<PAGE>
As filed with the Securities and Exchange Commission on March 24, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
PRE-EFFECTIVE AMENDMENT NO. 4 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 jurisdiction (I.R.S. Employer
of incorporation) Identification 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 28202-6001
(212) 821-8000 (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>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
=========================================== ================== =================== ====================== ===================
Proposed Maximum
Aggregate Price Proposed Maximum Amount of
Title of Each Class of Securities to be Amount to be per Unit(3) Aggregate Offering Registration
Registered Registered(1)(2) Price(3) Fee(1)
- ------------------------------------------- ------------------ ------------------- ---------------------- -------------------
Commercial Mortgage Pass-Through
Certificates......................... $3,000,000,000 100% $3,000,000,000 $909,132.71
- ------------------------------------------- ------------------ ------------------- ---------------------- -------------------
</TABLE>
(1) The registration fee in the amount of $909,132.71 for the
registration of $3,000,000,000 of Commercial Mortgage Pass-Through
Certificates was previously paid in connection with the October 11,
1995 filing of the Registration Statement and the March 19, 1997 filing
of Amendment No. 3 to the Registration Statement, and such amounts are
being shown solely for purposes of the registration described below in
footnote 2.
(2) There is 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>
[INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.]
[GRAPHIC OMITTED]
SUBJECT TO COMPLETION, DATED MARCH 24, 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 21 UNDER THE CAPTION "RISK FACTORS" HEREIN AND ON PAGE 21 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>
(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>
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
accessed 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
3
<PAGE>
the registered holder of the Offered 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.
4
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT..........................................................3
AVAILABLE INFORMATION..........................................................3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..............................4
SUMMARY OF PROSPECTUS..........................................................9
RISK FACTORS..................................................................21
Limited Liquidity...........................................................21
Limited Assets..............................................................21
Prepayments; Average Life of Certificates; Yields...........................22
Limited Nature of Ratings...................................................23
Risks Associated with Mortgage Loans and Mortgaged Properties...............23
Risks Associated with Certain Mortgage Loans and Related Leases.............24
Balloon Payments; Borrower Default..........................................25
Junior Mortgage Loans.......................................................25
Credit Support Limitations..................................................25
Enforceability..............................................................26
Leases and Rents............................................................26
Environmental Risks.........................................................27
ERISA Considerations........................................................27
Certain Federal Tax Considerations Regarding REMIC Residual Certificates....27
Book-Entry Registration.....................................................28
Delinquent and Non-Performing Mortgage Loans................................28
DESCRIPTION OF THE TRUST FUNDS................................................28
General.....................................................................28
Mortgage Loans-Leases.......................................................28
General...................................................................28
Leases....................................................................29
Default and Loss Considerations with Respect to the Mortgage Loans........30
Payment Provisions of the Mortgage Loans..................................31
Mortgage Loan Information in Prospectus Supplements.......................32
CMBS........................................................................32
Certificate Accounts........................................................33
Credit Support..............................................................33
Cash Flow Agreements........................................................34
YIELD AND MATURITY CONSIDERATIONS.............................................34
General.....................................................................34
Pass-Through Rate...........................................................34
Payment Delays..............................................................34
Certain Shortfalls in Collections of Interest...............................35
Yield and Prepayment Considerations.........................................35
Weighted Average Life and Maturity..........................................36
Controlled Amortization Classes and Companion Classes.......................37
Other Factors Affecting Yield, Weighted Average Life and Maturity...........38
Balloon Payments; Extensions of Maturity..................................38
Negative Amortization.....................................................38
5
<PAGE>
Foreclosures and Payment Plans............................................38
Losses and Shortfalls on the Mortgage Assets..............................39
Additional Certificate Amortization.......................................39
THE DEPOSITOR.................................................................39
USE OF PROCEEDS...............................................................40
DESCRIPTION OF THE CERTIFICATES...............................................40
General.....................................................................40
Distributions...............................................................40
Distributions of Interest on the Certificates...............................41
Distributions of Certificate Principal......................................42
Distributions on the Certificates in Respect of Prepayment Premiums
or in Respect of Equity Participations...................................43
Allocation of Losses and Shortfalls.........................................43
Advances in Respect of Delinquencies........................................43
Reports to Certificateholders...............................................44
Voting Rights...............................................................46
Termination.................................................................46
Book-Entry Registration and Definitive Certificates.........................47
DESCRIPTION OF THE POOLING AGREEMENTS.........................................48
General.....................................................................48
Assignment of Mortgage Assets; Repurchases..................................49
Representations and Warranties; Repurchases.................................50
Certificate Account.........................................................51
General...................................................................51
Deposits..................................................................51
Withdrawals...............................................................52
Collection and Other Servicing Procedures...................................54
Modifications, Waivers and Amendments of Mortgage Loans.....................54
Sub-Servicers...............................................................54
Special Servicers...........................................................54
Realization Upon Defaulted Mortgage Loans...................................55
Hazard Insurance Policies...................................................56
Due-on-Sale and Due-on-Encumbrance Provisions...............................57
Servicing Compensation and Payment of Expenses..............................57
Evidence as to Compliance...................................................58
Certain Matters Regarding the Master Servicer and the Depositor.............58
Events of Default...........................................................59
Rights Upon Event of Default................................................60
Amendment...................................................................60
List of Certificateholders..................................................61
The Trustee.................................................................61
Duties of the Trustee.......................................................61
Certain Matters Regarding the Trustee.......................................61
Resignation and Removal of the Trustee......................................62
DESCRIPTION OF CREDIT SUPPORT.................................................62
General.....................................................................62
Subordinate Certificates....................................................63
Cross-Support Provisions....................................................63
Insurance or Guarantees with Respect to Mortgage Loans......................63
6
<PAGE>
Letter of Credit............................................................63
Certificate Insurance and Surety Bonds......................................63
Reserve Funds...............................................................64
Credit Support with Respect to CMBS.........................................64
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND LEASES............................64
General.....................................................................65
Types of Mortgage Instruments...............................................65
Leases and Rents............................................................65
Personalty..................................................................66
Cooperative Loans...........................................................66
Junior Mortgages; Rights of Senior Lenders..................................67
Foreclosure.................................................................68
General...................................................................68
Judicial Foreclosure......................................................68
Non-Judicial Foreclosure/Power of Sale....................................68
Equitable Limitations on Enforceability of Certain Provisions.............69
Public Sale...............................................................69
Rights of Redemption......................................................70
Anti-Deficiency Legislation...............................................70
Leasehold Risks...........................................................71
Regulated Healthcare Facilities...........................................71
Cross-Collateralization...................................................71
Cooperative Loans.........................................................71
Bankruptcy Laws.............................................................72
Environmental Considerations................................................73
General...................................................................73
Superlien Laws............................................................73
CERCLA....................................................................73
Certain Other State Laws..................................................74
Additional Considerations.................................................74
Due-on-Sale and Due-on-Encumbrance..........................................75
Subordinate Financing.......................................................75
Default Interest and Limitations on Prepayments.............................75
Applicability of Usury Laws.................................................75
Soldiers' and Sailors' Civil Relief Act of 1940.............................76
Americans with Disabilities Act.............................................76
Forfeitures in Drug and RICO Proceedings....................................76
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................................77
General.....................................................................77
REMICs......................................................................78
Classification of REMICs..................................................78
Characterization of Investments in REMIC Certificates.....................78
Tiered REMIC Structures...................................................79
Taxation of Owners of REMIC Regular Certificates............................79
General...................................................................79
Original Issue Discount...................................................79
Market Discount...........................................................81
Premium...................................................................83
Realized Losses...........................................................83
Taxation of Owners of REMIC Residual Certificates...........................83
General...................................................................83
Taxable Income of the REMIC...............................................84
7
<PAGE>
Basis Rules, Net Losses and Distributions.................................86
Excess Inclusions.........................................................86
Noneconomic REMIC Residual Certificates...................................87
Mark-to-Market Rules......................................................88
Possible Pass-Through of Miscellaneous Itemized Deductions................89
Sales of REMIC Certificates...............................................89
Prohibited Transactions Tax and Other Taxes...............................90
Tax and Restrictions on Transfers of REMIC Residual Certificates to
Certain Organizations...................................................91
Termination...............................................................92
Reporting and Other Administrative Matters................................92
Backup Withholding with Respect to REMIC Certificates.....................93
Foreign Investors in REMIC Certificates...................................93
Grantor Trust Funds.........................................................94
Classification of Grantor Trust Funds.....................................94
Characterization of Investments in Grantor Trust Certificates...............94
Grantor Trust Fractional Interest Certificates............................94
Grantor Trust Strip Certificates..........................................94
Taxation of Owners of Grantor Trust Fractional Interest Certificates........94
General...................................................................94
If Stripped Bond Rules Apply..............................................95
If Stripped Bond Rules Do Not Apply.......................................97
Market Discount...........................................................98
Premium...................................................................99
Taxation of Owners of Grantor Trust Strip Certificates...................100
Possible Application of Contingent Payment Rules.........................101
Sales of Grantor Trust Certificates......................................101
Grantor Trust Reporting..................................................102
Backup Withholding.......................................................102
Foreign Investor.........................................................102
STATE AND OTHER TAX CONSEQUENCES.............................................102
ERISA CONSIDERATIONS.........................................................103
General....................................................................103
Plan Asset Regulations...................................................103
Prohibited Transaction Exemptions..........................................103
LEGAL INVESTMENT.............................................................106
METHOD OF DISTRIBUTION.......................................................107
LEGAL MATTERS................................................................108
FINANCIAL INFORMATION........................................................108
RATING.......................................................................108
INDEX OF PRINCIPAL DEFINITIONS...............................................110
8
<PAGE>
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
Properties"), (iii) CMBS, or (iv) participations
in, or any combination of, the foregoing. If so
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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 method
by which the Mortgage Rate will be calculated,
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<PAGE>
(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
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<PAGE>
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. See "Description
of the Trust Funds--Certificate 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".
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<PAGE>
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. 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
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<PAGE>
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, 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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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
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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
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
Consequences--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
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<PAGE>
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 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.
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<PAGE>
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.
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.
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<PAGE>
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.
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<PAGE>
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 would otherwise affect the related Controlled
Amortization Class if all payments of principal of the Mortgage Loans were
allocated on a pro rata basis.
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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 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
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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 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.
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The performance of a Mortgage Loan secured by an
income-producing property leased (pursuant to general commercial-type leases
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".
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
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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.
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".
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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 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.
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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 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
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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.
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
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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 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
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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 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
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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
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
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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 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
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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.
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.
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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 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
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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 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.
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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 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
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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.
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,
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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.
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.
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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 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
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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 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
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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 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.
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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 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
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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 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
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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;
(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.
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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 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
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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.
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
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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 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
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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 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.
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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. 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
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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 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";
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(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",
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
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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;
(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.
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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
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
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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".
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:
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(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 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
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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
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-on Encumbrance".
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
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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".
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
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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 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
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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, 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
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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.
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.
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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.
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".
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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 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
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Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of the Certificates of the related series.
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.
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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.
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
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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 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
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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 clause 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, 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
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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 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
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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
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. ss.ss. 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
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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 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
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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.
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
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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.
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.
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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 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
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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
storage 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 environmental 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, 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.
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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 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
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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 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
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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 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".
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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 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
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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 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
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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 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
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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 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,
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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 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
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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
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
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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 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
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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 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,
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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.
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
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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 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
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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 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
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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.
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
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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 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.
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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
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.
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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
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,
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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.
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.
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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.
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
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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.
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
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"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.
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
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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.
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
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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.
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
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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 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
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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.
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.
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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 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
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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.
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.
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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.
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-
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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").
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
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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) 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
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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.
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 "Riegle 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
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<PAGE>
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 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
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<PAGE>
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.
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
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<PAGE>
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.
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.
109
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Page
Accrual Certificates .................................................15, 41
Accrued Certificate Interest ......................................... 41
ADA .................................................................. 76
ARM Loans ............................................................ 32
Available Distribution Amount ........................................ 41
Bondtype ............................................................. 29
BookEntry Certificates ...............................................17, 40
Cash Flow Agreement ..................................................2, 13, 34
CERCLA ............................................................... 27
Certificate ..........................................................2, 9, 49
Certificate Account ..................................................11, 33
Certificate Balance ..................................................3, 14, 42
Certificate Owner ....................................................17, 47
Certificateholders ................................................... 3
Closing Date ......................................................... 80
CMBS .................................................................2, 11, 28
CMBS Agreement ....................................................... 32
CMBS Issuer .......................................................... 32
CMBS Servicer ........................................................ 32
CMBS Trustee ......................................................... 33
Code .................................................................17, 77
Commercial Properties ................................................9, 29
Commission ........................................................... 3
Committee Report ..................................................... 79
Companion Class ......................................................15, 16, 42
Contributions Tax .................................................... 90
Controlled Amortization Class ........................................15, 16, 42
Cooperative Loans .................................................... 66
Cooperatives ......................................................... 29
CPR .................................................................. 37
Credit Support .......................................................2, 12, 33
Credittype ........................................................... 29
Cutoff Date .......................................................... 15
Debt Service Coverage Ratio .......................................... 30
Definitive Certificate ............................................... 17
Definitive Certificates .............................................. 40
Depositor ............................................................ 28
Determination Date ................................................... 41
Direct Participants .................................................. 47
Distribution Date .................................................... 15
Distribution Date Statement .......................................... 44
DOL ..................................................................103
DTC .................................................................. 3
Due Period ........................................................... 43
Equity Participation ................................................. 32
ERISA ................................................................19, 103
Events of Default .................................................... 59
Excess Funds ......................................................... 39
Exchange Act ......................................................... 4
110
<PAGE>
Exemption ............................................................103
FAMC ................................................................. 11
FHLMC ................................................................ 11
First Union ..........................................................103
FNMA ................................................................. 11
Garn Act ............................................................. 75
GNMA ................................................................. 11
Grantor Trust Certificates ...........................................17, 77
Grantor Trust Fractional Interest Certificates .......................18, 19, 94
Grantor Trust Fund ................................................... 77
Grantor Trust Strip Certificate ...................................... 94
Indirect Participants ................................................ 47
Insurance Proceeds ................................................... 51
IRS .................................................................. 80
Issue Premium ........................................................ 85
L/C Bank ............................................................. 63
Lease ................................................................4, 10
Lease Assignment ..................................................... 10
Lessee ...............................................................4, 10
Liquidation Proceeds ................................................. 51
LoantoValue Ratio .................................................... 31
Lockout Period ....................................................... 32
Master Servicer ......................................................3, 9
Mortgage Asset Seller ................................................11, 28
Mortgage Assets ......................................................2, 28
Mortgage Loans .......................................................2, 9, 28
Mortgage Notes ....................................................... 28
Mortgage Rate ........................................................10, 32
Mortgaged Properties ................................................. 28
Mortgages ............................................................ 28
Multifamily Properties ...............................................9, 28
Net Operating Income ................................................. 30
Nonrecoverable Advance ............................................... 43
Notional Amount ......................................................14, 41
Offered Certificates ................................................. 2
OID Regulations ...................................................... 78
Originator ........................................................... 29
PAC .................................................................. 37
Participants ......................................................... 28
Parties in Interest ..................................................103
PassThrough Rate .....................................................3, 14
Permitted Investments ................................................ 51
Plans ................................................................103
Pooling Agreement ....................................................13, 48
Prepayment Assumption ................................................ 79
Prepayment Interest Shortfall ........................................ 35
Prepayment Period .................................................... 45
Prepayment Premium ................................................... 32
Prohibited Transactions Tax .......................................... 90
Proposed MarktoMarket Regulations .................................... 88
Prospectus Supplement ................................................ 2
Rating Agency ........................................................ 20
Record Date .......................................................... 41
Related Proceeds ..................................................... 43
111
<PAGE>
Relief Act ........................................................... 76
REMIC ................................................................3, 77
REMIC Certificates ................................................... 77
REMIC Provisions ..................................................... 77
REMIC Regular Certificates ...........................................17, 78
REMIC Regulations .................................................... 78
REMIC Residual Certificates ..........................................17, 78
REO Property .........................................................9, 10, 45
RICO ................................................................. 76
Securities Act ....................................................... 3
Senior Certificates ..................................................13, 40
Servicing Standard ................................................... 54
SMMEA ................................................................106
SPA .................................................................. 37
Special Servicer .....................................................3, 9, 54
Stripped Bond Prepayment Assumption .................................. 96
Stripped Interest Certificates .......................................13, 14, 40
Stripped Principal Certificates ......................................13, 40
Subordinate Certificates .............................................13, 40
SubServicer .......................................................... 54
SubServicing Agreement ............................................... 54
TAC .................................................................. 37
Temporary MarktoMarket Regulations ................................... 88
Tiered REMICS ........................................................ 79
Title V .............................................................. 75
Trust Assets ......................................................... 3
Trust Fund ........................................................... 2
Trustee ..............................................................3, 9
UCC .................................................................. 65
Value ................................................................ 31
Warranting Party ..................................................... 50
112
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113
<PAGE>
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 .............................................$ 909,133
Rating Agency Fees .............................................2,300,000
Printing and Engraving Expenses ................................. 375,000
Accounting Fees and Expenses .................................... 375,000
Legal Fees and Expenses ........................................1,500,000
Blue Sky and Legal Investment Fees and Expenses ................. 250,000
Trustee Fees and Expenses ....................................... 250,000
Miscellaneous ................................................... 750,000
Total .........................................................$6,709,133
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 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.
II-1
<PAGE>
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;
(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;
II-2
<PAGE>
(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.
II-3
<PAGE>
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. 4 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 March 24, 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. 4 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.
Signature Capacity Date
/s/ Brian E. Simpson President and Director March 24, 1997
- --------------
Brian E. Simpson
* Senior Vice President and March 24, 1997
- --------------
James H. Hatch Treasurer (Chief Financial
Officer and Chief Accounting
Officer)
* Director March 24, 1997
- --------------
Wayne K. Brown
* Director March 24, 1997
- --------------------
Michael H. Greco
*By: /s/ Brian E. Simpson
Brian E. Simpson
Attorney-in-Fact
II-4
<PAGE>
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 Underwriter. This Prospectus Supplement
and the accompanying 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 of this Prospectus Supplement and the
accompanying Prospectus nor any sale First Union Commercial Mortgage made
hereunder shall, under any circumstances, create an Securities, Inc. implication
that information herein or therein is correct as of (Depositor) anytime since
the date of this Prospectus Supplement or the accompanying Prospectus.
-----------------
TABLE OF CONTENTS
Prospectus Supplement
Page
Summary of Prospectus Supplement............................S-6
Risk Factors...............................................S-21
Description of the Mortgage Pool...........................S-24
Servicing of the Mortgage Loans............................S-38
Description of the Certificates............................S-42
Yield and Maturity Considerations..........................S-52
Use of Proceeds............................................S-57
Certain Federal Income Tax Consequences....................S-57
ERISA Considerations.......................................S-58
Legal Investment...........................................S-61
Method of Distribution.....................................S-61
Legal Matters..............................................S-62
Rating.....................................................S-62
Index of Principal Definitions.............................S-63
Annex A....................................................S-65
Prospectus
Prospectus Supplement.........................................3
Available Information.........................................3
Incorporation of Certain Information
by Reference............................................4
Summary of Prospectus.........................................9
Risk Factors.................................................21
Description of the Trust Funds...............................28
Yield and Maturity Considerations............................34
The Depositor................................................39
Use of Proceeds..............................................40
Description of the Certificates..............................40
D0000000000000 the Pooling Agreements........................48
Description of Credit Support................................62
Certain Legal Aspects of Mortgage Loans and Leases...........64
Certain Federal Income Tax Consequences......................77
State and Other Tax Consequences............................102
ERISA Considerations........................................103
Legal Investment............................................106
Method of Distribution......................................107
Legal Matters...............................................108
Financial Information.......................................108
Rating......................................................108
Index of Principal Definitions..............................110
First Union Commercial Mortgage
Securities, Inc.
(Depositor)
$___________
Commercial Mortgage Pass-Through
Certificates
Series 199[ ]-CMBS-[ ]
________________________
PROSPECTUS SUPPLEMENT
________________________
[ ], 199[ ]
II-5
<PAGE>
[INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.]
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-21 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 21 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>
<S> <C> <C> <C>
===================== =========================== =========================== ======================
Class Initial Certificate % of Initial Pool Initial Pass-
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>
(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.
S-2
<PAGE>
(cover continued)
See "Description of the 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.
S-3
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
SUMMARY OF PROSPECTUS SUPPLEMENT..............................................................................S-6
RISK FACTORS..................................................................................................S-21
The Certificates.....................................................................................S-21
Limited Liquidity...........................................................................S-21
Certain Yield and Maturity Considerations...................................................S-21
The Mortgage Loans...................................................................................S-22
Risks of Multifamily and Commercial Lending.................................................S-22
Limited Recourse............................................................................S-22
Environmental Law Considerations............................................................S-22
Geographic Concentration....................................................................S-23
Concentration of Mortgage Loans and Related Borrowers.......................................S-23
Balloon Payments............................................................................S-23
Adjustable Rate Loans.......................................................................S-24
Potential Conflict of Interest..............................................................S-24
DESCRIPTION OF THE MORTGAGE POOL..............................................................................S-24
General..............................................................................................S-24
Mortgage Loan History................................................................................S-24
Certain Terms and Conditions of the Mortgage Loans...................................................S-24
Mortgage Rates; Calculations of Interest....................................................S-24
Due Dates...................................................................................S-25
Amortization................................................................................S-25
Prepayment Provisions.......................................................................S-25
Non-recourse Obligations....................................................................S-25
Due-on-Sale" and "Due-on-Encumbrance" Provisions............................................S-25
Additional Mortgage Loan Information.................................................................S-26
The Mortgage Pool...........................................................................S-26
Property Inspections; Environmental Assessments.............................................S-34
Borrower Concentration......................................................................S-34
Condominium Loans...........................................................................S-34
The Mortgage Loan Seller.............................................................................S-35
Assignment of the Mortgage Loans; Repurchases........................................................S-35
Representations and Warranties; Repurchases..........................................................S-36
Changes in Mortgage Pool Characteristics.............................................................S-37
SERVICING OF THE MORTGAGE LOANS...............................................................................S-38
General..............................................................................................S-38
The Master Servicer..................................................................................S-39
The Special Servicer.................................................................................S-39
Servicing and Other Compensation and Payment of Expenses.............................................S-39
Modifications, Waivers and Amendments................................................................S-41
Inspections; Collection of Operating Information.....................................................S-41
DESCRIPTION OF THE CERTIFICATES...............................................................................S-42
General..............................................................................................S-42
Registration; Denominations..........................................................................S-42
Certificate Balances.................................................................................S-43
Pass-Through Rates...................................................................................S-43
Distributions........................................................................................S-44
General.....................................................................................S-44
The Available Distribution Amount...........................................................S-44
Application of the Available Distribution Amount............................................S-45
Distributable Certificate Interest..........................................................S-46
Principal Distribution Amount...............................................................S-47
S-4
<PAGE>
Treatment of REO Properties.................................................................S-48
Prepayment Premiums.........................................................................S-48
Subordination; Allocation of Losses and Certain Expenses.............................................S-48
P&I Advances.........................................................................................S-50
Reports to Certificateholders; Available Information.................................................S-50
Voting Rights........................................................................................S-51
Termination..........................................................................................S-51
The Trustee..........................................................................................S-52
YIELD AND MATURITY CONSIDERATIONS.............................................................................S-52
Yield Considerations.................................................................................S-52
General.....................................................................................S-52
Pass-Through Rates..........................................................................S-52
Rate and Timing of Principal Payments.......................................................S-52
Losses and Shortfalls.......................................................................S-53
Certain Relevant Factors....................................................................S-53
Delay in Payment of Distributions...........................................................S-54
Unpaid Distributable Certificate Interest...................................................S-54
Weighted Average Life................................................................................S-54
USE OF PROCEEDS...............................................................................................S-57
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................................................................S-57
ERISA CONSIDERATIONS..........................................................................................S-58
LEGAL INVESTMENT..............................................................................................S-61
METHOD OF DISTRIBUTION........................................................................................S-61
LEGAL MATTERS.................................................................................................S-62
RATING........................................................................................................S-62
INDEX OF PRINCIPAL DEFINITIONS................................................................................S-63
ANNEX A.......................................................................................................S-65
</TABLE>
S-5
<PAGE>
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 under the Bank Holding
Company Act of 1956, as amended. See
"Description of the Mortgage Pool--The
Mortgage Loan Seller" herein.
Cut-off Date.......................[ ].
S-6
<PAGE>
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 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
S-7
<PAGE>
"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
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):
S-8
<PAGE>
(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 the Mortgage Loans. See
"Description of the Mortgage Pool--
Representations and Warranties; Repurchases"
herein.
Description of the Certificates....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"), 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 Balances.......Upon initial issuance, the Class
[ ] Certificates will have a Certificate
Balance of [$ ], which will represent
approximately [ ]% of the Initial Pool
Balance; the Class [ ]
S-9
<PAGE>
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 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;
S-10
<PAGE>
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 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;
S-11
<PAGE>
(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;
(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;
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<PAGE>
(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 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
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<PAGE>
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 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
Distribution 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
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<PAGE>
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 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 Payments.....To the extent of its servicing
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
"Compensating 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
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<PAGE>
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.
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
S-16
<PAGE>
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 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--
Termination" herein and in the Prospectus.
Certain Investment Considerations..The yield to maturity of an Offered
Certificate 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.
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<PAGE>
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 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
"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.
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<PAGE>
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 underwritten 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.
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
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<PAGE>
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.
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<PAGE>
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 [ ] 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
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<PAGE>
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 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.
S-22
<PAGE>
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 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
S-23
<PAGE>
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.
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
S-24
<PAGE>
[ ]% 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.
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
S-25
<PAGE>
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.
(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.
S-26
<PAGE>
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.
(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.
S-27
<PAGE>
<TABLE>
MORTGAGE RATES
<CAPTION>
Weighted Averages
% by ---------------------------------------------------------------------------------------
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort. Indicative Cut-Off Date LTV
Number Date Date Mortgage Term Term ------------------------------------------------
Range of Loans Balance Balance Rate (Mo.) (Mo.) DSCR ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap)
- ------- -------- --------- --------- -------- ------- ------- ---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------
Loan/ Loan/ Occupancy Year
Unit Sq. Ft. Percentage Built
----- ------- ---------- -----
<C> <C> <C> <C>
</TABLE>
<TABLE>
CUT-OFF DATE BALANCES
<CAPTION>
Weighted Averages
% by ---------------------------------------------------------------------------------------
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort. Indicative Cut-Off Date LTV
Number Date Date Mortgage Term Term ------------------------------------------------
Range of Loans Balance Balance Rate (Mo.) (Mo.) DSCR ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap)
- ------- -------- --------- --------- -------- ------- ------- ---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------
Loan/ Loan/ Occupancy Year
Unit Sq. Ft. Percentage Built
----- ------- ---------- -----
<C> <C> <C> <C>
</TABLE>
S-28
<PAGE>
<TABLE>
STATED REMAINING TERMS
<CAPTION>
Weighted Averages
% by --------------------------------------------------------------------------------------
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort. Indicative Cut-Off Date LTV
Number Date Date Mortgage Term Term ------------------------------------------------
Range of Loans Balance Balance Rate (Mo.) (Mo.) DSCR ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap)
- ------- -------- --------- --------- -------- ------- ------- ---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------
Loan/ Loan/ Occupancy Year
Unit Sq. Ft. Percentage Built
----- ------- ---------- -----
<C> <C> <C> <C>
</TABLE>
<TABLE>
DEBT SERVICE COVERAGE RATIOS
<CAPTION>
Weighted Averages
% by ----------------------------------------------------------------------------------------
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort. Indicative Cut-Off Date LTV
Number Date Date Mortgage Term Term ------------------------------------------------
Range of Loans Balance Balance Rate (Mo.) (Mo.) DSCR ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap)
- ------- -------- --------- --------- -------- ------- ------- ---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------
Loan/ Loan/ Occupancy Year
Unit Sq. Ft. Percentage Built
----- ------- ---------- -----
<C> <C> <C> <C>
</TABLE>
S-29
<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.
<TABLE>
INDICATIVE CUT-OFF DATE LTVs ([ ]% CAP RATE)
<CAPTION>
Weighted Averages
% by ----------------------------------------------------------------------------------------
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort. Indicative Cut-Off Date LTV
Number Date Date Mortgage Term Term ------------------------------------------------
Range of Loans Balance Balance Rate (Mo.) (Mo.) DSCR ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap)
- ------- -------- --------- --------- -------- ------- ------- ---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------
Loan/ Loan/ Occupancy Year
Unit Sq. Ft. Percentage Built
----- ------- ---------- -----
<C> <C> <C> <C>
</TABLE>
<TABLE>
INDICATIVE CUT-OFF DATE LTVs ([ ]% CAP RATE)
<CAPTION>
Weighted Averages
% by ----------------------------------------------------------------------------------------
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort. Indicative Cut-Off Date LTV
Number Date Date Mortgage Term Term ------------------------------------------------
Range of Loans Balance Balance Rate (Mo.) (Mo.) DSCR ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap)
- ------- -------- --------- --------- -------- ------- ------- ---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------
Loan/ Loan/ Occupancy Year
Unit Sq. Ft. Percentage Built
----- ------- ---------- -----
<C> <C> <C> <C>
</TABLE>
S-30
<PAGE>
<TABLE>
INDICATIVE CUT-OFF DATE LTVs ([ ]% CAP RATE)
<CAPTION>
Weighted Averages
% by ----------------------------------------------------------------------------------------
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort. Indicative Cut-Off Date LTV
Number Date Date Mortgage Term Term ------------------------------------------------
Range of Loans Balance Balance Rate (Mo.) (Mo.) DSCR ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap)
- ------- -------- --------- --------- -------- ------- ------- ---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------
Loan/ Loan/ Occupancy Year
Unit Sq. Ft. Percentage Built
----- ------- ---------- -----
<C> <C> <C> <C>
</TABLE>
<TABLE>
INDICATIVE CUT-OFF DATE LTVs ([ ]% CAP RATE)
<CAPTION>
Weighted Averages
% by ----------------------------------------------------------------------------------------
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort. Indicative Cut-Off Date LTV
Number Date Date Mortgage Term Term ------------------------------------------------
Range of Loans Balance Balance Rate (Mo.) (Mo.) DSCR ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap)
- ------- -------- --------- --------- -------- ------- ------- ---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------
Loan/ Loan/ Occupancy Year
Unit Sq. Ft. Percentage Built
----- ------- ---------- -----
<C> <C> <C> <C>
</TABLE>
S-31
<PAGE>
<TABLE>
OCCUPANCY PERCENTAGES
<CAPTION>
Weighted Averages
% by ----------------------------------------------------------------------------------------
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort. Indicative Cut-Off Date LTV
Number Date Date Mortgage Term Term ------------------------------------------------
Range of Loans Balance Balance Rate (Mo.) (Mo.) DSCR ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap)
- ------- -------- --------- --------- -------- ------- ------- ---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------
Loan/ Loan/ Occupancy Year
Unit Sq. Ft. Percentage Built
----- ------- ---------- -----
<C> <C> <C> <C>
</TABLE>
<TABLE>
STATES
<CAPTION>
Weighted Averages
% by ----------------------------------------------------------------------------------------
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort. Indicative Cut-Off Date LTV
Number Date Date Mortgage Term Term ------------------------------------------------
Range of Loans Balance Balance Rate (Mo.) (Mo.) DSCR ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap)
- ------- -------- --------- --------- -------- ------- ------- ---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------
Loan/ Loan/ Occupancy Year
Unit Sq. Ft. Percentage Built
----- ------- ---------- -----
<C> <C> <C> <C>
</TABLE>
S-32
<PAGE>
<TABLE>
YEARS BUILT
<CAPTION>
Weighted Averages
% by ----------------------------------------------------------------------------------------
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort. Indicative Cut-Off Date LTV
Number Date Date Mortgage Term Term ------------------------------------------------
Range of Loans Balance Balance Rate (Mo.) (Mo.) DSCR ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap)
- ------- -------- --------- --------- -------- ------- ------- ---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------
Loan/ Loan/ Occupancy Year
Unit Sq. Ft. Percentage Built
----- ------- ---------- -----
<C> <C> <C> <C>
</TABLE>
<TABLE>
PREPAYMENT RESTRICTIONS
<CAPTION>
Weighted Averages
% by ----------------------------------------------------------------------------------------
Aggregate Aggregate Stated Remain.
Cut-Off Cut-Off Remain. Amort. Indicative Cut-Off Date LTV
Number Date Date Mortgage Term Term ------------------------------------------------
Range of Loans Balance Balance Rate (Mo.) (Mo.) DSCR ([ ]% Cap) ([ ]% Cap) ([ ]% Cap) ([ ]% Cap)
- ------- -------- --------- --------- -------- ------- ------- ---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------
Loan/ Loan/ Occupancy Year
Unit Sq. Ft. Percentage Built
----- ------- ---------- -----
<C> <C> <C> <C>
</TABLE>
S-33
<PAGE>
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.
<TABLE>
Prepayment Lock-out/Premium Analysis
<CAPTION>
Percentage of Pool Balance by Prepayment Restriction Assuming No Prepayments
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[ ]
- -------------------- -------- -------- -------- -------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</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
Percent by
Number of Aggregate Cut-Off Aggregate Cut-Off
Year Mortgage Loans Date Balance Date Balance
------ ------------------ --------------------- ----------------------
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 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
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<PAGE>
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
(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
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<PAGE>
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
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;
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<PAGE>
(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.
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.
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<PAGE>
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.
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
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<PAGE>
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 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.
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<PAGE>
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 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.
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<PAGE>
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.
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.
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<PAGE>
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.
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
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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.
Initial Percent of
Class of Certificates Certificate Balance Initial Pool Balance
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
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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.
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:
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(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
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;
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(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;
(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
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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:
(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
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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 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.
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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
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
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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 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
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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) 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
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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.
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
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distributed over the remaining terms of the Mortgage Loans. Defaults on the
Mortgage Loans, particularly at or near their stated maturity dates, may result
in significant delays in payments of principal on the Mortgage Loans (and,
accordingly, on the 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 a mortgage
interest rate, the related borrower has an incentive to refinance its mortgage
loan. See "Description
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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 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
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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.
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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.
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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.
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 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
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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 "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.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, 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 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
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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.
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.
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<PAGE>
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.
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
S-60
<PAGE>
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.
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
S-61
<PAGE>
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.
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, LLP, 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.
S-62
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Page
----
Accrued Certificate Interest.............................................47
Additional Trust Fund Expenses.......................................10, 49
Advance..................................................................50
ARM Loans..........................................................2, 7, 25
Assumed Scheduled Payment............................................14, 47
Available Distribution Amount........................................11, 44
Balloon Loans.............................................................8
Balloon Payment....................................................2, 8, 25
Certificate Balance...............................................2, 10, 43
Certificate Registrar....................................................43
Certificateholders...................................................11, 44
Certificates..........................................................6, 42
Class..............................................................1, 6, 42
Class Exemption..........................................................60
Code.....................................................................57
Collection Period........................................................44
Compensating Interest Payment........................................15, 39
Corrected Mortgage Loan..................................................40
Custodian................................................................35
Cut-off Date..............................................................2
Definitive Certificate...................................................42
Delivery Date.............................................................1
Depositor.................................................................2
Determination Date...................................................14, 44
Distributable Certificate Interest...................................13, 46
Distribution Date.................................................2, 11, 44
Distribution Date Statement..............................................50
DOL......................................................................19
DTC......................................................................42
ERISA................................................................19, 58
Exemption................................................................58
First Union..............................................................58
Fixed Rate Loans...................................................2, 7, 24
Initial Pool Balance...............................................2, 7, 24
IRS......................................................................58
Lock-out Expiration Date..............................................8, 25
Lock-out Period.......................................................8, 25
Master Servicer Reimbursement Rate...................................15, 50
Master Servicing Fee.....................................................39
Modification Fee.........................................................40
Monthly Payments..........................................................2
Mortgage.................................................................24
Mortgage File............................................................35
Mortgage Loan Purchase Agreement......................................9, 35
Mortgage Loan Seller..................................................2, 35
Mortgage Loans........................................................2, 24
Mortgage Note............................................................24
Mortgage Pool.............................................................2
Mortgage Rates.....................................................2, 7, 24
S-63
<PAGE>
Mortgaged Property....................................................7, 24
Net Aggregate Prepayment Interest Shortfall..........................15, 47
Net Mortgage Rate....................................................10, 44
Nonrecoverable P&I Advance...............................................50
Offered Certificates...............................................1, 6, 42
OID Regulations..........................................................58
P&I Advance..........................................................15, 50
Participants.............................................................42
Pass-Through Rate.........................................................2
Plan.................................................................19, 58
Pooling and Servicing Agreement.......................................9, 42
Prepayment Interest Excess...........................................15, 39
Prepayment Interest Shortfall........................................15, 39
Prepayment Premium....................................................8, 25
Principal Distribution Amount........................................13, 47
Private Certificates...............................................1, 6, 42
Purchase Price...........................................................36
Realized Losses......................................................10, 49
Record Date..............................................................11
Related Proceeds.........................................................50
REMIC.................................................................3, 18
REMIC Regular Certificates............................................6, 42
REO Property.........................................................17, 38
Resolution Fee...........................................................40
Scheduled Payment....................................................14, 47
Securities Act...........................................................42
Servicing Fees...........................................................40
SMMEA................................................................19, 61
Special Servicing Fee....................................................40
Specially Serviced Mortgage Loans........................................38
Specially Serviced Trust Fund Assets.....................................38
Stated Principal Balance.............................................11, 44
Step Rate Loans.......................................................7, 25
Subordinate Certificates.............................................16, 48
Trust Fund.........................................................2, 9, 42
Voting Rights............................................................51
Weighted Average Net Mortgage Rate...................................10, 44
S-64
<PAGE>
ANNEX A
<TABLE>
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
<CAPTION>
Remaining Term (mo)
Cut-Off Annual -------------------
Original Date Mortgage Debt Stated Maturity Loan
Loan Id. Property Address City State Zip Balance Balance Rate Service(2) Maturity Amort. Date Type
- -------- -------- ------- ---- ----- --- -------- ------- -------- ---------- -------- ------ -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
S-65
<PAGE>
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
March 24, 1997
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
<PAGE>
which is attached hereto) had the corporate power and
authority to enter into and perform all obligations under the Pooling and
Servicing Agreement.
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.
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
<PAGE>
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
March 24, 1997
First Union Commercial Mortgage Securities, Inc.
One First Union Center
301 S. College Street
Charlotte, NC 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 Vice President and Assistant 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>
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,
Paul C. Hurdle, III
Vice President and
Assistant General Counsel
