class [ ] Certificates by means of the subordination of the
Class [ ] and the Private Certificates, to the holders of the Class [ ]
Certificates by means of the subordination of the Class [ ], the Class [ ]
and the Private Certificates, and to the holders of the Class [ ] Certificates
by means of the subordination of the Subordinate Certificates, will be
accomplished by the application of the Available Distribution Amount on each
Distribution Date in accordance with the order of priority described under
" Distributions Application of the Available Distribution Amount" above. No
other form of Credit Support will be available for the benefit of the holders
of the Offered Certificates.
Allocation to the Class [ ] Certificates, for so long as they are
outstanding, of the entire Principal Distribution Amount for each Distribution
Date will have the effect of reducing the Certificate Balance of that Class at
a faster rate than the aggregate Stated Principal Balance of the Mortgage Pool
is reduced. Thus, as principal is distributed to the holders of the Class [ ]
Certificates, the percentage interest in the Trust Fund evidenced by the Class
[ ] Certificates will be decreased (with a corresponding increase in the
percentage interest in the Trust Fund evidenced by the Subordinate
Certificates), thereby increasing, relative to their respective Certificate
Balances, the subordination afforded the Class [ ] Certificates by the
Subordinate Certificates. Following retirement of the Class [ ] Certificates,
the herein described successive allocation to the Class [ ] Certificates, the
Class [ ] Certificates and the Class [ ] Certificates, in that order, in each
case for so long as they are outstanding, of the entire Principal Distribution
Amount for each Distribution Date will provide a similar benefit to each such
Class of Certificates as regards the relative amount of subordination afforded
thereto by the other Classes of REMIC Regular Certificates with later
alphabetical Class designations.
On each Distribution Date, following all distributions on the
Certificates to be made on such date, the aggregate of all Realized Losses and
Additional Trust Fund Expenses that have been incurred since the Cut-off Date
<PAGE>52
through the end of the related Collection Period and that have not previously
been allocated as described below will be allocated among the respective
Classes of REMIC Regular Certificates (in each case in reduction of its
Certificate Balance) as follows, but in the aggregate only to the extent that
the aggregate Certificate Balance of such Classes of Certificates remaining
outstanding after giving effect to the distributions on such Distribution Date
exceeds the aggregate Stated Principal Balance of the Mortgage Pool expected
to be outstanding immediately following such Distribution Date: first, to the
Class [ ] Certificates, until the remaining Certificate Balance of such
Certificates is reduced to zero; second, to the Class [ ] Certificates, until
the remaining Certificate Balance of such Certificate is reduced to zero;
third, to the Class [ ] Certificates, until the remaining Certificate Balance
of such Certificates is reduced to zero; fourth, to the Class [ ]
Certificates, until the remaining Certificate Balance of such Certificates is
reduced to zero; fifth, to the Class [ ] Certificates, until the remaining
Certificate Balance of such Certificates is reduced to zero; sixth, to the
Class [ ] Certificates, until the remaining Certificate Balance of such
Certificates is reduced to zero; and last, to the Class [ ] Certificates,
until the remaining Certificate Balance of such Certificates is reduced to
zero.
"Realized Losses" are losses arising from the inability to collect all
amounts due and owing under any defaulted Mortgage Loan, including by reason
of the fraud or bankruptcy of the borrower or a casualty of any nature at the
related Mortgage Property, to the extent not covered by insurance. The
Realized Loss in respect of a liquidated Mortgage Loan (or related REO
Property) is an amount generally equal to the excess, if any, of (a) the
outstanding principal balance of such Mortgage Loan as of the date of
liquidation, together with (i) all accrued and unpaid interest thereon at the
related Mortgage Rate in effect from time to time to but not including the Due
Date in the Collection Period in which the liquidation occurred and (ii)
certain related unreimbursed servicing expenses, over (b) the aggregate amount
of Liquidation Proceeds, if any, recovered in connection with such
liquidation. If any portion of the debt due under a Mortgage Loan is
forgiven, whether in connection with a modification, waiver or amendment
granted or agreed to by the Master Servicer and/or the Special Servicer or in
connection with the bankruptcy or similar proceeding involving the related
borrower, the amount so forgiven also will be treated as a Realized Loss.
"Additional Trust Fund Expenses" include, among other things, (i) any
Special Servicing Fees, Modification Fees and/or Resolution Fees paid to the
Special Servicer, (ii) any interest paid to the Master Servicer in respect of
unreimbursed P&I Advances, if any, and certain unreimbursed servicing expenses
incurred by it or reimbursed by it to the Special Servicer, and (iii) any of
certain unanticipated Non-Mortgage Loan specific expenses of the Trust Fund,
including certain reimbursements to the Trustee described under "Description
of the Pooling Agreements Certain Matters Regarding the Trustee" in the
Prospectus, certain reimbursements to the Master Servicer and the Depositor
described under "Description of the Pooling Agreements Certain Matters
Regarding the Master Servicer and the Depositor" in the Prospectus and certain
comparable reimbursements to the Special Servicer, and certain federal, state
and local taxes, and certain tax related expenses, payable from the assets of
the Trust Fund and described under "Certain Federal Income Tax
Consequences Taxation of Owners of REMIC Residual Certificates Prohibited
Transactions Tax and Other Taxes" in the Prospectus. Additional Trust Fund
Expenses will reduce amounts payable to Certificateholders and, subject to the
distribution priorities described above, may result in a loss on one or more
Classes of Offered Certificates.
P&I Advances
On or about each Distribution Date, the Master Servicer will be
obligated, subject to the recoverability determination described in the next
paragraph, to make advances (each, a "P&I Advance") out of its own funds or,
subject to the replacement thereof as provided in the Pooling and Servicing
Agreement, from funds held in the Certificate Account that are not required to
be distributed to Certificateholders on such Distribution Date. A P&I Advance
will be in an amount that is generally equal to the aggregate of all Scheduled
Payments (other than Balloon Payments) and any Assumed Scheduled Payments, net
of related Servicing Fees, due or deemed due, as the case
<PAGE>53
may be, in respect of the Mortgage Loans during the related Collection Period,
in each case to the extent such amount was not paid by or on behalf of the
related borrower or otherwise collected as of the close of business on the
related Determination Date. The Master Servicer's obligations to make P&I
Advances in respect of any Mortgage Loan will continue through liquidation of
such Mortgage Loan or disposition of any REO Property acquired in respect
thereof. However, if the Monthly Payment on any Mortgage Loan has been
reduced in connection with a bankruptcy or similar proceeding or a
modification, waiver or amendment granted or agreed to by the Special
Servicer, the Master Servicer will be required to advance only the amount of
the reduced Monthly Payment (net of related Servicing Fees) in-respect of
subsequent delinquencies.
The Master Servicer will be entitled to recover any P&I Advance, if any,
made out of its own funds from any amounts collected in respect of the
Mortgage Loan as to which such P&I Advance was made, whether such amounts are
collected in the form of late payments, Insurance Proceeds, Liquidation
Proceeds or otherwise ("Related Proceeds"). The Master Servicer will not be
obligated to make any P&I Advance that it determines in accordance with the
servicing standard described herein, would, if made, not be recoverable out of
Related Proceeds (a "Nonrecoverable P&I Advance"), and the Master Servicer
will be entitled to recover any P&I Advance made that it later determines to
be a Nonrecoverable P&I Advance out of general funds on deposit in the
Certificate Account. See "Description of the Certificates Advances in Respect
of Delinquencies" and "Description of the Pooling Agreements Certificate
Account" in the Prospectus.
In connection with its recovery of any P&I Advance made by the Master
Servicer or any reimbursable servicing expense incurred by it or reimbursed to
the Special Servicer (each such P&I Advance or expense, an "Advance"), the
Master Servicer will be entitled to be paid, out of any amounts then on
deposit in the Certificate Account, interest at a per annum rate equal to the
"prime rate" published in the "Money Rates" section of The Wall Street
Journal, as such "prime rate" may change from time to time (the "Master
Servicer Reimbursement Rate"), accrued on the amount of such Advance from the
date made to but not including the date of reimbursement to the Master
Servicer. To the extent not offset or covered by amounts otherwise payable on
the Private Certificates, interest accrued on outstanding Advances will result
in a reduction in amounts payable on the Offered Certificates, subject to the
distribution priorities described herein.
Reports to Certificateholders; Available Information
On each Distribution Date, the Master Servicer will be required to
forward by mail to each holder of an Offered Certificate a statement (a
"Distribution Date Statement") providing various items of information relating
to distributions made on such date with respect to the relevant Class and the
recent status of the Mortgage Pool. For a more detailed discussion of the
particular items of information to be provided in each Distribution Date
Statement, as well as a discussion of certain annual information reports to be
furnished by the Master Servicer to persons who at any time during the prior
calendar year were holders of the Offered Certificates, see "Description of
the Certificates Reports to Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the Master Servicer
make available at its offices primarily responsible for servicing the Mortgage
Loans, during normal business hours, for review by any holder of an Offered
Certificate or any person identified to the Master Servicer as a prospective
transferee of an Offered Certificate, originals or copies of, among other
things, the following items: (a) the Pooling and Servicing Agreement and any
amendments thereto, (b) all Distribution Date Statements delivered to holders
of the relevant Class of Offered Certificates since the Delivery Date, (c) all
officer's certificates delivered to the Trustee since the Delivery Date as
described under "Description of the Pooling Agreements Evidence as to
Compliance" in the Prospectus, (d) all accountants' reports delivered to the
Trustee since the Delivery Date as described under "Description of the Pooling
Agreements Evidence as to Compliance" in the Prospectus, (e) the most recent
property inspection report prepared by or on behalf of the Master Servicer or
the Special Servicer in respect of each Mortgaged Property, (f)
<PAGE>54
the most recent Mortgaged Property annual operating statements, if any,
collected by or on behalf of the Master Servicer or the Special Servicer, (g)
any and all modifications, waivers and amendments of the terms of a Mortgage
Loan entered into by the Master Servicer and/or the Special Servicer, and (h)
any and all officers' certificates and other evidence delivered to the Trustee
to support the Master Servicer's determination that any Advance was or, if
made, would not be recoverable. Copies of any and all of the foregoing items
will be available from the Master Servicer upon request; however, the Master
Servicer will be permitted to require payment of a sum sufficient to cover the
reasonable costs and expenses of providing such copies.
Upon written request of any Certificateholder of record made for purposes
of communicating with other Certificateholders with respect to their rights
under the Pooling and Servicing Agreement, the Certificate Registrar will
furnish such Certificateholder with a list of Certificateholders then of
record.
Until such time as Definitive Certificates are issued in respect of the
Class [ ] Certificates, the foregoing information and access will be available
to the Class [ ] Certificate Owners only to the extent it is forwarded by or
otherwise available through DTC and its Participants. The manner in which
notices and other communications are conveyed by DTC to Participants, and by
Participants to the Class [ ] Certificate Owners, will be governed by
arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time. The Master Servicer, the Special
Servicer, the Trustee, the Depositor and the Certificate Registrar are
required to recognize as Certificateholders only those persons in whose names
the Certificates are registered on the books and records of the Certificate
Registrar.
Voting Rights
At all times during the term of the Pooling and Servicing Agreement, 100%
of the voting rights for the series offered hereby (the "Voting Rights") will
be allocated among the respective Classes of REMIC Regular Certificates in
proportion to the Certificate Balances of those Classes. Voting Rights
allocated to a Class of Certificates will be allocated among the related
Certificateholders in proportion to the percentage interests evidenced by
their respective Certificates. See "Description of the Certificates Voting
Rights" in the Prospectus.
Termination
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in
respect thereof) or other liquidation of the last Mortgage Loan or REO
Property subject thereto, and (ii) the purchase of all of the assets of the
Trust Fund by the Master Servicer or the Depositor. Written notice of
termination of the Pooling and Servicing Agreement will be given to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at the office of the Certificate
Registrar or other location specified in such notice of termination.
Any such purchase by the Master Servicer or the Depositor of all the
Mortgage Loans and other assets in the Trust Fund is required to be made at a
price equal to (i) the aggregate Purchase Price of all the Mortgage Loans then
included in the Trust Fund, plus (ii) the fair market value of all REO
Properties then included in the Trust Fund, as determined by an appraiser
mutually agreed upon by the Master Servicer and the Trustee, minus (iii) if
the Purchaser is the Master Servicer, the aggregate of amounts payable or
reimbursable to the Master Servicer under the Pooling and Servicing Agreement.
Such purchase will effect early retirement of the then outstanding Offered
Certificates, but the right of the Master Servicer or the Depositor to effect
such termination is subject to the requirement that the then aggregate Stated
Principal Balance of the Mortgage Pool be less than 10% of the Initial Pool
Balance.
<PAGE>55
The Trustee
[ ], a [ ] corporation,
will act as Trustee on behalf of the Certificateholders. As compensation for
its services, the Trustee will be entitled to receive, from amounts on deposit
in the Certificate Account, a monthly fee equal to [ ] days' interest at the
rate of [ ]% per annum accrued on the aggregate Stated Principal Balance of
the Mortgage Pool then outstanding. The Corporate Trust Office of the Trustee
is located at [ ]. See "Description of the
Pooling Agreements The Trustee", " Duties of the Trustee", " Certain Matters
Regarding the Trustee" and " Resignation and Removal of the Trustee" in the
Prospectus.
YIELD AND MATURITY CONSIDERATIONS
Yield Considerations
General. The yield on any Offered Certificate will depend on (a) the
price at which such Certificate is purchased by an investor and (b) the rate,
timing and amount of distributions on such Certificate. The rate, timing and
amount of distributions on any Offered Certificate will in turn depend on,
among other things, (i) the Pass-Through Rate for such Certificate, (ii) the
rate and timing of principal payments (including principal prepayments) and
other principal collections on the Mortgage Loans and the extent to which such
amounts are to be applied in reduction of the Certificate Balance of the
related Class, (iii) the rate, timing and severity of Realized Losses on the
Mortgage Loans and Additional Trust Fund Expenses and the extent to which such
losses and expenses are allocable in reduction of the Certificate Balance of
the related Class, and (iv) the timing and severity of any Net Aggregate
Prepayment Interest Shortfalls and the extent to which such shortfalls are
allocable in reduction of the Distributable Certificates Interest payable on
the related Class.
Pass-Through Rates. The Pass-Through Rate applicable to each Class of
Offered Certificates for any Distribution Date will be variable and will equal
the Weighted Average Net Mortgage Rate for such date. Accordingly, the yields
on the Offered Certificates will be sensitive to changes in the relative
composition of the Mortgage Pool as a result of scheduled amortization,
voluntary prepayments and liquidations of Mortgage Loans following default.
To a lesser degree, that yield will also be sensitive to changes to the
Mortgage Rates on the ARM Loans and the Step Rate Loans. See "Description of
the Certificates Pass-Through Rates" and "Description of the Mortgage Pool"
herein and " Rate and Timing of Principal Payments" below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates purchased at a discount or premium will be affected by the rate
and timing of principal payments made in reduction of the principal balance of
such Certificates. As described herein, the Principal Distribution Amount for
each Distribution Date will be distributable entirely in respect of the Class
[ ] Certificates until the Certificate Balance thereof is reduced to zero, and
will thereafter be distributable entirely in respect of the Class [ ]
Certificates, the Class [ ], Certificates and the Class [ ] Certificates, in
that order, in each case until the Certificate Balance of such Class of
Certificates is reduced to zero. Consequently, the rate and timing of
principal payments made in reduction of the Certificate Balance of each Class
of Offered Certificates will be directly related to the rate and timing of
principal payments on or in respect of the Mortgage Loans, which will in turn
be affected by the amortization schedules thereof, the dates on which Balloon
Payments are due and the rate and timing of principal prepayments and other
unscheduled collections thereon (including for this purpose, collections made
in connection with liquidations of Mortgage Loans due to defaults, casualties
or condemnations affecting the Mortgaged Properties, or purchases of Mortgage
Loans out of the Trust Fund). Prepayments and, assuming the respective stated
maturity dates therefor have not occurred, liquidations and purchases of the
Mortgage Loans, will result in distributions on the Offered Certificates of
amounts that would otherwise be distributed over the remaining terms of the
Mortgage Loans. Defaults on the Mortgage
<PAGE>56
Loans, particularly at or near their stated maturity dates, may result in
significant delays in payments of principal on the Mortgage Loans (and,
accordingly, on the Offered Certificates) while work-outs are negotiated or
foreclosures are completed. See "Servicing of the Mortgage
Loans Modifications, Waivers and Amendments" herein and "Description of the
Pooling Agreements Realization Upon Defaulted Mortgage Loans" and "Certain
Legal Aspects of Mortgage Loans and Leases Foreclosure" in the Prospectus.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree
to which they are purchased at a discount or premium and when, and to what
degree, payments of principal on the Mortgage Loans are in turn distributed in
reduction of the Certificate Balance of such Certificates. An investor should
consider, in the case of any Offered Certificate purchased at a discount, the
risk that a slower than anticipated rate of principal payments on the Mortgage
Loans could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of an Offered Certificate purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to such investor that is lower than the
anticipated yield. In general, the earlier a payment of principal on the
Mortgage Loans is distributed in reduction of the principal balance of any
Offered Certificate purchased at a discount or premium, the greater will be
the effect on an investor's yield to maturity. As a result, the effect on an
investor's yield of principal payments on the Mortgage Loans occurring at a
rate higher (or lower) than the rate anticipated by the investor during any
particular period would not be fully offset by a subsequent like reduction (or
increase) in the rate of such principal payments. Because the rate of
principal payments on the Mortgage Loans will depend on future events and a
variety of factors (as described more fully below), no assurance can be given
as to such rate or the rate of principal prepayments in particular. The
Depositor is not aware of any relevant publicly available or authoritative
statistics with respect to the historical prepayment experience of a large
group of mortgage loans comparable to the Mortgage Loans.
Losses and Shortfalls. The yield to holders of the Offered Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net Aggregate
Prepayment Interest Shortfalls, generally be borne: first, by the holders of
the Private Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates: second, by the holders of the Class [ ]
Certificates, to the extent of amounts otherwise distributable in respect of
their Certificates: third by the holders of the Class [ ] Certificates, to the
extent of amounts otherwise distributable in respect of their Certificates,
fourth, by the holders of the Class [ ] Certificates, to the extent of amounts
otherwise distributable in respect of their Certificates; and last, by the
holders of the Class [ ] Certificates. Realized Losses and Additional Trust
Fund Expenses will be allocated. as and to the extent described herein, to the
respective Classes of REMIC Regular Certificates (in reduction of the
Certificate Balance of each such Class), in reverse alphabetical order of
their Class designation. As more fully described herein under "Description of
the Certificates Distributions Distributable Certificate Interest", Net
Aggregate Prepayment Interest Shortfalls will generally be borne by the
respective Classes of Certificateholders on a pro rata basis.
Certain Relevant Factors. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by a
number of factors, including, without limitation, prevailing interest rates,
the terms of the Mortgage Loans (for example, adjustable Mortgage Rates, Lock-
out Periods, provisions requiring the payment of Prepayment Premiums and
amortization terms that require Balloon Payments), the demographics and
relative economic vitality of the areas in which the Mortgaged Properties are
located and the general supply and demand for rental units in such areas, the
quality of management of the Mortgaged Properties, the servicing of the
Mortgage Loans, possible changes in tax laws and other opportunities for
investment. See "Risk Factors The Mortgage Loans" and "Description of the
Mortgage Pool" herein and "Yield and Maturity Considerations Yield and
Prepayment Considerations" in the Prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below
<PAGE>57
a mortgage interest rate, the related borrower has an incentive to refinance
its mortgage loan. See "Description of the Mortgage Pool Certain Terms and
Conditions of the Mortgage Loans" herein. In addition, as prevailing market
interest rates decline, even borrowers with adjustable rate loans may have an
incentive to refinance for purposes of either (i) converting to a fixed rate
loan and thereby "locking in" such rate or (ii) taking advantage of an initial
"teaser rate" (that is, a mortgage interest rate below what it would otherwise
be if the applicable index and gross margin were applied) on another
adjustable rate mortgage loan. The majority of the Mortgage Loans ([ ]% of
the Initial Pool Balance) may be prepaid at any time, and [ ] Mortgage Loans,
which represent approximately [ ]% of the Initial Pool Balance, may be
prepaid in whole or in part without payment of a Prepayment Premium. A
requirement that a prepayment be accompanied by a Prepayment Premium may not
provide a sufficient economic disincentive to a borrower seeking to refinance
at a more favorable interest rate.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Mortgage Loans that will be prepaid or as to
which a default will have occurred as of any date or as to the overall rate of
prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will
not be made to Certificateholders until a date that is scheduled to be at
least [ ] days following the Due Dates for the Mortgage Loans during the
related Collection Period, the effective yield to the holders of the Offered
Certificates will be lower than the yield that would otherwise be produced by
the applicable Pass-Through Rates and purchase prices (assuming such prices
did not account for such delay).
Unpaid Distributable Certificate Interest. As described under
"Description of the Certificates Distributions Application of the Available
Distribution Amount" herein, if the portion of the Available Distribution
Amount distributable in respect of interest on any Class of Offered
Certificates on any Distribution Date is less than the Distributable
Certificate Interest then payable for such Class, the shortfall will be
distributable to holders of such Class of Certificates on subsequent
Distribution Dates, to the extent of available funds. Any such shortfall will
not bear interest, however, and will therefore negatively affect the yield to
maturity of such Class of Certificates for so long as it is outstanding.
Weighted Average Life
The weighted average life of any Offered Certificate refers to the
average amount of time that will elapse from the date of its issuance until
each dollar allocable to principal of such Certificate is distributed to the
investor. The weighted average life of any such Offered Certificate will be
influenced by, among other things, the rate at which principal on the Mortgage
Loans is paid or otherwise collected or advanced and applied to pay principal
of such Offered Certificate. As described herein, the Principal Distribution
Amount for each Distribution Date will be distributable entirely in respect of
the Class [ ] Certificates until the Certificate Balance thereof is reduced
to zero, and will thereafter be distributable entirely in respect of the Class
[ ] Certificates, the Class [ ] Certificates and the Class [ ] Certificates,
in that order, in each case until the Certificate Balance of such Class of
Certificates is reduced to zero.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this Prospectus Supplement is the "Constant
Prepayment Rate" or "CPR" model. The CPR model represents an
<PAGE>58
assumed constant annual rate of prepayment each month, expressed as a per
annum percentage of the then scheduled principal balance of a pool of mortgage
loans. As used in each of the following tables, the column headed "0%"
assumes that none of the Mortgage Loans is prepaid before maturity. The
columns headed "5%", "10%", "15%" and "20%" assume that prepayments on the
Mortgage Loans are made at those CPRs. There is no assurance, however, that
prepayments of the Mortgage Loans will conform to any particular level of CPR,
and no representation is made that the Mortgage Loans will prepay at the CPRs
shown or at any other prepayment rate.
The following tables indicate the percentage of the initial Certificate
Balance of each Class of Offered Certificates that would be outstanding after
each of the dates shown at various CPRs and the corresponding weighted average
life of each such Class of Offered Certificates. The tables have been
prepared on the basis of, among others, the following assumptions (i) the
Initial Pool Balance is $[ ], (ii) the initial Certificate Balance of the
Class [ ] Certificates is $[ ], the initial Certificate Balance of the
Class [ ] Certificates is $[ ], the initial Certificate Balance of
the Class [ ] Certificates is $[ ], the initial Certificate Balance
of the Class [ ] Certificates is $[ ] and the Pass-Through Rate for
each Class of Offered Certificates is as described herein, (iii) the scheduled
monthly payments of interest and principal for each Mortgage Loan are those in
effect on the Cut-off Date, except that for each ARM Loan, such scheduled
monthly payments will adjust on the first interest rate adjustment date
therefor following the Cut-off Date (and will not adjust thereafter) to
reflect scheduled changes in outstanding principal balance, Mortgage Rate and
remaining amortization term and a value for the related Index applicable to
such interest rate adjustment date equal to [ ]%, and except that for each
Step Rate Loan, such scheduled monthly payments will reflect scheduled
increases to the Mortgage Rate provided for in the related Mortgage Note (and
that for the Step Rate Loan that provides for adjustments based on the [ ]
Index during the last two years of the loan term, the [ ] Index applicable
to each adjustment will be [ ]%) (iv) there are no delinquencies or
Realized Losses, scheduled interest and principal payments on the Mortgage
Loans are timely received and prepayments are made on the Mortgage Loans on
their respective Due Dates at the indicated CPRs (without regard to any Lock-
out Periods) set forth in the tables, (v) neither the Master Servicer nor the
Depositor exercises its right of optional termination described herein, (vi)
no Mortgage Loans are required to be purchased from the Mortgage Pool, (vii)
there are no Prepayment Interest Shortfalls, (viii) distributions on the
Certificates are made on the [ ] day of each month commencing in [
], 199[ ], and (ix) the Certificates will be issued on [ ], 199[ ]. To
the extent that the Mortgage Loans or the Certificates have characteristics
that differ from those assumed in preparing the tables set forth below, any of
the Class [ ], Class [ ], Class [ ] and/or Class [ ] Certificates may mature
earlier or later than indicated by the tables. It is highly unlikely that the
Mortgage Loans will prepay at any constant rate until maturity or that all the
Mortgage Loans will prepay at the same rate. In addition, variations in the
actual prepayment experience and the balance of the Mortgage Loans that prepay
may increase or decrease the percentages of initial Certificate Balances (and
shorten or extend the weighted average lives) shown in the following tables.
Such variations may occur even if the average prepayment experience of the
Mortgage Loans were to equal any of the specified CPR percentages. Investors
are urged to conduct their own analyses of the rates at which the Mortgage
Loans may be expected to prepay.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class [ ] Certificates and sets forth
the percentages of the initial Certificate Balance of the Class [ ]
Certificates that would be outstanding after each of the dates shown at the
indicated CPRs.
<PAGE>59
Percent of the Initial Certificate Balance of the
Class [ ] Certificates at the Respective CPRs
Set Forth Below:
Date 0% 5% 10% 15% 20%
---- -- -- --- --- ---
(A) The weighted average life of a Class [ ] Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class [ ] Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class [ ] Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class [ ] Certificates and sets forth
the percentages of the initial Certificate Balance of the Class [ ]
Certificates that would be outstanding after each of the dates shown at the
indicated CPRs.
Percent of the Initial Certificate Balance of the
Class [ ] Certificates at the Respective CPRs
Set Forth Below:
Date 0% 5% 10% 15% 20%
---- -- -- --- --- ---
(A) The weighted average life of a Class [ ] Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class [ ] Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class [ ] Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class [ ] Certificates and sets forth
the percentages of the initial Certificate Balance of the Class [ ]
Certificates that would be outstanding after each of the dates shown at the
indicated CPRs.
<PAGE>60
Percent of the Initial Certificate Balance of the
Class [ ] Certificates at the Respective CPRs
Date 0% 5% 10% 15% 20%
---- -- -- --- --- ---
(A) The weighted average life of a Class [ ] Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class [ ] Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class [ ] Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class [ ] Certificates and sets forth
the percentages of the initial Certificate Balance of the Class [ ]
Certificates that would be outstanding after each of the dates shown at the
indicated CPRs.
Percent of the Initial Certificate Balance of the
Class [ ] Certificates at the Respective CPRs
Set Forth Below:
Date 0% 5% 10% 15% 20%
---- -- -- --- --- ---
(A) The weighted average life of a Class [ ] Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class [ ] Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class [ ] Certificate.
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the Offered
Certificates will be used by the Depositor to purchase the Mortgage Loans and
to pay certain expenses in connection with the issuance of the Certificates.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is the opinion of Willkie Farr & Gallagher, counsel to the Depositor,
that upon the issuance of the Offered Certificates, assuming compliance with
all provisions of the Pooling and Servicing Agreement and based upon the law
on the date hereof, for federal income tax purposes, (a) the Trust Fund
(exclusive of the right to any Prepayment Premium collected from any borrower)
will qualify as a REMIC under the Internal Revenue Code of 1986 (the "Code")
and (b)(i) the Offered Certificates and the Private Certificates (other than
the Class R Certificates) will be the "regular interests" in the REMIC and
generally will be treated as debt instruments of the
<PAGE>61
REMIC and (ii) the Class R Certificates will be the sole class of "residual
interests" in the REMIC. See "Certain Federal Income Tax Consequences REMICs"
in the Prospectus.
The Class [ ] Certificates will not, and the Class [ ]
Certificates will, be treated as having been issued with original issue
discount for federal income tax reporting purposes. The prepayment assumption
that will be used in determining the rate of accrual of original issue
discount, market discount and premium, if any, for federal income tax purposes
will be based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to a CPR of
[ ]%. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Certain Federal Income Tax
Consequences REMICs Taxation of Owners of REMIC Regular Certificates Original
Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. The OID
Regulations in some circumstances permit the holder of a debt instrument to
recognize original issue discount under a method that differs from that used
by the issuer. Accordingly, it is possible that the holder of an Offered
Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the Trustee in preparing reports to
the Certificateholders and the IRS. Prospective purchasers of Offered
Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code and "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code. In addition,
interest (including original issue discount, if any) on the Offered
Certificates will be interest described in Section 856(c)(3)(B) of the Code.
Moreover, the Offered Certificates (other than the Class R Certificates) will
be "qualified mortgages" within the meaning of Section 860G of the Code.
However, the Offered Certificates will generally only be considered assets
described in Section 7701(a)(19)(C) of the Code to the extent that the
Mortgage Loans are secured by residential property and, accordingly,
investment in the Offered Certificates may not be suitable for certain thrift
institutions. See "Certain Federal Income Tax Consequences REMICs -
Characterization of Investments in REMIC Certificates" in the Prospectus.
Prospective purchasers of a Class R Certificate should consider carefully
the tax consequences of an investment in Residual Certificates discussed in
the Prospectus and should consult their own tax advisors with respect to those
consequences. See "Certain Federal Income Tax Consequences REMICs Taxation of
Owners of REMIC Residual Certificates" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences REMICs" in the Prospectus.
<PAGE>62
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested, that is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975
of the Code (each, a "Plan") should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction that is prohibited or is not otherwise permitted either under
ERISA or Section 4975 of the Code or whether there exists any statutory or
administrative exemption applicable thereto.
First Union Corporation ("First Union") has received from the DOL an
individual prohibited transaction exemption (the "Exemption"), which generally
exempts from the application of the prohibited transaction provisions of
Sections 406(a) and (b) and 407(a) of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code,
the purchase, sale and holding of Class [ ] Certificates, underwritten by an
Underwriter, as hereinafter defined, provided that certain conditions set
forth in the Exemption are satisfied. For purposes of this discussion, the
term "Underwriter" shall include (a) First Union, (b) any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with First Union, and (c) any member of the underwriting
syndicate or selling group of which First Union or a person described in (b)
is a manager or co-manger with respect to the Class [ ] Certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Class [ ]
Certificates to be eligible for exemptive relief under the Exemption.
First, the acquisition of Class [ ] Certificates by a Plan must be
on terms that are at least as favorable to the Plan as they would be in
an arm's length transaction with an unrelated party.
Second, the rights and interests evidenced by the Class [ ]
Certificate must not be subordinated to the rights and interests
evidenced by the other certificates of the same trust.
Third, the Class [ ] Certificates at the time of acquisition by the
Plan must be rated in one of the three highest generic rating categories
by Standard & Poor's Corporation ("Standard & Poor's), Moody's Investors
Service, Inc. ("Moody's"), Duff & Phelps Inc. ("Duff & Phelps") or Fitch
Investors Service, Inc. ("Fitch").
Fourth, the Trustee cannot be an affiliate of any other member of
the "Restricted Group," which consists of any Underwriter, the Depositor,
the Master Servicer, the Special Servicer, any sub-servicer, the Trustee,
any borrower with respect to Mortgage Loans constituting more than 5% of
the aggregate unamortized principal balance of the Mortgage Loans as of
the date of initial issuance of the Class [ ] Certificates and their
affiliates.
Fifth, the sum of all payments made to an retained by the
Underwriter must represent not more than reasonable compensation for
underwriting or placing the Class [ ] Certificates; the sum of all
payments made to and retained by the Depositor pursuant to the assignment
of the Mortgage Loans to the Trust Fund must represent not more than the
fair market value of such Mortgage Loans; and the sum of all payments
made to and retained by the Master Servicer, the Special Servicer and any
sub-servicer must represent not more than reasonable compensation for
such person's services under the Pooling and Servicing Agreement and
reimbursement of such person's reasonable expenses in connection
therewith.
Sixth, the investing Plan must be an accredited investor as defined
in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act.
<PAGE>63
Because the Class [ ] Certificates are not subordinated to any other
Class of Certificates, the second general condition set forth above is
satisfied with respect to the Class [ ] Certificates. It is a condition of
the issuance of the Class [ ] Certificates that they be rated not lower than [
] and [ ] by [ ] and [ ], respectively; thus, the
third general condition set forth above is satisfied with respect to the Class
[ ] Certificates as of the Delivery Date. In addition, the fourth general
condition set forth above is also satisfied as of the Delivery Date. A
fiduciary of a Plan contemplating purchasing a Class [ ] Certificate in the
secondary market must make its own determination that, at the time of such
purchase, the Class [ ] Certificates continue to satisfy the third and fourth
general conditions set forth above. A fiduciary of a Plan contemplating
purchasing any purchase of a Class [ ] Certificate must make its own
determination that the first, fifth and sixth general conditions set forth
above will be satisfied with respect to such Class [ ] Certificate as of the
date of such purchase.
The Exemption requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type
that have been included in other investment pools; (ii) certificates in such
other investment pools must have been rated in one of the three highest
categories of Standard & Poor's, Duff & Phelps, Moody's or Fitch for at least
one year prior to the Plan's acquisition of Certificates; and (iii)
certificates in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to any Plan's
acquisition of Certificates. The Depositor has confirmed to its satisfaction
that such requirements have been satisfied as of the date hereof.
If the general conditions set forth in the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by the reason of Sections 4975(c)(1)(A) through
(D) of the Code) in connection with (i) the direct or indirect sale, exchange
or transfer of Class [ ] Certificates in the initial issuance of Certificates
between the Depositor or an Underwriter and a Plan when the Depositor,
Underwriter, Trustee, Master Servicer, Special Servicer, sub-servicer or
mortgagor is a "Party in Interest" (as defined in the Prospectus) with respect
to the investing Plan, (ii) the direct or indirect acquisition or disposition
in the secondary market of Class [ ] Certificates by a Plan and (iii) the
holding of Class [ ] Certificates by a Plan. However, no exemption is
provided from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of
ERISA for the acquisition or holding of a Class [ ] Certificate on behalf of
an "Excluded Plan" by an person who has discretionary authority or renders
investment advice with respect to the assets of such Excluded Plan. For this
purpose, an Excluded Plan is a Plan sponsored by an member of the Restricted
Group.
If certain specific conditions set forth in the Exemption are also
satisfied, the Exemption also may provide an exemption from the restrictions
imposed by Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the
Code in connection with (1) the direct or indirect sale, exchange or transfer
of Class [ ] Certificates in the initial issuance of Certificates between the
Depositor or an Underwriter and a Plan (other than an Excluded Plan) when the
person who has discretionary authority or renders investment advice with
respect to the investment of Plan assets in such Certificates is (a) a
mortgagor with respect to 5% or less of the fair market value of the Mortgage
Loans or (b) an affiliate of such a person, (2) the direct or indirect
acquisition, or disposition in their secondary market, of Class [ ]
Certificates by a Plan and (3) the holding of Class [ ] Certificates by a
Plan.
Further, if certain specific conditions set forth in the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions
imposed by Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed
by Sections 4975(a) and (b) of the Code by reasons of Section 4975(c) of the
Code for transactions in connection with the servicing, management and
operation of the Mortgage Pool. The Depositor expects that the specific
conditions set forth in the Exemption application required for this purpose
will be satisfied with respect to the Class [ ] Certificates.
<PAGE>64
The Exemption also provides an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the
Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party in Interest with respect to an investing Plan
by virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Class [ ] Certificates. A purchaser of a Class [ ] Certificate
should be aware, however, that even if the conditions specified in one or more
exemptions are satisfied, the scope of relief provided by an exemption may not
cover all acts that may be considered prohibited transactions.
Before purchasing a Class [ ] Certificate, a fiduciary of a Plan should
itself confirm that the specific and general conditions and the other
requirements set forth in the Exemption would be satisfied. In addition to
making its own determination as to the availability of the exemptive relief
that may be provided in the Exemption, the Plan fiduciary should consider the
availability of any other prohibited transaction exemptions.
The DOL recently issued a Prohibited Transaction Class Exemption 95-60
(the "Class Exemption"), which exempts from the application of the prohibited
transactions provisions of Sections 406(a), 406(b) and 407(a) of ERISA and
Section 4975 of the Code transactions in connection with the servicing,
management and operation of a trust in which an insurance company general
account has an interest as a result of its acquisition of certificates issued
by the trust, provided that certain conditions are satisfied. Insurance
company general accounts are allowed to purchase, in reliance on the Class
Exemption, classes of Certificates that (i) are subordinated to other classes
of Certificates and/or (ii) have not received a rating at the time of the
acquisition in one of the three highest rating categories from Standard &
Poor's, Moody's, Duff & Phelps or Fitch. In addition to the foregoing Class
Exemption, certain insurance company general accounts, which support policies
issued by any insurer on or before December 31, 1998 to or for the benefit of
employee benefit plans, are allowed to purchase Certificates in reliance upon
regulations to be promulgated by the DOL pursuant to Section 1460 of the Small
Business Job Protection Act of 1996. If such policies satisfy the
Section 1460 regulations, then the insurer will be deemed in compliance
with ERISA's fiduciary requirements and prohibited transaction rules with
respect to those assets of the insurer's general account which support such
policies.
Because the characteristics of the Class [ ], Class [ ] and Class [ ]
Certificates do not meet the requirements set forth in the Exemption, the
purchase or holding such Certificates by a Plan may result in prohibited
transactions or the imposition of excise taxes or civil penalties. As a
result, no transfer of any such Certificate or any interest therein may be
made to a Plan or to any person who is directly or indirectly purchasing such
Certificate or interest therein on behalf of, as named fiduciary of, as
trustee of, or with assets of a Plan, unless the prospective transferee
provides the Certificate Registrar with a certification of facts and an
opinion of counsel which establish to the satisfaction of the Certificate
Registrar that such transfer will not result in a violation of Section 406 of
ERISA or Section 4975 of the Code or result in the imposition of an excise tax
under Section 4975 of the Code. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
The Class [ ] and Class [ ] Certificates will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") for so long as they remain rated in one of the two
highest rating categories by one or more nationally recognized statistical
rating organizations, and as such are legal investments for certain entities
to the extent provided in SMMEA. Such investments, however, will be subject
to general regulatory considerations governing investment practices under
state and federal law. Furthermore, certain states have recently enacted
legislation overriding the legal investment provisions of SMMEA. The Class [
] and Class [ ] Certificates will not constitute "mortgage related securities"
for purposes of SMMEA. As a result, the appropriate characterization of the
Class [ ] and Class [ ] Certificates under various legal investment
restrictions, and thus the ability of investors subject to these restrictions
to purchase Certificates of those Classes, may be subject to significant
interpretative uncertainties. In addition, and without regard to the
applicability of SMMEA, institutions whose investment activities are subject
to review by federal or state regulatory authorities may be or may become
subject to restrictions on the investment by such institutions in certain
forms of mortgage related securities. Investors should consult their own
legal advisors to determine whether and to what extent the Offered
Certificates constitute legal investments for them. See "Legal Investment" in
the Prospectus.
<PAGE>65
The Depositor makes no representation as to the ability of particular
investors to purchase the Offered Certificates under applicable legal
investment or other restrictions. All institutions whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the Offered
Certificates constitute legal investments for them or are subject to
investment, capital or other restrictions. See "Legal Investment" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter, the Offered Certificates
will be purchased from the Depositor by the Underwriter, upon issuance.
Proceeds to the Depositor from the sale of the Offered Certificates, after
deducting expenses payable by the Depositor, will be approximately [ ]% of
the initial aggregate Certificate Balance thereof, plus accrued interest.
Distribution of the Offered Certificates will be made by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The Underwriter may effect such
transactions by selling the Offered Certificates to or through dealers, and
such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter. In connection with the
purchase and sale of the Offered Certificates, the Underwriter may be deemed
to have received compensation from the Depositor in the form of underwriting
discounts. The Underwriter and any dealers that participate with the
Underwriter in the distribution of the Offered Certificates may be deemed to
be underwriters and any profit on the resale of the Offered Certificates
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act.
Purchasers of the Offered Certificates, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of Offered Certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
The Depositor also has been advised by the Underwriter that it, itself or
through one or more of its affiliates, currently intends to make a market in
the Offered Certificates; however, it has no obligation to do so, any market-
making may be discontinued at any time and there can be no assurance that an
active public market for the Offered Certificates will develop. See "Risk
Factors Certificates Limited Liquidity" herein and "Risk Factors Limited
Liquidity" in the Prospectus.
The Depositor has agreed to indemnify the Underwriter and each person, if
any, who controls the Underwriter within the meaning of Section 15 of the
Securities Act against, or make contributions to the Underwriter and each such
controlling person with respect to, certain liabilities, including liabilities
under the Securities Act.
Any underwriter not affiliated with the Depositor and certain of its
associates may be customers of (including borrowers from), engage in
transactions with, and/or perform services for the Depositor, its affiliates,
and the Trustee in the ordinary course of business.
<PAGE>66
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Willkie
Farr & Gallagher, New York, New York and for the Underwriter by
Kilpatrick Stockton, L.L.P., Charlotte, North Carolina.
RATING
It is a condition of their issuance that the Class [ ] Certificates
be rated not lower than "[ ]" by [ ], and that the Class [ ]
Certificates be rated not lower than "[ ]" by [ ].
The ratings on the Offered Certificates address the likelihood of the
timely receipt of interest payments and ultimate receipt of principal payments
to which the holders thereof are entitled. The ratings take into
consideration the credit quality of the Mortgage Pool, structural and legal
aspects associated with the Offered Certificates, and the extent to which, the
payment stream from the Mortgage Pool is adequate to make payments required
under the Offered Certificates. The ratings on the Offered Certificates do
not, however, constitute statements regarding frequency of prepayments
(including both voluntary and involuntary prepayments) on the Mortgage Loans
or the corresponding effect on yield to investors.
There can be no assurance that any rating agency not requested to rate
the Offered Certificates will not nonetheless issue a rating to any or all
Classes thereof and, if so, what such rating or ratings would be. A rating
assigned to any Class of Offered Certificates by a rating agency that has not
been requested by the Depositor to do so may be lower than the rating assigned
thereto by [ ].
The ratings on the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating agency. See "Risk
Factors Limited Nature of Ratings" in the Prospectus.
<PAGE>67
INDEX OF PRINCIPAL DEFINITIONS
Page
Accrued Certificate Interest . . . . . . . . . . . . . . . . . . . . . . S-49
Additional Trust Fund Expenses . . . . . . . . . . . . . . . . . . S-10, S-52
Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-53
ARM Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-8, S-26
Assumed Scheduled Payment . . . . . . . . . . . . . . . . . . . . . S-15, S-50
Available Distribution Amount . . . . . . . . . . . . . . . . . . . S-12, S-47
Balloon Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Balloon Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-8
Certificate Balance . . . . . . . . . . . . . . . . . . . . . S-2, S-10, S-45
Certificate Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-47
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-44
Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-6, S-44
Class Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-64
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
Collection Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
Compensating Interest Payment . . . . . . . . . . . . . . . . . . . S-16, S-42
Corrected Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Cut-off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Definitive Certificate . . . . . . . . . . . . . . . . . . . . . . . . . S-45
Delivery Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
Distributable Certificate Interest . . . . . . . . . . . . . . . . S-14, S-49
Distribution Date . . . . . . . . . . . . . . . . . . . . . . S-2, S-11, S-47
Distribution Date Statement . . . . . . . . . . . . . . . . . . . . . . . S-53
DOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20, S-62
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
First Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Fixed Rate Loans . . . . . . . . . . . . . . . . . . . . . . . S-2, S-7, S-26
Initial Pool Balance . . . . . . . . . . . . . . . . . . . . . S-2, S-7, S-25
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-61
Lock-out Expiration Date . . . . . . . . . . . . . . . . . . . . . S-8, S-26
Lock-out Period . . . . . . . . . . . . . . . . . . . . . . . . . . S-8, S-26
Master Servicer Reimbursement Rate . . . . . . . . . . . . . . . . S-16, S-53
Master Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Modification Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Monthly Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Mortgage File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Mortgage Loan Purchase Agreement . . . . . . . . . . . . . . . . . S-9, S-37
Mortgage Loan Seller . . . . . . . . . . . . . . . . . . . . . . . S-2, S-37
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-25
<PAGE>68
Mortgage Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Mortgage Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Mortgage Rates . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-7, S-26
Mortgaged Property . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-25
Net Aggregate Prepayment Interest Shortfall . . . . . . . . . . . . S-16, S-49
Net Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-46
Nonrecoverable P&I Advance . . . . . . . . . . . . . . . . . . . . . . . S-53
Offered Certificates . . . . . . . . . . . . . . . . . . . . . S-1, S-6, S-44
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-61
P&I Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15, S-52
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20, S-62
Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . S-10, S-44
Prepayment Interest Excess . . . . . . . . . . . . . . . . . . . . S-16, S-42
Prepayment Interest Shortfall . . . . . . . . . . . . . . . . . . . S-16, S-42
Prepayment Premium . . . . . . . . . . . . . . . . . . . . . . . . S-8, S-26
Principal Distribution Amount . . . . . . . . . . . . . . . . . . . S-14, S-49
Private Certificates . . . . . . . . . . . . . . . . . . . . . S-1, S-6, S-44
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
Realized Losses . . . . . . . . . . . . . . . . . . . . . . . . . . S-10, S-52
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
Related Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-53
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-19
REMIC Regular Certificates . . . . . . . . . . . . . . . . . . . . S-6, S-44
REO Property . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18, S-40
Resolution Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Scheduled Payment . . . . . . . . . . . . . . . . . . . . . . . . . S-15, S-50
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
Servicing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21, S-64
Special Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Specially Serviced Mortgage Loans . . . . . . . . . . . . . . . . . . . . S-40
Specially Serviced Trust Fund Assets . . . . . . . . . . . . . . . . . . S-40
Stated Principal Balance . . . . . . . . . . . . . . . . . . . . . S-11, S-46
Step Rate Loans . . . . . . . . . . . . . . . . . . . . . . . . . . S-8, S-26
Subordinate Certificates . . . . . . . . . . . . . . . . . . . . . S-17, S-51
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-10, S-44
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-54
Weighted Average Net Mortgage Rate . . . . . . . . . . . . . . . . S-11, S-46
<PAGE>69
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
Original
Loan Id. Property Address City State Zip Balance(1)
-------- -------- ------- ---- ----- --- ----------
Remaining Term
(mo.)
Cut-Off ----------------
Date Mortgage Annual Debt Stated Maturity Loan
Balance Rate Service(2) Maturity Amort. Date Type
------- -------- ------------ -------- ------ ------- ----
<PAGE>
FIRST UNION COMMERCIAL MORTGAGE SECURITIES, INC.
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(Issuable in Series)
UNDERWRITING AGREEMENT
Charlotte, North Carolina
____________, 199_
________________________________
As Representative of the several
Underwriters named in Schedule
II hereto
____________________
____________________
____________________
Dear Sirs:
First Union Commercial Mortgage Securities, Inc., a North Carolina
corporation (the "Company"), proposes to issue its Commercial Mortgage
Pass-Through Certificates, Series 199[ ]-CMBS-[ ] (the "Certificates"), in [ ]
classes (each, a "Class") to be designated as the Class [ ] Certificates, the
Class [ ] Certificates, the Class [ ] Certificates and the Class [ ]
Certificates. The Company further proposes to sell to the Underwriters named in
Schedule II hereto, for whom you are acting as Representative, the [Class [ ]
Certificates and Class [ ] Certificates (the "Underwritten Certificates") in the
respective original principal amounts set forth in Schedule I hereto]. The
Certificates will represent in the aggregate the entire beneficial ownership
interest in a trust fund (the "Trust Fund") consisting primarily of a segregated
pool (the "Mortgage Pool") of mortgage loans (the "Mortgage Loans") secured by
[first] [junior] liens on the borrowers' fee (or in [ ] cases, leasehold)
interests in multifamily and commercial properties (the "Mortgaged Properties").
The Trust Fund will be created, the Certificates will be issued and the Mortgage
Pool will be serviced and administered pursuant to a pooling and servicing
agreement (the "Pooling and Servicing Agreement"), to be dated as of
_______________, 199_ (the "Cut-off Date"), among the Company,
__________________, as master servicer (the "Master Servicer"), [ , as special
servicer (the "Special Servicer")] and ___________, as trustee (the "Trustee").
[The Mortgage Loans are owned, as of the date hereof, by _____________________
(the "Mortgage Loan Seller") and will be acquired by the Company, on or before
the Closing Date (as hereinafter defined), pursuant to a mortgage loan purchase
agreement (the "Mortgage Loan Purchase Agreement"), dated [the date hereof],
between the Company and the Mortgage Loan Seller.] The Underwritten Certificates
and the Mortgage Pool are described more fully in Schedule I hereto and in a
registration statement furnished to you by the Company.
<PAGE>
If the firm or firms listed in Schedule II hereto include only , then
the terms "Underwriters" and "Representative", as used herein, shall each be
deemed to refer to . Capitalized terms used but not otherwise defined herein
shall have the respective meanings assigned to them in the Pooling and Servicing
Agreement.
1. Representations and Warranties. (I) The Company represents and
warrants to, and agrees with, each Underwriter that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement (No. 33-_______) on Form S-3
for the registration of Commercial Mortgage Pass-Through Certificates,
issuable in series, including the Underwritten Certificates, under the
Securities Act of 1933, as amended (the "1933 Act"), which registration
statement has become effective and a copy of which, as amended to the date
hereof, has heretofore been delivered to you. The Company meets the
requirements for use of Form S-3 under the 1933 Act, and such registration
statement, as amended at the date hereof, meets the requirements set forth
in Rule 415(a)(1)(x) under the 1933 Act and complies in all other material
respects with the 1933 Act and the rules and regulations thereunder. The
Company proposes to file with the Commission, with your consent, pursuant
to Rule 424 under the 1933 Act, a supplement dated ____________, 199_ (the
"Prospectus Supplement") to the prospectus dated _______________, 199_ (the
"Basic Prospectus"), relating to the Underwritten Certificates and the
method of distribution thereof, and has previously advised you of all
further information (financial and other) with respect to the Underwritten
Certificates and the Mortgage Pool to be set forth therein. Such
registration statement (No. 33-_____________), including all exhibits
thereto, is referred to herein as the "Registration Statement"; and the
Basic Prospectus and the Prospectus Supplement, together with any amendment
thereof or supplement thereto authorized by the Company prior to the
Closing Date for use in connection with the offering of the Underwritten
Certificates, are hereinafter called the "Prospectus". Any preliminary form
of the Prospectus Supplement that has heretofore been filed pursuant to
Rule 424 or, prior to the effective date of the Registration Statement,
pursuant to Rule 402(a) or 424(a), is hereinafter called a "Preliminary
Prospectus Supplement". If so stated in the Prospectus Supplement, the
Company will file with the Commission within fifteen days of the issuance
of the Underwritten Certificates a report on Form 8-K ("8-K") setting forth
specific information concerning the Mortgage Pool and the Underwritten
Certificates to the extent that such information is not set forth in the
Prospectus Supplement.
(b) As of the date hereof, as of the date on which the Prospectus
Supplement is first filed pursuant to Rule 424 under the 1933 Act, as of
the date on which, prior to the Closing Date, any amendment to the
Registration Statement becomes effective, as of the date on which any
supplement to the Prospectus Supplement is filed with the Commission, and
as of the Closing Date, (i) the Registration Statement, as amended as of
any such time, and the Prospectus, as amended or supplemented as of any
such time, complies and will comply in all material respects with the
applicable requirements of
-2-
<PAGE>
the 1933 Act and the rules and regulations thereunder, (ii) the
Registration Statement, as amended as of any such time, does not contain
and will not contain any untrue statement of a material fact and does not
omit and will not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, and (iii) the Prospectus, as amended or supplemented as of any
such time, does not contain and will not contain any untrue statement of a
material fact and does not omit and will not omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
statements contained in or omitted from the Registration Statement or the
Prospectus or any amendment or supplement thereto made in reliance upon and
in conformity with information furnished in writing to the Company by or on
behalf of any Underwriter through you specifically for use in the
Registration Statement and the Prospectus.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of North Carolina
with corporate power and authority to own, lease or operate its properties
and to conduct its business as now conducted by it and to enter into and
perform its obligations under this Agreement and the Pooling and Servicing
Agreement; and the Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business.
(d) As of the date hereof, as of the date on which the Prospectus
Supplement is first filed pursuant to Rule 424 under the 1933 Act, as of
the date on which, prior to the Closing Date, any amendment to the
Registration Statement becomes effective, as of the date on which any
supplement to the Prospectus Supplement is filed with the Commission, and
as of the Closing Date, there has not and will not have been (i) any
request by the Commission for any further amendment to the Registration
Statement or the Prospectus or for any additional information, (ii) any
issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or the institution or threat of any
proceeding for that purpose or (iii) any notification with respect to the
suspension of the qualification of the Underwritten Certificates for sale
in any jurisdiction or any initiation or threat of any proceeding for such
purpose.
(e) This Agreement has been duly authorized, executed and delivered by
the Company, and the Pooling and Servicing Agreement, when executed and
delivered as contemplated hereby and thereby, will have been duly
authorized, executed and delivered by the Company; and this Agreement
constitutes, and the Pooling and Servicing Agreement, when so executed and
delivered will constitute, legal, valid and binding agreements of the
Company, enforceable against the Company in accordance with their
respective terms, except as enforceability may be limited by (i)
bankruptcy, insolvency, reorganization, receivership, moratorium or other
similar laws affecting the enforcement of the rights of creditors
generally, (ii) general principles of equity,
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whether enforcement is sought in a proceeding in equity or at law, and
(iii) public policy considerations underlying the securities laws, to the
extent that such public policy considerations limit the enforceability of
the provisions of this Agreement or the Pooling and Servicing Agreement
that purport to provide indemnification from or contributions relating to
securities law liabilities.
(f) As of the Closing Date, the Underwritten Certificates and the
Pooling and Servicing Agreement will conform in all material respects to
the respective descriptions thereof contained in the Prospectus. As of the
Closing Date, the Underwritten Certificates will be duly and validly
authorized and, when duly and validly executed, authenticated and delivered
in accordance with the Pooling and Servicing Agreement to you against
payment therefor as provided herein, will be duly and validly issued and
outstanding and entitled to the benefits of the Pooling and Servicing
Agreement.
(g) As of the Closing Date, each of the Mortgage Loans will meet the
criteria for selection described in the Prospectus, and on the Closing Date
the representations and warranties of the Company with respect to the
Mortgage Loans contained in the Pooling and Servicing Agreement will be
true and correct in all material respects.
(h) The Company is not in violation of its certificate of incorporation
or by-laws or in default under any agreement, indenture or instrument the
effect of which violation or default would be material to the Company.
Neither the issuance and sale of the Underwritten Certificates, nor the
execution and delivery by the Company of this Agreement or the Pooling and
Servicing Agreement, nor the consummation by the Company of any of the
transactions herein or therein contemplated, nor compliance by the Company
with the provisions hereof or thereof, does or will conflict with or result
in a breach of any term or provision of the certificate of incorporation or
by-laws of the Company or conflict with, result in a breach, violation or
acceleration of, or constitute a default under, the terms of any indenture
or other agreement or instrument to which the Company is a party or by
which it is bound, or any statute, order or regulation applicable to the
Company of any court, regulatory body, administrative agency or
governmental body having jurisdiction over the Company.
(i) Other than as set forth or contemplated in the Prospectus, there is
no action, suit or proceeding against the Company pending, or, to the
knowledge of the Company, threatened, before any court, arbitrator,
administrative agency or other tribunal (i) asserting the invalidity of
this Agreement, the Pooling and Servicing Agreement or the Underwritten
Certificates, (ii) seeking to prevent the issuance of the Underwritten
Certificates or the consummation of any of the transactions contemplated by
this Agreement or the Pooling and Servicing Agreement, (iii) that might
materially and adversely affect the performance by the Company of its
obligations under, or the validity or enforceability of, this Agreement,
the Pooling and Servicing Agreement or
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the Underwritten Certificates or (iv) seeking to affect adversely the
federal income tax attributes of the Underwritten Certificates as described
in the Prospectus.
(j) There are no contracts, indentures or other documents of a
character required by the 1933 Act or by the rules and regulations
thereunder to be described or referred to in the Registration Statement or
the Prospectus or to be filed as exhibits to the Registration Statement
which have not been so described or referred to therein or so filed or
incorporated by reference as exhibits thereto.
(k) No authorization, approval or consent of any court or governmental
authority or agency is necessary in connection with the offering, issuance
or sale of the Underwritten Certificates hereunder, except such as have
been, or as of the Closing Date will have been, obtained or such as may
otherwise be required under applicable state securities laws in connection
with the purchase and offer and sale of the Underwritten Certificates by
the Underwriters and any recordation of the respective assignments of the
Mortgage Loans to the Trustee pursuant to the Pooling and Servicing
Agreement that have not been completed.
(l) The Company possesses all material licenses, certificates,
authorities or permits issued by the appropriate state, federal or foreign
regulatory agencies or bodies necessary to conduct the business now
operated by it, and the Company has not received any notice of proceedings
relating to the revocation or modification of any such license,
certificate, authority or permit which, singly or in the aggregate, if the
subject of any unfavorable decision, ruling or finding, would materially
and adversely affect the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company.
(m) Any taxes, fees and other governmental charges in connection with
the execution and delivery of this Agreement and the Pooling and Servicing
Agreement or the execution, delivery and sale of the Underwritten
Certificates (other than such federal, state and local taxes as may be
payable on the income or gain recognized therefrom) have been or will be
paid at or prior to the Closing Date.
(n) Immediately prior to the assignment of the Mortgage Loans to the
Trustee, the Company will have good title to, and will be the sole owner
of, each Mortgage Loan, free and clear of any pledge, mortgage, lien,
security interest or other encumbrance.
(o) Neither the Company nor the Trust Fund is, and neither the issuance
and sale of the Underwritten Certificates in the manner contemplated by the
Prospectus nor the activities of the Trust Fund pursuant to the Pooling and
Servicing Agreement will cause the Company or the Trust Fund to be, an
"investment company" or under the control of an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended
(the "Investment Company Act").
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(p) Under generally accepted accounting principles ("GAAP") and for
federal income tax purposes, the Company will report the transfer of the
Mortgage Loans to the Trustee in exchange for the Underwritten Certificates
and the sale of the Underwritten Certificates to the Underwriters pursuant
to this Agreement as a sale of the interests in the Mortgage Loans
evidenced by the Underwritten Certificates. The consideration received by
the Company upon the sale of the Underwritten Certificates to the
Underwriters will constitute reasonably equivalent value and fair
consideration for the Underwritten Certificates. The Company will be
solvent at all relevant times prior to, and will not be rendered insolvent
by, the sale of the Underwritten Certificates to the Underwriters. The
Company is not selling the Underwritten Certificates to the Underwriters
with any intent to hinder, delay or defraud any of the creditors of the
Company.
(q) At the Closing Date, the respective classes of Underwritten
Certificates shall have been assigned ratings no lower than those set forth
in Schedule 1 hereto by the nationally recognized statistical rating
organizations identified in Schedule 1 hereto (individually and
collectively, the "Rating Agency").
(r) At the Closing Date, each of the representations and warranties of
the Company set forth in the Pooling and Servicing Agreement will be true
and correct in all material respects.
(II) Each Underwriter represents and warrants to the Company that, as
of the date hereof and as of the Closing Date, (i) such Underwriter has complied
with all of its obligations hereunder and (ii) with respect to all Computational
Materials and ABS Term Sheets, if any, provided by such Underwriter to the
Company pursuant to Section 4(b)(iv), such Computational Materials and ABS Term
Sheets are accurate in all material respects (taking into account the
assumptions explicitly set forth in the Computational Materials or ABS Term
Sheets) and constitute a complete set of all Computational Materials and ABS
Term Sheets that are required to be filed with the Commission pursuant to
Section 5(g).
2. Purchase and Sale. Subject to the terms and conditions and in
reliance upon the representations and warranties set forth herein, the Company
agrees to sell to the Underwriters, and the Underwriters agree, severally and
not jointly, to purchase from the Company, at the applicable purchase prices set
forth in Schedule I hereto, the respective principal amounts of the Underwritten
Certificates set forth opposite the name of each Underwriter set forth in
Schedule II hereto, and any additional portions of the Underwritten Certificates
that any such Underwriter may be obligated to purchase pursuant to Section 10,
in all cases plus accrued interest as set forth in Schedule I.
3. Delivery and Payment. Delivery of and payment for the Underwritten
Certificates shall be made in the manner, at the location(s), on the date and at
the time specified in Schedule I hereto (or such later date not later than ten
business days after such specified date as you shall designate), which date and
time may be changed by agreement between you and the Company or as provided in
Section 10 hereof (such date and time of
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delivery and payment for the Underwritten Certificates being herein called the
"Closing Date"). Delivery of the Underwritten Certificates shall be made either
directly to you or through the facilities of The Depository Trust Company
("DTC"), as specified in Schedule I hereto, for the respective accounts of the
Underwriters against payment by the respective Underwriters through you of the
purchase price therefor in immediately available funds wired to such bank as may
be designated by the Company, or such other manner of payment as may be agreed
upon by the Company and you. Any Class of Underwritten Certificates to be
delivered through the facilities of DTC shall be represented by one or more
global Certificates registered in the name of Cede & Co., as nominee of DTC,
which global Certificate(s) shall be placed in the custody of DTC not later than
10:00 a.m. (New York City time) on the Closing Date pursuant to a custodial
arrangement to be entered into between the Trustee or its agent and DTC. Unless
delivered through the facilities of DTC, the Underwritten Certificates shall be
in fully registered certificated form, in such denominations and registered in
such names as you may have requested in writing not less than one full business
day in advance of the Closing Date.
The Company agrees to have the Underwritten Certificates, including the
global Certificates representing the Underwritten Certificates to be delivered
through the facilities of DTC, available for inspection, checking and, if
applicable, packaging by you in New York, New York, not later than the close of
business (New York City time) on the business day preceding the Closing Date.
References herein, including, without limitation, in the Schedules
hereto, to actions taken or to be taken following the Closing Date with respect
to any Underwritten Certificates that are to be delivered through the facilities
of DTC shall include, if the context so permits, actions taken or to be taken
with respect to the interests in such Certificates as reflected on the books and
records of DTC.
4. Offering by Underwriters.
(a) It is understood that the Underwriters propose to offer the
Underwritten Certificates for sale to the public, including, without
limitation, in and from the State of New York, as set forth in the
Prospectus Supplement. It is further understood that the Company, in
reliance upon a no-filing letter from the Attorney General of the State of
New York granted pursuant to Policy Statement 105, has not and will not
file an offering statement pursuant to Section 352-c of the General
Business Law of the State of New York with respect to the _______________
Certificates. Each of the Underwriters therefore covenants and agrees with
the Company that sales of the ____________ Certificates made by such
Underwriter in and from the State of New York will be made only to
institutional investors within the meaning of Policy Statement 105.
(b) Each Underwriter may prepare and provide to prospective investors
certain Computational Materials, Structural Term Sheets or Collateral Term
Sheets in connection with its offering of the Certificates, subject to the
following conditions:
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(i) Such Underwriter shall comply with the requirements of the
no-action letter, dated May 20, 1994, issued by the Commission to
Kidder, Peabody Acceptance Corporation I, Kidder, Peabody & Co.
Incorporated and Kidder Structured Asset Corporation, as made
applicable to other issuers and underwriters by the Commission in
response to the request of the Public Securities Association, dated May
25, 1994 (collectively, the "Kidder/PSA Letter"), and the requirements
of the no-action letter, dated February 17, 1995, issued by the
Commission to the Public Securities Association (the "PSA Letter" and,
together with the Kidder/PSA Letter, the "No-Action Letters").
(ii) For purposes hereof, "Computational Materials" shall have the
meaning given such term in the No-Action Letters, but shall include
only those Computational Materials that have been prepared or delivered
to prospective investors by or at the direction of such Underwriter.
For purposes hereof, "ABS Term Sheets," "Structural Term Sheets" and
"Collateral Term Sheets" shall have the meanings given such terms in
the PSA Letter but shall include only those ABS Term Sheets, Structural
Term Sheets or Collateral Term Sheets that have been prepared for or
delivered to prospective investors by or at the direction of such
Underwriter.
(iii) All Computational Materials and ABS Term Sheets provided to
prospective investors shall bear a legend in a form previously approved
in writing by the Company. The Company shall have the right to require
additional specific legends or notations to appear on any Computational
Materials or ABS Term Sheets, the right to require changes regarding
the use of terminology and the right to determine the types of
information appearing therein.
(iv) Such Underwriter shall provide the Company with
representative forms of all Computational Materials and ABS Term Sheets
prior to their first use, to the extent such forms have not previously
been approved by the Company for use by the Underwriter. Such
Underwriter shall not distribute any such Computational Materials or
ABS Term Sheets unless the forms and methodology thereof have been
approved by the Company. Such Underwriter shall provide to the Company,
for filing on Form 8-K as provided in Section 5(g), copies (in such
format as required by the Company) of all Computational Materials and
ABS Term Sheets. The Underwriter may provide copies of the foregoing in
a consolidated or aggregated form including all information required to
be filed. All Computational Materials and ABS Term Sheets described in
this subsection (iv) must be provided to the Company (a) in a medium
suitable for electronic filing with the Commission under EDGAR, or a
medium that can be readily converted to such a medium (unless, as to
Computational Materials, an exemption is granted under Regulation S-T,
in which case the Computational Materials shall be provided in paper
format
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<PAGE>
suitable for filing with the Commission) and (b) not later than 10:00
a.m. (New York City time) on a business day that is not less than one
business day before filing thereof is required pursuant to the terms of
the No-Action Letters.
(v) All information included in the Computational Materials and
ABS Term Sheets shall be generated based on substantially the same
methodology and assumptions as are used to generate the information in
the Prospectus Supplement as set forth therein; provided that the
Computational Materials and ABS Term Sheets may include information
based on alternative methodologies or assumptions if specified therein.
If any Computational Materials or ABS Term Sheets were based on
assumptions with respect to the Mortgage Pool that differ from the
final Pool Information in any material respect or on Underwritten
Certificate structuring terms (except in the case of Computational
Materials when the different structuring terms were hypothesized and so
described) that were revised in any material respect prior to the
printing of the Prospectus, such Underwriter shall immediately inform
the Company and upon the direction of the Company shall prepare revised
Computational Materials and ABS Term Sheets, as the case may be, based
on the final Pool Information and structuring assumptions, circulate
such revised Computational Materials and ABS Term Sheets to all
recipients of the preliminary versions thereof, and include such
revised Computational Materials and ABS Term Sheets (marked, "as
revised") in the materials delivered to the Company pursuant to
subsection (iv) above.
(vi) The Company shall not be obligated to file any Computational
Materials or ABS Term Sheets that have been determined to contain any
material error or omission, provided that, at the request of such
Underwriter, the Company will file Computational Materials or ABS Term
Sheets that contain a material error or omission if clearly marked
"superseded by materials dated ____________ __" and accompanied by
corrected Computational Materials or ABS Term Sheets that are marked
"material previously dated ___________ __, as corrected." If, within
the period during which the Prospectus relating to the Underwritten
Certificates is required to be delivered under the 1933 Act, any
Computational Materials or ABS Term Sheets are determined, in the
reasonable judgment of the Company or such Underwriter, to contain a
material error or omission, the Underwriter shall prepare a corrected
version of such Computational Materials or ABS Term Sheets, shall
circulate such corrected Computational Materials or ABS Term Sheets to
all recipients of the prior versions thereof, and shall deliver copies
of such corrected Computational Materials or ABS Term Sheets (marked,
"as corrected") to the Company for filing with the Commission in a
subsequent Form 8-K submission (subject to the Company's obtaining an
accountant's comfort letter in respect of such corrected Computational
Materials and ABS Term Sheets, which shall be at the expense of such
Underwriter).
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(vii) Such Underwriter shall be deemed to have represented, as of
the Closing Date, that except for Computational Materials and/or ABS
Term Sheets provided to the Company pursuant to subsection (iv) above,
such Underwriter did not provide any prospective investors with any
information in written or electronic form in connection with the
offering of the Underwritten Certificates that is required to be filed
with the Commission in accordance with the No-Action Letters, and such
Underwriter shall provide the Company with a certification to that
effect on the Closing Date.
(viii) In the event of any delay in the delivery by such
Underwriter to the Company of all Computational Materials and ABS Term
Sheets required to be delivered in accordance with subsection (iv)
above, the Company shall have the right to delay the release of the
Prospectus to investors or to the Underwriter, to delay the Closing
Date and to take other appropriate actions in each case as necessary in
order to allow the Company to comply with its agreement set forth in
Section 5(g) to file the Computational Materials and ABS Term Sheets by
the time specified therein.
(ix) Computational Materials and ABS Term Sheets may be
distributed by the Underwriter through electronic means in accordance
with SEC Release No. 33-7233 (the "Release") and with such procedures
as the Company may prescribe from time to time.
(x) Such Underwriter represents that it has in place, and
covenants that it shall maintain, internal controls and procedures
which it reasonably believes to be sufficient to ensure full compliance
with all applicable legal requirements of the No-Action Letters with
respect to the generation and use of Computational Materials and ABS
Term Sheets in connection with the offering of the Underwritten
Certificates.
(c) Each Underwriter further agrees that it shall promptly provide the
Company with such information as to matters of fact as the Company may
reasonably request to enable it to comply with its reporting requirements
with respect to each class of Underwritten Certificates to the extent such
information can in the good faith judgment of the Underwriter be determined
by it.
5. Covenants of the Company. The Company covenants and agrees with the
Underwriters ------------------------- that:
(a) The Company will not file any amendment to the Registration
Statement or any supplement to the Basic Prospectus relating to or
affecting the Underwritten Certificates, unless the Company has furnished a
copy to you for your review prior to filing, and will not file any such
proposed amendment or supplement to which you reasonably object. Subject to
the foregoing sentence, the Company will cause the Prospectus Supplement to
be transmitted to the Commission for filing pursuant to Rule 424 under the
1933 Act or will cause the Prospectus Supplement to be filed with the
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Commission pursuant to said Rule 424. The Company promptly will advise you
or counsel for the Underwriters (i) when the Prospectus Supplement shall
have been filed or transmitted to the Commission for filing pursuant to
Rule 424, (ii) when any amendment to the Registration Statement shall have
become effective, (iii) of any request by the Commission to amend the
Registration Statement or supplement the Prospectus Supplement or for any
additional information in respect of the offering contemplated hereby, (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto which shall have become effective on or prior to the Closing Date
or the institution or threatening of any proceeding for that purpose, and
(v) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Underwritten Certificates for sale
in any jurisdiction or the institution or threatening of any proceeding for
that purpose. The Company will use its best efforts to prevent the issuance
of any such stop order or suspension and, if issued, to obtain as soon as
possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the Underwritten
Certificates is required to be delivered under the 1933 Act, any event
occurs as a result of which the Prospectus, as then amended or
supplemented, would include any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading, or
if it shall be necessary to amend or supplement the Prospectus to comply
with the 1933 Act or the rules and regulations thereunder, the Company
promptly will prepare and file with the Commission, at the expense of the
Company, subject to paragraph (a) of this Section 5, an amendment or
supplement that will correct such statement or omission or an amendment
that will effect such compliance and, if such amendment or supplement is
required to be contained in a post-effective amendment to the Registration
Statement, the Company will use its best efforts to cause such amendment to
the Registration Statement to be made effective as soon as possible.
(c) The Company will furnish to you and to counsel for the
Underwriters, without charge, signed copies of the Registration Statement
(including exhibits thereto) and each amendment thereto which shall become
effective on or prior to the Closing Date, and to each other Underwriter a
copy of the Registration Statement (without exhibits thereto) and each such
amendment and, so long as delivery of a prospectus by an Underwriter or
dealer may be required by the 1933 Act, as many copies of any Preliminary
Prospectus Supplement and the Prospectus Supplement and any amendments and
supplements thereto as you may reasonably request.
(d) The Company will furnish such information, execute such instruments
and take such action, if any, as may be required to qualify the
Underwritten Certificates for sale under the laws of such jurisdictions as
you may designate and will maintain such qualifications in effect so long
as required for the distribution of the Underwritten Certificates;
provided, however, that the Company shall not be required to qualify to do
business in any jurisdiction where it is not now qualified or to take any
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action that would subject it to general or unlimited service of process in
any jurisdiction where it is not now subject to such service of process.
(e) The Company will pay, or cause to be paid, all costs and expenses
in connection with the transactions herein contemplated, including, but not
limited to, the fees and disbursements of its counsel; the costs and
expenses of printing (or otherwise reproducing) and delivering the Pooling
and Servicing Agreement and the Underwritten Certificates; the fees and
disbursements of accountants for the Company; the costs and expenses in
connection with the qualification or exemption of the Underwritten
Certificates under state securities or "blue sky" laws, including filing
fees and reasonable fees and disbursements of counsel in connection
therewith, in connection with the preparation of any blue sky survey and in
connection with any determination of the eligibility of the Underwritten
Certificates for investment by institutional investors and the preparation
of any legal investment survey; the expenses of printing any such blue sky
survey and legal investment survey; ]the cost and expenses in connection
with the preparation, printing and filing of the Registration Statement
(including exhibits thereto), the Basic Prospectus, the Preliminary
Prospectus Supplement, if any, and the Prospectus Supplement, the
preparation and printing of this Agreement and the delivery to the
Underwriters of such copies of each Preliminary Prospectus Supplement, if
any, and Prospectus Supplement as you may reasonably request; and the fees
of the Rating Agency that are rating the Underwritten Certificates. Except
as provided in Section 7, the Underwriters shall be responsible for paying
all costs and expenses incurred by them in connection with the purchase and
sale of the Underwritten Certificates.
(f) The Company will enter into the Pooling and Servicing Agreement on
or prior to the Closing Date.
(g) The Company shall, as to itself, and the Company, or pursuant to
the Pooling and Servicing Agreement the Trustee, shall, as to the Trust
Fund, satisfy and comply with all reporting requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the rules and
regulations thereunder. The Company will also file with the Commission a
report on Form 8-K setting forth all Computational Materials and ABS Term
Sheets provided to the Company by an Underwriter and identified by it as
such within the time period allotted for such filing pursuant to the
No-Action Letters; provided, however, that prior to such filing of the
Computional Materials and ABS Term Sheets by the Company, each Underwriter
must comply with its obligations pursuant to Section 4. The Company shall
file any corrected Computational Materials described in Section 4(b)(v) as
soon as practicable following receipt thereof.
(h) The Company will seek to obtain from the staff of the Commission a
Continuing Hardship Exemption from electronic filing of Computational
Materials with the Commission under EDGAR pursuant to Regulation S-T,
allowing Computational Materials to be filed with the Commission in paper
format.
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6. Conditions to the Obligations of the Underwriters. The obligations
of the Underwriters hereunder to purchase the Underwritten Certificates shall be
subject to the accuracy of the representations and warranties on the part of the
Company contained herein as of the date hereof and as of the date of the
effectiveness of any amendment to the Registration Statement filed prior to the
Closing Date and as of the Closing Date, to the accuracy of the statements of
the Company made in any certificates delivered pursuant to the provisions
hereof, to the performance by the Company of its obligations hereunder and to
the following additional conditions:
(a) The Registration Statement shall have become effective and no stop
order suspending the effectiveness of the Registration Statement, as
amended from time to time, shall have been issued and not withdrawn and no
proceedings for that purpose shall have been instituted or, to the
Company's knowledge, threatened; and the Prospectus Supplement shall have
been filed or transmitted for filing with the Commission in accordance with
Rule 424 under the 1933 Act;
(b) You shall have received from Kilpatrick Stockton, LLP, counsel
for the Underwriters, a favorable opinion, dated the Closing Date, as to
satisfaction of the conditions precedent to the Underwriters' obligations
to purchase the Underwritten Certificates and such other matters regarding
the Underwritten Certificates as you may reasonably request;
(c) The Company shall have delivered to you a certificate of the
Company, signed by an authorized officer of the Company and dated the
Closing Date, to the effect that: (i) the representations and warranties of
the Company in this Agreement are true and correct in all material respects
at and as of the Closing Date with the same effect as if made on the
Closing Date; and (ii) the Company has in all material respects complied
with all the agreements and satisfied all the conditions on its part that
are required hereby to be performed or satisfied at or prior to the Closing
Date;
(d) You shall have received with respect to the Company a good standing
certificate from the Secretary of State of the State of North Carolina,
dated not earlier than 30 days prior to the Closing Date;
(e) You shall have received from the Secretary or an assistant
secretary of the Company, in his individual capacity, a certificate, dated
the Closing Date, to the effect that: (i) each individual who, as an
officer or representative of the Company, signed this Agreement, the
Pooling and Servicing Agreement or any other document or certificate
delivered on or before the Closing Date in connection with the transactions
contemplated herein or in the Pooling and Servicing Agreement, was at the
respective times of such signing and delivery, and is as of the Closing
Date, duly elected or appointed, qualified and acting as such officer or
representative, and the signatures of such persons appearing on such
documents and certificates are their genuine signatures; and (ii) no event
(including, without limitation, any act or omission on the part of the
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Company) has occurred since the date of the good standing certificate
referred to in paragraph 6(d) above which has affected the good standing of
the Company under the laws of the State of North Carolina. Such certificate
shall be accompanied by true and complete copies (certified as such by the
Secretary or an assistant secretary of the Company) of the certificate of
incorporation and by-laws of the Company, as in effect on the Closing Date,
and of the resolutions of the Company and any required shareholder consent
relating to the transactions contemplated in this Agreement and the Pooling
and Servicing Agreement;
(f) You shall have received from Willkie Farr & Gallagher, counsel for
the Company, a favorable opinion, dated the Closing Date and satisfactory
in form and substance to you and counsel for the Underwriters, to the
effect that:
(i) The Company is a corporation in good standing under the laws
of the State of North Carolina and has the corporate power and
authority to enter into and perform its obligations under this
Agreement and the Pooling and Servicing Agreement;
(ii) The Registration Statement and any amendments thereto have
become effective under the 1933 Act; to the best knowledge of such
counsel, no stop order suspending the effectiveness of the Registration
Statement, as amended, has been issued and not withdrawn, no
proceedings for that purpose have been instituted or threatened and not
terminated; and the Registration Statement, the Prospectus Supplement
and each amendment or supplement thereto, as of their respective
effective or issue dates (other than the financial statements,
schedules and other financial and statistical information contained
therein as to which such counsel need express no opinion), complied as
to form in all material respects with the applicable requirements of
the 1933 Act and the rules and regulations thereunder; and such counsel
has no reason to believe that (A) the Registration Statement (which,
for purposes of this clause, shall be deemed not to include any
exhibits filed therewith), or any amendment thereto, at the time it
became effective, contained or, as of the date of such opinion,
contains any untrue statement of a material fact or omitted or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or that (B) the Prospectus,
as amended or supplemented, contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading (other than the financial statements, schedules
and other financial and statistical information contained therein as to
which such counsel need express no opinion);
(iii) To the best knowledge of such counsel, there are no material
contracts, indentures or other documents of a character required to be
described or referred to in the Registration Statement, as amended, or
the Prospectus Supplement or to be filed as exhibits to the
Registration Statement, as amended,
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<PAGE>
other than those described or referred to therein or filed or
incorporated by reference as exhibits thereto;
(iv) To the best knowledge of such counsel, there are no actions,
proceedings or investigations pending before or threatened by any
court, administrative agency or other tribunal to which the Company is
a party or of which any of its properties is the subject (a) which if
determined adversely to the Company would have a material adverse
effect on the business or financial condition of the Company, (b)
asserting the invalidity of this Agreement, the Pooling and Servicing
Agreement or the Underwritten Certificates, (c) seeking to prevent the
issuance of the Underwritten Certificates or the consummation by the
Company of any of the transactions contemplated by the Pooling and
Servicing Agreement or this Agreement, as the case may be, or (d) which
might materially and adversely affect the performance by the Company of
its obligations under, or the validity or enforceability of, the
Pooling and Servicing Agreement, this Agreement or the Underwritten
Certificates;
(v) Each of this Agreement and the Pooling and Servicing Agreement
has been duly authorized, executed and delivered by the Company, and
the Pooling and Servicing Agreement constitutes a valid, legal, binding
and enforceable agreement of the Company, subject, as to
enforceability, to bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting creditors' rights generally and to
general principles of equity regardless of whether enforcement is
sought in a proceeding in equity or at law;
(vi) The Underwritten Certificates, when duly and validly executed
and authenticated in the manner contemplated in the Pooling and
Servicing Agreement and delivered and paid for by the Underwriters as
provided herein, will be entitled to the benefits of the Pooling and
Servicing Agreement;
(vii) The statements set forth in the Prospectus Supplement under
the headings "Description of the Certificates" and "Servicing of the
Mortgage Loans" and in the Basic Prospectus under the headings
"Description of the Certificates" and "Description of the Pooling
Agreements", insofar as such statements purport to summarize certain
provisions of the Underwritten Certificates and the Pooling and
Servicing Agreement, are true and correct in all material respects;
(viii) The statements set forth in the Basic Prospectus and the
Prospectus Supplement under the headings "Certain Federal Income Tax
Consequences", "ERISA Considerations" and "Legal Investment", to the
extent that they constitute matters of federal law or legal conclusions
with respect thereto, are correct in all material respects with respect
to those consequences or aspects that are discussed;
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<PAGE>
(ix) The Class [ ] Certificates will be "mortgage related
securities", as defined in Section 3(a)(41) of the 1934 Act, so long as
such Certificates are rated in one of the two highest rating categories
by at least one nationally recognized statistical rating organization;
(x) The Pooling and Servicing Agreement is not required to be
qualified under the Trust Indenture Act of 1939, as amended, and
neither the Company nor the Trust Fund is required to be registered
under the Investment Company Act;
(xi) No consent, approval, authorization or order of any State of
North Carolina or federal court or governmental agency or body is
required for the consummation by the Company of the transactions
contemplated herein or in the Pooling and Servicing Agreement, except
(A) such as have been obtained under the 1933 Act and (B) such as may
be required under the blue sky laws of any jurisdiction in connection
with the offer and sale of the Underwritten Certificates by the
Underwriters, as to which such counsel need express no opinion;
(xii) Neither the issuance and sale of the Underwritten
Certificates, nor the execution or delivery of or performance under
this Agreement or the Pooling and Servicing Agreement, nor the
consummation of any other of the transactions contemplated herein or
therein will conflict with or result in a breach or violation of any
term or provision of, or constitute a default (or an event which with
the passing of time or notification, or both, would constitute a
default) under, the certificate of incorporation or by-laws of the
Company, or, to the knowledge of such counsel, any indenture or other
agreement or instrument to which the Company is a party or by which it
is bound, or any State of North Carolina or federal statute or
regulation applicable to the Company, or, to the knowledge of such
counsel, any order of any State of North Carolina or federal court,
regulatory, body, administrative agency or governmental body having
jurisdiction over the Company;
(xiii) Assuming compliance with all provisions of the Pooling and
Servicing Agreement, for federal income tax purposes, the Trust Fund
will qualify as a real estate mortgage investment conduit (a "REMIC")
under the Internal Revenue Code of 1986 (the "Code"), the Class [ ],
Class [ ] and Class [ ] Certificates will be the "regular interests" in
the REMIC, and the Class R Certificates will be the sole class of
"residual interests" in the REMIC; and
(xiv) The Certificates conform in all material respects to the
description thereof contained in the Prospectus; and the Pooling and
Servicing Agreement conforms in all material respects to the
description thereof contained in the Prospectus.
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<PAGE>
With respect to such opinion, such counsel may express its reliance as
to factual matters on the representations and warranties made by, and on
certificates or other documents furnished by officers of, the parties to
this Agreement and the Pooling and Servicing Agreement; may assume the due
authorization, execution and delivery of the instruments and documents
referred to therein by the parties thereto other than the Company; may
qualify such opinion only as to the federal laws of the United States of
America, the laws of the State of New York, the laws of the State of North
Carolina and the corporation law of the State of Delaware; and may, to the
extent deemed necessary by such counsel, rely on the opinion of counsel in
the regular employ of the Company or any affiliate of the Company or
independent North Carolina counsel. Such counsel shall also confirm that
the Underwriters may rely, on and as of the Closing Date, on any opinion or
opinions of such counsel submitted to any Rating Agency as if addressed to
the Underwriters and dated the Closing Date;
(g) You shall have received from _______________, certified public
accountants, a letter dated the Closing Date and satisfactory in form and
substance to you and counsel for the Underwriters, to the following effect:
(1) they have performed certain specified procedures as a result of
which they have determined that the information of an accounting,
financial or statistical nature set forth in the Prospectus Supplement
under the captions "Summary of the Prospectus Supplement," "Description
of the Mortgage Pool" and "Yield and Maturity Considerations" and on
Annex A agrees with the data sheet or computer tape prepared by or on
behalf of the Mortgage Loan Seller, unless otherwise noted in such
letter; and
(2) they have compared the data contained in the data sheet or
computer tape referred to in the immediately preceding clause (1) to
information contained in an agreed upon sampling of the Mortgage Loan
files and in such other sources as shall be specified by them, and
found such data and information to be in agreement in all material
respects;
(h) You shall have received written confirmation from the Rating Agency
that the Underwritten Certificates have been assigned the rating or ratings
specified in Schedule I hereto, which rating or ratings shall not have been
withdrawn;
(i) You shall have received with respect to the Trustee a good standing
or similar certificate from the Secretary of State of the state of its
organization or, if not applicable, an appropriate federal official, dated
not earlier than 30 days prior to the Closing Date;
(j) You shall have received from the Secretary or an assistant
secretary of the Trustee, in his individual capacity, a certificate, dated
the Closing Date, to the effect that: (i) each individual who, as an
officer or representative of the Trustee, signed the Pooling and Servicing
Agreement or any other document or certificate
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<PAGE>
delivered on or before the Closing Date in connection with the transactions
contemplated in the Pooling and Servicing Agreement was at the respective
times of such signing and delivery, and is as of the Closing Date, duly
elected or appointed, qualified and acting as such officer or
representative, and the signatures of such persons appearing on such
documents or certificates are their genuine signatures; and (ii) no event
(including, without limitation, any act or omission on the part of the
Trustee) has occurred since the date of the good standing or similar
certificate referred to in paragraph 6(i) above which has affected the good
standing of the Trustee under laws of the [State of___________________]
[United States].
(k) You shall have received from _____________________, counsel for the
Trustee, a favorable opinion, dated the Closing Date, in form and substance
satisfactory to you and counsel for the Underwriters, addressing such
matters as you and such counsel may reasonably require for the purpose of
enabling you and such counsel to pass upon the issuance and sale of the
Underwritten Certificates as herein contemplated and related proceedings;
(l) You shall have received with respect to the Master Servicer a good
standing or similar certificate from the Secretary of State of the state of
its organization or, if not applicable, an appropriate federal official,
dated not earlier than 30 days prior to the Closing Date;
(m) You shall have received from the Secretary or an assistant
secretary of the Master Servicer, in his individual capacity, a
certificate, dated the Closing Date, to the effect that: (i) each
individual who, as an officer or representative of the Master Servicer,
signed the Pooling and Servicing Agreement or any other document or
certificate delivered on or before the Closing Date in connection with the
transactions contemplated in the Pooling and Servicing Agreement was at the
respective times of such signing and delivery, and is as of the Closing
Date, duly elected or appointed, qualified and acting as such officer or
representative, and the signatures of such persons appearing on such
documents are their genuine signatures; and (ii) no event (including
without limitation, any act or omission on the part of the Master Servicer)
has occurred since the date of the good standing or similar certificate
referred to in paragraph 6(l) above which has affected the good standing of
the Master Servicer under the laws of the [State of ____________] [United
States].
(n) You shall have received from ___________________________, counsel
for the Master Servicer, a favorable opinion, dated the Closing Date, in
form and substance satisfactory to you and counsel for the Underwriters,
addressing such matters as you and such counsel may reasonably require for
the purpose of enabling you and such counsel to pass upon the issuance and
sale of the Underwritten Certificates as herein contemplated and related
proceedings;
(o) You shall have received with respect to the Special Servicer a good
standing or similar certificate from the Secretary of State of the state of
its organization
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<PAGE>
or, if not applicable, an appropriate federal official, dated not earlier
than 30 days prior to the Closing Date;
(p) You shall have received from the Secretary or an assistant
secretary of the Special Servicer, in his individual capacity, a
certificate, dated the Closing Date, to the effect that: (i) each
individual who, as an officer or representative of the Special Servicer,
signed the Pooling and Servicing Agreement or any other document or
certificate delivered on or before the Closing Date in connection with the
transactions contemplated in the Pooling and Servicing Agreement was at the
respective times of such signing and delivery, and is as of the Closing
Date, duly elected or appointed, qualified and acting as such officer or
representative, and the signatures of such persons appearing on such
documents are their genuine signatures; and (ii) no event (including
without limitation, any act or omission on the part of the Special
Servicer) has occurred since the date of the good standing or similar
certificate referred to in paragraph 6(o) above which has affected the good
standing of the Special Servicer under the laws of the [State of
____________] [United States].
(q) You shall have received from ___________________________, counsel
for the Special Servicer, a favorable opinion, dated the Closing Date, in
form and substance satisfactory to you and counsel for the Underwriters,
addressing such matters as you and such counsel may reasonably require for
the purpose of enabling you and such counsel to pass upon the issuance and
sale of the Underwritten Certificates as herein contemplated and related
proceedings;
(r) You shall have received from the Mortgage Loan Seller and its
officers all such certificates as may be required to be delivered thereby
under the Mortgage Loan Purchase Agreement;
(s) You shall have received from _______________________, counsel for
the Mortgage Loan Seller, written confirmation that the Underwriters may
rely, as of the date rendered, on any opinion or opinions of such counsel
required to be delivered under the Mortgage Loan Purchase Agreement or by
the Rating Agency as if addressed to the Underwriters; and
(t) All proceedings in connection with the transactions contemplated by
this Agreement and all documents incident hereto, including, without
limitation, the Pooling and Servicing Agreement and the Mortgage Loan
Purchase Agreement, shall be satisfactory in form and substance to you and
counsel for the Underwriters, and you and such counsel shall have received
such additional information, certificates and documents as you or they may
have reasonably requested.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
if the Company is in breach of any covenants or agreements contained herein or
if any of the opinions and certificates referred to above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in
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<PAGE>
form and substance to you and counsel for the Underwriters, this Agreement and
all obligations of the Underwriters hereunder may be cancelled at, or at any
time prior to, the Closing Date by you. Notice of such cancellation shall be
given to the Company in writing, or by telephone or telegraph confirmed in
writing.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Underwritten Certificates provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth in Section 6 is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof,
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally, upon demand, for all out-of-pocket
expenses (including reasonable fees and disbursements of counsel) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Underwritten Certificates.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
contained in the Basic Prospectus, any Preliminary Prospectus
Supplement or the Prospectus Supplement (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided,
that the foregoing indemnity with respect to the Base Prospectus or any
Preliminary Prospectus Supplement shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such
Underwriter) from whom the person asserting claims giving rise to any
such losses, claims, damages, expenses or liabilities purchased
Underwritten Certificates if such untrue statement or omission or
alleged untrue statement or omission made in the Base Prospectus or
such Preliminary Prospectus is eliminated or remedied in the Prospectus
and, if required by law, a copy of the Prospectus shall not have been
furnished to such person at or prior to the written confirmation of the
sale of such Certificates to such person;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in
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<PAGE>
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, if such settlement is
effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by such
Underwriter or, if more than one Underwriter is involved, by the
Representative), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made
in reliance upon and in conformity with written information furnished to
the Company by any Underwriter expressly for use in the Registration
Statement (or any amendment thereto) or in the Basic Prospectus, any
Preliminary Prospectus Supplement or the Prospectus Supplement (or any
amendment or supplement thereto).
(b) Each Underwriter agrees to indemnify and hold harmless the Company,
its directors, each of its officers who signed the Registration Statement,
and each person, if any, who controls the Company within the meaning of
Section 15 of the 1933 Act against any and all loss, liability, claim,
damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or in the Basic
Prospectus, any Preliminary Prospectus Supplement or the Prospectus
Supplement (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter expressly for use in the Registration Statement (or any
amendment thereto) or in the Basic Prospectus, such Preliminary Prospectus
Supplement or the Prospectus Supplement (or any amendment or supplement
thereto).
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it
in respect of which indemnity may be sought hereunder, but failure to so
notify an indemnifying party shall not relieve such indemnifying party from
any liability which it may have otherwise than on account of this indemnity
agreement. An indemnifying party may participate at its own expense in the
defense of any such action. In no event shall the indemnifying party or
parties be liable for fees and expenses of more than one counsel (in
addition to any local counsel) separate from its or their own counsel for
all
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<PAGE>
indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances.
9. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 8 hereof is for any reason held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Company and the
Underwriters shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by said indemnity agreement
incurred by the Company and the Underwriters, as incurred, in such proportions
that each Underwriter is responsible for that portion represented by the
percentage that such Underwriter's share of the underwriting discount and
commissions pertaining to the Underwritten Certificates bears to the aggregate
of the initial public offering prices of the Underwritten Certificates and the
Company is responsible for the balance; provided, however, that no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the 1933
Act shall have the same rights to contribution as such Underwriter, and each
director of the Company, each officer of the Company who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act shall have the same rights to contribution as the
Company.
10. Default by an Underwriter. If any one or more Underwriters shall
fail to purchase and pay for any of the Underwritten Certificates agreed to be
purchased by such Underwriter or Underwriters hereunder and such failure to
purchase shall constitute a default in the performance of its or their
obligations under this Agreement, the remaining Underwriters shall be obligated
severally (in the respective proportions which the portion of the Underwritten
Certificates set forth opposite their names in Schedule II hereto bears to the
aggregate amount of Underwritten Certificates set forth opposite the names of
all the remaining Underwriters) to purchase the Underwritten Certificates that
the defaulting Underwriter or Underwriters agreed but failed to purchase;
provided, however, that in the event that the amount of Underwritten
Certificates that the defaulting Underwriter or Underwriters agreed but failed
to purchase shall exceed 10% of the aggregate principal amount of Underwritten
Certificates set forth in Schedule II hereto, the remaining Underwriters shall
have the right to purchase all, but shall not be under any obligation to
purchase any, of the Underwritten Certificates, and if such nondefaulting
Underwriters do not purchase all of the Underwritten Certificates, this
Agreement will terminate without liability to any nondefaulting Underwriter or
the Company, except as provided in Section 11. In the event of a default by any
Underwriter as set forth in this Section 10, the Closing Date for the
Underwritten Certificates shall be postponed for such period, not exceeding ten
business days, as you shall determine in order that the required changes in the
Registration Statement and the Prospectus Supplement or in any other documents
or arrangements may be effected. Nothing contained in this Agreement shall
relieve any defaulting Underwriter of its liability, if any, to
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<PAGE>
the Company and any nondefaulting Underwriter for damages occasioned by its
default hereunder.
11. Representations, Warranties and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement, or
contained in certificates of officers of the Company submitted pursuant hereto,
shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter, or by or on behalf of the
Company, or by or on behalf of any of the controlling persons and officers and
directors referred to in Sections 8 and 9, and shall survive delivery of the
Underwritten Certificates to the Underwriters.
12. Termination of Agreement.
(a) The Underwriters may terminate this Agreement, by notice to the
Company, at any time at or prior to the Closing Date (i) if there has been,
since the date of this Agreement or since the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any outbreak of
hostilities or escalation thereof or other calamity or crisis the effect of
which is such as to make it, in the reasonable judgment of the
Underwriters, impracticable to market the Underwritten Certificates or to
enforce contracts for the sale of the Underwritten Certificates, or (iii)
if trading generally on the New York Stock Exchange has been suspended, or
if a banking moratorium has been declared by either federal or New York
authorities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party,
except as provided in Section 11.
13. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or transmitted by
any standard form of telecommunication. Notices to the Underwriters shall be
directed to you at ________________ , attention: _________________; and notices
to the Company shall be directed to it at First Union Commercial Mortgage
Securities, Inc., ______________________ , attention of President; or, in either
case, such other address as may hereafter be furnished by either the
Representative or the Company to the other such party in writing.
14. Parties. This Agreement shall inure to the benefit of and be
binding upon each of the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 8 and
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<PAGE>
9 and their heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the Underwriters and the Company and
their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Underwritten Certificates
from any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
15. Applicable Law; Counterparts. This Agreement will be governed by
and construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed in said State. This Agreement may be
executed in any number of counterparts, each of which shall for all purposes be
deemed to be an original and all of which shall together constitute but one and
the same instrument.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
letter and your acceptance shall represent a binding agreement among the Company
and the several Underwriters.
Very truly yours,
FIRST UNION COMMERCIAL MORTGAGE
SECURITIES, INC.
By:_____________________________
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date
first above written.
By:_____________________________
Name:
Title:
For itself and the other Underwriters named in Schedule II to the
foregoing Agreement.
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<PAGE>
SCHEDULE I
Underwriting Agreement dated _______________________, 199_:
As used in this Schedule I, the term "Registration Statement" refers to
registration statement No. 33- __________ filed by the Company on Form S-3 and
declared effective on _______, 199_ . The term "Basic Prospectus" refers to the
form of prospectus in the Registration Statement or such later form as most
recently filed by the Company pursuant to Rule 424(b) under the Securities Act
of 1933, as amended. The term "Prospectus Supplement" refers to the supplement
dated _____________, 199_ to the Basic Prospectus, relating to the mortgage
pass-through certificates being sold pursuant to the Underwriting Agreement (the
"Underwritten Certificates").
Mortgage Pool:
Approximately commercial mortgage loans, having an aggregate principal
balance, after giving effect to payments of principal due on or before
__________, 199_ (the "Cut-off Date"), of approximately $________________ (the
"Initial Pool Balance"), and otherwise complying in all material respects with
the description thereof set forth in the Prospectus Supplement.
Title, Purchase Price and Description of Underwritten Certificates:
First Union Commercial Mortgage Securities, Inc., [Commercial Mortgage
Pass-Through Certificates, Series 1995-CMBS-1, Class [ ] and Class [ ]].
Initial Pass- Purchase
Aggregate Certificate Through Price
Designation Principal Balance Rate Rating Percentage
- ----------- --------------------- ------- ------ ----------
[Class [ ]] ___________ [Variable(1)] ____(2) ___%(3)
[Class [ ]] ___________ [Variable(1)] ____(2) ___%(3)
- --------------------
[(1) The Pass-Through Rates applicable to the Class [ ] and
Class [ ] Certificates for the initial Distribution Date will be ___% and
___% per annum, respectively. The Pass-Through Rates applicable to the
Class [ ] and Class [ ] Certificates for each subsequent Distribution Date
will be calculated as described in the Prospectus Supplement under the
heading "Description of the Certificates -- Distributions -- Pass-Through
Rates".]
<PAGE>
(2) [Specify rating agency or agencies.]
(3) There shall be added to the purchase price for each Class of Underwritten
Certificates accrued interest, if any, at the initial Pass-Through Rate for
such Class from [__________________, in the case of the Class [ ]
Certificates, and the Cut-off Date, in the case of the Class [ ]
Certificates,] up to, but not including, the Closing Date.
Credit Support and Other Terms and Conditions of the Underwritten Certificates:
As described in the Prospectus Supplement.
Closing Time, Date and Location: [10:00 a.m. (New York City time) on
_______________, 199_ at the offices of
_________________________________________________; except that delivery of the
Class [ ] Certificates shall be made through the facilities of The Depository
Trust Company.]
Initial Public Offering Price: [The Underwritten Certificates will be offered to
the public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale.]
<PAGE>
SCHEDULE II
-----------
Underwriting Agreement dated ________, 199_
Approximate Aggregate
Principal Amount of
Certificates to be
Underwriters Class Purchased
- ------------ ----- ---------------------
<PAGE>
ARTICLES OF RESTATEMENT
OF THE
ARTICLES OF INCORPORATION
FIRST UNION COMMERCIAL MORTGAGE SECURITIES, INC.
FIRST: The name of the corporation is First Union Commercial Mortgage
Securities, Inc.
SECOND: The articles of incorporation are amended and restated to
read as set forth in Exhibit A attached hereto.
THIRD: The amended and restated articles of incorporation contain
amendments to the articles of incorporation requiring shareholder approval.
FOURTH: The amended and restated articles of incorporation were
adopted effective November 22, 1996, by the unanimous consent of the holder of
the one (1) issued and outstanding share of capital stock of the corporation.
Dated: November 22, 1996
FIRST UNION
COMMERCIAL MORTGAGE
SECURITIES, INC.
By:__________________
Ross M. Annable
President
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
FIRST UNION COMMERCIAL MORTGAGE SECURITIES, INC.
1. The name of the corporation is First Union Commercial Mortgage
Securities, Inc.
2. The limited purposes of the corporation are as follows:
A. To acquire, own, hold, service, sell, transfer, assign, pledge, finance,
refinance, and otherwise deal with and in: (i) loans, installment sale
agreements, credit agreements or similar instruments or agreements secured by
mortgages, deeds of trust or similar instruments creating first or junior
priority liens on, or security interests in, fee leasehold or other interests in
multi-family residential real property or commercial real property (which may
include or be comprised solely of land) of any type or use (including without
limitation residential, commercial, health care, hospitality, industrial and
storage), whether or not completed or performing or shares issued by
corporations or partnerships formed for the purpose of cooperative ownership of
any such real property, together with all related personal property
(collectively, "Mortgage Loans"); (ii) certificates, participation interests or
other instruments (including Notes and Certificates, as defined below) that
evidence interests in, or that are secured by, Mortgage Loans, Notes or
Certificates (collectively, "CMBS"); and (iii) any property or rights in
property, or agreements or rights in agreements, pertaining to or securing
Mortgage Loans or CMBS (collectively, together with the Mortgage Loans and CMBS,
"Mortgage Assets");
B. To authorize, offer, issue, sell, transfer or deliver, or participate in
the authorization, offering, issuance, sale, transfer or delivery of,
participation certificates or other evidence of interests in, among other
assets, Mortgage Assets ("Certificates");
C. To authorize, offer, issue, sell, transfer or deliver, bonds, notes or
other evidence of indebtedness secured by Mortgage Assets ("Notes"), provided,
however, that the corporation shall have no liability on any Notes except to the
extent of the Mortgage Assets securing such Notes and any customary
indemnification and repurchase obligations;
D. To hold, and enjoy all of the rights and privileges as a holder of, any
of the Notes or Certificates;
E. To negotiate, authorize, execute, deliver, assume the obligation under,
and perform, any agreement or instrument or document relating to the activities
set forth in paragraphs A through D above, including, but not limited to, any
trust agreement, sales and servicing agreement, pooling and servicing agreement,
indenture, reimbursement agreement, credit support agreement, mortgage loan
purchase agreement, indemnification agreement, placement agreement or
underwriting agreement; and
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<PAGE>
F. To engage in any activity and to exercise any powers permitted to
corporations under the laws of the State of North Carolina that are related or
incidental to the foregoing and necessary, suitable or convenient to accomplish
the foregoing.
3. The corporation shall have the authority to issue 100 shares of common
stock with a par value of $1.00 per share. No holder of shares of any class of
stock of the corporation shall have any pre-emptive or preferential right to
purchase or to subscribe to (i) any shares of any class of the corporation,
whether now or hereafter authorized; (ii) any warrants, rights or options to
purchase any such shares; or (iii) any securities or obligations convertible
into any shares or into warrants, rights or options to purchase any such shares.
4. The corporation shall at all times have at least one (1) director (the
"Independent Director") who is not (i) a director, officer or employee of any
affiliate of the corporation other than a special purpose affiliate; (ii) a
person related to any director, officer or employee of any affiliate of the
corporation other than a special purpose affiliate; (iii) a holder (directly or
indirectly) of more than 5% of any voting securities of any affiliate of the
corporation; or (iv) a person related to a holder (directly or indirectly) of
more than 5% of any voting securities of any affiliate of the corporation.
For the purposes of these articles of incorporation, including particularly
this Article 4. the
following terms shall have the meanings given below.
(i) An "affiliate" of a specified person shall mean a person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the specified person.
(ii) The term " control " (including the terms " controlling,
controlled by " and "under common control with") shall mean the possession,
direct or indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of voting
securities, by contract, or otherwise; provided, however, that a person shall
not be deemed to control another person solely because he or she is a director
of such other person.
(iii) The term "person" shall mean any individual, partnership, firm,
corporation, limited liability company, association, trust, unincorporated
organization or other entity, as well as any syndicate or group deemed to be a
person pursuant to Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended.
(iv) The term "special purpose affiliate" shall mean an affiliate of
the corporation (a) that does not control the corporation, (b) that is
organized pursuant to a certificate of incorporation or comparable instrument
(the "charter") that requires there to be at least one director or comparable
member of the governing body of such affiliate who meets a test for
independence set forth in the charter and without whose affirmative vote
certain specified actions may not be undertaken by such affiliate and (c) that
is authorized to engage in only a limited range of activities.
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<PAGE>
5. Without the unanimous vote of the members of the board of directors of
the corporation, the corporation shall not (i) dissolve or liquidate, in whole
or in part, or institute proceedings to be adjudicated bankrupt or insolvent;
(ii) consent to the institution of bankruptcy or insolvency proceedings against
it; (iii) file a petition seeking or consenting to reorganization relief-under
any applicable federal or state law relating to bankruptcy; (iv) consent to the
appointment of a receiver, liquidator, assignee, trustee, or sequestrator (or
other similar official) of the corporation or a substantial part of its
property; (v) admit in writing its inability to pay its debts generally as they
become due; or (vi) take any corporate action in furtherance of the actions set
forth in clauses (i) through (v) of this Article 5.
6. These articles of incorporation or any provisions hereof may be amended,
altered or repealed in any particular only pursuant to a unanimous vote of the
full board of directors and the Independent Director must specifically approve
and authorize such amendment, alteration or repeal.
7. The corporation shall be operated observing the following principles:
A. The corporation's assets will not be commingled with those of any
affiliate of the corporation;
B. The corporation will maintain separate corporate records and books of
account from those of any affiliate of the corporation;
C. The corporation has provided and will provide for its operating expenses
and liabilities from
its own funds; and
D. The corporation will engage in transactions with affiliates only on
terms; and conditions comparable to transactions as they would be undertaken on
an arm's length basis with unaffiliated persons.
8. The personal liability of each director of the corporation is eliminated
to the fullest extent permitted by the provisions of the Business Corporation
Act of the State of North Carolina, as presently in effect or as the same may
hereafter from time to time be in effect. No amendment, modification or repeal
of this Article 8 shall adversely affect any right or protection of a director
that exists at the time of such amendment, modification or repeal.
9. The corporation shall not issue, assume, pledge or guarantee any
liability, other than administrative expenses of the corporation, unless such
liability is approved in writing by the nationally recognized statistical rating
agencies that have rated any outstanding Notes or Certificates.
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<PAGE>
AMENDED AND RESTATED BY-LAWS
OF
FIRST UNION COMMERCIAL MORTGAGE SECURITIES, INC.
--------------------
ARTICLE I.
OFFICES
Section 1. Principal office. The principal office of the corporation shall
be located at Charlotte in Mecklenburg County, North Carolina.
Section 2. Registered office. The registered office of the corporation
required by law to be maintained in the State of North Carolina may be, but need
not be, identical with the principal office.
Section 3. Other offices. The corporation may have offices at such other
places, either within or without the State of North Carolina, as the Board of
Directors may designate or as the affairs of the corporation may require from
time to time.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 1. Place of meetings. All meetings of shareholders shall be held at
the principal office of the corporation, or at such other place, either within
or without the State of North Carolina , as shall be designated on the notice of
the meeting or agreed upon by a majority of the shareholders entitled to vote
thereat.
Section 2. Annual meetings. The annual meeting of shareholders shall be
held on the third Tuesday in April of each year for the purpose of electing
directors of the corporation and for the transaction of such other business as
may be properly brought before the meeting. If the day fixed for the annual
meeting shall be a legal holiday, such meeting shall be held on the next
succeeding business day.
Section 3. Substitute annual meeting. If the annual meeting shall not be
held on the day designated by these by-laws, a substitute annual meeting may be
called in accordance with the provisions of Section 4 of this Article II. A
meeting so called shall be designated and treated for all purposes as the annual
meeting.
Section 4. Special meetings. Special meetings of the shareholders may be
called at any time by the President, Secretary, or Board of Directors of the
corporation, or by the written request of the holders of not less than one-tenth
of all the shares entitled to vote at the meeting.
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Section 5. Notice of meetings. Written or printed notice stating the time
and place of the meeting shall be delivered not less than ten nor more than
fifty days before the date of any shareholders' meeting, either personally or by
mail, by or at the direction of the President, the Secretary, or other person or
persons calling the meeting, to each shareholder of record entitled to vote at
such meeting; provided that such notice must be given not less than twenty days
before the date of any meeting at which a merger or consolidation is to be
considered. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, addressed to the shareholder at his address
as it appears on the record of shareholders of the corporation, with postage
thereon prepaid.
In the case of a special meeting, the notice of meeting shall specifically
state the purpose or purposes for which the meeting is called; but, in the case
of an annual or substitute annual meeting, the notice of meeting need not
specifically state the business to be transacted thereat unless such a statement
is required by the provisions of the North Carolina Business Corporation Act.
When a meeting is adjourned for thirty days or more, notice of the
adjourned meeting shall be given as in the case of an original meeting. When a
meeting is adjourned for less than thirty days in any one adjournment, it is not
necessary to give any notice of the adjourned meeting other than by announcement
at the meeting at which the adjournment is taken.
Section 6. Quorum. A majority of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders, except that at a substitute annual meeting of
shareholders the number of shares there represented either in person or by
proxy, even though less than a majority, shall constitute a quorum for the
purpose of such meeting.
The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
In the absence of a quorum at the opening of any meeting of shareholders,
such meeting may be adjourned from time to time by a vote of the majority of the
shares voting on the motion to adjourn; and at any adjourned meeting at which a
quorum is present, any business may be transacted which might have been
transacted at the original meeting.
Section 7. Proxies. Shares may be voted either in person or by one or more
agents authorized by a written proxy executed by the shareholder or by his duly
authorized attorney in fact. A proxy is not valid after the expiration of eleven
months from the date of its execution, unless the person executing it specifies
therein the length of time for which it is to continue in force, or limits its
use to a particular meeting, but no proxy shall be valid after ten years from
the date of its execution.
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<PAGE>
Section 8. Voting of shares. Subject to the provisions of Section 4 of
Article III, each outstanding share entitled to vote shall be entitled to one
vote on each matter submitted to a vote at a meeting of shareholders.
Except in the election of directors as governed by the provisions of
Section 3 of Article III, the vote of a majority of the shares voted on any
matter at a meeting of shareholders at which a quorum is present shall be the
act of the shareholders on that matter, unless the vote of a greater number is
required by law or by the charter or by-laws of the corporation.
Shares of its own stock owned by the corporation, directly or indirectly,
through a subsidiary corporation or otherwise, shall not be voted and shall not
be counted in determining the total number of shares entitled to vote, except
that shares held in a fiduciary capacity may be voted and shall be counted to
the extent provided by law.
Section 9. Informal action by shareholders. Any action which may be taken
at a meeting of the shareholders may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all of the
persons who would be entitled to vote upon such action at a meeting, and filed
with the Secretary of the corporation to be kept as part of the corporate
records.
ARTICLE III.
BOARD OF DIRECTORS
Section 1. General powers. The business and affairs of the corporation
shall be managed by its Board of Directors.
Section 2. Number, term and qualification. The number of directors
constituting the Board of Directors shall not be less than one (1) nor more than
seven (7) as may be fixed from time to time by resolution duly adopted by the
shareholders or by the Board of Directors of the corporation. Each director
shall hold office until his death, resignation, retirement, removal,
disqualification, or his successor shall have been elected and qualified.
Directors need not be residents of the State of North Carolina or shareholders
of the corporation.
The corporation shall at all times have at least one (1) director (the
"Independent Director") who is not (i) a director, officer or employee of any
affiliate of the corporation other than a special purpose affiliate; (ii) a
person related to any director, officer or employee of any affiliate of the
corporation other than a special purpose affiliate; (iii) a holder (directly or
indirectly) of more than 5% of any voting securities of any affiliate of the
corporation; or (iv) a person related to a holder (directly or indirectly) of
more than 5% of any voting securities of any affiliate of the corporation.
For the purposes of this Section 2 of this Article III, the terms
"affiliate", "control", "person" and "special purpose affiliate" shall have the
meanings ascribed to them in Article 4 of the charter of the corporation.
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Section 3. Election of directors. Except as provided in Section 6 of this
Article III, the directors shall be elected at the annual meeting of
shareholders; and those persons who receive the highest number of votes shall be
deemed to have been elected. If any shareholder so demands, the election of
directors shall be by ballot.
Section 4. Cumulati e voting. Every shareholder entitled to vote at an
election of directors shall have the right to vote the number of shares standing
of record in his name for as many persons as there are directors to be elected
and for whose election he has a right to vote, or to cumulate his votes by
giving one candidate as many votes as the number of such directors multiplied by
the number of his shares shall equal, or by distributing such votes on the same
principle among any number of such candidates. This right of cumulative voting
shall not be exercised unless some shareholder or proxyholder announces in open
meeting, before the voting for the directors starts, his intention so to vote
cumulatively; and if such announcement is made, the chair shall declare that all
shares entitled to vote have the right to vote cumulatively and shall thereupon
grant a recess of not less than one nor more than four hours, as he shall
determine, or of such other period of time as is unanimously then agreed upon.
Section 5. Removal. Any director may be removed at any time with or
without cause by a vote of the shareholders holding a majority of the
outstanding shares entitled to vote at an election of directors. However,
unless the entire Board is removed, an individual director shall not be removed
when the number of shares voting against the proposal for removal would be
sufficient to elect a director is such shares could be voted cumulatively at an
annual election. If any directors are so removed, new directors may be elected
at the same meeting.
Section 6. Vacancies. Any vacancy occurring in the Board of Directors may
be filled by the affirmative vote of a majority of the remaining directors even
though less than a quorum, or by the sole remaining director. A director elected
to fill a vacancy shall be elected for the unexpired term of his predecessor in
office. Any directorship to be filled by reason of an increase in the authorized
number of directors shall be filled only by election at an annual meeting or at
a special meeting of shareholders called for that purpose.
Section 7. Chairperson of board. There may be a chairperson of the Board of
Directors elected by the directors from their number at any meeting of the
Board. The chairperson shall preside at all meetings of the Board of Directors
and perform such other duties as may be directed by the Board.
Section 8. Compensation. The Board of Directors may compensate directors
for their services as such and may provide for the payment of any or all
expenses incurred by directors in attending regular and special meetings of the
Board.
ARTICLE IV.
MEETINGS OF DIRECTORS
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<PAGE>
Section 1. Regular meetings. A regular meeting of the Board of Directors
shall be held immediately after, and at the same place as, the annual meeting of
shareholders. In addition, the Board of Directors may provide, by resolution,
the time and place, either within or without the State of North Carolina, for
the holding of additional regular meetings. Any one or more members of the Board
of Directors may participate in a meeting of the Board by means of a conference
telephone or similar communications equipment allowing all persons participating
in the meeting to hear each other at the same time, and participation by such
means shall constitute presence in person at such meeting.
Section 2. Special meetings. Special meetings of the Board of Directors may
be called by or at the request of the President or any two directors. Such a
meeting may be held either within or without the State of North Carolina, as
fixed by the person or persons calling the meeting.
Section 3. Notice of meetings. Regular meetings of the Board of Directors
may be held without notice. The person or persons calling a special meeting of
the Board of Directors shall, at least two days before the meeting, give notice
thereof by any usual means of communication. Such notice need not specify the
purpose for which the meeting is called.
Section 4. Waiver of notice. Any director may waive notice of any meeting.
The attendance by a director at a meeting shall constitute a waiver of notice of
such meeting, except where a director attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or convened.
Section 5. Quorum. A majority of the number of directors in office shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors.
Section 6. Manner of acting. Except as otherwise provided in these fixed by
these by-laws, the act of the majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors.
Section 7. Presumption of assent. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his contrary vote is recorded or his dissent is otherwise entered in the minutes
of the meeting or unless he shall file his written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the Secretary of the
corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
Section 8. Informal action by directors. Action taken by a majority of the
directors without a meeting is nevertheless Board action if written consent to
the action in question is
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<PAGE>
signed by all the directors and filed with the minutes of the proceedings of
the Board, whether done before or after the action so taken.
ARTICLE V.
OFFICERS
Section 1. Officers of the corporation. The officers of the corporation
shall consist of a President, a Secretary, a Treasurer and such Vice-Presidents,
Assistant Secretaries, Assistant Treasurers, and other officers as the Board of
Directors may from time to time elect. Any two or more offices may be held by
the same person, but no officer may act in more than one capacity where action
of two or more officers is required.
Section 2. Election and term. The officers of the corporation shall be
elected by the Board of Directors or in such other manner as may be approved by
the Board of Directors, and each officer shall hold office until his death,
resignation, retirement, removal, or disqualification or until his successor
shall have been elected and qualified.
Section 3. Compensation of officers. The compensation of all officers of
the corporation shall be fixed by the Board of Directors or in such other manner
as may be approved by the Board of Directors and no officer shall serve the
corporation in any other capacity and receive compensation therefor unless such
additional compensation is authorized by the Board of Directors.
Section 4. Removal. Any officer or agent elected or appointed by the Board
of Directors may be removed with or without cause or for any reason whatsoever.
Section 5. Bonds. The corporation may require any officer, agent, or
employee of the corporation to give bond to the corporation, with sufficient
sureties, conditioned on the faithful performance of the duties of his
respective office or position, and to comply with such other conditions as may
from time to time be required by the corporation.
Section 6. Officers acting as Assistant Secretaries. Notwithstanding
anything contained in these by-laws, any Vice President (including any Senior
Vice President or any Assistant Vice President) shall have, by virtue of his
office, and by authority of these by-laws, the authority, from time to time, to
act as an Assistant Secretary of the corporation, and to such extent, said
officers are appointed to the office of Assistant Secretary.
ARTICLE VI.
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for shares. Certificates representing shares of the
corporation shall be in such form as shall be determined by the Board of
Directors. The corporation shall issue and deliver to each shareholder a
certificate or certificates representing all fully paid shares owned by him.
Certificates shall be signed by the President or a Vice President and by
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<PAGE>
the Secretary or Treasurer or an Assistant Secretary or an Assistant Treasurer
and may be sealed with the seal of the corporation or a facsimile thereof. The
signatures of the officers upon a certificate may be facsimiles if the
certificate is countersigned by a transfer agent or registered by a registrar
other than the corporation itself or its employee. In case any officer who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer before such certificate is issued, it may be
issued by the corporation with the same effect as if he were such officer at the
date of issue. All certificates for shares shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares
represented thereby are issued, with the number and class of shares and the date
of issue, shall be entered on the stock transfer books of the corporation.
Section 2. Transfer of shares. Transfer of shares of the corporation shall
be made only on the stock transfer books of the corporation by the holder of
record thereof or by his legal representative, who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary, and on surrender for
cancellation of the certificate for such shares with proper endorsement on the
certificate or on a separate accompanying document together with such evidence
of the payment of transfer taxes and compliance with such other provisions of
law as the corporation or its transfer agent may require.
Section 3. Lost certificate. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
corporation claimed to have been lost or destroyed, upon receipt of an affidavit
of such fact from the person claiming the certificate of stock to have been lost
or destroyed. When authorizing such issue of a new certificate, the Board of
Directors shall require that the owner of such lost or destroyed certificate, or
his legal representative, give the corporation a bond in such sum as the Board
may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate claimed to have been lost or
destroyed, except where the Board of Directors by resolution finds that in the
judgment of the directors the circumstances justify omission of a bond.
Section 4. Closing transfer books and fixing record date. For the purpose
of determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors may provide that the stock transfer books
shall be closed for a stated period but not to exceed, in any case, fifty days.
If the stock transfer books shall be closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books shall be closed for at least ten days immediately preceding such meeting.
In lieu of closing the stock transfer books, the Board of Directors may fix
in advance a date as the record date for any such determination of shareholders,
such record date in any case to be not more than fifty days, and in case of a
meeting of shareholders, not less than ten
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<PAGE>
days, immediately preceding the date on which the particular action, requiring
such determination of shareholders is to be taken.
If the stock transfer books are not closed and no record date is fixed for
the determination of shareholders entitled to notice of or to vote at a meeting
of shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, except where the determination has been made
through the closing of the stock transfer books and the stated period of closing
has expired.
Section 5. Holder of record. The corporation may treat as absolute owner of
shares the person in whose name the shares stand of record on its books just as
if that person had full competency, capacity and authority to exercise all
rights of ownership irrespective of any knowledge or notice to the contrary or
any description indicating a representative, pledge or other fiduciary relation
or any reference to any other instrument or to the rights of any other person
appearing upon its record or upon the share certificate except that any person
furnishing to the corporation proof of his appointment as a fiduciary shall be
treated as if he were a holder of record of the shares evidenced by such
certificate.
ARTICLE VII.
GENERAL PROVISIONS
Section 1. Dividends. The Board of Directors may from time to time declare,
and the corporation may pay, dividends on its outstanding shares in cash,
property, or its own shares pursuant to law and subject to the provisions of its
charter.
Section 2. Seal. The corporate seal of the corporation shall consist of two
concentric circles between which is the name of the corporation and in the
center of which is inscribed SEAL; and such seal is hereby adopted as the
corporate seal of the corporation.
Section 3. Waiver of notice. Whenever any notice is required to be given to
any shareholder or director by law, by the charter or by these by-laws, a waiver
thereof in writing signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be equivalent to the
giving of such notice.
Section 4. Fiscal Year. The fiscal year of the corporation shall be fixed
by the Board of Directors, and in the absence of any action on the matter, the
fiscal year shall be the calendar year.
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Section 5. Amendments. Except as otherwise provided herein, these by-laws
may be amended or repealed and new bylaws may be adopted by the affirmative vote
of a majority of the directors then holding office at any regular or special
meeting of the Board of Directors.
The Board of Directors shall have no power to adopt a by-law: (1)
prescribing quorum or voting requirements for action by shareholders or
directors different from those prescribed by law; or (2) classifying and
staggering the election of directors.
No by-law adopted or amended by the shareholders shall be amended or
repealed by the Board of Directors, except to the extent that such by-law
expressly authorizes its amendment or repeal by the Board of Directors.
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<PAGE>1
0073332.04
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022-4677
__________, 199_
First Union Commercial Mortgage Securities, Inc.
One First Union Center
301 S. College Street
Charlotte, N.C. 28228
Re: First Union Commercial Mortgage Securities, Inc.
Commercial Mortgage Pass-Through Certificates
Registration Statement on Form S-3
Ladies and Gentlemen:
We are counsel to First Union Commercial Mortgage
Securities, Inc., a North Carolina corporation (the "Registrant"), in
connection with the registration under the Securities Act of 1933, as amended
(the "Act"), of Commercial Mortgage Pass-Through Certificates (the
"Certificates"), and the related preparation and filing of a Registration
Statement on Form S-3 (the "Registration Statement"). The Certificates are
issuable in series under separate pooling and servicing agreements (each such
agreement, a "Pooling and Servicing Agreement") among the Registrant and a
trustee, a master servicer and/or a special servicer to be identified in the
prospectus supplement for such series of Certificates. Each Pooling and
Servicing Agreement will be substantially in the form filed as an Exhibit to
the Registration Statement.
In connection with rendering this opinion letter, we have
examined the form of the Pooling and Servicing Agreement contained as an
Exhibit in the Registration Statement, the Registration Statement and such
other documents as we have deemed necessary. As to matters of fact, we have
examined and relied upon representations or certifications of officers of the
Registrant or public officials. We have assumed the authenticity of all
documents submitted to us as originals, the genuineness of all signatures, the
legal capacity of natural persons and the conformity to the originals of all
documents submitted to us as copies. We have assumed that all parties other
than the Registrant (as to which we have relied upon the opinion of the Deputy
General Counsel of First Union National Bank of North Carolina, a copy of
which is attached hereto) had the corporate power and authority to enter into
and perform all obligations under the Pooling and Servicing Agreement.
<PAGE>2
In rendering this opinion letter, we express no opinion as
to the laws of any jurisdiction other than the laws of the State of New York
and the federal laws of the United States, nor do we express any opinion,
either implicitly or otherwise, on any issue not expressly addressed below. In
rendering this opinion letter, we have not passed upon and do not pass upon
the application of the "doing business" or securities laws of any
jurisdiction. This opinion letter is further subject to the qualification that
enforceability may be limited by (i) bankruptcy, insolvency, liquidation,
receivership, moratorium, reorganization or other laws affecting the
enforcement of the rights of creditors generally and (ii) general principles
of equity, whether enforcement is sought in a proceeding in equity or at law.
Based upon and subject to the foregoing, we are of the
opinion that:
1. When a Pooling and Servicing Agreement for a series of
Certificates has been duly authorized by all necessary action and duly
executed and delivered by the parties thereto, the Pooling and Servicing
Agreement will be a legal and valid obligation of the Registrant.
2. When a Pooling and Servicing Agreement for a series of
Certificates has been duly authorized by all necessary action and duly
executed and delivered by the parties thereto, and when the Certificates of
such series have been duly executed and authenticated in accordance with the
provisions of the Pooling and Servicing Agreement and issued and sold as
contemplated in the Registration Statement and the prospectus and prospectus
supplement delivered in connection therewith, the Certificates will be legally
and validly issued and outstanding, fully paid and non-assessable, and the
holders of the Certificates will be entitled to the benefits of the Pooling
and Servicing Agreement.
3. The description of federal income tax consequences
appearing under the heading "Certain Federal Income Tax Consequences" in the
prospectus contained in the Registration Statement, including the opinion of
counsel to the Depositor described therein under "REMICs - Classification of
REMICs," while not purporting to discuss all possible federal income tax
consequences of an investment in Certificates, is accurate with respect to
those tax consequences which are discussed.
<PAGE>3
We hereby consent to the filing of this opinion letter as an
Exhibit to the Registration Statement, and to the use of our name in the
prospectus included in the Registration Statement under the headings "Legal
Matters" and "Certain Federal Income Tax Consequences," without admitting that
we are "experts" within the meaning of the Act and the rules and regulations
thereunder with respect to any part of the Registration Statement, including
this Exhibit.
Very truly yours,
Willkie Farr & Gallagher
<PAGE>
- --------- --, 199-
First Union Commercial Mortgage Securities, Inc.
One First Union Center
301 S. College Street
Charlotte, N.C. 28228
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
Re: First Union Commercial Mortgage Securities, Inc.
Commercial Mortgage Pass-Through Certificates
Registration Statement on Form S-3
------------------------------------------------
Ladies and Gentlemen:
I am Senior Vice President and Deputy General Counsel of First Union
National Bank of North Carolina, a subsidiary of First Union Corporation, which
owns all issued and outstanding voting stock of First Union Commercial Mortgage
Securities, Inc., a North Carolina corporation (the "Registrant"). As such, I am
familiar with the Registrant, the registration under the Securities Act of 1933,
as amended (the "Act"), of the Registrant's Commercial Mortgage Pass-Through
Certificates (the "Certificates"), and the related preparation and filing of a
Registration Statement on Form S-3 (the "Registration Statement"). The
Certificates are issuable in series under separate pooling and servicing
agreements (each such agreement, a "Pooling and Servicing Agreement") among the
Registrant and a trustee, a master servicer and/or a special servicer to be
identified in the prospectus supplement for such series of Certificates. Each
Pooling and Servicing Agreement will be substantially in the form filed as an
Exhibit to the Registration Statement.
In connection with rendering this opinion letter, I have examined such
documents as I have deemed necessary. As to matters of fact, I have examined and
relied upon representations or certifications of officers of the Registrant or
public officials. I have assumed the authenticity of all documents submitted to
me as originals, the genuineness of all
<PAGE>
First Union Commercial Mortgage Securities, Inc.
Willkie Farr & Gallagher
____________ __, 199_
Page 2
signatures, the legal capacity of natural persons and the conformity to the
originals of all documents submitted to me as copies.
In rendering this opinion letter, I express no opinion as to the laws
of any jurisdiction other than the laws of the State of North Carolina and the
federal laws of the United States, nor do I express any opinion, either
implicitly or otherwise, on any issue not expressly addressed below.
Based upon and subject to the foregoing, I am of the opinion that the
Registrant has the corporate power and authority to enter into and perform all
obligations of the Registrant under the Pooling and Servicing Agreement.
I hereby consent to the filing of this opinion letter as an attachment
to the opinion of Willkie Farr & Gallagher, which will be filed as an Exhibit to
the Registration Statement, without admitting that I am an "expert" within the
meaning of the Act and the rules and regulations thereunder with respect to any
part of the Registration Statement, including this opinion.
Very truly yours,
Jerry M. Miller
<PAGE>
FIRST UNION COMMERCIAL MORTGAGE SECURITIES, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned directors and
officers of First Union Commercial Mortgage Securities, Inc. (the "Corporation")
hereby constitute and appoint Brian E. Simpson, Michael H. Greco, and James F.
Powers, and each of them severally, the true and lawful agents and
attorneys-in-fact of the undersigned, with full power and authority in said
agents and attorneys-in-fact, and in any one of them, to sign for the
undersigned and in their respective names as directors and officers of the
Corporation, a Registration Statement on Form S-3 (Registration No. 33-97994) to
be filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended, relating to the registration of Commercial Mortgage
Pass-Through Certificates and to sign any and all amendments to such
Registration Statement.
Signature Capacity Date
--------- -------- ----
/s/ Brian E. Simpson President January 21, 1997
- --------------------------
Brian E. Simpson
/s/ James H. Hatch Senior Vice January 21, 1997
- --------------------------- President and
James H. Hatch Treasurer (Chief
Financial
Officer and
Chief Accounting
Officer)
/s/ Wayne K. Brown Director January 21, 1997
- ---------------------------
Wayne K. Brown
/s/ Michael H. Greco Director January 21, 1997
- ----------------------------
Michael H. Greco
/s/ Brian E. Simpson Director January 21, 1997
- ----------------------------
Brian E. Simpson
