AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
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)
<TABLE>
<S> <C>
NORTH CAROLINA 56-1643598
- ---------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
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) 374-6868
---------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------
with copies to:
RICHARD C. SAMMIS, ESQ.
WILLKIE FARR & GALLAGHER
ONE CITICORP CENTER
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022
(212) 821-8000
--------------------
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. |_|
(Continued on next page)
================================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT
AMOUNT AGGREGATE AGGREGATE OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1)(2) UNIT (3) PRICE (3) FEE (1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Mortgage
Pass-Through Certificates $1,000,000 100% $1,000,000 $295
==============================================================================================================
</TABLE>
(1) $288,883,000 aggregate principal amount of Commercial Mortgage Pass-Through
Certificates registered by the Registrant under Registration Statement Nos.
33-97994 and 333-07854 (the "Prior Registration Statements") referred to
below and not previously sold are consolidated in this Registration
Statement pursuant to Rule 429. All registration fees in connection with
such unsold amount of Commercial Mortgage Pass-Through Certificates have
been previously paid by the Registrant under the Prior Registration
Statements.
(2) There is also being registered hereunder an indeterminate amount of
Commercial Mortgage Pass-Through Certificates that may be sold by
Registrant or any affiliate of Registrant, including First Union Capital
Markets, a division of Wheat First Securities, Inc. in furtherance of
market-making activities in the Commercial Mortgage Pass-Through
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 BUYNOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED [_______], 199[_]
PROSPECTUS SUPPLEMENT
- --------------------------
(TO PROSPECTUS 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. 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.
================================================================================
INITIAL % OF INITIAL PASS-
CERTIFICATE INITIAL POOL THROUGH
CLASS BALANCE BALANCE RATE (1)
- --------------------------------------------------------------------------------
================================================================================
(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 (the "Mortgage Loan Seller"), which originated
the Mortgage Loans, and will transfer the Mortgage Loans, without recourse, to
the Trustee in exchange for the Certificates.
Distributions of interest on and principal of the Certificates will be
made, to the extent of available funds, on the [_]th day of each month or, if
any such [_]th day is not a business day, then on the next succeeding business
day, commencing ________, 199[_] (each, a "Distribution Date"). As more fully
described herein, distributions allocable to interest accrued on each Class of
offered Certificates will be made on each Distribution Date based on the
pass-through rate (the "Pass-Through Rate") then applicable to such Class and
the stated principal amount (the "Certificate Balance") of such Class
outstanding immediately prior to such Distribution Date. The Pass-Through Rate
for each Class of Offered Certificates applicable to the first Distribution Date
is set forth on the previous page. After the initial Distribution Date, the
Pass-Through Rate for each Class of Offered Certificates will equal from time to
time the weighted average of, subject to certain adjustments described herein,
the Net Mortgage Rates on the Mortgage Loans. The Net Mortgage Rate for any
Mortgage Loan will generally equal its Mortgage Rate, minus [_] basis points.
The initial Certificate Balance of each Class of Offered Certificates is set
forth on the previous page. Distributions allocable to principal of the Offered
Certificates will be made in the amounts and in accordance with the priorities
described herein. Such distributions will be made sequentially, that is, solely
in respect of the Class [_] Certificates until they are retired, then in respect
of the Class [_] Certificates until they are retired, and so on in respect of
each of the other Classes of Certificates with Certificate Balances in
alphabetical order of Class designation. See "Description of the
Certificates--Distributions" herein.
The yield to maturity on each Class of Offered Certificates will depend on,
among other things, the rate and timing of principal payments (including by
reason of prepayments, defaults and liquidations) on the Mortgage Loans that are
applied in reduction of the Certificate Balance of such Class, and on the
changes to the Pass-Through Rate thereof as described herein. Any delay in
collection of a Balloon Payment due at the maturity of a Mortgage Loan will
likely extend the weighted average life of the Class or Classes of Offered
Certificates entitled to distributions in respect of principal as of the date
such payment was due. See "Description of the 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 "Material 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-2
<PAGE>
TABLE OF CONTENTS
PAGE
----
SUMMARY OF PROSPECTUS SUPPLEMENT ........................................ S-
RISK FACTORS ............................................................ S-
Certain Risk Factors Associated with the Certificates ................. S-
Limited Liquidity for Offered Certificates .......................... S-
Certain Yield and Maturity Considerations ........................... S-
Mortgage Loan Prepayment Considerations ............................. S-
Certain Risk Factors Associated with the Mortgage Loans ............... S-
Risks of Lending on Income-Producing Properties ..................... S-
Limited Recourse on Mortgage Loans .................................. S-
Environmental Law Considerations .................................... S-
Geographic Concentration of Properties Increasing
Isolated Geographic Risk ........................................... S-
Concentration of Mortgage Loans and Borrowers
Increasing Single Borrower Risk .................................... S-
Adjustable Rate Mortgage Loans; Negative Amortization
May Cause Higher Default Rate ..................................... S-
Balloon Payments on Mortgage Loans; Heightened Risk of
Borrower Default .................................................. S-
Adjustable Rate Loans................................................ S-
Potential Conflict of Interest....................................... S-
DESCRIPTION OF THE MORTGAGE POOL ........................................ S-
General ............................................................... S-
Mortgage Loan History ................................................. S-
Certain Terms and Conditions of the Mortgage Loans .................... S-
Mortgage Rates; Calculations of Interest ............................ S-
Due Dates ........................................................... S-
Amortization ........................................................ S-
Prepayment Provisions ............................................... S-
Non-recourse Obligations ............................................ S-
"Due-on-Sale" and "Due-on-Encumbrance" Provisions ............... S-
Additional Mortgage Loan Information .................................. S-
The Mortgage Pool ................................................... S-
Property Inspections; Environmental Assessments ..................... S-
Borrower Concentration .............................................. S-
Condominium Loans ................................................... S-
The Mortgage Loan Seller .............................................. S-
Assignment of the Mortgage Loans; Repurchases ......................... S-
Representations and Warranties; Repurchases ........................... S-
Changes in Mortgage Pool Characteristics .............................. S-
SERVICING OF THE MORTGAGE LOANS ......................................... S-
General ............................................................... S-
The Master Servicer ................................................... S-
The Special Servicer .................................................. S-
Servicing and Other Compensation and Payment of Expenses .............. S-
Modifications, Waivers and Amendments ................................. S-
Inspections; Collection of Operating Information ...................... S-
DESCRIPTION OF THE CERTIFICATES ......................................... S-
General ............................................................... S-
Registration; Denominations ........................................... S-
Certificate Balances .................................................. S-
Pass-Through Rates .................................................... S-
Distributions ......................................................... S-
General ............................................................. S-
The Available Distribution Amount ................................... S-
Application of the Available Distribution Amount .................... S-
S-3
<PAGE>
PAGE
----
Distributable Certificate Interest .................................. S-
Principal Distribution Amount ....................................... S-
Treatment of REO Properties ......................................... S-
Prepayment Premiums ................................................. S-
Subordination; Allocation of Losses and Certain Expenses .............. S-
P&I Advances .......................................................... S-
Reports to Certificateholders; Available Information .................. S-
Voting Rights ......................................................... S-
Termination ........................................................... S-
The Trustee ........................................................... S-
YIELD AND MATURITY CONSIDERATIONS ....................................... S-
Yield Considerations .................................................. S-
General ............................................................. S-
Pass-Through Rates .................................................. S-
Rate and Timing of Principal Payments ............................... S-
Losses and Shortfalls ............................................... S-
Certain Relevant Factors ............................................ S-
Delay in Payment of Distributions ................................... S-
Unpaid Distributable Certificate Interest ........................... S-
Weighted Average Life ................................................. S-
USE OF PROCEEDS ......................................................... S-
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ................................ S-
ERISA CONSIDERATIONS .................................................... S-
LEGAL INVESTMENT ........................................................ S-
METHOD OF DISTRIBUTION .................................................. S-
LEGAL MATTERS ........................................................... S-
RATING .................................................................. S-
INDEX OF PRINCIPAL DEFINITIONS .......................................... S-
ANNEX A ................................................................. S-
S-4
<PAGE>
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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, 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.
Issuer ............................. The Trust Fund established under the
Pooling and Servicing Agreement, as it
is described under "Description of the
Certificates."
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, 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-5
<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 "Description of the Mortgage
Pool--Certain Terms and Conditions of
the Mortgage Loans" herein.
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
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):
(i) Mortgage Rates ranging from [_]%
per annum to [_]% per annum, and a
weighted average Mortgage Rate of
[_]% per annum;
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S-7
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(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 [_] 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 [$_],
which will represent approximately [_]%
of the Initial Pool Balance; and the
Class
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S-8
<PAGE>
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[_], Class [_] and Class [_]
Certificates will have an aggregate
Certificate Balance of [$_], 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; 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
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S-9
<PAGE>
- --------------------------------------------------------------------------------
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;
(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
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S-10
<PAGE>
- --------------------------------------------------------------------------------
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;
(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;
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S-11
<PAGE>
- --------------------------------------------------------------------------------
(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 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
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S-12
<PAGE>
- --------------------------------------------------------------------------------
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 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
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S-13
<PAGE>
- --------------------------------------------------------------------------------
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 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
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S-14
<PAGE>
- --------------------------------------------------------------------------------
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--Distributions ". No other
form of Credit Support will be available
for the benefit of the holders of the
Offered Certificates.
On each Distribution Date, following all
distributions on the Certificates to be
made on such date, the aggregate of all
Realized Losses and Additional Trust
Fund- Expenses, that have been incurred
since the Cut-off Date through the end
of the related Collection Period and
have not previously been allocated as
described below will be allocated to the
respective Classes of REMIC Regular
Certificates (in each case in reduction
of its Certificate Balance), in reverse
alphabetical order of their Class
designations, but in the aggregate only
to the extent that the aggregate
Certificate Balance of such Classes of
Certificates remaining outstanding after
giving effect to the distributions on
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
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S-15
<PAGE>
- --------------------------------------------------------------------------------
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.
Risk Factors ....................... There are material risks associated with
an investment in the Offered
Certificates. See "Risk Factors" 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.
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).
Material 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
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S-16
<PAGE>
- --------------------------------------------------------------------------------
"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 "Material Federal Income Tax
Consequences" herein and in the
Prospectus.
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
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S-17
<PAGE>
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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 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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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.
Additional risk factors are set forth elsewhere in this Prospectus Supplement
under separate headings in connection with discussions regarding particular
aspects of Trust Fund Assets or the Certificates.
CERTAIN RISK FACTORS ASSOCIATED WITH THE CERTIFICATES
Limited Liquidity for Offered Certificates. 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 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.
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<PAGE>
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.
CERTAIN RISK FACTORS ASSOCIATED WITH THE MORTGAGE LOANS
Risks of Lending on Income-Producing Properties. 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 on Mortgage Loans. 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.
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 Properties Increasing Isolated Geographic Risk.
[_] 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
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<PAGE>
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 Borrowers Increasing Single Borrower
Risk. 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.
Adjustable Rate Mortgage Loans; Negative Amortization May Cause Higher
Default Rate.______ of the Mortgage Loans, which represent __% of the Initial
Pool Balance, are ARM Loans. In addition, of the ARM Loans, which represent % of
the Initial Pool Balance, allow negative amortization to occur. Increases in the
required Monthly Payments on ARM Loans in excess of those assumed in the
original underwriting of such loans may result in a default rate higher than
that on mortgage loans with fixed mortgage rates. Moreover, increases in the
principal balances of ARM Loans due to the deferral and capitalization of
interest payments may result in a default rate that is higher than that of
adjustable rate mortgage loans that do not provide for negative amortization.
Balloon Payments on Mortgage Loans; Heightened Risk of Borrower Default.
[_] 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 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
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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 [_]% 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
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<PAGE>
([_] 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 paymentof 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 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
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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.
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-24
<PAGE>
MORTGAGE RATES
<TABLE>
<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>
</TABLE>
WEIGHTED AVERAGES
- --------------------------------------
LOAN/ LOAN/ OCCUPANCY YEAR
UNIT SQ. FT. PERCENTAGE BUILT
CUT-OFF DATE BALANCES
<TABLE>
<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>
</TABLE>
WEIGHTED AVERAGES
- --------------------------------------
LOAN/ LOAN/ OCCUPANCY YEAR
UNIT SQ. FT. PERCENTAGE BUILT
S-25
<PAGE>
STATED REMAINING TERMS
<TABLE>
<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>
</TABLE>
WEIGHTED AVERAGES
- --------------------------------------
LOAN/ LOAN/ OCCUPANCY YEAR
UNIT SQ. FT. PERCENTAGE BUILT
DEBT SERVICE COVERAGE RATIOS
<TABLE>
<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>
</TABLE>
WEIGHTED AVERAGES
- --------------------------------------
LOAN/ LOAN/ OCCUPANCY YEAR
UNIT SQ. FT. PERCENTAGE BUILT
S-26
<PAGE>
The following four tables set forth certain information regarding the
Mortgage Pool presented by the range of Indicative Cut-off Date LTVs of the
Mortgage Loans, with the related Indicative Values estimated utilizing the
specified capitalization rate. As discussed above, the Indicative Values of the
Mortgaged Properties are not necessarily a reliable substitute for fair market
value that would be determined by an independent professional appraiser, and
there can be no assurance that any Indicative Value represents a fair
approximation of the actual fair market value of the related Mortgaged Property.
INDICATIVE CUT-OFF DATE LTVs ([_]% CAP RATE)
<TABLE>
<CAPTION>
WEIGHTED 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>
</TABLE>
WEIGHTED AVERAGES
- --------------------------------------
LOAN/ LOAN/ OCCUPANCY YEAR
UNIT SQ. FT. PERCENTAGE BUILT
INDICATIVE CUT-OFF DATE LTVs ([_]% CAP RATE)
<TABLE>
<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>
</TABLE>
WEIGHTED AVERAGES
- --------------------------------------
LOAN/ LOAN/ OCCUPANCY YEAR
UNIT SQ. FT. PERCENTAGE BUILT
S-27
<PAGE>
INDICATIVE CUT-OFF DATE LTVs ([_]% CAP RATE)
<TABLE>
<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>
</TABLE>
WEIGHTED AVERAGES
- --------------------------------------
LOAN/ LOAN/ OCCUPANCY YEAR
UNIT SQ. FT. PERCENTAGE BUILT
INDICATIVE CUT-OFF DATE LTVs ([_]% CAP RATE)
<TABLE>
<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>
</TABLE>
WEIGHTED AVERAGES
- --------------------------------------
LOAN/ LOAN/ OCCUPANCY YEAR
UNIT SQ. FT. PERCENTAGE BUILT
S-28
<PAGE>
OCCUPANCY PERCENTAGES
<TABLE>
<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>
</TABLE>
WEIGHTED AVERAGES
- --------------------------------------
LOAN/ LOAN/ OCCUPANCY YEAR
UNIT SQ. FT. PERCENTAGE BUILT
STATES
<TABLE>
<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>
</TABLE>
WEIGHTED AVERAGES
- --------------------------------------
LOAN/ LOAN/ OCCUPANCY YEAR
UNIT SQ. FT. PERCENTAGE BUILT
S-29
<PAGE>
YEARS BUILT
<TABLE>
<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>
</TABLE>
WEIGHTED AVERAGES
- --------------------------------------
LOAN/ LOAN/ OCCUPANCY YEAR
UNIT SQ. FT. PERCENTAGE BUILT
PREPAYMENT RESTRICTIONS
<TABLE>
<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>
</TABLE>
WEIGHTED AVERAGES
- --------------------------------------
LOAN/ LOAN/ OCCUPANCY YEAR
UNIT SQ. FT. PERCENTAGE BUILT
S-30
<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.
PREPAYMENT LOCK-OUT/PREMIUM ANALYSIS
PERCENTAGE OF POOL BALANCE BY PREPAYMENT RESTRICTION ASSUMING NO PREPAYMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOCK-OUT/PREPAYMENT CURRENT 12 (MO.) 24 (MO.) 36 (MO.) 48 (MO.) 60 (MO.) 72 (MO.) 84 (MO.) 96 (MO.)
PREMIUM PERCENTAGE [ ] -9[ ] [ ]-9[ ] [ ]-9[ ] [ ]-9[ ] [ ]-9[ ] [ ]-9[ ] [ ] -9[ ] [ ] -9[ ] [ ] -9[ ]
------------------- --------- -------- -------- -------- -------- -------- --------- --------- ---------
</TABLE>
The following table sets forth the respective years in which the Mortgage
Loans are scheduled to mature. Since [ ]% of the Mortgage Loans require Balloon
Payments to be made at maturity, the table provides an indication (which does
not account for any scheduled amortization, prepayments or liquidations) of the
concentration of Balloon Payments that will be due in those years. See "Risk
Factors--The Mortgage Loans--Balloon Payments" herein.
YEARS OF SCHEDULED MATURITY
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 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.
S-31
<PAGE>
[ ] 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 (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 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
S-32
<PAGE>
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;
(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
S-33
<PAGE>
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.
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
S-34
<PAGE>
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 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] [national banking association] 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
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invest or direct the investment of funds held in the Certificate Account in
certain short term United States government securities and other investment
grade obligations, and the Master Servicer will be entitled to retain any
interest or other income earned on such funds.
If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Collection Period on a date that is prior to its Due Date in such
Collection Period, the amount of interest (net of related Servicing Fees) that
accrues on the amount of such principal prepayment will be less (such shortfall,
a "Prepayment Interest Shortfall") than the corresponding amount of interest,
accruing on the Certificates. If such a principal prepayment occurs during any
Collection Period after the Due Date for such Mortgage Loan in such Collection
Period, the amount of interest (net of related Servicing Fees) that accrues on
the amount of such principal prepayment will exceed (such excess, a "Prepayment
Interest Excess") the corresponding amount of interest accruing on the
Certificates. Any Prepayment Interest Excesses collected will be paid to the
Master Servicer as additional servicing compensation. However, with respect to
each Distribution Date, the Master Servicer will be required to deposit into the
Certificate Account (such deposit, a "Compensating Interest Payment"), without
any right of reimbursement therefor, an amount equal to the lesser of (i) its
servicing compensation for the related Collection Period, including any
Prepayment Interest Excesses received during such Collection Period, and (ii)
the aggregate of any Prepayment Interest Shortfalls experienced during such
Collection Period. Compensating Interest Payments will not cover shortfalls in
Mortgage Loan interest accruals that result from any liquidation of a defaulted
Mortgage Loan, or of any REO Property acquired in respect thereof, that occurs
during a Collection Period prior to the related Due Date therein.
As and to the extent described herein under "Description of the
Certificates--P&I Advances", the Master Servicer will be entitled to receive
interest on P&I Advances and on reimbursable servicing expenses incurred by it
or reimbursed by it to the Special Servicer, such interest to be paid,
contemporaneously with the reimbursement of the related P&I Advance, if any, or
servicing expense, from general collections on the Mortgage Loans then on
deposit in the Certificate Account.
The principal compensation to be paid to the Special Servicer in respect of
its special servicing activities will be the Special Servicing Fee (together
with the Master Servicing Fee, the "Servicing Fees") and, in circumstances
described herein, Modification Fees and Resolution Fees. As is the case with the
Master Servicing Fee, but only as to Specially Serviced Mortgage Loans, the
"Special Servicing Fee" will be payable monthly on a loan-by-loan basis from
amounts received in respect of interest on each Specially Serviced Mortgage
Loan, will accrue at a rate equal to [ ]% per annum, and will be computed on the
basis of the same principal amount and for the same period respecting which any
related interest payment on the related Specially Serviced Mortgage Loan is
computed. The Special Servicing Fee with respect to any Specially Serviced
Mortgage Loan will cease to accrue if such loan comes current and the servicing
thereof is returned to the Master Servicer (whereupon it will become a
"Corrected Mortgage Loan"). The Special Servicer will be entitled to a
"Modification Fee" with respect to each Corrected Mortgage Loan (other than a
Corrected Mortgage Loan that has previously become a Corrected Mortgage Loan two
or more times) if, during the time the Mortgage Loan was most recently a
Specially Serviced Loan (i) the stated maturity thereof was extended, (ii) the
amount of the Monthly Payment payable with respect thereto was reduced for a
period in excess of 12 consecutive months following the date it became a
Corrected Mortgage Loan, or (iii) any amount due thereunder was forgiven
following the Special Servicer's good faith negotiations with the related
borrower, in any event in connection with and in furtherance of its becoming a
Corrected Mortgage Loan. The Modification Fee will equal [ ]% (or, if there was
solely an extension of the stated maturity of such Mortgage Loan, [ ]%) of the
principal balance of the Mortgage Loan at the time it became a Corrected
Mortgage Loan, less the amount of any modification fees collected by the Special
Servicer from the related borrower. The Special Servicer will be entitled to a
"Resolution Fee" if it liquidates any Specially Serviced Trust Fund Asset (other
than by way of the sale thereof to the Master Servicer or the Depositor or the
purchase thereof by the Special Servicer). The Resolution Fee will equal [ ]% of
the related liquidation proceeds. Any such Modification Fee or Resolution 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
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sub-servicers retained by it, and will not be entitled to reimbursement
therefor except as expressly provided in the Pooling and Servicing Agreement,
however, each of the Master Servicer and the Special Servicer will be permitted
to pay certain of such expenses directly out of the Certificate Account and at
times without regard to the relationship between the expense and the funds from
which it is being paid. In addition, the Special Servicer will be entitled to
reimbursement from the Master Servicer for all out-of-pocket expenses incurred
by it in connection with modifying any Specially Serviced Mortgage Loan or
liquidating any Specially Serviced Trust Fund Asset. See "Description of the
Certificates--Distributions" herein and "Description of the Pooling
Agreements--Certificate Account" and "--Servicing Compensation and Payment of
Expenses" in the Prospectus.
MODIFICATIONS, WAIVERS AND AMENDMENTS
The Pooling and Servicing Agreement will permit each of the Master Servicer
and the Special Servicer to modify, waive or amend any term of any Mortgage Loan
if it determines, in accordance with the servicing standard described herein,
that it is appropriate to do so and that such modification, waiver or amendment
will not (i) affect the amount or timing of any scheduled payments of principal
or interest on the Mortgage Loan, (ii) affect the obligation of the related
borrower to pay a Prepayment Premium or permit a principal prepayment during any
applicable Lock-out Period, (iii) except under limited circumstances, result in
a release of the lien of the related Mortgage on any material portion of the
related Mortgaged Property or (iv) in its judgment, materially impair the
security for the Mortgage Loan or reduce the likelihood of timely payment of
amounts due thereon.
The Special Servicer may agree to any otherwise prohibited modification,
waiver or amendment of the terms of a Mortgage Loan, but only if it has
determined that a material default on the Mortgage Loan has occurred or a
payment default is imminent, and that its agreement to such modification, waiver
or amendment is consistent with the servicing standard described herein. In
particular, the Special Servicer may, if it has made the foregoing
determinations,(i) reduce the amounts owing under any Mortgage Loan by forgiving
principal and/or accrued interest, (ii) reduce the amount of the Monthly Payment
on any Mortgage Loan, including by way of a reduction in the related Mortgage
Rate, and/or (iii) forbear in the enforcement of any right granted under any
Mortgage Note or Mortgage. However, the Special Servicer will not be permitted
to extend the date on which any Balloon Payment is scheduled to be due for a
period in excess of [ ] months beyond its scheduled due date.
The Master Servicer and the Special Servicer will each be required to
notify the Trustee of any modification, waiver or amendment of any term of any
Mortgage Loan, and to deliver to the Trustee or the related Custodian, for
deposit in the related Mortgage File, an original counterpart of the agreement
related to such modification, waiver or amendment, promptly (and in any event
within [____] business days) following the execution thereof. Copies of each
agreement whereby any such modification, waiver or amendment of any term of any
Mortgage Loan is effected are required to be available for review during normal
business hours at the offices of the Master Servicer. See "Description of the
Certificates--Reports to Certificateholders; Available Information" herein.
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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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 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
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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
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
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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:
(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;
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(2) to distributions of principal to the holders of the Class [ ]
Certificates in an amount (not to exceed the then outstanding Certificate
Balance of the Class [ ] Certificates) equal to the Principal Distribution
Amount for such Distribution Date;
(3) to distributions to the holders of the Class [ ] Certificates to
reimburse such holders for all Realized Losses and Additional Trust Fund
Expenses, if any, previously allocated to such Class of Certificates and
for which no reimbursement has previously been received;
(4) to distributions of interest to the holders of the Class [ ]
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class [ ] Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates;
(5) if the Class [ ] Certificates have been retired, to distributions
of principal to the holders of the Class [ ] Certificates in an amount (not
to exceed the then outstanding Certificate Balance of the Class [ ]
Certificates) equal to the Principal Distribution Amount for such
Distribution Date, less any portion thereof distributed in retirement of
the Class [ ] Certificates on such Distribution Date;
(6) to distributions to the holders of the Class [ ] Certificates to
reimburse such holders for all Realized Losses and Additional Trust Fund
Expenses, if any, previously allocated to such Class of Certificates and
for which no reimbursement has previously been received;
(7) to distributions of interest to the holders of the Class [ ]
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class [ ] Certificates for such Distribution Date and, to
the extent not previously distributed, for all prior Distribution Dates;
(8) if the Class [ ] and Class [ ] Certificates have been retired, to
distributions of principal to the holders of the Class [ ] Certificates in
an amount (not to exceed the then outstanding Certificate Balance of the
Class [ ] Certificates) equal to the Principal Distribution Amount for such
Distribution Date, less any portion thereof distributed in retirement of
the Class [ ] and/or Class [ ] Certificates on such Distribution Date;
(9) to distributions to the holders of the Class [ ] Certificates to
reimburse such holders for all Realized Losses and Additional Trust Fund
Expenses, if any, previously allocated to such Class of Certificates and
for which no reimbursement has previously been received;
(10) to distributions of interest to the holders of the Class [ ]
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class [ ] Certificates for such Distribution Date and, to
the extent not previously distributed, for all prior Distribution Dates;
(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
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alphabetical order of Class designation, until each such Class is, in turn,
retired, as described in the Pooling and Servicing Agreement.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of REMIC Regular Certificates for each
Distribution Date represents that portion of the Accrued Certificate Interest in
respect of such Class of Certificates for such Distribution Date that is net of
such Class's allocable share (calculated as described below) of the aggregate of
any Prepayment Interest Shortfalls resulting from voluntary principal
prepayments made on the Mortgage Loans during the related Collection Period that
are not covered by the Master Servicer's Compensating Interest Payment for such
Distribution Date (the aggregate of such Prepayment Interest Shortfalls that are
not so covered, as to such Distribution Date, the "Net Aggregate Prepayment
Interest Shortfall").
The "Accrued Certificate Interest" in respect of each Class of REMIC
Regular Certificates for each Distribution Date is equal to 30 days' interest at
the Pass-Through Rate applicable to such Class of Certificates for such
Distribution Date accrued on the related Certificate Balance outstanding
immediately prior to such Distribution Date.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of REMIC Regular Certificates
will equal the product of (a) such Net Aggregate Prepayment Interest Shortfall,
multiplied by (b) a fraction, the numerator of which is the Accrued Certificate
Interest in respect of such Class of Certificates for such Distribution Date,
and the denominator of which is equal to the aggregate Accrued Certificate
Interest for all the REMIC Regular Certificates for such Distribution Date.
Principal Distribution Amount. The "Principal Distribution Amount" for each
Distribution Date will generally equal the aggregate of the following:
(a) the aggregate of the principal portions of all Scheduled Payments
(other than Balloon Payments) due and any Assumed Scheduled Payments deemed
due on or in respect of the Mortgage Loans for their respective Due Dates
occurring during the related Collection Period;
(b) the aggregate of all principal prepayments received on the
Mortgage Loans during the related Collection Period;
(c) with respect to any Mortgage Loan as to which the related stated
maturity date occurred during or prior to the related Collection Period,
any payment of principal made by or on behalf of the related borrower
during the related Collection Period, net of any portion of such payment
that represents a recovery of the principal portion of any Scheduled
Payment (other than a Balloon Payment) due, or the principal portion of any
Assumed Scheduled Payment deemed due, in respect of such Mortgage Loan on a
Due Date during or prior to the related Collection Period and not
previously recovered;
(d) the aggregate of all Liquidation Proceeds and Insurance Proceeds
that were received on Mortgage Loans during the related Collection Period
and that were identified and applied by the Master Servicer as recoveries
of principal, in each case net of any portion of such amounts that
represents a recovery of the principal portion of any Scheduled Payment
(other than a Balloon Payment) due, or of the principal portion of any
Assumed Scheduled Payment deemed due, in respect of the related Mortgage
Loan on a Due Date during or prior to the related Collection Period and not
previously recovered; and
(e) if such Distribution Date is subsequent to the initial
Distribution Date, the excess, if any, of the Principal Distribution Amount
for the immediately preceding Distribution Date, over the aggregate
distributions of principal made on the Certificates on such immediately
preceding Distribution Date.
The "Scheduled Payment" due on any Mortgage Loan on any related Due Date
will be the amount of the Monthly Payment that would have been due thereon on
such date, without regard to any waiver, modification or amendment of such
Mortgage Loan granted or agreed to by the Master Servicer and/or Special
Servicer or otherwise resulting from a bankruptcy or similar proceeding
involving the related borrower, and assuming that each prior Scheduled Payment
has been made in a timely manner. The "Assumed Scheduled Payment" is an amount
deemed due in respect of any Balloon Loan that is delinquent in respect of its
Balloon Payment beyond the first Determination Date that follows its stated
maturity date. The Assumed Scheduled Payment deemed due on any such Balloon Loan
on its stated maturity date and on each successive related Due Date that it
remains or is deemed to remain outstanding will equal the Scheduled Payment that
would have been due thereon on such date if the related Balloon Payment had not
come due but rather such Mortgage Loan had continued to amortize in accordance
with such loan's amortization schedule in effect prior to its stated maturity
date.
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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.
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.
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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 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
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will be required to advance only the amount of the reduced Monthly Payment (net
of related Servicing Fees) in-respect of subsequent delinquencies.
The Master Servicer will be entitled to recover any P&I Advance, if any,
made out of its own funds from any amounts collected in respect of the Mortgage
Loan as to which such P&I Advance was made, whether such amounts are collected
in the form of late payments, Insurance Proceeds, Liquidation Proceeds or
otherwise ("Related Proceeds"). The Master Servicer will not be obligated to
make any P&I Advance that it determines in accordance with the servicing
standard described herein, would, if made, not be recoverable out of Related
Proceeds (a "Nonrecoverable P&I Advance"), and the Master Servicer will be
entitled to recover any P&I Advance made that it later determines to be a
Nonrecoverable P&I Advance out of general funds on deposit in the Certificate
Account. See "Description of the Certificates--Advances in Respect of
Delinquencies" and "Description of the Pooling Agreements--Certificate Account"
in the Prospectus.
In connection with its recovery of any P&I Advance made by the Master
Servicer or any reimbursable servicing expense incurred by it or reimbursed to
the Special Servicer (each such P&I Advance or expense, an "Advance"), the
Master Servicer will be entitled to be paid, out of any amounts then on deposit
in the Certificate Account, interest at a per annum rate equal to the "prime
rate" published in the "Money Rates" section of The Wall Street Journal, as such
"prime rate" may change from time to time (the "Master Servicer Reimbursement
Rate"), accrued on the amount of such Advance from the date made to but not
including the date of reimbursement to the Master Servicer. To the extent not
offset or covered by amounts otherwise payable on the Private Certificates,
interest accrued on outstanding Advances will result in a reduction in amounts
payable on the Offered Certificates, subject to the distribution priorities
described herein.
REPORTS TO CERTIFICATEHOLDERS; AVAILABLE INFORMATION
On each Distribution Date, the Master Servicer will be required to forward
by mail to each holder of an Offered Certificate a statement (a "Distribution
Date Statement") providing various items of information relating to
distributions made on such date with respect to the relevant Class and the
recent status of the Mortgage Pool. For a more detailed discussion of the
particular items of information to be provided in each Distribution Date
Statement, as well as a discussion of certain annual information reports to be
furnished by the Master Servicer to persons who at any time during the prior
calendar year were holders of the Offered Certificates, see "Description of the
Certificates--Reports to Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the Master Servicer make
available at its offices primarily responsible for servicing the Mortgage Loans,
during normal business hours, for review by any holder of an Offered Certificate
or any person identified to the Master Servicer as a prospective transferee of
an Offered Certificate, originals or copies of, among other things, the
following items: (a) the Pooling and Servicing Agreement and any amendments
thereto, (b) all Distribution Date Statements delivered to holders of the
relevant Class of Offered Certificates since the Delivery Date, (c) all
officer's certificates delivered to the Trustee since the Delivery Date as
described under "Description of the Pooling Agreements--Evidence as to
Compliance" in the Prospectus, (d) all accountants' reports delivered to the
Trustee since the Delivery Date as described under "Description of the Pooling
Agreements--Evidence as to Compliance" in the Prospectus, (e) the most recent
property inspection report prepared by or on behalf of the Master Servicer or
the Special Servicer in respect of each Mortgaged Property, (f) 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
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otherwise available through DTC and its Participants. The manner in which
notices and other communications are conveyed by DTC to Participants, and by
Participants to the Class [ ] Certificate Owners, will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time. The Master Servicer, the Special Servicer,
the Trustee, the Depositor and the Certificate Registrar are required to
recognize as Certificateholders only those persons in whose names the
Certificates are registered on the books and records of the Certificate
Registrar.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement, 100%
of the voting rights for the series offered hereby (the "Voting Rights") will be
allocated among the respective Classes of REMIC Regular Certificates in
proportion to the Certificate Balances of those Classes. Voting Rights allocated
to a Class of Certificates will be allocated among the related
Certificateholders in proportion to the percentage interests evidenced by their
respective Certificates. See "Description of the Certificates--Voting Rights" in
the Prospectus.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in respect
thereof) or other liquidation of the last Mortgage Loan or REO Property subject
thereto, and (ii) the purchase of all of the assets of the Trust Fund by the
Master Servicer or the Depositor. Written notice of termination of the Pooling
and Servicing Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at the office of the Certificate Registrar or other location
specified in such notice of termination.
Any such purchase by the Master Servicer or the Depositor of all the
Mortgage Loans and other assets in the Trust Fund is required to be made at a
price equal to (i) the aggregate Purchase Price of all the Mortgage Loans then
included in the Trust Fund, plus (ii) the fair market value of all REO
Properties then included in the Trust Fund, as determined by an appraiser
mutually agreed upon by the Master Servicer and the Trustee, minus (iii) if the
Purchaser is the Master Servicer, the aggregate of amounts payable or
reimbursable to the Master Servicer under the Pooling and Servicing Agreement.
Such purchase will effect early retirement of the then outstanding Offered
Certificates, but the right of the Master Servicer or the Depositor to effect
such termination is subject to the requirement that the then aggregate Stated
Principal Balance of the Mortgage Pool be less than 10% of the Initial Pool
Balance.
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.
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Pass-Through Rates. The Pass-Through Rate applicable to each Class of
Offered Certificates for any Distribution Date will be variable and will equal
the Weighted Average Net Mortgage Rate for such date. Accordingly, the yields on
the Offered Certificates will be sensitive to changes in the relative
composition of the Mortgage Pool as a result of scheduled amortization,
voluntary prepayments and liquidations of Mortgage Loans following default. To a
lesser degree, that yield will also be sensitive to changes to the Mortgage
Rates on the ARM Loans and the Step Rate Loans. See "Description of the
Certificates--Pass-Through Rates" and "Description of the Mortgage Pool" herein
and "--Rate and Timing of Principal Payments" below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates purchased at a discount or premium will be affected by the rate and
timing of principal payments made in reduction of the principal balance of such
Certificates. As described herein, the Principal Distribution Amount for each
Distribution Date will be distributable entirely in respect of the Class [ ]
Certificates until the Certificate Balance thereof is reduced to zero, and will
thereafter be distributable entirely in respect of the Class [ ] Certificates,
the Class [ ], Certificates and the Class [ ] Certificates, in that order, in
each case until the Certificate Balance of such Class of Certificates is reduced
to zero. Consequently, the rate and timing of principal payments made in
reduction of the Certificate Balance of each Class of Offered Certificates will
be directly related to the rate and timing of principal payments on or in
respect of the Mortgage Loans, which will in turn be affected by the
amortization schedules thereof, the dates on which Balloon Payments are due and
the rate and timing of principal prepayments and other unscheduled collections
thereon (including for this purpose, collections made in connection with
liquidations of Mortgage Loans due to defaults, casualties or condemnations
affecting the Mortgaged Properties, or purchases of Mortgage Loans out of the
Trust Fund). Prepayments and, assuming the respective stated maturity dates
therefor have not occurred, liquidations and purchases of the Mortgage Loans,
will result in distributions on the Offered Certificates of amounts that would
otherwise be distributed over the remaining terms of the Mortgage Loans.
Defaults on the Mortgage 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
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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 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
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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
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
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.
MATERIAL 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 "Material Federal
Income Tax Consequences--REMICs" in the Prospectus. Such opinion will be filed
with the Commission.
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The Class [ ] Certificates will not, and the Class [ ] Certificates will,
be treated as having been issued with original issue discount for federal income
tax reporting purposes. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount, market discount and
premium, if any, for federal income tax purposes will be based on the assumption
that subsequent to the date of any determination the Mortgage Loans will prepay
at a rate equal to a CPR of [ ]%. No representation is made that the Mortgage
Loans will prepay at that rate or at any other rate. See "Material 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 "Material 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 "Material 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 "Material 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, collective investment funds and separate and
general accounts in which such plans, accounts or arrangements are invested,
that is subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the Code (each, a "Plan") should carefully
review with its legal advisors whether the purchase or holding of Offered
Certificates could give rise to a transaction that is prohibited or is not
otherwise permitted either under ERISA or Section 4975 of the Code or whether
there exists any statutory or administrative exemption applicable thereto.
First Union Corporation ("First Union") has received from the DOL an
individual prohibited transaction exemption (the "Exemption"), which generally
exempts from the application of the prohibited transaction provisions of
Sections 406(a) and (b) and 407(a) of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code,
the purchase, sale and holding of Class [ ] Certificates, underwritten by an
Underwriter, as hereinafter defined, provided that certain conditions set forth
in the Exemption are satisfied. For purposes of this discussion, the term
"Underwriter" shall include (a) First Union, (b) any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with First Union, and (c) any member of the underwriting
syndicate or selling group of which First Union or a person described in (b) is
a manager or co-manger with respect to the Class [ ] Certificates.
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of Class [ ] Certificates
to be eligible for exemptive relief under the Exemption.
First, the acquisition of Class [ ] Certificates by a Plan must be on
terms that are at least as favorable to the Plan as they would be in an
arm's length transaction with an unrelated party.
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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 Structured Rating Group ("Standard & Poor's), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Rating Co. ("Duff
& Phelps") or Fitch Investors Service, L.P.("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.
Seventh, in the event the obligations used to fund the Trust Fund have
not all been transferred to the Trust Fund on the closing date, additional
obligations as specified in the Exemption shall be transferred to the Trust
Fund in exchange for the amounts credited to the Pre-Funding Account during
the period commencing on the closing date and ending no later than the
earliest to occur of: (i) the date the amount on deposit in the Pre-Funding
Account (as defined in the Exemption) is less than the minimum dollar
amount specified in the Pooling and Servicing Agreement; (ii) the date on
which an event of default occurs under the Pooling and Servicing Agreement;
or (iii) the date which is the later of three months or 90 days after the
closing date, provided certain conditions of the Exemption are met.
Because the Class [ ] Certificates are not subordinated to any other Class
of Certificates, the second general condition set forth above is satisfied with
respect to the Class [ ] Certificates. It is a condition of the issuance of the
Class [ ] Certificates that they be rated not lower than [ ] and [ ] by [ ] and
[ ], respectively; thus, the third general condition set forth above is
satisfied with respect to the Class [ ] Certificates as of the Delivery Date. In
addition, the fourth general condition set forth above is also satisfied as of
the Delivery Date. A fiduciary of a Plan contemplating purchasing a Class [ ]
Certificate in the secondary market must make its own determination that, at the
time of such purchase, the Class [ ] Certificates continue to satisfy the third
and fourth general conditions set forth above. A fiduciary of a Plan
contemplating purchasing any purchase of a Class [ ] Certificate must make its
own determination that the first, fifth and sixth general conditions set forth
above will be satisfied with respect to such Class [ ] Certificate as of the
date of such purchase.
The Exemption requires that the Trust Fund meet the following requirements:
(i) the Trust Fund must consist solely of assets of the type that have been
included in other investment pools; (ii) certificates in such other investment
pools must have been rated in one of the three highest categories of Standard &
Poor's, Duff & Phelps, Moody's or Fitch for at least one year prior to the
Plan's acquisition of Certificates; and (iii) certificates in such other
investment pools must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of Certificates. The Depositor
has confirmed to its satisfaction that such requirements have been satisfied as
of the date hereof.
If the general conditions set forth in the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by the reason of Sections 4975(c)(1)(A) through (D)
of the Code) in connection with (i) the direct or indirect sale, exchange or
transfer of Class [ ] Certificates in the initial issuance of Certificates
between the Depositor or an Underwriter and a Plan when the Depositor,
Underwriter, Trustee, Master Servicer, Special Servicer, sub-servicer or
mortgagor is a "Party in Interest" (as defined in the Prospectus) with respect
to the investing
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<PAGE>
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 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, except as described above for certain insurance company
general accounts.
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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 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.
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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 Sidley & Austin, New
York, New York.
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.
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INDEX OF PRINCIPAL DEFINITIONS
PAGE
----
Accrued Certificate Interest ....................................... 46
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 .................................................... 61
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
Mortgaged Property ................................................. 7,24
Net Aggregate Prepayment Interest Shortfall ........................ 15,47
Net Mortgage Rate .................................................. 10,43
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PAGE
----
Nonrecoverable P&I Advance ......................................... 50
Offered Certificates ............................................... 1,6,42
OID Regulations .................................................... 58
P&I Advance ........................................................ 14,49
Participants ....................................................... 42
Pass-Through Rate .................................................. 2
Plan ............................................................... 18,58
Pooling and Servicing Agreement .................................... 9,41
Prepayment Interest Excess ......................................... 15,39
Prepayment Interest Shortfall ...................................... 15,39
Prepayment Premium ................................................. 8,25
Principal Distribution Amount ...................................... 13,46
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 ........................................... 11,43
Step Rate Loans .................................................... 7,24
Subordinate Certificates ........................................... 16,48
Trust Fund ......................................................... 2,9,42
Voting Rights ...................................................... 51
Weighted Average Net Mortgage Rate ................................. 10,43
S-58
<PAGE>
<TABLE>
<CAPTION>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
Remaining Term (mo)
Cut-Off Annual -------------------
Original Date Mortgagae 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>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. OFFERS TO
BUY THESE SECURITIES MAY NOT BE ACCEPTED WITHOUT THE DELIVERY OF A FINAL
PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 31, 1998
PROSPECTUS
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".
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".
----------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING
ON PAGE [ ] UNDER THE CAPTION "RISK FACTORS" HEREIN AND
UNDER SUCH CAPTION 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. A CERTIFICATE IS NOT A DEPOSIT AND
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE ASSETS 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., a division of Wheat First Securities, Inc., 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.
(cover continued on next page)
, 1998
<PAGE>
(cover continued)
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"). [ALTERNATE COVER PAGES. ORDER BRACKETED
COMMERCIAL PROPERTY TYPE BY MATERIAL CONCENTRATION OF SUCH PROPERTY TYPE IN THE
TRUST FUND AND DELETE REFERENCE TO ANY PROPERTY TYPE WITHIN BRACKET NOT IN THE
TRUST FUND].[Mortgage Loans may be secured by interests in the following
property types [residential properties consisting of five or more rental or
cooperatively-owned dwelling units], [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 or self-storage facilities], [industrial plants], [mixed use or
other types of income producing properties] or [unimproved land.] [Bracketed
commercial mortgage property types to be included in order of the magnitude of
material concentration of such property type in the Trust Fund. Property types
absent from the Trust Fund are to be deleted.] See "Description of the Trust
Funds." Mortgage Loans (or mortgage loans underlying a CMBS) may be secured by
first or junior, recourse or non-recourse liens and may be delinquent 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 Certificate may include amounts on deposit in a
separate account (the "Pre-Funding Account") which may be used by the Trust Fund
to acquire additional assets as more fully described herein and 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 "Risk Factors--Effects of Pre-Funding and
Acquisition of Additional Mortgage Assets," "Description of the Trust Funds",
"Description of the Certificates" and "Description of Credit Support".
Distributions in respect of the Certificates will be made on a monthly,
quarterly or other periodic basis as 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 paymentsas described herein and in the related
Prospectus Supplement. See "Yield and Maturity Considerations". A Trust Fund may
be subjectto 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 "Material 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.
2
<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 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
3
<PAGE>
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>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT ................................................................................... 3
AVAILABLE INFORMATION ................................................................................... 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ....................................................... 4
SUMMARY OF PROSPECTUS ................................................................................... 9
RISK FACTORS ............................................................................................ 19
Limited Liquidity for Offered Certificates ............................................................. 19
Limited Assets to Support Payment on Certificates ...................................................... 19
Prepayments on Mortgage Loans; Effects on Average Life of Certificates;
Effects on Yields on Certificates ..................................................................... 19
Optional Early Termination ............................................................................. 21
Limited Nature of Ratings on Certificates .............................................................. 21
Effects of Pre-Funding and Acquisition of Additional Mortgage Assets ................................... 21
Risks to Lenders Associated with Certain Income Producing Loans and Mortgaged Properties ............... 21
Risks Associated with Mortgage Loans Secured by Multifamily Properties ................................ 22
Risks Associated with Mortgage Loans Secured by Office Buildings ...................................... 23
Risks Associated with Mortgage Loans Secured by Retail Properties ..................................... 23
Risks Associated with Mortgage Loans Secured by Hospitality Properties ................................ 23
Risks Associated with Mortgage Loans Secured by Residential Healthcare Facilities ..................... 24
Risks Associated with Mortgage Loans Secured by Warehouse and Self Storage Facilities ................. 24
Risks Associated with Mortgage Loans Secured by Industrial & Mixed-Use Facilities ..................... 24
Risks Associated with Mortgage Loans Secured by Health-Care Related Properties......................... 25
Management Risks ....................................................................................... 25
Risks Associated with Certain Mortgage Loans and Related Leases ........................................ 26
Balloon Payments on Mortgage Loans; Heightened Risk of Borrower Default ................................ 27
Junior Mortgage Loans .................................................................................. 27
Credit Support Limitations--May Not Cover All Risks or Full Payment on Certificates .................... 28
Enforceability ......................................................................................... 28
Leases and Rents Serving as Security for Mortgage Loans Pose Special Risks ............................. 28
Delinquent Mortgage Loans............................................................................... 29
Environmental Liability May Affect Lien on Mortgaged Property and Expose Lender to Costs ............... 29
Credit Support Limitations--May Not Cover All Risks or Full Payment on Certificates .................... 29
ERISA Considerations--Covered Investors May Experience Liability ....................................... 30
Certain Federal Tax Considerations Regarding REMIC Residual Certificates ............................... 30
Book-Entry Registration of Certificates Affects Ownership of Certificates and Receipt of Payment ....... 30
Delinquent and Non-Performing Mortgage Loans ........................................................... 31
DESCRIPTION OF THE TRUST FUNDS .......................................................................... 31
General ................................................................................................ 31
Mortgage Loans-Leases .................................................................................. 31
General ............................................................................................... 31
Leases ................................................................................................ 32
Default and Loss Considerations with Respect to the Mortgage Loans .................................... 32
Payment Provisions of the Mortgage Loans .............................................................. 34
Mortgage Loan Information in Prospectus Supplements ................................................... 34
CMBS ................................................................................................... 35
Certificate Accounts ................................................................................... 35
Credit Support ......................................................................................... 36
Cash Flow Agreements ................................................................................... 36
Pre-Funding ............................................................................................ 36
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
YIELD AND MATURITY CONSIDERATIONS ....................................................................... 37
General ................................................................................................ 37
Pass-Through Rate ...................................................................................... 37
Payment Delays ......................................................................................... 37
Certain Shortfalls in Collections of Interest .......................................................... 37
Yield and Prepayment Considerations .................................................................... 37
Weighted Average Life and Maturity ..................................................................... 39
Controlled Amortization Classes and Companion Classes .................................................. 39
Other Factors Affecting Yield, Weighted Average Life and Maturity ...................................... 40
Balloon Payments; Extensions of Maturity .............................................................. 40
Negative Amortization ................................................................................. 40
Foreclosures and Payment Plans ........................................................................ 41
Losses and Shortfalls on the Mortgage Assets .......................................................... 41
Additional Certificate Amortization ................................................................... 41
THE DEPOSITOR ........................................................................................... 41
USE OF PROCEEDS ......................................................................................... 41
DESCRIPTION OF THE CERTIFICATES ......................................................................... 42
General ................................................................................................ 42
Distributions .......................................................................................... 42
Distributions of Interest on the Certificates .......................................................... 43
Distributions of Certificate Principal ................................................................. 44
Distributions on the Certificates in Respect of Prepayment Premiums or
in Respect of Equity Participations ................................................................... 44
Allocation of Losses and Shortfalls .................................................................... 44
Advances in Respect of Delinquencies ................................................................... 44
Reports to Certificateholders .......................................................................... 45
Voting Rights .......................................................................................... 47
Termination ............................................................................................ 47
Book-Entry Registration and Definitive Certificates .................................................... 48
DESCRIPTION OF THE POOLING AGREEMENTS ................................................................... 49
General ................................................................................................ 49
Assignment of Mortgage Assets; Repurchases ............................................................. 50
Representations and Warranties; Repurchases ............................................................ 50
Certificate Account .................................................................................... 51
General ............................................................................................... 51
Deposits .............................................................................................. 51
Withdrawals ........................................................................................... 52
Collection and Other Servicing Procedures .............................................................. 53
Modifications, Waivers and Amendments of Mortgage Loans ................................................ 54
Sub-Servicers .......................................................................................... 54
Special Servicers ...................................................................................... 54
Realization Upon Defaulted Mortgage Loans .............................................................. 54
Hazard Insurance Policies .............................................................................. 56
Due-on-Sale and Due-on-Encumbrance Provisions .......................................................... 57
Servicing Compensation and Payment of Expenses ......................................................... 57
Evidence as to Compliance .............................................................................. 57
Certain Matters Regarding the Master Servicer and the Depositor ........................................ 58
Events of Default ...................................................................................... 58
Rights Upon Event of Default ........................................................................... 58
Amendment .............................................................................................. 58
List of Certificateholders ............................................................................. 60
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Trustee ............................................................................................ 60
Duties of the Trustee .................................................................................. 60
Certain Matters Regarding the Trustee .................................................................. 60
Resignation and Removal of the Trustee ................................................................. 60
DESCRIPTION OF CREDIT SUPPORT ........................................................................... 61
General ................................................................................................ 61
Subordinate Certificates ............................................................................... 61
Cross-Support Provisions ............................................................................... 62
Insurance or Guarantees with Respect to Mortgage Loans ................................................. 62
Letter of Credit ....................................................................................... 62
Certificate Insurance and Surety Bonds ................................................................. 62
Reserve Funds .......................................................................................... 62
Credit Support with Respect to CMBS .................................................................... 63
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND LEASES ...................................................... 63
General ................................................................................................ 63
Types of Mortgage Instruments .......................................................................... 64
Leases and Rents ....................................................................................... 64
Personalty ............................................................................................. 64
Cooperative Loans ...................................................................................... 64
Junior Mortgages; Rights of Senior Lenders ............................................................. 65
Foreclosure ............................................................................................ 66
General ............................................................................................... 66
Foreclosure Procedures Vary From State to State........................................................ 66
Judicial Foreclosure .................................................................................. 66
Non-Judicial Foreclosure/Power of Sale ................................................................ 67
Equitable Limitations on Enforceability of Certain Provisions ......................................... 67
Public Sale ........................................................................................... 67
Rights of Redemption .................................................................................. 68
Anti-Deficiency Legislation ........................................................................... 68
Leasehold Risks ....................................................................................... 69
Regulated Healthcare Facilities ....................................................................... 69
Cross-Collateralization ............................................................................... 69
Cooperative Loans ..................................................................................... 69
Bankruptcy Laws ........................................................................................ 70
Environmental Considerations ........................................................................... 71
General ............................................................................................... 71
Superlien Laws ........................................................................................ 71
CERCLA ................................................................................................ 71
Certain Other State Laws .............................................................................. 71
Additional Considerations ............................................................................. 72
Due-on-Sale and Due-on-Encumbrance ..................................................................... 72
Subordinate Financing .................................................................................. 72
Default Interest and Limitations on Prepayments ........................................................ 73
Applicability of Usury Laws ............................................................................ 73
Soldiers' and Sailors' Civil Relief Act of 1940 ........................................................ 73
Americans with Disabilities Act ........................................................................ 73
Forfeitures in Drug and RICO Proceedings ............................................................... 74
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ................................................................ 74
General ................................................................................................ 74
REMICs ................................................................................................. 75
Classification of REMICs .............................................................................. 75
Characterization of Investments in REMIC Certificates ................................................. 75
Tiered REMIC Structures ............................................................................... 76
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Taxation of Owners of REMIC Regular Certificates ....................................................... 76
General ............................................................................................... 76
Original Issue Discount ............................................................................... 76
Market Discount ....................................................................................... 78
Premium ............................................................................................... 79
Realized Losses ....................................................................................... 79
Taxation of Owners of REMIC Residual Certificates ...................................................... 80
General ............................................................................................... 80
Taxable Income of the REMIC ........................................................................... 80
Basis Rules, Net Losses and Distributions ............................................................. 82
Excess Inclusions ..................................................................................... 82
Noneconomic REMIC Residual Certificates ............................................................... 82
Mark-to-Market Rules .................................................................................. 84
Possible Pass-Through of Miscellaneous Itemized Deductions ............................................ 84
Sales of REMIC Certificates ........................................................................... 84
Prohibited Transactions Tax and Other Taxes ........................................................... 85
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain Organizations ............. 86
Termination ........................................................................................... 87
Reporting and Other Administrative Matters ............................................................ 87
Backup Withholding with Respect to REMIC Certificates ................................................. 88
Foreign Investors in REMIC Certificates ............................................................... 88
Grantor Trust Funds .................................................................................... 88
Classification of Grantor Trust Funds ................................................................. 88
Characterization of Investments in Grantor Trust Certificates .......................................... 89
Grantor Trust Fractional Interest Certificates ........................................................ 89
Grantor Trust Strip Certificates ...................................................................... 89
Taxation of Owners of Grantor Trust Fractional Interest Certificates ................................... 89
General ............................................................................................... 89
If Stripped Bond Rules Apply .......................................................................... 90
If Stripped Bond Rules Do Not Apply ................................................................... 91
Market Discount ....................................................................................... 92
Premium ............................................................................................... 93
Taxation of Owners of Grantor Trust Strip Certificates ................................................ 94
Possible Application of Contingent Payment Rules ...................................................... 95
Sales of Grantor Trust Certificates ................................................................... 95
Grantor Trust Reporting ............................................................................... 95
Backup Withholding .................................................................................... 96
Foreign Investor ...................................................................................... 96
STATE AND OTHER TAX CONSEQUENCES ........................................................................ 96
ERISA CONSIDERATIONS .................................................................................... 96
General ................................................................................................ 96
Plan Asset Regulations ................................................................................ 97
Prohibited Transaction Exemptions ...................................................................... 97
LEGAL INVESTMENT ........................................................................................ 99
METHOD OF DISTRIBUTION .................................................................................. 101
LEGAL MATTERS ........................................................................................... 102
FINANCIAL INFORMATION ................................................................................... 102
RATING .................................................................................................. 102
INDEX OF PRINCIPAL DEFINITIONS .......................................................................... 103
</TABLE>
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 withthe offering of Offered Certificates of such series.
An Index of Principal Definitions is included at the end ofthis Prospectus.
<TABLE>
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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. See "The Depositor".
Issuer .................. The Trust Fund established under a Pooling and Servicing Agreement, as described below in
this Summary of Prospectus under "Description of Certificates".
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 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 (the "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 (the
"Commercial Properties")], (iii) CMBS or (iv) participations in, or any combination of,
the foregoing. [Bracketed property types to be included in order of the magnitude of
material concentration of such property type in the Trust Fund. Property types absent
from the Trust Fund are to be deleted.] If so specified in the related Prospectus
Supplement and if permitted by applicable law, a Trust Fund may include (i) Multifamily
Properties or Commercial Properties acquired by foreclosure or by deed-in-lieu of
foreclosure ("REO Property") and (ii) Mortgage Loans secured by liens on real estate
projects under construction. If so specified in the related Prospectus Supplement, some
Mortgage Loans may
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be delinquent as of the date of their deposit into the related Trust Fund. A Mortgage Loan
will be considered "delinquent" if it is thirty (30) days or more past its most recently
contractual scheduled payment date in payment of all amounts due according to its terms.
In any event, at the time of its creation the Trust Fund will not include delinquent
loans which by principal amount are more than 20% of the aggregate principal amount of
all Mortgage Loans in the 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 any 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, (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--Leases".
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-
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through certificates or other mortgage-backed securities such as mortgage-backed
securities that are similar to a series of Certificates or (ii) certificates insured or
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National
Mortgage Association ("FNMA"), the Governmental National Mortgage Association ("GNMA")
or the Federal Agricultural Mortgage Corporation ("FAMC") (collectively, the
mortgage-backed securities referred to in clauses (i) and (ii), "CMBS"), provided that
each CMBS will evidence an interest in, or will be secured by a pledge of, one or more
mortgage loans that conform to the descriptions of the Mortgage Loans contained herein.
See "Description of the Trust Funds--CMBS".
Each Mortgage Asset will be selected by the Depositor for inclusion in a Trust Fund from
among those purchased, either directly or indirectly, from a prior holder thereof (a
"Mortgage Asset Seller"), which prior holder may or may not be the originator of such
Mortgage Loan or the issuer of such CMBS and may be an affiliate of the Depositor, all
as more particularly described in the related Prospectus Supplement.
B. Certificate Account .. Each Trust Fund will include one or more accounts (collectively, the"Certificate Account")
established and maintained on behalf of the Certificateholders into which the person or
persons designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement, deposit all payments and collections received
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 or reserve fund 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
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of such series. If so specified in the related Prospectus Supplement, any such Credit
Support may apply only in the event of certain types of losses or delinquencies and the
protection against losses or delinquencies provided by such Credit Support will be
limited. See "Risk Factors--Credit Support Limitations", "Description of the Trust
Funds--Credit Support" and "Description of Credit Support".
D. Cash Flow Agreements.. If so provided in the related Prospectus Supplement, a Trust Fund may include guaranteed
investment contracts pursuant to which moneys held in the funds and accounts established
for the related series will be invested at a specified rate. The Trust Fund may also
include 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".
E. Pre-Funding........... If so provided in the related Prospectus Supplement, a Trust Fund may include amounts on
deposit in a separate account (the "Pre-Funding Account") which amounts will not exceed
25% of the pool balance of the Trust Fund as of the Cut-off Date. Amounts on deposit in
the Pre-Funding Account may be used by the Trust Fund to acquire additional Mortgage
Assets, which additional Mortgage Assets will be selected using criteria that is
substantially similar to the criteria used to select the Mortgage Assets included in the
Trust Fund on the Closing Date. The Trust Fund may acquire such additional Mortgage
Assets for a period of time of not more than 120 days after the Closing Date (the
"Pre-Funding Period") as specified in the related Prospectus Supplement. Amounts on
deposit in the Pre-Funding Account after the end of the Pre-Funding Period, will be
distributed to Certificateholders or such other person as set forth in the related
Prospectus Supplement. If so provided in the related Prospectus Supplement, the Trust
Fund may include amounts on deposit in a separate account (the "Capitalized Interest
Account"). Amounts on deposit in the Capitalized Interest Account may be used to
supplement investment earnings, if any, of amounts on deposit in the Pre-Funding
Account, supplement interest collections of the Trust Fund, or such other purpose as
specified in the related Prospectus Supplement. As set forth in a related Prospectus
Supplement, amounts on deposit in the Capitalized Interest Account and Pre-Funding
Account will be held in cash or invested in short-term investment grade obligations. Any
amounts on deposit in the Capital-
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ized Interest Account will be released after the end of the Pre-Funding Period as
specified in the related Prospectus Supplement. See "Risk Factors--Effects of
Pre-Funding and Acquisition of Additional Mortgage Assets."
Description of
Certificates............ Each series of Certificates will be issued pursuant to a pooling and servicing agreement
or other agreement specified in the related Prospectus Supplement (in either case, a
"Pooling Agreement") and will represent in the aggregate the entire beneficial ownership
interest in the related Trust Fund.
Each series of Certificates may consist of one or more classes of Certificates, and such
class or classes (including classes of Offered Certificates) may (i) be senior
(collectively, "Senior Certificates") or subordinate (collectively, "Subordinate
Certificates") to one or more other classes of Certificates in entitlement to certain
distributions on the Certificates; (ii) be entitled to distributions of principal, with
disproportionately small, nominal or no distributions of interest (collectively,
"Stripped Principal Certificates"); (iii) be entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal (collectively,
"Stripped Interest Certificates"); (iv) provide for distributions of principal and/or
interest that commence only after the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of such series; (v) provide for
distributions of principal to be made, from time to time, or for designated periods, at
a rate that is faster (and, in some cases, substantially faster) or slower (and, in some
cases, 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
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of a variable or adjustable Pass-Through Rate, the method for determining the
Pass-Through Rate.
The Certificates will not be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other person, unless
otherwise provided in the related Prospectus Supplement. See "Risk Factors--Limited
Assets" and "Description of the Certificates".
Distributions of Interest
on the Certificates..... Interest on each class of Offered Certificates 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 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
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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
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
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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".
Risk Factors............. Risk Factors There are material risks associated with an investment in Certificates. See
"Risk Factors" herein. Additional risks pertaining to a particular series of
Certificates may be disclosed in the applicable Prospectus Supplement.
Tax Status of the
Certificates........... The Certificates of each series will constitute either (i) "regular interests" ("REMIC
Regular Certificates") and "residual interests" ("REMIC Residual Certificates") in a
Trust Fund, or a designated portion thereof, treated as a REMIC under Sections 860A
through 860G of the Internal Revenue Code of 1986 (the "Code"), or (ii) interests
("Grantor Trust Certificates") in a Trust Fund treated as a grantor trust under
applicable provisions of the Code. If so indicated in the related Prospectus Supplement,
an election alternatively may be made to treat the Trust Fund as a financial asset
securitization investment trust ("FASIT").
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 "Material 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
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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 "Material
Income Tax Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates".
B. Grantor Trust......... If so provided in the related Prospectus Supplement, Grantor Trust Certificates may be
either Certificates that have a Certificate Balance and a Pass-Through Rate or that are
Stripped Principal Certificates (collectively, "Grantor Trust Fractional Interest
Certificates"), or may be Stripped Interest Certificates. Holders of Grantor Trust
Fractional Interest Certificates generally will be treated as owning an interest in
qualifying assets and income under Sections 856(c)(5)(A), 856(c)(3)(B) and 860G(a)(3) of
the Code, but will not be so treated for purposes of Section 7701(a)(19)(C) of the Code
unless otherwise stated in the related Prospectus Supplement.
It is unclear whether Stripped Interest Certificates will be treated as representing an
ownership interest in qualifying assets and income under Sections 856(c)(5)(A) and
856(c)(3)(B) of the Code, although the policy considerations underlying those Sections
suggest that such treatment should be available. However, such Certificates will not be
treated as representing an ownership interest in assets described in Section
7701(a)(19)(C) of the Code unless otherwise stated 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 "Material Federal Income Tax Consequences--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 "Material 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, collective investment
funds, separate and general accounts in which such plans, accounts, annuities or
arrangements are invested, that are subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or Section 4975 of the Code, should carefully review
with their legal advisors whether the purchase or holding of Offered Certificates could
give rise to a transaction that is prohibited or is not otherwise permissible either
under ERISA or Section 4975 of the Code. See "ERISA Considerations" herein and in the
related Prospectus Supplement.
Legal Investment......... The Offered Certificates of any series will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 only if so specified
in the related Prospectus Supplement. Investors whose investment authority is subject to
legal restrictions should consult their own legal advisors to determine
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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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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. Additional risk factors are set forth elsewhere in the
Prospectus under separate headings, and will be set forth in the related
Prospectus Supplement under separate headings, in connection with discussions
regarding particular aspects of Trust Fund Assets or the Certificates. 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 FOR OFFERED CERTIFICATES
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 TO SUPPORT PAYMENT ON CERTIFICATES
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.
See "Description of the Trust Funds". 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 borne 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.
PREPAYMENTS ON MORTGAGE LOANS; EFFECTS ON AVERAGE LIFE OF CERTIFICATES; EFFECTS
ON YIELDS ON CERTIFICATES
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
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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 (i) 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, (ii) a
disproportionately large share (which, in some cases, may be all) of such
prepayments, or (iii) 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. 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. A Companion Class 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.
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. 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.
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OPTIONAL EARLY TERMINATION
If so specified in the related Prospectus Supplement, a series of
Certificates may 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.
In the event of a partial or complete termination of a Trust Fund, there can be
no assurance that the proceeds from a sale of the Mortgage Assets will be
sufficient to distribute the outstanding Certificate Balance plus accrued
interest and any undistributed shortfalls in interest accrued on the
Certificates subject to the termination. Accordingly the holders of such
Certificates may incur a loss. See "Description of the
Certificates--Termination." In the event that partial or complete early
termination of a series of Certificates is authorized and does occur in this
manner, the holders of the series of Certificates or one or more classes of a
series of Certificates that are terminated early may experience repayment of
their investment outside their control at an unpredictable and inopportune time.
Moreover, such early termination could have an adverse impact on the overall
yield received by such holder, depending, among other factors, upon the amount
of the series of Certificates or class or classes of such series that is
outstanding at the time of early termination.
LIMITED NATURE OF RATINGS ON CERTIFICATES
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".
EFFECTS OF PRE-FUNDING AND ACQUISITION OF ADDITIONAL MORTGAGE ASSETS
Any amounts on deposit in a Pre-Funding Account as described in the
Prospectus Supplement for a series of Certificates that is not used to acquire
additional Mortgage Assets by the end of the Pre-Funding Period, may be
distributed to holders of Certificates as a prepayment of principal as set forth
in the related Prospectus Supplement. Such a prepayment of principal to the
holders of Certificates may materially and adversely affect the yield on the
Certificates. See "Yield and Maturity Considerations" herein and, if applicable,
in the related Prospectus Supplement.
Any additional Mortgage Assets acquired by a Trust Fund during the
Pre-Funding Period, as described in the related Prospectus Supplement, may
possess substantially different characteristics than the Mortgage Assets in the
Trust Fund on the Closing Date. Therefore the aggregate characteristics of a
Trust Fund following the Pre-Funding Period may be substantially different than
the characteristics of a Trust Fund on the Closing Date.
RISKS TO LENDERS ASSOCIATED WITH CERTAIN INCOME
PRODUCING 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
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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 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.
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.
[Alternate Pages 22-26: Commercial property type Risk Factors. Alternate
Risk Factors to be included in order of the magnitude of material concentration
of such property type in the Trust Fund. Property types absent from the Trust
Fund are not to be included.]
Risks Associated with Mortgage Loans Secured by Multifamily Properties. If
so specified in the related Prospectus Supplement, Mortgage Loans secured by
multi-family properties will constitute a material concentration of the Mortgage
Loans in a Trust Fund. Adverse economic conditions, either local, regional or
national, may limit the amount of rent that can be charged for rental units, and
may result in a reduction in timely rent payments or a reduction in occupancy
levels. Occupancy and rent levels may also be affected by construction of
additional housing units, local military base closings, developments at local
colleges and universities and national, regional and local politics, including,
in the case of multifamily rental properties, current or future rent
stabilization and rent control laws and agreements. In addition, the level of
mortgage interest rates may encourage tenants in multifamily rental properties
to purchase housing. Furthermore, tax credit and city, state and federal housing
subsidy or similar programs may impose rent limitations and may adversely affect
the ability of the applicable borrowers to increase rents to maintain such
Mortgaged Properties in proper condition during periods of rapid inflation or
declining market value of such Mortgaged Properties. In addition, such programs
may impose income restrictions on tenants, which may reduce the number of
eligible tenants in such Mortgaged Properties and result in a reduction in
occupancy rates applicable thereto. Furthermore, some eligible tenants may not
find any differences in rents between such subsidized or supported properties
and other multifamily rental properties in the same area to be a sufficient
economic incentive to reside at a subsidized or supported property, which may
have fewer amenities or otherwise be less attractive as a residence. All of
these conditions and events may increase the possibility that a borrower may be
unable to meet its obligations under its Mortgage Loan.
Multifamily projects are part of a market that, in general, is
characterized by low barriers to entry. Thus, a particular apartment market with
historically low vacancies could experience substantial new construction, and a
resultant oversupply of units, in a relatively short period of time. Because
multifamily apartment units are typically leased on a short-term basis, the
tenants who reside in a particular project within such a market may easily move
to alternative projects with more desirable amenities or locations.
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Risks Associated with Mortgage Loans Secured by Office Buildings. Mortgage
Loans secured by office buildings may constitute a material concentration of the
Mortgage Loans in a Trust Fund. Significant factors determining the value of
office buildings are the quality of the tenants in the building, the physical
attributes of the building in relation to competing buildings and the strength
and stability of the market area as a desirable business location. Office
buildings may be adversely affected by an economic decline in the business
operated by the tenants. The risk of such an adverse effect is increased if
revenue is dependent on a single tenant or if there is a significant
concentration of tenants in a particular business or industry.
Office buildings are also subject to competition with other office
properties in the same market. Competition is affected by a property's age,
condition, design (e.g., floor sizes and layout), access to transportation and
ability or inability to offer certain amenities to its tenants, including
sophisticated building systems (such as fiberoptic cables, satellite
communications or other base building technological features).
The success of an office building also depends on the local economy. A
company's decision to locate office headquarters in a given area, for example,
may be affected by such factors as labor cost and quality, tax environment and
quality of life issues such as schools and cultural amenities. A central
business district may have an economy which is markedly different from that of a
suburb. The local economy and the financial condition of the owner will impact
on an office building's ability to attract stable tenants on a consistent basis.
In addition, the cost of refitting office space for a new tenant is often more
costly than for other property types.
Risks Associated with Mortgage Loans Secured by Retail Properties. Mortgage
Loans secured by retail properties may constitute a material concentration of
the Mortgage Loans in a Trust Fund. Significant factors determining the value of
retail properties are the quality of the tenants as well as fundamental aspects
of real estate such as location and market demographics. The correlation between
the success of tenant businesses and property value is more direct with respect
to retail properties than other types of commercial property because a
significant component of the total rent paid by retail tenants is often tied to
a percentage of gross sales. Significant tenants at a retail property play an
important part in generating customer traffic and making a retail property a
desirable location for other tenants at such property. Accordingly, retail
properties may be adversely affected if a significant tenant ceases operations
at such locations (which may occur on account of a voluntary decision not to
renew a lease, bankruptcy or insolvency of such tenant, such tenant's general
cessation of business activities or for other reasons). In addition, certain
tenants at retail properties may be entitled to terminate their leases or pay
reduced rent if an anchor tenant ceases operations at such property. In such
cases, there can be no assurance that any such anchor tenants will continue to
occupy space in the related shopping centers.
Shopping centers, in general, are affected by the health of the retail
industry, which is currently undergoing a consolidation and is experiencing
changes due to the growing market share of "off-price" retailing, and a
particular shopping center may be adversely affected by the bankruptcy or
decline in drawing power of an anchor tenant, the risk that an anchor tenant may
vacate notwithstanding such tenant's continuing obligation to pay rent, a shift
in consumer demand due to demographic changes (for example, population decreases
or changes in average age or income) and/or changes in consumer preference (for
example, to discount retailers).
Unlike other income producing properties, retail properties also face
competition from sources outside a given real estate market. Catalogue
retailers, home shopping networks, the Internet, telemarketing and outlet
centers all compete with more traditional retail properties for consumer
dollars. Continued growth of these alternative retail outlets (which are often
characterized by lower operating costs) could adversely affect the rents
collectible at the retail properties which secure Mortgage Loans in a Trust
Fund.
Risks Associated with Mortgage Loans Secured by Hospitality Properties.
Mortgage Loans secured by hospitality properties may constitute a material
concentration of the Mortgage Loans in a Trust Fund. Various factors, including
location, quality and franchise affiliation (or lack thereof), affect the
economic viability of a hospitality property (i.e., a hotel). Adverse economic
conditions, either local, regional or national, may limit the amount that a
consumer is willing to pay for a room and may result in a reduction in occupancy
levels. The construction of competing hospitality properties or motels can have
similar effects. Because hotel rooms generally are rented for short periods of
time, hospitality properties tend to be more sensitive to adverse economic
conditions and competition than do other commercial properties. Furthermore, the
financial strength and capabilities of the owner and operator of a hospitality
property may have a substantial impact on such property's quality of service and
economic performance. Additionally, the hotel and lodging industry is generally
seasonal in nature and this seasonality can be expected to cause periodic
fluctuations in room and other revenues, occupancy levels, room rates and
operating expenses.
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In addition, the successful operation of a hospitality property with a
franchise affiliation may depend in part upon the strength of the franchisor,
the public perception of the franchise service mark and the continued existence
of any franchise license agreement. The transferability of a franchise license
agreement may be restricted, and a lender or other person that acquires title to
a hospitality property as a result of foreclosure may be unable to succeed to
the borrower's rights under the franchise license agreement. Moreover, the
transferability of a hospitality property's operating, liquor and other licenses
upon a transfer of the hospitality property, whether through purchase or
foreclosure, is subject to local law requirements and may not be transferable.
Risks Associated with Mortgage Loans Secured by Residential Healthcare
Facilities. Mortgage Loans secured by residential healthcare facilities (i.e.,
nursing homes) may constitute a material concentration of the Mortgage Loans in
a Trust Fund. Mortgage Loans secured by liens on residential health care
facilities pose additional risks not associated with loans secured by liens on
other types of income-producing properties. Providers of long-term nursing care,
assisted living and other medical services are subject to federal and state laws
that relate to the adequacy of medical care, distribution of pharmaceuticals,
rate setting, equipment, personnel, operating policies and additions to
facilities and services and, to the extent dependent on patients whose fees are
reimbursed by private insurers, to the reimbursement policies of such insurers.
The failure of any of such borrowers to maintain or renew any required license
or regulatory approval could prevent it from continuing operations at a
Mortgaged Property (in which case no revenues would be received from such
property or portion thereof requiring licensing) or, if applicable, bar it from
participation in government reimbursement programs. Furthermore, in the event of
foreclosure, there can be no assurance that the Trustee or any other purchaser
at a foreclosure sale would be entitled to the rights under such licenses and
such party may have to apply in its own right for such a license. There can be
no assurance that a new license could be obtained or that the related Mortgaged
Property would be adaptable to other uses. To the extent any residential
healthcare facility receives a significant portion of its revenues from
government reimbursement programs, primarily Medicaid and Medicare, such
revenues may be subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings, policy interpretations, delays by fiscal
intermediaries and government funding restrictions. Moreover, governmental
payors have employed cost-containment measures that limit payments to health
care providers, and there are currently under consideration various proposals in
the United States Congress that could materially change or curtail those
payments. Accordingly, there can be no assurance that payments under government
reimbursement programs will, in the future, be sufficient to fully reimburse the
cost of caring for program beneficiaries. If not, net operating income of the
Mortgaged Properties that receive substantial revenues from those sources, and
consequently the ability of the related borrowers to meet their Mortgage Loan
obligations, could be adversely affected. Under applicable federal and state
laws and regulations, including those that govern Medicare and Medicaid
programs, only the provider who actually furnished the related medical goods and
services may sue for or enforce its rights to reimbursement. Accordingly, in the
event of foreclosure, none of the Trustee, the Master Servicer, the Special
Servicer or a subsequent lessee or operator of the property would generally be
entitled to obtain from federal or state governments any outstanding
reimbursement payments relating to services furnished at the respective
properties prior to such foreclosure.
Risks Associated with Mortgage Loans Secured by Warehouse and Self Storage
Facilities. Mortgage Loans secured by warehouse and storage facilities may
constitute a material concentration of the Mortgage Loans in a Trust Fund.
Storage facilities are part of a market that contains low barriers to entry.
Increased competition among self storage facilities may reduce income available
to repay Mortgage Loans secured by self storage facility. Furthermore, the
privacy considerations applicable to self storage facilities may increase
environmental risks. See "Risk Factors--Environmental Law Considerations"
herein.
Risks Associated with Mortgage Loans Secured by Industrial & Mixed-Use
Facilities. Mortgage Loans secured by industrial and mixed-use facilities may
constitute a material concentration of the Mortgage Loans in a Trust Fund.
Significant factors determining the value of industrial properties are the
quality of tenants, building design and adaptability and the location of the
property. Concerns about the quality of tenants, particularly major tenants, are
similar in both office properties and industrial properties, although industrial
properties are more frequently dependent on a single tenant. In addition,
properties used for many industrial purposes are more prone to environmental
concerns than other property types.
Aspects of building site design and adaptability affect the value of an
industrial property. Site characteristics which are valuable to an industrial
property include clear heights, column spacing, zoning restrictions, number of
bays and bay depths, divisibility, truck turning radius and overall
functionality and accessibility. Location is also
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important because an industrial property requires the availability of labor
sources, proximity to supply sources and customers and accessibility to rail
lines, major roadways and other distribution channels.
Industrial properties may be adversely affected by reduced demand for
industrial space occasioned by a decline in a particular industry segment (for
example, a decline in defense spending), and a particular industrial property
that suited the needs of its original tenant may be difficult to relet to
another tenant or may become functionally obsolete relative to newer properties.
Risks Associated with Mortgage Loans Secured by Health-Care Related
Properties. The Mortgaged Properties may include Senior Housing, Assisted Living
Facilities, Skilled Nursing Facilities and Acute Care Facilities (any of the
foregoing, "Health Care-Related Facilities"). "Senior Housing" generally
consists of facilities with respect to which the residents are ambulatory,
handle their own affairs and typically are couples whose children have left the
home and at which the accommodations are usually apartment style. "Assisted
Living Facilities" are typically single or double room occupancy,
dormitory-style housing facilities which provide food service, cleaning and some
personal care and with respect to which the tenants are able to medicate
themselves but may require assistance with certain daily routines. "Skilled
Nursing Facilities" provide services to post trauma and frail residents with
limited mobility who require extensive medical treatment. "Acute Care
Facilities" generally consist of hospital and other facilities providing
short-term, acute medical care services.
Certain types of Health Care-Related Properties, particularly Acute Care
Facilities, Skilled Nursing Facilities and some Assisted Living Facilities,
typically receive a substantial portion of their revenues from government
reimbursement programs, primarily Medicaid and Medicare. Medicaid and Medicare
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings, policy interpretations, delays by fiscal intermediaries
and government funding restrictions. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers, and
there exist various proposals for national health care reform that could further
limit those payments. Accordingly, there can be no assurance that payments under
government reimbursement programs will, in the future, be sufficient to fully
reimburse the cost of caring for program beneficiaries. If such payments are
insufficient, net operating income of those Health Care-Related Facilities that
receive revenues from those sources, and consequently the ability of the related
borrowers to meet their obligations under any Mortgage Loans secured thereby,
could be adversely affected.
Moreover, Health Care-Related Facilities are generally subject to federal
and state laws that relate to the adequacy of medical care, distribution of
pharmaceuticals, rate setting, equipment, personnel, operating policies and
additions to facilities and services. In addition, facilities where such care or
other medical services are provided are subject to periodic inspection by
governmental authorities to determine compliance with various standards
necessary to continued licensing under state law and continued participation in
the Medicaid and Medicare reimbursement programs. Providers of assisted living
services are also subject to state licensing requirements in certain states. The
failure of an operator to maintain or renew any required license or regulatory
approval could prevent it from continuing operations at a Health Care-Related
Facility or, if applicable, bar it from participation in government
reimbursement programs. Furthermore, under applicable federal and state laws and
regulations, Medicare and Medicaid reimbursements are generally not permitted to
be made to any person other than the provider who actually furnished the related
medical goods and services. Accordingly, in the event of foreclosure, none of
the Trustee, the Master Servicer, the Special Servicer or a subsequent lessee or
operator of any Health Care-Related Facility securing a defaulted Mortgage Loan
(a "Health Care-Related Mortgaged Property") would generally be entitled to
obtain from federal or state governments any outstanding reimbursement payments
relating to services furnished at such property prior to such foreclosure. Any
of the aforementioned events may adversely affect the ability of the related
borrowers to meet their Mortgage Loan obligations.
Government regulation applying specifically to Acute Care Facilities,
Skilled Nursing Facilities and certain types of Assisted Living Facilities
includes health planning legislation, enacted by most states, intended, at least
in part, to regulate the supply of nursing beds. The most common method of
control is the requirement that a state authority first make a determination of
need, evidenced by its issuance of a Certificate of Need ("CON"), before a
long-term care provider can establish a new facility, add beds to an existing
facility or, in some states, take certain other actions (for example, acquire
major medical equipment, make major capital expenditures, add services,
refinance long-term debt, or transfer ownership of a facility). States also
regulate nursing bed supply in other ways. For example, some states have imposed
moratoria on the licensing of new beds, or on the certification of new
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Medicaid beds, or have discouraged the construction of new nursing facilities by
limiting Medicaid reimbursements allocable to the cost of new construction and
equipment. In general, a CON is site specific and operator specific; it cannot
be transferred from one site to another, or to another operator, without the
approval of the appropriate state agency. Accordingly, if a Mortgage Loan
secured by a lien on such a Health Care-Related Mortgaged Property were
foreclosed upon, the purchaser at foreclosure might be required to obtain a new
CON or an appropriate exemption. In addition, compliance by a purchaser with
applicable regulations may in any case require the engagement of a new operator
and the issuance of a new operating license. Upon a foreclosure, a state
regulatory agency may be willing to expedite any necessary review and approval
process to avoid interruption of care to a facility's residents, but there can
be no assurance that any will do so or that any necessary licenses or approvals
will be issued.
Further government regulation applicable to Health Care-Related Facilities
is found in the form of federal and state "fraud and abuse" laws that generally
prohibit payment or fee-splitting arrangements between health care providers
that are designed to induce or encourage the referral of patients to, or the
recommendation of, a particular provider for medical products or services.
Violation of these restrictions can result in license revocation, civil and
criminal penalties, and exclusion from participation in Medicare or Medicaid
programs. The state law restrictions in this area vary considerably from state
to state. Moreover, the federal anti-kickback law includes broad language that
potentially could be applied to a wide range of referral arrangements, and
regulations designed to create "safe harbors" under the law provide only limited
guidance. Accordingly, there can be no assurance that such laws will be
interpreted in a manner consistent with the practices of the owners or operators
of the Health Care-Related Mortgaged Properties that are subject to such laws.
The operators of Health Care-Related Facilities are likely to compete on a
loca1 and regional basis with others that operate similar facilities, some of
which competitors may be better capitalized, may offer services not offered by
such operators, or may be owned by non-profit organizations or government
agencies supported by endowments, charitable contributions, tax revenues and
other sources not available to such operators. The successful operation of a
Health Care-Related Facility will generally depend upon the number of competing
facilities in the local market, as well as upon other factors such as its age,
appearance, reputation and management, the types of services it provides and,
where applicable, the quality of care and the cost of that care. The inability
of a Health Care-Related Mortgaged Property to flourish in a competitive market
may increase the likelihood of foreclosure on the related Mortgage Loan,
possibly affecting the yield on one or more classes of the related series of
Offered Certificates.
MANAGEMENT RISKS
Each Mortgaged Property is managed by a property manager (which generally
is an affiliate of the borrower) or by the borrower itself. The successful
operation of a real estate project is largely dependent on the performance and
viability of the management of such project. The property manager is responsible
for responding to changes in the local market, planning and implementing the
rental structure, including establishing levels of rent payments and advising
the borrowers so that maintenance and capital improvements can be carried out in
a timely fashion. There is no assurance regarding the performance of any
operators, leasing agents and/or managers or persons who may become operators
and/or managers upon the expiration or termination of management agreements or
following any default or foreclosure under a Mortgage Loan. In addition,
generally the property managers are operating companies and unlike limited
purpose entities, may not be restricted from incurring debt and other
liabilities in the ordinary course of business or otherwise. There can be no
assurance that the property managers will at all times be in a financial
condition to continue to fulfill their management responsibilities under the
related management agreements throughout the terms thereof.
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
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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.
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 ON MORTGAGE LOANS; HEIGHTENED RISK OF 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. See "Yield and
Maturity Considerations--Other Factors Affecting Yield, Weighted Average Life
and Maturity--Balloon Payments; Extenstion of Maturity".
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".
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CREDIT SUPPORT LIMITATIONS--MAY NOT COVER ALL RISKS OR
FULL PAYMENT ON CERTIFICATES
The Prospectus Supplement for the Offered Certificates of each series will
describe any Credit Support provided with respect thereto. Use of Credit Support
will be subject to the conditions and limitations described herein and in the
related Prospectus Supplement. Moreover, such Credit Support may not cover all
potential losses or risks; for example, Credit Support may or may not cover
fraud or negligence by a mortgage loan originator or other parties.
A series of Certificates may include one or more classes of Subordinate
Certificates (which may include Offered Certificates), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce the
risk to holders of Senior Certificates of delinquent distributions or ultimate
losses, the amount of subordination will be limited and may decline under
certain circumstances. In addition, if principal payments on one or more classes
of Certificates of a series are made in a specified order of priority, any
limits with respect to the aggregate amount of claims under any related Credit
Support may be exhausted before the principal of the lower priority classes of
Certificates of such series has been fully repaid. As a result, the impact of
losses and shortfalls experienced with respect to the Mortgage Assets may fall
primarily upon those classes of Certificates having a lower priority of payment.
Moreover, if a form of Credit Support covers more than one series of
Certificates, holders of Certificates of one series will be subject to the risk
that such Credit Support will be exhausted by the claims of the holders of
Certificates of one or more other series.
The amount of any applicable Credit Support supporting one or more classes
of Offered Certificates, including the subordination of one or more classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on an assumed level of
defaults, delinquencies and losses on the underlying Mortgage Assets and other
factors. There can, however, be no assurance that the loss experience on the
related Mortgage Assets will not exceed such assumed levels. See "--Limited
Nature of Ratings", "Description of the Certificates" and "Description of Credit
Support".
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The Master Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any series of Certificates if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. The rating of any series of Certificates by any applicable Rating
Agency may be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable credit support provider, or as
a result of losses on the related Mortgage Assets substantially in excess of the
levels contemplated by such Rating Agency at the time of its initial rating
analysis. None of the Depositor, the Master Servicer or any of their affiliates
will have any obligation to replace or supplement any credit enhancement, or to
take any other action to maintain any rating of any series of Certificates.
ENFORCEABILITY
Mortgages may contain a due-on-sale clause, which permits the lender to
accelerate the maturity of the Mortgage Loan if the borrower sells, transfers or
conveys the related Mortgaged Property or its interest in the Mortgaged
Property. Mortgages may also include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary or non-monetary default of the
borrower. Such clauses are not always enforceable. The courts of all states will
enforce clauses providing for acceleration in the event of a material payment
default. The equity courts of any state, however, may refuse the foreclosure of
a mortgage or deed of trust when an acceleration of the indebtedness would be
inequitable or unjust or the circumstances would render the acceleration
unconscionable.
LEASES AND RENTS SERVING AS SECURITY FOR MORTGAGE LOANS POSE SPECIAL RISKS
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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DELINQUENT 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 delinquent
as of the date they are deposited in the Trust Fund. A Mortgage Loan will be
considered "delinquent" if it is thirty (30) days or more past its most recently
contractual scheduled payment date in payment of all amounts due according to
its terms. In any event, at the time of its creation, the Trust Fund will not
include delinquent loans which by principal amount are more than 20% of the
aggregate principal amount of all Mortgage Loans 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 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".
ENVIRONMENTAL LIABILITY MAY AFFECT LIEN ON MORTGAGED PROPERTY AND EXPOSE LENDER
TO COSTS
Under certain laws, 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. 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 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". These provisions are designed to reduce substantially the risk of
liability for costs associated with remediation of hazardous substances, 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.
CREDIT SUPPORT LIMITATIONS--MAY NOT COVER ALL RISKS OR FULL PAYMENT ON
CERTIFICATES
The Prospectus Supplement for the Offered Certificates of each series will
describe any Credit Support provided with respect thereto. Use of Credit Support
will be subject to the conditions and limitations described herein and in the
related Prospectus Supplement. Moreover, such Credit Support may not cover all
potential losses or risks; for example, Credit Support may or may not cover
fraud or negligence by a mortgage loan originator or other parties.
A series of Certificates may include one or more classes of Subordinate
Certificates (which may include Offered Certificates), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce the
risk to holders of Senior Certificates of delinquent distributions or ultimate
losses, the amount of subordination will be limited and may decline under
certain circumstances. In addition, if principal payments on one or more classes
of Certificates of a series are made in a specified order of priority, any
limits with respect to the aggregate amount of claims under any related Credit
Support may be exhausted before the principal of the lower priority classes of
Certificates of such series has been fully repaid. As a result, the impact of
losses and shortfalls experienced with respect to the Mortgage Assets may fall
primarily upon those classes of Certificates having a lower priority of payment.
Moreover, if a form of Credit Support covers more than one series of
Certificates, holders of Certificates of one series will be subject to the risk
that such Credit Support will be exhausted by the claims of the holders of
Certificates of one or more other series.
The amount of any applicable Credit Support supporting one or more classes
of Offered Certificates, including the subordination of one or more classes of
Certificates, will be determined on the basis of criteria established by each
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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 be, however, 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."
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 "Material 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.
BOOK-ENTRY REGISTRATION OF CERTIFICATES AFFECTS OWNERSHIP OF CERTIFICATES AND
RECEIPT OF PAYMENTS
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
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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-Leases--General".
DESCRIPTION OF THE TRUST FUNDS
GENERAL
The primary assets of each Trust Fund will consist of a pool of mortgage
loans collectively, the "Mortgage Loans" secured by liens on, or security
interests in [(i) residential properties consisting of five or more rental or
cooperatively-owned dwelling units (the "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 (the "Commercial Properties")], (iii) mortgage
participations, pass-through certificates or other mortgage-backed securities
such as mortgage-backed securities that are similare to a series of Certificates
("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 (iv) a
combination of Mortgage Loans and CMBS (collectively, "Mortgage Assets").
[Bracketed property types to be included in order of the magnitude of material
concentration of such property type in the Trust Fund. Property types absent
from the Trust Fund are to be deleted.] Each Trust Fund will be established by
First Union Commercial Mortgage Securities, Inc. (the "Depositor"). Each
Mortgage Asset will be selected by the Depositor for inclusion in a Trust Fund
from among those purchased, either directly or indirectly, from a prior holder
thereof (a "Mortgage Asset Seller"), which prior holder may or may not be the
originator of such Mortgage Loan or the issuer of such CMBS and may be an
affiliate of the Depositor. The Mortgage Assets will not be guaranteed or
insured by the Depositor or any of its affiliates or, unless otherwise provided
in the related Prospectus Supplement, by any governmental agency or
instrumentality or by any other person. The discussion below under the heading
"--Mortgage Loans", unless otherwise noted, applies equally to mortgage loans
underlying any CMBS included in a particular Trust Fund.
MORTGAGE LOANS-LEASES
General. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments ("mortgages") that create first or junior liens on, or installment
contracts for the sale of, fee simple or leasehold interests in properties (the
"Mortgaged Properties") consisting of (i) residential properties consisting of
five or more rental or cooperatively owned dwelling units in high-rise, mid-rise
or garden apartment buildings or other residential structures ("Multifamily
Properties") or (ii) office buildings, retail stores, hotels or motels, nursing
homes, hospitals or other health care-related facilities, mobile home parks,
warehouse facilities, mini-warehouse facilities, self-storage facilities,
industrial plants, mixed use or other types of income-producing properties or
unimproved land ("Commercial Properties"). The Multifamily Properties may
include mixed commercial and residential structures and may include apartment
buildings owned by private cooperative housing corporations ("Cooperatives"). If
so 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, if so 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 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, 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.
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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
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. As more fully set forth in the related Prospectus Supplement,
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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. As more fully set forth 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 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. As
more fully set forth 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
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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. If so specified in the related
Prospectus Supplement, all of the Mortgage Loans will have had original terms to
maturity of not more than 40 years and will provide for scheduled payments of
principal, interest or both, to be made on specified dates that occur monthly or
quarterly or at such other interval as is specified in the Prospectus
Supplement. A Mortgage Loan (i) may provide for no accrual of interest or for
accrual of interest thereon at an interest rate (a "Mortgage Rate") that is
fixed over its term or that adjusts from time to time, or that may be converted
at the borrower's election from an adjustable to a fixed Mortgage Rate, or from
a fixed to an adjustable Mortgage Rate, (ii) may provide for the formula, index
or other method by which the Mortgage Rate will be calculated, (iii) may provide
for level payments to maturity or for payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the occurrence of certain
events, and may permit negative amortization or accelerated amortization, (iv)
may be fully amortizing over its term to maturity, or may provide for little or
no amortization over its term and thus require a balloon payment on its stated
maturity date, and (v) may contain a prohibition on prepayment (the period of
such prohibition, a "Lockout Period") or require payment of a premium or a yield
maintenance penalty (a "Prepayment Premium") in connection with a prepayment, in
each case as described in the related Prospectus Supplement. A Mortgage Loan may
also contain a provision that entitles the lender to a share of profits realized
from the operation or disposition of the Mortgaged Property (an "Equity
Participation"), as described in the related Prospectus Supplement. If holders
of any class or classes of Offered Certificates of a series will be entitled to
all or a portion of an Equity Participation, the related Prospectus Supplement
will describe the Equity Participation and the method or methods by which
distributions in respect thereof will be made to such holders.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans
which will generally be current as of a date specified in the related Prospectus
Supplement and which, to the extent then applicable and specifically known to
the Depositor, will include the following: (i) the aggregate outstanding
principal balance and the largest, smallest and average outstanding principal
balance of the Mortgage Loans as of the applicable Cut-off Date, (ii) the type
or types of property that provide security for repayment of the Mortgage Loans,
(iii) the original and remaining terms to maturity of the Mortgage Loans, and
the seasoning of the Mortgage Loans, (iv) the earliest and latest origination
date and maturity date and weighted average original and remaining terms to
maturity of the Mortgage Loans, (v) the original Loan-to-Value Ratios of the
Mortgage Loans, (vi) the Mortgage Rates or range of Mortgage Rates and the
weighted average Mortgage Rate carried by the Mortgage Loans, (vii) the
geographic distribution of the Mortgaged Properties on a 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
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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 such as
mortgage-backed securities that are similar to a series of Certificates or (ii)
certificates insured or guaranteed by FHLMC, FNMA, GNMA or FAMC, provided that
each CMBS will evidence an interest in, or will be secured by a pledge of,
mortgage loans that conform to the descriptions of the Mortgage Loans contained
herein.
Any CMBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(a "CMBS Agreement"). The issuer (the "CMBS Issuer") of the CMBS and/or the
servicer (the "CMBS Servicer") of the underlying mortgage loans will have
entered into the CMBS Agreement, generally with a trustee (the "CMBS Trustee")
or, in the alternative, with the original purchaser or purchasers of the CMBS.
The CMBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the CMBS will be made by the CMBS Servicer or the CMBS Trustee on the
dates specified in the related Prospectus Supplement. The CMBS Issuer or the
CMBS Servicer or another person specified in the related Prospectus Supplement
may have the right or obligation to repurchase or substitute assets underlying
the CMBS after a certain date or under other circumstances specified in the
related Prospectus Supplement.
Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the CMBS. The type, characteristics and amount of
such credit support, if any, will be a function of the characteristics of the
underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any Rating Agency that may have
assigned a rating to the CMBS, or by the initial purchasers of the CMBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in CMBS will specify, to the extent available and deemed material, (i)
the aggregate approximate initial and outstanding principal amount and type of
the CMBS to be included in the Trust Fund, (ii) the original and remaining term
to stated maturity of the CMBS, if applicable, (iii) the pass-through or bond
rate of the CMBS or the formula for determining such rates, (iv) the payment
characteristics of the CMBS, (v) the CMBS Issuer, CMBS Servicer and CMBS
Trustee, as applicable, (vi) a description of the credit support, if any, (vii)
the circumstances under which the related underlying mortgage loans, or the CMBS
themselves, may be purchased prior to their maturity, (viii) the terms on which
mortgage loans may be substituted for those originally underlying the CMBS, (ix)
the servicing fees payable under 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.
To the extent required under the securities laws, CMBS included among the
assets of a Trust Fund will (i) either have been registered under the Securities
Act of 1933, as amended, or be eligible for resale under Rule 144(k) thereunder
and (ii) have been acquired in a bona fide secondary market transaction and not
from the issuer or an affiliate.
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.
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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, or by a combination thereof (any such coverage with respect to
the Certificates of any series, "Credit Support"). The amount and types of
Credit Support, the identity of the entity providing it (if applicable) and
related information with respect to each type of Credit Support, if any, will be
set forth in the Prospectus Supplement for the Offered Certificates of each
series. The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes CMBS will describe in the same fashion
any similar forms of credit support that are provided by or with respect to, or
are included as part of the trust fund evidenced by or providing security for,
such CMBS to the extent information is available and deemed material. The type,
characteristic and amount of Credit Support will be determined based on the
characteristics of the Mortgage Assets and other factors and will be
established, in part, on the basis of requirements of each Rating Agency rating
the Certificates of such series. If so specified in the related Prospectus
Supplement, any such Credit Support may apply only in the event of certain types
of losses or delinquencies and the protection against losses or delinquencies
provided by such Credit Support will be limited. See "Risk Factors--Credit
Support Limitations" and "Description of Credit Support".
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include 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.
PRE-FUNDING
If so provided in the related Prospectus Supplement, a Trust Fund may
include amounts on deposit in a separate account (the "Pre-Funding Account")
which amounts will not exceed 25% of the pool balance of the Trust Fund as of
the Cut-off Date. Amounts on deposit in the Pre-Funding Account may be used by
the Trust Fund to acquire additional Mortgage Assets, which additional Mortgage
Assets will be selected using criteria that is substantially similar to the
criteria used to select the Mortgage Assets included in the Trust Fund on the
Closing Date. The Trust Fund may acquire such additional Mortgage Assets for a
period of time of not more than 120 days after the Closing Date (the
"Pre-Funding Period") as specified in the related Prospectus Supplement. Amounts
on deposit in the Pre-Funding Account after the end of the Pre-Funding Period
will be distributed to Certificateholders or such other person as set forth in
the related Prospectus Supplement. If so provided in the related Prospectus
Supplement, the Trust Fund may include amounts on deposit in a separate account
(the "Capitalized Interest Account"). Amounts on deposit in the Capitalized
Interest Account may be used to supplement investment earnings, if any, of
amounts on deposit in the Pre-Funding Account, supplement interest collections
of the Trust Fund, or such other purpose as specified in the related Prospectus
Supplement. As set forth in a related Prospectus Supplement, amounts on deposit
in the Capitalized Interest Account and Pre-Funding Account will be held in cash
or invested in short-term investment grade obligations. Any amounts on deposit
in the Capitalized Interest Account will be released after the end of the
Pre-Funding Period as specified in the related Prospectus Supplement. See "Risk
Factors--Effects of Pre-Funding and Acquisition of Additional Mortgage Assets".
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YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate and the amount and
timing of distributions on the Certificate. See "Risk Factors--Prepayments;
Average Life of Certificates; Yields". The following discussion contemplates a
Trust Fund that consists solely of Mortgage Loans. While the characteristics and
behavior of mortgage loans underlying CMBS can generally be expected to have the
same effect on the yield to maturity and/or weighted average life of a Class of
Certificates as will the characteristics and behavior of comparable Mortgage
Loans, the effect may differ due to the payment characteristics of the CMBS. If
a Trust Fund includes CMBS, the related Prospectus Supplement will discuss the
effect that the CMBS payment characteristics may have on the yield to maturity
and weighted average lives of the Offered Certificates offered thereby.
PASS-THROUGH RATE
The Certificates of any class within a series may have a fixed, variable or
adjustable Pass-Through Rate, which may or may not be based upon the interest
rates borne by the Mortgage Loans in the related Trust Fund. The Prospectus
Supplement with respect to the Offered Certificates of any series will specify
the Pass-Through Rate for each class of such Certificates or, in the case of a
class of Offered Certificates with a variable or adjustable Pass-Through Rate,
the method of determining the Pass-Through Rate; the effect, if any, of the
prepayment of any Mortgage Loan on the Pass-Through Rate of one or more classes
of Offered Certificates; and whether the distributions of interest on the
Offered Certificates of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
PAYMENT DELAYS
With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the Mortgage Loans in the related Trust
Fund are due and the Distribution Date on which such payments are passed through
to Certificateholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Certificateholders on or near the date they were due.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full or in part is made on a Mortgage Loan,
the borrower is generally charged interest only for the period from the Due Date
of the preceding scheduled payment up to the date of such prepayment, instead of
for the full accrual period, that is, the period from the Due Date of the
preceding scheduled payment up to the Due Date for the next scheduled payment.
However, interest accrued on any series of Certificates and distributable
thereon on any Distribution Date will generally correspond to interest accrued
on the principal balance of Mortgage Loans for their respective full accrual
periods. Consequently, if a prepayment on any Mortgage Loan is distributable to
Certificateholders on a particular Distribution Date, but such prepayment is not
accompanied by interest thereon for the full accrual period, the interest
charged to the borrower (net of servicing and administrative fees) may be less
(such shortfall, a "Prepayment Interest Shortfall") than the corresponding
amount of interest accrued and otherwise payable on the Certificates of the
related series. If and to the extent that any such shortfall is allocated to a
class of Offered Certificates, the yield thereon will be adversely affected. The
Prospectus Supplement for a series of Certificates will describe the manner in
which any such shortfalls will be allocated among the classes of such
Certificates. If so specified in the related Prospectus Supplement, the Master
Servicer will be required to apply some or all of its servicing compensation for
the corresponding period to offset 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
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schedules thereof (which, in the case of ARM Loans, will change periodically to
accommodate adjustments to their Mortgage Rates), the dates on which any balloon
payments are due, and the rate of principal prepayments thereon (including for
this purpose, prepayments resulting from liquidations of Mortgage Loans due to
defaults, casualties or condemnations affecting the Mortgaged Properties, or
purchases of Mortgage Loans out of the Trust Fund). Because the rate of
principal prepayments on the Mortgage Loans in any Trust Fund will depend on
future events and a variety of factors (as discussed more fully below), it is
impossible to predict with assurance.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend upon
the degree to which they are purchased at a discount or premium and when, and to
what degree, payments of principal on the Mortgage Loans in the related Trust
Fund are in turn distributed on such Certificates (or, in the case of a class of
Stripped Interest Certificates, result in the reduction of the Notional Amount
thereof). Further, an investor should consider, in the case of any Offered
Certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on the Mortgage Loans in the related Trust Fund could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of any Offered Certificate purchased at a premium, the
risk that a faster than anticipated rate of principal payments could result in
an actual yield to such investor that is lower than the anticipated yield. In
general, the earlier a prepayment of principal on the Mortgage Loans is
distributed on an Offered Certificate purchased at a discount or premium (or, if
applicable, is allocated in reduction of the Notional Amount thereof), the
greater will be the effect on the investor's yield to maturity. As a result, the
effect on such investor's yield of principal payments (to the extent
distributable in reduction of the principal balance or Notional Amount of such
investor's Offered Certificates) occurring at a rate higher (or lower) than the
rate anticipated by the investor during any particular period would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments.
A class of Certificates, including a class of Offered Certificates, may
provide that on any Distribution Date the holders of such Certificates are
entitled to a pro rata share of the prepayments (including prepayments
occasioned by defaults) on the Mortgage Loans in the related Trust Fund that are
distributable on such date, to a disproportionately large share (which, in some
cases, may be all) of such prepayments, or to a disproportionately small share
(which, in some cases, may be none) of such prepayments. As and to the extent
described in the related Prospectus Supplement, the respective entitlements of
the various classes of Certificateholders of any series to receive payments
(and, in particular, prepayments) of principal of the Mortgage Loans in the
related Trust Fund may vary based on the occurrence of certain events (e.g., the
retirement of one or more classes of Certificates of such series) or subject to
certain contingencies (e.g., prepayment and default rates with respect to such
Mortgage Loans).
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or all
of the Mortgage Assets in the related Trust Fund or (ii) equal the Certificate
Balances of one or more of the other classes of Certificates of the same series.
Accordingly, the yield on such Stripped Interest Certificates will be directly
related to the amortization of such Mortgage Assets or such classes of
Certificates, as the case may be. Thus, if a class of Certificates of any series
consists of Stripped Interest 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
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interest rate decline may have an increased incentive to refinance for purposes
of either (i) converting to a fixed rate loan and thereby "locking in" such rate
or (ii) taking advantage of the initial "teaser rate" (a mortgage interest rate
below what it would otherwise be if the applicable index and gross margin were
applied) on another adjustable rate mortgage loan.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits. The Depositor
will make no representation as to the particular factors that will affect the
prepayment of the Mortgage Loans in any Trust Fund, as to the relative
importance of such factors, as to the percentage of the principal balance of
such Mortgage Loans that will be paid as of any date or as to the overall rate
of prepayment on such Mortgage Loans.
WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the Mortgage Loans in
any Trust Fund will affect the ultimate maturity and the weighted average life
of one or more classes of the Certificates of such series. Weighted average life
refers to the average amount of time that will elapse from the date of issuance
of an instrument until each dollar of the principal amount of such instrument is
repaid to the investor.
The weighted average life and maturity of a class of Certificates of any
series will be influenced by the rate at which principal on the related Mortgage
Loans, whether in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes voluntary prepayments, liquidations due
to default and purchases of Mortgage Loans out of the related Trust Fund), is
paid to such class. Prepayment rates on loans are commonly measured relative to
a prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model.
CPR represents an assumed constant rate of prepayment each month (expressed as
an annual percentage) relative to the then outstanding principal balance of a
pool of loans for the life of such loans. SPA represents an assumed variable
rate of prepayment each month (expressed as an annual percentage) relative to
the then outstanding principal balance of a pool of loans, with 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. If so 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
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or more Companion Classes remain to absorb excess cash flows and make up for
shortfalls. For example, if the rate of prepayments is significantly higher than
expected, the excess prepayments may retire the Companion Classes much earlier
than expected, thus leaving the PAC without further prepayment protection. A TAC
is similar to a PAC, but a TAC structure generally does not draw on Companion
Classes to make up cash flow shortfalls, and will generally not provide
protection to the TAC against the risk that prepayments occur more slowly than
expected.
In general, the reduction of prepayment risk afforded to a Controlled
Amortization Class comes at the expense of one or more Companion Classes of the
same series (any of which may also be a class of Offered Certificates) which
absorb a disproportionate share of the overall prepayment risk of a given
structure. As more particularly described in the related Prospectus Supplement,
the holders of a Companion Class will receive a disproportionately large share
of prepayments when the rate of prepayment exceeds the rate assumed in
structuring the Controlled Amortization Class, and (in the case of a Companion
Class that supports a PAC) a disproportionately small share of prepayments (or
no prepayments) when the rate of prepayment falls below that assumed rate. Thus,
as and to the extent described in the related Prospectus Supplement, a Companion
Class will absorb a disproportionate share of the risk that a relatively fast
rate of prepayments will result in the early retirement of the investment, that
is, "call risk", and, if applicable, the risk that a relatively slow rate of
prepayments will extend the average life of the investment, that is, "extension
risk" that would otherwise be allocated to the related Controlled Amortization
Class. Accordingly, Companion Classes can exhibit significant average life
variability.
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.
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Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance with
their terms will affect the weighted average lives of those Mortgage Loans and,
accordingly, the weighted average lives of and yields on the Certificates of the
related series. Servicing decisions made with respect to the Mortgage Loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of Mortgage Loans in bankruptcy proceedings, may also have an
effect upon the payment patterns of particular Mortgage Loans and thus the
weighted average lives of and yields on the Certificates of the related series.
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 Assets in the related Trust
Fund 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 Assets 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. As specifically set forth 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, a national banking association with its main
office located in Charlotte, North Carolina. First Union National Bank 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's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor maintains its principal office at
301 South College St., Charlotte, N.C. 28228-0600. Its telephone number is
704-374-6161. There can be no assurance that the Depositor will have any
significant assets.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of any
series will be applied by the Depositor to the purchase of Trust Assets or will
be used by the Depositor for general corporate purposes. The Depositor expects
to sell the Certificates from time to time, but the timing and amount of
offerings of Certificates will depend on a number
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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. If so provided in the related
Prospectus Supplement, the "Available Distribution Amount" for any series of
Certificates and any Distribution Date will refer to the total of all payments
or other collections (or advances in lieu thereof) on, under or in respect of
the Mortgage 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
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names such Certificates are registered at the close of business on the last
business day of the month preceding the month in which the applicable
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates in such
class. Payments will be made either by wire transfer in immediately available
funds to the account of a Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder has provided the
Trustee or other person required to make such payments with wiring instructions
(which may be provided in the form of a standing order applicable to all
subsequent distributions) no later than the date specified in the related
Prospectus Supplement (and, if so provided in the related Prospectus Supplement,
such Certificateholder holds Certificates in the requisite amount or
denomination specified therein), or by check mailed to the address of such
Certificateholder as it appears on the Certificate Register; provided, however,
that the final distribution in retirement of any class of Certificates (whether
Definitive Certificates or Book-Entry Certificates) will be made only upon
presentation and surrender of such Certificates at the location specified in the
notice to Certificateholders of such final distribution.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes of
Stripped Principal Certificates and certain REMIC Residual Certificates that
have no Pass-Through Rate) may have a different Pass-Through Rate, which may be
fixed, variable or adjustable. The related Prospectus Supplement will specify
the Pass-Through Rate or, in the case of a variable or adjustable Pass-Through
Rate, the method for determining the Pass-Through Rate, for each class. Unless
otherwise specified in the related Prospectus Supplement, interest on the
Certificates of each series will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of interest in respect of the Certificates of any class
(other than any class of Certificates that will be entitled to distributions of
accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement ("Accrual
Certificates"), and other than any class of Stripped Principal Certificates or
REMIC Residual Certificates that is not entitled to any distributions of
interest) will be made on each Distribution Date based on the Accrued
Certificate Interest for such class and such Distribution Date, subject to the
sufficiency of the portion of the Available Distribution Amount allocable to
such class on such Distribution Date. Prior to the time interest is
distributable on any class of Accrual Certificates, the amount of Accrued
Certificate Interest otherwise distributable on such class will be added to the
Certificate Balance thereof on each Distribution Date. With respect to each
class of Certificates (other than certain classes of Stripped Interest
Certificates and REMIC Residual Certificates), "Accrued Certificate Interest"
for each Distribution Date will be equal to interest at the applicable
Pass-Through Rate accrued for a specified period (generally the period between
Distribution Dates) on the outstanding Certificate Balance thereof immediately
prior to such Distribution Date. Unless otherwise provided in the related
Prospectus Supplement, Accrued Certificate Interest for each Distribution Date
on Stripped Interest Certificates will be similarly calculated except that it
will accrue on a notional amount (a "Notional Amount") that is either (i) based
on the principal balances of some or all of the Mortgage Assets in the related
Trust Fund or (ii) equal to the Certificate Balances of one or more other
classes of Certificates of the same series. Reference to a Notional Amount with
respect to a class of Stripped Interest Certificates is solely for convenience
in making certain calculations and does not represent the right to receive any
distributions of principal. If so specified in the related Prospectus
Supplement, the amount of Accrued Certificate Interest that is 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
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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.
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
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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 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;
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(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 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;
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(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.
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 thePooling 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,
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under the circumstances and in the manner set forth therein. If so provided in
the related Prospectus Supplement, upon the reduction of the Certificate Balance
of a specified class or classes of Certificates by a specified percentage or
amount, a party identified therein will be authorized or required to solicit
bids for the purchase of all the assets of the related Trust Fund, or of a
sufficient portion of such assets to retire such class or classes, under the
circumstances and in the manner set forth therein. In any event, unless
otherwise disclosed in the applicable Prospectus Supplement, any such repurchase
or purchase shall be at a price or prices that are generally based upon the
unpaid principal balance of, plus accrued interest on, all Mortgage Loans (other
than Mortgage Loans secured by REO Properties) then included in a Trust Fund and
the fair market value of all REO Properties then included in the Trust Fund,
which may or may not result in full payment of the aggregate Certificate Balance
plus accrued interest and any undistributed shortfall in interest for the then
outstanding Certificates. Any sale of Trust Fund assets will be without recourse
to the Trust and/or Certificateholders, provided, however, that there can be no
assurance that in all events a court would accept such a contractual
stipulation.
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
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be the responsibility of each such Participant (and not of DTC, the Depositor or
any Trustee or Master Servicer), subject to any statutory or regulatory
requirements as may be in effect from time to time. Under a book-entry system,
Certificate Owners may receive payments after the related Distribution Date.
As may be 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.
As may be 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 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.
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ASSIGNMENT OF MORTGAGE ASSETS; REPURCHASES
As set forth in the related Prospectus Supplement, generally 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 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. 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 Leases for the payment of
maintenance, insurance and taxes, to the extent specified in the related Leases.
The Trustee, or if so specified in the Prospectus Supplement, the Master
Servicer, as agent for the Trustee, may hold the Leases in trust for the benefit
of the Certificateholders.
With respect to each CMBS in certificate form, the Depositor will deliver
or cause to be delivered to the Trustee (or the custodian) the original
certificate or other definitive evidence of such CMBS together with bond power
or other instruments, certifications or documents required to transfer fully
such CMBS to the Trustee for the benefit of the Certificateholders. With respect
to each CMBS in uncertificated or book-entry form or held through a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, the
Depositor and the Trustee will cause such CMBS to be registered directly or on
the books of such clearing corporation or of a financial intermediary in the
name of the Trustee for the benefit of the Certificateholders. Unless otherwise
provided in the related Prospectus Supplement, the related Pooling Agreement
will require that either the Depositor or the Trustee promptly cause any CMBS in
certificated form not registered in the name of the Trustee to be reregistered,
with the applicable persons, in the name of the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
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
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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.
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.
This repurchase or substitution obligation may 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.
The dates as of which representations and warranties have been made by a
Warranting Party will be specified in the related Prospectus Supplement. In some
cases, such representations and warranties will have been made as of a date
prior to the date upon which the related series of Certificates is issued, and
thus may not address events that may occur following the date as of which they
were made. However, the Depositor will not include any Mortgage Loan in the
Trust Fund for any series of Certificates if anything has come to the
Depositor's attention that would cause it to believe that the representations
and warranties made in respect of such Mortgage Loan will not be accurate in all
material respects as of such date of issuance.
CERTIFICATE ACCOUNT
General. The Master Servicer and/or the Trustee will, as to each Trust
Fund, establish and maintain or cause to be established and maintained
Certificate Accounts for the collection of payments on the related Mortgage
Loans, which will be established so as to comply with the standards of each
Rating Agency that has rated any one or more classes of Certificates of the
related series. As described in the related Prospectus Supplement, a Certificate
Account may be maintained either as an interest-bearing or a
non-interest-bearing account, and the funds held therein may be held as cash or
invested in United States government securities and other investment grade
obligations specified in the related Pooling Agreement ("Permitted
Investments"). 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
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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";
(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;
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(iv) to reimburse the Master Servicer or any other specified person
for any advances described in clause (ii) above made by it, any servicing
expenses referred to in clause (iii) above incurred by it and any servicing
fees earned by it, which, in the good faith judgment of the Master Servicer
or such other person, will not be recoverable from the amounts described in
clauses (ii) and (iii), respectively, such reimbursement to be made from
amounts collected on other Mortgage Loans in the related Trust Fund or, if
and to the extent so provided by the related Pooling Agreement and
described in the related Prospectus Supplement, only from that portion of
amounts collected on such other Mortgage Loans that is otherwise
distributable on one or more classes of Subordinate Certificates of the
related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay the Master Servicer, a Special Servicer or another
specified entity (including a provider of Credit Support) interest accrued
on the advances described in clause (ii) above made by it and the servicing
expenses described in clause (iii) above incurred by it while such remain
outstanding and unreimbursed;
(vi) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Mortgaged
Properties that constitute security for defaulted Mortgage Loans, and for
any containment, clean-up or remediation of hazardous wastes and materials
present on such Mortgaged Properties, as described under "--Realization
Upon Defaulted Mortgage Loans";
(vii) to reimburse the Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be,
for certain expenses, costs and liabilities incurred thereby, as and to the
extent described under "--Certain Matters Regarding the Master Servicer and
the Depositor";
(viii) if and to the extent described in the related Prospectus
Supplement, to pay the fees of the Trustee;
(ix) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under
"--Certain Matters Regarding the Trustee";
(x) to pay the Master Servicer or the Trustee, as additional
compensation, interest and investment income earned in respect of amounts
held in the Certificate Account;
(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 "Material Federal Income Tax Consequences--
REMICS--Taxation of Owners of REMIC Residual Certificates--Prohibited
Transactions Tax and Other Taxes";
(xiii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted Mortgage Loan or a property acquired in respect thereof in
connection with the liquidation of such Mortgage Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Pooling Agreement for the benefit of
Certificateholders;
(xv) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xvi) to clear and terminate the Certificate Account upon the
termination of the Trust Fund.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer for any mortgage pool, directly or through
Sub-Servicers, will be required to make reasonable efforts to collect all
scheduled Mortgage Loan payments and will be required to follow such collection
procedures as it would follow with respect to mortgage loans that are comparable
to such Mortgage Loans and held for
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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. Generally, 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 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. 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.
Generally, the Master Servicer will be solely liable for all fees owed by
it to any Sub-Servicer, irrespective of whether the Master Servicer's
compensation pursuant to the related Pooling Agreement is sufficient to pay such
fees. Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under a Pooling Agreement. See "--Certificate Account" and
"--Servicing Compensation and Payment of Expenses".
SPECIAL SERVICERS
If and to the extent specified in the related Prospectus Supplement, a
special servicer (the "Special Servicer") may be a party to the related Pooling
Agreement or may be appointed by the Master Servicer or another specified party
to perform certain specified duties (for example, the servicing of defaulted
Mortgage Loans) in respect of the servicing of the related Mortgage Loans. The
Master Servicer will be liable for the performance of a Special Servicer only
if, and to the extent, set forth in such Prospectus Supplement.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
A borrower's failure to make required Mortgage Loan payments may mean that
operating income is insufficient to service the mortgage debt, or may reflect
the diversion of that income from the servicing of the mortgage debt. In
addition, a borrower that is unable to make Mortgage Loan payments may also be
unable to make timely payment of taxes and to otherwise maintain and insure the
related Mortgaged Property. In general, the related Master Servicer will be
required to monitor any Mortgage Loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property,
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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. Generally, the related Pooling Agreement will
require that the Master Servicer accept the highest cash bid received from any
person (including itself, an affiliate of the Master Servicer or any
Certificateholder) that constitutes a fair price for such defaulted Mortgage
Loan. In the absence of any bid determined in accordance with the related
Pooling Agreement to be fair, the Master Servicer will generally be required to
proceed with respect to such defaulted Mortgage Loan as described below.
If a default on a Mortgage Loan has occurred or, in the Master Servicer's
judgment, is imminent, the Master Servicer, on behalf of the Trustee, may at any
time institute foreclosure proceedings, exercise any power of sale contained in
the related Mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire
title to the related Mortgaged Property, by operation of law or otherwise, if
such action is consistent with the Servicing Standard. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer may not,
however, acquire title to any Mortgaged Property or take any other action that
would cause the Trustee, for the benefit of Certificateholders of the related
series, or any other specified person to be considered to hold title to, to be a
"mortgagee-in-possession" of, or to be an "owner" or an "operator" of such
Mortgaged Property within the meaning of certain federal environmental laws,
unless the Master Servicer has previously determined, based on a report prepared
by a person who regularly conducts environmental audits (which report will be an
expense of the Trust Fund), that:
(i) either the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions as
are necessary to bring the Mortgaged Property into compliance therewith is
reasonably likely to produce a greater recovery on a present value basis
than not taking such actions; and
(ii) either there are no circumstances or conditions present at the
Mortgaged Property relating to the use, management or disposal of hazardous
materials 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 reasonably be expected to 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".
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 by the end of the third
calendar year following the year of acquisition or 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 three years after the
end of the calendar year in which it was acquired 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
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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
Each Pooling Agreement may 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. Such coverage generally will be
in an amount equal to the lesser of the principal balance owing on such Mortgage
Loan and the replacement cost of the Mortgaged Property, but in either case not
less than the amount necessary to avoid the application of any co-insurance
clause contained in the hazard insurance policy. The ability of the Master
Servicer to assure that hazard insurance proceeds are appropriately applied may
be dependent upon its being named as an additional insured under any hazard
insurance policy and under any other insurance policy referred to below, or upon
the extent to which information concerning covered losses is furnished by
borrowers. All amounts collected by the Master Servicer under any such policy
(except for amounts to be applied to the restoration or repair of the Mortgaged
Property or released to the borrower in accordance with the Master Servicer's
normal servicing procedures and/or to the terms and conditions of the related
Mortgage and Mortgage Note) will be deposited in the related Certificate
Account. The Pooling Agreement may provide that the Master Servicer may satisfy
its obligation to cause each borrower to maintain such a hazard insurance policy
by maintaining a blanket policy insuring against hazard losses on all of the
Mortgage Loans in the related Trust Fund. If such blanket policy contains a
deductible clause, the Master Servicer will be required, in the event of a
casualty covered by such blanket policy, to deposit in the related Certificate
Account all sums that would have been deposited therein but for such deductible
clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the Mortgaged Properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
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
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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.
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
Generally, a Master Servicer's primary servicing compensation with respect
to a series of Certificates will come from the periodic payment to it of a
portion of the interest payments on each Mortgage Loan in the related Trust
Fund. Since that compensation is generally based on a percentage of the
principal balance of each such Mortgage Loan outstanding from time to time, it
will decrease in accordance with the amortization of the Mortgage Loans. The
Prospectus Supplement with respect to a series of Certificates may provide that,
as additional compensation, the Master Servicer may retain all or a portion of
late payment charges, Prepayment Premiums, modification fees and other fees
collected from borrowers and any interest or other income that may be earned on
funds held in the Certificate Account. Any Sub-Servicer will receive a portion
of the Master Servicer's compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, a Master Servicer may
be required, to the extent provided in the related Prospectus Supplement, to pay
from amounts that represent its servicing compensation certain expenses incurred
in connection with the administration of the related Trust Fund, including,
without limitation, payment of the fees and disbursements of independent
accountants and payment of expenses incurred in connection with distributions
and reports to Certificateholders. Certain other expenses, including certain
expenses related to Mortgage Loan defaults and liquidations and, to the extent
so provided in the related Prospectus Supplement, interest on such expenses at
the rate specified therein, and the fees of the Trustee and any Special
Servicer, may be required to be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any period to Prepayment Interest
Shortfalls. See "Yield and Maturity Considerations--Certain Shortfalls in
Collections of Interest".
EVIDENCE AS TO COMPLIANCE
Each Pooling Agreement may 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.
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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. The related Pooling Agreement may permit the Master
Servicer to resign from its obligations thereunder only upon a determination
that such obligations are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it at the date of the Pooling Agreement. No such resignation will become
effective until the Trustee or a successor servicer has assumed the Master
Servicer's obligations and duties under the Pooling Agreement. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will also be
required to maintain a fidelity bond and errors and omissions policy that
provides coverage against losses that may be sustained as a result of an
officer's or employee's misappropriation of funds, errors and omissions or
negligence, subject to certain limitations as to amount of coverage, deductible
amounts, conditions, exclusions and exceptions.
Each Pooling Agreement may 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 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.
Subject, in certain circumstances, to the satisfaction of certain
conditions that may be required in the related Pooling Agreement, 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
MasterServicer or the Depositor, as the case may be, under the related Pooling
Agreement.
EVENTS OF DEFAULT
The "Events of Default for a Series of Certificates" under the related
Pooling Agreement generally 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,
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which failure continues unremedied for five days after written notice of such
failure has been given to the Master Servicer by the Trustee or the Depositor,
or to the Master Servicer, the Depositor and the Trustee by Certificateholders
entitled to not less than 25% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights for such series, (ii) any failure by
the Master Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the Pooling Agreement which continues
unremedied for 60 days after written notice of such failure has been given to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by Certificateholders entitled to not less than
25% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights for such series; and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings in respect of or relating to the Master Servicer and certain actions
by or on behalf of the Master Servicer indicating its insolvency or inability to
pay its obligations. Material variations to the foregoing Events of Default
(other than to add thereto or shorten cure periods or eliminate notice
requirements) will be specified in the related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under a Pooling Agreement remains
unremedied, the Depositor or the Trustee will be authorized, and at the
direction of Certificateholders entitled to not less than 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series, the Trustee will be required, to terminate all of the rights
and obligations of the Master Servicer as master servicer under the Pooling
Agreement, whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the Master Servicer under the Pooling Agreement
(except that if the Master Servicer is required to make advances in respect of
Mortgage Loan delinquencies, but the Trustee is prohibited by law from
obligating itself to do so, or if the related Prospectus Supplement so
specifies, the Trustee will not be obligated to make such advances) and will be
entitled to similar compensation arrangements. 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. 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 no such
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amendment may (x) reduce in any manner the amount of, or delay the timing of,
payments received or advanced on Mortgage Loans that are required to be
distributed in respect of any Certificate without the consent of the holder of
such Certificate, (y) adversely affect in any material respect the interests of
the holders of any class of Certificates, in a manner other than as described in
clause (x), without the consent of the holders of all Certificates of such class
or (z) modify the provisions of the Pooling Agreement described in this
paragraph without the consent of the holders of all Certificates of the related
series. However, unless otherwise specified in the related Pooling Agreement,
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
The Trustee for a series of Certificates may be entitled to
indemnification, from amounts held in the related Certificate Account, for any
loss, liability or expense incurred by the Trustee in connection with the
Trustee's acceptance or administration of its trusts under the related Pooling
Agreement; provided, however, that such indemnification will not extend to any
loss, liability or expense that constitutes a specific liability imposed on the
Trustee pursuant to the Pooling Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein. As and to the extent described in the related Prospectus
Supplement, the fees and normal disbursements of any Trustee may be the expense
of the related Master Servicer or other specified person or may be required to
be borne by the related Trust Fund.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee for a series of Certificates will be permitted at any time to
resign from its obligations and duties under the related Pooling Agreement by
giving written notice thereof to the Depositor. Upon receiving such notice of
resignation, the Master Servicer (or such other person as may be specified in
the related Prospectus Supplement) will
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be required to use reasonable 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.
Unless otherwise provided in the related Prospectus Supplement, 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, unless otherwise
provided in the related Prospectus Supplement, 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.
The Credit Support generally will not provide protection against all risks
of loss and will not guarantee payment to Certificateholders of all amounts to
which they are entitled under the related Pooling Agreement. If losses or
shortfalls occur that exceed the amount covered by the Credit Support or that
are not covered by the Credit Support, Certificateholders will bear their
allocable share of deficiencies. Moreover, if a form of Credit Support covers
more than one series of Certificates, holders of Certificates of one series will
be subject to the risk that such Credit Support will be exhausted by the claims
of the holders of Certificates of one or more other series before the former
receive their intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature and
amount of coverage under such Credit Support, (ii) any conditions to payment
thereunder not otherwise described herein, (iii) the conditions (if any) under
which the amount of coverage under such Credit Support may be reduced and under
which such Credit Support may be terminated or replaced and (iv) the material
provisions relating to such Credit Support. Additionally, the related Prospectus
Supplement will set forth certain information with respect to the obligor under
any instrument of Credit Support, generally including (w) a brief description of
its principal business activities, (x) its principal place of business, place of
incorporation and the jurisdiction under which it is chartered or licensed to do
business, (y) if applicable, the identity of the regulatory agencies that
exercise primary jurisdiction over the conduct of its business and (z) its total
assets, and its stockholders equity or policyholders' surplus, if applicable, as
of a date that will be specified in the Prospectus Supplement. See "Risk
Factors--Credit Support Limitations".
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate Account
on any Distribution Date will be 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.
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CROSS-SUPPORT PROVISIONS
If the Mortgage Assets in any Trust Fund are divided into separate groups,
each supporting a separate class or classes of Certificates of a series, Credit
Support may be provided by cross-support provisions requiring that distributions
be made on Senior Certificates evidencing interests in one group of Mortgage
Assets prior to distributions on Subordinate Certificates evidencing interests
in a different group of Mortgage Assets within the Trust Fund. The Prospectus
Supplement for a series that includes a cross-support provision will describe
the manner and conditions for applying such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
If so provided in the Prospectus Supplement for a series of Certificates,
Mortgage Loans included in the related Trust Fund will be covered for certain
default risks by insurance policies or guarantees. To the extent material, a
copy of each such instrument will accompany the Current Report on Form 8-K to be
filed with the Commission within 15 days of issuance of the Certificates of the
related series.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or financial institution specified in such Prospectus Supplement (the "L/C
Bank"). Under a letter of credit, the L/C Bank will be obligated to honor draws
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, generally equal to a percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Mortgage Assets on the
related Cut-off Date or of the initial aggregate Certificate Balance of one or
more classes of Certificates. If so specified in the related Prospectus
Supplement, the letter of credit may permit draws only in the event of certain
types of losses and shortfalls. The amount available under the letter of credit
will, in all cases, be reduced to the extent of the unreimbursed payments
thereunder and may otherwise be reduced as described in the related Prospectus
Supplement. The obligations of the L/C Bank under the letter of credit for each
series of Certificates will expire at the earlier of the date specified in the
related Prospectus Supplement or the termination of the Trust Fund. A copy of
any such letter of credit will accompany the Current Report on Form 8-K to be
filed with the Commission within 15 days of issuance of the Certificates of the
related series.
CERTIFICATE INSURANCE AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies and/or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest and/or full distributions of principal
on the basis of a schedule of principal distributions set forth in or determined
in the manner specified in the related Prospectus Supplement. A copy of any such
instrument will accompany the Current Report on Form 8-K to be filed with the
Commission within 15 days of issuance of the Certificates of the related series.
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
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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.
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.
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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
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.
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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 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
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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 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
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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 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
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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 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 bringing a personal action against the borrower. In
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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 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
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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.
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
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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 certain laws, contamination on a property may give
rise to a lien on the property for clean-up costs. In several states, such a
lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to such
a "superlien".
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. Excluded from CERCLA's definition of "owner" or "operator,"
however, is a lender that, "without participating in the management" of the
facility, holds indicia of ownership primarily to protect his security interest
in the facility. This so-called secured creditor exemption is intended to
provide a lender protection from liability under CERCLA as an owner or operator
of contaminated property. The secured creditor exemption, however, does not
necessarily protect a lender from liability for cleanup of hazardous substances
in every situation. A secured lender may be liable as an "owner" or "operator"
of a contaminated mortgaged property if agents or employees of the lender are
deemed to have participated in the management of such mortgaged property or the
operations of the borrower. Such liability may exist even if the lender did not
cause or contribute to the contamination and regardless of whether the lender
has actually taken possession of a mortgaged property through foreclosure, deed
in lieu of foreclosure or otherwise. Moreover, such liability is not limited to
the original or unamortized principal balance of a loan or to the value of the
property securing a loan.
In addition, lenders may face potential liability for remediation of
releases of petroleum or hazardous substances from underground storage tanks
under 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.
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In a few states, transfers of some types of properties are conditioned upon
cleanup of contamination. 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.
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 result in the imposition of certain investigation or remediation
requirements and/or 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
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loan and/or any junior loan or loans, the existence of junior loans and actions
taken by junior lenders can impair the security available to the senior lender
and can interfere with or delay the taking of action by the senior lender.
Moreover, the bankruptcy of a junior lender may operate to stay foreclosure or
similar proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal law.
In addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
No Mortgage Loan originated in any state in which application of Title V
has been expressly rejected or a provision limiting discount points or other
charges has been adopted will (if originated after that rejection or adoption)
be eligible for inclusion in a Trust Fund unless (i) such Mortgage Loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such Mortgage Loan provides that the terms thereof are to be
construed in accordance with the laws of another state under which such interest
rate, discount points and charges would not be usurious and the borrower's
counsel has rendered an opinion that such choice of law provision would be given
effect.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of such borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
individuals who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of any servicer to
collect full amounts of interest on certain of the Mortgage Loans. Any
shortfalls in interest collections resulting from the application of the Relief
Act would result in a reduction of the amounts distributable 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,
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shopping centers, hospitals, schools and social service center establishments)
must remove architectural and communication barriers that are structural in
nature from existing places of public accommodation to the extent "readily
achievable". In addition, under the ADA, alterations to a place of public
accommodation or a commercial facility are to be made so that, to the maximum
extent feasible, such altered portions are readily accessible to and usable by
disabled individuals. The "readily achievable" standard takes into account,
among other factors, the financial resources of the affected site, owner,
landlord or other applicable person. The requirements of the ADA may also be
imposed on a foreclosing lender who succeeds to the interest of the borrower as
owner or landlord. Since the "readily achievable" standard may vary depending on
the financial condition of the owner or landlord, a foreclosing lender who is
financially more capable than the borrower of complying with the requirements of
the ADA may be subject to more stringent requirements than those to which the
borrower is subject.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property", including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
MATERIAL 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. If no REMIC election is
made and the Trust Fund does not elect to be treated as a Grantor Trust Fund,
the Trust Fund may elect to be treated as a financial assets securitization
investment trust ("FASIT"). The Prospectus Supplement relating to such an
election will describe the requirements for the classification of the Trust Fund
as a FASIT and the consequences to a holder of owing certificates
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in a FASIT. The Prospectus Supplement for each series of Certificates also will
indicate whether a REMIC election (or elections) will be made for the related
Trust Fund and, if such an election is to be made, will identify all "regular
interests" and "residual interests" in the REMIC. For purposes of this tax
discussion, references to a "Certificateholder" or a "holder" are to the
beneficial owner of a Certificate.
The following discussion is limited in applicability to Offered
Certificates. Moreover, this discussion applies only to the extent that Mortgage
Assets held by a Trust Fund consist solely of Mortgage Loans. To the extent that
other Mortgage Assets, including REMIC certificates and mortgage pass-through
certificates, are to be held by a Trust Fund, the tax consequences associated
with the inclusion of such assets will be disclosed in the related Prospectus
Supplement. In addition, if Cash Flow Agreements, other than guaranteed
investment contracts, are included in a Trust Fund, the tax consequences
associated with such Cash Flow Agreements also will be disclosed in the related
Prospectus Supplement. See "Description of the Trust Funds--Cash Flow
Agreements".
Furthermore, the following discussion is based in part upon the rules
governing original issue discount that are set forth in Sections 1271-1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations do
not adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICs
Classification of REMICs. It is the opinion of Willkie Farr & Gallagher,
counsel to the Depositor, that upon the issuance of each series of REMIC
Certificates, assuming compliance with all provisions of the related Pooling
Agreement and based upon the law on the date hereof, for federal income tax
purposes the related Trust Fund (or each applicable portion thereof) will
qualify as a REMIC and the REMIC Certificates offered with respect thereto will
be considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period during which the requirements for such status are
not satisfied. The Pooling Agreement with 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, 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.
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The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. In
addition, in some instances Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. If so, the related Prospectus Supplement
will describe those Mortgage Loans that may not be so treated. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(5)(A) of the Code.
Tiered REMIC Structures. For certain series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
Trust Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such series of REMIC Certificates, counsel to the Depositor will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the related Pooling Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Certificates issued by the Tiered REMICs, respectively,
will be considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in the related REMIC within the meaning of the REMIC
Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to such income. In addition, Section 1272(a)(6)
of the Code provides special rules applicable to REMIC Regular Certificates and
certain other debt instruments issued with original issue discount. Regulations
have not been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor nor any other person will
make any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest".
"Qualified stated interest" includes interest that is unconditionally payable at
least
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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").
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns provided to
the Certificateholders and the IRS will be based on the position that the
portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of such
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that portion of the interest paid on the first Distribution Date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first Distribution Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of such accrued interest may be treated as a
separate asset the cost of which is recovered entirely out of interest paid on
the first Distribution Date. It is unclear how an election to do so would be
made under the OID Regulations and whether such an election could be made
unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period", that is, 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
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Certificate. For these purposes, the original yield to maturity of the
Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price", in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price, will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a Certificateholder generally will be required to allocate the portion
of each such distribution representing stated redemption price first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
made with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to currently include
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "--Taxation of Owners of REMIC
Regular Certificates --Premium". Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and 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
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Regular Certificate issued without original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total amount of stated interest
remaining to be paid on the REMIC Regular Certificate as of the beginning of the
accrual period or (iii) in the case of a REMIC Regular Certificate issued with
original issue discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount accrued in the accrual
period bears to the total original issue discount remaining on the REMIC Regular
Certificate at the beginning of the accrual period. Moreover, the Prepayment
Assumption used in calculating the accrual of original issue discount is also
used in calculating the accrual of market discount. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect such regulations might have on the tax treatment of a REMIC
Regular Certificate purchased at a discount in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. On June 27, 1996, the IRS published in the
Federal Register proposed regulations on the amortization of bond premium. Under
those regulations, if a holder elects to amortize bond premium, bond premium
would be amortized on a constant yield method and would be applied against
qualified stated interest. The proposed regulations generally would be effective
for REMIC Regular Certificates acquired on or after the date 60 days after the
date final regulations are published in the Federal Register. 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
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reduction ultimately will not be recoverable. As a result, the amount of taxable
income reported in any period by the holder of a REMIC Regular Certificate could
exceed the amount of economic income actually realized by the holder in such
period. Although the holder of a REMIC Regular Certificate eventually will
recognize a loss or reduction in income attributable to previously accrued and
included income that as the result of a realized loss ultimately will not be
realized, the law is unclear with respect to the timing and character of such
loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
General. As residual interests, the REMIC Residual Certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Loans or as debt instruments issued
by the REMIC.
An original holder of a REMIC Residual Certificate generally will be
required to report its daily portion of the taxable income or, subject to the
limitations noted in this discussion, the net loss of the REMIC for each day
during a calendar quarter that such holder owned such REMIC Residual
Certificate. For this purpose, the taxable income or net loss of the REMIC will
be allocated to each day in the calendar quarter ratably using a "30 days per
month/90 days per quarter/360 days per year" convention unless otherwise
disclosed in the related Prospectus Supplement. The daily amounts so allocated
will then be allocated among the REMIC Residual Certificateholders in proportion
to their respective ownership interests on such day. Any amount included in the
gross income or allowed as a loss of any REMIC Residual Certificateholder by
virtue of this paragraph will be treated as ordinary income or loss. The taxable
income of the REMIC will be determined under the rules described below in
"--Taxable Income of the REMIC" and will be taxable to the REMIC Residual
Certificateholders without regard to the timing or amount of cash distributions
by the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses".
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation 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
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REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby), amortization of any premium on the Mortgage Loans, bad debt losses with
respect to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount".
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the
Master Servicer or the Trustee may be required to estimate the fair market value
of such interests in order to determine the basis of the REMIC in the Mortgage
Loans and other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant interest basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing 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
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that the REMIC will be allowed deductions for servicing, administrative and
other non-interest expenses in determining its taxable income. All such expenses
will be allocated as a separate item to the holders of REMIC Certificates,
subject to the limitation of Section 67 of the Code. See "--Possible
Pass-Through of Miscellaneous Itemized Deductions". If the deductions allowed to
the REMIC exceed its gross income for a calendar quarter, such excess will be
the net loss for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the Trust Fund. However, such bases increases may not occur until the
end of the calendar quarter, or perhaps the end of the calendar year, with
respect to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates". For a discussion of possible modifications of these rules that
may require adjustments to income of a holder of a REMIC Residual Certificate
other than an original holder in order to reflect any difference between the
cost of such REMIC Residual Certificate to such REMIC Residual Certificateholder
and the adjusted basis such REMIC Residual Certificate would have in the hands
of an original holder, see "--Taxation of Owners of REMIC Residual
Certificates--General".
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Certificate will, with an exception discussed below for certain REMIC Residual
Certificates held by thrift institutions, be subject to federal income tax in
all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond
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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 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
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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. On December 24, 1996, the IRS released final
regulations (the "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 Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a REMIC Residual Certificate issued after January 4,
1995 is not treated as a security and thus may not be marked to market.
Prospective purchasers of a REMIC Residual Certificate should consult their tax
advisors regarding the possible application of the mark-to-market requirement to
REMIC Residual Certificates.
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.
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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 for individuals of 20%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the Certificate based on the
application of the Prepayment Assumption to such Certificate, which rate is
computed and published monthly by the IRS), determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount of ordinary
income actually 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.
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
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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. Such loss may be treated as a capital loss and
may be subject to the "wash sale" rules of Section 1091 of the Code.
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,
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.
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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, an estate 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 or a trust if (a) a
court within the United States is able to exercise primary supervision over the
administration of the trust, and (b) one or more United States persons have the
authority to control all substantial decisions of the trust. It is possible that
the IRS may assert that the foregoing tax exemption should not apply with
respect to interest distributed on a REMIC Regular Certificate that is held by
(i) a REMIC Residual Certificateholder that owns directly or indirectly a 10% or
greater interest in the REMIC Residual Certificates or (ii) to the extent of the
amount of interest paid by the related Mortgagor on a particular Mortgage Loan,
(A) a REMIC Regular Certificateholder that owns a 10% or greater ownership
interest in such Mortgage or (B) a REMIC Regular Certificateholder that is a
controlled foreign corporation as to the United States of which such Mortgagor
is a "United States shareholder" within the meaning of Section 951(b) of the
Code. 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.
Transfers of REMIC Residual Certificates to investors that are not United
States persons will be prohibited under the related Pooling Agreement.
GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds. With respect to each series of
Grantor Trust Certificates, counsel to the Depositor will deliver its opinion to
the effect that, assuming compliance with all provisions of the related Pooling
Agreement, the related Grantor Trust Fund will be classified as a grantor trust
under subpart E, part I of subchapter J of the Code and not as a partnership or
an association taxable as a corporation. Accordingly, each holder of a Grantor
Trust Certificate generally will be treated as the owner of an interest in the
Mortgage Loans included in the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate". A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any spread) and interest paid to the holders of Grantor
Trust Fractional Interest Certificates issued with respect to such Grantor Trust
Fund will be referred to as a "Grantor Trust Strip Certificate". A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
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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 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
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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
"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.
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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
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.
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Notwithstanding the general definition of original issue discount, original
issue discount will be considered to be de minimis if such original issue
discount is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Mortgage Loan. For this purpose, the weighted
average maturity of the Mortgage Loan will be computed as the sum of the amounts
determined, as to each payment included in the stated redemption price of such
Mortgage Loan, by multiplying (i) the number of complete years (rounding down
for partial years) from the issue date until such payment is expected to be made
by (ii) a fraction, the numerator of which is the amount of the payment and the
denominator of which is the stated redemption price of the Mortgage Loan. Under
the OID Regulations, original issue discount of only a de minimis amount (other
than de minimis original issue discount attributable to a so-called "teaser"
rate or initial interest holiday) will be included in income as each payment of
stated principal price is made, based on the product of the total amount of such
de minimis original issue discount and a fraction, the numerator of which is the
amount of each such payment and the denominator of which is the outstanding
stated principal amount of the Mortgage Loan. The OID Regulations also permit a
Certificateholder to elect to accrue de minimis original issue discount into
income currently based on a constant yield method. See "--Market Discount"
below.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such Mortgage Loan, increased by the aggregate amount of original issue
discount with respect to such Mortgage Loan that accrued in prior accrual
periods, and reduced by the amount of any payments made on such Mortgage Loan in
prior accrual periods of amounts included in its stated redemption price.
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
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Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing.
If made, such election will apply to all market discount bonds acquired by such
Certificateholder during or after the first taxable year to which such election
applies. In addition, the OID Regulations would permit a Certificateholder to
elect to accrue all interest, discount (including de minimis market or original
issue discount) and premium in income as interest, based on a constant yield
method. If such an election were made with respect to a Mortgage Loan with
market discount, the Certificateholder would be deemed to have made an election
to currently include market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election and thereafter and, possibly, previously
acquired instruments. Similarly, a Certificateholder that made this election for
a Certificate acquired at a premium would be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See "--Taxation of
Owners of REMIC Regular Certificates--Premium". Each of these elections to
accrue interest, discount and premium with respect to a Certificate on a
constant yield method or as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Mortgage Loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be considered
to be de minimis if it is less than 0.25% of the stated redemption price of the
Mortgage Loans multiplied by the number of complete years to maturity remaining
after the date of its purchase. In interpreting a similar rule with respect to
original issue discount on obligations payable in installments, the OID
Regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied with respect to market discount,
presumably taking into account the prepayment assumption used, if any. The
effect of using a prepayment assumption could be to accelerate the reporting of
such discount income. If market discount is treated as de minimis under the
foregoing rule, it appears that actual discount would be treated in a manner
similar to original issue discount of a de minimis amount. See "--If Stripped
Bond Rules Do Not Apply".
Further, under the rules described in "--Taxation of Owners of REMIC
Regular Certificates--Market Discount", any discount that is not original issue
discount and exceeds a de minimis amount may require the deferral of interest
expense deductions attributable to accrued market discount not yet includible in
income, unless an election has been made to report market discount currently as
it accrues. This rule applies without regard to the origination dates of the
Mortgage Loans.
Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to Mortgage
Loans for which an amortization election is not made, should be allocated
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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.
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
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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 for individuals of 20%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction. Finally, a
taxpayer may elect to have net capital gain taxed at ordinary income rates
rather than capital gains rates in order to include such net capital gain in
total net investment income for that taxable year, for purposes of the rule that
limits the deduction of interest on indebtedness incurred to purchase or carry
property held for investment to a taxpayer's net investment income.
Grantor Trust Reporting. As may be 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
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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
preparingsuch 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 "Material
Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership and disposition of the
Offered Certificates. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Offered
Certificates.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans, and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, medical savings accounts, Keogh plans, collective
investment funds and separate and general 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.
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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-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 Structured Rating Group ("Standard & Poor's"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Rating Co. ("Duff
& Phelps") or Fitch Investors Service, L.P. ("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
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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.
Seventh, in the event the obligations used to fund the Trust Fund have
not all been transferred to the Trust Fund on the closing date, additional
obligations meeting certain requirements as specified in the Exemption
shall be transferred to the Trust Fund in exchange for the amounts credited
to the Pre-Funding Account during the period commencing on the closing date
and ending no later than the earliest to occur of: (i) the date the amount
on deposit in the Pre-Funding Account (as defined in the Exemption) is less
than the minimum dollar amount specified in the Pooling Agreement; (ii) the
date on which an event of default occurs under the Pooling Agreement; or
(iii) the date which is the later of three months or 90 days after the
closing date. Certain conditions of the Exemption relating to pre-funding
accounts must also be met, to be described in the Prospectus Supplement.
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, or (ii) Certificates evidencing an interest
in a Trust Fund including Cash Flow Agreements. Also, as noted, subordinated
Classes of Certificates are not covered by the Exemption.
If the general conditions set forth in the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (A) through (D) of
the Code) in connection with (i) the direct or indirect sale, exchange or
transfer of Offered Certificates acquired by a Plan upon issuance from the
Depositor or Underwriter when the Depositor, Underwriter, Master Servicer,
Special Servicer, Sub-Servicer, Trustee, provider of Credit Support, or obligor
with respect to Mortgage Assets is a "Party in Interest" under ERISA with
respect to the investing Plan, (ii) the direct or indirect acquisition or
disposition in the secondary market of Offered Certificates by a Plan and (iii)
the holding of Offered Certificates by a Plan. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for
the acquisition or holding of a Certificate on behalf of an "Excluded Plan" by
any person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For this purpose, an Excluded Plan
is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions set forth in the Exemption are also
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code in
connection with (i) the direct or indirect sale, exchange or transfer of Offered
Certificates in the initial issuance of Offered Certificates between the
Depositor or an Underwriter and a Plan (other than an Excluded Plan) when the
person who has discretionary authority or renders investment advice with respect
to the investment of the Plan's assets in such Certificates is (a) an
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obligor with respect to 5% or less of the fair market value of the Mortgage
Assets (including mortgage loans underlying a CMBS not issued by FNMA, FHLMC or
GNMA) in the related Trust Fund or (b) an affiliate of such a person, (ii) the
direct or indirect acquisition or disposition in the secondary market of Offered
Certificates by such Plan and (iii) the holding of Offered Certificates by such
Plan.
Further, if certain specific conditions set forth in the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code,
for transactions in connection with the servicing, management and operation of
the Trust Assets. The Depositor expects that the specific conditions set forth
in the Exemption that are required for this purpose will be satisfied with
respect to the Certificates so that the Exemption would provide an exemption
from the restrictions imposed by Sections 406(a) and (b) of ERISA (as well as
the excise taxes imposed by Sections 4975(a) and (b) of the Code by reason of
Section 4975(c) of the Code) for transactions in connection with the servicing,
management and operation of the pools of Mortgage Assets, provided that the
general conditions set forth in the Exemption are satisfied.
The Exemption also provides an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1) (A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a Party in Interest with respect to an investing Plan by virtue of
providing services to the Plan (or by virtue of having certain specified
relationships to such a person) solely as a result of the Plan's ownership of
Offered Certificates.
Before purchasing an Offered Certificate, a fiduciary of a Plan should
itself confirm (i) that the Offered Certificates constitute "certificates" for
purposes of the Exemption and (ii) that the specific and general conditions and
the other requirements set forth in the Exemption would be satisfied. In
addition to making its own determination as to the availability of the exemptive
relief that may be provided in the Exemption the Plan fiduciary should consider
its general fiduciary obligations under ERISA in determining whether to purchase
any Offered Certificates on behalf of a Plan.
The DOL recently issued a Prohibited Transaction Class Exemption 95-60 (the
"Class Exemption"), which exempts from the application of the prohibited
transactions provisions of Sections 406(a), 406(b) and 407(a) of ERISA and
Section 4975 of the Code transactions in connection with the servicing,
management and operation of a trust in which an insurance company general
account has an interest as a result of its acquisition of certificates issued by
the trust, provided that certain conditions are satisfied. Insurance company
general accounts are allowed to purchase, in reliance on the Class Exemption,
classes of Certificates that (i) are subordinated to other classes of
Certificates and/or (ii) have not received a rating at the time of the
acquisition in one of the three highest rating categories from Standard &
Poor's, Moody's, Duff & Phelps or Fitch. In addition to the foregoing Class
Exemption, certain insurance company general accounts, which support policies
issued by any insurer on or before December 31, 1998 to or for the benefit of
employee benefit plans, are allowed to purchase Certificates in reliance upon
regulations to be promulgated by the DOL pursuant to Section 1460 of the Small
Business Job Protection Act of 1996. If such policies satisfy the Section 1460
regulations, then the insurer will be deemed in compliance with ERISA's
fiduciary requirements and prohibited transaction rules with respect to those
assets of the insurer's general account which support such policies.
Any fiduciary of a Plan that proposes to cause the Plan to purchase Offered
Certificates should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and the availability of
(and scope of relief provided by) the Exemption or any other prohibited
transaction exemption in connection therewith. The Prospectus Supplement with
respect to a series of Certificates may contain additional information regarding
the application of the Exemption or any other exemption, with respect to the
Certificates offered thereby. In addition, any Plan fiduciary that proposes to
cause a Plan to purchase Stripped Interest Certificates should consider the
federal income tax consequences of such investment.
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.
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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.
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 December 31, 1996 to include among the types of
loans to which such securities may relate loans directly secured by a first lien
on "one or more parcels of real estate upon which is located one or more
commercial structures". The regulations also imposed on national banks
purchasing "mortgage related securities" the requirement that the securities be
fully secured by interests in a pool of loans to numerous obligors. In addition,
the related legislative history of the Riegle Act indicates that this expanded
definition includes multifamily loans secured by more than one parcel of real
estate upon which is located more than one structure. Until September 23, 2001
any state may enact legislation limiting the extent to which "commercial
mortgage related securities" would constitute legal investments under that
state's laws.
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. In this connection, effective
December 31, 1996, the Office of the Comptroller of the Currency (the "OCC")
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with certain general standards concerning
"safety and soundness" and retention of credit information in 12 C.F.R. Section
1.5), certain "Type IV securities", defined in 12 C.F.R. Section 1.2(1) to
include certain "commercial mortgage-related securities" and "residential
mortgage-related securities". As so defined, "commercial mortgage-related
security" and "residential mortgage-related security" mean, in relevant part,
"mortgage related security" within the meaning of SMMEA, provided that, in the
case of a "commercial mortgage-related security," it "represents ownership of a
promissory note or certificate of interest or participation that is directly
secured by a first lien on one or more parcels of real estate upon which one or
more commercial structures are located and that is fully secured by interests in
a pool of loans to numerous obligors." In the absence of any rule or
administrative interpretation by the OCC defining the term "numerous obligors,"
no representation is made as to whether any class of Offered Certificates will
qualify as "commercial mortgage-related securities", and thus as "Type IV
securities", for investment by national banks. Federal credit unions should
review NCUA Letter to Credit Unions No. 96, as modified by Letter to Credit
Unions No. 108, which includes guidelines to assist federal credit unions in
making investment decisions for mortgage related securities. The NCUA has
adopted rules, codified as 12 C.F.R. Section 703.5(f)-(k), which prohibit
federal credit unions from investing in certain mortgage related securities
(including securities such as certain classes of Offered Certificates), except
under limited circumstances.
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.
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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, a division of Wheat First Securities, Inc., 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 acting as agent. If First Union Capital Markets
acts as agent in the sale of Offered Certificates, First Union Capital Markets
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 elects to purchase Offered Certificates as principal, First
Union Capital Markets 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., a division of Wheat First
Securities, Inc., 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 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, a
division of Wheat First Securities, Inc., 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, a division
of Wheat First Securities, Inc., 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.
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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 the underwriters by
Sidley & Austin, New York,New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates, and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one Rating Agency.
Ratings on commercial mortgage pass-through certificates address the
likelihood of receipt by the holders thereof of all collections on the
underlying mortgage assets to which such holders are entitled. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying mortgage assets and the credit
quality of the guarantor, if any. Ratings on commercial mortgage pass-through
certificates do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which such prepayments might differ
from those originally anticipated. As a result, Certificateholders might suffer
a lower than anticipated yield, and, in addition, holders of Stripped Interest
Certificates in extreme cases might fail to recoup their initial investments.
There can be no assurance that any rating agency not requested to rate the
Offered Certificates will not nonetheless issue a rating to any or all Classes
thereof and, if so, what such rating or ratings would be. A rating assigned to
any Class of Offered Certificates by a rating agency that has not been requested
by the Depositor to do so may be lower than the rating assigned thereto by one
or more of the Rating Agencies.
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.
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INDEX OF PRINCIPAL DEFINITIONS
PAGE
----
Accrual Certificates .................................. 13, 36
Accrued Certificate Interest .......................... 36
ADA ................................................... 67
ARM Loans ............................................. 28
Available Distribution Amount ......................... 35
Bond-type ............................................. 35
Book-Entry Certificates ............................... 15, 35
Cash Flow Agreement ................................... Front Cover, 12, 29
CERCLA ................................................ 23
Certificate ........................................... Front Cover, 9
Certificate Account ................................... 11, 29
Certificate Balance ................................... 3, 13
Certificate Owner ..................................... 15, 41
Certificateholders .................................... Front Cover
Closing Date .......................................... 69
CMBS .................................................. Front Cover, 10, 24
CMBS Agreement ........................................ 28
CMBS Issuer ........................................... 28
CMBS Servicer ......................................... 28
CMBS Trustee .......................................... 28
Code .................................................. 15, 67
Commercial Properties ................................. 9, 25
Commission ............................................ 3
Committee Report ...................................... 69
Companion Class ....................................... 14, 37
Contributions Tax ..................................... 78
Controlled Amortization Class ......................... 14, 37
Cooperative Loans ..................................... 57
Cooperatives .......................................... 25, 57
CPR ................................................... 32
Credit Support ........................................ Front Cover, 11, 29
Cut-off Date .......................................... 14
Debt Service Coverage Ratio ........................... 26
Definitive Certificate ................................ 15
Definitive Certificates ............................... 35
Depositor ............................................. 24
Determination Date .................................... 35
Direct Participants ................................... 41
Distribution Date ..................................... 13
Distribution Date Statement ........................... 38
DOL ................................................... 90
DTC ................................................... 3
Due Period ............................................ 38
Equity Participation .................................. 28
ERISA ................................................. 16, 89
Event of Default ...................................... 52
Excess Funds .......................................... 34
Exchange Act .......................................... 4
Exemption ............................................. 90
FAMC .................................................. 10
FHLMC ................................................. 10
First Union ........................................... 90
FNMA .................................................. 10
Garn Act .............................................. 65
103
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PAGE
----
GNMA .................................................. 10
Grantor Trust Certificates ............................ 67
Grantor Trust Fractional Interest Certificates ........ 16, 81
Grantor Trust Fund .................................... 67
Grantor Trust Strip Certificate ....................... 82
Indirect Participants ................................. 41
Insurance Proceeds .................................... 45
IRS ................................................... 70
Issue Premium ......................................... 74
L/C Bank .............................................. 55
Lease ................................................. 4, 10
Lease Assignment ...................................... 10
Lessee ................................................ 4, 10
Liquidation Proceeds .................................. 45
Loan-to-Value Ratio ................................... 27
Lock-out Period ....................................... 27
Mark-to-Market Regulations ............................ 77
Master Servicer ....................................... 3, 9
Mortgage Asset Seller ................................. 11, 24
Mortgage Assets ....................................... Front Cover, 24
Mortgage Loans ........................................ Front Cover, 9, 24
Mortgage Notes ........................................ 25
Mortgage Rate ......................................... 10, 27
Mortgaged Properties .................................. 25
Mortgages ............................................. 25
Multifamily Properties ................................ 9, 25
Net Operating Income .................................. 26
Nonrecoverable Advance ................................ 38
Notional Amount ....................................... 13, 36
Offered Certificates .................................. Front Cover
OID Regulations ....................................... 68
Originator ............................................ 25
PAC ................................................... 32
Participants .......................................... 24
Parties in Interest ................................... 89
Pass-Through Rate ..................................... 3, 13
Permitted Investments ................................. 44
Plans ................................................. 89
Pooling Agreement ..................................... 12, 42
Prepayment Assumption ................................. 69
Prepayment Interest Shortfall ......................... 30
Prepayment Period ..................................... 39
Prepayment Premium .................................... 28
Prohibited Transactions Tax ........................... 78
Prospectus Supplement ................................. Front Cover
Rating Agency ......................................... 17
Record Date ........................................... 35
Related Proceeds ...................................... 38
Relief Act ............................................ 66
REMIC ................................................. Front Cover, 67
REMIC Certificates .................................... 67
REMIC Provisions ...................................... 67
REMIC Regular Certificates ............................ 15, 68
REMIC Regulations ..................................... 68
REMIC Residual Certificates ........................... 15, 68
REO Property .......................................... 9, 39
104
<PAGE>
PAGE
----
RICO .................................................. 67
Securities Act ........................................ 3
Senior Certificates ................................... 12, 35
Servicing Standard .................................... 93
SMMEA ................................................. 92
SPA ................................................... 32
Special Servicer ...................................... 3, 9, 47
Stripped Bond Prepayment Assumption ................... 84
Stripped Interest Certificates ........................ 12, 35
Stripped Principal Certificates ....................... 12, 35
Subordinate Certificates .............................. 12, 35
Sub-Servicer .......................................... 47
Sub-Servicing Agreement ............................... 47
TAC ................................................... 32
Tiered REMICs ......................................... 69
Title V ............................................... 66
Trust Assets .......................................... 3
Trust Fund ............................................ Front Cover
Trustee ............................................... 3, 9
UCC ................................................... 57
Value ................................................. 27
Warranting Party ...................................... 43
105
<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 ............................................. $295
Rating Agency Fees ........................................... *
Printing and Engraving Expenses .............................. *
Accounting Fees and Expenses ................................. *
Legal Fees and Expenses ...................................... *
Blue Sky and Legal Investment Fees and Expenses .............. *
Trustee Fees and Expenses .................................... *
Miscellaneous ................................................ *
------
Total ...................................................... *
======
- ----------
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Pooling and Servicing Agreements will provide that no director,
officer, employee or agent of the Registrant is liable to the Trust Fund or the
Certificateholders, except for any liability which would otherwise be imposed by
reason of misfeasance, bad faith or negligence in the performance of duties
under such Pooling and Servicing Agreements, or by reason of reckless disregard
of such duties. The Pooling and Servicing Agreements will further provide that,
with the exceptions stated above, a director, officer, employee or agent of the
Registrant is entitled to be indemnified and held harmless by the Trust Fund
against any loss, liability or expense incurred in connection with legal action
relating to such Pooling and Servicing Agreements and related Certificates,
other than any loss, liability or expense: (i) specifically required to be borne
thereby pursuant to the terms of such Pooling and Servicing Agreements, or
otherwise incidental to the performance of obligations and duties thereunder;
and (ii) incurred in connection with any violation of any state or federal
securities law.
Sections 55-8-50 through 55-8-58 of the revised North Carolina Business
Corporation Act (the "NCBCA") contain specific provisions relating to
indemnification of directors and officers of North Carolina corporations. In
general, the statute provides that (i) a corporation must indemnify a director
or officer who is wholly successful in his defense of a proceeding to which he
is a party because of his status as such, unless limited by the articles of
incorporation, and (ii) a corporation may indemnify a director or officer if he
is not wholly successful in such defense, if it is determined as provided in
the statute that the director or officer meets a, certain standard of conduct,
provided when a director or officer is liable to the corporation, the
corporation may not indemnify him. The statute also permits a director or
officer of a corporation who is a party to a proceeding to apply to the courts
for indemnification, unless the articles of incorporation provide otherwise, and
the court may order indemnification 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.
First Union Corporation maintains directors and officers liability
insurance for the benefit of its subsidiaries, 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, in certain cases, its 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.
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<PAGE>
In connection with an agreement between the Registrant and Wayne K. Brown,
an independent director of the Registrant, the Registrant has agreed to
indemnily and hold harmless Mr. Brown from any and all loss, claim, damage or
cause of action, including reasonable attorneys' fees related thereto
(collectively, "Claims"), incurred by Mr. Brown in the performance of his duties
as a director; provided, however, that Mr. Brown shall not be so indemnified for
such Claims if they arise from his own negligence or willful misconduct.
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.*
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 (included as part of Exhibit 5(b)).*
24(a) -- Power of Attorney (included as part of signature page).+
- ----------
+ Filed herewith.
* To be filed by amendment.
** Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-97994).
*** Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 333-07854).
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 l0(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;
(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;
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<PAGE>
provided, however, that paragraphs (A)(l)(i) and (A)(l)(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 posteffective 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.
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<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 Registration
Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Charlotte, State of North Carolina, on March 30,
1998.
FIRST UNION COMMERCIAL MORTGAGE SECURITIES, INC.
By /s/ BRIAN E. SIMPSON
------------------------------
Brian E. Simpson
President
Each of the undersigned directors and officers of First Union Commercial
Mortgage Securities, Inc. hereby severally constitutes and appoints Brian E.
Simpson, K. Wesley M. Jones, and James F. Powers, and each of them as agents and
attorneys-in-fact of the undersigned, in any and all capacities, with full power
of substitution, to sign any and all pre- or post-effective amendments to this
Registration Statement, any subsequent Registration Statement for the same
offering which may be filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and any and all pre- or post-effective amendments thereto, and
to file the same with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
agents and attorneys-in-fact, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each said agent and
attorney-in-fact, or any of them, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-3 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 30, 1998
Brian E. Simpson
/s/ JAMES H. HATCH Senior Vice President and March 30, 1998
--------------------------- Treasurer (Chief Financial
James H. Hatch Officer and Chief
Accounting Officer)
/s/ WAYNE K. BROWN
--------------------------- Director March 30, 1998
Wayne K. Brown
/s/ K. WESLEY M. JONES
--------------------------- Director March 30, 1998
K. Wesley M. Jones
II-4
