AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 2001
REGISTRATION NO. 333-53266
----------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------
FIRST UNION COMMERCIAL MORTGAGE SECURITIES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1643598
---------------------------- ----------------------------
(State or other jurisdiction I.R.S. Employer
of incorporation) Identification No.)
First Union Commercial Mortgage Securities, Inc.
201 South College Street
Charlotte, North Carolina 28288-0166
(704) 374-6161
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive office)
----------------------------
Timothy F. Danello
Senior Vice President and Assistant General Counsel
First Union Corporation
301 South College Street
Charlotte, North Carolina 28288-0630
(704) 374-6161
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------------------
with a copy to:
Stuart N. Goldstein, Esq.
Cadwalader, Wickersham & Taft
227 W. Trade Street
Suite 2400
Charlotte, NC 28202
----------------------------
<PAGE>
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, please 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, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT TO BE AGGREGATE AGGREGATE AMOUNT OF
TITLE OF SHARES REGISTERED PRICE OFFERING REGISTRATION
TO BE REGISTERED (1)(2) PER UNIT (3) PRICE FEE (1)
---------------- ------ ------------ ----- -------
Commercial Mortgage
Pass-Through
Certificates $2,400,000,000 100% $2,400,000,000 $600,000
(1) The registration fee in the amount of $600,000 for the registration of
$2,400,000,000 of Commercial Mortgage Pass-Through Certificates
includes the $250 registration fee previously paid in connection with the
January 5, 2001 filing of the Registration Statement pursuant to which the
Registrant registered $1,000,000 of Commercial Mortgage Pass-Through
Certificates. The $1,000,000 of Commercial Mortgage Pass-Through
Certificates registered in connection with the January 5, 2001 filing of
the Registration Statement has been aggregated with the $2,399,000,000
of Commercial Mortgage Pass-Through Certificates registered hereunder.
$850,362,965 aggregate principal amount of Commercial Mortgage Pass-Through
Certificates registered by the Registrant under the Registrant's
Registration Statement No. 333-30294 (the "Prior Registration Statement")
referred to below and not previously sold are consolidated in this
Registration Statement pursuant to Rule 429 of the Securities Act of 1933,
as amended. 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 Statement.
(2) There is also being registered hereunder an indeterminate amount of
Commercial Mortgage Pass-Through Certificates that may be sold by the
Registrant or any affiliate of Registrant, including First Union
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 WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
PURSUANT TO RULE 429 OF THE SECURITIES ACT OF 1933, THE PROSPECTUS AND THE
PROSPECTUS SUPPLEMENT CONTAINED IN THIS REGISTRATION STATEMENT ALSO RELATE TO
THE REGISTRANT'S PRIOR REGISTRATION STATEMENT ON FORM S-3. THIS REGISTRATION
STATEMENT, WHICH IS A NEW REGISTRATION STATEMENT, ALSO CONSTITUTES A
POST-EFFECTIVE AMENDMENT TO THE PRIOR REGISTRATION STATEMENT. SUCH
POST-EFFECTIVE AMENDMENT SHALL HEREAFTER BECOME EFFECTIVE CONCURRENTLY WITH THE
EFFECTIVENESS OF THIS REGISTRATION STATEMENT IN ACCORDANCE WITH SECTION 8(c) OF
THE SECURITIES ACT OF 1933.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. NEITHER THIS
PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS IS AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT MAY BE AMENDED OR
COMPLETED, DATED [ ] [ ], 20[ ]
PROSPECTUS SUPPLEMENT
(to accompanying prospectus dated [ ] [ ], 20[ ])
$[ ] (Approximate)
(OFFERED CERTIFICATES)
First Union National Bank Commercial Mortgage Trust
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 20[ ]-[ ]
First Union Commercial Mortgage Securities, Inc.
(DEPOSITOR)
-------------------------------------
YOU SHOULD CAREFULLY CONSIDER THE THE TRUST FUND:
RISK FACTORS BEGINNING ON PAGE S-[ ] o As of [ ] [ ], 20[ ], the
OF THIS PROSPECTUS SUPPLEMENT AND mortgage loans included in the trust
ON PAGE [ ] OF THE ACCOMPANYING fund will have an aggregate principal
PROSPECTUS. balance of approximately $[ ].
Neither the offered certificates o The trust fund will consist of a pool
nor the underlying mortgage loans of [ ] fixed rate mortgage
are insured or guaranteed by any loans.
government agency or instrumentality.
o The mortgage loans are secured by
The offered certificates will first liens on commercial and
represent interests in the trust multifamily properties.
fund only. They will not represent
obligations of any other party. o All of the mortgage loans were
originated or acquired by either
The offered certificates will not be First Union National Bank or [ ].
listed on any national securities
exchange or any automated quotation
system of any registered securities
association.
This prospectus supplement may be
used to offer and sell the offered
certificates only if it is
accompanied by the prospectus dated
[ ] [ ], 20[ ].
-------------------------------------
THE CERTIFICATES:
o The trust fund will issue [ ]
classes of certificates.
o Only the [ ] classes of offered
certificates described in the
following table are being offered by
this prospectus supplement and the
------------------------------------- accompanying prospectus.
<TABLE>
<CAPTION>
===============================================================================================
CLASS CLOSING DATE
CERTIFICATE PERCENTAGE OF PASS- ASSUMED
BALANCE OR CUT-OFF DATE THROUGH FINAL EXPECTED
NOTIONAL POOL RATE DISTRIBUTION [ ]/[ ]
AMOUNT (1) BALANCE DESCRIPTION DATE (2) CUSIP NO. RATING (3)
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$
$
(4) $
$ (5)
================================================================================================
</TABLE>
(Footnotes explaining the table are on page S-4)
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE OFFERED CERTIFICATES OR HAS
DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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.
First Union Securities, Inc. and [ ] are acting as co-lead managers for the
offering. First Union Securities, Inc. and [ ] are required to purchase the
offered certificates from us, subject to certain conditions. The underwriters
will offer the offered certificates to the public from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. We expect to receive from this offering approximately [ ]% of the
initial certificate balance of the offered certificates, plus accrued interest
from [ ] [ ], 20[ ] , before deducting expenses.
We expect that delivery of the offered certificates will be made in
book-entry form on or about [ ] [ ], [ ].
FIRST UNION SECURITIES, INC. [ ]
[ ] [ ], 20[ ]
<PAGE>
[MAP APPEARS HERE]
S-3
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the offered certificates in two
separate documents that progressively provide more detail: (a) the accompanying
prospectus, which provides general information, some of which may not apply to
the offered certificates and (b) this prospectus supplement, which describes the
specific terms of the offered certificates. You should read both this prospectus
supplement and the prospectus before investing in any of the offered
certificates.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THE INFORMATION IN THIS DOCUMENT
MAY ONLY BE ACCURATE AS OF THE DATE OF THIS DOCUMENT. IF THE DESCRIPTIONS OF THE
OFFERED CERTIFICATES VARY BETWEEN THE ACCOMPANYING PROSPECTUS AND THIS
PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
This prospectus supplement begins with several introductory sections
describing the offered certificates and the trust fund in abbreviated form:
o Summary of Prospectus Supplement, commencing on page S-[ ] of this
prospectus supplement, which gives a brief introduction of the key
features of the offered certificates and a description of the mortgage
loans included in the trust fund; and
o Risk Factors, commencing on page S-[ ] of this prospectus supplement,
which describes risks that apply to the offered certificates which are
in addition to those described in the prospectus.
This prospectus supplement and the accompanying prospectus include cross
references to sections in these materials where you can find further related
discussions. The Tables of Contents in this prospectus supplement and the
accompanying prospectus identify the pages where these sections are located.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Principal
Definitions" beginning on page S-[ ] in this prospectus supplement.
In this prospectus supplement, the terms "depositor," "we," "us" and "our"
refer to First Union Commercial Mortgage Securities, Inc.
WE DO NOT INTEND THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
TO BE AN OFFER OR SOLICITATION:
o IF USED IN A JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED;
o IF THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO; OR
o IF SUCH OFFER OR SOLICITATION IS MADE TO ANYONE TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
This prospectus supplement and the accompanying prospectus may be used by
us, First Union Securities, Inc., our affiliate, and any other of our affiliates
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 Securities, Inc. or any such other affiliate
may act as principal or agent in these transactions. Sales will be made at
prices related to prevailing market prices at the time of sale or otherwise.
(Footnotes to table on the front cover)
---------------------------
(1) Subject to a permitted variance of plus or minus [ ]%.
(2) The assumed final distribution date has been determined on the basis of the
assumptions set forth in "DESCRIPTION OF THE CERTIFICATES-Assumed Final
Distribution Date; Rated Final Distribution Date" in this prospectus
supplement and a [ ]% constant prepayment rate. The rated final
distribution date is the distribution date to occur in [ ], 20[ ]. See
"DESCRIPTION OF THE CERTIFICATES-Assumed Final Distribution Date; Rated
Final Distribution Date" and "RATINGS" in this prospectus supplement.
(3) By each of [ ] and [ ].
(4) The Class [ ] certificates will not have a certificate balance and their
holders will not receive distributions of principal, but such holders are
entitled to receive payments of the aggregate interest accrued on the
notional amount of each component of the Class [ ] certificates, as
described in this prospectus supplement. See "DESCRIPTION OF THE
CERTIFICATES-Certificate Balances and Notional Amount" and "-Pass-Through
Rates" in this prospectus supplement. The interest rate applicable to each
component of the Class [ ] certificates for each distribution date will
equal the excess, if any, of the weighted average net mortgage rate for
such distribution date over the pass-through rate then applicable to the
corresponding class of offered certificates entitled to receive
distributions of principal.
(5) The pass-through rate applicable to the Class [ ] certificates on each
distribution date will equal the lesser of the rate set forth in the table
on the front cover and the applicable weighted average net mortgage rate
for such distribution date.
S-4
<PAGE>
TABLE OF CONTENTS
PAGE
----
SUMMARY OF PROSPECTUS SUPPLEMENT.............................................7
RISK FACTORS................................................................24
DESCRIPTION OF THE MORTGAGE POOL............................................52
SERVICING OF THE MORTGAGE LOANS.............................................84
DESCRIPTION OF THE CERTIFICATES.............................................92
YIELD AND MATURITY CONSIDERATIONS..........................................116
ERISA CONSIDERATIONS.......................................................125
LEGAL INVESTMENT...........................................................128
METHOD OF DISTRIBUTION.....................................................128
LEGAL MATTERS..............................................................129
RATINGS....................................................................129
Index of PRINCIPAL DEFINITIONS.............................................131
ANNEX A-1 -- CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS AND
MORTGAGED PROPERTIES.....................................A-1
ANNEX A-2 -- DEBT SERVICE PAYMENT SCHEDULES FOR CERTAIN
CREDIT LEASE LOANS.......................................A-2
ANNEX A-3 -- CERTAIN INFORMATION REGARDING MULTIFAMILY MORTGAGED
PROPERTIES...............................................A-3
ANNEX A-4 -- RESERVE ACCOUNTS.........................................A-4
ANNEX A-5 -- COMMERCIAL TENANT SCHEDULE...............................A-5
ANNEX B -- PRICE/YIELD TABLES.......................................B-1
ANNEX C -- FORM OF DISTRIBUTION DATE STATEMENT......................C-1
ANNEX D -- FORM OF DELINQUENT LOAN STATUS REPORT....................D-1
ANNEX E -- FORM OF HISTORICAL LOAN MODIFICATION REPORT..............E-1
ANNEX F -- FORM OF HISTORICAL LIQUIDATION REPORT....................F-1
ANNEX G -- FORM OF REO STATUS REPORT................................G-1
ANNEX H -- SERVICER WATCH LIST......................................H-1
ANNEX I -- FORM OF OPERATING STATEMENT ANALYSIS REPORT..............I-1
ANNEX J -- FORM OF NOI ADJUSTMENT WORKSHEET FOR "YEAR"..............J-1
ANNEX K -- FORM OF COMPARATIVE FINANCIAL STATUS REPORT..............K-1
S-5
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND THE TERMS OF THE
OFFERED CERTIFICATES, YOU MUST CAREFULLY READ THIS ENTIRE PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.
o THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOWS AND
OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED BY THE FULL
DESCRIPTION OF THESE CALCULATIONS, CASH FLOWS AND OTHER INFORMATION IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.
o WE PROVIDE INFORMATION IN THIS PROSPECTUS SUPPLEMENT ON THE CERTIFICATES
THAT ARE NOT OFFERED BY THIS PROSPECTUS SUPPLEMENT ONLY TO ENHANCE YOUR
UNDERSTANDING OF THE OFFERED CERTIFICATES. WE ARE NOT OFFERING THE
NON-OFFERED CERTIFICATES PURSUANT TO THIS PROSPECTUS SUPPLEMENT.
o UNLESS OTHERWISE STATED, ALL PERCENTAGES OF THE MORTGAGE LOANS INCLUDED IN
THE TRUST FUND, OR OF ANY SPECIFIED GROUP OF MORTGAGE LOANS INCLUDED IN THE
TRUST FUND, REFERRED TO IN THIS PROSPECTUS SUPPLEMENT ARE CALCULATED USING
THE AGGREGATE PRINCIPAL BALANCE OF ALL THE MORTGAGE LOANS INCLUDED IN THE
TRUST FUND AS OF THE CUT-OFF DATE. PERCENTAGES OF MORTGAGED PROPERTIES ARE
REFERENCES TO THE PERCENTAGES OF THE AGGREGATE PRINCIPAL BALANCE OF ALL THE
MORTGAGE LOANS INCLUDED IN THE TRUST FUND AS OF THE CUT-OFF DATE
REPRESENTED BY THE AGGREGATE PRINCIPAL BALANCE OF THE RELATED MORTGAGE
LOANS AS OF THE CUT-OFF DATE.
o ALL NUMERICAL INFORMATION CONCERNING THE MORTGAGE LOANS INCLUDED IN THE
TRUST FUND IS PROVIDED ON AN APPROXIMATE BASIS.
OVERVIEW OF THE CERTIFICATES
The table below lists certain summary information concerning the First Union
National Bank Commercial Mortgage Trust, Commercial Mortgage Pass-Through
Certificates, Series 20[ ]-[ ], which we are offering pursuant to the
accompanying prospectus and this prospectus supplement. Each certificate
represents an interest in the mortgage loans included in the trust fund and the
other assets of the trust fund. The table also describes the certificates that
are not offered by this prospectus supplement (other than the Class R-[ ], Class
R-[ ] and Class R-[ ] certificates) which have not been registered under the
Securities Act of 1933, as amended, and which will be sold to investors in
private transactions.
<TABLE>
<CAPTION>
CLOSING DATE CASH FLOW OR
CERTIFICATE PERCENTAGE PASS- INITIAL WEIGHTED PRINCIPAL EXPECTED
BALANCE OR OF CUT-OFF THROUGH PASS- AVERAGE WINDOW [ ]/
NOTIONAL DATE POOL CREDIT RATE THROUGH LIFE (MON./ [ ]
CLASS AMOUNT (1) PERCENTAGE SUPPORT DESCRIPTION RATE (YEARS) (2) YR.) (2) RATINGS (3)
----- ------------ ---------- ------- ----------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
(1) Subject to a permitted variance of plus or minus [ ]%.
(2) Based on no prepayments and the other assumptions set forth under "YIELD
AND MATURITY CONSIDERATIONS--Weighted Average Life" in this prospectus
supplement.
(3) By each of [ ] and [ ]. "NR" indicates that such class is not rated by the
applicable rating agency.
(4) [The Class [ ] certificates will not have a certificate balance and their
holders will not receive distributions of principal, but such holders are
entitled to receive payments of the aggregate interest accrued on the
notional amount of each of the components of the Class [ ] certificates as
described in this prospectus supplement. The pass-through rate applicable
to each component of the Class [ ] certificates for each distribution date
will equal the excess, if any, of the weighted average net mortgage rate
for such distribution date over the pass-through rate then applicable to
the corresponding class of offered certificates entitled to receive
distributions of principal.]
S-6
<PAGE>
(5) [The pass-through rate applicable to the Class [ ], Class [ ] and Class [ ]
certificates on each distribution date will equal the lesser of the rate
set forth above and the applicable weighted average net mortgage rate for
such distribution date.]
(6) [The pass-through rate applicable to the Class [ ] and Class [ ]
certificates on each distribution date will equal the weighted average net
mortgage rate for such distribution date.]
-------
offered certificates
-------
------- private certificates
-------
THE PARTIES
THE TRUST FUND............... The trust fund will be created on or about the
closing date pursuant to a pooling and servicing
agreement dated as of [ ] [ ], 20[ ] by and among
the depositor, the master servicer, the special
servicer and the trustee.
THE DEPOSITOR................ First Union Commercial Mortgage Securities, Inc.
We are a wholly-owned subsidiary of First Union
National Bank, which is one of the mortgage loan
sellers and the master servicer, and an affiliate
of one of the underwriters. Our principal
executive office is located at 201 South College
Street, Charlotte, North Carolina 28288-0166 and
our telephone number is (704) 374-6161. Neither we
nor any of our affiliates have insured or
guaranteed the offered certificates. For more
detailed information, see "THE DEPOSITOR" in the
accompanying prospectus. On the closing date, we
will sell the mortgage loans and related assets to
be included in the trust fund to the trustee to
create the trust fund.
THE ISSUER................... The trust fund to be established under the pooling
and servicing agreement. For more detailed
information, see "DESCRIPTION OF THE CERTIFICATES"
in the accompanying prospectus.
THE MORTGAGE LOAN SELLERS.... First Union National Bank and [ ]. For more
information, see "DESCRIPTION OF THE MORTGAGE
POOL--The Mortgage Loan Sellers" in this
prospectus supplement. The mortgage loan sellers
will sell and assign to us on the closing date the
mortgage loans to be included in the trust fund.
See "DESCRIPTION OF THE MORTGAGE
POOL--Representations and Warranties; Repurchases
and Substitutions" in this prospectus supplement.
[ ] ([ ]) of the mortgage loans to be included in
the trust fund, representing [ ]% of the cut-off
date pool balance of all of the mortgage loans
included in the trust fund, are being assigned to
us by First Union National Bank, and [ ] ([ ]) of
the mortgage loans to be included in the trust
fund, representing [ ]% of the cut-off date pool
balance of all of the mortgage loans to be
included in the trust fund, are being assigned to
us by [ ].
THE MASTER SERVICER.......... First Union National Bank. First Union National
Bank is our affiliate and is one of the mortgage
loan sellers. The master servicer will be
primarily responsible for collecting payments and
gathering information with respect to the mortgage
loans included in the trust fund. See "SERVICING
OF THE MORTGAGE LOANS--The Master Servicer" in
this prospectus supplement.
THE SPECIAL SERVICER......... [First Union National Bank]. [First Union National
Bank is our affiliate and is the master servicer
and one of the mortgage sellers.] The special
servicer will be responsible for performing
certain servicing functions with respect to the
mortgage loans included in the
S-7
<PAGE>
trust fund that, in general, are in default or as
to which default is imminent. Some holders of
certificates will have the right to replace the
special servicer and to select a representative
who may advise and direct the special servicer and
whose approval is required for certain actions by
the special servicer under certain circumstances.
See "SERVICING OF THE MORTGAGE LOANS--The Special
Servicer" in this prospectus supplement.
THE TRUSTEE.................. [ ]. The trustee will be responsible for
distributing payments to certificateholders and
delivering to certificateholders certain reports
on the mortgage loans included in the trust fund
and the certificates. See "DESCRIPTION OF THE
CERTIFICATES--The Trustee" in this prospectus
supplement.
THE UNDERWRITERS............. First Union Securities, Inc. and [ ]. [ ] is an
affiliate of [ ]. First Union Securities, Inc. is
our affiliate and is an affiliate of First Union
National Bank, the master servicer [and the
Special Servicer]. First Union Securities, Inc.
and [ ] are acting as co-lead managers for the
offering.
IMPORTANT DATES AND PERIODS
CLOSING DATE................. On or about [ ] [ ], 20[ ].
CUT-OFF DATE................. [ ] [ ], 20[ ]. The cut-off date balance of each
mortgage loan included in the trust fund and each
cut-off date certificate balance in this
prospectus supplement assumes the timely receipt
of principal scheduled to be paid in [ ] on each
mortgage loan and no defaults, delinquencies or
prepayments on any mortgage loan as of the cut-off
date.
DISTRIBUTION DATE............ The [ ]th day of each month or, if such day is not
a business day, the next succeeding business day;
provided, however, that the distribution date will
be no earlier than the [____] business day
following the determination date in the month in
which such distribution date occurs. The first
distribution date on which investors in the
offered certificates may receive distributions
will occur in [ ], 20[ ].
DETERMINATION DATE........... For each distribution date, the [ ]th day of each
month, or if such day is not a business day, the
immediately succeeding business day.
COLLECTION PERIOD............ For any distribution date, the period beginning on
the day after a determination date in the
immediately preceding month (or the cut-off date,
in the case of the first collection period)
through and including the related determination
date.
THE CERTIFICATES
OFFERED CERTIFICATES......... We are offering to you the following [ ] classes
of certificates of our Commercial Mortgage
Pass-Through Certificates, Series 20[ ]-[ ]
pursuant to this prospectus supplement:
Class [ ]
Class [ ]
Class [ ]
Class [ ]
S-8
<PAGE>
PRIORITY OF DISTRIBUTIONS.... On each distribution date, you will be entitled to
distributions of all payments or other collections
on the mortgage loans that the master servicer
collected or advanced during or with respect to
the related collection period after deducting
certain fees and expenses. The trustee will
distribute such amounts to the extent that the
money is available, in the following order of
priority, to pay:
--------------------------------------------------
Interest, pro rata, on the Class [ ], Class [ ]
and Class [ ] certificates.
--------------------------------------------------
--------------------------------------------------
Principal on the Class [ ] certificates, up to the
principal distribution amount, until their
certificate balance is reduced to zero.
--------------------------------------------------
--------------------------------------------------
Principal on the Class [ ] certificates, up to the
principal distribution amount, until their
certificate balance is reduced to zero.
--------------------------------------------------
--------------------------------------------------
Reimbursement to the Class [ ] and Class [ ]
certificates, pro rata, for any realized losses
and trust fund expenses borne by such classes.
--------------------------------------------------
--------------------------------------------------
Interest on the Class [ ] certificates.
--------------------------------------------------
--------------------------------------------------
Principal on the Class [ ] certificates, up to the
principal distribution amount, until their
certificate balance is reduced to zero.
--------------------------------------------------
--------------------------------------------------
Reimbursement to the Class [ ] certificates for
any realized losses and trust fund expenses borne
by such class.
--------------------------------------------------
--------------------------------------------------
Distributions to the non-offered certificates.
--------------------------------------------------
If, on any distribution date, the certificate
balances of the Class [ ] through Class [ ]
certificates have been reduced to zero, but the
Class [ ] and Class [ ] certificates remain
outstanding, distributions of principal will be
made pro rata to the Class [ ] and Class [ ]
certificates. See "DESCRIPTION OF THE
CERTIFICATES--Distributions" in this prospectus
supplement.
INTEREST..................... On each distribution date each class of offered
certificates will be entitled to receive:
o the distributions of accrued interest for such
class of certificates on such distribution
date; and
o any unpaid accrued interest for such class of
certificates from all prior distribution dates.
On any distribution date, the amount of interest
distributable to each class of certificates
generally will equal:
o one month's interest at the applicable
pass-through rate accrued during the calendar
month prior to the related distribution date,
on the certificate balance or notional amount
of such class of certificates immediately prior
to such distribution date;
o minus (other than in the case of the Class [ ]
certificates) such class' share of any
shortfalls in interest collections due to
prepayments on mortgage loans included in the
trust fund that are not offset by certain
payments made by the master servicer; and
S-9
<PAGE>
o minus (other than in the case of the Class [ ]
certificates) such class' allocable share of
certificate deferred interest. See "DESCRIPTION
OF THE CERTIFICATES-Certificate Balances and
Notional Amount" and "--Distributions" in this
prospectus supplement.
Interest on the certificates will be calculated on
the basis of a 360-day year consisting of twelve
30-day months.
As reflected in the chart under "Priority of
Distributions" on page S-[ ] above, on each
distribution date, the trustee will distribute
interest to the holders of the offered
certificates:
o first, pro rata, to the Class [ ] certificates,
Class [ ] certificates and Class [ ]
certificates, and then to each other class of
offered certificates in alphabetical order; and
o only to the extent funds remain after the
trustee makes all distributions of interest and
principal required to be made on such date on
each class of certificates with a higher
priority of distribution.
You may, in certain circumstances, also receive
distributions of prepayment premiums and yield
maintenance charges collected on the mortgage
loans included in the trust fund. Such
distributions are in addition to the distributions
of principal and interest described above. See
"DESCRIPTION OF THE CERTIFICATES--Distributions"
in this prospectus supplement.
PASS-THROUGH RATES........... The pass-through rate for each class of offered
certificates on each distribution date is set
forth above under "Overview of the Certificates."
The pass-through rate on the Class [ ]
certificates is variable and is equal to the
weighted average net mortgage rate. The weighted
average net mortgage rate for each distribution
date is the weighted average of the net mortgage
rates for the mortgage loans included in the trust
fund as of the beginning of the related collection
period, weighted on the basis of their respective
stated principal balances on the first day of the
related collection period. The net mortgage rate
for each mortgage loan included in the trust fund
will generally equal:
o the mortgage interest rate in effect for such
mortgage loan as of the closing date; minus
o the applicable administrative cost rate, as
described in this prospectus supplement.
The stated principal balance of each mortgage loan
included in the trust fund will generally equal
the balance of that mortgage loan as of the
cut-off date, reduced as of any date of
determination (to not less than zero) by:
o any payments or other collections (or advances
in lieu thereof) of principal on such mortgage
loan that are due or received, as the case may
be, during the related collection period and
distributed on the certificates on and prior to
such date; and
o the principal portion of any realized loss
incurred in respect of such mortgage loan
during the related collection period.
S-10
<PAGE>
See "DESCRIPTION OF THE CERTIFICATES--Pass-Through
Rates" in this prospectus supplement.
PRINCIPAL DISTRIBUTIONS...... On the closing date, each class of offered
certificates will have the certificate balance
shown in the table at the beginning of this
summary. The certificate balance for each class of
certificates entitled to receive principal may be
reduced by:
o distributions of principal; and
o allocations of realized losses and trust fund
expenses.
The certificate balance of a class of offered
certificates may be increased in certain
circumstances by the allocation of accrued but
unpaid interest to the certificate balance of such
class. See "DESCRIPTION OF THE
CERTIFICATES--Certificate Balances and Notional
Amount" in this prospectus supplement.
The Class [ ] certificates have no principal
balance and will not receive distributions of
principal.
As reflected in the chart under "Priority of
Distributions" above:
o Principal is distributed to each class of
offered certificates entitled to receive
distributions of principal in alphabetical and,
if applicable, numerical order.
o Principal is only distributed on a class of
certificates to the extent funds remain after
the trustee makes all distributions of
principal and interest on each class of
certificates with an earlier alphabetical and,
if applicable, numerical designation.
o Generally, no class of certificates is entitled
to distributions of principal until the
certificate balance of each class of
certificates with an earlier alphabetical and,
if applicable, numerical designation has been
reduced to zero.
The amount of principal to be distributed for each
distribution date generally will be an amount
equal to:
o the scheduled principal payments (other than
balloon payments) due on the mortgage loans
included in the trust fund during the related
collection period whether or not such scheduled
payments are actually received;
o balloon payments actually received with respect
to mortgage loans included in the trust fund
during the related collection period;
o prepayments received with respect to the
mortgage loans included in the trust fund
during the related collection period; and
o all liquidation proceeds, insurance proceeds,
condemnation awards and repurchase and
substitution amounts received during the
related collection period that are allocable to
principal.
SUBORDINATION; ALLOCATION OF
LOSSES AND CERTAIN
EXPENSES................... Credit support for any class of certificates
(other than the Class [ ], Class [ ], Class [ ]
and Class [ ] certificates) is provided by the
subordination of payments and allocation of any
losses to such classes of certificates which have
a later alphabetical class designation. The
certificate balance of a class of certificates
(other than the Class [ ], Class [ ], Class [ ]
and Class [ ] certificates) will be reduced on
each
S-11
<PAGE>
distribution date by any losses on the mortgage
loans that have been realized and certain
additional trust fund expenses actually allocated
to such class of certificates on such distribution
date. Losses on the mortgage loans that have been
realized and additional trust fund expenses will
first be allocated to the certificates (other than
the Class [ ], Class [ ], Class [ ] and Class [ ]
certificates) that are non-offered certificates
and then to the certificates (other than the Class
[ ], Class [ ], Class [ ] and Class [ ]
certificates) that are offered certificates in
reverse alphabetical order as indicated on the
following table.
PERCENTAGE ORDER OF
CLOSING CUT-OFF APPLICATION
DATE DATE OF LOSSES
CLASS CERTIFICATE POOL AND
DESIGNATION BALANCE BALANCE EXPENSES
----------- ----------- --------- -----------
Any losses realized on the mortgage loans included
in the trust fund or additional trust fund
expenses allocated in reduction of the certificate
balance of any class of certificates (other than
the Class [ ], Class [ ], Class [ ] and Class [ ]
certificates) will result in a corresponding
reduction in the notional amount for the
interest-only component of the Class [ ]
certificates that is related to such class of
certificates. [See "DESCRIPTION OF THE
CERTIFICATES-- Subordination; Allocation of Losses
and Certain Expenses" in this prospectus
supplement.]
PREPAYMENT PREMIUMS; YIELD
MAINTENANCE CHARGES........ On each distribution date, any prepayment premium
or yield maintenance charge collected during the
related collection period on a mortgage loan
included in the trust fund will be distributed to
the holders of each class of offered certificates
then entitled to distributions as follows:
o The holders of each class of offered
certificates then entitled to distributions of
principal on such distribution date will be
entitled to a portion of prepayment premiums
equal to the product of:
o the amount of such prepayment premiums,
multiplied by
o a fraction, the numerator of which is equal
to the amount of principal distributable to
such class of certificates on such
distribution date, and the denominator of
which is the principal distribution amount
for such distribution date, multiplied by
o [ ]%.
o The remaining portion of prepayment premiums
will be distributed to the holders of the Class
[ ] certificates. The holders of each class of
offered certificates then entitled to
distributions of principal on such distribution
date will be entitled to a portion of yield
maintenance charges equal to the product of:
o the amount of such yield maintenance
charges, multiplied by
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a fraction (in no event greater than one), the
numerator of which is equal to the excess, if
any, of the pass-through rate of such class of
offered certificates over the relevant discount
rate, and the denominator of which is equal to
the excess, if any, of the mortgage interest
rate of the prepaid mortgage loan over the
relevant discount rate, multiplied by a
fraction, the numerator of which is equal to
the amount of principal distributable on such
class of offered certificates on such
distribution date, and the denominator of which
is the principal distribution amount for such
distribution date.
If there is more than one class of offered
certificates entitled to distributions of
principal on any particular distribution date on
which a yield maintenance charge or principal
prepayment is distributable, the aggregate amount
of such yield maintenance charge or principal
prepayment will be allocated among all such
classes on a pro rata basis in accordance with the
foregoing entitlements. The portion, if any, of
the yield maintenance charges or principal
prepayments remaining after any such payments to
the holders of the offered certificates will be
distributed to the holders of the Class [ ]
certificates.
The "discount rate" applicable to any class of
offered certificates or non-offered certificates
will be equal to the discount rate stated in the
related mortgage loan documents used in
calculating the yield maintenance charge with
respect to such principal prepayment. To the
extent a discount rate is not stated therein, the
discount rate will equal the yield (when
compounded monthly) on the U.S. Treasury issue
with a maturity date closest to the maturity date
for the prepaid mortgage loan or mortgage loan for
which title to the related mortgaged property was
acquired by the trust fund.
o In the event that there are two or more such
U.S. Treasury issues with the same coupon, the
issue with the lowest yield will be utilized;
and
o In the event that there are two or more such
U.S. Treasury issues with maturity dates
equally close to the maturity date for the
prepaid mortgage loan, the issue with the
earliest maturity date will be utilized.
EXAMPLES OF ALLOCATION OF YIELD
MAINTENANCE CHARGES
Mortgage interest rate................. = 8%
Pass-through rate for applicable = 6%
class................................
Discount rate.......................... = 5%
ALLOCATION
PERCENTAGE
FOR APPLICABLE ALLOCATION PERCENTAGE
CLASS FOR CLASS [ ]
-------------- ---------------------
6%-5%
----- = 33 1/3% 100%-33 1/3% = 66 2/3%
8%-5%
See "DESCRIPTION OF THE CERTIFICATES--
Distributions--Allocation of Prepayment Premiums
and Yield Maintenance Charges" in this prospectus
supplement.
ADVANCING.................... In the event the master servicer fails to receive
one or more scheduled payments of principal and
interest (other than balloon payments) on a
mortgage loan by the related determination date
and the master servicer
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determines that such scheduled payment of
principal and interest will be ultimately
recoverable from the related mortgage loan, the
master servicer, or if it fails to do so, the
trustee is required to make a principal and
interest cash advance of such scheduled payment of
principal and interest. These cash advances are
only intended to maintain a regular flow of
scheduled principal and interest payments on the
certificates and are not intended to guarantee or
insure against losses. In other words, the
advances are intended to provide liquidity (rather
than credit enhancement) to certificateholders. To
the extent described in this prospectus
supplement, the trust fund will pay interest to
the master servicer or the trustee, as the case
may be, on the amount of any principal and
interest cash advance calculated at the prime rate
and will reimburse the master servicer or the
trustee for any principal and interest cash
advances that are later determined to be not
recoverable. See "DESCRIPTION OF THE
CERTIFICATES--P&I Advances" in this prospectus
supplement.
OPTIONAL TERMINATION
OF THE TRUST FUND.......... The trust fund may be terminated when the
aggregate principal balance of the mortgage loans
included in the trust fund is less than [ ]% of
the aggregate principal balance of the mortgage
loans included in the trust fund as of the cut-off
date. See "DESCRIPTION OF THE CERTIFICATES--
Termination" in this prospectus supplement and in
the accompanying prospectus.
REGISTRATION AND
DENOMINATION............... The offered certificates will be registered in the
name of Cede & Co., as nominee for The Depository
Trust Company in the United States, or in Europe
through Clearstream, Luxembourg or The Euroclear
System. You will not receive a definitive
certificate representing your interest in the
trust fund, except in the limited circumstances
described in the accompanying prospectus. See
"DESCRIPTION OF THE CERTIFICATES--Book-Entry
Registration and Definitive Certificates" in the
accompanying prospectus.
Beneficial interests in the Class [ ], Class [ ]
and Class [ ] certificates will be offered in
minimum denominations of $[ ] actual principal
amount and in integral multiples of $[ ] in excess
of those amounts. The Class [ ] certificates will
be offered in minimum denominations of $[ ]
notional amount and in integral multiples of $[ ]
in excess of those amounts.
MATERIAL FEDERAL
INCOME TAX CONSEQUENCES.... One or more separate real estate mortgage
investment conduit elections will be made with
respect to the trust fund. However, a "real estate
mortgage investment conduit" election will not be
made with respect to any additional interest that
has accrued on a mortgage loan that provides for
the accrual of such additional interest if the
unamortized principal amount of such mortgage loan
is not repaid on the anticipated repayment date
set forth in the related mortgage note. The
certificates will evidence regular interests in a
real estate mortgage investment conduit and
generally will be treated as debt instruments of
such real estate mortgage investment conduit.
Certificateholders' entitlement to a portion of
the additional interest described above will be
treated as a grantor trust strip certificate (as
described in the accompanying prospectus) issued
by an entity treated as a grantor trust for United
States federal income tax purposes.
Based on expected issue prices, the Class [ ]
certificates will, and certain of the classes of
certificates (other than the Class [ ], Class [ ],
Class [ ] and Class [ ] certificates), depending
on their issue prices,
S-14
<PAGE>
may, be treated as having been issued with
original issue discount for federal income tax
reporting purposes. For further information
regarding the federal income tax consequences of
investing in the offered certificates, see
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES" in this
prospectus supplement and in the accompanying
prospectus.
ERISA CONSIDERATIONS......... Subject to important considerations described
under "ERISA CONSIDERATIONS" in this prospectus
supplement and the accompanying prospectus, only
the following certificates may be eligible for
purchase by persons investing assets of employee
benefit plans, individual retirement accounts, or
other retirement plans and accounts:
Class [ ]
Class [ ]
Class [ ]
The following certificates may not be sold to such
plans and accounts except as may be permitted
under a prohibited transaction exemption available
to certain insurance companies using general
account assets:
Class [ ]
Class [ ]
Class [ ]
See "ERISA CONSIDERATIONS" in this prospectus
supplement and in the accompanying prospectus.
SMMEA ELIGIBILITY............ We expect that the following certificates will
constitute "mortgage related securities" pursuant
to the Secondary Mortgage Market Enhancement Act
of 1984, as amended:
Class [ ]
Class [ ]
Class [ ]
Class [ ]
See "LEGAL INVESTMENT" in this prospectus
supplement and in the accompanying prospectus.
RATINGS...................... The offered certificates will not be issued unless
they have received the following ratings from [ ]
and [ ]:
EXPECTED
RATING FROM
CLASS [ ]/[ ]
----- -----------
The offered certificates are required to receive
the ratings from [ ] and [ ] indicated on the
cover page of this prospectus supplement. The
ratings on the offered certificates address the
likelihood of timely receipt of interest and
ultimate receipt of principal by the rated final
distribution date by the holders of offered
certificates. They do not address the likely
actual rate of prepayments. Such rate of
prepayments, if different than originally
anticipated, could adversely affect the yield
realized by holders of the offered certificates or
cause the Class [ ] certificateholders to fail to
recover their initial investments. See "Ratings"
in this prospectus supplement and in the
accompanying
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<PAGE>
prospectus for a discussion of the basis upon
which ratings are given, the limitations and
restrictions on the ratings, and conclusions that
should not be drawn from a rating.
THE MORTGAGE LOANS
GENERAL...................... It is expected that the mortgage loans to be
included in the trust fund will have the following
approximate characteristics as of the cut-off
date. Where a mortgage loan is secured by multiple
properties, statistical information in this
prospectus supplement relating to geographical
locations and mortgaged property types is based on
the loan amount allocated to each such property.
Such allocation is based on the relative appraised
values of such properties. In addition, the
loan-to-value ratio or debt service coverage ratio
of each mortgaged property securing a mortgage
loan secured by multiple mortgaged properties is
assumed to be the weighted average loan-to-value
ratio or debt service coverage ratio of such
mortgage loan. The totals in the following tables
may not add up to 100% due to rounding.
Number of mortgage loans..................
Number of mortgaged properties............
Aggregate balance of all mortgage loans
in the trust fund.......................
Minimum balance...........................
Maximum balance...........................
Average balance...........................
Weighted average loan-to-value ratio(1)...
Weighted average debt service coverage
ratio(1)................................
Weighted average loan-to-value ratio at
stated maturity.........................
Range of mortgage interest rates..........
Weighted average mortgage interest rate...
Range of remaining term to maturity or
anticipated repayment date (months).....
Weighted average remaining term to
maturity or anticipated repayment
date (months)...........................
Range of remaining amortization term
(months)(2).............................
Weighted average remaining amortization
term (months)(2)........................
Weighted average occupancy rate(3)........
---------------------------
(1) The weighted average loan-to-value ratio and
the weighted average debt service coverage
ratio information shown above does not reflect
the [ ] credit lease loans, or approximately
[ ]% of the mortgage pool, which typically at
origination have loan-to-value ratios at
origination that range from 90-100% and debt
service coverage ratios at origination that
generally range from 1.00x - 1.05x. Credit
lease loans are generally underwritten based
upon the creditworthiness of the tenant
leasing the related mortgaged property or the
related guarantor.
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<PAGE>
(2) Excludes [ ] mortgage loan, or approximately
[ ]% of the mortgage pool, which is
interest-only throughout the loan term.
(3) The weighted average occupancy rate
information shown above excludes all
hospitality properties, or approximately [ ]%
of the mortgage pool.
SECURITY FOR THE MORTGAGE
LOANS ..................... o Generally, all of the mortgage loans included
in the trust fund are non-recourse obligations
of the related borrowers.
o No mortgage loan included in the trust fund is
insured or guaranteed by any government agency
or private insurer.
o All of the mortgage loans included in the trust
fund are secured by first lien fee mortgages or
leasehold mortgages on commercial or
multifamily properties.
PROPERTY TYPES............... The following table describes the mortgage loans
expected to be included in the trust fund based
upon property type as of the cut-off date:
MORTGAGED PROPERTIES BY PROPERTY TYPE
==================================================
PERCENTAGE
NUMBER NUMBER AGGREGATE OF
OF OF CUT-OFF CUT-OFF
PROPERTY MORTGAGE MORTGAGED DATE DATE POOL
LOANS LOANS PROPERTIES BALANCE BALANCE
-------- -------- ---------- --------- ----------
$ %
-------- ---------- --------- ----------
Total..... $ %
-------- ---------- --------- ----------
-------- ---------- --------- ----------
---------------------------
(1) Including [ ] mortgage loan, or approximately
[ ]% of the mortgage pool, secured by an
assisted living facility, and [ ] mortgage
loan, or approximately [ ]% of the mortgage
pool, secured by a skilled nursing facility.
(2) Includes [ ] hospitality properties, or
approximately [ ]% of the mortgage pool, and
[ ] retail property, or approximately [ ]% of
the mortgage pool.
[PIE CHART OMITTED]
GEOGRAPHIC CONCENTRATIONS.... The mortgaged properties are located throughout
[ ] states and the District of Columbia. The
following table lists the number and percentage of
mortgaged properties in states which have
concentrations of mortgaged properties above [ ]%:
S-17
<PAGE>
MORTGAGED PROPERTIES BY GEOGRAPHIC CONCENTRATION
PERCENTAGE
OF
AGGREGATE CUT-OFF
NUMBER OF CUT-OFF DATE
MORTGAGED DATE POOL
STATES PROPERTIES BALANCE BALANCE
------ ---------- --------- ----------
$ %
---------- --------- ----------
Total...... $ %
---------- --------- ----------
---------- --------- ----------
PRINCIPAL AND INTEREST
PAYMENT TERMS.............. o All of the mortgage loans included in the trust
fund accrue interest at a fixed rate, other
than mortgage loans providing for an
anticipated repayment date, which provide for
an adjustment of fixed interest after a certain
date.
o As of the cut-off date, payments on all of the
mortgage loans included in the trust fund are
due on the first day of the month, subject to
grace periods which do not exceed 10 days.
o As of the cut-off date, [ ] of the mortgage
loans included in the trust fund, or
approximately [ ]% of the mortgage pool, bear
interest on a 30/360 basis, which includes [ ]
mortgage loan, or approximately [ ]% of the
mortgage pool, which is an interest-only loan
for the entire term.
o As of the cut-off date, [ ] of the mortgage
loans included in the trust fund, or
approximately [ ]% of the mortgage pool, bear
interest on an actual/360 basis. [ ] of such
mortgage loans, or approximately [ ]% of the
mortgage pool, have periods during which only
interest is due and periods in which principal
and interest are due, but in either case
interest is calculated on an actual/360 basis.
The following tables set forth additional
characteristics of the mortgage loans that we
anticipate to be included in the trust fund as of
the cut-off date:
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<PAGE>
RANGE OF CUT-OFF DATE BALANCES
PERCENTAGE
AGGREGATE OF
RANGE OF NUMBER CUT-OFF CUT-OFF DATE
CUT-OFF OF DATE POOL
DATE BALANCES($) LOANS BALANCE BALANCE
---------------- ------ --------- ------------
$ %
------ --------- ------------
Total........... $ %
------ --------- ------------
------ --------- ------------
RANGE OF MORTGAGE RATES
PERCENTAGE
AGGREGATE OF
NUMBER CUT-OFF CUT-OFF DATE
RANGE OF OF DATE POOL
MORTGAGE RATES LOANS BALANCE BALANCE
---------------- ------ --------- ------------
$ %
------ --------- ------------
Total............ $ %
------ --------- ------------
------ --------- ------------
S-19
<PAGE>
RANGE OF CUT-OFF DATE DSC RATIOS
PERCENTAGE
OF
AGGREGATE CUT-OFF
RANGE OF NUMBER CUT-OFF DATE
DSCRS (X) OF DATE POOL
(EXCLUDING CTLS) LOANS(1) BALANCE(1) BALANCE(1)
---------------- -------- ---------- -----------
$ %
(2) -------- ---------- -----------
Total............ $ %
-------- ---------- -----------
-------- ---------- -----------
-----------------
(1) Excludes [ ] credit lease loans, or
approximately [ ]% of the mortgage pool,
secured by credit lease properties. The debt
service coverage ratio for all such mortgage
loans is generally 1.00x-1.05x. Credit lease
loans are generally underwritten based upon
the creditworthiness of the tenant leasing the
related mortgaged property or the related
guarantor.
(2) Includes [ ] mortgage loans, or approximately
[ ]% of the mortgage pool, that are secured by
Section 42 multifamily properties which
entitle the owners to low-income housing tax
credits.
RANGE OF CUT-OFF DATE LTV RATIOS
PERCENTAGE
OF
AGGREGATE CUT-OFF
RANGE OF NUMBER CUT-OFF DATE
CUT-OFF LTVS (%) OF DATE POOL
(EXCLUDING CTLS) LOANS(1) BALANCE(1) BALANCE(1)
---------------- -------- ---------- -----------
$ %
(2) -------- ---------- -----------
Total............ $ %
-------- ---------- -----------
-------- ---------- -----------
-----------------
(1) Excludes [ ] credit lease loans, or
approximately [ ]% of the mortgage pool,
secured by credit lease properties. The
loan-to-value ratio for all such mortgage
loans at origination is generally 90-100%.
Credit lease loans are generally underwritten
based upon the creditworthiness of the tenant
leasing the related mortgaged property or the
related guarantor.
S-20
<PAGE>
RANGE OF REMAINING TERM TO MATURITY DATE OR
ANTICIPATED REPAYMENT DATE
PERCENTAGE
OF
AGGREGATE CUT-OFF
RANGE OF NUMBER CUT-OFF DATE
REMAINING OF DATE POOL
TERMS (MOS.) LOANS BALANCE BALANCE
------------ ------ --------- ----------
$ %
------ --------- ----------
Total........... $ %
------ --------- ----------
------ --------- ----------
AMORTIZATION TYPES
PERCENTAGE
OF
AGGREGATE CUT-OFF
NUMBER CUT-OFF DATE
TYPE OF OF DATE POOL
AMORTIZATION LOANS BALANCE BALANCE
------------ ------ --------- ----------
$ %
------ --------- ----------
Total........... $ %
------ --------- ----------
------ --------- ----------
Balloon loans have amortization schedules
significantly longer than their terms to maturity
and have substantial principal payments due on
their maturity dates, unless prepaid earlier.
Mortgage loans providing for anticipated repayment
dates fully or substantially amortize through
their terms to maturity. However, if such a
mortgage loan is not prepaid by the date specified
in its mortgage note, interest will accrue at a
higher rate and the borrower will be required to
apply all cash flow generated by the mortgaged
property in excess of its regular debt service
payments and certain other permitted expenses and
reserves to repay principal on the mortgage loan.
See "DESCRIPTION OF THE MORTGAGE POOL--Certain
Terms and Conditions of the Mortgage Loans," in
this prospectus supplement.
PREPAYMENT RESTRICTIONS...... As of the cut-off date, all of the mortgage loans
included in the trust fund restrict or prohibit
voluntary prepayments of principal in some manner
for some period of time.
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<PAGE>
TYPES OF PREPAYMENT RESTRICTIONS
PERCENTAGE
OF
AGGREGATE CUT-OFF
TYPE OF NUMBER CUT-OFF DATE
PREPAYMENT OF DATE POOL
RESTRICTION LOANS BALANCE BALANCE
----------- ------ --------- ----------
$ %
(1)
(1)
(1)
------ --------- ----------
Total...... $ %
------ --------- ----------
------ --------- ----------
(1) For the purposes hereof, "remaining term"
refers to either remaining term to maturity or
anticipated repayment date, as applicable.
See "DESCRIPTION OF THE MORTGAGE POOL--Additional
Mortgage Loan Information" in this prospectus
supplement.
The ability of the special servicer to waive or
modify the terms of any mortgage loan relating to
the payment of a prepayment premium or yield
maintenance charge will be limited as described in
this prospectus supplement. See "SERVICING OF THE
MORTGAGE LOANS--Modifications, Waivers and
Amendments" in this prospectus supplement. We make
no representations as to the enforceability of the
provisions of any mortgage notes requiring the
payment of a prepayment premium or yield
maintenance charge or the ability of the master
servicer or special servicer to collect any
prepayment premium or yield maintenance charge.
DEFEASANCE................... [ ] ([ ]) of the mortgage loans included in the
trust fund as of the cut-off date, or
approximately [ ]% of the mortgage pool, permit
the borrower, under certain conditions, to
substitute direct non-callable United States
Treasury obligations as collateral for the related
mortgage loans (or a portion thereof) following
their respective lock-out periods. Upon such
substitution, the related mortgaged property (or,
in the case of a mortgage loan secured by multiple
mortgaged properties, one or more of such
mortgaged properties) will no longer secure such
mortgage loan. The payments on the defeasance
collateral are required to be at least equal to an
amount sufficient to make, when due, all payments
on the related mortgage loan or allocated to the
related mortgaged property. The master servicer
may not permit borrowers to defease a mortgage
loan under certain circumstances. See "RISK
FACTORS--The Mortgage Loans-Risks Associated with
Commercial Lending May Be Different Than For
Residential Lending" and "-Future Cash Flow and
Property Values Are Not Predictable" and
"DESCRIPTION OF THE MORTGAGE POOL" in this
prospectus supplement.
TEN LARGEST MORTGAGE LOANS... The following table and summaries describe the ten
largest mortgage loans in the trust fund by
principal balance as of the cut-off date:
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<PAGE>
TEN LARGEST MORTGAGE LOANS BY CUT-OFF DATE BALANCE
<TABLE>
<CAPTION>
PERCENTAGE
OF LTV
NUMBER CUT-OFF CUT-OFF CUT-OFF RATIO AT CUT-OFF
OF DATE DATE POOL PROPERTY DATE LTV MATURITY DATE DSC MORTGAGE
LOAN NAME PROPERTIES BALANCE BALANCE TYPE RATIO OR ARD RATIO RATE
--------- ---------- ------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ % % % % %
---------- ------- ---------- -------- -------- -------- -------- --------
Total....... $ % % % % %
---------- ------- ---------- -------- -------- -------- -------- --------
---------- ------- ---------- -------- -------- -------- -------- --------
</TABLE>
[Property 1] [Description of Property 1].
[Property 2] [Description of Property 2].
[Property 3] [Description of Property 3].
[Property 4] [Description of Property 4].
[Property 5] [Description of Property 5].
[Property 6] [Description of Property 6 ].
[Property 7] [Description of Property 7 ].
[Property 8] [Description of Property 8].
[Property 9] [Description of Property 9].
[Property 10] [Description of Property 10].
RISK FACTORS
o You should carefully consider, among other things, the following risk
factors (as well as the risk factors set forth under "RISK FACTORS" in
the accompanying prospectus) before making your investment decision.
Additional risks are described elsewhere in this prospectus supplement
under separate headings in connection with discussions regarding
particular aspects of the mortgage loans included in the trust fund or
the certificates.
o The risks and uncertainties described below are not the only ones
relating to your certificates. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also
impair your investment.
o If any of the following risks are realized, your investment could be
materially and adversely affected.
S-23
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THE OFFERED CERTIFICATES
ONLY TRUST FUND ASSETS If the assets of the trust fund, primarily the
ARE AVAILABLE TO PAY YOU mortgage loans, are insufficient to make
payments on the offered certificates, no other
assets will be available for payment of the
deficiency. See "Risk Factors -The Assets of the
Trust Fund May Not Be Sufficient to Pay Your
Certificates" in the accompanying prospectus.
PREPAYMENTS WILL AFFECT Prepayments. The yield to maturity on the
YOUR YIELD offered certificates will depend on the rate and
timing of principal payments (including both
voluntary prepayments, in the case of mortgage
loans that permit voluntary prepayment, and
involuntary prepayments, such as prepayments
resulting from casualty or condemnation,
defaults, liquidations or repurchases for
breaches of representations or warranties) on the
mortgage loans included in the trust fund and how
such payments are allocated among the offered
certificates entitled to distributions of
principal. The yield to maturity of the Class [ ]
certificates will be particularly sensitive to
the rate and timing of receipt of principal since
its sole distribution is interest based upon the
aggregate principal balance of all the
certificates.
In addition, upon the occurrence of certain
limited events, a party may be required to
repurchase a mortgage loan from the trust fund
and the money paid would be passed through to the
holders of the certificates with the same effect
as if such mortgage loan had been prepaid in full
(except that no prepayment premium would be
payable with respect to any such repurchase). We
cannot make any representation as to the
anticipated rate of prepayments (voluntary or
involuntary) on the mortgage loans or as to the
anticipated yield to maturity of any certificate.
See "YIELD AND MATURITY CONSIDERATIONS" in this
prospectus supplement and "YIELD CONSIDERATIONS"
and in the accompanying prospectus.
Yield. In general, if you purchase an offered
certificate at a premium and principal
distributions on that offered certificate occur
at a rate faster than you anticipated at the time
of purchase, and no prepayment premiums are
collected, your actual yield to maturity may be
lower than you had predicted at the time of
purchase. In the case of the Class [ ]
certificates, this could result in the failure of
investors in the Class [ ] certificates to
recover their initial investment. Conversely, if
you purchase an offered certificate at a discount
and principal distributions on that offered
certificate occur at a rate slower than you
anticipated at the time of purchase, your actual
yield to maturity may be lower than you had
predicted at the time of purchase. In addition,
the yield on the Class [ ] certificates will be
adversely affected if mortgage loans with higher
mortgage interest rates pay faster than mortgage
loans with lower mortgage interest rates.
Interest Rate Environment. Mortgagors generally
are less likely to prepay if prevailing interest
rates are at or above the rates borne by their
mortgage loans. On the other hand, mortgagors are
more likely to prepay if prevailing interest
rates fall significantly below the mortgage
interest rates of their mortgage loans.
Mortgagors are less likely to prepay mortgage
loans with a lockout period or prepayment premium
provision, to the extent enforceable, than
similar mortgage loans without such provisions,
with shorter lockout periods or with lower
prepayment
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premiums.
Premiums. Provisions requiring prepayment
premiums and yield maintenance charges may not be
enforceable in some states and under federal
bankruptcy law, and may constitute interest for
usury purposes. Accordingly, we cannot provide
assurance that the obligation to pay such premium
or charge will be enforceable or, if enforceable,
that the foreclosure proceeds will be sufficient
to pay such prepayment premium or yield
maintenance charge. Additionally, although the
collateral substitution provisions related to
defeasance are not intended to be, and do not
have the same effect on the certificateholders
as, a prepayment, we cannot provide assurance
that a court would not interpret such provisions
as requiring a prepayment premium and possibly
determine that such provisions are unenforceable
or usurious under applicable law. Prepayment
premiums and yield maintenance charges are
generally not charged for prepayments resulting
from casualty or condemnation and would not be
paid in connection with repurchases of mortgage
loans for breaches of representations or
warranties.
BORROWER DEFAULTS MAY The aggregate amount of distributions on the
ADVERSELY AFFECT YOUR offered certificates, the yield to maturity of
YIELD the offered certificates, the rate of principal
payments on the offered certificates and the
weighted average life of the offered certificates
will be affected by the rate and timing of
delinquencies and defaults on the mortgage loans
included in the trust fund. Delinquencies on the
mortgage loans included in the trust fund, if the
delinquent amounts are not advanced, may result
in shortfalls in distributions of interest and/or
principal to the offered certificates for the
current month. Any late payments received on or
in respect of the mortgage loans will be
distributed to the certificates in the priorities
described more fully in this prospectus
supplement, but no interest will accrue on such
shortfall during the period of time such payment
is delinquent.
If you calculate your anticipated yield based on
an assumed rate of default and an assumed amount
of losses on the mortgage pool that are lower
than the default rate and the amount of losses
actually experienced, and if such losses are
allocated to your class of certificates, your
actual yield to maturity will be lower than the
yield so calculated and could, under certain
scenarios, be negative. Losses on the mortgage
loans included in the trust fund will reduce the
notional amount of the Class [ ] certificates.
This could result in the failure of investors in
the Class [ ] certificates to recover their
initial investment. The timing of any loss on a
liquidated mortgage loan also will affect the
actual yield to maturity of the offered
certificates to which all or a portion of such
loss is allocable, even if the rate of defaults
and severity of losses are consistent with your
expectations. In general, the earlier you bear a
loss, the greater the effect on your yield to
maturity. See "Yield and Maturity Considerations"
in this prospectus supplement and in the
accompanying prospectus.
Even if losses on the mortgage loans included in
the trust fund are allocated to a particular
class of offered certificates, such losses may
affect the weighted average life and yield to
maturity of other certificates. Losses on the
mortgage loans, to the extent not allocated to
such class of offered certificates, may result in
a higher percentage ownership interest evidenced
by such certificates than would otherwise
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have resulted absent such loss. The consequent
effect on the weighted average life and yield to
maturity of the offered certificates will depend
upon the characteristics of the remaining
mortgage loans.
DELINQUENCIES WILL To the extent described in this prospectus
ENTITLE THE SERVICER TO supplement, the master servicer, the special
ADDITIONAL COMPENSATION servicer or the trustee, as applicable, will be
WHICH TAKES PRECEDENCE entitled to receive interest on unreimbursed
OVER YOUR RIGHT TO advances and unreimbursed servicing expenses. The
RECEIVE DISTRIBUTIONS right of the master servicer, the special
servicer or the trustee to receive such payments
of interest is senior to the rights of
certificateholders to receive distributions on
the offered certificates and, consequently, may
result in losses being allocated to the offered
certificates that would not have resulted absent
the accrual of such interest. In addition, the
special servicer will receive a fee with respect
to each specially serviced mortgage loan and any
collections thereon, including specially serviced
mortgage loans which have been returned to
performing status. This will result in shortfalls
which may be allocated to the offered
certificates.
VOTES OF OTHER Under certain circumstances, the consent or
CERTIFICATEHOLDERS MAY approval of the holders of a specified
ADVERSELY AFFECT YOUR percentage of the aggregate certificate balance
INTERESTS of all outstanding certificates will be required
to take, and will bind all certificateholders to,
certain actions relating to the trust fund. For
example, such certificateholders may direct the
actions of the special servicer or the master
servicer with respect to certain mortgage loans
and real estate owned properties and may amend
the pooling and servicing agreement in certain
circumstances. See "Description of the
Certificates - Voting Rights" in this prospectus
supplement.
POTENTIAL CONFLICTS OF The master servicer [and the special servicer]
INTEREST is an affiliate[s] of the depositor and one of
the mortgage loan sellers. This affiliation could
cause a conflict with the master servicer's [and
the special servicer's] duties to the trust under
the pooling and servicing agreement. However, the
pooling and servicing agreement provides that the
mortgage loans shall be administered in
accordance with the servicing standards without
regard to an affiliation with any other party to
the pooling and servicing agreement. See
"SERVICING OF THE MORTGAGE LOANS--General" in
this prospectus supplement.
The Special Servicer or an affiliate may purchase
certain non-offered certificates (including the
Controlling Class). This could cause a conflict
between the special servicer's duties to the
trust under the pooling and servicing agreement
and its interest as a holder of a certificate.
However, the pooling and servicing agreement
provides that the mortgage loans shall be
administered in accordance with the servicing
standards without regard to ownership of any
certificate by the master servicer, the special
servicer or any affiliate of the special
servicer. See "SERVICING OF THE MORTGAGE
LOANS--General" in this prospectus supplement.
The special servicer will also have considerable
latitude in determining whether to liquidate or
modify defaulted mortgage loans. See "SERVICING
OF THE MORTGAGE LOANS--Modifications, Waivers and
Amendments" in this prospectus supplement.
In addition, certain mortgage loans included in
the trust may have been refinancings of debt
previously held by an affiliate of one of the
mortgage loan sellers.
The related property managers and borrowers may
experience conflicts of interest in the
management and/or ownership of the mortgaged
properties securing the mortgage loans because:
o a substantial number of the mortgaged
properties are managed by property managers
affiliated with the respective borrowers;
o these property managers also may manage and/or
franchise additional properties, including
properties that may compete with the mortgaged
properties; and
o affiliates of the property manager and/or the
borrowers, or the property managers and/or the
borrowers themselves also may own other
properties, including competing properties.
THE MORTGAGE LOANS
RISKS ASSOCIATED WITH Commercial and multifamily lending is generally
COMMERCIAL LENDING MAY viewed as exposing a lender (and your investment
BE DIFFERENT THAN FOR in the trust fund) to a greater risk of loss
RESIDENTIAL LENDING than lending which is secured by single-family
residences, in part because it typically involves
making larger loans to single borrowers or groups
of related mortgagors. In addition, and unlike
loans which are secured by single-family
residences, repayment of loans secured by
commercial and multifamily properties depends
upon the ability of the related real estate
project:
o to generate income sufficient to pay operating
expenses and leasing commissions, to make
necessary repairs, tenant improvements and
capital improvements and to pay debt service;
and
o in the case of loans that do not fully
amortize over their terms, to retain
sufficient value to permit the borrower to pay
off the loan at maturity by sale or
refinancing.
FUTURE CASH FLOW AND A number of factors, many beyond the control of
PROPERTY VALUES ARE NOT the property owner, may affect the ability of an
PREDICTABLE income-producing real estate project to generate
sufficient net operating income to pay debt
service and/or to maintain its value. Among these
factors are:
o economic conditions generally and in the area
of the project;
o the age, quality, functionality and design of
the project;
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o the degree to which the project competes with
other projects in the area;
o changes or continued weakness in specific
industry segments;
o increases in operating costs;
o the willingness and ability of the owner to
provide capable property management and
maintenance;
o the degree to which the project's revenue is
dependent upon a single tenant or user, a
small group of tenants, tenants concentrated
in a particular business or industry and the
competition to any such tenants;
o an increase in the capital expenditures needed
to maintain the properties or make
improvements;
o a decline in the financial condition of a
major tenant;
o the location of a mortgaged property;
o whether a mortgaged property can be easily
converted to alternative uses;
o an increase in vacancy rates;
o perceptions regarding the safety, convenience
and attractiveness of such properties;
o vulnerability to litigation by tenants and
patrons; and
o environmental contamination caused by adjacent
properties.
If leases are not renewed or replaced, if tenants
default, if rental rates fall and/or if operating
expenses increase, the borrower's ability to
repay the loan may be impaired and the resale
value of the property, which is substantially
dependent upon the property's ability to generate
income, may decline. Even if borrowers
successfully renew leases or relet vacated space,
the costs associated with reletting, including
tenant improvements, leasing commissions and free
rent, can exceed the amount of any reserves
maintained for that purpose and reduce cash from
the mortgaged properties. Although some of the
mortgage loans included in the trust fund require
the borrower to maintain escrows for leasing
expenses, there is no guarantee that these
reserves will be sufficient. In addition, there
are other factors, including changes in zoning or
tax laws, the availability of credit for
refinancing and changes in interest-rate levels
that may adversely affect the value of a project
(and thus the borrower's ability to sell or
refinance) without necessarily affecting the
ability to generate current income.
Other factors are more general in nature, such
as:
o national, regional or local economic
conditions (including plant and military
installation closings, industry slowdowns and
unemployment rates);
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o local real estate conditions (such as an
oversupply of retail space, office space or
multifamily housing);
o demographic factors;
o consumer confidence;
o consumer tastes and preferences; and
o changes in building codes and other applicable
laws.
The volatility of net operating income will be
influenced by many of the foregoing factors, as
well as by:
o the length of tenant leases;
o the creditworthiness of tenants;
o in the case of rental properties, the rate at
which new rentals occur; and
o the property's "operating leverage" (i.e., the
percentage of total property expenses in
relation to revenue, the ratio of fixed
operating expenses to those that vary with
revenues and the level of capital expenditures
required to maintain the property and to
retain or replace tenants).
A decline in the real estate market or in the
financial condition of a major tenant will tend
to have a more immediate effect on the net
operating income of properties with short-term
revenue sources, such as short-term or
month-to-month leases, and may lead to higher
rates of delinquency or defaults.
SOME MORTGAGED PROPERTIES Some of the mortgaged properties securing the
MAY NOT BE READILY mortgage loans included in the trust fund may
CONVERTIBLE TO not be readily convertible to alternative uses
ALTERNATIVE USES if those properties were to become unprofitable
for any reason. Converting commercial properties
to alternate uses generally requires substantial
capital expenditures. The liquidation value of
any such mortgaged property consequently may be
substantially less than would be the case if the
property were readily adaptable to other uses.
LOANS NOT INSURED OR The mortgage loans included in the trust fund
GUARANTEED (other than certain credit lease loans with
respect to which a residual value insurance
policy is in effect) will not be an obligation
of, or be insured or guaranteed by, any
governmental entity, by any private mortgage
insurer, or by the depositor, the mortgage loan
sellers, the underwriters, the master servicer,
the special servicer, the trustee or any of their
respective affiliates.
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We have not evaluated the significance of the
recourse provisions of mortgage loans that may
permit recourse against the related borrower or
another person in the event of a default.
Accordingly, other than [ ] mortgage loans
included in the trust fund as of the cut-off date
(control number [ ]), or [ ]% of the mortgage
pool, you should assume all of the mortgage loans
included in the trust fund are nonrecourse loans,
and that recourse in the case of default will be
limited to the related mortgaged property.
However, in certain circumstances the mortgage
loan sellers will be obligated to repurchase or
substitute a mortgage loan if:
o there is a defect with respect to certain of
the documents relating to such mortgage loan;
or
o certain of their respective representations or
warranties concerning such mortgage loan are
breached, and such defect or breach materially
and adversely affects your interests and is
not cured as required.
We cannot provide assurance that the applicable
mortgage loan seller will be in a financial
position to make such a repurchase or
substitution.
RISKS RELATING TO CERTAIN Particular types of income properties are
PROPERTY TYPES exposed to particular risks. For instance:
SPECIAL RISKS ASSOCIATED Multifamily projects are part of a market that,
WITH MULTIFAMILY PROJECTS 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. Since 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.
A large number of factors may adversely affect
the value and successful operation of a
multifamily property, including:
o the physical attributes of the apartment
building (for example, its age, appearance and
construction quality);
o the location of the property (for example, a
change in the neighborhood over time);
o the ability of management to provide adequate
maintenance and insurance;
o the types of services and amenities that the
property provides;
o the property's reputation;
o the level of mortgage interest rates (which,
if relatively low, may encourage tenants to
purchase rather than lease housing);
o the presence of competing properties;
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o adverse local or national economic conditions;
and
o state and local regulations.
Multifamily properties secure [ ] of the mortgage
loans included in the trust fund as of the
cut-off date, or approximately [ ]% of the
mortgage pool.
In addition, [ ] of the mortgage loans included
in the trust fund as of the cut-off date, or
approximately [ ]% of the mortgage pool, entitle
their owners to receive low income housing tax
credits under Section 42 of the Internal Revenue
Code of 1986, as amended. The tax credit
provisions impose limits on the amount of gross
rents that can be charged to tenants and require
the property owner to comply with tenant income
restrictions during established compliance
periods. These limitations and restrictions may
adversely affect the value and operation of a
multifamily project upon which low income tax
credits have been taken. In addition, the owner's
failure to comply with these limits and
restrictions may result in the prospective loss
or recapture of previously taken tax credits
which may have an adverse effect on the borrower.
SPECIAL RISKS ASSOCIATED Shopping centers are affected by the health of
WITH SHOPPING CENTERS the retail industry, which is currently
AND OTHER RETAIL undergoing a consolidation and is experiencing
PROPERTIES changes due to the growing market share of
"off-price" retailing, including the popularity
of home shopping networks, shopping via Internet
web sites and telemarketing. A particular
shopping center may be adversely affected by the
bankruptcy or decline in drawing power of an
anchor tenant, 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).
In the case of retail properties, the failure of
an anchor tenant to renew its lease, the
termination of an anchor tenant's lease, the
bankruptcy or economic decline of an anchor
tenant, or the cessation of the business of an
anchor tenant at its store, notwithstanding its
continued payment of rent after "going dark," may
have a particularly negative effect on the
economic performance of a shopping center
property given the importance of anchor tenants
in attracting traffic to other stores within the
same shopping center. In addition, the failure of
one or more major tenants, such as an anchor
tenant, to operate from its premises may entitle
other tenants to rent reductions or the right to
terminate their leases.
Retail properties, including shopping centers,
secure [ ] of the mortgage loans included in the
trust fund as of the cut-off date, or
approximately [ ]% of the mortgage pool.
SPECIAL RISKS ASSOCIATED Hospitality properties are affected by various
WITH HOSPITALITY factors, including:
PROPERTIES
o location;
o quality;
o management ability;
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o amenities;
o franchise affiliation (or lack thereof);
o continuing expenditures for modernizing,
refurbishing and maintaining existing
facilities prior to the expiration of their
anticipated useful lives;
o a deterioration in the financial strength or
managerial capabilities of the owner and
operator of a hotel;
o changes in travel patterns caused by changes
in access, energy prices, strikes, relocation
of highways, the construction of additional
highways or other factors;
o adverse economic conditions, either local,
regional or national, which may limit the
amount that may be charged for a room and may
result in a reduction in occupancy levels; and
o construction of competing hotels or motels,
which may also limit the amount that may be
charged for a room and may result in a
reduction in occupancy levels.
Because hotel rooms generally are rented for
short periods of time, hospitality properties
tend to be affected more quickly by adverse
economic conditions and competition than other
commercial properties. 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 any franchise
license agreement.
Furthermore, the ability of a hotel to attract
customers, and some of such hotel's revenues, may
depend in large part on its having a liquor
license. Such a license may not be transferable
(for example, in connection with a foreclosure).
Moreover, the hotel and lodging industry is
generally seasonal in nature; different seasons
affect different hotels depending on type and
location. This seasonality can be expected to
cause periodic fluctuations in a hospitality
property's room and restaurant revenues,
occupancy levels, room rates and operating
expenses. Because hotel rooms generally are
rented for short periods of time, the financial
performance of hotels tends to be affected by
adverse economic conditions and competition more
quickly than other commercial properties.
Hospitality properties secure [ ] of the mortgage
loans included in the trust fund as of the
cut-off date, or approximately [ ]% of the
mortgage pool, of which [ ] mortgage loans, or
approximately [ ]% of the mortgage pool, are
credit lease loans.
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SPECIAL RISKS ASSOCIATED Office properties may require their owners to
WITH OFFICE PROPERTIES expend significant amounts of cash to pay for
general capital improvements, tenant improvements
and costs of re-leasing space. Office properties
that are not equipped to accommodate the needs of
modern businesses may become functionally
obsolete and thus non-competitive.
In addition, a large number of factors may
adversely affect the value of office properties,
including:
o the quality of an office building's tenants;
o the physical attributes of the building in
relation to competing buildings (e.g. age,
condition, design, access to transportation
and ability to offer certain amenities, such
as sophisticated building systems);
o the desirability of the area as a business
location; and
o the strength and nature of the local economy
(including labor costs and quality, tax
environment and quality of life for
employees).
Moreover, the cost of refitting office space for
a new tenant is often higher than the cost of
refitting other types of property.
Office properties secure [ ] of the mortgage
loans included in the trust fund as of the
cut-off date, or approximately [ ]% of the
mortgage pool.
SPECIAL RISKS ASSOCIATED Residential healthcare facilities pose risks not
WITH RESIDENTIAL associated with other types of income-producing
HEALTHCARE FACILITIES real estate. 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
and maintenance of facilities and services.
Providers also are affected by the reimbursement
policies of private insurers to the extent that
providers are dependent on patients whose fees
are reimbursed by such insurers.
The failure of a borrower 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.
In the event of foreclosure, we cannot ensure
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.
We also cannot provide assurance that a new
license could be obtained or that the related
mortgaged property would be adaptable to other
uses following a foreclosure.
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To the extent any residential healthcare facility
receives a significant portion of its revenues
from government reimbursement programs, primarily
Medicaid and Medicare, such revenue may be
subject to statutory and regulatory changes,
retroactive rate adjustments, administrative
rulings, policy interpretations, delays by fiscal
intermediaries and government funding
restrictions.
Governmental payors have employed
cost-containment measures that limit payments to
healthcare providers, and there are currently
under consideration various proposals in the
United States Congress that could materially
change or curtail those payments. Accordingly, we
can give 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 right to
reimbursement. Accordingly, in the event of
foreclosure, none of the trustee, the master
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.
Other factors that may adversely affect the value
and successful operation of a residential
healthcare property include:
o increasing governmental regulation and
supervision;
o a decline in the financial health, skill or
reputation of the operator;
o increased operating expenses; and
o competing facilities owned by non-profit
organizations or government agencies supported
by endowments, charitable contributions, tax
revenues, or other sources.
Residential healthcare facilities secure [ ] of
the mortgage loans included in the trust fund as
of the cut-off date, or approximately [ ]% of the
mortgage pool.
See "RISK FACTORS--Special Risks of Mortgage
Loans Secured by Healthcare-Related Properties"
in the accompanying prospectus.
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SPECIAL RISKS ASSOCIATED The self storage facilities market contains low
WITH SELF STORAGE barriers to entry. In addition, it is difficult
FACILITIES to assess the environmental risks posed by such
facilities due to tenant privacy, anonymity and
unsupervised access to such facilities.
Therefore, such facilities may pose additional
environmental risks to investors. The
environmental site assessments discussed in this
prospectus supplement did not include an
inspection of the contents of the self-storage
units included in the self storage properties. We
therefore cannot provide assurance that all of
the units included in the self storage properties
are free from hazardous substances or other
pollutants or contaminants or will remain so in
the future. See "--Environmental Laws May
Adversely Affect the Value Of and Cash Flow From
a Mortgaged Property" below.
Due to the short-term nature of self storage
leases, self storage properties also may be
subject to more volatility in terms of supply and
demand than loans secured by other types of
properties. In addition, because of the
construction utilized in connection with certain
self storage facilities, it might be difficult or
costly to convert such a facility to an
alternative use. Thus, the liquidation value of
self storage properties may be substantially less
than would be the case if the same were readily
adaptable to other uses.
Self storage properties secure [ ] of the
mortgage loans included in the trust fund as of
the cut-off date, or approximately [ ]% of the
mortgage pool.
SPECIAL RISKS ASSOCIATED [ ] ([ ]) of the mortgage loans
WITH CREDIT LEASE LOANS included in the trust fund as of the cut-off
date, or approximately [ ]% of the mortgage pool,
are credit lease loans. The payment of interest
and principal on credit lease loans is dependent
principally on the payment by each tenant or
guarantor of the credit lease, if any, of monthly
rental payments and other payments due under the
terms of its credit lease.
In addition, because the ability of a borrower to
make payments on the related credit lease loan is
dependent on revenue from a single tenant, in the
event of a default under a credit lease or the
associated guarantee, as the case may be, the
related borrower may not have the ability to make
required payments on such credit lease loan until
the premises are re-let. If a payment default on
the credit lease loan occurs, the special
servicer may be entitled to foreclose upon or
otherwise realize upon the related mortgaged
property to recover amounts due under the credit
lease loan, and will also be entitled to pursue
any available remedies against the defaulting
tenant and any guarantor.
Any failure by the provider of any residual value
insurance policy to pay under the terms of any
such policy, or any downgrade, qualification or
withdrawal of the credit rating of such provider
or of any tenant or guarantor, may have an
adverse effect on the ratings of your
certificates. See "DESCRIPTION OF THE MORTGAGE
POOL--Credit Lease Loans" and "--Special Risks
Associated With Balloon Loans and Anticipated
Repayment Date Loans" in this prospectus
supplement.
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ENVIRONMENTAL LAWS MAY If an adverse environmental condition exists
ADVERSELY AFFECT THE with respect to a mortgaged property securing a
VALUE OF AND CASH FLOW mortgage loan included in the trust fund, the
FROM A MORTGAGED trust fund will be subject to certain risks
PROPERTY including the following:
o a reduction in the value of such mortgaged
property or the inability to foreclose against
such mortgaged property;
o the potential that the related borrower may
default on the related mortgage loan due to
such borrower's inability to pay high
remediation costs or difficulty in bringing
its operations into compliance with
environmental laws;
o liability for clean-up costs or other
remedial actions, which could exceed the
value of such mortgaged property or the
unpaid balance of the related mortgage loan;
and
o the inability to sell the related mortgage
loan in the secondary market or to lease such
mortgaged property to potential tenants.
Under certain federal and state laws, federal and
state agencies may impose a statutory lien over
affected property to secure the reimbursement of
remedial costs incurred by these agencies to
correct environmental conditions. This lien may
be prior to the lien of an existing mortgage. Any
such lien arising with respect to a mortgaged
property securing a mortgage loan included in the
trust fund would adversely affect the value of
such mortgaged property and could make
impracticable the foreclosure by the special
servicer on such mortgaged property in the event
of a default by the related borrower.
Under various federal, state and local laws,
ordinances and regulations, a current or previous
owner or operator of real property, as well as
certain other types of parties, may be liable for
the costs of removal or remediation of hazardous
or toxic substances on, under, adjacent to or in
such property. The cost of any required
remediation and the owner's liability therefor is
generally not limited under applicable laws. Such
liability could exceed the value of the property
and/or the aggregate assets of the owner. Under
some environmental laws, a secured lender (such
as the trust fund) may be found to be an "owner"
or "operator" of the related mortgaged property
if it is determined that the lender actually
participated in the management of the borrower,
regardless of whether the borrower actually
caused the environmental damage. In such cases, a
secured lender may be liable for the costs of any
required removal or remediation of hazardous
substances. The trust fund's potential exposure
to liability for cleanup costs will increase if
the trust fund, or an agent of the trust fund,
actually takes possession of a mortgaged property
or control of its day-to-day operations. See
"CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND
LEASES--Environmental Considerations" in the
accompanying prospectus, and "DESCRIPTION OF THE
MORTGAGE POOL--Assessments of Property
Condition--Environmental Assessments" in this
prospectus supplement.
S-35
<PAGE>
A third-party environmental consultant conducted
an environmental site assessment (or updated a
previously conducted environmental site
assessment) with respect to each mortgaged
property securing a mortgage loan included in the
trust fund. Such assessments do not generally
include environmental testing. In each case where
the environmental site assessment or update
revealed a material adverse environmental
condition or circumstance at any mortgaged
property, then (depending on the nature of the
condition or circumstance) one or more of the
following actions has been or is expected to be
taken:
o an environmental insurance policy, having the
characteristics described below, was obtained
from a third-party insurer; or
o either (i) an operations and maintenance
program, including, in several cases, with
respect to asbestos-containing materials,
lead-based paint and/or radon, or periodic
monitoring of nearby properties, has been or
is expected to be implemented in the manner
and within the time frames specified in the
related loan documents, or (ii) remediation in
accordance with applicable law has been
performed; or
o an escrow or reserve was established to cover
the estimated cost of remediation, with each
remediation required to be completed within a
reasonable time frame in accordance with the
related loan documents.
We cannot provide assurance, however, that the
environmental assessments identified all
environmental conditions and risks, that the
related borrowers will implement all recommended
operations and maintenance plans, that such plans
will adequately remediate the environmental
condition, or that any environmental indemnity,
insurance or escrow will fully cover all
potential environmental issues. In addition, the
environmental condition of the underlying real
properties could be adversely affected by tenants
or by the condition of land or operations in the
vicinity of the properties, such as underground
storage tanks.
With respect to [ ] ([ ]) mortgage loans included
in the trust fund as of the cut-off date, or
approximately [ ]% of the mortgage pool,
borrowers were required to purchase a secured
creditor impaired property environmental
insurance policy in lieu of or in addition to
environmental escrows established, provided:
o the policy premium for the term is fully paid
and the deductible either escrowed or is less
than or equal to $[ ];
o at issuance, the issuer has a claims paying
ability of not less than "[____]" by S&P or if
not rated by S&P, such comparable rating by
another nationally recognized statistical
rating agency; and
o the policy is in an amount not less than the
full principal amount of the loan.
S-36
<PAGE>
We cannot provide assurance, however, that should
such coverage be needed, coverage would be
available or uncontested, that the terms and
conditions of such coverage would be met, that
coverage would be sufficient for the claims at
issue or that coverage would not be subject to
certain deductibles.
The pooling and servicing agreement will require
that the special servicer obtain an environmental
site assessment of a mortgaged property securing
a mortgage loan included in the trust fund prior
to taking possession of the property through
foreclosure or otherwise or assuming control of
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, we cannot give 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 Liability
May Affect Lien on Mortgaged Property and Expose
Lender to Costs" and "CERTAIN LEGAL ASPECTS OF
THE MORTGAGE LOANS AND LEASES--Environmental
Considerations" in the accompanying prospectus.
SPECIAL RISKS ASSOCIATED [ ] ([ ]) of the mortgage loans
WITH BALLOON LOANS AND included in the trust fund as of the cut-off
ANTICIPATED REPAYMENT date, or approximately [ ]% of the mortgage
DATE LOANS pool, including [ ] interest-only mortgage
loans, or approximately [ ]% of the mortgage
pool, provide for scheduled payments of principal
and interest based on amortization schedules
significantly longer than their respective
remaining terms to maturity and a balloon payment
on their respective maturity dates. [ ] ([ ]) of
the mortgage loans included in the trust fund as
of the cut-off date, or approximately [ ]% of the
mortgage pool, are anticipated repayment date
loans, which provide that if the principal
balance of the loan is not repaid on a date
specified in the related mortgage note, the loan
will accrue interest at an increased rate.
A borrower's ability to make a balloon payment or
repay its anticipated repayment date loan on the
anticipated repayment date typically will depend
upon its ability either to refinance fully the
loan or to sell the related mortgaged property at
a price sufficient to permit the borrower to make
such payment.
Whether or not losses are ultimately sustained,
any delay in the collection of a balloon payment
on the maturity date or repayment on the
anticipated repayment date that would otherwise
be distributable on your certificates will likely
extend the weighted average life of your
certificates.
S-37
<PAGE>
The ability of a borrower to effect a refinancing
or sale 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 mortgaged property, the
financial condition and operating history of the
borrower and the mortgaged property, tax laws,
prevailing general and regional economic
conditions and the availability of credit for
loans secured by multifamily or commercial
properties, as the case may be.
We cannot assure you that each borrower under a
balloon loan or an anticipated repayment date
loan will have the ability to repay the principal
balance of such mortgage loan on the related
maturity date or anticipated repayment date, as
applicable. For additional description of risks
associated with balloon loans, see "RISK
FACTORS--Balloon Payments on Mortgage Loans
Result in Heightened Risk of Borrower Default" in
the accompanying 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" in
this prospectus supplement. We cannot provide
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 on your certificates,
whether such delay is due to borrower default or
to modification of the related mortgage loan,
will likely extend the weighted average life of
your certificates. See "YIELD AND MATURITY
CONSIDERATIONS" in this prospectus supplement and
"YIELD CONSIDERATIONS" in the accompanying
prospectus.
S-38
<PAGE>
ADVERSE CONSEQUENCES Certain borrowers under the mortgage loans
ASSOCIATED WITH BORROWER included in the trust fund are affiliated or
CONCENTRATION, BORROWERS under common control with one another. In such
UNDER COMMON CONTROL AND circumstances, any adverse circumstances
RELATED BORROWERS relating to a borrower or an affiliate thereof
and affecting one of the related mortgage loans
or mortgaged properties could also affect other
mortgage loans or mortgaged properties of the
related borrower. In particular, the bankruptcy
or insolvency of any such borrower or affiliate
could have an adverse effect on the operation of
all of the mortgaged properties of that borrower
and its affiliates and on the ability of such
related mortgaged properties to produce
sufficient cash flow to make required payments on
the mortgage loans. For example, if a person that
owns or directly or indirectly controls several
mortgaged properties experiences financial
difficulty at one mortgaged property, they could
defer maintenance at one or more other mortgaged
properties in order to satisfy current expenses
with respect to the mortgaged property
experiencing financial difficulty, or they could
attempt to avert foreclosure by filing a
bankruptcy petition that might have the effect of
interrupting payments for an indefinite period on
all the related mortgage loans. In particular,
such person experiencing financial difficulty or
becoming subject to a bankruptcy proceeding may
have an adverse effect on the funds available to
make distributions on the certificates and may
lead to a downgrade, withdrawal or qualification
(if applicable) of the ratings of the
certificates.
Mortgaged properties owned by related borrowers
are likely to:
o have common management, increasing the risk
that financial or other difficulties
experienced by the property manager could have
a greater impact on the pool of mortgage loans
included in the trust fund; and
o have common general partners which would
increase the risk that a financial failure or
bankruptcy filing would have a greater impact
on the pool of mortgage loans included in the
trust fund.
SIGNIFICANT AFFILIATED SPONSOR CONCENTRATIONS
<TABLE>
<CAPTION>
PERCENTAGE
OF LTV
NUMBER CUT-OFF CUT-OFF CUT-OFF RATIO AT CUT-OFF
SPONSOR OF DATE DATE POOL PROPERTY DATE LTV MATURITY DATE DSC MORTGAGE
NAME PROPERTIES BALANCE BALANCE TYPE RATIO OR ARD RATIO RATE
--------- ---------- ------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ % % % % %
---------- ------- ---------- -------- -------- -------- -------- --------
Total....... $ % % % % %
---------- ------- ---------- -------- -------- -------- -------- --------
---------- ------- ---------- -------- -------- -------- -------- --------
</TABLE>
S-39
<PAGE>
THE GEOGRAPHIC Except as indicated in the following table, less
CONCENTRATION OF than 5.0% of the mortgage loans, by initial pool
MORTGAGED PROPERTIES balance are secured by mortgaged properties in
SUBJECTS THE TRUST FUND any one state.
TO A GREATER EXTENT TO
STATE AND REGIONAL
CONDITIONS
PERCENTAGE
OF CUT-OFF DATE
STATE NUMBER POOL BALANCE
----- ------ ---------------
The concentration of mortgaged properties in a
specific state or region will make the
performance of the trust fund as a whole more
sensitive to the following in the state or
region where the mortgagors and the mortgaged
properties are located:
o economic conditions;
o conditions in the real estate market;
o changes in governmental rules and fiscal
policies;
o acts of God (which may result in uninsured
losses); and
o other factors which are beyond the control of
the mortgagors.
SPECIAL RISKS ASSOCIATED Several of the mortgage loans included in the
WITH HIGH BALANCE trust fund, individually or together with other
MORTGAGE LOANS such mortgage loans with which they are
cross-collateralized, have principal balances as
of the cut-off date that are substantially
higher than the average principal balance as of
the cut-off date.
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.
The largest mortgage loan included in the trust
fund as of the cut-off date represents
approximately [ ]% of the mortgage pool.
The [ ] largest mortgage loans included in the
trust fund as of the cut-off date represent, in
the aggregate, approximately [ ]% of the
mortgage pool.
The [ ] largest mortgage loans included in the
trust fund as of the cut-off date represent, in
the aggregate, approximately [ ]% of the
mortgage pool.
S-40
<PAGE>
CONCENTRATION OF MORTGAGED A concentration of mortgaged property types can
PROPERTY TYPES SUBJECT increase the risk that a decline in a particular
THE TRUST FUND TO industry or business would have a
INCREASED RISK OF disproportionately large impact on a pool of
DECLINE IN A PARTICULAR mortgage loans. For example, if there is a
INDUSTRY decline in tourism, the hotel industry might be
adversely affected, leading to increased losses
on loans secured by hospitality properties as
compared to the mortgage loans secured by other
property types.
In that regard:
o mortgage loans included in the trust fund and
secured by multifamily properties represent
as of the cut-off date approximately [ ]% of
the mortgage pool;
o mortgage loans included in the trust fund and
secured by retail properties represent as of
the cut-off date approximately [ ]% of the
mortgage pool (based on the primary property
type for combined office/retail properties)
(which includes [ ] credit lease loans, or
approximately [ ]% of the mortgage pool); and
o mortgage loans included in the trust fund and
secured by hospitality properties represent
as of the cut-off date approximately [ ]% of
the mortgage pool (which includes [ ] credit
lease loans or approximately [ ]% of the
mortgage pool).
WE HAVE NOT REUNDERWRITTEN We have not reunderwritten the mortgage loans
ANY OF THE MORTGAGE LOANS included in the trust fund. Instead, we have
relied on the representations and warranties
made by the mortgage loan sellers, and the
applicable mortgage loan seller's obligation to
repurchase, cure or substitute a mortgage loan
in the event that a representation or warranty
was not true when made. These representations
and warranties do not cover all of the matters
that we would review in underwriting a mortgage
loan and you should not view them as a
substitute for reunderwriting the mortgage
loans. If we had reunderwritten the mortgage
loans included in the trust fund, it is possible
that the reunderwriting process may have
revealed problems with a mortgage loan not
covered by a representation or warranty. In
addition, we cannot provide assurance that the
applicable mortgage loan seller will be able to
repurchase or substitute a mortgage loan if a
representation or warranty has been breached.
See "DESCRIPTION OF THE MORTGAGE
POOL--Representations and Warranties;
Repurchases and Substitutions" in this
prospectus supplement.
FORECLOSURE ON MORTGAGED One or more of the REMICs established under the
PROPERTIES MAY RESULT IN pooling and servicing agreement might become
ADVERSE TAX CONSEQUENCES subject to federal (and possibly state or
local) tax on certain of its net income from the
operation and management of a mortgaged property
subsequent to the trust fund's acquisition of a
mortgaged property pursuant to a foreclosure or
deed-in-lieu of foreclosure. Any such tax would
substantially reduce net proceeds available for
distribution to you. See "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES--Taxation of Owners of
REMIC Regular Certificates," and "--Taxation of
Owners of REMIC Residual Certificates" in the
accompanying prospectus.
S-41
<PAGE>
INSURANCE COVERAGE ON The master servicer and/or special servicer
MORTGAGED PROPERTIES MAY will generally be required to cause the
NOT COVER SPECIAL HAZARD borrower on each mortgage loan included in the
LOSSES trust fund and serviced by it to maintain such
insurance coverage on the related mortgaged
property as is required under the related
mortgage, including hazard insurance; provided,
that, each of the master servicer and the
special servicer may satisfy its obligation to
cause hazard insurance to be maintained with
respect to any mortgaged property by acquiring a
blanket or master single interest insurance
policy. In general, the standard form of fire
and extended coverage policy covers physical
damage to or destruction of the improvements on
the related mortgaged 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 are underwritten by different
insurers under different state laws in
accordance with different applicable state
forms, and therefore do not contain identical
terms and conditions, most such policies
typically do not cover any physical damage
resulting from:
o war;
o revolution;
o governmental actions;
o floods, and other water-related causes;
o earth movement (including earthquakes,
landslides and mud flows);
o wet or dry rot;
o vermin;
o domestic animals; and
o other kinds of risks not specified in the
preceding paragraph.
Any losses incurred with respect to mortgage
loans included in the trust fund due to
uninsured risks or insufficient hazard insurance
proceeds could adversely affect distributions on
your certificates.
SOME MORTGAGED PROPERTIES In general, the borrowers are:
MAY BE ENCUMBERED BY
SUBORDINATED DEBT WHICH
MAY DELAY FORECLOSURE o required to satisfy any existing
indebtedness encumbering the related
mortgaged property as of the closing of the
related mortgage loan; and
o prohibited from encumbering the related
mortgaged property with additional secured
debt without the lender's prior approval.
S-42
<PAGE>
With respect to [ ] mortgage loans included in
the trust fund as of the cut-off date (control
numbers [ ] and [ ]), or approximately [ ]% of
the mortgage pool, the mortgaged properties
remain encumbered by existing subordinate debt,
subject to the terms of a subordination and
standstill agreement entered into in favor of
the lender.
With respect to [ ] mortgage loans included in
the trust fund as of the cut-off date (control
numbers [ ], [ ] and [ ]), or approximately [ ]%
of the mortgage pool, the related mortgage loan
documents provide that the borrower, under
certain specified circumstances, may encumber
the related mortgaged property with a
subordinate mortgage in the future.
Secured subordinated debt encumbering any
mortgaged property may increase the difficulty
of refinancing the related mortgage loan at
maturity and the possibility that reduced cash
flow could result in deferred maintenance. Also,
in the event that the holder of the subordinated
debt has filed for bankruptcy or been placed in
involuntary receivership, foreclosure by any
senior lienholder (including the trust fund) on
the mortgaged property could be delayed. Many of
the mortgage loans included in the trust fund,
and the mortgage loan documents and
organizational documents of the related
borrower, do not prohibit the borrower from
incurring additional indebtedness if incurred in
the ordinary course of business and not secured
by a lien on the related mortgaged properties. A
default by the borrower on such additional
indebtedness could impair the borrower's
financial condition and result in the bankruptcy
or receivership of the borrower which would
cause a delay in the foreclosure by the trust
fund on the mortgaged property. It may not be
evident that a borrower has incurred any such
future subordinate second lien debt until the
related mortgage loan otherwise defaults. In
cases in which one or more subordinate liens are
imposed on a mortgaged property or the borrower
incurs other indebtedness, the trust fund is
subject to additional risks, including, without
limitation, the following:
o the risk that the necessary maintenance of
the mortgaged property could be deferred to
allow the borrower to pay the required debt
service on the subordinate financing and that
the value of the mortgaged property may fall
as a result;
o the risk that the borrower may have a greater
incentive to repay the subordinate or
unsecured indebtedness first;
o the risk that it may be more difficult for
the borrower to refinance the mortgage loan
or to sell the mortgaged property for
purposes of making any balloon payment upon
the maturity of the mortgage loan;
o the existence of subordinated debt
encumbering any mortgaged property may
increase the difficulty of refinancing the
related mortgage loan at maturity and the
possibility that reduced cash flow could
result in deferred maintenance; and
S-43
<PAGE>
o the risk that, in the event that the holder
of the subordinated debt has filed for
bankruptcy or been placed in involuntary
receivership, foreclosing on the mortgaged
property could be delayed and the trust may
be subjected to the costs and administrative
burdens of involvement in foreclosure or
bankruptcy proceedings or related litigation.
See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
AND LEASES--Subordinate Financing" and
"--Due-on-Sale and Due-on-Encumbrance" in the
accompanying prospectus and "DESCRIPTION OF THE
MORTGAGE POOL--Certain Terms and Conditions of
the Mortgage Loans--'Due-on-Sale' and
`Due-on-Encumbrance' Provisions" in this
prospectus supplement.
With respect to [ ] mortgage loans included in
the trust fund as of the cut-off date (control
numbers [ ] and [ ]), or approximately [ ]% of
the mortgage pool, the owners of the related
borrowers have pledged their limited partnership
interests or other ownership interests in the
borrower as security for mezzanine debt that was
in existence as of the date of origination of
the related mortgage loan. The enforcement of
such mezzanine debt may be subject, however, to
certain limitations and restrictions imposed
upon the borrower and the holders of the
mezzanine debt pursuant to subordination or
standstill agreements.
Mezzanine debt is debt that is incurred by the
owner of equity in one or more borrowers and is
secured by a pledge of the equity ownership
interests in such borrowers. Because mezzanine
debt is secured by the obligor's equity interest
in the related borrowers, such financing
effectively reduces the obligor's economic stake
in the related mortgaged property. The existence
of mezzanine debt may reduce cash flow on the
borrower's mortgaged property after the payment
of debt service and may increase the likelihood
that the owner of a borrower will permit the
value or income producing potential of a
mortgaged property to fall and may create a
slightly greater risk that a borrower will
default on the mortgage loan secured by a
mortgaged property whose value or income is
relatively weak.
Upon a default under mezzanine debt, the holder
of such mezzanine debt would be entitled to
foreclose upon the equity in the related
mortgagor, which has been pledged to secure
payment of such mezzanine debt. Although such
transfer of equity would not trigger the due on
sale clause under the related mortgage loan, it
could cause the obligor under such mezzanine
debt to file for bankruptcy, which could
negatively affect the operation of the related
mortgaged property and such borrower's ability
to make payments on the related mortgage loan in
a timely manner.
See "CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND
LEASES--Due-on-Sale and Due-on-Encumbrance" in
the accompanying prospectus and "DESCRIPTION OF
THE MORTGAGE POOL--Certain Terms and Conditions
of the Mortgage Loans-'Due-on-Sale' and
`Due-on-Encumbrance' Provisions" in this
prospectus supplement.
S-44
<PAGE>
THE BORROWER'S FORM OF The borrowers may be either individuals or
ENTITY MAY CAUSE SPECIAL legal entities. Mortgage loans made to legal
RISKS entities may entail risks of loss greater than
those of mortgage loans made to individuals. For
example, a legal entity, as opposed to an
individual, may be more inclined to seek legal
protection from its creditors under the
bankruptcy laws. Unlike individuals involved in
bankruptcies, various types of entities
generally do not have personal assets and
creditworthiness at stake. The bankruptcy of a
borrower, or a general partner or managing
member of a borrower, may impair the ability of
the lender to enforce its rights and remedies
under the related mortgage.
The borrowers are generally not
bankruptcy-remote entities, and therefore may be
more likely to become insolvent or the subject
of a voluntary or involuntary bankruptcy
proceeding because such borrowers may be:
o operating entities with businesses distinct
from the operation of the property with the
associated liabilities and risks of operating
an ongoing business; and
o individuals that have personal liabilities
unrelated to the property.
However, any borrower, even a bankruptcy-remote
entity, as owner of real estate will be subject
to certain potential liabilities and risks. We
cannot provide assurances that any borrower will
not file for bankruptcy protection or that
creditors of a borrower or a corporate or
individual general partner or managing member of
a borrower will not initiate a bankruptcy or
similar proceeding against such borrower or
corporate or individual general partner or
managing member. Furthermore, with respect to
any related borrowers, creditors of a common
parent in bankruptcy may seek to consolidate the
assets of such borrowers with those of the
parent. Consolidation of the assets of such
borrowers would likely have an adverse effect on
the funds available to make distributions on
your certificates, and may lead to a downgrade,
withdrawal or qualification of the ratings of
your certificates. See "CERTAIN LEGAL ASPECTS OF
MORTGAGE LOANS AND LEASES-- Bankruptcy Laws" in
the accompanying prospectus.
INSPECTIONS AND APPRAISAL In general, appraisals represent only the
OF MORTGAGED PROPERTY analysis and opinion of qualified experts and
MAY HAVE OVERLOOKED are not guaranties of present or future value,
NECESSARY REPAIRS and may determine a value of a property that is
significantly higher than the amount that can be
obtained from the sale of a mortgaged property
under a distress or liquidation sale.
Information regarding the values of the
mortgaged properties at the date of such report
is presented under "DESCRIPTION OF THE MORTGAGE
POOL--Additional Mortgage Loan Information" in
this prospectus supplement for illustrative
purposes only. Any engineering reports obtained
in connection with this offering represent only
the analysis of the individual engineers or site
inspectors preparing such reports at the time of
such report, and may not reveal all necessary or
desirable repairs, maintenance or capital
improvement items.
S-45
<PAGE>
THE MORTGAGED PROPERTIES The mortgaged properties securing the mortgage
MAY NOT BE IN COMPLIANCE loans included in the trust fund are typically
WITH CURRENT ZONING LAWS subject to building and zoning ordinances and
codes affecting the construction and use of real
property. Since the zoning laws applicable to a
mortgaged property (including, without
limitation, density, use, parking and set-back
requirements) are usually subject to change by
the applicable regulatory authority at any time,
the improvements upon the mortgaged properties
may not comply fully with all applicable current
and future zoning laws. Such changes may limit
the ability of the related borrower to
rehabilitate, renovate and update the premises,
and to rebuild or utilize the premises "as is"
in the event of a substantial casualty loss with
respect thereto. Such limitations may adversely
affect the cash flow of the mortgaged property
following such loss.
In addition, certain of the mortgaged properties
securing mortgage loans included in the trust
fund which are non-conforming may not be
"permitted non-conforming" uses. The failure of
a mortgaged property to comply with zoning laws
or to be a "permitted non-conforming" use may
adversely affect the market value of the
mortgaged property or the borrower's ability to
continue to use it in the manner it is currently
being used.
In addition, certain of the mortgaged properties
are subject to certain use restrictions imposed
pursuant to reciprocal easement agreements or
operating agreements. Such use restrictions
include, for example, limitations on the
character of the improvements or the properties,
limitations affecting noise and parking
requirements, among other things, and
limitations on the borrowers' right to operate
certain types of facilities within a prescribed
radius. These limitations could adversely affect
the ability of the related borrower to lease the
mortgaged property on favorable terms, thus
adversely affecting the borrower's ability to
fulfill its obligations under the related
mortgage loan.
COMPLIANCE WITH APPLICABLE A borrower may be required to incur costs to
LAWS AND REGULATIONS MAY comply with various existing and future
RESULT IN LOSSES federal, state or local laws and regulations
applicable to the related mortgaged property
securing a mortgage loan included in the trust
fund. Examples of these laws and regulations
include zoning laws and the Americans with
Disabilities Act of 1990, which requires all
public accommodations to meet certain federal
requirements related to access and use by
disabled persons. See "CERTAIN LEGAL ASPECTS OF
MORTGAGE LOANS AND LEASES--Americans with
Disabilities Act" in the accompanying
prospectus. The expenditure of such costs or the
imposition of injunctive relief, penalties or
fines in connection with the borrower's
noncompliance could negatively impact the
borrower's cash flow and, consequently, its
ability to pay its mortgage loan.
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ENFORCEABILITY OF The mortgages securing the mortgage loans
DUE-ON-SALE CLAUSES AND included in the trust fund generally contain
ASSIGNMENTS OF LEASES due-on-sale clauses, which permit the
AND RENTS IS LIMITED. acceleration of the maturity of the related
mortgage loan if the borrower sells, transfers
or conveys the related mortgaged property or its
interest in the mortgaged property without the
consent of the lender. There also may be
limitations on the enforceability of such
clauses. The mortgages also generally include a
debt-acceleration clause, which permits the
acceleration of the related mortgage loan upon a
monetary or non-monetary default by the
borrower. The courts of all states will
generally enforce clauses providing for
acceleration in the event of a material payment
default, but may refuse the foreclosure of a
mortgaged property when acceleration of the
indebtedness would be inequitable or unjust or
the circumstances would render acceleration
unconscionable. However, certain of the mortgage
loans included in the trust fund permit one or
more transfers of the related mortgaged property
to pre-approved borrowers or pursuant to
pre-approved conditions without the lender
approval. See "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS AND LEASES--Due-on-Sale and
Due-on-Encumbrance" in the accompanying
prospectus.
The mortgage loans included in the trust fund
may also be secured by an assignment of leases
and rents pursuant to which the borrower
typically assigns its right, title and interest
as landlord under the leases on the related
mortgaged property and the income derived
therefrom to the lender as further security for
the related mortgage loan, while retaining a
license to collect rents for so long as there is
no default. In the event the borrower defaults,
the license terminates and the lender is
entitled to collect the rents. Such assignments
are typically not perfected as security
interests prior to the lender's taking
possession of the related mortgaged property
and/or appointment of a receiver. 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 THE
MORTGAGE LOANS AND LEASES--Leases and Rents" in
the accompanying prospectus.
LIMITATIONS ON THE [ ] ([ ]) groups of mortgage loans
BENEFITS OF included in the trust fund as of the cut-off
CROSS-COLLATERALIZED AND date (control numbers [ ] and [ ]; control
CROSS-DEFAULTED numbers [ ] and [ ]; control numbers [ ] and
PROPERTIES [ ]; and control numbers [ ] and [ ]), or
approximately [ ]% of the mortgage pool, are
cross-collateralized and cross-defaulted with
one or more related cross-collateralized loans.
Such arrangements could be challenged as
fraudulent conveyances by creditors of any of
the related borrowers or by the representative
of the bankruptcy estate of any related borrower
if one or more of such borrowers becomes a
debtor in a bankruptcy case. Generally, under
federal and most state fraudulent conveyance
statutes, a lien granted by any such borrower
could be voided if a court determines that:
o such borrower was insolvent at the time of
granting the lien, was rendered insolvent by
the granting of the lien, was left with
inadequate capital or was not able to pay its
debts as they matured; and
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o the borrower did not, when it allowed its
mortgaged property to be encumbered by the
liens securing the indebtedness represented
by the other cross-collateralized loans,
receive "fair consideration" or "reasonably
equivalent value" for pledging such mortgaged
property for the equal benefit of the other
related borrowers.
We cannot give assurances that a lien granted by
a borrower on a cross-collateralized loan to
secure the mortgage loan of another borrower, or
any payment thereon, would not be avoided as a
fraudulent conveyance. See "DESCRIPTION OF THE
MORTGAGE POOL--Certain Terms and Conditions of
the Mortgage Loans--Cross-Default and
Cross-Collateralization of Certain Mortgage
Loans" and Annex A to this prospectus supplement
for more information regarding the
cross-collateralized loans.
No mortgage loan included in the trust fund is
cross-collateralized with a mortgage loan not
included in the trust fund. See "DESCRIPTION OF
THE MORTGAGE POOL--Certain Terms and Conditions
of the Mortgage Loans--Other Financing".
SINGLE TENANTS AND Certain of the mortgaged properties securing
CONCENTRATION OF TENANTS mortgage loans included in the trust fund are
SUBJECT THE TRUST FUND leased wholly or in large part to a single
TO INCREASED RISK tenant or are wholly or in large part
owner-occupied. Any default by a major tenant
could adversely affect the related borrower's
ability to make payments on the related mortgage
loan. We cannot give assurances that any major
tenant will continue to perform its obligations
under its lease (or, in the case of an
owner-occupied mortgaged property, under the
related mortgage loan documents).
Mortgaged properties leased to a single tenant,
or a small number of tenants, also are more
likely to experience interruptions of cash flow
if a tenant fails to renew its lease because
there may be less or no rental income until new
tenants are found and it may be necessary to
expend substantial amounts of capital to make
the space acceptable to new tenants.
Retail and office properties also may be
adversely affected if there is a concentration
of particular tenants among the mortgaged
properties or of tenants in a particular
business or industry.
THE FAILURE OF A TENANT The bankruptcy or insolvency of a major tenant,
WILL HAVE A NEGATIVE or a number of smaller tenants, in retail,
IMPACT ON SINGLE TENANT industrial and office properties may adversely
PROPERTIES affect the income produced by a mortgaged
property. Under the Bankruptcy Code, a tenant
has the option of assuming or rejecting any
unexpired lease. If the tenant rejects the
lease, the landlord's claim for breach of the
lease would be a general unsecured claim against
the tenant (absent collateral securing the
claim) and the amounts the landlord could claim
would be limited.
LITIGATION MAY HAVE From time to time, there may be legal
ADVERSE AFFECT ON proceedings pending or threatened against the
BORROWERS borrowers and their affiliates relating to the
business of, or arising out of the ordinary
course of business of, the borrowers and their
affiliates. It is possible that future
litigation may have a material adverse effect on
any borrower's ability to meet its obligations
under the related mortgage loan and, thus, on
distributions on your certificates.
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POOR PROPERTY MANAGEMENT The successful operation of a real estate
WILL LOWER THE project depends upon the property manager's
PERFORMANCE OF THE performance and viability. The property manager
RELATED MORTGAGED is responsible for:
PROPERTY
o responding to changes in the local market;
o planning and implementing the rental
structure;
o operating the property and providing building
services;
o managing operating expenses; and
o assuring that maintenance and capital
improvements are carried out in a timely
fashion.
Properties deriving revenues primarily from
short-term sources, such as short term leases,
are generally more management intensive than
properties leased to creditworthy tenants under
long-term leases.
We make no representation or warranty as to the
skills of any present or future managers.
Additionally, we cannot provide assurance that
the property managers will be in a financial
condition to fulfill their management
responsibilities throughout the terms of their
respective management agreements.
CONDEMNATIONS OF MORTGAGED From time to time, there may be condemnations
PROPERTIES MAY RESULT IN pending or threatened against one or more of
LOSSES the mortgaged properties securing mortgage
loans included in the trust fund. The proceeds
payable in connection with a total condemnation
may not be sufficient to restore the related
mortgaged property or to satisfy the remaining
indebtedness of the related mortgage loan. The
occurrence of a partial condemnation may have a
material adverse effect on the continued use of,
or income generation from, the affected
mortgaged property. Therefore, we cannot give
assurances that the occurrence of any
condemnation will not have a negative impact
upon distributions on your certificates.
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TIMING OF PRINCIPAL Principal payments (including prepayments) on
PAYMENTS AND PREPAYMENTS the mortgage loans included in the trust fund
MAY RESULT IN DIFFERENT will occur at different rates. In addition,
ASSET CONCENTRATIONS IN mortgaged properties can be released from the
THE TRUST FUND trust fund as a result of prepayments,
repurchases or condemnations. As a result, the
aggregate balance of the mortgage loans
concentrated in various property types changes
over time. You therefore may be exposed to
varying concentration risks as the mixture of
property types and relative principal balance of
the mortgage loans associated with certain
property types changes. See the table entitled
"Range of Remaining Term to Maturity or
Anticipated Repayment Date for all Mortgaged
Loans as of the Cut-off Date" under "DESCRIPTION
OF THE MORTGAGE POOL-- Additional Mortgage Loan
Information" in this prospectus supplement for a
description of the respective maturity dates of
the mortgage loans included in the trust fund.
Because principal on your certificates (other
than the Class [ ] certificates) is payable in
sequential order to the extent described in this
prospectus supplement under "DESCRIPTION OF THE
CERTIFICATES--Distributions", classes that have
a lower priority of distributions are more
likely to be exposed to the risk of changing
concentrations discussed under "--Special Risks
Associated with High Balance Mortgage Loans"
above than classes with a higher sequential
priority.
THE STATUS OF A GROUND [ ] of the mortgaged properties securing
LEASE MAY BE UNCERTAIN mortgage loans included in the trust fund as of
IN A BANKRUPTCY the cut-off date, or approximately [ ]% of
PROCEEDING mortgage pool, are secured in whole or in part
by leasehold interests. Pursuant to Section
365(h) of the Bankruptcy Code, ground lessees
have the right to continue in a ground lease
even though the representative of their bankrupt
ground lessor rejects the lease. The leasehold
mortgages provide that the borrower may not
elect to treat the ground lease as terminated on
account of any such rejection by the ground
lessor without the prior approval of the holder
of the mortgage note. In a bankruptcy of a
ground lessee/borrower, the ground
lessee/borrower under the protection of the
Bankruptcy Code has the right to assume
(continue) or reject (terminate) any or all of
its ground leases. If the ground lessor and the
ground lessee/borrower are concurrently involved
in bankruptcy proceedings, the trustee may be
unable to enforce the bankrupt ground
lessee/borrower's right to continue in a ground
lease rejected by a bankrupt ground lessor. In
such circumstances, a ground lease could be
terminated notwithstanding lender protection
provisions contained therein or in the related
mortgage.
MORTGAGE LOAN SELLERS MAY Each mortgage loan seller is the sole
NOT BE ABLE TO MAKE A warranting party in respect of the mortgage
REQUIRED REPURCHASE OR loans sold by such mortgage loan seller to us.
SUBSTITUTION OF A Neither we nor any of our affiliates are
DEFECTIVE MORTGAGE LOAN obligated to repurchase or substitute any
mortgage loan in connection with either a breach
of the mortgage loan seller's representations
and warranties or any document defects, if such
mortgage loan seller defaults on its obligation
to do so. We cannot give assurances that either
mortgage loan seller will have the financial
ability to effect such repurchases or
substitutions.
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In addition, one or more of the mortgage loan
sellers has acquired a portion of the mortgage
loans included in the trust fund in one or more
secondary market purchases. Such purchases may
be challenged as fraudulent conveyances. Such a
challenge, if successful, may have a negative
impact on the distributions on your
certificates. See "DESCRIPTION OF THE MORTGAGE
POOL-- Assignment of the Mortgage Loans;
Repurchases and Substitutions" and
"--Representations and Warranties; Repurchases
and Substitutions" in this prospectus supplement
and "DESCRIPTION OF THE POOLING
AGREEMENTS--Representations and Warranties;
Repurchases" in the accompanying prospectus.
ONE ACTION JURISDICTION Several states (including California) have laws
MAY LIMIT THE ABILITY OF that prohibit more than one judicial action to
THE SPECIAL SERVICER TO enforce a mortgage obligation, and some courts
FORECLOSE ON THE have construed the term judicial action
MORTGAGED PROPERTY broadly. Accordingly, the special servicer is
required to obtain advice of counsel prior to
enforcing any of the trust fund's rights under
any of the mortgage loans that include mortgaged
properties where this rule could be applicable.
In the case of either a cross-collateralized and
cross-defaulted mortgage loan or a
multi-property mortgage loan which is secured by
mortgaged properties located in multiple states,
the special servicer may be required to
foreclose first on properties located in states
where such "one action" rules apply (and where
non-judicial foreclosure is permitted) before
foreclosing on properties located in the states
where judicial foreclosure is the only permitted
method of foreclosure. As a result, the special
servicer may incur delay and expense in
foreclosing on mortgaged properties affected by
one action rules. See "CERTAIN LEGAL ASPECTS OF
MORTGAGE LOANS AND LEASES--Foreclosure" in the
accompanying prospectus.
PROPERTY MANAGERS MAY The managers of the mortgaged properties
EXPERIENCE CONFLICTS OF securing mortgage loans included in the trust
INTEREST IN MANAGING fund and the borrowers may experience conflicts
MULTIPLE PROPERTIES of interest in the management and/or ownership
of such properties because:
o a substantial number of the mortgaged
properties are managed by property managers
affiliated with the respective borrowers;
o these property managers also may manage
and/or franchise additional properties,
including properties that may compete with
the mortgaged properties securing the
mortgage loans included in the trust fund;
and
o affiliates of the managers and/or the
borrowers, or the managers and/or the
borrowers themselves, also may own other
properties, including competing properties.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of [ ] fixed rate Mortgage Loans, with an
aggregate balance as of the Cut-Off Date (the "Cut-Off Date Pool Balance") of
approximately $[ ] secured by [ ] Mortgaged Properties located in [ ] states
[and the District of Columbia.] The "Cut-Off Date Balance" of each Mortgage Loan
will equal the unpaid principal balance thereof as of the Cut-Off Date, after
reduction for all payment of principal due on or before such
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<PAGE>
date, whether or not received. The Cut-Off Date Balances of the Mortgage Loans
range from $[ ] to $[ ] and the Mortgage Loans have an average Cut-Off Date
Balance of $[ ]. All percentages of the Mortgage loans, or of any specified
group of Mortgage Loans, referred to in this Prospectus Supplement without
further description are approximate percentages calculated using the Cut-Off
Date Pool Balance. References to percentages of Mortgaged Properties referred to
in this Prospectus Supplement without further description are references to the
percentages of the Cut-Off Date Pool Balance represented by the aggregate
Cut-Off Date Balance of the related Mortgage Loans. Where a Mortgage Loan is
secured by multiple properties, statistical information in this Prospectus
Supplement relating to geographical locations and property types of the
Mortgaged Properties is based on the loan amount allocated to such property.
Such allocation is based on the relative appraised values of such properties. In
addition, wherever information is presented in this Prospectus Supplement with
respect to LTV Ratios or DSC Ratios, the LTV Ratio or DSC Ratio of each
Mortgaged Property securing a Mortgage Loan secured by multiple Mortgaged
Properties is assumed to be the weighted average LTV Ratio or DSC Ratio of such
Mortgage Loan.
All of the Mortgage Loans are evidenced by a promissory note (each a
"Mortgage Note"). All of the Mortgage Loans are secured by a mortgage, deed of
trust or other similar security instrument (each, a "Mortgage") that creates a
first mortgage lien on a borrower's fee simple estate (or, with respect to [ ]
Mortgaged Properties, or approximately [ ]% of the Cut-Off Date Pool Balance, on
the borrower's leasehold estate) in an income-producing real property (each, a
"Mortgaged Property").
Set forth below are the number of Mortgage Loans, and the approximate
percentage of the Cut-Off Date Pool Balance represented by such Mortgage Loans,
that are secured by Mortgaged Properties operated for each indicated purpose:
MORTGAGED PROPERTIES BY PROPERTY TYPE
AGGREGATE
NUMBER CUT-OFF PERCENTAGE OF
NUMBER OF OF S DATE CUT-OFF DATE
PROPERTY TYPE LOANS PROPERTIES BALANCE POOL BALANCE
------------- --------- ---------- --------- -------------
Multifamily..................
Retail (Anchored)............
Hospitality..................
Office.......................
Healthcare(1)................
Retail (Unanchored)..........
Credit Lease Loans(2)........
Industrial/Warehouse.........
Mixed Use....................
Mobile Home Community........
Self Storage.................
Total......................
---------------------------
(1)Including [ ] Mortgage Loan, or approximately [ ]% of the Cut-Off Date Pool
Balance, secured by an assisted living facility; and [ ] Mortgage Loan, or
approximately [ ]% of the Cut-Off Date Pool Balance, secured by a skilled
nursing facility.
(2)Including [ ] Mortgage Loans, or approximately [ ]% of the Cut-Off Date Pool
Balance, secured by hospitality properties and [ ] Mortgage Loan, or
approximately [ ]% of the Cut-Off Date Pool Balance, secured by a retail
property.
MORTGAGE LOAN HISTORY
All of the Mortgage Loans will be acquired on the Closing Date by the
Depositor from the Mortgage Loan Sellers, which either originated each such
Mortgage Loan or acquired it in connection with their commercial and multifamily
mortgage loan conduit programs. None of the Mortgage Loans was 30 days or more
delinquent as of the Cut-Off Date, and no Mortgage Loan has been 30 days or more
delinquent during the 12 months preceding the Cut-Off Date (or since the date of
origination if such Mortgage Loan has been originated within the past 12
months).
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CERTAIN TERMS AND CONDITIONS OF THE MORTGAGE LOANS
Mortgage Rates; Calculations of Interest. All of the Mortgage Loans bear
interest at rates (each a "Mortgage Rate") that will remain fixed for their
remaining terms, provided, however, that after the applicable Anticipated
Repayment Date, the interest rate on the related ARD Loans will increase as
described in this Prospectus Supplement. See "Amortization" below. [ ] of the
Mortgage Loans, or approximately [ ]% of the Cut-Off Date Pool Balance, accrue
interest on the basis (a "30/360 basis") of a 360-day year consisting of twelve
30-day months and [ ] of the Mortgage Loans, or approximately [ ]% of the
Cut-Off Date Pool Balance, accrue interest on the basis (an "Actual/360 basis")
of the actual number of days elapsed over a 360 day year. [ ] of the [ ]
Mortgage Loans that accrue interest on an Actual/360 basis, or approximately [
]% of the Cut-Off Date Pool Balance, have periods during which only interest is
due.
Mortgage Loan Payments. Scheduled payments of principal and interest other
than Balloon Payments (the "Periodic Payments") on [ ] of the Mortgage Loans, or
approximately [ ]% of the Cut-Off Date Pool Balance, are due monthly and [ ] of
the Mortgage Loans, or approximately [ ]% of the Cut-Off Date Pool Balance, are
due semi-annually (the "Semi-Annual Loans"). With respect to each Semi-Annual
Loan the Depositor has arranged for the Master Servicer to advance at the
Depositor's sole cost, on a monthly basis, the interest payments that would have
otherwise been payable if the Periodic Payments had been paid monthly by the
related borrower.
Due Dates. All of the Mortgage Loans are due on the date (each such date, a
"Due Date") occurring on the first day of the month, subject to grace periods
which do not exceed 10 days.
Amortization. [ ]of the Mortgage Loans (the "Balloon Loans"), or
approximately [ ]% of the Cut-Off Date Pool Balance, provide for Periodic
Payments based on amortization schedules significantly longer than their
respective terms to maturity. [ ] of the Mortgage Loans, or approximately [ ]%
of the Cut-Off Date Pool Balance, (the "Fully Amortizing Loans") fully or
substantially amortize through their respective remaining terms to maturity. [ ]
Mortgage Loan, or approximately [ ]% of the Cut-Off Date Pool Balance, provides
for interest only Periodic Payments for the entire term and does not amortize. [
] ([ ]) of the Mortgage Loans (the "ARD Loans"), or approximately [ ]% of the
Cut-Off Date Pool Balance, provides that if the unamortized principal amount
thereof is not repaid on a date set forth in the related Mortgage Note (the
"Anticipated Repayment Date"), the Mortgage Loan will accrue additional interest
(the "Additional Interest") at the rate set forth therein and the borrower will
be required to apply excess monthly cash flow (the "Excess Cash Flow") generated
by the Mortgaged Property (as determined in the related loan documents) to the
repayment of principal outstanding on the Mortgage Loan. Additional Interest
will not be included in the calculation of the Mortgage Rate for a Mortgage
Loan, and will only be paid after the outstanding principal balance of the
Mortgage Loan together with all interest thereon at the Mortgage Rate has been
paid. With respect to such Mortgage Loans, no Prepayment Premiums or Yield
Maintenance Charges will be due in connection with any principal prepayment
after the Anticipated Repayment Date. [ ] of the Balloon Loans, or approximately
[ ]% of the Cut-Off Date Pool Balance provide for changes in the amount of their
respective Periodic Payments at specified times in the future which coincide
with rent increases on the underlying property leases.
[ ] Mortgage Loans, or approximately [ ]% of the Cut-Off Date Pool Balance,
all of which are Credit Lease Loans, have a Balloon Payment which is insured (an
"Insured Balloon Payment") through a Residual Value Insurance Policy (defined
below). With respect to all such Mortgage Loans, the related Tenant is obligated
to make a rent payment corresponding to such Balloon Payment (a "Tenant Balloon
Payment"). If a default occurs under such Balloon Loans with respect to an
Insured Balloon Payment and no recovery is available from the related borrower,
the Tenant or any Guarantor, the Special Servicer will be entitled to recover in
full the amount of the Balloon Payment due under such Mortgage Loan through the
Residual Value Insurance Policy after the maturity date for such Mortgage Loan.
In the event a Residual Value Insurer defaults on an Insured Balloon Payment,
the Special Servicer will still be able to assert whatever other remedies it has
with respect to the related Mortgaged Property and the Residual Value Insurer.
Residual Value Insurance Policy. With respect to each Mortgage Loan which has
an Insured Balloon Payment, the Trustee will be named as the loss-payee under a
related non-cancelable residual value insurance policy obtained to cover the
Balloon Payment relating to such Mortgaged Property (each such policy, a
"Residual Value Insurance Policy"). The Residual Value Insurance Policy will be
or has been issued by [_____________] (the "Residual Value Insurer") which, as
of [ ] [ ] , 20[ ] , had a rating of "[__]" by [ ] and a claims paying rating of
"[___]" by [ ].
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Each Residual Value Insurance Policy is subject to certain limited exclusions.
The Residual Value Insurer under each Residual Value Insurance Policy is not
required to pay amounts due under the Mortgage Loan other than the related
Balloon Payment and, subject to certain limitations set forth in the Residual
Value Insurance Policy, accrued interest, and therefore is not required to pay
any Prepayment Premium or interest due thereunder or any amounts the related
borrower may be obligated to pay thereunder as reimbursement for outstanding P&I
Advances.
Prepayment Provisions. As of the Cut-Off Date, all of the Mortgage Loans
restrict or prohibit voluntary principal prepayment. In general, the Mortgage
Loans either (i) prohibit voluntary payments for most of the term of the related
Mortgage Loan, but permit defeasance after a date specified in the related
Mortgage Note for most of the remaining term ([ ] Mortgage Loans, or
approximately [ ]% of the Cut-Off Date Pool Balance) (ii) prohibit voluntary
prepayments of principal for a period ending on a date specified in the related
Mortgage Note, and thereafter either impose a Yield Maintenance Charge or
Prepayment Premium (but not both) for most of the remaining term ([ ] Mortgage
Loans, or approximately [ ]% of the Cut-Off Date Pool Balance) or (iii) prohibit
prepayment until the date specified in the related Mortgage Note and then allow
prepayment without a Yield Maintenance Charge or a Prepayment Premium for the
remaining term ([ ] Mortgage Loan, or approximately [ ]% of the Cut-Off Date
Pool Balance); provided that, for purposes of each of the foregoing, "remaining
term" refers to either the remaining term to maturity or the Anticipated
Repayment Date, as applicable, of the related Mortgage Loan. With respect to [ ]
Mortgage Loans, or approximately [ ]% of the Cut-Off Date Pool Balance, which
impose Yield Maintenance Charges, such Mortgage Loans provide for the
calculation of the Yield Maintenance Charge using a discount rate equal to the
Discount Rate. See "--Additional Mortgage Loan Information" in this Prospectus
Supplement. Prepayment Premiums and Yield Maintenance Charges, if and to the
extent collected, will be distributed to the holders of the Offered Certificates
as described in this Prospectus Supplement under "DESCRIPTION OF THE
CERTIFICATES--Distributions--Allocation of Prepayment Premiums and Yield
Maintenance Charges." The Depositor makes no representation as to the
enforceability of the provisions of any Mortgage Note requiring the payment of a
Prepayment Premium or Yield Maintenance Charge, or of the collectability of any
Prepayment Premium or Yield Maintenance Charge.
Certain state laws limit the amounts that a lender may collect from a
borrower as an additional charge in connection with the prepayment of a mortgage
loan. None of the Mortgage Loans require the payment of Prepayment Premiums or
Yield Maintenance Charges in connection with a prepayment of the related
Mortgage Loan as a result of a total casualty or condemnation. Furthermore, the
enforceability, under the laws of a number of states, of provisions providing
for payments comparable to the Prepayment Premiums and/or Yield Maintenance
Charges upon an involuntary prepayment is unclear. No assurance can be given
that, at the time a Prepayment Premium or a Yield Maintenance Charge is required
to be made on a Mortgage Loan in connection with an involuntary prepayment, the
obligation to pay such Prepayment Premium or Yield Maintenance Charge will be
enforceable under applicable state law.
[ ] of the Mortgage Loans, or approximately [ ]% of the Cut-Off Date Pool
Balance, provide that, in general, under certain conditions, the related
borrower will have the right, after two years following the Closing Date, to
substitute a pledge of "Defeasance Collateral" in exchange for a release of the
related Mortgaged Property from the lien of the related Mortgage without the
prepayment of the Mortgage Loan or the payment of the applicable Yield
Maintenance Charge or Prepayment Premium. Mortgage Loans secured by more than
one Mortgaged Property which provide for partial defeasance generally require
that (i) prior to the release of a related Mortgaged Property, a specified
percentage (generally 125%) of the allocated loan amount for such Mortgaged
Property be defeased and (ii) that certain DSCR and LTV tests (if applicable) be
satisfied with respect to the remaining Mortgaged Properties after the
defeasance. In general, "Defeasance Collateral" is required to consist of
direct, non-callable United States Treasury obligations that provide for
payments prior, but as close as possible, to all successive Due Dates and the
scheduled maturity date (or the Anticipated Repayment Date in the case of the
ARD Loans), with each such payment being equal to or greater than (with any
excess to be returned to the borrower), the Periodic Payment due on such date or
(i) in the case of a Balloon Loan on the scheduled maturity date, the Balloon
Payment, or (ii) in the case of an ARD Loan, the principal balance on its
Anticipated Repayment Date. The Pooling and Servicing Agreement requires the
Master Servicer or the Special Servicer to require each borrower that proposes
to prepay its Mortgage Loan to pledge Defeasance Collateral in lieu of making a
prepayment, to the extent provided for in the related Mortgage Note, but in each
case subject to certain conditions, including that the defeasance would not have
an adverse effect on the REMIC status of any of the REMICs (accordingly, no
defeasance would be required or permitted prior to the second anniversary of the
Closing Date). The cash amount a borrower must expend to
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purchase, or deliver to the Master Servicer in order for the Master Servicer to
purchase, such United States Treasury obligations may be in excess of the
principal balance of the related Mortgage Loan. There can be no assurances that
a court would not interpret such portion of the cash amount that exceeds the
principal balance as a form of prepayment consideration and would not take it
into account for usury purposes. In some states some forms of prepayment
consideration are unenforceable.
Neither the Master Servicer nor the Special Servicer is permitted to waive or
modify the terms of any Mortgage Loan prohibiting voluntary prepayments during a
Lockout Period or requiring the payment of a Prepayment Premium or Yield
Maintenance Charge except under the circumstances described in "SERVICING OF THE
MORTGAGE LOANS--Modifications, Waivers and Amendments" in this Prospectus
Supplement.
Other Financing. With limited exceptions, all of the Mortgage Loans prohibit
the related borrower from encumbering the Mortgaged Property with additional
secured debt without the lender's prior consent. With respect to [ ] Mortgage
Loans (control numbers [ ] and [ ]), or approximately [ ]% of the Cut-Off Date
Pool Balance, the Mortgaged Properties remain encumbered by existing subordinate
debt, subject to the terms of a subordination and standstill agreement entered
in favor of the lender. With respect to [ ] Mortgage Loans (control numbers [ ],
[ ] and [ ]), or approximately [ ]% of the Cut-Off Date Pool Balance, the
related Mortgage Loan documents provide that the borrower may, under certain
specified circumstances, encumber the related Mortgaged Property with a
subordinate mortgage in the future. See "--'Due-On-Sale' and
`Due-On-Encumbrance' Provisions" below.
With respect to [ ] Mortgage Loans (control numbers[ ] and [ ]), or
approximately [ ]% of the Cut-Off Date Pool Balance, the owners of the related
borrowers have pledged their limited partnership interest or other ownership
interests in the borrower as security for mezzanine debt that was in existence
as of the date of origination of the related Mortgage Loan. See "RISK
FACTORS--Some Mortgaged Properties May Be Encumbered by Subordinated Debt Which
May Delay Foreclosure" in this Prospectus Supplement.
Nonrecourse Obligations. Other than [ ] mortgage loan (control number [ ]) or
approximately [ ]% of the Cut-Off Date Pool Balance, the Mortgage Loans are
generally nonrecourse obligations of the related borrowers and, upon any such
borrower's default in the payment of any amount due under the related Mortgage
Loan, the holder thereof 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
nonrecourse.
"Due-On-Sale" and "Due-On-Encumbrance" Provisions. Substantially all of the
Mortgages contain "due-on-sale" and "due-on-encumbrance" clauses that, in
general, permit the holder of the Mortgage to accelerate the maturity of the
related Mortgage Loan if the borrower sells or otherwise transfers or encumbers
the related Mortgaged Property or prohibit the borrower from doing so without
the consent of the holder of the Mortgage. However, certain of the Mortgage
Loans permit one or more transfers of the related Mortgaged Property to
pre-approved borrowers or pursuant to pre-approved conditions without Lender
approval. As provided in, and subject to, the Pooling and Servicing Agreement,
the Special Servicer, with respect to Specially Serviced Mortgage Loans, and the
Master Servicer, with respect to all other Mortgage Loans and with the consent
of the Special Servicer, on behalf of the Trust Fund, will determine, in a
manner consistent with the servicing standard described in this Prospectus
Supplement 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.
Cross-Default and Cross-Collateralization of Certain Mortgage Loans. [ ] ([
]) groups of Mortgage Loans, or approximately [ ]% of the Cut-Off Date Pool
Balance (control numbers [ ] and [ ]; control numbers [ ] and [ ]; control
numbers [ ] and [ ]; and control numbers [ ] and [ ]), are cross-collateralized
and cross-defaulted with one or more Mortgage Loans in the Mortgage Pool as
indicated in Annex A. No Mortgage Loans are cross-collateralized or
cross-defaulted with any loans that are not included in the Mortgage Pool. The
Master Servicer or the Special Servicer, as the case may be, will determine
whether to enforce the cross-default and cross-collateralization rights upon a
mortgage loan default with respect to any of these Mortgage Loans. The
Certificateholders will not have any right to participate in or control any such
determination. No other Mortgage Loans are subject to cross-collateralization or
cross-default provisions.
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ASSESSMENTS OF PROPERTY CONDITION
Property Inspections. All of the Mortgaged Properties were inspected by or on
behalf of the applicable Mortgage Loan Seller in connection with the origination
or acquisition of the related Mortgage Loans to assess their general condition.
No inspection revealed any patent structural deficiency or any deferred
maintenance considered material and adverse to the interests of the holders of
the Offered Certificates and for which adequate reserves have not been
established.
Appraisals. All of the Mortgaged Properties were appraised by a
state-certified appraiser or an appraiser belonging to the Appraisal Institute
in accordance with the Federal Institutions Reform, Recovery and Enforcement Act
of 1989. The primary purpose of each appraisal was to provide an opinion of the
market value of the related Mortgaged Property. There can be no assurance that
another appraiser would have arrived at the same opinion of market value.
Environmental Assessments. A "Phase I" environmental site assessment was
performed by independent environmental consultants with respect to all the
Mortgaged Properties in connection with the origination of the related Mortgage
Loans. "Phase I" environmental site assessments generally do not include
environmental testing. In certain cases, environmental testing, including in
some cases a "Phase II" environmental site assessment as recommended by such
"Phase I" assessment, was performed. Generally, in each case where environmental
assessments recommended corrective action, the originator determined that the
necessary corrective action had been undertaken in a satisfactory manner, was
being undertaken in a satisfactory manner or that such corrective action would
be adequately addressed post-closing. In some instances, the originator required
that reserves be established to cover the estimated cost of such remediation or
an environmental insurance policy was obtained from a third party.
Engineering Assessments. In connection with the origination of [ ] of the
Mortgage Loans, or approximately [ ] % of the Cut-Off Date Pool Balance, a
licensed engineer or architect inspected the related Mortgaged Property to
assess the condition of the structure, exterior walls, roofing, interior
structure and mechanical and electrical systems. No engineering inspections were
made with respect to the remaining [ ] Mortgage Loans, or approximately [ ]% of
the Cut-Off Date Pool Balance, which were determined by the applicable Mortgage
Loan Seller to be "new construction" or a "substantially rehabilitated property"
pursuant to its underwriting guidelines. The resulting reports indicated
deferred maintenance items and/or recommended capital improvements on certain of
the Mortgaged Properties. Generally, with respect to a majority of Mortgaged
Properties, the related borrowers were required to deposit with the lender an
amount equal to at least [ ]% of the licensed engineer's estimated cost of the
recommended repairs, corrections or replacements to assure their completion.
Earthquake Analyses. An architectural and engineering consultant performed an
analysis on the [ ] Mortgaged Properties, or approximately [ ]% of the Cut-Off
Date Pool Balance, located in a seismic zone 3 or 4 as determined by the United
States Geological Survey in order to evaluate the structural and seismic
condition of the property and to assess, based primarily on statistical
information, the maximum probable loss for the property in an earthquake
scenario. The resulting reports concluded that in the event of an earthquake,
three of the Mortgaged Properties, securing Mortgage Loans which represent
approximately [ ]% of the Cut-Off Date Pool Balance, are likely to suffer a
probable maximum loss in excess of 20% of the amount of the estimated
replacement cost of the improvements located on the related Mortgaged Property.
None of the [ ] Mortgaged Properties described above are covered by earthquake
insurance.
CREDIT LEASE LOANS
[ ] of the Mortgage Loans, or approximately [ ]% of the Cut-Off Date Pool
Balance (the "Credit Lease Loans"), are secured by Mortgages on Mortgaged
Properties that are, in each case, subject to a lease (a "Credit Lease") to a
tenant (each a "Tenant" and, collectively, the "Tenants") which possesses (or
the parent of which or other affiliate of which guarantees the Credit Lease
obligation possesses) the rating indicated in the Credit Lease Table below.
Scheduled monthly rent payments (the "Monthly Rental Payments") under the Credit
Leases are generally determined in underwriting to be sufficient to pay in full
and on a timely basis all interest and principal scheduled to be paid with
respect to the related Credit Lease Loans.
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The Credit Leases generally provide that the Tenant is responsible for all
costs and expenses incurred in connection with the maintenance and operation of
the related Mortgaged Property. In the event of a casualty or condemnation of a
material portion of the related Mortgaged Property, except with respect to [ ]
Credit Lease Loan, or approximately [ ]% of the Cut-Off Date Pool Balance, the
Credit Lease provides that the Tenant is obligated to continue making payments,
and/or the Tenant must make an offer to purchase the applicable Mortgaged
Property for an amount not less than the unpaid principal balance plus accrued
interest on the related Credit Lease Loan.
The payment of interest and principal on Credit Lease Loans is dependent
principally on the payment by each Tenant or guarantor of the Tenant's Credit
Lease (the "Guarantor"), if any, of Monthly Rental Payments and other payments
due under the terms of its Credit Lease. Each Credit Lease has a primary lease
term (the "Primary Term") that expires on or after the scheduled final maturity
date of the related Credit Lease Loan. The Credit Lease Loans are scheduled to
be fully repaid from (i) Monthly Rental Payments made over the Primary Term of
the related Credit Lease or (ii) with respect to Credit Lease Loans which are
Balloon Loans, Monthly Rental Payments and the related Tenant Balloon Payments
(which Balloon Payments (except for [ ] Credit Lease Loan, or approximately [ ]%
of the Cut-Off Date Pool Balance), are guaranteed by a Residual Value Insurance
Policy). Certain of the Credit Leases give the Tenant the right to extend the
term of the Credit Lease by one or more renewal periods after the end of the
Primary Term.
The amount of the Monthly Rental Payments payable by each Tenant is equal to
or greater than the scheduled payment of all principal, interest and other
amounts due each month on the related Credit Lease Loan.
All of the Credit Lease Loans are Balloon Loans which require the related
Tenant to make a rent payment corresponding to the Tenant Balloon Payment. [ ]
of the Credit Lease Loans or approximately [ ]% of the Cut-Off Date Pool
Balance, which are Balloon Loans are insured to the extent of the related
Balloon Payment through a Residual Value Insurance Policy. Pursuant to the terms
of such policies, if a default occurs under such Credit Lease Loans and no
recovery is available from the related Mortgagor, the Tenant or any Guarantor,
the Special Servicer will be entitled to recover in full the amount of the
Balloon Payment due under such Credit Lease Loan after the maturity date for
such Credit Lease Loan.
Set forth in the table below (the "Credit Lease Loan Table") for each Credit
Lease Loan, is the name of the Tenant, the Cut-Off Date Balance of the related
Credit Lease Loan, the Guarantor, if any, the rating of the Tenant or Guarantor
and the Credit Lease type.
CREDIT LEASE LOAN TABLE
CUT-OFF [ ]
CONTROL PROPERTY PROPERTY DATE RATING LEASE TYPE
NUMBER TYPE GUARANTOR/TENANT TYPE BALANCE (1) CODE (2)
------- -------- ---------------- -------- ------- ------- ----------
$
--------
Total.....$
--------
--------
---------------------------
(1)Unless otherwise indicated, such ratings were the highest assigned to the
applicable Tenant or Guarantor, as applicable, by [ ].
(2) "NNN" means triple net lease; "B" means bond type lease.
Generally, each Credit Lease provides that the related Tenant is responsible
for all real property taxes and assessments levied or assessed against the
related Mortgaged Property, all charges for utility services, insurance and
other operating expenses incurred in connection with the operation of the
related Mortgaged Property.
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Generally, each Credit Lease Loan provides that if the Tenant defaults beyond
applicable notice and grace periods in the performance of any covenant or
agreement in such Credit Lease (a "Credit Lease Default"), then the holder of
the related Mortgage may require the related Mortgagor either (i) to terminate
such Credit Lease or (ii) refrain from the exercise of any of its rights
thereunder. A Credit Lease Default will constitute a default under the related
Credit Lease Loan, although in certain cases the Mortgagor may possess certain
cure rights.
In addition, most of the Credit Leases permit the Tenant, at its own expense,
and generally with the consent of the Mortgagor, to make alterations or
improvements on the related Mortgaged Property as the Tenant may deem necessary
or desirable. Such actions, if undertaken by the Tenant, will not affect the
Tenant's obligations under the Credit Lease.
Lease termination rights and rent abatement rights, if any, provide that
Tenants in the Credit Leases may be divided into three categories: (i)
termination and abatement rights directly arising from certain casualty
occurrences or condemnations ("Casualty or Condemnation Rights"), (ii)
termination and abatement rights arising from a Mortgagor's default relating to
its obligations under a Credit Lease to perform required maintenance, repairs or
replacements with respect to the related Mortgaged Property ("Maintenance
Rights") and (iii) termination and abatement rights arising from a Mortgagor's
default in the performance of various other obligations under the Credit Lease,
including remediating environmental conditions not caused by the Tenant,
enforcement of restrictive covenants affecting other property owned by the
Mortgagor in the area of the related Mortgaged Property and complying with laws
affecting such Mortgaged Property or common areas related to such Mortgaged
Property ("Additional Rights"). Certain Credit Leases ("Bond-Type Leases")
provide neither Casualty or Condemnation Rights, Maintenance Rights nor
Additional Rights and the Tenants thereunder are required, at their expense, to
maintain their related Mortgaged Property in good order and repair. Other Credit
Leases provide Casualty or Condemnation Rights and may provide Additional Rights
("Triple Net Leases"). The Tenants under Triple Net Leases are required, at
their expense, to maintain their Mortgaged Properties, including the roof and
structure, in good order and repair. If the Mortgagor defaults in the
performance of certain obligations under a Triple Net Lease and the Tenant
exercises its Additional Rights or Maintenance Rights, there could be a
disruption in the stream of Monthly Rental Payments available to pay principal
and interest to the Credit Lease Loans. Generally, Additional Rights and
Maintenance Rights are mitigated by repair and maintenance reserves, debt
service coverage ratios in excess of 1.0x and, prior to the disbursement of such
Mortgage Loan, receiving Tenant estoppel certificates (i.e., Tenant certificates
confirming the non-existence of landlord default).
Credit Leases with respect to [ ] of the Mortgage Loans, or approximately [ ]
of the Cut-Off Date Pool Balance, are Bond-Type Leases, and the Credit Lease
with respect to [ ] Mortgage Loan, or approximately [ ]% of the Cut-Off Date
Pool Balance, is a Triple Net Lease.
At the end of the term of the Credit Leases, Tenants are generally obligated
to surrender the related Mortgaged Properties in good order and in its original
condition received by the Tenant, except for ordinary wear and tear and repairs
required to be performed by the Mortgagor.
Pursuant to the terms of each assignment of a Credit Lease (the "Credit Lease
Assignment"), the related Mortgagor has assigned to the Mortgagee of the related
Credit Lease Loan, as security for such Mortgagor's obligations thereunder, such
Mortgagor's rights under the Credit Leases and its rights to all income and
profits to be derived from the operation and leasing of the related Mortgaged
Property including, but not limited to, an assignment of any guarantee of the
Tenant's obligations under the Credit Lease and an assignment of the right to
receive all Monthly Rental Payments due under the Credit Leases. Pursuant to the
terms of the Credit Lease Assignments, each Tenant is obligated under its Credit
Lease to make all Monthly Rental Payments directly to the owner of the related
Credit Lease Loan. Repayment of the Credit Lease Loans and other obligations of
the Mortgagors are expected to be funded from such Monthly Rental Payments and
Tenant Balloon Payments. Notwithstanding the foregoing, the Mortgagors remain
liable for all obligations under the Credit Lease Loans (subject to the
non-recourse provisions thereof).
The Mortgage Loans which are Credit Lease Loans are indicated on Annex A-1 to
this Prospectus Supplement.
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SECTION 42 LOW INCOME HOUSING TAX CREDITS
[ ] of the Mortgaged Properties, representing approximately [ ]% of the
Cut-Off Date Pool Balance, entitle their owners to receive low-income housing
tax credits ("Tax Credits") pursuant to Section 42 of the Internal Revenue Code
of 1986 as amended (the "Code"). Section 42 of the Code provides a Tax Credit
for owners of residential rental property meeting the definition of low-income
housing who have received a tax credit allocation from the state or local
allocating agency.
At the time the project is "placed in service," the property owner must make
an irrevocable election of one of two set-aside rules, either (i) at least 20%
of the units must be rented to tenants with incomes of 50% or less of the median
income, or (ii) at least 40% of the units must be rented to tenants with incomes
of 60% or less of the median income. The aggregate amount of Tax Credits the
owner is entitled to is based upon the percentage of total units made available
to qualified tenants. Median income is determined by the U.S. Department of
Housing and Urban Development ("HUD") for each metropolitan area or county in
the United States and is adjusted annually.
The Tax Credit provisions require that gross rent for each low-income unit
not exceed 30% of the annual HUD median income, adjusted for household size
based on the number of bedrooms in the particular unit. The gross rent charged
for a unit must take into account an allowance for utilities. If utilities are
paid by the tenant, then the maximum allowable Tax Credit rent is reduced
according to utility allowances, as provided in regulations of the Internal
Revenue Service.
Under the Tax Credit provisions, a property owner must comply with the tenant
income restrictions and rental restrictions over a minimum of a 15-year
compliance period. In addition, agreements governing the property may require an
"extended use period" which has the effect of extending the income and rental
restrictions for an additional period.
In the event a Tax Credit project does not maintain compliance with the Tax
Credit restrictions on tenant income or rental rates or otherwise satisfy the
Tax Credit provisions of the Code, the owners of the related Mortgaged Property
may suffer a reduction in the amount of available Tax Credits and/or face the
recapture of all or part of the Tax Credits related to the period of the
noncompliance and face the partial recapture of previously taken Tax Credits.
The loss of Tax Credits, and the possibility of recapture of Tax Credits already
taken, may provide significant incentive for project owners to keep the related
Mortgaged Property project in compliance and to fund property operating
deficits.
ADDITIONAL MORTGAGE LOAN INFORMATION
The Mortgage Pool. For a detailed presentation of certain of the
characteristics of the Mortgage Loans and the Mortgaged Properties, on an
individual basis, see Annexes A-1, A-2, A-3, A-4 and A-5 to this Prospectus
Supplement. Certain additional information regarding the Mortgage Loans is
contained in this Prospectus Supplement under "--Assignment of the Mortgage
Loans; Repurchases and Substitutions" and "--Representations and Warranties;
Repurchases and Substitutions," and in the Prospectus under "DESCRIPTION OF THE
TRUST FUNDS" and "CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND LEASES."
In the schedule and tables set forth in Annexes A-1, A-2, A-3, A-4 and A-5 to
this Prospectus Supplement, cross collateralized Mortgage Loans are not grouped
together; instead, references are made under the heading "Cross Collateralized
Group" with respect to the other Mortgage Loans with which they are cross
collateralized.
Each of the following tables sets forth certain characteristics of the
Mortgage Pool presented, where applicable, as of the Cut-Off Date. For purposes
of the tables and Annexes A-1, A-2, A-3, A-4 and A-5:
(i) References to "DSC Ratio" and "DSCR" are references to debt
service coverage ratios. Debt service coverage ratios are used by income
property lenders to measure the ratio of (a) cash currently generated by a
property that is available for debt service (that is, cash that remains
after average cost of non-capital expenses of operation, tenant
improvements, leasing commissions and replacement reserves during the term
of the Mortgage Loan) to (b) required debt service payments. However, debt
service coverage ratios only measure the current, or recent, ability of a
property to service mortgage debt. The DSC Ratio for any Mortgage Loan is
the ratio of "Net Cash Flow" produced by the related Mortgaged Property
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to the annualized amount of debt service that will be payable under that
Mortgage Loan commencing after the origination date. The Net Cash Flow for
a Mortgaged Property is the "net cash flow" of such Mortgaged Property as
set forth in, or determined by the Mortgage Loan Sellers on the basis of,
Mortgaged Property operating statements, generally unaudited, and
certified rent rolls (as applicable) supplied by the related borrower in
the case of multifamily, mixed use, retail, mobile home community,
industrial, self-storage and office properties (each a "Rental Property").
In general, the Mortgage Loan Sellers relied on either full-year operating
statements, rolling 12-month operating statements and/or applicable
year-to-date financial statements, if available, and on rent rolls for all
Rental Properties that were current as of a date not earlier than six
months prior to the respective date of origination in determining Net Cash
Flow for the Mortgaged Properties. References to "Cut-Off Date DSC Ratio"
and "Cut-Off Date DSCR" are references to the DSC Ratio as of the Cut-Off
Date.
In general, "net cash flow" is the revenue derived from the use and
operation of a Mortgaged Property less operating expenses (such as utilities,
administrative expenses, repairs and maintenance, tenant improvement costs,
leasing commissions, management fees and advertising), fixed expenses (such
as insurance, real estate taxes and, if applicable, ground lease payments)
and replacement reserves and an allowance for vacancies and credit losses.
Net cash flow does not reflect interest expenses and non-cash items such as
depreciation and amortization, and generally does not reflect capital
expenditures, but does reflect reserves for replacements and an allowance for
vacancies and credit losses.
In determining the "revenue" component of Net Cash Flow for each Rental
Property, the Mortgage Loan Sellers generally relied on the most recent rent
roll supplied and, where the actual vacancy shown thereon and the market
vacancy was less than 5.0%, assumed a 5.0% vacancy in determining revenue
from rents, except that in the case of certain non-Multifamily Properties,
space occupied by such anchor or single tenants or other large creditworthy
tenants may have been disregarded in performing the vacancy adjustment due to
the length of the related leases or creditworthiness of such tenants, in
accordance with the respective Mortgage Loan Seller's underwriting standards.
Where the actual or market vacancy was not less than 5.0%, the Mortgage Loan
Sellers determined revenue from rents by generally relying on the most recent
rent roll supplied and the greater of (a) actual historical vacancy at the
related Mortgaged Property, (b) historical vacancy at comparable properties
in the same market as the related Mortgaged Property, and (c) 5.0%. In
determining rental revenue for multifamily, self storage and mobile home park
properties, the Mortgage Loan Sellers generally either reviewed rental
revenue shown on the certified rolling 12-month operating statements or
annualized the rental revenue and reimbursement of expenses shown on rent
rolls or operating statements with respect to the prior one to twelve month
periods. For the other Rental Properties, the Mortgage Loan Sellers generally
annualized rental revenue shown on the most recent certified rent roll (as
applicable), after applying the vacancy factor, without further regard to the
terms (including expiration dates) of the leases shown thereon. In the case
of hospitality properties, other than hospitality properties securing Credit
Lease Loans, gross receipts were generally determined based upon the average
occupancy not to exceed 75.0% and daily rates achieved during the prior two
to three year annual reporting period. In the case of residential health care
facilities, receipts were based on historical occupancy levels, historical
operating revenues and the then current occupancy rates. Occupancy rates for
the private health care facilities were generally within the then current
market ranges, and vacancy levels were generally a minimum of 5.0%. In
general, any non-recurring items and non-property related revenue were
eliminated from the calculation except in the case of residential health care
facilities.
In determining the "expense" component of Net Cash Flow for each Mortgaged
Property, the Mortgage Loan Sellers generally relied on rolling 12-month
operating statements and/or full-year or year-to-date financial statements
supplied by the related borrower, except that (a) if tax or insurance expense
information more current than that reflected in the financial statements was
available, the newer information was used, (b) property management fees were
generally assumed to be 3.0% to 7.0% of effective gross revenue (except with
respect to full service hospitality properties, where a minimum of 3.5% of
gross receipts was assumed, and with respect to limited service hospitality
properties, where a minimum of 4.0% of gross receipts was assumed and, with
respect to single tenant properties, where fees as low as 3.0% of effective
gross receipts were assumed), (c) assumptions were made with respect to
reserves for leasing commissions, tenant improvement expenses and capital
expenditures and (d) expenses were assumed to include annual replacement
reserves. See "--Underwriting Standards--Escrow Requirements--Replacement
Reserves" in this Prospectus Supplement. In addition, in some instances, the
Mortgage Loan Sellers recharacterized as capital expenditures those items
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reported by borrowers as operating expenses (thus increasing "net cash flow")
where the Mortgage Loan Sellers determined appropriate.
THE BORROWERS' FINANCIAL INFORMATION USED TO DETERMINE NET CASH FLOW WAS
IN MOST CASES BORROWER CERTIFIED, BUT UNAUDITED, AND NEITHER THE MORTGAGE
LOAN SELLERS NOR THE DEPOSITOR VERIFIED THEIR ACCURACY.
(ii) References to "Cut-Off Date LTV" and "Cut-Off Date LTV Ratio"
are references to the ratio, expressed as a percentage, of the Cut-Off
Date Balance of a Mortgage Loan to the appraised value of the related
Mortgaged Property as shown on the most recent third-party appraisal
thereof available to the Mortgage Loan Sellers.
(iii) References to "Maturity Date LTV Ratio" and "LTV at ARD or
Maturity" are references to the ratio, expressed as a percentage, of the
expected balance of a Balloon Loan on its scheduled maturity date (or ARD
Loan on its Anticipated Repayment Date) (prior to the payment of any
Balloon Payment or principal prepayments) to the appraised value of the
related Mortgaged Property as shown on the most recent third-party
appraisal thereof available to the Mortgage Loan Sellers prior to the
Cut-Off Date.
(iv) References to "Loan per Sq Ft, Unit, Bed, Pad or Room" are, for
each Mortgage Loan secured by a lien on a multifamily property (including
a mobile home community), hospitality property or healthcare facility,
respectively, references to the Cut-Off Date Balance of such Mortgage Loan
divided by the number of dwelling units, pads, guest rooms or beds,
respectively that the related Mortgaged Property comprises, and, for each
Mortgage Loan secured by a lien on a retail, industrial/warehouse, self
storage or office property, references to the Cut-Off Date Balance of such
Mortgage Loan divided by the net rentable square foot area of the related
Mortgaged Property.
(v) References to "Year Built" are references to the year that a
Mortgaged Property was originally constructed or substantially renovated.
With respect to any Mortgaged Property which was constructed in phases,
the "Year Built" refers to the year that the first phase was originally
constructed.
(vi) References to "weighted averages" are references to averages
weighted on the basis of the Cut-Off Date Balances of the related Mortgage
Loans.
(vii) References to "Underwritten Replacement Reserves" represent
estimated annual capital costs, as used by the Mortgage Loan Sellers in
determining Net Cash Flow.
(viii) References to "Administrative Cost Rate" for each Mortgage
Loan represent the sum of (a) the Master Servicing Fee Rate for such
Mortgage Loan, (b) [ ]%, which percentage represents the trustee fee rate
with respect to each Mortgage Loan and (c) with respect to the Semi-Annual
Loans (control numbers [ ] and [ ]) [ ]%, which percentage represents
costs of the Depositor to provide for the advance of monthly interest on
such Semi-Annual Loans (the "Swap Fee").
(ix) References to "Remaining Term to Maturity" represent, with
respect to each Mortgage Loan, the number of months remaining from the
Cut-Off Date to the stated maturity date of such Mortgage Loan (or the
remaining number of months to the Anticipated Repayment Date with respect
to each ARD Loan).
(x) References to "Remaining Amortization Term" represent, with
respect to each Mortgage Loan, the number of months remaining from the
Cut-Off Date to the month in which such Mortgage Loan would fully amortize
in accordance with such loan's amortization schedule without regard to any
Balloon Payment or any interest-only period, if any, due on such Mortgage
Loan.
(xi) References to "L ( )" or "Lockout" or "Lockout Period"
represent, with respect to each Mortgage Loan, the period during which
prepayments of principal are prohibited and no substitution of Defeasance
Collateral is permitted. The number indicated in the parentheses indicates
the duration in years of such period. References to "X ( )" represent the
percentage of Prepayment Premium percentages and the duration such
Prepayment Premium is assessed. References to "O ( )" represent the period
for which no (A) Prepayment Premium or Yield Maintenance Charge is
assessed or (B) defeasance can be required. References to "YMx% ( )"
represent the period for which the Prepayment Premium for such Mortgage
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Loan is equal to the greater of the Yield Maintenance Charge for such
Mortgage Loan and x% of such Mortgage Loan's outstanding principal
balance. References to "YM ( )" represent the period for which the Yield
Maintenance Charge is assessed. The periods, if any, between consecutive
Due Dates occurring prior to the maturity date or Anticipated Repayment
Date, as applicable, of a Mortgage Loan during which the related borrower
will have the right to prepay such Mortgage Loan without being required to
pay a Prepayment Premium or a Yield Maintenance Charge (each such period,
an "Open Period") with respect to all of the Mortgage Loans have been
calculated as those Open Periods occurring immediately prior to the
maturity date or Anticipated Repayment Date, as applicable, of such
Mortgage Loan as set forth in the related Mortgage Loan documents.
(xii) References to "D" or "Defeasance" represent, with respect to
each Mortgage Loan, the right of the related holder of the Mortgage to
require the related borrower, in lieu of a prepayment premium, to pledge
to such holder Defeasance Collateral.
(xiii) References to "Occupancy Percentage" are, with respect to any
Mortgaged Property, references as of the most recently available rent
rolls to (a) in the case of multifamily properties, mobile home
communities and assisted living/congregate care facilities, the percentage
of units rented, (b) in the case of office and retail properties, the
percentage of the net rentable square footage rented, and (c) in the case
of self-storage facilities, either the percentage of the net rentable
square footage rented or the percentage of units rented (depending on
borrower reporting).
(xiv) References to "Original Term to Maturity" are references to the
term from origination to maturity for each Mortgage Loan (or the term from
origination to the Anticipated Repayment Date with respect to each ARD
Loan).
(xv) References to "NAP" indicate that with respect to a particular
category of data, that such data is not applicable.
(xvi) References to "NAV" indicate that, with respect to a particular
category of data, such data is not available.
(xvii) References to "Capital Imp. Reserve" are references to funded
reserves escrowed for repairs, replacements and corrections of issues
outlined in the engineering reports.
(xviii) References to "Replacement Reserve" are references to funded
reserves escrowed for ongoing items such as repairs and replacements,
including, in the case of hospitality properties, reserves for furniture,
fixtures and equipment. In certain cases, however, the subject reserve
will be subject to a maximum amount, and once such maximum amount is
reached, such reserve will not thereafter be funded, except, in some such
cases, to the extent it is drawn upon.
(xix) References to "TI/LC Reserve" are references to funded reserves
escrowed for tenant improvement allowances and leasing commissions. In
certain cases, however, the subject reserve will be subject to a maximum
amount, and once such maximum amount is reached, such reserve will not
thereafter be funded, except, in some such cases, to the extent it is
drawn upon.
The sum in any column of any of the following tables may not equal the
indicated total due to rounding.
The Cut-Off Date DSC Ratio and the Cut-Off Date LTV Ratio calculations for
the Mortgage Loans are exclusive of Credit Lease Loans because the Credit Lease
Loans were originated primarily on the basis of the creditworthiness of the
related Tenants or Guarantors.
S-62
<PAGE>
MORTGAGED PROPERTIES BY PROPERTY TYPE FOR ALL MORTGAGE LOANS
<TABLE>
<CAPTION>
WTD. AVG. WTD.
% BY WTD. AVG. WTD. AVG. STATED AVG. MINIMUM
NUMBER AGGREGATE CUT-OFF AVERAGE HIGHEST CUT-OFF LTV REMAINING CUT-OFF CUT-OFF
NUMBER OF CUT-OFF DATE CUT-OFF CUT-OFF DATE RATIO AT TERM TO DATE DATE
OF PROPERTIES DATE POOL DATE DATE LTV MATURITY MATURITY DSC DSC
PROPERTY TYPE LOANS (5) BALANCE BALANCE BALANCE BALANCE RATIO (1) (2) MOS. (2) RATIO (1) RATION (1)
------------- ------ ---------- --------- ------- ------- ------- --------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Multifamily.....
Retail -
Anchored......
Hospitality.....
Office..........
Healthcare......
Retail -
Unanchored....
Credit Lease
Loans(4)......
Industrial......
Mixed Use.......
Mobil Home
Community.....
Self Storage....
Total/Weighted
Average.......
<CAPTION>
MAXIMUM
CUT-OFF
DATE WTD. AVG. WTD. AVG.
DSC OCCUPANCY MORTGAGE
PROPERTY TYPE RATIO (1) RATE (3) RATE
------------- --------- --------- ---------
<S> <C> <C> <C>
Multifamily.....
Retail -
Anchored......
Hospitality.....
Office..........
Healthcare......
Retail -
Unanchored....
Credit Lease
Loans(4)......
Industrial......
Mixed Use.......
Mobil Home
Community.....
Self Storage....
Total/Weighted
Average.......
</TABLE>
(1) The Cut-Off Date DSC Ratio and Cut-Off Date LTV Ratio information shown
above do not reflect the [ ] Credit Lease Loans, or approximately [ ]% of
the Cut-Off Date Pool Balance, which typically at origination have debt
service coverage ratios below 1.05x and loan-to-value ratios in excess of
90%.
(2) Calculated with respect to the Anticipated Repayment Date for ARD Loans.
(3) Occupancy Rates were calculated without reference to hospitality
properties.
(4) Including [ ] Mortgage Loans, or approximately [ ]% of the Cut-Off Date
Pool Balance, secured by hospitality properties and [ ] Mortgage Loan, or
approximately [ ]% of the Cut-Off Date Pool Balance, secured by a retail
property.
(5) Because this table is presented at the Mortgaged Property level, weighted
averages are based on allocated loan amounts (allocated by either the
amount allocated in the related Mortgage or the appraised value of the
Mortgaged Property) for the Mortgage Loans secured by more than one
Mortgaged Property and may therefore deviate slightly from weighted
averages presented at the Mortgage Pool level in other tables in this
Prospectus Supplement.
S-63
<PAGE>
RANGE OF CUT-OFF DATE BALANCES FOR ALL MORTGAGE LOANS
<TABLE>
<CAPTION>
WTD. AVG. WTD.
% BY WTD. AVG. WTD. AVG. STATED AVG.
CUT-OFF AVERAGE HIGHEST CUT-OFF LTV REMAINING CUT-OFF
NUMBER AGGREGATE DATE CUT-OFF CUT-OFF DATE RATIO AT TERM TO DATE WTD. AVG.
OF CUT-OFF DATE POOL DATE DATE LTV MATURITY MATURITY DSC MORTGAGE
DATE BALANCES ($) LOANS BALANCE BALANCE BALANCE BALANCE RATIO (1) (2) MOS. (2) RATIO (1) RATE
------------------------- ------ ------------ -------- ------- ------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
[ - 2,000,000....
2,000,001 - 4,000,000....
4,000,001 - 6,000,000....
6,000,001 - 8,000,000....
8,000,001 - 10,000,000....
10,000,001 - 15,000,000....
15,000,001 - 20,000,000....
20,000,001 - 25,000,000....
25,000,001 - 30,000,000....
45,000,001 - 50,000,000....
Total/Weighted Average...
</TABLE>
The average Cut-Off Date Balance for all Mortgage Loans is $[ ].
----------
(1) The Cut-Off Date DSC Ratio and Cut-Off Date LTV Ratio information shown
above do not reflect the [ ] Credit Lease Loans, or approximately [ ]% of
the Cut-Off Date Pool Balance, which typically at origination have debt
service coverage ratios below 1.05x and loan-to-value ratios in excess of
90%.
(2) Calculated with respect to the Anticipated Repayment Date for the ARD
Loans.
S-64
<PAGE>
MORTGAGED PROPERTIES BY STATE FOR
ALL MORTGAGE LOANS
<TABLE>
<CAPTION>
WTD.
% BY WTD. AVG. WTD. AVG. WTD. AVG. AVG.
CUT-OFF AVERAGE HIGHEST CUT-OFF LTV STATED CUT-OFF
NUMBER OF AGGREGATE DATE CUT-OFF CUT-OFF DATE RATIO AT REMAINING DATE WTD. AVG.
MORTGAGED CUT-OFF DATE POOL DATE DATE LTV MATURITY TERM TO DSC MORTGAGE
STATE PROPERTIES(3) BALANCE BALANCE BALANCE BALANCE RATIO (1) (2) MATURITY (2) RATIO (1) RATE
----- ------------- ------------ ------- ------- ------- --------- -------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total/Weighted
Average.....
</TABLE>
----------
(1) The Cut-Off Date DSC Ratio and Cut-Off Date LTV Ratio information shown
above do not reflect the [ ] Credit Lease Loans, or approximately [ ]% of
the Cut-Off Date Pool Balance, which typically at origination have debt
service coverage ratios below 1.05x and loan-to-value ratios in excess of
90%.
(2) Calculated with respect to the Anticipated Repayment Date for ARD Loans.
(3) Because this table is presented at the Mortgaged Property Level, weighted
averages are based on allocated loan amounts (allocated by either the
amount allocated in the related Mortgage or the appraised value of the
Mortgaged Property) for the Mortgage Loans secured by more than one
Mortgaged Property and may therefore deviate slightly from weighted
averages presented at the mortgage pool level in other tables in this
Prospectus Supplement.
S-65
<PAGE>
RANGE OF DSC RATIOS
FOR ALL MORTGAGE LOANS OTHER THAN CREDIT LEASE LOANS
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
% BY WTD. AVG. WTD. AVG.
RANGE OF CUT-OFF AVERAGE CUT-OFF WTD. AVG. STATED WTD. AVG.
CUT-OFF DATE NUMBER AGGREGATE DATE CUT-OFF HIGHEST DATE LTV RATIO REMAINING CUT-OFF WTD. AVG.
DSC OF CUT-OFF DATE POOL DATE CUT-OFF LTV AT MATURITY TERM TO DATE DSC MORTGAGE
RATIO(X) LOANS BALANCE BALANCE BALANCE BALANCE RATIO (1) (2) MATURITY (2) RATIO (1) RATE
------------ ------ ------------ ------- ------- ------- --------- ----------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total/Weighted Average.............
</TABLE>
The weighted average Cut-Off Date DSC Ratio for all Mortgage Loans other than
Credit Lease Loans is 1.35x.
----------
(1) The Cut-Off Date DSC Ratio and Cut-Off Date LTV Ratio information shown
above do not reflect the [ ] Credit Lease Loans, or approximately [ ]% of
the Cut-Off Date Pool Balance, which typically at origination have debt
service coverage ratios below 1.05x and loan-to-value ratios in excess of
90%.
(2) Calculated with respect to the Anticipated Repayment Date for the ARD
Loans.
(3) Includes [ ] Mortgage Loans that are secured by Section 42 multifamily
properties which entitle the owners to low-income housing tax credits.
S-66
<PAGE>
RANGE OF LTV RATIOS
FOR ALL MORTGAGE LOANS OTHER THAN CREDIT LEASE LOANS
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
WTD. AVG.
% BY WTD. AVG. STATED
RANGE OF CUT-OFF AVERAGE CUT-OFF WTD. AVG. REMAINING WTD. AVG.
CUT-OFF DATE NUMBER AGGREGATE DATE CUT-OFF HIGHEST DATE LTV RATIO TERM TO CUT-OFF WTD. AVG.
LTV OF CUT-OFF DATE POOL DATE CUT-OFF LTV AT MATURITY MATURITY DATE DSC MORTGAGE
RATIO(X) LOANS BALANCE BALANCE BALANCE BALANCE RATIO (1) (2) MOS. (2) RATIO (1) RATE
------------ ------ ------------ ------- ------- ------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total/Weighted Average.............
</TABLE>
The weighted average Cut-Off Date LTV Ratio for all the Mortgage Loans other
than Credit Lease Loans is [ ]%.
----------
(1) The Cut-Off Date DSC Ratio and Cut-Off Date LTV Ratio information shown
above do not reflect the [ ] Credit Lease Loans, or approximately [ ]% of
the Cut-Off Date Pool Balance, which typically at origination have debt
service coverage ratios below 1.05x and loan-to-value ratios in excess of
90%.
(2) Calculated with respect to the Anticipated Repayment Date for the ARD
Loans.
(3) The Mortgage Loan with the highest Cut-Off Date LTV Ratio is secured by a
Section 42 multifamily property which entitles the owner to low-income
housing tax credits.
S-67
<PAGE>
RANGE OF LTV RATIOS
FOR ALL MORTGAGE LOANS AS OF THE MATURITY DATE
<TABLE>
<CAPTION>
WTD. AVG.
% BY WTD. AVG. STATED
RANGE OF CUT-OFF AVERAGE CUT-OFF WTD. AVG. REMAINING WTD. AVG.
MATURITY DATE NUMBER AGGREGATE DATE CUT-OFF HIGHEST DATE LTV RATIO TERM TO CUT-OFF WTD. AVG.
DSC OF CUT-OFF DATE POOL DATE CUT-OFF LTV AT MATURITY MATURITY DATE DSC MORTGAGE
RATIO(X) LOANS BALANCE BALANCE BALANCE BALANCE RATIO (1) (2) MOS. (2) RATIO (1) RATE
------------- ------ ------------ ------- ------- ------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total/Weighted Average.............
</TABLE>
The weighted average LTV Ratio at maturity for all Mortgage Loans is [ ]%.
----------
(1) The Cut-Off Date DSC Ratio and Cut-Off Date LTV Ratio information shown
above do not reflect the [ ] Credit Lease Loans that are Balloon Loans,
comprising approximately [ ]% of the Cut-Off Date Pool Balance, which
typically at origination have debt service coverage ratios below 1.05x and
loan-to-value ratios in excess of 90%.
(2) Calculated with respect to the Anticipated Repayment Date for the ARD
Loans.
S-68
<PAGE>
RANGE OF MORTGAGE RATES
FOR ALL MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
WTD. AVG.
% BY WTD. AVG. STATED
CUT-OFF AVERAGE CUT-OFF WTD. AVG. REMAINING WTD. AVG.
NUMBER AGGREGATE DATE CUT-OFF HIGHEST DATE LTV RATIO TERM TO CUT-OFF WTD. AVG.
RANGE OF OF CUT-OFF DATE POOL DATE CUT-OFF LTV AT MATURITY MATURITY DATE DSC MORTGAGE
MORTGAGE RATES(%) LOANS BALANCE BALANCE BALANCE BALANCE RATIO (1) (2) MOS. (2) RATIO (1) RATE
------------- ------ ------------ ------- ------- ------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total/Weighted Average.............
</TABLE>
The weighted average Mortgage Rate for all Mortgage Loans is [ ]%.
----------
(1) The Cut-Off Date DSC Ratio and Cut-Off Date LTV Ratio information shown
above do not reflect the [ ] Credit Lease Loans, or approximately [ ]% of
the Cut-Off Date Pool Balance, which typically origination have at debt
service coverage ratios below 1.05x and loan-to-value ratios in excess of
90%.
(2) Calculated with respect to the Anticipated Repayment Date for the ARD
Loans.
S-69
<PAGE>
RANGE OF ORIGINAL TERMS TO MATURITY OR ANTICIPATED REPAYMENT DATE
FOR ALL MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
WTD. AVG.
RANGE OF % BY WTD. AVG. STATED
REMAINING TERMS CUT-OFF AVERAGE CUT-OFF WTD. AVG. REMAINING WTD. AVG.
TO MATURITY NUMBER AGGREGATE DATE CUT-OFF HIGHEST DATE LTV RATIO TERM TO CUT-OFF WTD. AVG.
OR ANTICIPATED OF CUT-OFF DATE POOL DATE CUT-OFF LTV AT MATURITY MATURITY DATE DSC MORTGAGE
REPAYMENT DATE (MONTHS) LOANS BALANCE BALANCE BALANCE BALANCE RATIO (1) (2) MOS. (2) RATIO (1) RATE
----------------------- ------ ------------ ------- ------- ------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total/Weighted Average.............
</TABLE>
The weighted average original term to maturity for all Mortgage Loans is [ ]
months.
----------
(1) The Cut-Off Date DSC Ratio and Cut-Off Date LTV Ratio information shown
above do not reflect the [ ] Credit Lease Loans, or approximately [ ]% of
the Cut-Off Date Pool Balance, which typically at origination have debt
service coverage ratios below 1.05x and loan-to-value ratios in excess of
90%.
(2) Calculated with respect to the Anticipated Repayment Date for the ARD
Loans.
S-70
<PAGE>
RANGE OF REMAINING TERM TO MATURITY OR ANTICIPATED REPAYMENT DATE
FOR ALL MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
WTD. AVG.
RANGE OF % BY WTD. AVG. STATED
REMAINING TERMS CUT-OFF AVERAGE CUT-OFF WTD. AVG. REMAINING WTD. AVG.
TO MATURITY NUMBER AGGREGATE DATE CUT-OFF HIGHEST DATE LTV RATIO TERM TO CUT-OFF WTD. AVG.
OR ANTICIPATED OF CUT-OFF DATE POOL DATE CUT-OFF LTV AT MATURITY MATURITY DATE DSC MORTGAGE
REPAYMENT DATE (MONTHS) LOANS BALANCE BALANCE BALANCE BALANCE RATIO (1) (2) MOS. (2) RATIO (1) RATE
----------------------- ------ ------------ ------- ------- ------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total/Weighted Average.............
</TABLE>
The weighted average remaining term to maturity for all Mortgage Loans is [ ]
months.
----------
(1) The Cut-Off Date DSC Ratio and Cut-Off Date LTV Ratio information shown
above do not reflect the [ ] Credit Lease Loans, or approximately [ ]% of
the Cut-Off Date Pool Balance, which typically at origination have debt
service coverage ratios below 1.05x and loan-to-value ratios in excess of
90%.
(2) Calculated with respect to the Anticipated Repayment Date for the ARD
Loans.
S-71
<PAGE>
RANGE OF REMAINING AMORTIZATION TERMS
FOR ALL MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
WTD. AVG.
% BY WTD. AVG. STATED
CUT-OFF AVERAGE CUT-OFF WTD. AVG. REMAINING WTD. AVG.
REMAINING NUMBER AGGREGATE DATE CUT-OFF HIGHEST DATE LTV RATIO TERM TO CUT-OFF WTD. AVG.
AMORTIZATION OF CUT-OFF DATE POOL DATE CUT-OFF LTV AT MATURITY MATURITY DATE DSC MORTGAGE
TERM (MONTHS) LOANS BALANCE BALANCE BALANCE BALANCE RATIO (1) (2) MOS. (2) RATIO (1) RATE
------------------ ------ ------------ ------- ------- ------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total/Weighted Average.............
</TABLE>
The weighted average remaining amortization term for all Mortgage Loans is [ ]
months.
----------
(1) The Cut-Off Date DSC Ratio and Cut-Off Date LTV Ratio information shown
above do not reflect the [ ] Credit Lease Loans, or approximately [ ]% of
the Cut-Off Date Pool Balance, which typically at origination have debt
service coverage ratios below 1.05x and loan-to-value ratios in excess of
90%.
(2) Calculated with respect to the Anticipated Repayment Date for the ARD
Loans.
S-72
<PAGE>
AMORTIZATION TYPES FOR ALL MORTGAGE LOANS
<TABLE>
<CAPTION>
WTD. AVG.
% BY WTD. AVG. STATED
CUT-OFF AVERAGE CUT-OFF WTD. AVG. REMAINING WTD. AVG.
NUMBER AGGREGATE DATE CUT-OFF HIGHEST DATE LTV RATIO TERM TO CUT-OFF WTD. AVG.
AMORTIZATION OF CUT-OFF DATE POOL DATE CUT-OFF LTV AT MATURITY MATURITY DATE DSC MORTGAGE
TYPES LOANS BALANCE BALANCE BALANCE BALANCE RATIO (1) (2) MOS. (2) RATIO (1) RATE
------------ ------ ------------ ------- ------- ------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Total/Weighted Average.............
----------
(1) The Cut-Off Date DSC Ratio and Cut-Off Date LTV Ratio information shown
above do not reflect the [ ] Credit Lease Loans, or approximately [ ]% of
the Cut-Off Date Pool Balance, which typically at origination have debt
service coverage ratios below 1.05x and loan-to-value ratios in excess of
90%.
(2) Calculated with respect to the Anticipation Repayment Date for ARD Loans.
(3) Contains certain Credit Lease Loans that are subject to changes in the
amount of the monthly payment at specified times in the future. Refer to
Annex A-2 contained in this Prospectus Supplement and to the sheet named
"CTL Step Schedules" in the file "FUNB[ ]" on the diskette in the back
cover of the Prospectus Supplement.
(4) These Mortgage Loans require payments of interest only for a period of [ ]
to [ ] months from origination prior to the commencement of payments of
principal and interest.
S-73
<PAGE>
RANGE OF OCCUPANCY RATES FOR ALL MORTGAGE LOANS
OTHER THAN LOANS SECURED BY HOSPITALITY PROPERTIES
<TABLE>
<CAPTION>
WTD. AVG.
% BY WTD. AVG. STATED
CUT-OFF AVERAGE CUT-OFF WTD. AVG. REMAINING WTD. AVG.
RANGE OF NUMBER AGGREGATE DATE CUT-OFF HIGHEST DATE LTV RATIO TERM TO CUT-OFF WTD. AVG.
OCCUPANCY OF CUT-OFF DATE POOL DATE CUT-OFF LTV AT MATURITY MATURITY DATE DSC MORTGAGE
RATES(%)(1) LOANS BALANCE BALANCE BALANCE BALANCE RATIO (1) (2) MOS. (2) RATIO (1) RATE
----------- ------ ------------ ------- ------- ------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total/Weighted Average.............
</TABLE>
----------
(1) Excludes [ ] hospitality properties, or approximately [ ]% of the Cut-Off
Date Pool Balance.
(2) Occupancy Rates have been calculated in this table based upon rent rolls
made available to the Mortgage Loan Sellers by the related borrowers as of
the rent roll date set forth on Annex A-1 to this Prospectus Supplement.
(3) The Cut-Off Date DSC Ratio and Cut-Off Date LTV Ratio information shown
above do not reflect the [ ] Credit Lease Loan, or approximately [ ]% of
the Cut-Off Date Pool Balance, which typically at origination have debt
service coverage ratios below 1.05x and loan to value ratios in excess of
90%.
(4) Calculated with respect to the Anticipated Repayment Date for the ARD
Loans.
S-74
<PAGE>
PERCENTAGE OF MORTGAGE POOL BY
PREPAYMENT RESTRICTION (ASSUMING NO PREPAYMENT)
PREPAYMENT [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
RESTRICTION --- --- --- --- --- --- --- --- --- ---
Lock-out/Defeasance..................
Yield Maintenance/Prepayment Premium.
Sub Total............................
PREPAYMENT PREMIUM
Total.............................
S-75
<PAGE>
TEN LARGEST MORTGAGE LOANS
The following table and summaries describe the ten largest Mortgage Loans in the
Mortgage Pool by Cut-Off Date Balance:
TEN LARGEST MORTGAGE LOANS BY CUT-OFF DATE BALANCE
<TABLE>
<CAPTION>
PERCENTAGE
CUT-OFF OF CUT-OFF CUT-OFF LTV CUT-OFF
NO. OF DATE DATE POOL PROPERTY DATE LTV RATIO AT DATE DSC MORTGAGE
PROPERTY NAME PROPERTIES BALANCE BALANCE TYPE RATIO MATURITY RATIO RATE
------------- ---------- ------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
[insert description of largest mortgage loans]
</TABLE>
THE MORTGAGE LOAN SELLERS
The Depositor will acquire the Mortgage Loans from the Mortgage Loan Sellers
on or prior to the Closing Date pursuant to separate mortgage loan purchase
agreements (each a "Mortgage Loan Purchase Agreement," and together, the
"Mortgage Loan Purchase Agreements"). The Mortgage Loan Sellers acquired or
originated the Mortgage Loans as described above under "--Mortgage Loan
History."
UNDERWRITING STANDARDS
General. Each Mortgage Loan Seller's commercial real estate finance or
commercial mortgage banking group has the authority, with the approval from the
appropriate credit committee to originate fixed-rate, first lien mortgage loans
for securitization. Each Mortgage Loan Seller's commercial real estate finance
or commercial mortgage banking operation is a vertically integrated entity,
staffed by real estate professionals. Each Mortgage Loan Seller's loan
underwriting group is an integral component of the commercial real estate
finance or commercial mortgage banking group which also includes distinct groups
responsible for loan origination and closing mortgage loans.
Upon receipt of a loan package, the respective Mortgage Loan Seller's loan
underwriters commence an extensive review of the borrower's financial condition
and creditworthiness and the real estate which will secure the loan.
Loan Analysis. Generally, each Mortgage Loan Seller performs both a credit
analysis and collateral analysis with respect to a loan applicant. The credit
analysis of the borrower includes a review of historical financial statements,
including operating statements and rent rolls (generally unaudited), historical
tax returns, third party credit reports, judgment, lien, bankruptcy and pending
litigation searches and, if applicable, the loan payment history of the
borrower. Each Mortgage Loan Seller also performs a qualitative analysis which
incorporates independent credit checks, periodical searches, industry research
and published debt and equity information with respect to certain principals of
the borrower as well as the borrower itself. Borrowers are generally required to
be single-purpose entities although they are generally not required to be
bankruptcy-remote entities. The collateral analysis includes an analysis of the
historical property operating statements, rent rolls and a projection of future
performance and a review of tenant leases. A member of the loan underwriting
team also conducts a site inspection or causes such inspection to be performed
to confirm the occupancy rate of the mortgaged property, analyzes the market and
assesses the utility of the mortgaged property within the market. Each Mortgage
Loan Seller requires
S-76
<PAGE>
third party appraisals, as well as environmental and building condition reports.
Each report is reviewed for acceptability by a Mortgage Loan Seller staff member
for compliance with program standards and such staff member approves or rejects
such report. The results of these reviews are incorporated into the underwriting
report.
Loan Approval. Prior to commitment, all mortgage loans must be approved by
the applicable Mortgage Loan Seller's credit committee in accordance with its
credit policies. The credit committee may approve a mortgage loan as
recommended, modify the loan terms or decline a loan transaction. All mortgage
loans purchased by either Mortgage Loan Seller from non-affiliated originators
must be reviewed by the underwriting staff and credit committee to determine if
they comply with such Mortgage Loan Seller's underwriting standards.
Debt Service Coverage Ratio and LTV Ratio. Each Mortgage Loan Seller's
underwriting standards generally mandate minimum debt service coverage ratios
and maximum loan-to-value ratios for each of the indicated property types as
follows:
MINIMUM MAXIMUM
DSC RATIO LTV RATIO
PROPERTY TYPE GUIDELINES GUIDELINES
------------- ---------- ----------
Multifamily.....................
Anchored Retail.................
Unanchored Retail...............
Office..........................
Industrial......................
Hospitality.....................
Credit Lease....................
Self-Storage....................
Healthcare......................
Mixed Use.......................
Mobile Home Park................
Section 42 Properties...........
See Annex A for actual DSC Ratios and LTV Ratios with respect to the Mortgage
Loans.
The debt service coverage ratio guidelines listed above are calculated based
on net cash flow at the time of origination. In addition, each Mortgage Loan
Seller's underwriting guidelines generally permit a maximum amortization period
of 30 years. However, notwithstanding the foregoing guidelines, in certain
circumstances the actual debt service coverage ratios, loan-to-value ratios and
amortization periods for the mortgage loans originated by such Mortgage Loan
Seller may vary from these guidelines. See Annex A-1 to this Prospectus
Supplement.
Escrow Requirements. Except with respect to Credit Lease Loans, each Mortgage
Loan Seller requires substantially all borrowers to fund various escrows for
taxes and insurance, capital expenses and replacement reserves. Generally, the
required escrows for mortgage loans originated by each Mortgage Loan Seller are
as follows:
o Taxes--Typically an initial deposit and monthly escrow deposits equal
to 1/12th of the annual property taxes (based on the most recent
property assessment and the current mileage rate) are required to
provide the Mortgage Loan Seller with sufficient funds to satisfy all
taxes and assessments at least one month prior to their respective due
dates.
o Insurance--If the property is insured under an individual policy (i.e.,
the property is not covered by a blanket policy), typically an initial
deposit and monthly escrow deposits equal to 1/12th of the annual
property insurance premium are required to provide the Mortgage Loan
Seller with sufficient funds to pay all insurance premiums at least one
month prior to their respective due dates. If the property is covered
by a blanket policy of insurance, the Mortgage Loan Seller reserves the
right in the mortgage to require a separate insurance policy and
insurance escrows.
o Replacement Reserves--Replacement reserves are calculated in accordance
with the expected useful life of the components of the property during
the term of the mortgage loan.
S-77
<PAGE>
Notwithstanding the actual level of escrowed reserves, the following minimum
reserve level ranges (the level of which varies according to the Mortgage Loan
Seller) were generally assumed by each Mortgage Loan Seller in determining net
cash flow:
Multifamily..........................
Retail...............................
Office...............................
Industrial...........................
Hospitality..........................
Self-Storage.........................
Healthcare...........................
Mixed Use............................
Mobile Home Community................
o Completion Repair/Environmental Remediation--Typically, a completion
repair or remediation reserve is required. An initial deposit, upon
funding of the applicable Mortgage Loan, in an amount equal to at least
125% of the estimated costs of repairs or replacements to be completed
within the first year of the mortgage loan pursuant to the building
condition report is required.
o Re-tenanting/Debt Service Coverage--In some cases, major tenants have
lease expirations within the Mortgage Loan term. To mitigate this risk,
special reserves are required to be funded either at closing of the
Mortgage Loan and/or during the Mortgage Loan term to cover certain
anticipated leasing commissions or tenant improvement costs which might
be associated with re-leasing the space occupied by such tenants.
ASSIGNMENT OF THE MORTGAGE LOANS; REPURCHASES AND SUBSTITUTIONS
On the Closing 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 each 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 sold by the applicable Mortgage Loan Seller
(collectively, as to each Mortgage Loan, the "Mortgage File"): (i) the original
Mortgage Note, endorsed on its face or by allonge attached thereto, without
recourse, to the order of the Trustee (or, if the original Mortgage Note has
been lost, an affidavit to such effect from the applicable Mortgage Loan Seller
or another prior holder, together with a copy of the Mortgage Note); (ii) the
original or a copy of the Mortgage, together with an original or copy 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 and of any intervening assignments thereof (if such item is a document
separate from the Mortgage), with evidence of recording indicated thereon; (iv)
an original assignment of the Mortgage in favor of the Trustee and in recordable
form; (v) an original 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) the original assignment of all unrecorded documents
relating to the Mortgage Loan; (vii) originals or copies of all modification,
consolidation, assumption and substitution agreements in those instances in
which the terms or provisions of the Mortgage or Mortgage Note have been
modified or the Mortgage Loan has been assumed or consolidated; (viii) the
original or a copy of the policy or certificate of lender's title insurance
issued on the date of the origination of such Mortgage Loan, or, if such policy
has not been issued, an irrevocable, binding commitment to issue such title
insurance policy; (ix) any filed copies (bearing evidence of filing) or other
evidence of filing satisfactory to the Trustee of any UCC financing statements,
related amendments and continuation statements in the possession of the
applicable Mortgage Loan Seller and (x) an original assignment in favor of the
Trustee of any financing statement executed and filed in favor of the applicable
Mortgage Loan Seller in the relevant jurisdiction; and (xi) the original or copy
of any ground lease, any Credit Lease, Residual Value Insurance Policy or
guaranty relating to a Mortgage Loan.
As described in the Pooling and Servicing Agreement, the Trustee or a
Custodian on its behalf is 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
applicable Mortgage Loan Seller, if it cannot deliver the document or cure the
defect (other than omissions solely
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due to a document not having been returned by the related recording office)
within a period of 90 days following such Mortgage Loan Seller's receipt of
notice thereof, will be obligated pursuant to the applicable Mortgage Loan
Purchase Agreement (the relevant rights under which will be assigned by the
Depositor to the Trustee) to (1) repurchase the affected Mortgage Loan within
such 90-day period at a price (the "Purchase Price") generally equal to the sum
of (i) the unpaid principal balance of such Mortgage Loan, (ii) the unpaid
accrued interest on such Mortgage Loan (calculated at the applicable Mortgage
Rate) to but not including the Due Date in the Collection Period in which the
purchase is to occur and (iii) certain Additional Trust Fund Expenses in respect
of such Mortgage Loan, including but not limited to, servicing expenses that are
reimbursable to the Master Servicer, the Special Servicer or the Trustee plus
any interest thereon and on any related P&I Advances or (2) substitute a
Qualified Substitute Mortgage Loan for such Mortgage Loan and pay the Trustee a
shortfall amount equal to the difference between the Purchase Price of the
deleted Mortgage Loan calculated as of the date of substitution and the Stated
Principal Balance of such Qualified Substitute Mortgage Loan as of the date of
substitution (the "Substitution Shortfall Amount"); provided that the applicable
Mortgage Loan Seller will generally have an additional 90-day period to deliver
the document or cure the defect, as the case may be, if it is diligently
proceeding to effect such delivery or cure and has delivered to the Trustee an
officer's certificate that describes the reasons that such delivery or cure was
not effected within the first 90-day cure period and the actions it proposes to
take to effect such delivery or cure, and which states that it anticipates such
delivery or cure will be effected within the additional 90-day period. The
foregoing repurchase or substitution obligation constitutes the sole remedy
available to the Certificateholders and the Trustee for any uncured failure to
deliver, or any uncured defect in, a constituent Mortgage Loan document. Each
Mortgage Loan Seller is solely responsible for such Mortgage Loan Seller's
repurchase or substitution obligation, and such obligations will not be the
responsibility of the Depositor.
The Pooling and Servicing Agreement requires the Trustee promptly to cause
each of the assignments described in clauses (iv), (v) and (x) of the second
preceding paragraph to be submitted for recording in the real property records
of the jurisdiction in which the related Mortgaged Property is located. See
"DESCRIPTION OF THE POOLING AGREEMENTS--Assignment of Mortgage Loans;
Repurchases" in the Prospectus.
A "Qualified Substitute Mortgage Loan" is a mortgage loan which must, on the
date of substitution: (i) have an outstanding Stated Principal Balance, after
application of all scheduled payments of principal and interest due during or
prior to the month of substitution, not in excess of the Stated Principal
Balance of the deleted Mortgage Loan as of the Due Date in the calendar month
during which the substitution occurs; (ii) have a Mortgage Rate not less than
the Mortgage Rate of the deleted Mortgage Loan; (iii) have the same Due Date as
the deleted Mortgage Loan; (iv) accrue interest on the same basis as the deleted
Mortgage Loan (for example, on the basis of a 360-day year consisting of twelve
30-day months); (v) have a remaining term to stated maturity not greater than,
and not more than two years less than, the remaining term to stated maturity of
the deleted Mortgage Loan; (vi) have an original loan-to-value ratio not higher
than that of the deleted Mortgage Loan and a current loan-to-value ratio not
higher than the then-current loan-to-value ratio of the deleted Mortgage Loan;
(vii) comply as of the date of substitution with all of the representations and
warranties set forth in the applicable Mortgage Loan Purchase Agreement; (viii)
have an environmental report with respect to the related Mortgaged Property
which will be delivered as a part of the related Mortgage File; (ix) have an
original debt service coverage ratio not less than the original debt service
coverage ratio of the deleted Mortgage Loan; (x) be determined by an Opinion of
Counsel to be a "qualified replacement mortgage" within the meaning of Section
860G(a)(4) of the Code; (xi) not have a maturity date after the date three years
prior to the Rated Final Distribution Date; (xii) not be substituted for a
deleted Mortgage Loan unless the Trustee has received prior confirmation in
writing by each Rating Agency that such substitution will not result in the
withdrawal, downgrade, or qualification of the rating assigned by the Rating
Agency to any Class of Certificates then rated by the Rating Agency (the cost,
if any, of obtaining such confirmation to be paid by the applicable Mortgage
Loan Seller); (xiii) have a date of origination that is not more than 12 months
prior to the date of substitution; (xiv) have been approved by the Controlling
Class Representative; provided, that the Controlling Class Representative shall
cease to have the right to approve the substitution of a Qualified Substitute
Mortgage Loan for a deleted Mortgage Loan after the aggregate of the Stated
Principal Balances of all Qualified Substitute Mortgage Loans which were
previously substituted for deleted Mortgage Loans exceeds 10% of the aggregate
Stated Principal Balance of all the Mortgage Loans as of the Cut-Off Date;
provided, further, that such approval of the Controlling Class Representative
may not be unreasonably withheld, as determined by the Special Servicer; and
(xv) not be substituted for a deleted Mortgage Loan if it would result in the
termination of the REMIC status of any of the REMICs or the imposition of tax on
any of the REMICs other than a tax on income expressly permitted or contemplated
to be received by the terms of the Pooling and Servicing Agreement. In the event
that one or more
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mortgage loans are substituted for one or more deleted Mortgage Loans, then the
amounts described in clause (i) shall be determined on the basis of aggregate
principal balances and the rates described in clause (ii) above and the
remaining term to stated maturity referred to in clause (v) above shall be
determined on a weighted average basis. When a Qualified Substitute Mortgage
Loan is substituted for a deleted Mortgage Loan, the applicable Mortgage Loan
Seller shall certify that such Mortgage Loan meets all of the requirements of
the above definition and shall send such certification to the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES AND SUBSTITUTIONS
In each Mortgage Loan Purchase Agreement, the applicable Mortgage Loan Seller
has represented and warranted with respect to each Mortgage Loan (subject to
certain exceptions specified in the applicable Mortgage Loan Purchase
Agreement), as of the Closing Date, or as of such other date specifically
provided in the representation and warranty, among other things, generally that:
(i) the information set forth in the schedule of Mortgage Loans
attached to the applicable Mortgage Loan Purchase Agreement (which
contains certain of the information set forth in Annex A) is true and
correct in all material respects as of the Cut-Off Date;
(ii) as of the date of its origination, such Mortgage Loan complied
in all material respects with, or was exempt from, all requirements of
federal, state or local law relating to the origination of such Mortgage
Loan and such Mortgage Loan has been serviced in accordance with the
servicing performed on comparable mortgage loans originated by the
applicable Mortgage Loan Seller;
(iii) immediately prior to the sale, transfer and assignment to the
Depositor, the applicable Mortgage Loan Seller had good title to, and was
the sole owner of, each Mortgage Loan, and is transferring the Mortgage
Loan free and clear of any and all liens, pledges, charges or security
interests of any nature encumbering such Mortgage Loan;
(iv) the proceeds of such Mortgage Loan have been fully disbursed and
there is no requirement for future advances thereunder;
(v) each of the related Mortgage Note, related Mortgage, related
assignment of leases, if any, and other agreements executed in connection
with such Mortgage Loan are the legal, valid and binding obligations of
the related mortgagor (subject to any nonrecourse provisions therein and
any state anti-deficiency legislation), enforceable in accordance with
their terms, except with respect to provisions relating to default
interest, yield maintenance charges or prepayment premiums and 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);
(vi) as of the date of its origination, there was no valid offset,
defense, counterclaim, abatement or right to rescission with respect to
any of the related Mortgage Note, Mortgage(s) or other agreements executed
in connection therewith, and, as of the Closing Date, to the actual
knowledge of the applicable Mortgage Loan Seller there was no valid
offset, defense, counterclaim or right to rescission with respect to such
Mortgage Note, Mortgage(s) or other agreements;
(vii) the assignment of the related Mortgage and assignment of leases
in favor of the Trustee constitutes the legal, valid and binding
assignment of such Mortgage and leases to the Trustee (subject to
customary limitations);
(viii) the related Mortgage is a valid and enforceable first lien on
the related Mortgaged Property except for (a) liens for current real
property taxes, ground rents, water charges, sewer rents and assessments
not yet due and payable, (b) covenants, conditions and restrictions,
rights of way, easements and other matters of public record, none of
which, individually or in the aggregate, materially interferes with the
current use of the Mortgaged Property or the security intended to be
provided by such Mortgage or with the borrower's ability to pay its
obligations when they become due or materially and adversely affects the
value of the Mortgaged Property and (c) the exceptions (general and
specific) set forth in the related title
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insurance policy or appearing of record, none of which, individually or in
the aggregate, materially interferes with the current use of the Mortgaged
Property or the security intended to be provided by such Mortgage or with
the borrower's ability to pay its obligations when they become due or
materially and adversely affects the value of the Mortgaged Property;
(ix) all taxes and governmental assessments that prior to the Closing
Date became due and owing in respect of the related Mortgaged Property
have been paid, or an escrow of funds in an amount sufficient to cover
such payments has been established;
(x) to the applicable Mortgage Loan Seller's actual knowledge as of
the Closing Date, each related Mortgaged Property was free and clear of
any material damage that would affect materially and adversely the value
of such Mortgaged Property as security for the Mortgage Loan, except to
the extent, based upon engineering reports, reserves or escrows have been
established with respect thereto, and to the applicable Mortgage Loan
Seller's knowledge as of the Closing Date there was no proceeding pending
for the total or partial condemnation of such Mortgaged Property that
would affect materially and adversely the value of such Mortgaged Property
as security for the Mortgage Loan;
(xi) as of the date of its origination, all insurance coverage
required under each related Mortgage (including comprehensive general
liability and business interruption coverage for a period of twelve
months), which insurance covered such risks as were customarily acceptable
to prudent commercial and multifamily mortgage lending institutions
lending on the security of property comparable to the related Mortgaged
Property in the jurisdiction in which such Mortgaged Property is located,
and with respect to a fire and extended perils insurance policy, was in an
amount (subject to a customary deductible) at least equal to the
replacement cost of improvements located on such Mortgaged Property, or an
amount at least equal to the initial principal balance of the Mortgage
Loan in each case, without deduction for depreciation, and was in full
force and effect with respect to each related Mortgaged Property;
(xii) as of the Cut-Off Date, the Mortgage Loan was not, and in the
prior 12 months (or since the date of origination if such Mortgage Loan
has been originated within the past 12 months), has not been, 30 days or
more past due in respect of any Scheduled Payment; and
(xiii) one or more environmental site assessments were performed by
an environmental consulting firm independent of the applicable Mortgage
Loan Seller and such Mortgage Loan Seller's affiliates with respect to
each related Mortgaged Property during the 18-month period preceding the
origination of the related Mortgage Loan, and the applicable Mortgage Loan
Seller, having made no independent inquiry other than to review the
report(s) prepared in connection with the assessment(s) referenced herein,
has no knowledge and has received no notice of any material and adverse
environmental condition or circumstance affecting such Mortgaged Property
that was not disclosed in such report(s) and either (a) no such report
reveals any known circumstances or conditions with respect to the related
Mortgaged Property that rendered such Mortgaged Property, as of the date
of such report, in material violation of applicable environmental laws or
(b) if such report reveals such circumstances or conditions with respect
to the related Mortgaged Property, then either: (i) an environmental
insurance policy was obtained from a third-party insurer; or (ii) either
(a) an operations and maintenance program, including, in several cases,
with respect to asbestos-containing materials, lead-based paint and/or
radon, or periodic monitoring of nearby properties, has been or is
expected to be implemented in the manner and within the time frames
specified in the related loan documents, or (b) remediation in accordance
with applicable law has been performed; or (iii) an escrow or reserve was
established to cover the estimated cost of remediation, with each
remediation required to be completed within a reasonable time frame in
accordance with the related loan documents.
In the case of a breach of any of the representations and warranties in the
applicable Mortgage Loan Purchase Agreement that materially and adversely
affects the interests of the Certificateholders, the applicable Mortgage Loan
Seller, if it cannot cure such breach within a period of 90 days following its
receipt of notice thereof, is obligated pursuant to the applicable Mortgage Loan
Purchase Agreement (the relevant rights under which have been assigned by the
Depositor to the Trustee) to either substitute a Qualified Substitute Mortgage
Loan and pay any Substitution Shortfall Amount or to repurchase the affected
Mortgage Loan within such 90-day period at the applicable Purchase Price;
provided, that the applicable Mortgage Loan Seller generally has an additional
90-day period to cure such breach if it is diligently proceeding with such cure,
and has delivered to the Trustee an officer's certificate that
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describes the reasons that a cure was not effected within the first 90-day cure
period and the actions it proposes to take to effect such cure and which states
that it anticipates such cure will be effected within the additional 90-day
period.
The foregoing substitution or repurchase obligation constitutes the sole
remedy available to the Certificateholders and the Trustee for any uncured
breach of any Mortgage Loan Seller's representations and warranties regarding
its Mortgage Loans. Each Mortgage Loan Seller is the sole warranting party in
respect of the Mortgage Loans sold by such Mortgage Loan Seller to the
Depositor, and none of the Depositor, the other Mortgage Loan Seller nor any of
such party's affiliates will be obligated to substitute or repurchase any such
affected Mortgage Loan in connection with a breach of such Mortgage Loan
Seller's representations and warranties if such Mortgage Loan Seller defaults on
its obligation to do so.
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The descriptions in this Prospectus Supplement of the Mortgage Loans and the
Mortgaged Properties are based upon the Mortgage Pool as it is expected to be
constituted as of the close of business on the Closing Date, assuming that (i)
all scheduled principal and interest payments due on or before the Cut-Off Date
will be made, and (ii) there will be no principal prepayments on or before the
Cut-Off Date. Prior to the issuance of the Certificates, Mortgage Loans may be
removed from the Mortgage Pool as a result of prepayments, delinquencies,
incomplete documentation or otherwise, if the Depositor or the applicable
Mortgage Loan Seller deems such removal necessary, appropriate or desirable. A
limited number of other mortgage loans may be included in the Mortgage Pool
prior to the issuance of the Certificates, unless including such mortgage loans
would materially alter the characteristics of the Mortgage Pool as described in
this Prospectus Supplement. The Depositor believes that the information set
forth in this Prospectus Supplement will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities as
well as other characteristics of the Mortgage Loans described in this Prospectus
Supplement 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 Closing 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.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Master Servicer and the Special Servicer, either directly or through
sub-servicers, are required to service and administer the Mortgage Loans for the
benefit of the Certificateholders, in accordance with applicable law, the terms
of the Pooling and Servicing Agreement and the terms of the respective Mortgage
Loans and, to the extent consistent with the foregoing, (a) in the same manner
in which, and with the same care, skill, prudence and diligence with which, the
Master Servicer or the Special Servicer, as the case may be, generally services
and administers similar mortgage loans with similar borrowers (i) for other
third-parties, giving due consideration to customary and usual standards of
practice of prudent institutional commercial mortgage lenders servicing their
own loans, or (ii) held in its own portfolio, whichever standard is higher, (b)
with a view to the maximization of the recovery on such Mortgage Loans on a net
present value basis, and (c) without regard to (i) any relationship that the
Master Servicer or the Special Servicer, as the case may be, or any affiliate
thereof, may have with the related borrower, any Mortgage Loan Seller or any
other party to the Pooling and Servicing Agreement; (ii) the ownership of any
Certificate by the Master Servicer or the Special Servicer, as the case may be,
or by any affiliate thereof; (iii) the right of the Master Servicer or the
Special Servicer, as the case may be, to receive compensation or other fees for
its services rendered pursuant to the Pooling and Servicing Agreement; (iv) the
obligation of the Master Servicer to make Advances (as defined in this
Prospectus Supplement); (v) the ownership, servicing or management for others of
any other mortgage loans or real property; and (vi) any obligation of the Master
Servicer, or any affiliate thereof, to repurchase or substitute a Mortgage Loan
as a Mortgage Loan Seller.
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
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OF THE POOLING AGREEMENTS," for important information in addition to that set
forth in this Prospectus Supplement regarding the terms and conditions of the
Pooling and Servicing Agreement as they relate to the rights and obligations of
the Master Servicer and Special Servicer thereunder. The Special Servicer
generally has all of the rights to indemnity and reimbursement, and limitations
on liability, that the Master Servicer is described as having in the Prospectus
and certain additional rights to indemnity as provided in the Pooling and
Servicing Agreement relating to actions taken at the direction of the
Controlling Class Representative, and the Special Servicer rather than the
Master Servicer will perform the servicing duties described in the Prospectus
with respect to Specially Serviced Mortgage Loans and REO Properties (each as
described in this Prospectus Supplement). In addition to the circumstances for
resignation of the Master Servicer set forth in the Prospectus, the Master
Servicer and the Special Servicer each has the right to resign at any other time
provided that (i) a willing successor thereto has been found, (ii) each of the
Rating Agencies confirms in writing that the successor's appointment will not
result in a withdrawal, qualification or downgrade of any rating or ratings
assigned to any class of Certificates, (iii) the resigning party pays all costs
and expenses in connection with such transfer, and (iv) the successor accepts
appointment prior to the effectiveness of such resignation. See "DESCRIPTION OF
THE POOLING AGREEMENTS--Certain Matters Regarding the Master Servicer and the
Depositor" in the Prospectus.
THE MASTER SERVICER
First Union National Bank, in its capacity as Master Servicer under the
Pooling and Servicing Agreement (in such capacity, the "Master Servicer") will
be responsible for servicing the Mortgage Loans (other than Specially Serviced
Mortgage Loans and REO Properties). Although the Master Servicer will be
authorized to employ agents, including sub-servicers, to directly service the
Mortgage Loans for which it will be responsible, the Master Servicer will remain
liable for its servicing obligations under the Pooling and Servicing Agreement.
The Master Servicer is a wholly-owned subsidiary of First Union Corporation, and
as such is our affiliate and is one of the Mortgage Loan Sellers. The Master
Servicer's principal servicing offices are located at [ ].
As of [ ] [ ], 20[ ], the Master Servicer and its affiliates were responsible
for servicing approximately [ ] commercial and multifamily loans, totaling
approximately $[ ] in aggregate outstanding principal amounts, including loans
securitized in mortgage-backed securitization transactions.
The information set forth in this Prospectus Supplement concerning the Master
Servicer has been provided by the Master Servicer, and neither the Depositor nor
either Underwriter makes any representation or warranty as to the accuracy or
completeness of such information. The Master Servicer (apart from its
obligations as a Mortgage Loan Seller and except for the information in the
first two paragraphs under this heading) will make no representations as to the
validity or sufficiency of the Pooling and Servicing Agreement, the
Certificates, the Mortgage Loans, this Prospectus Supplement or related
documents.
THE SPECIAL SERVICER
[First Union National Bank], in its capacity as Special Servicer under the
Pooling and Servicing Agreement (in such capacity, the "Special Servicer") will
be responsible for servicing the Specially Serviced Mortgage Loans. As of [ ] [
], 20[ ], [ ] served as the named special servicer on [ ] securitized
transactions encompassing [ ] loans, with an aggregate principal balance of
approximately $[ ]. Additionally, [ ] manages a master servicing portfolio of
commercial and multifamily loans with an aggregate principal balance, as of [ ]
[ ], 20[ ] , of approximately $[ ], the collateral for which is located in [ ]
states, [ ], [ ], [ ], and [ ]. [ ]'s servicing operations are located at [ ].
The information set forth in this Prospectus Supplement concerning the
Special Servicer has been provided by the Special Servicer and neither the
Depositor nor either Underwriter makes any representation or warranty as to the
accuracy or completeness of such information. The Special Servicer (except for
the information in the immediately preceding paragraph) will make no
representations as to the validity or sufficiency of the Pooling and Servicing
Agreement, the Certificates, the Mortgage Loans, this Prospectus Supplement or
related documents.
The Pooling and Servicing Agreement permits the holder (or holders) of the
majority of the Voting Rights allocated to the Controlling Class to replace the
Special Servicer and to select a representative (the "Controlling Class
Representative") who may advise and direct the Special Servicer and whose
approval is required for certain actions by the Special Servicer under certain
circumstances. The Controlling Class Representative is selected by holders of
Certificates representing more than 50% of the Certificate Balance of the
Controlling Class. See "--The
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Controlling Class Representative" in this Prospectus Supplement. Such holder (or
holders) will be required to pay all out-of-pocket costs related to the transfer
of servicing if the Special Servicer is replaced other than due to an Event of
Default, including without limitation, any costs relating to Rating Agency
confirmation and legal fees associated with the transfer. The "Controlling
Class" is the Class of Sequential Pay Certificates that has the latest
alphabetical Class designation and that has a Certificate Balance that is
greater than 25% of its original Certificate Balance; provided that if no Class
of Sequential Pay Certificates has a Certificate Balance that is greater than
25% of its original Certificate Balance, the then outstanding class of
Sequential Pay Certificates with the latest alphabetical class designation will
be the "Controlling Class." The Class [ ] and Class [ ] Certificates will be
treated as one class for determining the Controlling Class. Any such replacement
of a Special Servicer will be subject to, among other things, (i) the delivery
of notice of the proposed replacement to the Rating Agencies and receipt of
written confirmation from the Rating Agencies that the replacement will not
result in a qualification, downgrade or withdrawal of any of the then current
ratings assigned to the Certificates, and (ii) the written agreement of the
successor Special Servicer to be bound by the terms and conditions of the
Pooling and Servicing Agreement. Subject to the foregoing, any Certificateholder
or affiliate thereof may be appointed as Special Servicer. See "DESCRIPTION OF
THE CERTIFICATES--Voting Rights" in this Prospectus Supplement.
The Special Servicer is responsible for servicing and administering any
Mortgage Loan as to which (a) any Periodic Payment shall be delinquent 60 or
more days (or, in the case of a Balloon Payment, if the related borrower
continues to make the Periodic Payment and the Master Servicer receives written
evidence that the related borrower has obtained a binding commitment from an
institutional lender to refinance, such longer period of delinquency (not to
exceed 120 days) within which such refinancing is expected to occur); (b) the
Master Servicer shall have determined in its good faith reasonable judgment
based on communications with the related mortgagor that a default in making a
Periodic Payment is likely to occur within 30 days and is likely to remain
unremedied for at least 60 days (or, in the case of a Balloon Payment, if the
Master Servicer reasonably expects the related borrower to continue to make the
Periodic Payment and the Master Servicer receives written evidence, among other
things, that the related borrower has obtained a binding commitment from an
institutional lender to refinance, such longer period of delinquency (not to
exceed 120 days) within which such refinancing is expected to occur); (c) there
shall have occurred a default (other than as described in clause (a) above) that
materially impairs the value of the Mortgaged Property as security for the
Mortgage Loan or otherwise materially adversely affects the interests of
Certificateholders and that continues unremedied for the applicable grace period
under the terms of the Mortgage Loan (or, if no grace period is specified, for
60 days); (d) a decree or order under any bankruptcy, insolvency or similar law
shall have been entered against the related borrower and such decree or order
shall have remained in force, undischarged, undismissed or unstayed for a period
of 60 days; (e) the related borrower shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency or similar proceedings
of or relating to such related borrower or of or relating to all or
substantially all of its property; (f) the related borrower shall admit in
writing its inability to pay its debts generally as they become due, file a
petition to take advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors, or voluntarily
suspend payment of its obligations; or (g) the Master Servicer shall have
received notice of the commencement of foreclosure or similar proceedings with
respect to the related Mortgaged Property (each event described in clauses (a)
through (g) above, a "Servicing Transfer Event").
If a Servicing Transfer Event occurs with respect to any Mortgage Loan, the
Master Servicer is in general required to transfer its servicing
responsibilities with respect to such Mortgage Loan to the Special Servicer.
Notwithstanding such transfer, the Master Servicer 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, and
to make remittances (including, if necessary, P&I Advances) and prepare certain
reports to the Trustee with respect to such Mortgage Loan. If title to the
related Mortgaged Property is acquired by the Trust Fund (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. Mortgage Loans serviced by the Special
Servicer are referred to in this Prospectus Supplement as "Specially Serviced
Mortgage Loans" and, together with any REO Properties, constitute "Specially
Serviced Trust Fund Assets." The Master Servicer has no responsibility for the
Special Servicer's performance of its duties under the Pooling and Servicing
Agreement.
A Mortgage Loan will cease to be a Specially Serviced Mortgage Loan (and will
become a "Corrected Mortgage Loan" as to which the Master Servicer will
re-assume servicing responsibilities):
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(a) with respect to the circumstances described in clause (a) of the
definition of Servicing Transfer Event, when the related borrower has made
three consecutive full and timely (or, in the case of any Semi-Annual Loan,
two consecutive) Periodic Payments under the terms of such Mortgage Loan (as
such terms may be changed or modified in connection with a bankruptcy or
similar proceeding involving the related borrower or by reason of a
modification, waiver or amendment granted or agreed to by the Special
Servicer);
(b) with respect to any of the circumstances described in clauses (b),
(d), (e) and (f) of the definition of Servicing Transfer Event, when such
circumstances cease to exist in the good faith, reasonable judgment of the
Special Servicer, but, with respect to any bankruptcy or insolvency
proceedings described in clauses (d), (e) and (f), no later than the entry of
an order or decree dismissing such proceeding;
(c) with respect to the circumstances described in clause (c) of the
definition of Servicing Transfer Event, when such default is cured; and
(d) with respect to the circumstances described in clause (g) of the
definition of Servicing Transfer Event, when such proceedings are terminated;
so long as at that time no other Servicing Transfer Event then exists and
provided no additional default is foreseeable in the reasonable judgment of the
Special Servicer.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its servicing activities is the Master Servicing Fee. The "Master Servicing Fee"
is payable monthly (or, with respect to Semi-Annual Loans, semi-annually) on a
loan-by-loan basis from amounts received in respect of interest on each Mortgage
Loan (including each Specially Serviced Mortgage Loan and from REO Revenue with
respect to each REO Mortgage Loan), is calculated on the basis of a 360-day year
consisting of twelve 30-day months, accrues at the related Master Servicing Fee
Rate and is computed on the basis of the same principal amount respecting which
any related interest payment due on the Mortgage Loan is computed. The "Master
Servicing Fee Rate" is a per annum rate ranging from [ ]% to [ ]%. As of the
Cut-Off Date the weighted average Master Servicing Fee Rate will be [ ]% per
annum.
If a borrower voluntarily prepays a Mortgage Loan on a date that is prior to
its Due Date in any Collection Period, the amount of interest (net of related
Master Servicing Fees and, if applicable, Additional Interest) that accrues on
the Mortgage Loan during such Collection Period will be less (such shortfall, a
"Prepayment Interest Shortfall") than the amount of interest (net of related
Master Servicing Fees and, if applicable, related Swap Fee and Additional
Interest and without regard to any Prepayment Premium or Yield Maintenance
Charge actually collected) that would have accrued on the Mortgage Loan through
its Due Date (or, with respect to any Semi-Annual Loan, the first day of the
month). If such a principal prepayment occurs during any Collection Period after
the Due Date (or, with respect to any Semi-Annual Loan, the first day of the
month) for such Mortgage Loan in such Collection Period, the amount of interest
(net of related Master Servicing Fees) that accrues and is collected on the
Mortgage Loans during such Collection Period will exceed (such excess, a
"Prepayment Interest Excess") the amount of interest (net of related Master
Servicing Fees, and without regard to any Prepayment Premium or Yield
Maintenance Charge actually collected) that would have been collected on the
Mortgage Loan during such Collection Period if the borrower had not prepaid. 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 is required to deposit into the Distribution Account
(such deposit, a "Compensating Interest Payment"), without any right of
reimbursement therefor, with respect to each Mortgage Loan (other than a
Specially Serviced Mortgage Loan) that was subject to a voluntary Principal
Prepayment during the most recently ended Collection Period creating a
Prepayment Interest Shortfall, an amount equal to the lesser of (i) the sum of
(A) the Master Servicing Fee (up to a Master Servicing Fee Rate of [ ]% per
annum) received by the Master Servicer during such Collection Period on such
Mortgage Loan and (B) investment income earned by the Master Servicer on the
related Principal Prepayment during the most recently ended Collection Period,
and (ii) the amount of the related Prepayment Interest Shortfall. 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 or involuntary prepayments.
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The principal compensation to be paid to the Special Servicer in respect of
its special servicing activities is the Special Servicing Fee (together with the
Master Servicing Fee, the "Servicing Fees") and, under the circumstances
described in this Prospectus Supplement, Principal Recovery Fees and Workout
Fees. The "Special Servicing Fee" is calculated on the basis of a 360-day year
consisting of twelve 30-day months, accrues at a rate (the "Special Servicing
Fee Rate") equal to [ ]% per annum and is computed on the basis of the same
principal amount respecting which any related interest payment due on such
Specially Serviced Mortgage Loan or REO Mortgage Loan, as the case may be.
However, earned Special Servicing Fees are payable out of general collections on
the Mortgage Loans then on deposit in the Certificate Account. The Special
Servicing Fee with respect to any Specially Serviced Mortgage Loan (or REO
Mortgage Loan) will cease to accrue if such loan (or the related REO Property)
is liquidated or if such loan becomes a Corrected Mortgage Loan. The Special
Servicer is entitled to a "Principal Recovery Fee" with respect to each
Specially Serviced Trust Fund Asset, which Principal Recovery Fee generally will
be in an amount equal to [ ]% of all whole or partial cash payments of
Liquidation Proceeds (as defined in the Prospectus) received in respect thereof;
provided, however, in no event shall the Principal Recovery Fee be payable to
the extent a Workout Fee is payable concerning the related cash payments.
However, no Principal Recovery Fee will be payable in connection with, or out
of, insurance proceeds, condemnation proceeds or Liquidation Proceeds (as
defined in the Prospectus) resulting from, the purchase of any Specially
Serviced Trust Fund Asset (i) by either Mortgage Loan Seller (as described in
this Prospectus Supplement under "DESCRIPTION OF THE MORTGAGE POOL--Assignment
of the Mortgage Loans; Repurchases and Substitutions" and "--Representations and
Warranties; Repurchases and Substitutions"), (ii) by the Master Servicer, the
Special Servicer, the Depositor or the Majority Subordinate Certificateholder as
described in this Prospectus Supplement under "DESCRIPTION OF THE
CERTIFICATES--Termination" or (iii) in certain other limited circumstances. The
Special Servicer also is entitled to a "Workout Fee" with respect to each
Corrected Mortgage Loan, which is generally equal to [ ]% of all payments of
interest and principal received on such Mortgage Loan for so long as it remains
a Corrected Mortgage Loan.
As additional servicing compensation, the Master Servicer or the Special
Servicer is entitled to retain all assumption and modification fees, assumption
application fees, late payment charges and penalty interest (to the extent not
used to offset interest on Advances) and Prepayment Interest Excesses collected
from borrowers on Mortgage Loans. In addition, each of the Master Servicer and
the Special Servicer is authorized to invest or direct the investment of funds
held in those accounts maintained by it that relate to the Mortgage Loans or REO
Properties, as the case may be, in certain short-term United States government
securities and other permitted investment grade obligations, and the Master
Servicer and the Special Servicer each will be entitled to retain any interest
or other income earned on such funds held in those accounts maintained by it,
but shall be required to cover any losses on investments of funds held in those
accounts maintained by it, from its own funds without any right to
reimbursement.
Each of the Master Servicer and Special Servicer is, in general, required to
pay all ordinary expenses incurred by it in connection with its servicing
activities under the Pooling and Servicing Agreement, including the fees of any
sub-servicers retained by it, and is not entitled to reimbursement therefor
except as expressly provided in the Pooling and Servicing Agreement. However,
each of the Master Servicer and Special Servicer is permitted to pay certain of
such expenses (including certain expenses incurred as a result of a Mortgage
Loan default) directly out of the Certificate Account and at times without
regard to the Mortgage Loan with respect to which such expenses were incurred.
See "DESCRIPTION OF THE CERTIFICATES--Distributions" in this Prospectus
Supplement and "DESCRIPTION OF THE POOLING AGREEMENTS--Certificate Account" and
"--Servicing Compensation and Payment of Expenses" in the Prospectus.
As and to the extent described in this Prospectus Supplement under
"DESCRIPTION OF THE CERTIFICATES--P&I Advances," each of the Master Servicer and
the Trustee is entitled to receive interest, at the Reimbursement Rate, on any
reimbursable servicing expenses incurred by it. Such interest will compound
annually and will be paid, contemporaneously with the reimbursement of the
related servicing expense, first out of late payment charges and penalty
interest on such Mortgage Loan received during the related calendar year in
which such reimbursement is made and then in certain circumstances from general
collections on the Mortgage Loans then on deposit in the Certificate Account.
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MODIFICATIONS, WAIVERS AND AMENDMENTS
The Pooling and Servicing Agreement permits the Special Servicer to modify,
waive or amend any term of any Mortgage Loan if (a) it determines, in accordance
with the servicing standard described under "--General" above, that it is
appropriate to do so and (b) except as described in the following paragraph,
such modification, waiver or amendment, will not (i) affect the amount or timing
of any related payments of principal, interest or other amount (including
Prepayment Premiums and Yield Maintenance Charges) payable under the Mortgage
Loan, (ii) affect the obligation of the related borrower to pay a Prepayment
Premium or Yield Maintenance Charge or permit a principal prepayment during the
applicable Lockout Period, (iii) except as expressly provided by the related
Mortgage or in connection with a material adverse environmental condition at the
related Mortgaged Property, result in a release of the lien of the related
Mortgage on any material portion of such Mortgaged Property without a
corresponding principal prepayment in an amount not less than the fair market
value of the property released, (iv) if such Mortgage Loan (A) with respect to [
], is equal to or in excess of [ ]% of the then aggregate current principal
balances of all Mortgage Loans or $[ ], and (B) with respect to [ ], is equal to
or in excess of [ ]% of the then aggregate current principal balances of all
Mortgage Loans, permit the transfer of equity interests in the related borrower
or an equity owner of the borrower that would result, in the aggregate during
the term of the related Mortgage Loan, in a transfer greater than [ ]% of the
total interest in the borrower and/or any equity owner of the borrower or a
transfer of voting control in the borrower or an equity owner of the borrower
without the prior written confirmation from each Rating Agency (as applicable)
that such change will not result in the qualification, downgrade or withdrawal
of the ratings then assigned to the Certificates or (v) in the good faith,
reasonable judgment of the Special Servicer, materially impair the security for
the Mortgage Loan or reduce the likelihood of timely payment of amounts due
thereon.
Notwithstanding clause (b) of the preceding paragraph, the Special Servicer
may (i) reduce the amounts owing under any Specially Serviced Mortgage Loan by
forgiving principal, accrued interest and/or any Prepayment Premium or Yield
Maintenance Charge, (ii) reduce the amount of the Periodic Payment on any
Specially Serviced Mortgage Loan, including by way of a reduction in the related
Mortgage Rate, (iii) forbear in the enforcement of any right granted under any
Mortgage Note or Mortgage relating to a Specially Serviced Mortgage Loan, (iv)
extend the maturity date of any Mortgage Loan, and/or (v) accept a principal
prepayment during any Lockout Period; provided that (x) the related borrower is
in default with respect to the Specially Serviced Mortgage Loan or, in the
reasonable, good faith judgment of the Special Servicer, such default is
reasonably foreseeable, (y) in the reasonable, good faith judgment of the
Special Servicer, such modification, would increase the recovery to
Certificateholders on a net present value basis and (z) such modification,
waiver or amendment does not result in a tax being imposed on the Trust Fund or
cause any REMIC created pursuant to the Pooling and Servicing Agreement to fail
to qualify as a REMIC at any time the Certificates are outstanding. In no event,
however, is the Special Servicer permitted to (i) extend the maturity date of a
Mortgage Loan beyond a date that is two years prior to the Rated Final
Distribution Date or, without the prior written confirmation from [ ] that such
extension will not result in the downgrade or withdrawal of the ratings then
assigned to the Certificates, for more than three one-year extensions, (ii)
extend the maturity date of any Mortgage Loan which has a Mortgage Rate below
the then prevailing interest rate for comparable loans, as determined by the
Special Servicer, unless such Mortgage Loan is a Balloon Loan and the related
borrower has failed to make the Balloon Payment at its scheduled maturity and
such Balloon Loan is not a Specially Serviced Mortgage Loan (other than by
reason of failure to make the Balloon Payment) and has not been delinquent in
the preceding 12 months (other than with respect to the Balloon Payment), in
which case the Special Servicer may make up to three one-year extensions at the
existing Mortgage Rate for such Mortgage Loan (such limitation of extensions
made at a below market rate shall not limit the ability of the Special Servicer
to extend the maturity date of any Mortgage Loan at an interest rate at or in
excess of the prevailing rate for comparable loans at the time of such
modification), (iii) if the Mortgage Loan is secured by a ground lease (and not
also by the corresponding fee simple interest), extend the maturity date of such
Mortgage Loan beyond a date which is 10 years (or, in the case of any Mortgage
Loan that is a Balloon Loan or ARD Loan, 20 years) prior to the expiration of
the term of such ground lease, (iv) reduce the Mortgage Rate to a rate below the
then prevailing interest rate for comparable loans, as determined by the Special
Servicer or (v) defer interest due on any Mortgage Loan in excess of [ ]% of the
Stated Principal Balance of such Mortgage Loan or defer the collection of
interest on any Mortgage Loan without accruing interest on such deferred
interest at a rate at least equal to the Mortgage Rate of such Mortgage Loan.
The Special Servicer is required to notify the Trustee, the Master Servicer
and the Rating Agencies of any modification, waiver or amendment of any term of
any Mortgage Loan, and to deliver to the Trustee or the related
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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 10 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 Special Servicer. See "DESCRIPTION
OF THE CERTIFICATES--Reports to Certificateholders; Available Information" in
this Prospectus Supplement.
For any Mortgage Loan other than a Specially Serviced Mortgaged Loan and
subject to the rights of the Special Servicer, the Master Servicer is
responsible for any request by a borrower for the consent to modify, waive or
amend certain terms as specified in the Pooling and Servicing Agreement,
including, without limitation, (i) approving certain leasing activity, (ii)
approving certain substitute property managers and (iii) approving certain
consents with respect to right-of-ways and easements and consents to
subordination of the related Mortgage Loan to such easements or right-of-ways.
THE CONTROLLING CLASS REPRESENTATIVE
Subject to the succeeding paragraph, the Controlling Class Representative is
entitled to advise the Special Servicer with respect to the following actions of
the Special Servicer, and the Special Servicer is not permitted to take any of
the following actions as to which the Controlling Class Representative has
objected in writing within ten business days of being notified thereof (provided
that if such written objection has not been received by the Special Servicer
within such ten business day period, then the Controlling Class Representative's
approval will be deemed to have been given):
(i) any foreclosure upon or comparable conversion (which may include
acquisitions of an REO Property) of the ownership of properties securing
such of the Specially Serviced Mortgage Loans as come into and continue in
default;
(ii) any modification or waiver of a monetary term of a Mortgage Loan
other than a modification consisting of the extension of the maturity date
of a Mortgage Loan for one year or less;
(iii) any proposed sale of a defaulted Mortgage Loan or REO Property
(other than in connection with the termination of the Trust Fund as
described under "DESCRIPTION OF THE CERTIFICATES --Termination" in this
Prospectus Supplement);
(iv) any determination to bring an REO Property into compliance with
applicable environmental laws or to otherwise address hazardous materials
located at an REO Property;
(v) any acceptance of substitute or additional collateral for a
Mortgage Loan unless permitted by the underlying loan documents;
(vi) any waiver of a "due-on-sale" or "due-on-encumbrance" clause;
and
(vii) any acceptance of an assumption agreement releasing a borrower
from liability under a Mortgage Loan.
In addition, the Controlling Class Representative may direct the Special
Servicer to take, or to refrain from taking, such other actions as the
Controlling Class Representative may deem advisable or as to which provision is
otherwise made in the Pooling and Servicing Agreement; provided that no such
direction and no objection contemplated by the prior paragraph may require or
cause the Special Servicer to violate any REMIC Provisions, provision of the
Pooling and Servicing Agreement or applicable law, including the Special
Servicer's obligation to act in accordance with the servicing standards
described under "--General" above, or expose the Master Servicer, the Special
Servicer, the Trust Fund or the Trustee to liability, or materially expand the
scope of the Special Servicer's responsibilities under the Pooling and Servicing
Agreement or cause the Special Servicer to act or fail to act in a manner which,
in the reasonable judgment of the Special Servicer, is not in the best interests
of the Certificateholders.
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Limitation on Liability of Controlling Class Representative. The Controlling
Class Representative will have no liability to the Certificateholders for any
action taken, or for refraining from the taking of any action, in good faith
pursuant to the Pooling and Servicing Agreement, or for errors in judgment;
provided, however, that the Controlling Class Representative will not be
protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in the performance of duties or by
reason of negligent disregard of obligations or duties. By its acceptance of a
Certificate, each Certificateholder confirms its understanding that the
Controlling Class Representative may take actions that favor the interests of
one or more Classes of the Certificates over other Classes of the Certificates,
and that the Controlling Class Representative may have special relationships and
interests that conflict with those of holders of some Classes of the
Certificates; and, absent willful misfeasance, bad faith or negligence on the
part of the Controlling Class Representative, each Certificateholder agrees to
take no action against the Controlling Class Representative or any of its
officers, directors, employees, principals or agents as a result of such a
special relationship or conflict.
REO PROPERTIES; SALE OF MORTGAGE LOANS
If title to any Mortgaged Property is acquired by the Trustee on behalf of
the Certificateholders pursuant to foreclosure proceedings instituted by the
Special Servicer or otherwise, the Special Servicer, on behalf of such holders,
is required to sell the Mortgaged Property by the end of the third calendar year
following the year of acquisition, unless (i) the Internal Revenue Service
grants an extension of time to sell such property (an "REO Extension") or (ii)
it obtains an opinion of counsel generally to the effect that the holding of the
property 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 any REMIC created pursuant to the Pooling and Servicing Agreement to fail
to qualify as a REMIC under the Code. Subject to the foregoing, the Special
Servicer is generally required to solicit bids for any Mortgaged Property so
acquired in such a manner as will be reasonably likely to realize a fair price
for such property. The Special Servicer may retain an independent contractor to
operate and manage any REO Property; however, the retention of an independent
contractor will not relieve the Special Servicer of its obligations with respect
to such REO Property.
In general, the Special Servicer or an independent contractor employed by the
Special Servicer at the expense of the Trust Fund is obligated to operate and
manage any Mortgaged Property acquired as REO Property in a manner that (i)
maintains its status as "foreclosure property" under the REMIC Provisions and
(ii) would, to the extent commercially feasible and consistent with the forgoing
clause (i), maximize the Trust Fund's net after-tax proceeds from such property.
After the Special Servicer reviews the operation of such property and consults
with the Trustee to determine the Trust Fund's federal income tax reporting
position with respect to the income it is anticipated that the Trust Fund would
derive from such property, the Special Servicer could determine (particularly in
the case of an REO Property that is a hospitality or residential health care
facility) that it would not be commercially feasible to manage and operate such
property in a manner that would avoid the imposition of a tax on "net income
from foreclosure property," within the meaning of Section 857(b)(4)(B) of the
Code (an "REO Tax"). To the extent that income the Trust Fund receives from an
REO Property is subject to a tax on "net income from foreclosure property," such
income would be subject to federal tax at the highest marginal corporate tax
rate (currently 35%). The determination as to whether income from an REO
Property would be subject to an REO Tax will depend on the specific facts and
circumstances relating to the management and operation of each REO Property.
Generally, the Trust Fund will not be taxed on income received with respect to
the Mortgaged Property to the extent that it constitutes "rents from real
property," within the meaning of Code Section 856(c)(3)(A) and Treasury
regulations thereunder. "Rents from real property" do not include any rental
income under a lease based in whole or part on the net income or profits of any
tenant or sub-tenant. "Rents from real property" include charges (or an
allocable portion of rental income where no separate charge is stated) for
services customarily furnished or rendered in connection with the rental of real
property, whether or not the charges are separately stated. Services to the
tenants of a particular building will be considered as customary if, in the
geographic market in which the building is located, tenants in buildings which
are of similar class are customarily provided with the service. No determination
has been made whether the services furnished to the tenants of the Mortgaged
Properties are "customary" within the meaning of the applicable regulations. It
is therefore possible that a portion of the income with respect to a Mortgaged
Property owned by the Trust Fund would not constitute "rents from real
property," and could taint all of the rental income paid under the relevant
lease unless the non-customary services are performed by an independent
contractor and separately charged for. In addition to the foregoing, any net
income from a trade or business operated or managed by an independent contractor
on a Mortgaged Property (such as a hospitality or residential health care)
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owned by the Trust Fund (other than qualifying rent) will not constitute "rents
from real property." Any REO Tax imposed on the Trust Fund's income from an REO
Property would reduce the amount available for distribution to
Certificateholders. Certificateholders are advised to consult their tax advisors
regarding the possible imposition of REO Taxes in connection with the operation
of commercial REO Properties by REMICs. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES" in this Prospectus Supplement and "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--REMICs" in the Prospectus.
Each of the Majority Subordinate Certificateholder (as defined in this
Prospectus Supplement), the Special Servicer and the Master Servicer, in that
order, has been granted a right of first refusal to purchase any defaulted
Mortgage Loan at a cash price equal to the outstanding principal balance of such
Mortgage Loan as of the date of purchase, all accrued but unpaid interest, and
related fees and expenses. If such interested parties refuse to exercise such
right, the Special Servicer may offer to sell any defaulted Mortgage Loan if the
Special Servicer determines, consistent with the Servicing Standard, that such
sale would be in the best economic interest of the Trust Fund. In connection
with such a sale, the Special Servicer is not obligated to accept the highest
bid if the Special Servicer determines, in accordance with the Servicing
Standard, that rejection of the highest bid would be in the best interest of the
Certificateholders.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The Special Servicer is required, at the Trust Fund's expense, to perform or
cause to be performed a physical inspection of a Mortgaged Property as soon as
practicable after the related Mortgage Loan becomes a Specially Serviced
Mortgage Loan and annually thereafter so long as it remains a Specially Serviced
Mortgage Loan. In addition, with respect to each Mortgage Loan (other than a
Specially Serviced Mortgage Loan) with a principal balance at the time of such
inspection of more than or equal to $[ ] or [ ]% of the then current principal
balance of all Mortgage Loans, the Master Servicer is required to inspect or
cause to be inspected the related Mortgaged Property every calendar year and
with respect to each Mortgage Loan (other than a Specially Serviced Mortgage
Loan) with a principal balance at the time of such inspection of less than $[ ]
and [ ]% of the then current principal balance of all Mortgage Loans once every
other year. The Special Servicer and the Master Servicer each will 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 sale, transfer or abandonment or any
material change in its condition or value.
The Special Servicer or the Master Servicer is also required consistent with
the Servicing Standard to collect from the related borrower and review the
quarterly and annual operating statements of each Mortgaged Property and to
cause annual operating statements to be prepared for each REO Property.
Generally, the Mortgage Loans require the related borrower to deliver an annual
property operating statement. However, there can be no assurance that any
operating statements required to be delivered will in fact be delivered, nor is
the Master Servicer or 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 Special Servicer or the Master Servicer, as
applicable. See "DESCRIPTION OF THE CERTIFICATES--Reports to Certificateholders;
Available Information" in this Prospectus Supplement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The First Union National Bank Commercial Mortgage Trust, Commercial Mortgage
Pass-Through Certificates, Series 20[ ]-[ ] (the "Certificates") will be issued
pursuant to a Pooling and Servicing Agreement, dated as of [ ] [ ], 20[ ] ,
among the Depositor, the Master Servicer, the Special Servicer, and the Trustee
(the "Pooling and Servicing Agreement"). The Certificates represent in the
aggregate the entire beneficial ownership interest in a trust fund (the "Trust
Fund") consisting primarily of: (i) the Mortgage Loans and all payments and
other collections in respect of the Mortgage Loans received or applicable to
periods after the Cut-Off Date (exclusive of payments of principal and interest
due, and principal prepayments received, on or before the Cut-Off Date and in
the case of
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Semi-Annual Loans, interest accrued before the Cut-Off Date); (ii) any REO
Property acquired on behalf of the Trust Fund; (iii) such funds or assets as
from time to time are deposited in the Certificate Account, the Distribution
Account, the REO Accounts and the Interest Reserve Account (see "DESCRIPTION OF
THE POOLING AGREEMENTS--Certificate Account" in the Prospectus); and (iv)
certain rights of the Depositor under the Mortgage Loan Purchase Agreements
relating to Mortgage Loan document delivery requirements and the representations
and warranties of the Mortgage Loan Sellers regarding the Mortgage Loans.
The Certificates consist of the following classes (each, a "Class")
designated as: (i) the Class [ ] and Class [ ] Certificates (together, the
"Class [ ] Certificates"); (ii) the Class [ ], Class [ ], Class [ ], Class [ ],
Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ]
Certificates and Class [ ] Certificates (collectively, the "Subordinate
Certificates" and, together with the Class [ ] Certificates, the "Sequential Pay
Certificates"); (iii) the Class [ ] Certificates (collectively with the
Sequential Pay Certificates, the "REMIC Regular Certificates"); and (iv) the
Class [ ], Class [ ] and Class [ ] Certificates (collectively, the "REMIC
Residual Certificates").
Only the Class [ ], Class [ ], Class [ ] and Class [ ] Certificates
(collectively, the "Offered Certificates") are offered hereby. The Class [ ],
Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ],
Class [ ], Class [ ] and Class [ ] Certificates (collectively, the "Non-Offered
Certificates") and the REMIC Residual Certificates have not been registered
under the Securities Act and are not offered hereby. Accordingly, information in
this Prospectus Supplement regarding the terms of the Non-Offered Certificates
is provided solely because of its potential relevance to a prospective purchaser
of an Offered Certificate.
REGISTRATION AND DENOMINATIONS
The Offered Certificates will be made available in book-entry format through
the facilities of The Depository Trust Company ("DTC"). The Class [ ], Class [ ]
and Class [ ] Certificates will be offered in denominations of not less than $[
] actual principal amount and in integral multiples of $[ ] in excess thereof.
The Class [ ] Certificates will be offered in minimum denominations of $[ ]
notional amount and in integral multiples of $[ ] in excess of those amounts.
Holders of Offered Certificates may hold their Certificates through DTC (in
the United States) or Clearstream Banking, societe anonyme ("Clearstream") or
Euroclear (in Europe) if they are Participants of such respective system, or
indirectly through organizations that are Participants in such systems.
Clearstream and Euroclear will hold omnibus positions on behalf of the
Clearstream Participants and the Euroclear Participants, respectively, through
customers' securities accounts in Clearstream and Euroclear's names on the books
of their respective depositaries (collectively, the "Depositaries") which in
turn will hold such positions in customers' securities accounts in the
Depositaries' names on the books of DTC. DTC is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" 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 Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its Participants and to facilitate the clearance and settlement of
securities transactions between Participants through electronic computerized
book-entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly through Clearstream Participants or Euroclear
Participants, on the other, will be effected in DTC in accordance with DTC rules
on behalf of the relevant European international clearing system by its
Depositary; however, such cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its
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behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same-day funds settlement
applicable to DTC. Clearstream Participants and Euroclear Participants may not
deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in Clearstream or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Clearstream Participant or Euroclear Participant on such business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream Participant or a Euroclear Participant to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant Clearstream or Euroclear cash account only as of the
business day following settlement in DTC.
The holders of Offered Certificates that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Offered Certificates may do so only through Participants and
Indirect Participants. In addition, holders of Offered Certificates will receive
all distributions of principal and interest from the Trustee through the
Participants who in turn will receive them from DTC. Similarly, reports
distributed to Certificateholders pursuant to the Pooling and Servicing
Agreement and requests for the consent of Certificateholders will be delivered
to beneficial owners only through DTC, Euroclear, Clearstream and their
respective Participants. Under a book-entry format, holders of Offered
Certificates may experience some delay in their receipt of payments, reports and
notices, since such payments, reports and notices will be forwarded by the
Trustee to Cedel & Co., as nominee for DTC. DTC will forward such payments,
reports and notices to its Participants, which thereafter will forward them to
Indirect Participants, Clearstream, Euroclear or holders of Offered
Certificates, as applicable.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Offered Certificates among Participants on whose behalf it acts with respect to
the Offered Certificates and to receive and transmit distributions of principal
of, and interest on, the Offered Certificates. Participants and Indirect
Participants with which the holders of Offered Certificates have accounts with
respect to the Offered Certificates similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
holders of Offered Certificates. Accordingly, although the holders of Offered
Certificates will not possess the Offered Certificates, the Rules provide a
mechanism by which Participants will receive payments on Offered Certificates
and will be able to transfer their interest.
Because DTC can only act on behalf of Participants, who in turn act on behalf
of Indirect Participants and certain banks, the ability of a holder of Offered
Certificates to pledge such Certificates to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
DTC has advised the Depositor that it will take any action permitted to be
taken by a holder of an Offered Certificate under the Pooling and Servicing
Agreement only at the direction of one or more Participants to whose accounts
with DTC the Offered Certificates are credited. DTC may take conflicting actions
with respect to other undivided interests to the extent that such actions are
taken on behalf of Participants whose holdings include such undivided interests.
Except as required by law, none of the Depositor, the Underwriters, the
Master Servicer, nor the Trustee will have any liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Offered Certificates held by Cede & Co., as nominee for DTC, or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Clearstream is incorporated under the laws of Luxembourg as a professional
depository. Clearstream holds securities for its participating organizations (
"Clearstream Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream Participants through electronic
book-entry changes in accounts of Clearstream Participants, thereby eliminating
the need for physical movement of certificates. Transactions may be settled in
Clearstream in any of 28 currencies, including United States dollars.
Clearstream provides to its Clearstream Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets
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in several countries. As a professional depository, Clearstream is subject to
regulation by the Luxembourg Monetary Institute. Clearstream Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the Underwriters. Indirect
access to Clearstream is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Clearstream Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear system ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 27 currencies, including United
States dollars. The Euroclear system includes various other services, including
securities lending and borrowing and interfaces with domestic markets in several
countries generally similar to the arrangements for cross-market transfers with
DTC described above. Euroclear is operated by Morgan Guaranty Trust Company of
New York, Brussels, Belgium office (the "Euroclear Operator"), under the
contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear system on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear system is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as by the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear system, withdrawal of
securities and cash from the Euroclear system, and receipts of payments with
respect to securities in the Euroclear system. All securities in the Euroclear
system are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
The information in this Prospectus Supplement concerning DTC, Clearstream or
Euroclear and their book-entry systems has been obtained from sources believed
to be reliable, but the Depositor takes no responsibility for the accuracy or
completeness thereof.
CERTIFICATE BALANCES AND NOTIONAL AMOUNT
Subject to a permitted variance of plus or minus [ ]%, the respective Classes
of Sequential Pay Certificates will have the Certificate Balances representing
the approximate percentage of the Cut-Off Date Pool Balance as set forth in the
following table:
CLOSING DATE PERCENTAGE OF
CERTIFICATE CUT-OFF DATE
CLASS OF CERTIFICATE BALANCE POOL BALANCE
-------------------- ------------ -------------
The "Certificate Balance" of any Class of Sequential Pay 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
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flow on the Mortgage Loans and the other assets in the Trust Fund. The
Certificate Balance of each Class of Sequential Pay 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.
The Class [ ] Certificates do not have a Certificate Balance, but represent
the right to receive distributions of interest in an amount equal to the
aggregate interest accrued on the notional amount of each of the [ ] Components,
as described in this Prospectus Supplement. The Class [ ] Certificates have [ ]
separate components (each an "[ ] Component"), each corresponding to a different
Class of Sequential Pay Certificates. Each such [ ] Component has the same
letter and/or numerical designation as its related Class of Sequential Pay
Certificates. The notional amount of each [ ] Component will equal the
Certificate Balance of the corresponding Class of Sequential Pay Certificates
outstanding from time to time. On the Closing Date, the aggregate of the
notional amounts of all the [ ] Components will equal approximately $[ ], which
amount will equal the Cut-Off Date Pool Balance. References in this Prospectus
Supplement to the "notional amount" of the Class [ ] Certificates shall mean the
aggregate of the notional amounts of the [ ] Components.
The Certificate Balance of any Class of Sequential Pay Certificates may be
increased by the amount, if any, of Certificate Deferred Interest added to such
Class's Certificate Balance. With respect to any Mortgage Loan as to which the
Mortgage Rate has been reduced through a modification on any Distribution Date,
"Mortgage Deferred Interest" is the amount by which (a) interest accrued at such
reduced rate is less than (b) the amount of interest that would have accrued on
such Mortgage Loan at the Mortgage Rate before such reduction, to the extent
such amount has been added to the outstanding principal balance of such Mortgage
Loan. On each Distribution Date the amount of interest distributable to a Class
of Sequential Pay Certificates will be reduced by the amount of Mortgage
Deferred Interest allocable to such Class (any such amount, "Certificate
Deferred Interest"), such allocation being in reverse alphabetical order. The
Certificate Balance of each Class of Sequential Pay Certificates to which
Certificate Deferred Interest has been so allocated on a Distribution Date will
be increased by the amount of Certificate Deferred Interest.
The REMIC Residual Certificates do not have Certificate Balances or notional
amounts, but 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 have been made on all the REMIC
Regular Certificates. It is not anticipated that any such portion of the
Available Distribution Amount will result in more than a de minimis distribution
to the REMIC Residual Certificates.
PASS-THROUGH RATES
The Pass-Through Rate applicable to the Class [ ] and Class [ ] Certificates
for each Distribution Date will equal the respective fixed rate per annum set
forth on the front cover of this Prospectus Supplement. The Pass-Through Rate
applicable to the Class [ ] Certificates for each Distribution Date will equal
the lesser of the rate set forth on the cover of this Prospectus Supplement and
the Weighted Average Net Mortgage Rate as of the commencement of the related
Interest Accrual Period. Interest will accrue for each Class of Certificates
(other than the REMIC Residual Certificates) during the calendar month prior to
the related Distribution Date (each such period, an "Interest Accrual Period")
and will be calculated assuming that each month has 30 days and a 360-day year.
Each [ ] Component accrues interest on its related notional amount. The interest
rate applicable to each [ ] Component for any Distribution Date will equal the
excess, if any, of the Weighted Average Net Mortgage Rate for any Distribution
Date over the Pass-Through Rate applicable to the corresponding Class of
S-62Sequential Pay Certificates. Because the Pass-Through Rates applicable to
the Class [ ] and Class [ ] Certificates is equal to the Weighted Average Net
Mortgage Rate, the Pass-Through Rate applicable to the corresponding [ ]
Components will be zero.
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 on the first day of such Collection Period;
provided that, if the Mortgage Rate for any Mortgage Loan has been modified in
connection with a bankruptcy or similar proceeding involving the related
borrower or a modification, waiver or amendment granted or agreed to by the
Special Servicer, the Weighted Average Net Mortgage Rate for such Mortgage Loan
will be calculated without regard to such event.
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The "Net Mortgage Rate" for each Mortgage Loan will generally equal (x) the
Mortgage Rate in effect for such Mortgage Loan as of the Cut-Off Date, minus (y)
the applicable Administrative Cost Rate for such Mortgage Loan. Notwithstanding
the foregoing, if any Mortgage Loan does not accrue interest on the basis of a
360-day year consisting of twelve 30-day months (which is the basis on which
interest accrues in respect of the REMIC Regular Certificates), then, solely for
purposes of calculating the Weighted Average Net Mortgage Rate for each
Distribution Date, the Mortgage Rate of such Mortgage Loan in effect during any
calendar month will be deemed to be the annualized rate at which interest would
have to accrue in respect of such loan on a 30/360 basis in order to derive the
aggregate amount of interest (other than default interest) actually accrued in
respect of such loan during such calendar month; provided, however, that, with
respect to each Interest Reserve Loan (as defined in this Prospectus
Supplement), the Mortgage Rate in effect during (a) December of each year that
does not immediately precede a leap year, (b) January of each year and (c)
February of each year, will be the per annum rate stated in the related Mortgage
Note. The "Stated Principal Balance" of each Mortgage Loan outstanding at any
time will generally be an amount equal to the principal balance thereof as of
the Cut-Off Date, (a) reduced on each Distribution Date (to not less than zero)
by (i) any payments or other collections (or advances in lieu thereof) of
principal of such Mortgage Loan that are due or received, as the case may be,
during the related Collection Period and 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
and (b) increased on each Distribution Date by any Mortgage Deferred Interest
added to the principal balance of such Mortgage Loan on such Distribution Date.
The Stated Principal Balance of a Mortgage Loan may also be reduced in
connection with any forced reduction of the actual unpaid principal balance
thereof imposed by a court presiding over a bankruptcy proceeding in which the
related borrower is a debtor. Notwithstanding the foregoing, if any Mortgage
Loan is paid in full, liquidated or otherwise removed from the Trust Fund,
commencing as of the first Distribution Date following the Collection Period
during which such event occurred, the Stated Principal Balance of such Mortgage
Loan will be zero.
The "Collection Period" for each Distribution Date is the period that begins
immediately following the Determination Date in the month preceding the month in
which such Distribution Date occurs and ends on and includes the Determination
Date in the same month as such Distribution Date. The "Determination Date" will
be the [ ]th day of each month (or, if not a business day, the immediately
succeeding business day).
DISTRIBUTIONS
General. Distributions on the Certificates are made by the Trustee, to the
extent of the Available Distribution Amount, 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 with the same force and effect (each, a "Distribution Date");
provided, however, that the Distribution Date will be no earlier than the fourth
business day following the related Determination Date. Except as described
below, all such distributions will be made to the persons in whose names the
Certificates are registered (the "Certificateholders") at the close of business
on the last business day of the month preceding the month in which the related
Distribution Date occurs and shall be made by wire transfer of immediately
available funds, if such Certificateholder shall have provided wiring
instructions no less than five business days prior to such record date, or
otherwise by check mailed to the address of such Certificateholder as it appears
in the Certificate register. The final distribution on any Certificate
(determined without regard to any possible future reimbursement of any Realized
Loss or Additional Trust Fund Expense previously allocated to such Certificate)
will be made 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 first
Distribution Date on which investors in the Offered Certificates may receive
distributions will be the Distribution Date occurring in [ ] [ ], 20[ ] .
The Available Distribution Amount. The aggregate amount available for
distributions of interest and principal 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 or in respect of the Mortgage
Loans and any REO Properties by the Master Servicer as of the close of
business on the related Determination Date and not previously distributed
with respect to the Certificates or applied for any other permitted purpose,
exclusive of any portion thereof that represents one or more of the
following:
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(i) any Periodic Payments collected but due on a Due Date after the
related Collection Period;
(ii) any Prepayment Premiums and Yield Maintenance Charges;
(iii) all amounts in the Certificate Account that are payable or
reimbursable to any person other than the Certificateholders, including
any Servicing Fees and Trustee Fees;
(iv) any amounts deposited in the Certificate Account in error;
(v) any Additional Interest on the ARD Loans; and
(vi) if such Distribution Date occurs during February of any year or
during January of any year that is not a leap year, the Interest Reserve
Amounts with respect to the Interest Reserve Loans to be deposited in the
Interest Reserve Account and held for future distribution;
(b) all P&I Advances made by the Master Servicer or the Trustee with
respect to such Distribution Date;
(c) any Compensating Interest Payment made by the Master Servicer to cover
the aggregate of any Prepayment Interest Shortfalls experienced during the
related Collection Period; and
(d) if such Distribution Date occurs during March of any year, the
aggregate of the Interest Reserve Amounts then on deposit in the Interest
Reserve Account in respect of each Interest Reserve Loan.
See "SERVICING OF THE MORTGAGE LOANS--Servicing and Other Compensation and
Payment of Expenses" in this Prospectus Supplement, "--P&I Advances" below and
"DESCRIPTION OF THE POOLING AGREEMENTS--Certificate Account" in the Prospectus.
Any Prepayment Premiums or Yield Maintenance Charges actually collected wilL
BE distributed separately from the Available Distribution Amount. See
"--Distributions--Allocation of Prepayment Premiums and Yield Maintenance
Charges."
Interest Reserve Account. The Master Servicer has established and will
maintain an "Interest Reserve Account" in the name of the Trustee for the
benefit of the holders of the Certificates. With respect to each Distribution
Date occurring in February and each Distribution Date occurring in any January
which occurs in a year that is not a leap year, there will be deposited to the
Interest Reserve Account in respect of each Mortgage Loan bearing interest
computed on an actual/360 basis (the "Interest Reserve Loans") an amount equal
to one day's interest at the related Net Mortgage Rate on its Stated Principal
Balance, as of the Due Date in the month in which such Distribution Date occurs,
to the extent a Periodic Payment or P&I Advance is timely made in respect
thereof for such Due Date (all amounts so deposited in any consecutive January
(if applicable) and February in respect of each Interest Reserve Loan, the
"Interest Reserve Amount"). With respect to each Distribution Date occurring in
March, there will be withdrawn from the Interest Reserve Account in respect of
each Interest Reserve Loan the amount by which thirty days' interest at the Net
Mortgage Rate exceeds the amount of interest that actually accrues on such
Mortgage Loan, and such withdrawn amount is to be included as part of the
Available Distribution Amount for such Distribution Date.
Application of the Available Distribution Amount. On each Distribution Date,
the Trustee 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 [ ], Class
[ ] and Class [ ] Certificates (in each case, so long as any such Class
REMAINS outstanding), pro rata, in accordance with the respective amounts of
Distributable Certificate Interest (as defined in this Prospectus Supplement)
in respect of such Classes of Certificates on such Distribution Date, in an
amount equal to all Distributable Certificate Interest in respect of each
such Class of 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 (as defined in this Prospectus Supplement) for such Distribution Date;
(3) after 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 respect of the
Class [ ] Certificates;
(4) to distributions to the holders of the Class [ ] and Class [ ]
Certificates, pro rata, in accordance with the respective amounts of Realized
Losses and Additional Trust Fund Expenses, if any, previously allocated to
such Classes of Certificates and for which no reimbursement has previously
been received, to reimburse such holders for all such Realized Losses and
Additional Trust Fund Expenses, if any;
(5) 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;
(6) after 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 respect of the
Class [ ] Certificates on such Distribution Date;
(7) 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;
(8) 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;
(9) after 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 respect of the
Class [ ] and/or Class [ ] Certificates on such Distribution Date;
(10) 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;
(11) 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;
(12) after 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
respect of the Class [ ], Class [ ] and/or Class [ ] Certificates on such
Distribution Date;
(13) 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;
(14) 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;
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(15) after the Class [ ], 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
respect of the Class [ ], Class [ ], Class [ ] and/or Class [ ] Certificates;
(16) 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;
(17) 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;
(18) after the Class [ ], Class [ ], 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 respect of the Class [ ], Class [ ], Class [ ], Class
[ ] and/or Class [ ] Certificates;
(19) 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;
(20) 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;
(21) after the Class [ ], Class [ ], Class [ ], 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 respect of the Class [ ], Class [ ], Class [
], Class [ ], Class [ ] and/or Class [ ] Certificates;
(22) 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;
(23) 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;
(24) after the Class [ ], Class [ ], Class [ ], Class [ ], 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 respect of the
Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ] and/or Class
[ ] Certificates;
(25) 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;
(26) 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;
(27) after the Class [ ], Class [ ], Class [ ], Class [ ], Class [ ],
Class [ ], Class [ ] and Class [ ] Certificates have been retired, to
distributions of principal to the holders of the Class [ ] Certificates in an
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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 respect of the
Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ]
and/or Class [ ] Certificates;
(28) 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;
(29) 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;
(30) after the Class [ ], Class [ ], Class [ ], Class [ ], Class [ ],
Class [ ], 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 respect of the
Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ],
Class [ ] and/or Class [ ] Certificates;
(31) 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;
(32) 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;
(33) after the Class [ ] , Class [ ], Class [ ], Class [ ], Class [ ],
Class [ ], Class [ ], 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
respect of the Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [
], Class [ ], Class [ ], Class [ ] and/or Class [ ] Certificates;
(34) 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;
(35) 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;
(36) after the Class [ ] , Class [ ], Class [ ], Class [ ], Class [ ],
Class [ ], Class [ ], Class [ ], 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 respect of the Class [ ], Class [ ], Class [ ], Class
[ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ] and/or
Class [ ] Certificates;
(37) 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;
(38) 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;
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(39) after the Class [ ], Class [ ], Class [ ], Class [ ], Class [ ],
Class [ ], Class [ ], Class [ ], Class [ ], 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 respect of the Class [ ], Class [ ], Class [ ], Class
[ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class
[ ] and/or Class [ ] Certificates;
(40) 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
(41) to distributions to the holders of the REMIC Residual 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 (40) above;
provided that, on each Distribution Date, if any, after the aggregate of the
Certificate Balances of the Subordinate Certificates has been reduced to zero
(prior to retirement of the Class [ ] Certificates) as a result of the
allocations of Realized Losses and Additional Trust Fund Expenses, and in any
event on the final Distribution Date in connection with a termination of the
Trust Fund (see "DESCRIPTION OF THE CERTIFICATES--Termination" in this
Prospectus Supplement), the payments of principal to be made as contemplated by
clauses (2) and (3) above with respect to the Class [ ] Certificates will be so
made to the holders of the respective Classes of such Certificates up to an
amount equal to, and pro rata as between such Classes in accordance with, the
respective then outstanding Certificate Balances of such Classes of Certificates
and without regard to the Principal Distribution Amount for such date.
Distributable Certificate Interest. The "Distributable Certificate Interest"
in respect of each Class of REMIC Regular Certificates for each Distribution
Date equals the Accrued Certificate Interest in respect of such Class of
Certificates for such Distribution Date, reduced (other than in the case of the
Class [ ] Certificates) (to not less than zero) by (i) 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") and
(ii) any Certificate Deferred Interest allocated to such Class of REMIC Regular
Certificates.
The "Accrued Certificate Interest" in respect of each Class of Sequential Pay
Certificates for each Distribution Date will equal one month's interest at the
Pass-Through Rate applicable to such Class of Certificates for such Distribution
Date accrued for the related Interest Accrual Period on the related Certificate
Balance outstanding immediately prior to such Distribution Date. The "Accrued
Certificate Interest" in respect of the Class [ ] Certificates for any
Distribution Date will equal the aggregate of one month's interest at the
applicable Pass-Through Rate on the notional amount of each [ ] Component
outstanding immediately prior to such Distribution Date. Accrued Certificate
Interest will be calculated on a 30/360 basis.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of REMIC Regular Certificates
(other than the Class [ ] Certificates) will equal the product of (a) such Net
Aggregate Prepayment Interest Shortfall, multiplied by (b) a fraction, the
numerator of which is equal to 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 in respect of all
Classes of REMIC Regular Certificates (other than the Class [ ] Certificates)
for such Distribution Date.
Principal Distribution Amount. The "Principal Distribution Amount" for each
Distribution Date will generally equal the aggregate of the following (without
duplication) to the extent paid by the related borrower during the related
Collection Period or advanced by the Master Servicer or the Trustee, as
applicable:
(a) the aggregate of the principal portions of all Scheduled Payments
(other than Balloon Payments) and of any Assumed Scheduled Payments due or
deemed due, on or in respect of the Mortgage Loans for their
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respective Due Dates occurring during the related Collection Period, to the
extent not previously paid by the related borrower or advanced by the Master
Servicer or Trustee, as applicable, prior to such 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 (including any Balloon Payment), 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 the principal portion of all Liquidation Proceeds,
Insurance Proceeds (each as defined in the Prospectus), condemnation awards
and proceeds of Mortgage Loan repurchases and Substitution Shortfall Amounts
and, to the extent not otherwise included in clause (a), (b) or (c) above,
payments and other amounts that were received on or in respect of Mortgage
Loans during the related Collection Period and that were identified and
applied by the Master Servicer as recoveries of principal, in each case net
of any portion of such amounts that represents a recovery of the principal
portion of any Scheduled Payment (other than a Balloon Payment) due, or of
the principal portion of any Assumed Scheduled Payment deemed due, in respect
of the related Mortgage Loan on a Due Date during or prior to the related
Collection Period and not previously recovered; and
(e) if such Distribution Date is subsequent to the initial Distribution
Date, the excess, if any, of the Principal Distribution Amount for the
immediately preceding Distribution Date, over the aggregate distributions of
principal made on the Certificates on such immediately preceding Distribution
Date.
The "Scheduled Payment" due on any Mortgage Loan on any related Due Date is
the amount of the Periodic Payment (including Balloon Payments) that is or would
have been, as the case may be, due thereon on such date, without regard to any
waiver, modification or amendment of such Mortgage Loan granted or agreed to by
the Special Servicer or otherwise resulting from a bankruptcy or similar
proceeding involving the related borrower, without regard to the accrual of
Additional Interest on or the application of any Excess Cash Flow to pay
principal on an ARD Loan, without regard to any acceleration of principal by
reason of default, and with the assumption that each prior Scheduled Payment has
been made in a timely manner. The "Assumed Scheduled Payment" is an amount
deemed due (i) on any Balloon Loan that is delinquent in respect of its Balloon
Payment beyond the first Determination Date that follows its stated maturity
date and (ii) on an REO Mortgage Loan. 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, if
any, and to accrue interest at the Mortgage Rate in effect as of the Closing
Date. The Assumed Scheduled Payment deemed due on any REO Mortgage Loan on each
Due Date that the related REO Property remains part of the Trust Fund will equal
the Scheduled Payment that would have been due in respect of such Mortgage Loan
on such Due Date had it remained outstanding (or, if such Mortgage Loan was a
Balloon Mortgage Loan and such Due Date coincides with or follows what had been
its stated maturity date, the Assumed Scheduled Payment that would have been
deemed due in respect of such Mortgage Loan on such Due Date had it remained
outstanding).
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, for
purposes of determining (i) distributions on the Certificates, (ii) allocations
of Realized Losses and Additional Trust Fund Expenses to the Certificates, and
(iii) the amount of Trustee Fees and Servicing Fees payable under the Pooling
and Servicing Agreement, as having remained outstanding until such REO Property
is liquidated. In
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connection therewith, operating revenues and other proceeds derived from such
REO Property (net of related operating costs) will be "applied" by the Master
Servicer as principal, interest and other amounts that would have been "due" on
such Mortgage Loan, and the Master Servicer will be required to make P&I
Advances in respect of such Mortgage Loan, in all cases as if such Mortgage Loan
had remained outstanding. References to "Mortgage Loan" or "Mortgage Loans" in
the definitions of "Principal Distribution Amount" and "Weighted Average Net
Mortgage Rate" are intended to include any Mortgage Loan as to which the related
Mortgaged Property has become an REO Property (an "REO Mortgage Loan").
Allocation of Prepayment Premiums and Yield Maintenance Charges. In the event
a borrower is required to pay any Yield Maintenance Charge or any Prepayment
Premium, the amount of such payments actually collected will be distributed in
respect of the Offered Certificates and the Class [ ], Class [ ], Class [ ] and
Class [ ] Certificates as set forth below. "Yield Maintenance Charges" are fees
paid or payable, as the context requires, as a result of a prepayment of
principal on a Mortgage Loan, which fees have been calculated (based on
Scheduled Payments on such Mortgage Loan) to compensate the holder of the
Mortgage for reinvestment losses based on the value of a discount rate at or
near the time of prepayment. Any other fees paid or payable, as the context
requires, as a result of a prepayment of principal on a Mortgage Loan, which are
calculated based upon a specified percentage (which may decline over time) of
the amount prepaid are considered "Prepayment Premiums."
Prepayment Premiums collected on a Mortgage Loan during the related
Collection Period will be distributed as follows: on each Distribution Date and
with respect to the collection of any Prepayment Premiums, the holders of each
Class of Offered Certificates and the Class [ ], Class [ ], Class [ ] and Class
[ ] Certificates then entitled to distributions of principal on such
Distribution Date will be entitled to an amount of Prepayment Premiums equal to
the product of (a) the amount of such Prepayment Premiums, multiplied by (b) a
fraction, the numerator of which is equal to the amount of principal
distributable to such Class of Offered Certificates or applicable Non-Offered
Certificates on such Distribution Date, and the denominator of which is the
Principal Distribution Amount for such Distribution Date, multiplied by (c) [
]%. The remaining portion of Prepayment Premiums will be distributed to the
Class [ ] Certificates.
Yield Maintenance Charges collected on a Mortgage Loan during the related
Collection Period will be distributed as follows: on each Distribution Date and
with respect to the collection of any Yield Maintenance Charges, the holders of
each Class of Offered Certificates or applicable Non-Offered Certificates then
entitled to distributions of principal on such Distribution Date will be
entitled to an amount of Yield Maintenance Charges equal to the product of (a)
the amount of such Yield Maintenance Charges, multiplied by (b) a fraction
(which in no event may be greater than one), the numerator of which is equal to
the excess, if any, of the Pass-Through Rate of such Class of Offered
Certificates or applicable Class of Non-Offered Certificates over the relevant
Discount Rate (as defined below), and the denominator of which is equal to the
excess, if any, of the Mortgage Rate of the prepaid Mortgage Loan over the
relevant Discount Rate, multiplied by (c) a fraction, the numerator of which is
equal to the amount of principal distributable on such Class of Offered
Certificates or applicable Class of Non-Offered Certificates on such
Distribution Date, and the denominator of which is the Principal Distribution
Amount for such Distribution Date. If there is more than one Class of Offered
Certificates and applicable Class of Non-Offered Certificates entitled to
distributions of principal on any particular Distribution Date on which a Yield
Maintenance Charge is distributable, the aggregate amount of such Yield
Maintenance Charge will be allocated among all such Classes up to, and on a pro
rata basis in accordance with, their respective entitlements thereto in
accordance with, the foregoing sentence. The portion, if any, of the Yield
Maintenance Charges remaining after any such payments to the holders of the
Offered Certificates and applicable Non-Offered Certificates will be distributed
to the holders of the Class [ ] Certificates.
The "Discount Rate" applicable to any Class of Offered Certificates or
Non-Offered Certificates will be equal to the discount rate stated in the
related mortgage loan documents used in calculating the Yield Maintenance Charge
with respect to such principal prepayment. To the extent a discount rate is not
stated therein, the "Discount Rate" will equal the yield (when compounded
monthly) on the U.S. Treasury issue with a maturity date closest to the maturity
date for the prepaid Mortgage Loan or REO Mortgage Loan. In the event that there
are two or more such U.S. Treasury issues (a) with the same coupon, the issue
with the lowest yield will be utilized, and (b) with maturity dates equally
close to the maturity date for the prepaid Mortgage Loan or REO Mortgage Loan,
the issue with the earliest maturity date will be utilized.
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For an example of the foregoing allocation of Prepayment Premiums and Yield
Maintenance Charges, see "SUMMARY OF PROSPECTUS SUPPLEMENT" in this Prospectus
Supplement. The Depositor makes no representation as to the enforceability of
the provision of any Mortgage Note requiring the payment of a Prepayment Premium
or Yield Maintenance Charge, or of the collectability of any Prepayment Premium
or Yield Maintenance Charge. See "DESCRIPTION OF THE MORTGAGE POOL--Certain
Terms and Conditions of the Mortgage Loans--Prepayment Provisions" in this
Prospectus Supplement.
Distributions of Additional Interest. On each Distribution Date, [ ]% of any
Additional Interest collected on an ARD Loan during the related Collection
Period will be distributed among all the holders of the Class [ ], Class [ ] and
Class [ ] Certificates, on a pro rata basis in accordance with the respective
initial Certificate Balances of such Classes of Certificates, and the remainder
of such Additional Interest will be distributed to the holders of the Class [ ]
Certificates. There can be no assurance that any Additional Interest will be
collected on the ARD Loans.
SUBORDINATION; ALLOCATION OF LOSSES AND CERTAIN EXPENSES
The rights of holders of the Subordinate Certificates to receive
distributions of amounts collected or advanced on the Mortgage Loans will be
subordinated, to the extent described in this Prospectus Supplement, to the
rights of holders of the Senior Certificates and 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 Senior 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 each Class of the Class [ ] Certificates of principal in an amount equal to
the entire related 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 [ ] 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 such Certificates
of, in the case of each such Class thereof, principal equal to the entire
related Certificate Balance. The protection afforded to the holders of the Class
[ ] Certificates by means of the subordination of the Non-Offered Certificates,
and to the holders of the Senior Certificates by means of the subordination of
the Subordinate Certificates, will be accomplished by (i) 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 and (ii) by the allocation of Realized Losses and
Additional Trust Fund Expenses as described below. Until the first Distribution
Date after the aggregate of the Certificate Balances of the Subordinate
Certificates has been reduced to zero, the Class [ ] Certificates will receive
principal payments only after the Certificate Balance of the Class [ ]
Certificates has been reduced to zero. However, after the Distribution Date on
which the Certificate Balances of the Subordinate Certificates have been reduced
to zero, the Class [ ] and Class [ ] Certificates will bear shortfalls in
collections and losses incurred in respect of the Mortgage Loans pro rata in
respect of distributions of principal and then the Class [ ], Class [ ] and
Class [ ] Certificates will bear such shortfalls pro rata in respect of
distributions of interest. No other form of credit support will be available for
the benefit of the holders of the Offered Certificates.
Allocation to the Class [ ] and Class [ ] Certificates (unless the aggregate
Certificate Balance of each Class of Subordinate Certificates has been reduced
to zero, first to the Class [ ] Certificates until the Certificate Balance
thereof has been reduced to zero, then to the Class [ ] Certificates until the
Certificate Balance thereof has been reduced to zero), for so long as they are
outstanding, of the entire Principal Distribution Amount for each Distribution
Date will have the effect of reducing the aggregate Certificate Balance of the
Class [ ] and Class [ ] Certificates at a proportionately faster rate than the
rate at which the aggregate Stated Principal Balance of the Mortgage Pool will
reduce. Thus, as principal is distributed to the holders of such Class [ ] and
Class [ ] Certificates, the percentage interest in the Trust Fund evidenced by
such Class [ ] and 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 such Class [ ] and Class [ ]
Certificates by the Subordinate 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 that have not previously been allocated as
described below will be allocated among the respective Classes of Sequential Pay
Certificates (in each case in reduction of their respective Certificate
Balances) as follows, but in the aggregate only to the extent that the aggregate
Certificate Balance of all
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Classes of Sequential Pay Certificates remaining outstanding after giving effect
to the distributions on such Distribution Date exceeds the aggregate Stated
Principal Balance of the Mortgage Pool that will be outstanding immediately
following such Distribution Date: first, to the Class [ ] Certificates, until
the remaining Certificate Balance of such Class of Certificates is reduced to
zero; second, to the Class [ ] Certificates, until the remaining Certificate
Balance of such Class of Certificates is reduced to zero; third, to the Class [
] Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; fourth, to the Class [ ] Certificates, until
the remaining Certificate Balance of such Class of Certificates is reduced to
zero; fifth, to the Class [ ] Certificates, until the remaining Certificate
Balance of such Class of Certificates is reduced to zero; sixth, to the Class [
] Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; seventh, to the Class [ ] Certificates, until
the remaining Certificate Balance of such Class of Certificates is reduced to
zero; eighth, to the Class [ ] Certificates, until the remaining Certificate
Balance of such Class of Certificates is reduced to zero; ninth, to the Class [
] Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; tenth, to the Class [ ] Certificates, until the
remaining Certificate Balance of such Class of Certificates is reduced to zero;
eleventh, to the Class [ ] Certificates, until the remaining Certificate Balance
of such Class of Certificates is reduced to zero; twelfth, to the Class [ ]
Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; and, last, to the Class [ ] Certificates and
the Class [ ] Certificates, pro rata, in proportion to their respective
outstanding Certificate Balances, until the remaining Certificate Balances of
such Classes of Certificates are reduced to zero.
Any Realized Losses or Additional Trust Fund Expenses allocated in reduction
of the Certificate Balance of any Class of Sequential Pay Certificates will
result in a corresponding reduction in the notional amount for the [ ] Component
of the Class [ ] Certificates that is related to such Class of Sequential Pay
Certificates.
"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 Mortgaged 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 to but not including the Due Date in the
Collection Period in which the liquidation occurred (exclusive of any related
default interest in excess of the Mortgage Rate, Additional Interest, Prepayment
Premiums or Yield Maintenance Charges) 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 (other than Additional Interest and default interest
in excess of the Mortgage Rate) is forgiven, whether in connection with a
modification, waiver or amendment granted or agreed to by 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, Principal Recovery Fees, or Workout Fees paid to the Special
Servicer, (ii) any interest paid to the Master Servicer, and/or the Trustee in
respect of unreimbursed Advances (to the extent not otherwise offset by penalty
interest and late payment charges) and amounts payable to the Special Servicer
in connection with certain inspections of Mortgaged Properties required pursuant
to the Pooling and Servicing Agreement, and (iii) any of certain unanticipated,
expenses of the Trust Fund, including certain indemnities and reimbursements to
the Trustee of the type described under "DESCRIPTION OF THE POOLING
AGREEMENTS--Certain Matters Regarding the Trustee" in the Prospectus, certain
indemnities and reimbursements to the Master Servicer, the Special Servicer and
the Depositor of the type described under "DESCRIPTION OF THE POOLING
AGREEMENTS--Certain Matters Regarding the Master Servicer and the Depositor" in
the Prospectus (the Special Servicer having the same rights to indemnity and
reimbursement as described thereunder with respect to the Master Servicer),
certain Rating Agency fees to the extent such fees are not paid by any other
party and certain federal, state and local taxes, and certain tax related
expenses, payable from the assets of the Trust Fund and described under
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Prohibited Transactions Tax and Other
Taxes" in the Prospectus and "SERVICING OF THE MORTGAGE LOANS--REO Properties;
Sale of Mortgage Loans" in this Prospectus Supplement. 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.
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P&I ADVANCES
On or about each Distribution Date, the Master Servicer is 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 (or paid to any other Person pursuant to the Pooling and
Servicing Agreement) on such Distribution Date, in an amount that is generally
equal to the aggregate of all Periodic Payments (other than Balloon Payments)
and any Assumed Scheduled Payments, net of related Servicing Fees and, if
applicable, Swap Fees, due or deemed due, as the case may be, in respect of the
Mortgage Loans and any REO 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 (or previously advanced by the Master Servicer)
as of the close of business on the related Determination Date. With respect to
each Semi-Annual Loan, the Master Servicer will make a P&I Advance each month
(other than any month in which its Due Date occurs) in an amount equal to
one-sixth of the interest portion of the following Periodic Payment due on such
Mortgage Loan, net of related Servicing Fees and, if applicable, Swap Fees, due
or deemed due, and shall be entitled to reimbursement for such advances from the
related Periodic Payment when collected or, if non-recoverable from such
Periodic Payment, then from general collections, in accordance with the next
paragraph. No interest shall accrue on P&I Advances made in respect of any
Semi-Annual Loan until after any Due Date on which no related Periodic Payment
is collected in respect of such Semi-Annual Loan. The Master Servicer's
obligations to make P&I Advances in respect of any Mortgage Loan, subject to the
recoverability determination, will continue until liquidation of such Mortgage
Loan or disposition of any REO Property acquired in respect thereof. However, if
the Periodic Payment on any Mortgage Loan has been reduced in connection with a
bankruptcy or similar proceeding or a modification, waiver or amendment granted
or agreed to by the Special Servicer, the Master Servicer will be required to
advance only the amount of the reduced Periodic Payment (net of related
Servicing Fees and Trustee Fees) in respect of subsequent delinquencies. In
addition, if it is determined that an Appraisal Reduction Amount (as defined
below) exists with respect to any Required Appraisal Loan (as defined below),
then, with respect to the Distribution Date immediately following the date of
such determination and with respect to each subsequent Distribution Date for so
long as such Appraisal Reduction Amount exists, the Master Servicer will be
required in the event of subsequent delinquencies to advance in respect of such
Mortgage Loan only an amount equal to the sum of (i) the product of (a) the
amount of the interest portion of the P&I Advance that would otherwise be
required without regard to this sentence, multiplied by (b) a fraction, the
numerator of which is equal to the Stated Principal Balance of such Mortgage
Loan, net of such Appraisal Reduction Amount, and the denominator of which is
equal to the Stated Principal Balance of such Mortgage Loan and (ii) the amount
of the principal portion of the P&I Advance that would otherwise be required
without regard to this sentence. Pursuant to the terms of the Pooling and
Servicing Agreement, if the Master Servicer fails to make a P&I Advance required
to be made, the Trustee shall then be required to make such P&I Advance, in such
case, subject to the recoverability standard described below. Neither the Master
Servicer nor Trustee will be required to make a P&I Advance for Balloon
Payments, default interest, Yield Maintenance Charges, Prepayment Premiums or
Additional Interest.
The Master Servicer (or the Trustee) is entitled to recover any P&I Advance
made out of its own funds from any amounts collected in respect of the Mortgage
Loan (net of related Servicing Fees with respect to collections of interest and
net of related Principal Recovery Fees and Workout Fees with respect to
collections of principal) as to which such P&I Advance was made whether such
amounts are collected in the form of late payments, insurance and condemnation
proceeds or Liquidation Proceeds, or any other recovery of the related Mortgage
Loan or REO Property or, with respect to any Semi-Annual Loan, the related
Periodic Payment ("Related Proceeds"). Neither the Master Servicer nor the
Trustee is obligated to make any P&I Advance that it determines in accordance
with the servicing standards described in this Prospectus Supplement, would, if
made, not be recoverable from Related Proceeds (a "Nonrecoverable P&I Advance"),
and the Master Servicer (or the Trustee) is entitled to recover, from general
funds on deposit in the Certificate Account, any P&I Advance made that it later
determines to be a Nonrecoverable P&I Advance. See "DESCRIPTION OF THE
CERTIFICATES--Advances in Respect of Delinquencies" and "DESCRIPTION OF THE
POOLING AGREEMENTS--Certificate Account" in the Prospectus.
In connection with the recovery by the Master Servicer or the Trustee of any
P&I Advance made by it or the recovery by the Master Servicer or the Trustee of
any reimbursable servicing expense incurred by it (each such P&I Advance or
expense, an "Advance"), the Master Servicer or the Trustee, as applicable, is
entitled to be paid (subject
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to the second preceding paragraph with respect to Semi-Annual Loans), out of
penalty interest and late payment charges that have been collected on the
related Mortgage Loan during the calendar year in which such reimbursement is
made and, in certain circumstances, out of any other amounts then on deposit in
the Certificate Account, interest compounded annually at a per annum rate (the
"Reimbursement 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, accrued on the amount of such Advance from the date made to but not
including the date of reimbursement. To the extent not offset or covered by
amounts otherwise payable on the Non-Offered Certificates, interest accrued on
outstanding Advances will result in a reduction in amounts payable on the
Offered Certificates, subject to the distribution priorities described in this
Prospectus Supplement.
APPRAISAL REDUCTIONS
Upon the earliest of the date (each such date, a "Required Appraisal Date")
that (1) any Mortgage Loan is 60 days delinquent in respect of any Periodic
Payments, (2) any REO Property is acquired on behalf of the Trust Fund in
respect of any Mortgage Loan, (3) any Mortgage Loan has been modified by the
Special Servicer to reduce the amount of any Periodic Payment, other than a
Balloon Payment, (4) a receiver is appointed and continues in such capacity in
respect of the Mortgaged Property securing any Mortgage Loan, (5) a borrower
with respect to any Mortgage Loan becomes subject to any bankruptcy proceeding
or (6) a Balloon Payment with respect to any Mortgage Loan has not been paid on
its scheduled maturity date (each such Mortgage Loan, including an REO Mortgage
Loan, a "Required Appraisal Loan"), the Special Servicer is required to obtain
(within 60 days of the applicable Required Appraisal Date) an appraisal of the
related Mortgaged Property prepared in accordance with 12 CFR Section 225.62 and
conducted in accordance with the standards of the Appraisal Institute by a
Qualified Appraiser (or with respect to any Mortgage Loan with an outstanding
principal balance less than $1 million, an internal valuation performed by the
Special Servicer), unless such an appraisal had previously been obtained within
the prior twelve months. A "Qualified Appraiser" is an independent appraiser,
selected by the Special Servicer or the Master Servicer, that is a member in
good standing of the Appraisal Institute, and that, if the state in which the
subject Mortgaged Property is located certifies or licenses appraisers, is
certified or licensed in such state, and in each such case, who has a minimum of
five years experience in the subject property type and market. The cost of such
appraisal will be advanced by the Master Servicer, subject to the Master
Servicer's right to be reimbursed therefor out of Related Proceeds or, if not
reimbursable therefrom, out of general funds on deposit in the Certificate
Account. As a result of any such appraisal, it may be determined that an
"Appraisal Reduction Amount" exists with respect to the related Required
Appraisal Loan, such determination to be made by the Master Servicer upon the
later of 30 days after the Required Appraisal Date if no new appraisal is
required or upon receipt of a new appraisal (or internal valuation, if
applicable) and each Determination Date thereafter so long as the related
Mortgage Loan remains a Required Appraisal Loan. The Appraisal Reduction Amount
for any Required Appraisal Loan will equal the excess, if any, of (a) the sum
(without duplication), as of the Determination Date immediately succeeding the
date on which the appraisal or internal valuation, if applicable, is obtained
and each Determination Date thereafter so long as the related Mortgage Loan
remains a Required Appraisal Loan, of (i) the Stated Principal Balance of such
Required Appraisal Loan, (ii) to the extent not previously advanced by or on
behalf of the Master Servicer or the Trustee, all unpaid interest on the
Required Appraisal Loan through the most recent Due Date prior to such
Determination Date at a per annum rate equal to the related Net Mortgage Rate,
(iii) all accrued but unpaid Servicing Fees and any Additional Trust Fund
Expenses in respect of such Required Appraisal Loan, (iv) all related
unreimbursed Advances (plus accrued interest thereon) made by or on behalf of
the Master Servicer, the Special Servicer or the Trustee with respect to such
Required Appraisal Loan and (v) all currently due and unpaid real estate taxes
and reserves owed for improvements and assessments, insurance premiums, and, if
applicable, ground rents in respect of the related Mortgaged Property, over (b)
an amount equal to the sum of (i) all escrows and reserves held with respect to
such Required Appraisal Loan, plus (ii) 90% of the appraised value (net of any
prior liens and estimated liquidation expenses) of the related Mortgaged
Property as determined by such appraisal. If the Special Servicer has not
obtained a new appraisal (or performed an internal valuation, if applicable)
within the time limit described above, the Appraisal Reduction Amount for the
related Mortgage Loan will equal 25% of the principal balance of such Mortgage
Loan, to be adjusted upon receipt of the new appraisal (or internal valuation,
if applicable).
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REPORTS TO CERTIFICATEHOLDERS; AVAILABLE INFORMATION
Trustee Reports. Based solely on information provided in monthly reports
prepared by the Master Servicer and the Special Servicer and delivered to the
Trustee, the Trustee is required to provide or make available either
electronically (on the Trustee's internet website initially located at "www.[
]") or by first class mail on each Distribution Date to each Certificateholder:
1. A statement (a "Distribution Date Statement"), substantially in the
form of Annex C to this Prospectus Supplement, setting forth, among other
things, for each Distribution Date:
(i) the amount of the distribution to the holders of each Class of
REMIC Regular Certificates in reduction of the Certificate Balance
thereof;
(ii) the amount of the distribution to the holders of each Class of
REMIC Regular Certificates allocable to Distributable Certificate
Interest;
(iii) the amount of the distribution to the holders of each Class of
REMIC Regular Certificates allocable to Prepayment Premiums and Yield
Maintenance Charges;
(iv) the amount of the distribution to the holders of each Class of
REMIC Regular Certificates in reimbursement of previously allocated
Realized Losses and Additional Trust Fund Expenses;
(v) the Available Distribution Amount for such Distribution Date;
(vi) (A) the aggregate amount of P&I Advances made in respect of such
Distribution Date and (B) the aggregate amount of servicing advances as of
the close of business on the related Determination Date; (C) the aggregate
unpaid principal balance of the Mortgage Pool outstanding as of the close
of business on the related Determination Date;
(vii) the aggregate unpaid principal balance of the Mortgage Pool
outstanding as of the close of business on the related Determination Date;
(viii) the aggregate Stated Principal Balance of the Mortgage Pool
outstanding immediately before and immediately after such Distribution
Date;
(ix) the number, aggregate unpaid principal balance, weighted average
remaining term to maturity or Anticipated Repayment Date and weighted
average Mortgage Rate of the Mortgage Loans as of the close of business on
the related Determination Date;
(x) the number and aggregate Stated Principal Balance (immediately
after such Distribution Date) (and with respect to each delinquent
Mortgage Loan, a brief description of the reason for delinquency, if known
by the Master Servicer or Special Servicer, as applicable) of Mortgage
Loans (A) delinquent 30-59 days, (B) delinquent 60-89 days, (C) delinquent
90 days or more, and (D) as to which foreclosure proceedings have been
commenced;
(xi) as to each Mortgage Loan referred to in the preceding clause (x)
above; (A) the loan number thereof, (B) the Stated Principal Balance
thereof immediately following such Distribution Date and (C) a brief
description of any loan modification;
(xii) with respect to any Mortgage Loan as to which a liquidation
event occurred during the related Collection Period (other than a payment
in full), (A) the loan number thereof, (B) the aggregate of all
liquidation proceeds and other amounts received in connection with such
liquidation event (separately identifying the portion thereof allocable to
distributions on the Certificates), and (C) the amount of any Realized
Loss in connection with such liquidation event;
(xiii) with respect to any REO Property included in the Trust Fund as
to which the Special Servicer has determined, in accordance with accepted
servicing standards, that all payments or recoveries with respect to such
property have been ultimately recovered (a "Final Recovery Determination")
was made
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during the related Collection Period, (A) the loan number of the related
Mortgage Loan, (B) the aggregate of all liquidation proceeds and other
amounts received in connection with such Final Recovery Determination
(separately identifying the portion thereof allocable to distributions on
the Certificates), and (C) the amount of any Realized Loss in respect of
the related REO Property in connection with such Final Recovery
Determination;
(xiv) the Accrued Certificate Interest in respect of each Class of
REMIC Regular Certificates for such Distribution Date;
(xv) any unpaid Distributable Certificate Interest in respect of each
Class of REMIC Regular Certificates after giving effect to the
distributions made on such Distribution Date;
(xvi) the Pass-Through Rate for each Class of REMIC Regular
Certificates for such Distribution Date;
(xvii) the Principal Distribution Amount for such Distribution Date
(and, in the case of any principal prepayment or other unscheduled
collection of principal received during the related Collection Period, the
loan number for the related Mortgage Loan and the amount of such
prepayment or other collection of principal);
(xviii)the aggregate of all Realized Losses incurred during the
related Collection Period and all Additional Trust Fund Expenses incurred
during the related Collection Period;
(xix) the aggregate of all Realized Losses and Additional Trust Fund
Expenses that were allocated on such Distribution Date;
(xx) the Certificate Balance of each Class of REMIC Regular
Certificates (other than the Class [ ] Certificates) and the notional
amount of each [ ] Component immediately before and immediately after such
Distribution Date, separately identifying any reduction therein due to the
allocation of Realized Losses and Additional Trust Fund Expenses on such
Distribution Date;
(xxi) the certificate factor for each Class of REMIC Regular
Certificates immediately following such Distribution Date;
(xxii) the aggregate amount of interest on P&I Advances paid to the
Master Servicer or the Trustee during the related Collection Period;
(xxiii)the aggregate amount of interest on servicing advances paid to
the Master Servicer, the Special Servicer and the Trustee during the
related Collection Period;
(xxiv) the aggregate amount of servicing fees and Trustee fees paid
to the Master Servicer, the Special Servicer and the Trustee, as
applicable, during the related Collection Period;
(xxv) the loan number for each Required Appraisal Loan and any
related Appraisal Reduction Amount as of the related Determination Date;
(xxvi) the original and then current credit support levels for each
Class of REMIC Regular Certificates;
(xxvii)the original and then current ratings for each Class of REMIC
Regular Certificates; and
(xxviii) the aggregate amount of Prepayment Premiums and Yield
Maintenance Charges collected during the related Collection Period.
2. A "CMSA Loan File" and a "CMSA Property File" (in electronic form and
substance as provided by the Master Servicer and/or the Special Servicer)
setting forth certain information with respect to the Mortgage Loans and the
Mortgaged Properties, respectively.
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3. A "CMSA Collateral File" and a "CMSA Bond File" setting forth
certain information with respect to the Mortgaged Properties and the
Certificates, respectively.
The Master Servicer and/or the Special Servicer is required to deliver (in
electronic format acceptable to the Trustee) to the Trustee prior to each
Distribution Date, and the Trustee is required to provide or make available
either electronically or by first class mail to each Certificateholder, the
Depositor, the Underwriters and each Rating Agency on each Distribution Date,
the following eight reports providing the required information (unless otherwise
specified below) as of the Determination Date immediately preceding the
preparation of each such report:
(a) A "Delinquent Loan Status Report" containing substantially the content
set forth in Annex D attached to this Prospectus Supplement, prepared by the
Master Servicer (combining reports prepared by the Master Servicer and the
Special Servicer) setting forth, among other things, those Mortgage Loans
that were delinquent 30-59 days, delinquent 60-89 days, delinquent 90 days or
more, current but specially serviced, or in foreclosure but not REO Property
and status of resolution.
(b) An "Historical Loan Modification Report" containing substantially the
content set forth in Annex E attached to this Prospectus Supplement, prepared
by the Special Servicer setting forth, among other things, those Mortgage
Loans that have been modified pursuant to the Pooling and Servicing Agreement
(i) during the related Collection Period and (ii) since the Cut-Off Date,
showing the original and the revised terms thereof.
(c) An "Historical Liquidation Report" containing substantially the
content set forth in Annex F attached to this Prospectus Supplement, prepared
by the Special Servicer setting forth, among other things, (i) the aggregate
amount of Liquidation Proceeds and expenses relating to each Final Recovery
Determination, both during the related Collection Period and historically,
and (ii) the amount of Realized Losses occurring during the related
Collection Period, set forth on a loan-by-loan basis.
(d) An "REO Status Report" containing substantially the content set forth
in Annex G attached to this Prospectus Supplement, prepared by the Special
Servicer setting forth, among other things, with respect to each REO Property
then currently included in the Trust Fund, (i) the acquisition date of such
REO Property, (ii) the amount of income collected with respect to such REO
Property (net of related expenses) and other amounts, if any, received on
such REO Property during the related Collection Period and (iii) the value of
the REO Property based on the most recent appraisal or other valuation
thereof available to the Special Servicer as of such Determination Date
(including any prepared internally by the Special Servicer).
(e) A "Watch List Report" containing substantially the content set forth
in Annex H attached to this Prospectus Supplement, prepared by the Master
Servicer identifying each Mortgage Loan that is not a Specially Serviced
Mortgage Loan (i) with a debt service coverage ratio of less than 1.05x
(other than in the case of Credit Lease Loans), (ii) that has a stated
maturity date occurring in the next sixty days, (iii) that is delinquent in
respect of its real estate taxes, (iv) for which any outstanding Advances
exist, (v) that has been a Specially Serviced Mortgage Loan in the past 90
days, (vi) for which the debt service coverage ratio has decreased by more
than 10% in the prior 12 months, (vii) for which any lease relating to more
than 25% of the related Mortgaged Property has expired, been terminated, is
in default or will expire within the next three months, (viii) that is late
in making its Periodic Payment three or more times in the preceding 12
months, (ix) with material deferred maintenance at the related Mortgaged
Property or (x)that is 30 or more days delinquent.
(f) An "Operating Statement Analysis" containing substantially the content
set forth in Annex I attached to this Prospectus Supplement, together with
copies of the operating statements and rent rolls (but only to the extent the
related borrower is required by the Mortgage to deliver, or otherwise agrees
to provide, such information). The Master Servicer or the Special Servicer is
required consistent with the servicing standards described in this Prospectus
Supplement to endeavor to obtain such operating statements and rent rolls.
(g) With respect to any Mortgaged Property or REO Property, an "NOI
Adjustment Worksheet" containing substantially the content set forth in Annex
J attached to this Prospectus Supplement, for such property (with the related
annual operating statements attached thereto as an exhibit), presenting the
computations made in accordance with the methodology described in the Pooling
and Servicing Agreement to
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"normalize" the full year net operating income and debt service coverage
numbers used by the Master Servicer or the Special Servicer in the other
reports referenced above.
(h) A "Comparative Financial Status Report" containing substantially the
content set forth in Annex K attached to this Prospectus Supplement, setting
forth, among other things, the occupancy, revenue, net operating income and
DSCR for each Mortgage Loan or the related Mortgaged Property, as applicable,
as of the end of the calendar month immediately preceding the preparation of
such report for each of the following three periods (to the extent such
information is in the Master Servicer's or Special Servicer's possession, as
applicable): (i) the most current available year-to-date, (ii) each of the
previous two full fiscal years stated separately; and (iii) the "base year"
(representing the original analysis of information used as of the Cut-Off
Date).
The reports identified in clauses (a), (b), (c) and (d) above are referred to
in this Prospectus Supplement as the "Unrestricted Servicer Reports", and the
reports identified in clauses (e), (f), (g) and (h) above are referred to in
this Prospectus Supplement as the "Restricted Servicer Reports".
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee is required to send to each person who at any time
during the calendar year was a Certificateholder of record, a report summarizing
on an annual basis (if appropriate) certain items provided to Certificateholders
in the monthly Distribution Date Statements and such other information as may be
required to enable such Certificateholders to prepare their federal income tax
returns. Such information is required to include the amount of original issue
discount accrued on each Class of Certificates and information regarding the
expenses of the Trust Fund. Such requirements shall be deemed to be satisfied to
the extent such information is provided pursuant to applicable requirements of
the Code in force from time to time.
The information that pertains to Specially Serviced Trust Fund Assets
reflected in reports will be based solely upon the reports delivered by the
Special Servicer or the Master Servicer to the Trustee prior to related
Distribution Date. Absent manifest error, none of the Master Servicer, the
Special Servicer or the Trustee will be responsible for the accuracy or
completeness of any information supplied to it by a Mortgagor or third party
that is included in any reports, statements, materials or information prepared
or provided by the Master Servicer, the Special Servicer or the Trustee, as
applicable.
Book-Entry Certificates. Until such time as Definitive Offered Certificates
are issued in respect of the Book-Entry Certificates, the foregoing information
will be available to the holders of the Book-Entry Certificates only to the
extent it is forwarded by or otherwise available through DTC and its
Participants. Any beneficial owner of a Book-Entry Certificate who does not
receive information through DTC or its Participants may request that the Trustee
reports be mailed directly to it by written request to the Trustee (accompanied
by evidence of such beneficial ownership) at the Corporate Trust Office of the
Trustee. The manner in which notices and other communications are conveyed by
DTC to its Participants, and by its Participants to the holders of the
Book-Entry Certificates, 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 and the Depositor 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.
Information Available Electronically. The Trustee will make available each
month, to any interested party, the Distribution Date Statement via the
Trustee's internet website and its fax-on-demand service. In addition, the
Trustee will make available each month the Unrestricted Servicer Reports on the
Trustee's internet website. The Trustee's internet website will initially be
located at "www.[ ]". The Trustee's fax-on-demand service may be accessed by
calling [ ]. For assistance with the above mentioned services, investors may
call [ ]. In addition, the Trustee will also make Mortgage Loan information as
presented in the CMSA loan setup file, CMSA Collateral File, CMSA Bond File and
CMSA Loan File format available each month to any Certificateholder, any
Certificate Owner, the Rating Agencies, or any other interested party via the
Trustee's internet website. In addition, pursuant to the Pooling and Servicing
Agreement, the Trustee will make available, as a convenience for interested
parties (and not in furtherance of the distribution of the Prospectus or this
Prospectus Supplement under the securities laws), the Pooling and Servicing
Agreement, the Prospectus and this Prospectus Supplement via the Trustee's
internet website. The Trustee will make no representations or warranties as to
the accuracy or completeness of such documents and will assume no responsibility
therefor. In addition, the Trustee may disclaim responsibility for any
information distributed by the Trustee for which it is not the original source.
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The Trustee will make available each month, the Restricted Servicer Reports
and the CMSA Property File, to any holder or Certificate Owner of an Offered
Certificate or any person identified to the Trustee as a prospective transferee
of an Offered Certificate or any interest therein, any designee of the
Depositor, the Rating Agencies, the Underwriters and to any of the parties to
the Pooling and Servicing Agreement (collectively, "Privileged Persons") via the
Trustee's internet website with the use of a password provided by the Trustee to
such person upon receipt by the Trustee from such person of a certification in
the form attached to the Pooling and Servicing Agreement (and located on the
Trustee's internet website); provided, however, that the Rating Agencies, the
Underwriters and the parties to the Pooling and Servicing Agreement will not be
required to provide such certification.
The Master Servicer may make available each month via the Master Servicer's
internet website, initially located at "www.firstunion.com", to any interested
party, the Delinquent Loan Status Report, the Historical Loan Modification
Report, the Historical Liquidation Report, the REO Status Report, the Watch List
Report, the Comparative Financial Status Report, the CMSA loan setup file, the
CMSA Loan File, the CMSA Property File, and, as a convenience for interested
parties (and not in furtherance of the distribution thereof under the securities
laws) the Prospectus and this Prospectus Supplement. For assistance with the
Master Servicer's internet website, investors may call [ ].
In connection with providing access to the Trustee's internet website or the
Master Servicer's internet website, the Trustee or the Master Servicer, as
applicable, may require registration and the acceptance of a disclaimer. Neither
the Trustee nor the Master Servicer shall be liable for the dissemination of
information in accordance with the Pooling and Servicing Agreement.
Other Information. The Pooling and Servicing Agreement requires that the
Master Servicer or the Special Servicer make available at its offices primarily
responsible for administration of the Trust Fund, during normal business hours,
or send the requesting party at the expense of such requesting party, for review
by any holder or Certificate Owner owning an Offered Certificate or an interest
therein or any person identified by the Trustee to the Master Servicer or
Special Servicer, as the case may be, as a prospective transferee of an Offered
Certificate or an interest therein, 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 Closing Date, (c) all officer's
certificates delivered by the Master Servicer since the Closing Date as
described under "DESCRIPTION OF THE POOLING AGREEMENTS--Evidence as to
Compliance" in the Prospectus, (d) all accountants' reports delivered with
respect to the Master Servicer since the Closing 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 in respect of each Mortgaged Property, (f) the
most recent Mortgaged Property annual operating statements and rent roll, if
any, collected by or on behalf of the Master Servicer, (g) any and all
modifications, waivers and amendments of the terms of a Mortgage Loan entered
into by the Special Servicer, (h) the Mortgage File relating to each Mortgage
Loan, and (i) any and all officers' certificates and other evidence prepared by
the Master Servicer or the Special Servicer to support its determination that
any Advance was or, if made, would not be recoverable from Related Proceeds.
Copies of any and all of the foregoing items will be available from the Master
Servicer or Special Servicer, as the case may be, upon request; however, the
Master Servicer or Special Servicer, as the case may be, will be permitted to
require (other than from the Rating Agencies) a certification from the person
seeking such information (covering among other matters, confidentiality) and
payment of a sum sufficient to cover the reasonable costs and expenses of
providing such information to Certificateholders, Certificate Owners and their
prospective transferees, including, without limitation, copy charges and
reasonable fees for employee time and for space.
ASSUMED FINAL DISTRIBUTION DATE; RATED FINAL DISTRIBUTION DATE
The "Assumed Final Distribution Date" with respect to any Class of REMIC
Regular Certificates is the Distribution Date on which the Certificate Balance
of such Class of Certificates (or, in the case of the Class [ ] Certificates,
the aggregate of the notional amounts of the respective [ ] Components) would be
reduced to zero based on the assumption that no Mortgage Loan is voluntarily
prepaid prior to its stated maturity date (except for the ARD Loans which are
assumed to be paid in full on their respective Anticipated Repayment Dates) and
otherwise based on the "Table Assumptions" set forth under "YIELD AND MATURITY
CONSIDERATIONS--Weighted Average Life" in this Prospectus Supplement, which
Distribution Date shall in each case be as follows:
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ASSUMED FINAL
CLASS DESIGNATION DISTRIBUTION DATE
--------------------------------------- ---------------------------------------
THE ASSUMED FINAL DISTRIBUTION DATES SET FORTH ABOVE WERE CALCULATED WITHOUT
REGARD TO ANY DELAYS IN THE COLLECTION OF BALLOON PAYMENTS AND WITHOUT REGARD TO
A REASONABLE LIQUIDATION TIME WITH RESPECT TO ANY MORTGAGE LOANS THAT MAY BE
DELINQUENT. ACCORDINGLY, IN THE EVENT OF DEFAULTS ON THE MORTGAGE LOANS, THE
ACTUAL FINAL DISTRIBUTION DATE FOR ONE OR MORE CLASSES OF THE OFFERED
CERTIFICATES MAY BE LATER, AND COULD BE SUBSTANTIALLY LATER, THAN THE RELATED
ASSUMED FINAL DISTRIBUTION DATE(S).
In addition, the Assumed Final Distribution Dates set forth above were
calculated on the basis of a [ ]% CPR (as defined in this Prospectus Supplement)
(except that it is assumed that the ARD Loans pay their respective principal
balances on their related Anticipated Repayment Dates) and no losses on the
Mortgage Loans. Because the rate of principal payments (including prepayments)
on the Mortgage Loans can be expected to exceed the scheduled rate of principal
payments, and could exceed such scheduled rate by a substantial amount, and
because losses may occur in respect of the Mortgage Loans, the actual final
Distribution Date for one or more Classes of the Offered Certificates may be
earlier, and could be substantially earlier, than the related Assumed Final
Distribution Date(s). The rate of principal payments (including prepayments) on
the Mortgage Loans will depend on the characteristics of the Mortgage Loans, as
well as on the prevailing level of interest rates and other economic factors,
and no assurance can be given as to actual principal payment experience.
Finally, the Assumed Final Distribution Dates were calculated assuming there
would not be an early termination of the Trust Fund. See "YIELD AND MATURITY
CONSIDERATIONS" in this Prospectus Supplement and "DESCRIPTION OF THE MORTGAGE
POOL" in this Prospectus Supplement and in the accompanying Prospectus.
The "Rated Final Distribution Date" with respect to each Class of Offered
Certificates is the Distribution Date in [ ] [ ], 20[ ], the first Distribution
Date that follows the second anniversary of the end of the amortization term for
the Mortgage Loan that, as of the Cut-Off Date, has the longest remaining
amortization term. The rating assigned by a Rating Agency to any Class of
Offered Certificates entitled to receive distributions in respect of principal
reflects an assessment of the likelihood that Certificateholders of such Class
will receive, on or before the Rated Final Distribution Date, all principal
distributions to which they are entitled. See "RATINGS" in this Prospectus
Supplement.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement, [ ]% of
the voting rights for the Certificates (the "Voting Rights") will be allocated
among the respective Classes of Certificates as follows: (i) [ ]% in the case of
the Class [ ] Certificates and (ii) in the case of any other Class of
Certificates, a percentage equal to the product of [ ]% and a fraction, the
numerator of which is equal to the aggregate Certificate Balance of such Class
of Certificates and the denominator of which is equal to the aggregate
Certificate Balances of all Classes of Certificates, determined as of the
Distribution Date immediately preceding such time. The Class [ ], Class [ ] and
Class [ ] Certificates will not be entitled to any Voting Rights of those
Classes. Voting Rights allocated to a Class of Certificates will be allocated
among the related Certificateholders in proportion to the percentage interests
in such Class evidenced by their respective Certificates. The Class [ ] and
Class [ ] Certificates will be treated as one Class for determining the
Controlling Class. In addition, if either the Master Servicer or the Special
Servicer is the holder of any Sequential Pay Certificate, neither of the Master
Servicer or Special Servicer, in its capacity as a Certificateholder, will have
Voting Rights with respect to matters concerning compensation affecting the
Master Servicer or the Special Servicer. See "DESCRIPTION OF THE
CERTIFICATES--Voting Rights" in the Prospectus.
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TERMINATION
The obligations created by the Pooling and Servicing Agreement will terminate
following the earlier 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 Mortgage Loans and all of the REO
Properties, if any, remaining in the Trust Fund by the Master Servicer, the
Special Servicer, the Depositor or any single Certificateholder that is entitled
to greater than 50% of the Voting Rights allocated to the Class of Sequential
Pay Certificates with the latest alphabetical class designation then outstanding
(or if no Certificateholder is entitled to greater than 50% of the Voting Rights
of such Class, the Certificateholder with the largest percentage of Voting
Rights allocated to such Class) (the "Majority Subordinate Certificateholder")
and distribution or provision for distribution thereof to the
Certificateholders. 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 Trustee or other registrar for the Certificates or at such other
location as may be specified in such notice of termination.
Any such purchase by the Master Servicer, the Special Servicer, the Depositor
or the Majority Subordinate Certificateholder of all the Mortgage Loans and all
of the REO Properties, if any, remaining in the Trust Fund is required to be
made at a price equal to (i) the aggregate Purchase Price of all the Mortgage
Loans (other than REO 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 independent appraiser selected by the Master Servicer and
approved by the Trustee (which may be less than the Purchase Price for the
corresponding REO Loan), 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, the Special Servicer, the Majority Subordinate Certificateholder or
the Depositor to effect such purchase is subject to the requirement that the
aggregate principal balance of the Mortgage Loans is less than 1% of the Cut-Off
Date Pool Balance.
The purchase price paid in connection with the purchase of all Mortgage Loans
and REO Properties remaining in the Trust Fund, exclusive of any portion thereof
payable or reimbursable to any person other than the Certificateholders, will
constitute part of the Available Distribution Amount for the final Distribution
Date. The Available Distribution Amount for the final Distribution Date will be
distributed by the Trustee generally as described in this Prospectus Supplement
under "--Distributions--Application of the Available Distribution Amount",
except that the distributions of principal on any Class of Sequential Pay
Certificates described thereunder will be made, subject to available funds and
the distribution priorities described thereunder, in an amount equal to the
entire Certificate Balance of such Class remaining outstanding.
THE TRUSTEE
[ ] ("[ ]") is acting as Trustee pursuant to the Pooling and Servicing
Agreement. [ ], a direct, wholly owned subsidiary of [ ], is a national banking
association originally chartered in [ ] and is engaged in a wide range of
activities typical of a national bank. [ ]'s principal office is located at[ ],
[ ], [ ]. Certificate transfer services are conducted at [ ]'s offices in[ ]. [
] otherwise conducts its trustee and securities administration services at its
offices in [ ], [ ]. Its address there is [ ]. Certificateholders and other
interested parties should direct their inquires to[ ]'s CMBS Customer Service
office. The telephone number is [ ]. 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. As compensation for its services, the Trustee will be entitled to
receive monthly, from general funds on deposit in the Certificate Account, the
Trustee Fee. The "Trustee Fee" for each Mortgage Loan and REO Loan for any
Distribution Date equals one month's interest for the most recently ended
calendar month (calculated on the basis of a 360-day year consisting of twelve
30-day months), accrued at the trustee fee rate on the Stated Principal Balance
of such Mortgage Loan or REO Loan, as the case may be, outstanding immediately
following the prior Distribution Date (or, in the case of the initial
Distribution Date, as of the Closing Date). The trustee fee rate is a per annum
rate set forth in the Pooling and Servicing Agreement. In addition, the Trustee
will be entitled to recover from the Trust Fund all reasonable unanticipated
expenses and disbursements incurred or made by the Trustee in accordance with
any of the provisions of the Pooling and Servicing Agreement, but not including
expenses incurred in the ordinary course of performing its duties as Trustee
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under the Pooling and Servicing Agreement, and not including any such expense,
disbursement or advance as may arise from its willful misconduct, negligence or
bad faith.
The Trustee also has certain duties with respect to REMIC administration (in
such capacity the "REMIC Administrator"). See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of Owners of REMIC Residual Certificates--Reporting and
Other Administrative Matters" 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 (deemed, in the case of a
Class [ ] Certificate, to equal the weighted average of the Pass-Through Rates
for the respective [ ] Components from time to time), (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 or notional amount of the
related Class or [ ] Component, as the case may be, (iii) the rate, timing and
severity of Realized Losses and Additional Trust Fund Expenses and the extent to
which such losses and expenses are allocable in reduction of the Certificate
Balance or notional amount of the related Class or [ ] Component, as the case
may be, and (iv) the timing and severity of any Net Aggregate Prepayment
Interest Shortfalls and the extent to which such shortfalls allocable in
reduction of the Distributable Certificate Interest payable on the related
Class.
Rate and Timing of Principal Payment. The yield to holders of the Class [ ]
Certificates will be extremely sensitive to, and the yield to holders of any
other Offered Certificates purchased at a discount or premium will be affected
by, the rate and timing of principal payments made in reduction of the
Certificate Balance of any Class of Sequential Pay Certificates and,
correspondingly, the notional amount of any [ ] Component. As described in this
Prospectus Supplement, the Principal Distribution Amount for each Distribution
Date will generally be distributable first in respect of the Class [ ]
Certificates until the Certificate Balance thereof is reduced to zero, and
thereafter will generally be distributable entirely in respect of the Class [ ]
Certificates, the Class [ ] Certificates and then the Non-Offered Certificates,
in that order, in each case until the Certificate Balance of such Class of
Certificates is reduced to zero. Any reduction of the Certificate Balance of any
Class of Sequential Pay Certificates will result in a corresponding reduction in
the notional amount of the related [ ] Component. Consequently, the rate and
timing of principal payments that are distributed or otherwise result in
reduction of the Certificate Balance of any Class of Offered Certificates or the
notional amount of an [ ] Component, as the case may be, 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, any extension of maturity
dates by the Master Servicer or the Special Servicer, 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). In addition, although the
borrowers under ARD Loans may have certain incentives to repay ARD Loans on
their Anticipated Repayment Dates, there can be no assurance that the related
borrowers will be able to repay the ARD Loans on their Anticipated Repayment
Date. The failure of a borrower to repay the ARD Loans on their Anticipated
Repayment Dates will not be an event of default under the terms of the ARD
Loans, and pursuant to the terms of the Pooling and Servicing Agreement, neither
the Master Servicer nor the Special Servicer will be permitted to take any
enforcement action with respect to a borrower's failure to pay Additional
Interest or principal in excess of the principal component of the constant
Periodic Payment, other than requests for collection, until the scheduled
maturity of the ARD Loans; provided, that the Master Servicer or the Special
Servicer, as the case may be, may take action to enforce the Trust Fund's right
to apply Excess Cash Flow to principal in accordance with the terms of the ARD
Loans documents.
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 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,
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accordingly, on the Offered Certificates that are Sequential Pay Certificates)
while work-outs are negotiated or foreclosures are completed. See "SERVICING OF
THE MORTGAGE LOANS--Modifications, Waivers and Amendments" in this Prospectus
Supplement and "DESCRIPTION OF THE POOLING AGREEMENTS--Realization Upon
Defaulted Mortgage Loans" and "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS--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 such Certificates are purchased at a discount or premium and when, and to
what degree, payments of principal on the Mortgage Loans in turn are distributed
or otherwise result in reduction of the Certificate Balance or notional amount
of a Component, as the case may be, 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 a Class [ ] Certificate or any other
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 or otherwise results
in reduction of the principal balance (or notional amount of an [ ] Component,
as applicable) of an 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. Investors in the
Class [ ] Certificates should fully consider the risk that a rapid rate of
principal prepayments on the Mortgage Loans could result in the failure of such
investors to recoup their initial investments. 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 by the holders of the respective Classes
of Sequential Pay Certificates, to the extent of amounts otherwise distributable
in respect of such Certificates, in reverse alphabetical order of their Class
designations. Realized Losses and Additional Trust Fund Expenses will be
allocated, as and to the extent described in this Prospectus Supplement, to the
respective Classes of Sequential Pay Certificates (in reduction of the
Certificate Balance of each such Class), in reverse alphabetical order of their
Class designations. In the event of a reduction of the Certificate Balances of
all such Classes of Certificates, such losses and shortfalls will then be borne,
pro rata, by the Class [ ] and Class [ ] Certificates (and the Class [ ]
Certificates with respect to shortfalls of interest). Any Realized Loss or
Additional Trust Fund Expenses allocated in reduction of the Certificate Balance
of any Class of Sequential Pay Certificates will result in a corresponding
reduction in the notional amount of the related [ ] Component. As more fully
described in this Prospectus Supplement under "DESCRIPTION OF THE
CERTIFICATES--Distributions--Distributable Certificate Interest," Net Aggregate
Prepayment Interest Shortfalls will generally be borne by the respective Classes
of REMIC Regular Certificates (other than the Class [ ] Certificates) on a pro
rata basis.
Pass-Through Rates. The Pass-Through Rates applicable to each [ ] Component
will be variable and will be equal to the excess, if any, of the Weighted
Average Net Mortgage Rate for such Distribution Date over the Pass-Through Rate
applicable to the corresponding Class of Sequential Pay Certificates.
Accordingly, the Pass-Through Rate on the [ ] Components and, correspondingly,
the yield on the Class [ ] Certificates, will be sensitive to changes in the
relative composition of the Mortgage Pool as a result of scheduled amortization,
voluntary prepayments and liquidations and to changes in the relative sizes of
the Certificate Balances of the respective Classes of Sequential Pay
Certificates. The yield on the Class [ ] and Class [ ] Certificates could also
be adversely affected if Mortgage Loans with higher interest rates pay faster
than the Mortgage Loans with lower interest rates, since those classes bear
interest at a rate limited by the Weighted Average Net Mortgage Rate of the
Mortgage Loans.
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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, due-on-sale clauses, Lockout Periods,
provisions requiring the payment of Prepayment Premiums and Yield Maintenance
Charges 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, hotel/motel
guest rooms, health care facility beds, mobile home park pads or comparable
commercial space, as applicable, 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" in this Prospectus Supplement and
"Yield Considerations--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 may have an incentive to refinance its
mortgage loan. As of the Cut-Off Date, all of the Mortgage Loans may be prepaid
at any time after the expiration of any applicable Lockout Period and/or any
period when the holder of a Mortgage may require a borrower to pledge Defeasance
Collateral in lieu of prepaying the related Mortgage Loan (a "Required
Defeasance Period"), subject, in most cases, to the payment of a Prepayment
Premium or a Yield Maintenance Charge. A requirement that a prepayment be
accompanied by a Prepayment Premium or Yield Maintenance Charge may not provide
a sufficient economic disincentive to deter a borrower from refinancing 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 or
refinance 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 whether 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 up to [ ] 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" in this Prospectus Supplement, 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.
Yield Sensitivity of the Class [ ] Certificates. The yield to maturity on the
Class [ ] Certificates will be extremely sensitive to the rate and timing of
principal payments (including by reason of prepayments, defaults and
liquidations) and interest rate reductions on the Mortgage Loans. Accordingly,
investors in the Class [ ] Certificates should fully consider the associated
risks, including the risk that a rapid rate of prepayment of the Mortgage Loans
could result in the failure of such investors to fully recoup their initial
investments. The allocation of a portion of collected Prepayment Premiums and
Yield Maintenance Charges to the Class [ ] Certificates is intended to reduce
those risks; however, such allocation may be insufficient to offset fully the
adverse effects on the yields on such Class of Certificates that the related
prepayments may otherwise have.
Any optional termination of the Trust Fund would result in prepayment in full
of the Certificates and would have an adverse effect on the yield of the Class [
] Certificates because a termination would have an effect similar to
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a prepayment in full of the Mortgage Loans (without, however, the payment of any
Prepayment Premiums or Yield Maintenance Charges) and, as a result, investors in
the Class [ ] Certificates and any other Certificates purchased at a premium
might not fully recoup their initial investment. See "DESCRIPTION OF THE
CERTIFICATES--Termination" in this Prospectus Supplement.
PRICE/YIELD TABLES
The tables beginning on page B-1 of this Prospectus Supplement (the "Yield
Tables") show the pre-tax corporate bond equivalent ("CBE") yield to maturity,
modified duration (except in the case of the Class [ ] Certificates), weighted
average life, first Distribution Date on which principal is to be paid ("First
Principal Payment Date") and final Distribution Date on which principal is to be
paid ("Last Principal Payment Date") with respect to each Class of Offered
Certificates, prepared using the Table Assumptions (as described below) and,
where applicable, the specified assumed purchase prices (which prices do not
include accrued interest). Assumed purchase prices are expressed in 32nds (i.e.,
100/04 means 100 4/32%) as a percentage of the initial Certificate Balance (or,
in the case of the Class [ ] Certificates, of the aggregate of the initial
notional amounts of the respective [ ] Components) of each Class of Offered
Certificates. For purposes of the Yield Tables relating to the Class [ ]
Certificates, the information therein relating to weighted average life, First
Principal Payment Date and Last Principal Payment Date is being calculated in
respect of the aggregate notional amount of the respective [ ] Components of the
Class [ ] Certificates.
The yields set forth in the Yield Tables were calculated by determining the
monthly discount rates which, when applied to the assumed stream of cash flows
to be paid on each Class of Offered Certificates, would cause the discounted
present value of such assumed stream of cash flows to equal the assumed purchase
prices, plus accrued interest from and including [ ] [ ], 20[ ] to but excluding
[ ] [ ], 20[ ], and by converting such monthly rates to semi-annual corporate
bond equivalent rates. Such calculation does not take into account variations
that may occur in the interest rates at which investors may be able to reinvest
funds received by them as distributions on the Offered Certificates and
consequently does not purport to reflect the return on any investment in such
Classes of Offered Certificates when such reinvestment rates are considered. For
purposes of the Yield Tables (except in the case of the Class [ ] Certificates),
"modified duration" has been calculated using the modified Macaulay Duration as
specified in the "PSA Standard Formulas." The Macaulay Duration is calculated as
the present value weighted average time to receive future payments of principal
and interest, and the PSA Standard Formula modified duration is calculated by
dividing the Macaulay Duration by the appropriate semi-annual compounding
factor. The duration of a security may be calculated according to various
methodologies; accordingly, no representation is made by the Depositor or any
other person that the "modified duration" approach used in this Prospectus
Supplement is appropriate. Duration, like yield, will be affected by the
prepayment rate of the Mortgage Loans and extensions in respect of Balloon
Payments that actually occur during the life of the Class [ ] and Class [ ]
Certificates and by the actual performance of the Mortgage Loans, all of which
may differ, and may differ significantly, from the assumptions used in preparing
the Yield Tables.
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 the pool of mortgage loans. As used in the Yield
Tables, the column headed "0% CPR" assumes that none of the Mortgage Loans is
prepaid in whole or in part before maturity or the Anticipated Repayment Date,
as the case may be. The columns headed "[ ]% CPR", "[ ]% CPR", "[ ]% CPR" and "[
]% CPR," respectively, assume that prepayments are made each month at those
levels of CPR on the Mortgage Loans that are eligible for prepayment under the
Table Assumptions set forth in the next paragraph (each such scenario, a
"Scenario"). There is no assurance, however, that prepayments on the Mortgage
Loans will conform to any level of CPR, and no representation is made that the
Mortgage Loans will prepay at the levels of CPR shown or at any other prepayment
rate.
The Yield Tables were derived from calculations based on the following
assumptions (the "Table Assumptions"): (i) no Mortgage Loan prepays during any
applicable Lockout Period or any period during which Defeasance Collateral is
permitted or required to be pledged (otherwise, in the case of each of the Yield
Tables, each Mortgage Loan is assumed to prepay at the indicated level of CPR,
with each prepayment being applied on the first day of the applicable month in
which it is assumed to be received), (ii) the Pass-Through Rates and initial
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Certificate Balances of the respective Classes of Sequential Pay Certificates
are as described in this Prospectus Supplement, (iii) there are no delinquencies
or defaults with respect to, and no modifications, waivers or amendments of the
terms of, the Mortgage Loans, (iv) there are no Realized Losses, Additional
Trust Fund Expenses or Appraisal Reduction Amounts with respect to the Mortgage
Loans or the Trust Fund, (v) scheduled interest and principal payments on the
Mortgage Loans are timely received, (vi) ARD Loans pay in full on their
Anticipated Repayment Dates, (vii) all Mortgage Loans have Due Dates on the
first day of each month and accrue interest on the respective basis described in
this Prospectus Supplement (i.e., a 30/360 basis or an actual/360 basis), (viii)
all prepayments are accompanied by a full month's interest and there are no
Prepayment Interest Shortfalls, (ix) there are no breaches of the applicable
Mortgage Loan Seller's representations and warranties regarding its Mortgage
Loans, (x) no Prepayment Premiums or Yield Maintenance Charges are collected,
(xi) no party entitled thereto exercises its right of optional termination of
the Trust Fund described in this Prospectus Supplement, (xii) distributions on
the Certificates are made on the [ ]th day (each assumed to be a business day)
of each month, commencing in [ ] [ ] 20[ ] , and (xiii) the Closing Date for the
sale of the Offered Certificates is [ ] [ ], 20[ ].
The periods, if any, between consecutive Due Dates occurring prior to the
maturity date or Anticipated Repayment Date, as applicable, of a Mortgage Loan
during which the related borrower will have the right to prepay such Mortgage
Loan without being required to pay a Prepayment Premium or a Yield Maintenance
Charge (each such period, an "Open Period") with respect to all the Mortgage
Loans, have been calculated as those Open Periods occurring immediately prior to
the maturity date or Anticipated Repayment Date as applicable.
The characteristics of the Mortgage Loans differ in certain respects from
those assumed in preparing the Yield Tables, and the Yield Tables are presented
for illustrative purposes only. In particular, none of the Mortgage Loans permit
voluntary partial prepayments. Thus neither the Mortgage Pool nor any Mortgage
Loan will prepay at any constant rate, and it is unlikely that the Mortgage
Loans will prepay in a manner consistent with the designated Scenario for the
Yield Tables. In addition, there can be no assurance that the Mortgage Loans
will prepay at any particular rate, that the Mortgage Loans will not prepay
(involuntarily or otherwise) despite prepayment restrictions, that the actual
pre-tax yields on, or any other payment characteristics of, any Class of Offered
Certificates will correspond to any of the information shown in the Yield
Tables, or that the aggregate purchase prices of the Offered Certificates will
be as assumed. Accordingly, investors must make their own decisions as to the
appropriate assumptions (including prepayment assumptions) to be used in
deciding whether to purchase the Offered Certificates.
WEIGHTED AVERAGE LIFE
The weighted average life of any Class [ ], Class [ ] or Class [ ]
Certificate refers to the average amount of time that will elapse from the
assumed Closing Date until each dollar allocable to principal of such
Certificate is distributed to the investor. The weighted average life of any
such Offered Certificate will be influenced by, among other things, the rate at
which principal on the Mortgage Loans is paid or otherwise collected or advanced
and applied to pay principal of such Offered Certificate, which may be in the
form of scheduled amortization, voluntary prepayments, insurance and
condemnation proceeds and liquidation proceeds. As described in this Prospectus
Supplement, the Principal Distribution Amount for each Distribution Date will
generally be distributable first in respect of the Class [ ] Certificates until
the Certificate Balance thereof is reduced to zero, and will thereafter
generally be distributable entirely in respect of 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.
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 and the corresponding weighted average life of each such
Class of Offered Certificates. The tables have been prepared on the basis of the
Table Assumptions. To the extent that the Mortgage Loans or the Certificates
have characteristics that differ from those assumed in preparing the tables, the
Class [ ], Class [ ] and/or Class [ ] Certificates may mature earlier or later
than indicated by the tables. In particular, voluntary prepayments on the
Mortgage Loans in fact are not permitted. Accordingly, the Mortgage Loans will
not prepay at any constant rate nor will the Mortgage Loans prepay at the same
rate, and it is highly unlikely that the Mortgage Loans will prepay in a manner
consistent with the assumptions described above. In addition, variations in the
actual prepayment experience and in the balance of the Mortgage Loans that
actually prepay may increase or decrease the percentages of initial Certificate
Balances (and shorten or extend the weighted
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average lives) shown in the following tables. Investors are urged to conduct
their own analyses of the rates at which the Mortgage Loans may be expected to
prepay.
The tables set forth below were prepared on the basis of the Table
Assumptions and indicate the resulting weighted average lives of each Class of
Offered Certificates (other than the Class [ ] Certificates) and set forth the
percentages of the initial Certificate Balance of such Class of Offered
Certificates that would be outstanding after each of the dates shown in each
case assuming the indicated level of CPR. For purposes of the following tables,
the weighted average life of an Offered Certificate (other than the Class [ ]
Certificates) is determined by (i) multiplying the amount of each principal
distribution thereon by the number of years from the assumed Closing Date of
such Certificate 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 Certificate.
PERCENTAGES OF THE CLOSING DATE CERTIFICATE
BALANCE OF THE CLASS [ ] CERTIFICATES
0% CPR DURING LOCKOUT AND DEFEASANCE
OTHERWISE AT INDICATED CPR
----------------------------------------------------
DISTRIBUTION DATE 0% CPR [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR
----------------- ------ -------- -------- -------- --------
PERCENTAGES OF THE CLOSING DATE CERTIFICATE
BALANCE OF THE CLASS [ ] CERTIFICATES
0% CPR DURING LOCKOUT AND DEFEASANCE
OTHERWISE AT INDICATED CPR
----------------------------------------------------
DISTRIBUTION DATE 0% CPR [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR
----------------- ------ -------- -------- -------- --------
PERCENTAGES OF THE CLOSING DATE CERTIFICATE
BALANCE OF THE CLASS [ ] CERTIFICATES
0% CPR DURING LOCKOUT AND DEFEASANCE
OTHERWISE AT INDICATED CPR
----------------------------------------------------
DISTRIBUTION DATE 0% CPR [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR
----------------- ------ -------- -------- -------- --------
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0% CPR DURING LOCKOUT AND DEFEASANCE
OTHERWISE AT INDICATED CPR
----------------------------------------------------
DISTRIBUTION DATE 0% CPR [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR
----------------- ------ -------- -------- -------- --------
YIELD SENSITIVITY OF THE CLASS [ ] CERTIFICATES
The yield to maturity on the Class [ ] Certificates will be extremely
sensitive to the rate and timing of principal payments (including prepayments),
principal losses and interest rate reductions due to modifications on the
Mortgage Loans and to other factors set forth above. Investors should fully
consider the associated risks, including the risk that a rapid rate of principal
payments or principal losses on the Mortgage Pool could result in the failure by
investors in the Class [ ] Certificates to fully recoup their initial
investments.
ANY OPTIONAL TERMINATION BY THE SPECIAL SERVICER, THE MASTER SERVICER, THE
DEPOSITOR OR THE MAJORITY SUBORDINATE CERTIFICATEHOLDER WOULD RESULT IN
PREPAYMENT IN FULL OF THE CERTIFICATES AND WOULD HAVE AN ADVERSE EFFECT ON THE
YIELD OF THE CLASS [ ] CERTIFICATES BECAUSE A TERMINATION WOULD HAVE AN EFFECT
SIMILAR TO A PRINCIPAL PREPAYMENT IN FULL OF THE MORTGAGE LOANS (WITHOUT,
HOWEVER, THE PAYMENT OF ANY PREPAYMENT PREMIUMS OR YIELD MAINTENANCE CHARGES)
AND, AS A RESULT, INVESTORS IN THE CLASS [ ] CERTIFICATES AND ANY OTHER
CERTIFICATES PURCHASED AT PREMIUM MIGHT NOT FULLY RECOUP THEIR INITIAL
INVESTMENT. SEE "DESCRIPTION OF THE CERTIFICATES--TERMINATION" IN THIS
PROSPECTUS SUPPLEMENT.
The table below indicates the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of the Class [ ] Certificates at various prices
and constant prepayment rates. The allocations and calculations do not take
account of any Prepayment Premiums or Yield Maintenance Charges. The yields set
forth in the table were calculated by determining the monthly discount rates
that, when applied to the assumed stream of cash flows to be paid on the Class [
] Certificates, would cause the discounted present value of such assumed stream
of cash flows to equal the assumed purchase prices plus accrued interest of such
Class of Certificates and converting such monthly rates to corporate bond
equivalent rates. Such calculations do not take into account variations that may
occur in the interest rates at which investors may be able to reinvest funds
received by them as distributions on the Class [ ] Certificates and consequently
do not purport to reflect the return on any investment in such Class of
Certificates when such reinvestment rates are considered.
The table below has been prepared based on the assumption that distributions
are made in accordance with "DESCRIPTION OF THE CERTIFICATES--Distributions" in
this Prospectus Supplement and on the Table Assumptions and with the assumed
respective purchase prices (as a percentage of the aggregate of the notional
amounts of the components of the Class [ ] Certificates) of the Class [ ]
Certificates set forth in the table, plus accrued interest thereon from [ ], 20[
] to the Closing Date and on the additional assumption that the Pass-Through
Rates for all of the Sequential Pay Certificates are as stated on page S-[ ] of
this Prospectus Supplement.
SENSITIVITY TO PRINCIPAL OF THE PRE-TAX YIELDS TO MATURITY
OF THE CLASS [ ] CERTIFICATES
0% CPR DURING LOCKOUT AND DEFEASANCE
OTHERWISE AT INDICATED CPR
----------------------------------------------------
ASSUMED PURCHASED PRICE 0% CPR [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR
----------------------- ------ -------- -------- -------- --------
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0% CPR DURING LOCKOUT AND DEFEASANCE
OTHERWISE AT INDICATED CPR
----------------------------------------------------
ASSUMED PURCHASED PRICE 0% CPR [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR
----------------------- ------ -------- -------- -------- --------
There can be no assurance that the Mortgage Loans will prepay at any of the
rates shown in the table or at any other particular rate, that the cash flows on
the Class [ ] Certificates will correspond to the cash flows assumed for
purposes of the above table or that the aggregate purchase price of the Class [
] Certificates will be as assumed. In addition, it is unlikely that the Mortgage
Loans will prepay at any of the specified percentages of CPR until maturity or
that all the Mortgage Loans will so prepay at the same rate. Timing of changes
in the rate of prepayments may significantly affect the actual yield to maturity
to investors, even if the average rate of principal prepayments is consistent
with the expectations of investors. Investors must make their own decisions as
to the appropriate prepayment assumption to be used in deciding whether to
purchase the Class [ ] Certificates.
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
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
is based on the advice of [ ], counsel to the Depositor. This summary is based
on laws, regulations, including the REMIC regulations promulgated by the
Treasury Department (the "REMIC Regulations"), rulings and decisions now in
effect or (with respect to the regulations) proposed, all of which are subject
to change either prospectively or retroactively. This summary does not address
the federal income tax consequences of an investment in Offered Certificates
applicable to all categories of investors, some of which (for example, banks and
insurance companies) may be subject to special rules. Prospective investors
should consult their tax advisors regarding the federal, state, local and other
tax consequences to them of the purchase, ownership and disposition of Offered
Certificates.
For federal income tax purposes, one or more separate REMIC elections will be
made with respect to segregated asset pools that make up the trust, other than
any Additional Interest on the ARD Loans. Upon the issuance of the Offered
Certificates, [ ] will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes each REMIC will qualify as a REMIC under the
Code. For federal income tax purposes, the REMIC Regular Certificates (or, in
the case of the Class [ ] Certificates, the respective Components thereof) will
represent ownership of the "regular interests" in one of such REMICs and
generally will be treated as debt instruments of such REMIC. See "MATERIAL
FEDERAL INCOME TAX CONSEQUENCES--REMICs" in the Prospectus.
Certificateholders' entitlement to a portion of the Additional Interest will
be treated as a Grantor Trust Strip Certificate (as defined in the accompanying
Prospectus) issued by an entity treated as a grantor trust for United States
federal income tax purposes. Certificateholders will be required to allocate
their basis between the portion of the Offered Certificates treated as a REMIC
regular interest (or in the case of the Class [ ] Certificate, the [ ]
Components treated as REMIC regular interests) and their right to Additional
Interest based on the relative fair market value of such REMIC regular interest
and their right to Additional Interest as of the date of issuance. The accrual
of income with respect to Additional Interest is not entirely clear and
Certificateholders should consult their own tax advisor regarding the accrual of
income with respect to the Additional Interest. However, it is anticipated that
Certificateholders will not have to accrue income with respect to the Additional
Interest until the interest accrual period following the related Anticipated
Repayment Date. See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--Taxation of Owners of
Grantor Trust Strip Certificates" in the accompanying Prospectus.
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Based on expected issue prices, the Class [ ] Certificates will, and certain
of the Sequential Pay Certificates, depending on their issue price, may, be
treated as having been issued with original issue discount for federal income
tax reporting purposes. In addition, although there is no clear authority, the
trust intends to treat the respective [ ] Components as instruments issued with
OID. The prepayment assumption that will be used in determining the rate of
accrual of original issue discount 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 0%, except that it is assumed that
the ARD Loans pay their respective outstanding principal balances on their
related Anticipated Repayment Dates. 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.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder (in particular, the holder of a Class [ ] Certificate), the
amount of original issue discount allocable to such period would be zero and
such Certificateholder will be permitted to offset such negative amount only
against future original issue discount (if any) attributable to such
Certificates. Although the matter is not free from doubt, a holder of a Class [
] Certificate may be permitted to deduct a loss to the extent that his or her
respective remaining basis in such Certificate exceeds the maximum amount of
future payments to which such Certificateholder is entitled, assuming no further
prepayments of the Mortgage Loans. Any such loss might be treated as a capital
loss.
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. Purchasers of
the Offered Certificates should be aware that the OID Regulations and Section
1272(a)(6) of the Code do not adequately address certain issues relevant to, or
are not applicable to, securities such as the Offered Certificates. 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 OID Regulations provide in general that original issue discount with
respect to debt instruments issued in connection with the same or related
transactions are treated as a single debt instrument for purposes of computing
the accrual of original issue discount with respect to such debt instruments.
This aggregation rule ordinarily is only to be applied when single debt
instruments are issued by a single issuer to a single holder. Although it is not
entirely clear that this aggregation rule applies to REMIC Regular Certificates
and other debt instruments subject to Section 1272(a)(6) of the Code,
information reports or returns sent to holders of the Class [ ] Certificates and
the IRS with respect to the Class [ ] Certificates will be based on such
aggregate method. However, a literal reading of the regulations addressing
integration would not allow the integration of the portion of the Trust Fund
treated as a Grantor Trust Strip Certificate and the portion treated as a REMIC
regular interest held by a Certificateholder. Prospective purchasers of the
Class [ ] Certificates are advised to consult their own tax advisers about the
use of this methodology and potential consequences of being required to report
original issue discount on the Class [ ] Certificates. Certain classes of the
Offered Certificates bear interest at the lesser of a fixed rate and a Weighted
Average Net Mortgage Rate. Although it is not entirely clear that such interest
constitutes "qualified stated interest" for purposes of the OID Regulations, the
Trust Fund will report it as such.
The Offered Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of such a class of
Certificates will be treated as holding a certificate with amortizable bond
premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of each such class of
Certificates should consult their own tax advisors regarding the possibility of
making an election to amortize such premium. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of Owners of REMIC Regular Certificates--Premium" in the
accompanying Prospectus.
The Offered Certificates will be treated as "real estate assets" within the
meaning of Section 856(c)(5)(B) of the Code generally in the same proportion
that the assets of the Trust Fund would be so treated. 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
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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.
Prepayment Premiums and Yield Maintenance Charges actually collected will be
distributed to the holders of the Offered Certificates as described in this
Prospectus Supplement. It is not entirely clear under the Code when the amount
of a Prepayment Premium or Yield Maintenance Charge should be taxed to the
holder of an Offered Certificate, but it is not expected, for federal income tax
reporting purposes, that Prepayment Premiums and Yield Maintenance Charges will
be treated as giving rise to any income to the holders of the Offered
Certificates prior to the Master Servicer's actual receipt of a Prepayment
Premium or Yield Maintenance Charge. It is not entirely clear whether Prepayment
Premiums or Yield Maintenance Charges give rise to ordinary income or capital
gains and Certificateholders should consult their own tax advisors concerning
this character issue and the treatment of Prepayment and Yield Maintenance
Charges in general.
The Treasury Department has issued new regulations (the "New Regulations")
which make certain modifications to the withholding, backup withholding, and
information reporting rules described in the prospectus. The New Regulations
attempt to unify certification requirements and to modify reliance standards.
The New Regulations are generally effective for payments made after December 31,
2000 , subject to certain transition rules. Prospective investors are urged to
consult their tax advisors regarding the New Regulations.
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, Keogh plans
and collective investment funds, separate accounts 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. Governmental plans (as defined in
Section 3(32) of ERISA), while not subject to ERISA and the Code, may be subject
to materially similar provisions of applicable federal, state or local law.
The U.S. Department of Labor has issued individual exemptions to each of the
Underwriters (Prohibited Transaction Exemption 96-22 (April 3, 1996) to First
Union Corporation, and its subsidiaries and its affiliates, which include First
Union Securities, Inc.; and Prohibited Transaction Exemption [ ] ([ ], 20[ ]) to
[ ] ("[ ]") (each, an "Exemption" and collectively, the "Exemptions"), each of
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 mortgage pass-through 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 Securities,
Inc., (b) [ ], (c) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with First
Union Securities, Inc. or [ ] and (d) any member of the underwriting syndicate
or selling group of which First Union Securities or [ ] or a person described in
(c) is a manager or co-manager with respect to the Offered Certificates.
The obligations covered by the Exemptions include mortgage loans such as the
Mortgage Loans. The Exemptions would apply to the acquisition, holding and
resale of the Certificates by a Plan only if specific conditions (certain of
which are described below) are met. It is not clear whether the Exemptions apply
to participant directed plans as described in Section 404(c) of ERISA or plans
that are subject to Section 4975 of the Code but that are not subject to Title 1
of ERISA, such as certain Keogh plans and certain individual retirement
accounts.
The Exemptions set forth five general conditions that, among others, must be
satisfied for a transaction involving the purchase, sale and holding of Class [
], Class [ ] and Class [ ] Certificates ("ERISA Eligible Certificates") by a
Plan to be eligible for exemptive relief thereunder. First, the acquisition of
the Certificates by a
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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, such
Certificates at the time of acquisition by the Plan must be rated in one of the
four highest generic rating categories by Standard & Poor's Rating Services, a
division of The McGraw-Hill Companies, Inc. ("S&P"), ("Standard & Poor's Rating
Services"), Moody's Investors Service, Inc. ("Moody's") or Fitch, Inc. ("Fitch")
(each, an "NRSRO"). Third, the Trustee cannot be an affiliate of any other
member of the "Restricted Group," which consists of each of the Underwriters,
the Depositor, the Master Servicer, the Special Servicer, the Trustee, any
sub-servicer, and any borrower with respect to Mortgage Loans constituting more
than 5.0% of the aggregate unamortized principal balance of the Mortgage Loans
as of the date of initial issuance of such Certificates. Fourth, the sum of all
payments made to and retained by any Underwriter in connection with the
distribution or placement of Certificates must represent not more than
reasonable compensation for underwriting such 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 obligations; and the sum of all payments made to and retained by
the Master Servicer, a Special Servicer or 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. Fifth, 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.
A fiduciary of a Plan contemplating purchasing any such Certificate must make
its own determination that, at the time of such purchase, such Certificate
satisfies the general conditions set forth above.
The Exemptions also require 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 four highest categories of
S&P, Moody's or Fitch for at least one year prior to the Plan's acquisition of
such 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 such Certificates.
If the general conditions of the Exemptions are satisfied, they 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 such Certificates
in the initial issuance of Certificates between the Depositor or an Underwriter
and a Plan when the Depositor, an Underwriter, the Trustee, the Master Servicer,
the Special Servicer, a sub-servicer or a borrower is a "Party in Interest," as
defined in the Prospectus, with respect to the investing Plan, (ii) the direct
or indirect acquisition or disposition in the secondary market of ERISA Eligible
Certificates by a Plan and (iii) the holding of ERISA Eligible 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 such
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 purposes hereof, an Excluded Plan is a Plan sponsored by any
member of the Restricted Group.
If certain specific conditions of the Exemptions are also satisfied, each
such Exemption may provide relief from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code to an obligor acting as a fiduciary with respect to the investment of a
Plan's assets in the Certificates (or such obligor's affiliate) only if, among
other requirements (i) such obligor (or its affiliate) is an obligor with
respect to 5% or less of the fair market value of the assets contained in the
Trust and is otherwise not a member of the Restricted Group, (ii) a Plan's
investment in Certificates does not exceed 25% of all of the Certificates
outstanding at the time of the acquisition, (iii) immediately after the
acquisition, no more than 25% of the assets of the Plan are invested in
certificates representing an interest in trusts (including the Trust Fund)
containing assets sold or serviced by the Depositor or the Master Servicer and
(iv) in the case of the acquisition of the Certificates in connection with their
initial issuance, at least 50% of the aggregate interest in the Trust Fund is
acquired by persons independent of the Restricted Group.
The Exemptions also apply to transactions in connection with the servicing,
management and operation of the Trust Fund, provided that, in addition to the
general requirements described above, (a) such transactions are carried out in
accordance with the terms of a binding pooling and servicing agreement and (b)
the pooling and servicing agreement is provided to, or described in all material
respects in the prospectus or private placement memorandum
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provided to, investing Plans before their purchase of Certificates issued by the
Trust Fund. The Pooling and Servicing Agreement is a pooling and servicing
agreement as defined in the Exemptions. The Pooling and Servicing Agreement
provides that all transactions relating to the servicing, management and
operations of the Trust Fund must be carried out in accordance with the Pooling
and Servicing Agreement.
Before purchasing any ERISA Eligible Certificate, a fiduciary of a Plan
should itself confirm that the specific and general conditions of the Exemptions
and the other requirements set forth in the Exemptions would be satisfied.
THE CHARACTERISTICS OF THE CLASS [ ] CERTIFICATES DO NOT MEET THE
REQUIREMENTS OF THE EXEMPTIONS. ACCORDINGLY, CERTIFICATES OF THOSE CLASSES MAY
NOT BE ACQUIRED BY A PLAN, OTHER THAN AN INSURANCE COMPANY GENERAL ACCOUNT,
WHICH MAY BE ABLE TO RELY ON SECTIONS I AND III OF PTE 95-60 (DISCUSSED BELOW).
Sections I and III of Department of Labor Prohibited Transaction Class
Exemption 95-60 ("PTE 95-60") provides relief from the application of the
prohibited transaction provisions of Sections 406(a), 406(b) and 407(a) of ERISA
and Section 4975 of the Code for transactions in connection with the servicing,
management and operation of a trust (such as the Trust Fund) 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. If these conditions are met, insurance company general accounts would
be allowed to purchase classes of Certificates (such as the Class [ ]
Certificates) which do not meet the requirements of the Exemption solely because
they have not received a rating at the time of the acquisition in one of the
four highest rating categories from S&P, Moody's or Fitch. All other conditions
of the Exemption would have to be satisfied in order for PTE 95-60 to be
available. Before purchasing Class [ ] Certificates, an insurance company
general account seeking to rely on Sections I and III of PTE 95-60 should itself
confirm that it is eligible for, and has satisfied all applicable conditions and
other requirements of relief under such section.
Any Plan fiduciary considering the purchase of Certificates should consult
with its counsel with respect to the applicability of the Exemptions and other
issues and determine on its own whether all conditions have been satisfied and
whether the Certificates are an appropriate investment for a Plan under ERISA
and the Code (or, in the case of governmental plans, under applicable Federal,
state or local law). Each purchaser of ERISA Eligible Certificates with the
assets of one or more Plans shall be deemed to represent that each such Plan
qualifies as an "accredited investor" as defined in Rule 501(a)(1) of Regulation
D under the Securities Act. No Plan may purchase or hold ERISA Eligible
Certificates unless such Certificates are rated in one of the top four rating
categories by at least one NRSRO at the time of such purchase, unless such Plan
is an insurance company general account that represents and warrants that it is
eligible for, and meets all of the requirements of, Sections I and III of
Prohibited Transaction Class Exemption 95-60. Each Purchaser of Class [ ]
Certificates shall be deemed to represent that it is eligible for, and meets all
of the requirements of, Part III of Prohibited Transaction Class Exemption
95-60.
LEGAL INVESTMENT
The Class [ ] Certificates will constitute "mortgage related securities" for
the purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"), so long as they are rated in the category of "AAA" or "AA"
(or their equivalent) by at least one Rating Agency or another nationally
recognized statistical rating organization. All other Offered Certificates (the
"Non-SMMEA Certificates") will not constitute "mortgage related securities" for
purposes of SMMEA. As a result, the appropriate characterization of the
Non-SMMEA Certificates under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase the Non-SMMEA
Certificates of any Class, may be subject to significant interpretative
uncertainties. In addition, 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 to the proper characterization of any
Class of Offered Certificates for legal investment, financial institution
regulatory or other purposes or 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
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<PAGE>
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
(the "Underwriting Agreement") among the Depositor, First Union Securities, Inc.
and [ ] ("[ ]", and together with First Union Securities, Inc., the
"Underwriters"), the Depositor has agreed to sell to each of First Union
Securities, Inc. and [ ], and each of First Union Securities, Inc. and [ ], has
agreed to purchase, severally but not jointly, the respective Certificate
Balances, or notional amounts, as applicable, of each Class of the Offered
Certificates as set forth below subject in each case to a variance of [ ]%;
CLASS FIRST UNION SECURITIES, INC. [ ]
-------------------- ----------------------------------------- ---------------
First Union Securities, Inc. and [ ] are acting as co-lead managers of the
offering.
Proceeds to the Depositor from the sale of the Offered Certificates, before
deducting expenses payable by the Depositor, will be approximately $[ ], which
includes accrued interest.
Distribution of the Offered Certificates will be made by each Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Sales of the Offered Certificates may also
occur on the Closing Date and other dates after the Closing Date, as agreed upon
in negotiated transactions with various purchasers. Each 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 such Underwriter. In connection with the
purchase and sale of the Offered Certificates, First Union Securities and [ ]
may be deemed to have received compensation from the Depositor in the form of
underwriting discounts. Each Underwriter and any dealers that participate with
any 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 Underwriters that each of them,
through one or more of its affiliates, currently intends to make a market in the
Offered Certificates; however, neither Underwriter has any obligation to do so,
any market making may be discontinued at any time and there can be no assurance
that an active secondary market for the Offered Certificates will develop. See
"RISK FACTORS--Limited Liquidity for Offered Certificates" in this Prospectus
Supplement and in the Prospectus.
This Prospectus Supplement and the Prospectus may be used by the Depositor,
First Union 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 Securities, Inc.
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 has agreed to indemnify each Underwriter and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the
Securities Act against, or make contributions to each Underwriter and each such
controlling person with respect to, certain liabilities, including liabilities
under the Securities Act.
First Union Securities, Inc., one of the Underwriters, is an affiliate of the
Depositor, First Union National Bank and the Master Servicer and the Special
Servicer. [ ], one of the Underwriters, is an affiliate of [ ], one of the
Mortgage Loan Sellers.
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<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by [ ],
[ ], [ ] and certain legal matters will be passed upon for the
Underwriters by [ ], [ ], [ ].
RATINGS
The Offered Certificates are required as a condition of their issuance to
have received the following ratings from [ ] and [ ] (the "Rating Agencies"):
RATINGS FROM
CLASS [ ]/[ ]
-------------------------------------- ----------------------------------------
The ratings on the Offered Certificates address the likelihood of timely
receipt by holders thereof of all distributions of interest to which they are
entitled and, except in the case of the Class [ ] Certificates, distributions of
principal by the Rated Final Distribution Date set forth on the cover page of
this Prospectus Supplement. 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. A security rating does not represent any assessment of the yield
to maturity that investors may experience or the possibility that the holders of
the Class [ ] Certificates might not fully recover their investment in the event
of rapid prepayments of the Mortgage Loans (including both voluntary and
involuntary prepayments). In addition, a rating does not address (i) the
likelihood or frequency of voluntary or mandatory prepayments of Mortgage Loans,
(ii) the degree to which such prepayments might differ from those originally
anticipated, (iii) payment of Additional Interest or net default interest, (iv)
whether and to what extent payments of Prepayment Premiums or Yield Maintenance
Charges will be received or the corresponding effect on yield to investors or
(v) whether and to what extent Net Aggregate Prepayment Interest Shortfalls will
be realized. As described in this Prospectus Supplement, the amounts payable
with respect to the Class [ ] Certificates consist only of interest. If the
entire Mortgage Pool were to prepay in the initial month, with the result that
the holders of the Class [ ] Certificates receive only a single month's interest
and thus suffer a nearly complete loss of their investment, all amounts "due" to
such Certificateholders will nevertheless have been paid, and such result is
consistent with the ratings received on the Class [ ] Certificates. The Class [
] Certificates' notional amount upon which interest is calculated is reduced by
the allocation of Realized Losses, Additional Trust Fund Expenses and
prepayments, whether voluntary or involuntary. The rating does not address the
timing or magnitude of reductions of the notional amounts of the [ ] Components,
but only the obligation to pay interest timely on the notional amount as reduced
from time to time. Accordingly, the ratings of the Class [ ] Certificates should
be evaluated independently from similar ratings on other types of securities.
A downgrade, qualification (if applicable) or withdrawal of a rating with
respect to a Residual Value Insurer, a Tenant or a Guarantor may adversely
affect the ratings of the Offered Certificates.
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 any
of the Rating Agencies.
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--Ratings Do Not Guarantee Payment and Do Not Address Prepayment Risks"
in the Prospectus.
S-127
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
[ ] Component.............................................................S-96
30/360 basis..............................................................S-54
AA........................................................................S-37
Accrued Certificate Interest.............................................S-102
Actual/360 basis..........................................................S-54
Additional Interest.......................................................S-54
Additional Rights.........................................................S-59
Administrative Cost Rate..................................................S-62
Advance..................................................................S-108
Anticipated Repayment Date................................................S-54
Appraisal Reduction Amount...............................................S-108
ARD Loans.................................................................S-54
Assumed Final Distribution Date..........................................S-114
Assumed Scheduled Payment................................................S-103
Available Distribution Amount.............................................S-98
Balloon Loans.............................................................S-54
banking organization......................................................S-93
base year................................................................S-112
Bond-Type Leases..........................................................S-59
Capital Imp. Reserve......................................................S-63
Casualty or Condemnation Rights...........................................S-59
CBE......................................................................S-119
Certificate Balance.......................................................S-96
Certificate Deferred Interest.............................................S-96
Certificateholders........................................................S-97
Certificates..............................................................S-92
Class.....................................................................S-93
Class [ ] Certificates....................................................S-93
clearing agency...........................................................S-93
clearing corporation......................................................S-93
Clearstream...............................................................S-93
Clearstream Participants..................................................S-95
CMSA Bond File...........................................................S-111
CMSA Collateral File.....................................................S-111
CMSA Loan File...........................................................S-111
CMSA Property File.......................................................S-111
Code......................................................................S-60
Collection Period.........................................................S-97
Comparative Financial Status Report......................................S-112
Compensating Interest Payment.............................................S-87
Constant Prepayment Rate.................................................S-120
Controlling Class Representative..........................................S-85
Cooperative...............................................................S-95
CPR......................................................................S-120
Credit Lease..............................................................S-57
Credit Lease Assignment...................................................S-59
Credit Lease Default......................................................S-59
Credit Lease Loan Table...................................................S-58
Credit Lease Loans........................................................S-57
Custodian.................................................................S-80
Cut-Off Date DSC Ratio....................................................S-61
Cut-Off Date DSCR.........................................................S-61
Cut-Off Date LTV..........................................................S-62
<PAGE>
Cut-Off Date LTV Ratio....................................................S-62
D ........................................................................S-63
Defeasance................................................................S-63
Delinquent Loan Status Report............................................S-111
Depositaries..............................................................S-93
Determination Date........................................................S-97
Distribution Date.........................................................S-97
Distribution Date Statement..............................................S-109
DSC Ratio.................................................................S-60
DSCR......................................................................S-60
DTC.......................................................................S-93
Due Date..................................................................S-54
ERISA....................................................................S-125
Euroclear Operator........................................................S-95
Euroclear Participants....................................................S-95
Excess Cash Flow..........................................................S-54
Excluded Plan............................................................S-126
Exemption................................................................S-125
Exemptions...............................................................S-125
Final Recovery Determination.............................................S-110
First Principal Payment Date.............................................S-119
Fitch....................................................................S-126
foreclosure property......................................................S-91
Form 8-K..................................................................S-84
Fully Amortizing Loans....................................................S-54
Guarantor.................................................................S-58
Historical Liquidation Report............................................S-111
Historical Loan Modification Report......................................S-111
HUD.......................................................................S-60
Indirect Participants.....................................................S-93
Insured Balloon Payment...................................................S-54
Interest Accrual Period...................................................S-96
Interest Reserve Amount...................................................S-98
Interest Reserve Loans....................................................S-98
IRS......................................................................S-124
L ( )....................................................................S-63
Last Principal Payment Date..............................................S-119
Lockout...................................................................S-63
Lockout Period............................................................S-63
LTV at ARD or Maturity....................................................S-62
Maintenance Rights........................................................S-59
Majority Subordinate Certificateholder...................................S-115
Master Servicer...........................................................S-85
Master Servicing Fee......................................................S-87
Master Servicing Fee Rate.................................................S-87
Maturity Date LTV Ratio...................................................S-62
modified duration........................................................S-119
Monthly Rental Payments...................................................S-57
Mortgage..................................................................S-53
Mortgage Deferred Interest................................................S-96
Mortgage File.............................................................S-80
Mortgage Loan............................................................S-104
Mortgage Loan Purchase Agreements.........................................S-78
Mortgage Loans...........................................................S-104
Mortgage Note.............................................................S-53
Mortgage Rate.............................................................S-54
<PAGE>
Mortgaged Property........................................................S-53
NAP.......................................................................S-63
NAV.......................................................................S-63
Net Aggregate Prepayment Interest Shortfall..............................S-102
New Regulations..........................................................S-125
NNN.......................................................................S-58
NOI Adjustment Worksheet.................................................S-112
Non-Offered Certificates..................................................S-93
Nonrecoverable P&I Advance...............................................S-108
Non-SMMEA Certificates...................................................S-128
NRSRO....................................................................S-126
O ( )....................................................................S-63
Occupancy Percentage......................................................S-63
Offered Certificates......................................................S-93
OID Regulations..........................................................S-124
Open Period........................................................S-63, S-120
Operating Statement Analysis.............................................S-112
Original Term to Maturity.................................................S-63
P&I Advance..............................................................S-107
Party in Interest........................................................S-126
Periodic Payments.........................................................S-54
Plan.....................................................................S-125
Pooling and Servicing Agreement...........................................S-92
Prepayment Interest Excess................................................S-87
Prepayment Interest Shortfall.............................................S-87
Prepayment Premiums......................................................S-104
Primary Term..............................................................S-58
Principal Recovery Fee....................................................S-88
Privileged Persons.......................................................S-113
PSA Standard Formulas....................................................S-119
PTE 95-60................................................................S-127
Purchase Price............................................................S-81
Qualified Appraiser......................................................S-108
Qualified Substitute Mortgage Loan........................................S-81
Rating Agencies..........................................................S-129
real estate assets.......................................................S-125
Reimbursement Rate.......................................................S-108
Related Proceeds.........................................................S-108
REMIC Administrator......................................................S-116
REMIC Regular Certificates................................................S-93
REMIC Regulations........................................................S-123
REMIC Residual Certificates...............................................S-93
Rental Property...........................................................S-61
REO Extension.............................................................S-91
REO Mortgage Loan........................................................S-104
REO Property..............................................................S-86
REO Status Report........................................................S-111
REO Tax...................................................................S-91
Replacement Reserve.......................................................S-63
Required Appraisal Date..................................................S-108
Required Appraisal Loan..................................................S-108
Required Defeasance Period...............................................S-118
Residual Value Insurance Policy...........................................S-55
Residual Value Insurer....................................................S-55
Restricted Group.........................................................S-126
<PAGE>
Restricted Servicer Reports..............................................S-112
Rules.....................................................................S-94
S&P......................................................................S-126
Scenario.................................................................S-120
Scheduled Payment........................................................S-103
Semi-Annual Loans.........................................................S-54
Sequential Pay Certificates...............................................S-93
Servicing Fees............................................................S-88
Servicing Transfer Event..................................................S-86
Special Servicing Fee.....................................................S-88
Special Servicing Fee Rate................................................S-88
Specially Serviced Mortgage Loans.........................................S-86
Specially Serviced Trust Fund Assets......................................S-86
Stated Principal Balance..................................................S-97
Swap Fee..................................................................S-62
Table Assumptions.................................................S-114, S-120
Tax Credits...............................................................S-60
Tenant....................................................................S-57
Tenant Balloon Payment....................................................S-54
Tenants...................................................................S-57
Terms and Conditions......................................................S-95
TI/LC Reserve.............................................................S-63
Triple Net Leases.........................................................S-59
Trust Fund................................................................S-92
Underwriter..............................................................S-126
Underwriting Agreement...................................................S-128
Underwritten Replacement Reserves.........................................S-62
Voting Rights............................................................S-115
Watch List Report........................................................S-111
Workout Fee...............................................................S-88
X ( )....................................................................S-63
Year Built................................................................S-62
Yield Maintenance Charges................................................S-104
Yield Tables.............................................................S-119
YMx% ( ).................................................................S-63
<PAGE>
PROSPECTUS
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
FIRST UNION COMMERCIAL MORTGAGE SECURITIES, INC.
DEPOSITOR
First Union Commercial Mortgage Securities, Inc. will periodically offer
certificates in one or more series. Each series of certificates will represent
the entire beneficial ownership interest in a trust fund. Distributions on the
certificates of any series will be made only from the assets of the related
trust fund.
Neither the certificates nor any assets in the related trust fund will be
obligations of, or be guaranteed by, the depositor, any servicer or any of their
respective affiliates. Neither the certificates nor any assets in the related
trust fund will be guaranteed or insured by any governmental agency or
instrumentality or by any person, unless otherwise provided in the prospectus
supplement.
The primary assets of the trust fund may include:
o multifamily and commercial mortgage loans, including participations
therein;
o mortgage-backed securities evidencing interests in or secured by
multifamily and commercial mortgage loans, including participations
therein, and other mortgage-backed securities;
o direct obligations of the United States or other government agencies; or
o a combination of the assets described above.
INVESTING IN THE OFFERED CERTIFICATES INVOLVES RISKS. YOU SHOULD REVIEW THE
INFORMATION APPEARING UNDER THE CAPTION "RISK FACTORS" ON PAGE 10 AND IN THE
PROSPECTUS SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS SUPPLEMENT IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
[_________________, ___, 2001]
<PAGE>
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT........................................3
ADDITIONAL INFORMATION.......................................................3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................4
SUMMARY OF PROSPECTUS........................................................5
RISK FACTORS................................................................10
DESCRIPTION OF THE TRUST FUNDS..............................................28
YIELD CONSIDERATIONS........................................................33
THE DEPOSITOR...............................................................38
USE OF PROCEEDS.............................................................38
DESCRIPTION OF THE CERTIFICATES.............................................39
DESCRIPTION OF THE POOLING AGREEMENTS.......................................46
DESCRIPTION OF CREDIT SUPPORT...............................................58
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND LEASES..........................60
MATERIAL FEDERAL INCOME TAX CONSEQUENCES....................................73
STATE AND OTHER TAX CONSEQUENCES............................................95
ERISA CONSIDERATIONS........................................................95
LEGAL INVESTMENT............................................................98
METHOD OF DISTRIBUTION.....................................................100
LEGAL MATTERS..............................................................101
FINANCIAL INFORMATION......................................................101
RATINGS....................................................................102
INDEX OF PRINCIPAL DEFINITIONS.............................................103
-2-
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the offered certificates in two separate
documents that provide progressively more detail:
o this prospectus, which provides general information, some of which may not
apply to your series of certificates; and
o the accompanying prospectus supplement, which describes the specific terms
of your series of certificates.
If the description of your certificates in the accompanying prospectus
supplement differs from the related description in this prospectus, you should
rely on the information in that prospectus supplement.
This prospectus may not be used to consummate sales of the offered
certificates of any series unless accompanied by the prospectus supplement for
that series. This prospectus and the prospectus supplements also may be used by
us, First Union Securities, Inc., our affiliate, and any other of our affiliates
when required under the federal securities laws in connection with offers and
sales of offered certificates in furtherance of market-making activities in the
offered certificates. First Union Securities, Inc. 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.
Some capitalized terms used in this prospectus are defined under the caption
"Index of Principal Definitions" beginning on page 98 in this prospectus.
In this prospectus, the terms "depositor", "we", "us" and "our" refer to
First Union Commercial Mortgage Securities, Inc.
----------
Until 90 days after the date of each prospectus supplement, all dealers
effecting transactions in the offered certificates covered by that 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.
You should rely only on any information or representations contained or
incorporated by reference in this prospectus and the related prospectus
supplement. This prospectus and any prospectus supplement do not constitute an
offer to sell or a solicitation of an offer to buy any securities in any state
or other jurisdiction in which such offer would be unlawful.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement (of which this prospectus forms a part) under the Securities Act of
1933, as amended, with respect to the offered certificates. This prospectus and
the prospectus supplement do not contain all of the information set forth in the
registration statement. For further information, you should refer to the
registration statement and the exhibits attached thereto. Copies of the
Registration Statement may be obtained from the Public Reference Section of the
Securities and Exchange Commission, Washington, D.C. 20549, upon payment of the
prescribed charges, or may be examined free of charge at the Securities and
Exchange Commission's offices, 450 Fifth Street, N.W., Washington, D.C. 20549 or
at the regional offices of the Securities and Exchange Commission located at
Suite 1300, 7 World Trade Center, New York, New York 10048 and Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2511. The
Securities and Exchange Commission also maintains a site on the World Wide Web
at "http://www.sec.gov" at which you can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval system.
-3-
<PAGE>
We will file or cause to be filed with the Securities and Exchange Commission
such periodic reports with respect to each trust fund as are required under the
Securities Exchange Act of 1934, as amended, and the rules and regulations of
the Securities and Exchange Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
We are incorporating in this prospectus by reference all documents and
reports filed by us with respect to a trust fund pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended. You may
obtain, without charge, a copy of any or all documents or reports incorporated
in this prospectus by reference, to the extent such documents or reports relate
to an offered certificate. Exhibits to those documents will be provided to you
only if such exhibits were specifically incorporated by reference in those
documents. Requests to the depositor should be directed in writing to First
Union Commercial Mortgage Securities, Inc., 201 South College Street, Charlotte,
North Carolina 28288-0166, Attention: Secretary, or by telephone at
704-374-6161.
-4-
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is a brief description of the main terms of the offered
certificates. For this reason, the summary does not contain all the information
that may be important to you. You will find a detailed description of the terms
of the offered certificates following this summary and in the accompanying
prospectus supplement.
The Trust Assets............. Each series of certificates will represent the
entire beneficial ownership interest in a trust
fund consisting primarily of any of the following:
o mortgage assets;
o certificate accounts;
o forms of credit support;
o cash flow agreements; and
o amounts on deposit in a pre-funding account.
The Mortgage Assets.......... The mortgage assets with respect to each series of
certificates may consist of any of the following:
o multifamily and commercial mortgage loans,
including participations therein;
o commercial mortgage-backed securities,
including participations therein;
o direct obligations of the United States or
other government agencies; and
o a combination of the assets described above.
The mortgage loans will not be guaranteed or
insured by us or any of our affiliates or, unless
otherwise provided in the prospectus supplement,
by any governmental agency or instrumentality or
other person. The mortgage loans will be primarily
secured by first or junior liens on, or security
interests in fee simple, leasehold or a similar
interest in, any of the following types of
properties:
o residential properties consisting of five or
more rental or cooperatively owned dwelling
units;
o shopping centers;
o retail buildings or centers;
o hotels and motels;
o office buildings;
o nursing homes;
o hospitals or other health-care related
facilities;
o industrial properties;
o warehouse, mini-warehouse or self-storage
facilities;
o mobile home parks;
o mixed use properties; and
o other types of commercial properties.
Some or all of the mortgage loans may also be
secured by an assignment of one or more leases of
all or a portion of the related mortgaged
properties. A significant or the sole source of
payments on certain mortgage loans will be the
rental payments due under the related leases.
A mortgage loan may have an interest rate that has
any of the following features:
-5-
<PAGE>
o is fixed over its term;
o adjusts from time to time;
o is partially fixed and partially floating;
o is floating based on one or more formulae or
indices;
o may be converted from a floating to a fixed
interest rate;
o may be converted from a fixed to a floating
interest rate; or
o interest is not paid currently but is accrued
and added to the principal balance.
A mortgage loan may provide for any of the
following:
o scheduled payments to maturity;
o payments that adjust from time to time;
o negative amortization or accelerated
amortization;
o full amortization or require a balloon
payment due on its stated maturity date;
o prohibitions on prepayment;
o releases or substitutions of collateral,
including defeasance thereof with direct
obligations of the United States; and
o payment of a premium or a yield maintenance
penalty in connection with a principal
prepayment.
Unless otherwise described in the prospectus
supplement for a series of certificates:
o the mortgaged properties may be located in
any one of the 50 states, the District of
Columbia or the Commonwealth of Puerto Rico;
o all mortgage loans will have original terms
to maturity of not more than 40 years;
o all mortgage loans will have individual
principal balances at origination of not less
than $100,000;
o all mortgage loans will have been originated
by persons other than the depositor; and
o all mortgage assets will have been purchased,
either directly or indirectly, by the
depositor on or before the date of initial
issuance of the related series of
certificates.
Any commercial mortgage-backed securities included
in a trust fund will evidence ownership interests
in or be secured by mortgage loans similar to
those described above and other mortgage-backed
securities. Some commercial mortgage-backed
securities included in a trust fund may be
guaranteed or insured by an affiliate of the
depositor, Freddie Mac, Fannie Mae, Ginnie Mae,
Farmer Mac or any other person specified in the
prospectus supplement.
Certificate Accounts......... Each trust fund will include one or more accounts
established and maintained on behalf of the
certificateholders. All payments and collections
received or advanced with respect to the mortgage
assets and other assets in the trust fund will be
deposited into those accounts. A certificate
account may be maintained as an interest bearing
or a non-interest bearing account, and funds may
be held as cash or reinvested.
Credit Support............... The following types of credit support may be used
to enhance the likelihood of distributions on
certain classes of certificates:
-6-
<PAGE>
o subordination of junior certificates;
o over collateralization;
o letters of credit;
o insurance policies;
o guarantees;
o reserve funds; and/or
o other types of credit support described in
the prospectus supplement and a combination
of any of the above.
Cash Flow Agreements......... Cash flow agreements are used to reduce the
effects of interest rate or currency exchange rate
fluctuations on the underlying mortgage assets and
increase the likelihood of timely distributions on
the certificates. The trust fund may include any
of the following types of cash flow agreements:
o guaranteed investment contracts;
o interest rate swap or exchange contracts;
o interest rate cap or floor agreements;
o currency exchange agreements;
o yield supplement agreements; or
o other types of similar agreements described
in the prospectus supplement.
Pre-Funding Account;
Capitalized Interest
Account ................... A trust fund may use monies deposited into a
pre-funding account to acquire additional mortgage
assets following a closing date for the related
series of certificates. The amount on deposit in a
pre-funding account will not exceed 25% of the
pool balance of the trust fund as of the cut-off
date on which the ownership of the mortgage loans
and rights to payment thereon are deemed
transferred to the trust fund, as specified in the
related prospectus supplement. The depositor will
select any additional mortgage assets using
criteria that is substantially similar to the
criteria used to select the mortgage assets
included in the trust fund on the closing date.
If provided in the prospectus supplement, a trust
fund also may include amounts on deposit in a
separate capitalized interest account. The
depositor may use amounts on deposit in a
capitalized interest account 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 prospectus supplement.
Amounts on deposit in any pre-funding account or
any capitalized interest account will be held in
cash or invested in short-term investment grade
obligations. Amounts remaining on deposit in any
pre-funding account and any capitalized interest
account after the end of the related pre-funding
period will be distributed to certificateholders
as described in the prospectus supplement.
Description of Certificates.. Each series of certificates will include one or
more classes. Each series of certificates will
represent in the aggregate the entire beneficial
ownership interest in the related trust fund. The
offered certificates are the classes of
certificates being offered to you pursuant to the
prospectus supplement. The non-offered
certificates are the classes of certificates not
being offered to you pursuant to the prospectus
supplement. Information on the non-offered
certificates is being
-7-
<PAGE>
provided solely to assist you in your
understanding of the offered certificates.
Distributions on
Certificates ............. The certificates may provide for different methods
of distributions to specific classes. Any class of
certificates may:
o provide for the accrual of interest thereon
based on fixed, variable or floating rates;
o be senior or subordinate to one or more other
classes of certificates with respect to
interest or principal distribution and the
allocation of losses on the assets of the
trust fund;
o be entitled to principal distributions, with
disproportionately low, nominal or no
interest distributions;
o be entitled to interest distributions, with
disproportionately low, nominal or no
principal distributions;
o provide for distributions of principal or
accrued interest only after the occurrence of
certain events, such as the retirement of one
or more other classes of certificates;
o provide for distributions of principal to be
made at a rate that is faster or slower than
the rate at which payments are received on
the mortgage assets in the related trust
fund;
o provide for distributions of principal
sequentially, based on specified payment
schedules or other methodologies; and
o provide for distributions based on a
combination of any of the above features.
Interest on each class of offered certificates of
each series will accrue at the applicable
pass-through rate on the outstanding certificate
balance or notional amount. 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 in this prospectus and the
prospectus supplement.
The certificate balance of a certificate
outstanding from time to time represents the
maximum amount that the holder thereof is then
entitled to receive in respect of principal from
future cash flow on the assets in the related
trust fund. Unless otherwise specified in the
prospectus supplement, distributions of principal
will be made on each distribution date to the
class or classes of certificates entitled thereto
until the certificate balance of such certificates
is reduced to zero. Distributions of principal to
any class of certificates will be made on a pro
rata basis among all of the certificates of such
class.
Advances..................... A servicer may be obligated as part of its
servicing responsibilities to make certain
advances with respect to delinquent scheduled
payments and property related expenses which it
deems recoverable. The trust fund may be charged
interest for any advance. We will not have any
responsibility to make such advances. One of our
affiliates may have the responsibility to make
such advances, but only if that affiliate is
acting as a servicer or master servicer for
related series of certificates.
Termination.................. A series of certificates may be subject to
optional early termination through the repurchase
of the mortgage assets in the related trust fund.
Registration of
Certificates ............. One or more classes of the offered certificates
may be initially represented by one or more
certificates registered in the name of Cede
-8-
<PAGE>
& Co. as the nominee of The Depository Trust
Company. If your offered certificates are so
registered, you will not be entitled to receive a
definitive certificate representing your interest
except in the event that physical certificates are
issued under the limited circumstances described
in this prospectus and the prospectus supplement.
Tax Status of the
Certificates ............. The certificates of each series will constitute
either:
o "regular interests" or "residual interests"
in a trust fund treated as a "real estate
mortgage investment conduit" under the
Internal Revenue Code of 1986, as amended;
o interests in a trust fund treated as a
grantor trust under applicable provisions of
the Internal Revenue Code of 1986, as
amended;
o "regular interests" or "residual interests"
in a trust fund treated as a "financial
assets securitization investment trust" under
the Internal Revenue Code of 1986, as
amended; or
o any combination of any of the above features.
ERISA Considerations......... If you are a fiduciary of an employee benefit plan
or other retirement plan or arrangement that is
subject to the Employee Retirement Income Security
Act of 1974, as amended, or Section 4975 of the
Internal Revenue Code of 1986, as amended, or any
materially similar federal, state or local law, or
any person who proposes to use "plan assets" of
any of these plans to acquire any offered
certificates, you should carefully review with
your legal counsel whether the purchase or holding
of any offered certificates could give rise to
transactions not permitted under these laws. The
prospectus supplement will specify if investment
in some certificates may require a representation
that the investor is not (or is not investing on
behalf of) a plan or similar arrangement or if
other restrictions apply.
Legal Investment............. The prospectus supplement will specify whether the
offered certificates will constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as
amended. If your investment authority is subject
to legal restrictions you should consult your
legal counsel to determine whether and to what
extent the offered certificates constitute legal
investments for you.
Rating....................... At the date of issuance, as to each series, each
class of offered certificates will not be rated
lower than investment grade by one or more
nationally recognized statistical rating agencies.
A security rating is not a recommendation to buy,
sell or hold securities and may be subject to
qualification, revision or withdrawal at any time
by the assigning rating organization.
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RISK FACTORS
YOU SHOULD CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE RISK
FACTORS IN THE PROSPECTUS SUPPLEMENT, IN DECIDING WHETHER TO PURCHASE ANY OF THE
OFFERED CERTIFICATES. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW, TOGETHER WITH
THOSE DESCRIBED IN THE PROSPECTUS SUPPLEMENT UNDER "RISK FACTORS", SUMMARIZE THE
MATERIAL RISKS RELATING TO YOUR CERTIFICATES.
YOUR ABILITY TO RESELL
CERTIFICATES MAY BE
LIMITED BECAUSE OF
THEIR CHARACTERISTICS You may not be able to resell your certificates
and the value of your certificates may be less
than you anticipated for a variety of reasons
including:
o a secondary market for your certificates may
not develop;
o interest rates fluctuations;
o the absence of redemption rights; and
o the limited sources of information about the
certificates other than that provided in this
prospectus, the prospectus supplement and the
monthly report to certificateholders.
THE ASSETS OF THE TRUST
FUND MAY NOT BE
SUFFICIENT TO PAY
YOUR CERTIFICATES Unless otherwise specified in the prospectus
supplement, neither the offered certificates of
any series nor the mortgage assets in the related
trust fund will be guaranteed or insured by us or
any of our affiliates, by any governmental agency
or instrumentality or by any other person. No
offered certificate of any series will represent a
claim against or security interest in the trust
fund for any other series. Accordingly, if the
related trust fund has insufficient assets to make
payments on the certificates, there will be no
other assets available for payment of the
deficiency.
Additionally, the trustee, master servicer,
special servicer or other specified person may
under certain circumstances withdraw some amounts
on deposit in certain funds or accounts
constituting part of a trust fund, including the
certificate account and any accounts maintained as
credit support, as described in the prospectus
supplement. The trustee, master servicer, special
servicer or other specified person may have the
authority to make these withdrawals for purposes
other than the payment of principal of or interest
on the related series of certificates.
The prospectus supplement for a series of
certificates may provide for one or more classes
of certificates that are subordinate to one or
more other classes of certificates in entitlement
to certain distributions on the certificates. On
any distribution date in which the related trust
fund has incurred losses or shortfalls in
collections on the mortgage assets, the
subordinate certificates initially will bear the
amount of such losses or shortfalls and,
thereafter, the remaining classes of certificates
will bear the remaining amount of such losses or
shortfalls. The priority, manner and limitations
on the allocation of losses and shortfalls will be
specified in the prospectus supplement.
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PREPAYMENTS AND REPURCHASES
OF THE MORTGAGE ASSETS WILL
AFFECT THE TIMING OF YOUR
CASH FLOW AND MAY AFFECT
YOUR YIELD Prepayments (including those caused by defaults on
the mortgage loans and repurchases for breach of
representation or warranty) on the mortgage loans
in a trust fund generally will result in a faster
rate of principal payments on one or more classes
of the related certificates than if payments on
such mortgage assets were made as scheduled. Thus,
the prepayment experience on the mortgage assets
may affect the average life of each class of
related certificates. The rate of principal
payments on mortgage loans varies between pools
and from time to time is influenced by a variety
of economic, demographic, geographic, social, tax,
legal and other factors.
We cannot provide any 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 in this prospectus 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 could occur significantly
earlier or later than you expected.
The rate of voluntary prepayments will also be
affected by:
o the voluntary prepayment terms of the
mortgage loan, including prepayment lock-out
periods and prepayment premiums;
o then-current interest rates being charged on
similar mortgage loans; and
o the availability of mortgage credit.
A series of certificates may include one or more
classes of certificates with entitlements to
payments prior to other classes of certificates.
As a result, yields on classes of certificates
with a lower priority of payment, including
classes of offered certificates, of such series
may be more sensitive to prepayments on mortgage
assets. A series of certificates may include one
or more classes offered at a significant premium
or discount. Yields on such classes of
certificates will be sensitive, and in some cases
extremely sensitive, to prepayments on mortgage
assets and, where the amount of interest payable
with respect to a class is disproportionately
high, as compared to the amount of principal, a
holder might, in some prepayment scenarios, fail
to recoup its original investment.
If a mortgage loan is in default it may not be
possible to collect a prepayment premium. No
person will be required to pay any premium if a
mortgage loan is repurchased for a breach of
representation or warranty.
The yield on your certificates may be less than
anticipated because:
o the prepayment premium or yield maintenance
required under the certain prepayment
scenarios may not be enforceable in some
states or under federal bankruptcy laws; and
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<PAGE>
o some courts may consider the prepayment
premium to be usurious.
OPTIONAL EARLY TERMINATION
OF THE TRUST FUND MAY
RESULT IN AN ADVERSE IMPACT
ON YOUR YIELD OR MAY
RESULT IN A LOSS 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. We cannot assure you 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 that are subject to the
termination. Accordingly, the holders of such
certificates may suffer an adverse impact on the
overall yield on their certificates, may
experience repayment of their investment at an
unpredictable and inopportune time or may even
incur a loss on their investment.
RATINGS DO NOT GUARANTEE
PAYMENT AND DO NOT ADDRESS
PREPAYMENT RISKS Any rating assigned by a rating agency to a class
of offeredcertificates 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. Ratings do
not address:
o the likelihood that principal prepayments
(including those caused by defaults) on the
related mortgage loans will be made;
o the degree to which the rate of prepayments
on the related mortgage loans might differ
from that originally anticipated;
o the likelihood of early optional termination
of the related trust fund;
o 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
o the possibility 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 certificates of such series. Those
criteria are sometimes based upon an actuarial
analysis of the behavior of mortgage loans in a
larger group. However, we cannot provide 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,
a rating agency may base their criteria upon
determinations of the values of the mortgaged
properties that provide security for the mortgage
loans. However, we cannot provide assurance that
those values will not decline in the future.
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UNUSED AMOUNTS IN
PRE-FUNDING ACCOUNTS MAY
BE RETURNED TO
YOU AS A PREPAYMENT The prospectus supplement will disclose when we
are using a pre-funding account to purchase
additional mortgage assets in connection with the
issuance of certificates. Amounts on deposit in a
pre-funding account that are not used to acquire
additional mortgage assets by the end of the
pre-funding period for a series of certificates
may be distributed to holders of those
certificates as a prepayment of principal, which
may materially and adversely affect the yield on
those certificates.
ADDITIONAL MORTGAGE ASSETS
ACQUIRED IN CONNECTION WITH
THE USE OF A PRE-FUNDING
ACCOUNT MAY CHANGE THE
AGGREGATE CHARACTERISTICS
OF A TRUST FUND Any additional mortgage assets acquired by a trust
fund with funds in a pre-funding account may
possess substantially different characteristics
than the mortgage assets in the trust fund on the
closing date for a series of certificates.
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 for that
series of certificates.
NET OPERATING INCOME
PRODUCED BY A MORTGAGED
PROPERTY MAY BE INADEQUATE
TO REPAY THE MORTGAGE LOANS The value of a mortgage loan secured by a
multifamily or commercial property is directly
related to the net operating income derived from
that property because the ability of a borrower to
repay a loan secured by an income-producing
property typically depends primarily upon the
successful operation of that property rather than
upon the existence of independent income or assets
of the borrower. The reduction in the net
operating income of the property may impair the
borrower's ability to repay the loan.
Many of the mortgage loans included in a trust
fund 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 may have a disproportionately
greater affect on the net operating income from
such mortgaged properties than would be the case
with respect to mortgaged properties with multiple
tenants.
FUTURE VALUE OF A MORTGAGED
PROPERTY AND ITS NET
OPERATING INCOME AND CASH
FLOW IS NOT PREDICTABLE Commercial and multifamily property values and
cash flows and net operating income from such
mortgaged properties are volatile and may be
insufficient to cover debt service on the related
mortgage loan at any given time. Property value,
cash flow and net operating income depend upon a
number of factors, including:
o changes in general or local economic
conditions and/or specific industry segments;
o declines in real estate values;
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<PAGE>
o an oversupply of commercial or multifamily
properties in the relevant market;
o declines in rental or occupancy rates;
o increases in interest rates, real estate tax
rates and other operating expenses;
o changes in governmental rules, regulations
and fiscal policies, including environmental
legislation;
o perceptions by prospective tenants and, if
applicable, their customers, of the safety,
convenience, services and attractiveness of
the property;
o the age, construction quality and design of a
particular property;
o whether the mortgaged properties are readily
convertible to alternative uses;
o acts of God; and
o other factors beyond our control or the
control of a servicer.
NONRECOURSE LOANS LIMIT
THE REMEDIES AVAILABLE
FOLLOWING A MORTGAGOR
DEFAULT The mortgage loans will not be an obligation of,
or be insured or guaranteed by, any governmental
entity, by any private mortgage insurer, or by the
depositor, the originators, the master servicer,
the servicer, the trustee or any of their
respective affiliates.
Each mortgage loan included in a trust fund
generally will be a nonrecourse loan. If there is
a default (other than a default resulting from
voluntary bankruptcy, fraud or wilful misconduct)
there will generally only be recourse against the
specific mortgaged properties and other assets
that have been pledged to secure such mortgage
loan. Even if a mortgage loan provides for
recourse to a mortgagor or its affiliates, it is
unlikely the trust fund ultimately could recover
any amounts not covered by the mortgaged property.
SPECIAL RISKS OF MORTGAGE
LOANS SECURED BY
MULTIFAMILY PROPERTIES Mortgage loans secured by multifamily properties
may 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 a borrower may
charge 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:
o construction of additional housing units;
o local military base closings;
o developments at local colleges and
universities;
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<PAGE>
o national, regional and local politics,
including, in the case of multifamily rental
properties, current or future rent
stabilization and rent control laws and
agreements;
o the level of mortgage interest rates, which
may encourage tenants in multifamily rental
properties to purchase housing;
o tax credit and city, state and federal
housing subsidy or similar programs which may
impose rent limitations and may adversely
affect the ability of the applicable
borrowers to increase rents to maintain the
mortgaged properties in proper condition
during periods of rapid inflation or
declining market value of the mortgaged
properties;
o tax credit and city, state and federal
housing subsidy or similar programs which may
impose income restrictions on tenants and
which may reduce the number of eligible
tenants in such mortgaged properties and
result in a reduction in occupancy rates
applicable thereto; and
o the possibility that some eligible tenants
may not find any differences in rents between
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.
The multifamily projects market is characterized
generally 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.
SPECIAL RISKS OF 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:
o the quality of the tenants; and
o the 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 that property. Accordingly,
retail
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<PAGE>
properties may be adversely affected if a
significant tenant ceases operations at those
locations, which may occur on account of a
voluntary decision not to renew a lease,
bankruptcy or insolvency of the tenant, the
tenant's general cessation of business activities
or for other reasons. In addition, some tenants at
retail properties may be entitled to terminate
their leases or pay reduced rent if an anchor
tenant ceases operations at the property. In those
cases, we cannot provide assurance that any 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. In addition, a
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 that 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, such as:
o catalogue retailers;
o home shopping networks;
o the internet;
o telemarketing; and
o outlet centers.
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.
SPECIAL RISKS OF MORTGAGE
LOANS SECURED BY
HOSPITALITY PROPERTIES Mortgage loans secured by hospitality properties
(e.g., a hotel or motel) may constitute a material
concentration of the mortgage loans in a trust
fund. Various factors affect the economic
viability of a hospitality property, including:
o location, quality and franchise affiliation
(or lack thereof); o adverse economic
conditions, either local, regional or
national, which may limit the amount that a
consumer is willing to pay for a room and may
result in a reduction in occupancy levels;
o the construction of competing hospitality
properties, which may result in a reduction
in occupancy levels;
o the increased sensitivity of hospitality
properties (relative to other commercial
properties) to adverse economic conditions
and competition, as hotel rooms generally are
rented for short periods of time;
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<PAGE>
o the financial strength and capabilities of
the owner and operator of a hospitality
property, which may have a substantial impact
on the property's quality of service and
economic performance; and
o the generally seasonal nature of the
hospitality industry, which can be expected
to cause periodic fluctuations in room and
other revenues, occupancy levels, room rates
and operating expenses.
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.
SPECIAL RISKS OF 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
include:
o the quality of the tenants in the building;
o the physical attributes of the building in
relation to competing buildings; and
o the strength and stability of the market area
as a desirable business location.
An economic decline in the business operated by
the tenants may adversely affect an office
building. That risk 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:
o age;
o condition;
o design (e.g., floor sizes and layout);
o access to transportation; and
o ability or inability to offer certain
amenities to its tenants, including
sophisticated building systems (such as fiber
optic cables, satellite communications or
other base building technological features).
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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.
SPECIAL RISKS OF 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. The storage
facilities market contains low barriers to entry.
Increased competition among self storage
facilities may reduce income available to repay
mortgage loans secured by a self storage facility.
Furthermore, the inability of a borrower to police
what is stored in a self storage facility due to
privacy considerations may increase environmental
risks.
SPECIAL RISKS OF MORTGAGE
LOANS SECURED BY
HEALTHCARE-RELATED
PROPERTIES The mortgaged properties may include health
care-related facilities, including senior housing,
assisted living facilities, skilled nursing
facilities and acute care facilities.
o 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;
o 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;
o Skilled nursing facilities provide services
to post trauma and frail residents with
limited mobility who require extensive
medical treatment; and
o 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
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reform that could further limit those payments.
Accordingly, we cannot provide assurance that
payments under government reimbursement programs
will, in the future, be sufficient to fully
reimburse the cost of caring for program
beneficiaries. If those payments are insufficient,
net operating income of health care-related
facilities that receive revenues from those
sources may decline, which consequently could have
an adverse affect on the ability of the related
borrowers to meet their obligations under any
mortgage loans secured by health care-related
facilities.
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. 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, 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 generally would not be entitled to
obtain from federal or state governments any
outstanding reimbursement payments relating to
services furnished at such property prior to
foreclosure. Any of the aforementioned events may
adversely affect the ability of the related
borrowers to meet their mortgage loan obligations.
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. In the event of
foreclosure, we cannot provide assurance that the
trustee or any other purchaser at a foreclosure
sale would be entitled to the rights under the
licenses, and the trustee or other purchaser may
have to apply in its own right for the applicable
license. We cannot provide assurance that the
trustee or other purchaser could obtain the
applicable license or that the related mortgaged
property would be adaptable to other uses.
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, 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
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licensing of new beds, or on the certification of
new 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
certificate of need 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, in the case of foreclosure upon a
mortgage loan secured by a lien on a health
care-related mortgaged property, the purchaser at
foreclosure might be required to obtain a new
certificate of need 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 we cannot provide assurance that any state
regulatory agency will do so or that the state
regulatory agency will issue any necessary
licenses or approvals.
Federal and state government "fraud and abuse"
laws also apply to health care-related facilities.
"Fraud and abuse" laws 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, we cannot provide
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 those laws.
The operators of health care-related facilities
are likely to compete on a local 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:
o the number of competing facilities in the
local market;
o the facility's age and appearance;
o the reputation and management of the
facility;
o the types of services the facility provides;
and
o 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
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related mortgage loan, possibly affecting the
yield on one or more classes of the related series
of offered certificates.
SPECIAL RISKS OF MORTGAGE
LOANS SECURED BY INDUSTRIAL
AND 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 include:
o the quality of tenants;
o building design and adaptability; and
o 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 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 (e.g. 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.
POOR PROPERTY MANAGEMENT
WILL ADVERSELY AFFECT THE
PERFORMANCE OF THE RELATED
MORTGAGED PROPERTY Each mortgaged property securing a mortgage loan
which has been sold into a trust fund 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:
o operating the property;
o providing building services;
o responding to changes in the local market;
and
o planning and implementing the rental
structure, including establishing levels of
rent payments and advising the
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borrowers so that maintenance and capital
improvements can be carried out in a timely
fashion.
We cannot provide assurance regarding the
performance of any operators, leasing agents
and/or property managers or persons who may become
operators and/or property 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 of those
agreements.
BALLOON PAYMENTS ON MORTGAGE
LOANS RESULT IN HEIGHTENED
RISK OF BORROWER DEFAULT Some 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 either:
o its ability to fully refinance the loan; or
o its ability 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:
o the value of the related mortgaged property;
o the level of available mortgage interest
rates at the time of sale or refinancing;
o the borrower's equity in the related
mortgaged property;
o the financial condition and operating history
of the borrower and the related mortgaged
property;
o tax laws;
o rent control laws (with respect to certain
residential properties);
o Medicaid and Medicare reimbursement rates
(with respect to hospitals and nursing
homes);
o prevailing general economic conditions; and
o the availability of credit for loans secured
by commercial or multifamily, as the case may
be, real properties generally.
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THE SERVICER WILL HAVE
DISCRETION TO HANDLE OR
AVOID OBLIGOR DEFAULTS IN
A MANNER WHICH MAY BE
ADVERSE TO YOUR INTERESTS If and to the extent specified in the prospectus
supplement defaulted mortgage loans exist or are
imminent, in order to maximize recoveries on
defaulted mortgage loans, the related pooling
agreement will permit (within prescribed limits)
the master servicer or a special servicer to
extend and modify mortgage loans that are in
default or as to which a payment default is
imminent. While the related pooling agreement
generally will require a master servicer to
determine that any such extension or modification
is reasonably likely to produce a greater recovery
on a present value basis than liquidation, we
cannot provide assurance that any such extension
or modification will in fact increase the present
value of receipts from or proceeds of the affected
mortgage loans.
In addition, a master servicer or a special
servicer may receive a workout fee based on
receipts from or proceeds of such mortgage loans.
PROCEEDS RECEIVED UPON
FORECLOSURE OF MORTGAGE
LOANS SECURED PRIMARILY
BY JUNIOR MORTGAGES MAY
RESULT IN LOSSES To the extent specified in the prospectus
supplement, some of the mortgage loans included in
a trust fund may be secured primarily by junior
mortgages. When liquidated, 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 insufficient funds to
satisfy both the 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.
CREDIT SUPPORT MAY NOT
COVER LOSSES OR RISKS
WHICH COULD ADVERSELY
AFFECT PAYMENT ON YOUR
CERTIFICATES The prospectus supplement for the offered
certificates of each series will describe any
credit support provided with respect to those
certificates. Use of credit support will be
subject to the conditions and limitations
described in this prospectus and in the related
prospectus supplement. Moreover, 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 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
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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.
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 of
those certificates will not be adversely affected.
The rating of any series of certificates by any
applicable rating agency may be lowered following
the initial issuance of those certificates 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 that rating agency at the time of its initial
rating analysis. None of the depositor, the master
servicer or any of our or the master servicer's
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.
MORTGAGORS OF COMMERCIAL
MORTGAGE LOANS ARE
SOPHISTICATED AND MAY
TAKE ACTIONS ADVERSE TO
YOUR INTERESTS Mortgage loans made to partnerships, corporations
or other entities may entail risks of loss from
delinquency and foreclosure that are greater than
those of mortgage loans made to individuals. The
mortgagor's sophistication and form of
organization may increase the likelihood of
protracted litigation or bankruptcy in default
situations.
SOME ACTIONS ALLOWED BY
THE MORTGAGE MAY BE
LIMITED BY LAW Mortgages securing mortgage loans included in a
trust fund 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
securing mortgage loans included in a trust fund
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.
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ASSIGNMENT OF LEASES AND
RENTS TO PROVIDE FURTHER
SECURITY FOR MORTGAGE LOANS
POSES 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,
bankruptcy or the commencement of similar
proceedings by or in respect of the borrower may
adversely affect the lender's ability to collect
the rents.
INCLUSION IN A TRUST FUND
OF DELINQUENT MORTGAGE
LOANS MAY ADVERSELY AFFECT
THE RATE OF DEFAULTS AND
PREPAYMENTS ON THE
MORTGAGE LOANS If so provided in the prospectus supplement, the
trust fund for a 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 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
prospectus supplement, the servicing of such
mortgage loans will be performed by a special
servicer.
Credit support provided with respect to a series
of certificates may not cover all losses related
to 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.
ENVIRONMENTAL LIABILITY
MAY AFFECT THE LIEN ON A
MORTGAGED PROPERTY AND
EXPOSE THE 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, that lien
has priority over an existing mortgage lien on a
property. In addition, under the laws of some
states and under the federal Comprehensive
Environmental Response, Compensation, and
Liability Act of 1980, 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
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affect a borrower's ability to repay a loan. If a
trust fund includes mortgage loans and the
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. These provisions are
designed to reduce substantially the risk of
liability for costs associated with remediation of
hazardous substances, but we cannot provide
assurance in a given case that those risks can be
eliminated entirely. In addition, 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.
ONE ACTION JURISDICTION
MAY LIMIT THE ABILITY OF
THE SPECIAL SERVICER TO
FORECLOSE ON A
MORTGAGED PROPERTY Several states (including California) have laws
that prohibit more than one "judicial action" to
enforce a mortgage obligation, and some courts
have construed the term "judicial action" broadly.
The special servicer may need to obtain advice of
counsel prior to enforcing any of the trust fund's
rights under any of the mortgage loans that
include mortgaged properties where the rule could
be applicable.
In the case of a mortgage loan secured by
mortgaged properties located in multiple states,
the special servicer may be required to foreclose
first on properties located in states where "one
action" rules apply (and where non-judicial
foreclosure is permitted) before foreclosing on
properties located in states where judicial
foreclosure is the only permitted method of
foreclosure.
RIGHTS AGAINST TENANTS MAY
BE LIMITED IF LEASES ARE
NOT SUBORDINATE TO THE
MORTGAGE OR DO NOT CONTAIN
ATTORNMENT PROVISIONS Some of the tenant leases contain provisions that
require the tenant to attorn to (that is,
recognize as landlord under the lease) a successor
owner of the property following foreclosure. Some
of the leases may be either subordinate to the
liens created by the mortgage loans or else
contain a provision that requires the tenant to
subordinate the lease if the mortgagee agrees to
enter into a non-disturbance agreement.
In some states, if tenant leases are subordinate
to the liens created by the mortgage loans and
such leases do not contain attornment provisions,
such leases may terminate upon the transfer of the
property to a foreclosing lender or purchaser at
foreclosure. Accordingly, in the case of the
foreclosure of a mortgaged property located in
such a state and leased to one or more desirable
tenants under leases that do not contain
attornment provisions, such mortgaged property
could experience a further decline in value if
such tenants' leases were terminated (e.g., if
such tenants were paying above-market rents).
If a lease is senior to a mortgage, the lender
will not (unless it has otherwise agreed with the
tenant) possess the right to dispossess the tenant
upon foreclosure of the property, and if the lease
contains provisions inconsistent with the mortgage
(e.g., provisions relating to
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application of insurance proceeds or condemnation
awards), the provisions of the lease will take
precedence over the provisions of the mortgage.
IF MORTGAGED PROPERTIES
ARE NOT IN COMPLIANCE WITH
CURRENT ZONING LAWS, YOU
MAY NOT BE ABLE TO RESTORE
COMPLIANCE FOLLOWING A
CASUALTY LOSS Due to changes in applicable building and zoning
ordinances and codes which have come into effect
after the construction of improvements on certain
of the mortgaged properties, some improvements may
not comply fully with current zoning laws
(including density, use, parking and set-back
requirements) but may qualify as permitted
non-confirming uses. Such changes may limit the
ability of the related mortgagor to rebuild the
premises "as is" in the event of a substantial
casualty loss. Such limitations may adversely
affect the ability of the mortgagor to meet its
mortgage loan obligations from cash flow.
Insurance proceeds may not be sufficient to pay
off such mortgage loan in full. In addition, if
the mortgaged property were to be repaired or
restored in conformity with then current law, its
value could be less than the remaining balance on
the mortgage loan and it may produce less revenue
than before such repair or restoration.
INSPECTIONS OF THE MORTGAGED
PROPERTIES WERE LIMITED The mortgaged properties were inspected by
licensed engineers at the time the mortgage loans
were originated to assess the structure, exterior
walls, roofing interior construction, mechanical
and electrical systems and general condition of
the site, buildings and other improvements located
on the mortgaged properties. We cannot provide
assurance that all conditions requiring repair or
replacement have been identified in such
inspections.
LITIGATION CONCERNS There may be legal proceedings pending and, from
time to time, threatened against the mortgagors or
their affiliates relating to the business, or
arising out of the ordinary course of business, of
the mortgagors and their affiliates. We cannot
provide assurance that such litigation will not
have a material adverse effect on the
distributions to you on your certificates.
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DESCRIPTION OF THE TRUST FUNDS
GENERAL
The primary assets of each trust fund will consist of mortgage assets which
include (i) one or more multifamily and/or commercial mortgage loans and
participations therein, (ii) CMBS, or (iii) a combination of mortgage loans,
participations therein and/or CMBS. Each trust fund will be established by 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, which 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 prospectus supplement, by any
governmental agency or instrumentality or by any other person. The discussion
below under the heading "--Mortgage Loans-Leases," 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 mortgage notes secured by
mortgages or deeds of trust or similar security instruments that create first or
junior liens on, or installment contracts for the sale of, mortgaged properties
consisting of (i) multifamily properties, which are 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, or (ii) commercial properties, which include 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. The multifamily properties
may include mixed commercial and residential structures and may include
apartment buildings owned by private cooperative housing corporations. If so
specified in the 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, the term of any such
leasehold will exceed the term of the mortgage note by at least ten years. Each
mortgage loan will have been originated by a person other than the depositor.
If so specified in the 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 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, mortgage assets may include mortgage loans that are delinquent as of
the date of issuance of a series of certificates. In that case, the 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.
Leases. To the extent specified in the prospectus supplement, the commercial
properties may be leased to lessees that occupy all or a portion of such
properties. Pursuant to a lease assignment, the borrower may assign its right,
title and interest as lessor under each lease and the income derived therefrom
to the 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 lessee 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 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 prospectus supplement, the
borrower and the mortgagee may agree that payments under leases are to be made
directly to a servicer.
To the extent described in the 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 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
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repay the related note(s). A bond-type lease requires the lessee to perform and
pay for all obligations related to the leased premises and provides that, 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 and pay for most of the obligations related to the leased
premises, excluding only a few landlord duties which remain the responsibility
of the borrower/lessor. Leases (other than bond-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 prospectus supplement, under certain circumstances the
lessees may be permitted to set off their rental obligations against the
obligations of the borrowers 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 mortgage
loans, the borrowers must rely on other income or sources generated by the
mortgaged property to make payments on the mortgage loan. To the extent
specified in the prospectus supplement, some commercial properties may be leased
entirely to one lessee. This is generally 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
commercial loan. To the extent specified in the prospectus supplement, some
leases (not including bond-type leases) may expire prior to the stated maturity
of the mortgage loan. In such cases, upon expiration of the leases the borrowers
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 the mortgage
loans unless the lease is renewed. As specified in the prospectus supplement,
some 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. Some leases may provide that it is
the lessor's responsibility to restore the mortgaged property to its original
condition after a casualty. Some leases may provide that it is the lessee's
responsibility to restore the mortgaged property to its original condition after
a casualty. Some leases may provide a right of termination to the 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 which are secured by 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 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 the borrower 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 prospectus supplement, the Debt
Service Coverage Ratio of a mortgage loan at any given time is the ratio of (i)
the Net Operating Income of the 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 mortgage. As more fully set forth in the prospectus supplement, Net
Operating Income means, for any given period, the total operating revenues
derived from a mortgaged property, minus the total operating expenses incurred
in respect of the mortgaged property other than (i) non-cash items such as
depreciation and amortization, (ii) capital expenditures and (iii) debt service
on loans (including the mortgage loan) secured by liens on the mortgaged
property. The Net Operating Income of a mortgaged property will fluctuate over
time and may not be sufficient to cover debt service on the mortgage loan at any
given time. An insufficiency of Net Operating Income can be compounded or solely
caused by an adjustable rate mortgage loan. As the primary source of the
operating revenues of a non-owner occupied income-producing property, the
condition of the applicable real estate market and/or area economy may effect
rental income (and maintenance payments from tenant-stockholders of a private
cooperative housing corporation). In addition, properties typically leased,
occupied or used on a short-term basis, such as certain health care-related
facilities, hotels and motels, and mini warehouse and self-storage facilities,
tend to be affected more rapidly by changes in market or business conditions
than do properties typically leased, occupied or used for longer
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periods, such as warehouses, retail stores, office buildings and industrial
plants. Commercial loans may be secured by owner-occupied mortgaged properties
or mortgaged properties leased to a single tenant. Accordingly, a decline in the
financial condition of the mortgagor or single tenant, as applicable, may have a
disproportionately greater effect on the Net Operating Income from such
mortgaged properties than the case of mortgaged properties with multiple
tenants.
The Debt Service Coverage Ratio should not be relied upon as the sole measure
of the risk of default of any loan, however, since other factors may outweigh a
high Debt Service Coverage Ratio. With respect to a balloon mortgage loan, for
example, the risk of default as a result of the unavailability of a source of
funds to finance the related balloon payment at maturity on terms comparable to
or better than those of the balloon mortgage loans could be significant even
though the related Debt Service Coverage Ratio is high.
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 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. 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 fair market value of the mortgaged property
determined in an appraisal determined at loan origination, and will likely
continue to fluctuate from time to time based upon changes in economic
conditions and the real estate market. Moreover, even when current, an appraisal
is not necessarily a reliable estimate of value. Appraised values of
income-producing properties are generally based on the market comparison method
(recent resale value of comparable properties at the date of the appraisal), the
cost replacement method (the cost of replacing the property at such date), the
income capitalization method (a projection of value based upon the property's
projected net cash flow), or upon a selection from or interpolation of the
values derived from such methods. Each of these appraisal methods can present
analytical difficulties. It is often difficult to find truly comparable
properties that have recently been sold; the replacement cost of a property may
have little to do with its current market value; and income capitalization is
inherently based on inexact projections of income and expense and the selection
of an appropriate capitalization rate. Where more than one of these appraisal
methods are used and provide significantly different results, an accurate
determination of value and, correspondingly, a reliable analysis of default and
loss risks, is even more difficult.
While the depositor believes that the foregoing considerations are important
factors that generally distinguish loans secured by liens on income-producing
real estate from single-family mortgage loans, there is no assurance that all of
such factors will in fact have been prudently considered by the originators of
the mortgage loans, or that, for a particular mortgage loan, they are complete
or relevant. See "Risk Factors--Net Operating Income Produced
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by a Mortgaged Property May Be Inadequate to Repay the Mortgage Loans" and
"--Balloon Payments on Mortgage Loans Result in Heightened Risk of Borrower
Default."
Payment Provisions of the Mortgage Loans. Unless otherwise specified in the
prospectus supplement, all of the mortgage loans will have 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 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 interest rate, or from a fixed to an
adjustable interest rate, (ii) may provide for the formula, index or other
method by which the interest 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 interest 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 for a specified
lockout period or require payment of a prepayment premium or a yield maintenance
penalty in connection with a prepayment, in each case as described in the
prospectus supplement. A mortgage loan may also contain an equity participation
provision that entitles the lender to a share of profits realized from the
operation or disposition of the mortgaged property, as described in the
prospectus supplement. If holders of any series or class of offered certificates
will be entitled to all or a portion of a prepayment premium or an equity
participation, the prospectus supplement will describe the prepayment premium
and/or equity participation and the method or methods by which any such amounts
will be allocated to holders.
Mortgage Loan Information in Prospectus Supplements. Each prospectus
supplement will contain certain information pertaining to the mortgage loans in
the related trust fund which will generally 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 interest rates or
range of mortgage interest rates and the weighted average mortgage interest 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 adjustable rate mortgage 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 interest rate
adjustments at the time of any adjustment and over the life of the adjustable
rate mortgage loans, (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 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 specific information regarding the mortgage loans is not known to
the depositor at the time the certificates are initially offered, the depositor
will provide more general information of the nature described above in the
prospectus supplement, and the depositor will set forth specific information of
the nature described above in a report which will be available to purchasers of
the related certificates at or before the initial issuance thereof and will be
filed as part of a Current Report on Form 8-K with the Securities and Exchange
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 Freddie Mac, Fannie Mae, Ginnie Mae or
Farmer Mac, 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 in this prospectus.
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The CMBS may have been issued in one or more classes with characteristics
similar to the classes of certificates described in this prospectus.
Distributions in respect of the CMBS will be made by the CMBS servicer or the
CMBS trustee on the dates specified in the prospectus supplement. The CMBS
issuer or the CMBS servicer or another person specified in the 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 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 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, (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) under the
Securities Act of 1933, as amended, 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 certificate accounts established and
maintained on behalf of the certificateholders into which the person or persons
designated in the prospectus supplement will, to the extent described in this
prospectus and in the 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 prospectus supplement.
CREDIT SUPPORT
If so provided in the prospectus supplement, partial or full protection
against certain defaults and losses on the mortgage assets in the trust fund may
be provided to one or more classes of certificates in the form of subordination
of one or more other classes of certificates or by one or more other types of
credit support, such as over collateralization, a letter of credit, insurance
policy, guarantee or reserve fund, or by a combination thereof. 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 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
a series of certificates. If so specified in the prospectus supplement, any
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--
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Credit support may not cover losses or risks which could adversely affect
payment on your certificates" and "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the 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 guaranteed investment contract or other agreement,
and the identity of the obligor under any guaranteed investment contract or
other agreement, will be described in the prospectus supplement.
PRE-FUNDING
If so provided in the prospectus supplement, a trust fund may include amounts
on deposit in a separate pre-funding account that may be used by the trust fund
to acquire additional mortgage assets. Amounts in a pre-funding account will not
exceed 25% of the pool balance of the trust fund as of the Cut-Off Date.
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 for
the related series of certificates. 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 prospectus
supplement.
In addition, a trust fund may include a separate 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 prospectus supplement. Amounts on deposit in the
capitalized interest account and pre-funding account generally 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 prospectus supplement. See "Risk
Factors--Unused Amounts in Pre-Funding Accounts May Be Returned to You as a
Prepayment."
YIELD 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 and
Repurchases of the Mortgage Assets Will Affect the Timing of Your Cash Flow and
May Affect Your Yield." The following discussion contemplates a trust fund that
consists solely of mortgage loans. While you generally can expect the
characteristics and behavior of mortgage loans underlying CMBS 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 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.
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 will specify the pass-through rate for each class of 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.
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PAYMENT DELAYS
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.
SHORTFALLS IN COLLECTIONS OF INTEREST RESULTING FROM PREPAYMENTS
When a borrower makes a principal prepayment on a mortgage loan in full or in
part, the borrower is generally charged interest only for the period from the
date on which the preceding scheduled payment was due 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 than the corresponding amount of interest accrued and otherwise
payable on the certificates of the related series. If and to the extent that any
prepayment interest shortfall is allocated to a class of offered certificates,
the yield on the offered certificates will be adversely affected. The prospectus
supplement will describe the manner in which any prepayment interest shortfalls
will be allocated among the classes of certificates. If so specified in the
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 prepayment interest shortfalls. The prospectus supplement will also
describe any other amounts available to offset prepayment interest shortfalls.
See "Description of the Pooling Agreements--Servicing Compensation and Payment
of Expenses."
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 of
those principal payments to reduce the principal balance (or notional amount, if
applicable) of the certificate. The rate of principal payments on the mortgage
loans will in turn be affected by the amortization schedules of the mortgage
loans (which, in the case of adjustable rate mortgage loans, will change
periodically to accommodate adjustments to their mortgage interest 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 a
certificate's yield to maturity.
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 of the
Stripped Interest Certificate). 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 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 an investor's yield of principal payments (to the extent
distributable in reduction of the principal balance or notional amount of the
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.
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A class of certificates, including a class of offered certificates, may
provide that on any distribution date the holders of 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 that 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 the prepayments. As and to the extent described in the
prospectus supplement, the 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 a series of certificates) or subject to certain contingencies
(e.g., prepayment and default rates with respect to the 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 the mortgage assets or 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 the
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 adjustable rate mortgage loans that have experienced a corresponding
interest rate decline may have an increased incentive to refinance for purposes
of either (i) converting to a fixed rate loan and thereby "locking in" such rate
or (ii) taking advantage of the initial "teaser rate" (a mortgage interest rate
below what it would otherwise be if the applicable index and gross margin were
applied) on another adjustable rate mortgage loan.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
mortgaged properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by federal and state tax laws (which are subject to change) to sell mortgaged
properties prior to the exhaustion of tax depreciation benefits. The depositor
will make no representation as to the particular factors that will affect the
prepayment of the mortgage loans in any trust fund, as to the relative
importance of such factors, as to the percentage of the principal balance of the
mortgage loans that will be paid as of any date or as to the overall rate of
prepayment on the mortgage loans.
WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the mortgage loans in a
trust fund will affect the ultimate maturity and the weighted average life of
one or more classes of a series of certificates. 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 a series
will be influenced by the rate at which principal on the 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
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mortgage loans out of the trust fund), is paid to that class of
certificateholders. Prepayment rates on loans are commonly measured relative to
a prepayment standard or model, such as the CPR prepayment model or the 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 those 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 loans in
the first month of the life of the loans and an additional 0.2% per annum in
each following month until the 30th month. Beginning in the 30th month, and in
each following month 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 for each series of certificates will contain
tables, if applicable, setting forth the projected weighted average life of each
class of offered certificates and the percentage of the initial certificate
balance of each class that would be outstanding on specified distribution dates
based on the assumptions stated in the prospectus supplement, including
assumptions that borrowers make prepayments on the mortgage loans at rates
corresponding to various percentages of CPR or SPA, or at such other rates
specified in the prospectus supplement. The tables and assumptions will
illustrate the sensitivity of the weighted average lives of the certificates to
various assumed prepayment rates and will not be intended to predict, or to
provide information that will enable investors to predict, the actual weighted
average lives of the certificates.
CONTROLLED AMORTIZATION CLASSES AND COMPANION CLASSES
A series of certificates may include one or more controlled amortization
classes that are designed to provide increased protection against prepayment
risk by transferring that risk to one or more companion classes. Unless
otherwise specified in the prospectus supplement, each controlled amortization
class will either be a planned amortization class or a targeted amortization
class. In general, distributions of principal on a planned amortization class of
certificates are made in accordance with a specified amortization schedule so
long as prepayments on the underlying mortgage loans occur within a specified
range of constant prepayment rates and, as described below, so long as one or
more companion classes remain to absorb excess cash flows and make up for
shortfalls. For example, if the rate of prepayments is significantly higher than
expected, the excess prepayments will be applied to retire the companion classes
prior to reducing the principal balance of a planned amortization class. If the
rate of prepayments is significantly lower than expected, a disproportionately
large portion of prepayments may be applied to a planned amoritzation class.
Once the companion classes for a planned amortization class are retired, the
planned amortization class of certificates will have no further prepayment
protection. A targeted amortization class of certificates is similar to a
planned amortization class of certificates, but a targeted amortization class
structure generally does not draw on companion classes to make up cash flow
shortfalls, and will generally not provide protection to the targeted
amortization class 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 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 planned amortization class of certificates) 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 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
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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 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 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 in this prospectus
and in the 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 the certificates and, if the certificates
were purchased at a discount, reduce the yield thereon.
Negative Amortization. Mortgage loans that permit negative amortization can
affect the weighted average life of a class of certificates. In general,
mortgage loans that permit negative amortization by their terms limit the amount
by which scheduled payments may adjust in response to changes in mortgage
interest rates and/or provide that scheduled payment amounts will adjust less
frequently than the mortgage interest 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 interest rate. In that case, the mortgage loan balance would
amortize more slowly than necessary to repay it over its schedule and, if the
amount of scheduled payment were less than the amount necessary to pay current
interest at the applicable mortgage interest 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 a mortgage loan that permits negative amortization may exceed the amount
necessary to amortize the loan fully over its remaining amortization schedule
and pay interest at the then applicable mortgage interest 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 its 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
the mortgage loans) may increase as a result of such feature. A faster rate of
mortgage loan amortization will shorten the weighted average life of the
mortgage loans and, correspondingly, the weighted average lives of those classes
of certificates then entitled to a portion of the principal payments on those
mortgage loans. The prospectus supplement will describe, if applicable, the
manner in which negative amortization in respect of the mortgage loans in any
trust fund is allocated among the respective classes of certificates of the
related series.
Foreclosures and Payment Plans. The number of foreclosures and the principal
amount of the mortgage loans that are foreclosed in relation to the number and
principal amount of mortgage loans that are repaid in accordance with their
terms will affect the weighted average lives of those mortgage loans and,
accordingly, the weighted average lives of and yields on the certificates of the
related series. Servicing decisions made with respect to the mortgage loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of mortgage loans in bankruptcy proceedings, may also have an
effect upon the payment patterns of particular mortgage loans and thus the
weighted average lives of and yields on the certificates of the related series.
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 of the
loss or shortfall.
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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
classes of certificates of the related series in the priority and manner, and
subject to the limitations, specified in the prospectus supplement. As described
in the prospectus supplement, such allocations may result in reductions in the
entitlements to interest and/or certificate balances of one or more classes of
certificates, or may be effected simply by a prioritization of payments among
the 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
certificateholders 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 a series, may provide for distributions of
principal 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 prospectus supplement. As
specifically set forth in the prospectus supplement, "excess funds" generally
will 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 that series of certificates,
as well as any interest accrued but not currently distributable on any Accrual
Certificates of that series or (ii) prepayment premiums, payments from equity
participations entitling the lender to a share of profits realized from the
operation or disposition of the mortgaged property, or any other amounts
received on the mortgage assets in the 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 certificates
and, if those certificates were purchased at a premium, reduce the yield on
those certificates. The prospectus supplement will discuss the relevant factors
that you should consider 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 your 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. First Union Corporation is a financial holding company under the
Gramm-Leach-Bliley Act. 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 201 South College Street, Charlotte, N.C. 28288-0166. 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 certificates will be applied
by the depositor to the purchase of trust assets or will be used by the
depositor for general corporate purposes. The depositor expects to sell the
certificates from time to time, but the timing and amount of offerings of
certificates will depend on a number of factors, including the volume of
mortgage assets acquired by the depositor, prevailing interest rates,
availability of funds and general market conditions.
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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 or
subordinate to one or more other classes of certificates in entitlement to
certain distributions on the certificates; (iii) be entitled, as Stripped
Principal Certificates, to distributions of principal with disproportionately
small, nominal or no distributions of interest; (iv) be entitled, as Stripped
Interest Certificates, to distributions of interest with disproportionately
small, nominal or no distributions of principal; (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 prospectus supplement. Any such classes may include classes
of offered certificates. With respect to certificates with two or more
components, references in this prospectus 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 that 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 prospectus supplement. As provided in the
prospectus supplement, one or more classes of offered certificates of any series
may be issued in fully registered, definitive form or may be offered in
book-entry format 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 prospectus
supplement, at the location specified in the 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--Your Ability to Resell Certificates May Be
Limited Because of Their Characteristics," and "--The Assets of the Trust Fund
May Not Be Sufficient to Pay Your Certificates".
DISTRIBUTIONS
Distributions on the certificates of each series will be made by or on behalf
of the trustee or master servicer on each distribution date as specified in the
prospectus supplement from the Available Distribution Amount for such series and
such distribution date.
Except as otherwise specified in the prospectus supplement, distributions on
the certificates of each series (other than the final distribution in retirement
of any certificate) will be made to the persons in whose names those
certificates are registered on the record date, which is the close of business
on the last business day of the month preceding the month in which the
applicable distribution date occurs, and the amount of each distribution will be
determined as of the close of business on the determination date that is
specified in the 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 that class. The trustee will make payments
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 prospectus supplement (and, if so provided
in the prospectus supplement, such certificateholder holds certificates in the
requisite amount or denomination specified in the prospectus supplement), or by
check mailed to the address of the certificateholder as it appears on the
certificate register; provided, however,
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that the trustee will make the final distribution in retirement of any class of
certificates (whether definitive certificates or book-entry certificates) only
upon presentation and surrender of the 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 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 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 Accrual Certificates that will be entitled to distributions of
accrued interest commencing only on the distribution date, or under the
circumstances, specified in the prospectus supplement, 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 that class
will be added to the certificate balance of that class on each distribution
date. With respect to each class of certificates (other than some 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 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 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 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
Considerations--Shortfalls in Collections of Interest Resulting from
Prepayments" exceed the amount of any sums (including, if and to the extent
specified in the prospectus supplement, the master servicer's servicing
compensation) that are applied to offset such shortfalls. The particular manner
in which prepayment interest shortfalls will be allocated among some or all of
the classes of certificates of that series will be specified in the prospectus
supplement. The 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 prospectus supplement, any reduction in the
amount of Accrued Certificate Interest otherwise distributable on a class of
certificates by reason of the allocation to such class of a portion of any
deferred interest on or in respect of the mortgage assets in the related trust
fund will result in a corresponding increase in the certificate balance of that
class. See "Risk Factors--Prepayment and Repurchases of the Mortgage Assets Will
Affect the Timing of Your Cash Flow and May Affect Your Yield" and "Yield
Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
Each class of certificates of each series (other than certain classes of
Stripped Interest Certificates or REMIC residual certificates) will have a
certificate balance which, at any time, will equal the then maximum amount that
the holders of certificates of that 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
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certificates will be reduced by distributions of principal made on those
certificates from time to time and, if so provided in the prospectus supplement,
further by any losses incurred in respect of the related mortgage assets
allocated to those certificates 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 to those certificates 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 on those Accrual Certificates are required to
commence, by the amount of any Accrued Certificate Interest in respect thereof
(reduced as described above). Unless otherwise provided in the 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 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 to distributions until the certificate balances of those
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 controlled amortization
certificates may be made, subject to available funds, based on a specified
principal payment schedule and, with respect to one or more classes of companion
classes of certificates, may be contingent on the specified principal payment
schedule for a controlled amortization class of certificates 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 prospectus supplement, distributions of principal of any class
of certificates will be made on a pro rata basis among all of the certificates
belonging to that class.
COMPONENTS
To the extent specified in the prospectus supplement, distribution on a class
of certificates may be based on a combination of two or more different
components as described under "--General" above. To that extent, the
descriptions set forth under "--Distributions of Interest on the Certificates"
and "--Distributions of Principal of the Certificates" above also relate to
components of such a class of certificates. In such case, reference in those
sections to certificate balance and pass-through rate refer to the principal
balance, if any, of any of the components and the pass-through rate, if any, on
any component, respectively.
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS OR IN
RESPECT OF EQUITY PARTICIPATIONS
If so provided in the prospectus supplement, prepayment premiums or payments
in respect of equity participations entitling the lender to a share of profits
realized from the operation or disposition of the mortgaged property 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
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 a class of subordinate certificates in the priority and manner
and subject to the limitations specified in the prospectus supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in shortfalls on mortgage assets comprising the trust fund.
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ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of certificates evidencing an interest in a trust
fund, unless otherwise provided in the prospectus supplement, a servicer or
another entity described therein will be required as part of its servicing
responsibilities to advance on or before each distribution date its own funds or
funds held in the related certificate account that are not included in the
Available Distribution Amount for such distribution date, in an amount equal to
the aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees) that were due on the mortgage loans in
the trust fund and were delinquent on the related determination date, subject to
the servicer's (or another entity's) good faith determination that such advances
will be reimbursable from the loan proceeds. In the case of a series of
certificates that includes one or more classes of subordinate certificates and
if so provided in the prospectus supplement, each servicer's (or another
entity's) advance obligation may be limited only to the portion of such
delinquencies necessary to make the required distributions on one or more
classes of senior certificates and/or may be subject to the servicer's (or
another entity's) good faith determination that such advances will be
reimbursable not only from the loan proceeds but also from collections on other
trust assets otherwise distributable on one or more classes of subordinate
certificates. See "Description of Credit Support".
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. Unless otherwise
provided in the prospectus supplement, advances of a servicer's (or another
entity's) funds will be reimbursable only out of recoveries on the mortgage
loans (including amounts received under any form of credit support) respecting
which advances were made and, if so provided in the prospectus supplement, out
of any amounts otherwise distributable on one or more classes of subordinate
certificates of such series; provided, however, that any advance will be
reimbursable from any amounts in the related certificate account prior to any
distributions being made on the certificates to the extent that a servicer (or
such other entity) shall determine in good faith that such advance is not
ultimately recoverable from related proceeds on the mortgage loans or, if
applicable, from collections on other trust assets otherwise distributable on
the subordinate certificates.
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 that date. If so specified in the
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, we will provide in the prospectus supplement
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond.
If and to the extent so provided in the prospectus supplement, any entity
making advances will be entitled to receive interest on those advances for the
period that such advances are outstanding at the rate specified therein and will
be entitled to pay itself that interest periodically from general collections on
the mortgage assets prior to any payment to certificateholders as described in
the 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 a master servicer or trustee will forward to the
holder of certificates of each class of a series a distribution date statement
accompanying the distribution of principal and/or interest to those holders. As
further provided in the prospectus supplement, the distribution date statement
for each class will set forth to the extent applicable and available:
(i) the amount of such distribution to holders of certificates of such
class applied to reduce the certificate balance thereof;
(ii) the amount of such distribution to holders of certificates of such
class allocable to Accrued Certificate Interest;
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(iii) the amount, if any, of such distribution to holders of
certificates of such class allocable to (A) prepayment premiums and (B)
payments on account of a lender's equity participation in the related
mortgaged property;
(iv) the amount of servicing compensation received by each servicer and
such other customary information as the master servicer or the trustee
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, (B) the unpaid
balance, (C) whether the delinquency is in respect of any balloon payment,
(D) the aggregate amount of unreimbursed servicing expenses and
unreimbursed advances in respect of the mortgage loan, (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 (as to the current distribution date, generally the
period extending from the prior distribution date to and including the
current distribution date) in connection with a default on that mortgage
loan or because the mortgage loan was purchased out of the trust fund, (A)
the loan number, (B) the manner in which the mortgage loan was liquidated,
(C) the aggregate amount of liquidation proceeds received, (D) the portion
of liquidation proceeds payable or reimbursable to the related master
servicer or a special servicer in respect of the mortgage loan and (E) the
amount of any loss to certificateholders;
(x) with respect to each REO Property 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 of the related
mortgage loan, 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
collection 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 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 the 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;
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(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 the reserve
fund as of the close of business on such distribution date;
(xv) the amount of any Accrued Certificate Interest due but not paid on
such class of offered certificates at the close of business on such
distribution date;
(xvi) if such class of offered certificates has a variable pass-through
rate or an adjustable pass-through rate, the pass-through rate applicable
thereto for such distribution date and, if determinable, for the next
succeeding distribution date; and
(xvii) if the related trust fund includes one or more types 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 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
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 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 under the related pooling agreement on the part of the
master servicer. See "Description of the Pooling Agreements--Events of Default,"
"--Rights upon Event of Default" and "--Resignation and Removal of the Trustee."
TERMINATION
The obligations created by the pooling agreement for each series of
certificates will terminate upon the payment (or provision for payment) to
certificateholders of that series of all amounts held in the related certificate
account, or otherwise by the related master servicer or trustee or by a special
servicer, and required to be paid to such certificateholders pursuant to such
pooling agreement following the earlier of (i) the final payment or other
liquidation of the last mortgage asset subject to the pooling agreement or the
disposition of all property acquired upon foreclosure of any mortgage loan
subject to the pooling agreement and (ii) the purchase of all of the assets of
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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 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 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 in the prospectus
supplement, under the circumstances and in the manner set forth in the
prospectus supplement. If so provided in the 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 in the
prospectus supplement 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 in the prospectus supplement. In any event, unless
otherwise disclosed in the 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 prospectus supplement, one or more classes of the
offered certificates of any series will be offered in book-entry format through
the facilities of DTC, 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 Securities Exchange
Act of 1934. DTC holds securities that its participating organizations 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 that 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 indirect participants in the DTC system such as securities
brokers and dealers, banks and trust companies that clear through or maintain a
custodial relationship with a direct participant in the DTC system, either
directly or indirectly. The rules applicable to DTC and its participants are on
file with the Securities and Exchange Commission.
Purchases of book-entry certificates under the DTC system must be made by or
through direct participants in the DTC system, which will receive a credit for
the book-entry certificates on DTC's records. A certificate owner's ownership
interest as an actual purchaser of a book-entry certificate will in turn be
recorded on the records of direct participants 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 participant 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
in the DTC system 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
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other communications conveyed by DTC to direct participants in the DTC system,
by direct participants to indirect participants, and by direct participants and
indirect participants to certificate owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Distributions on the book-entry certificates will be made to DTC. DTC's
practice is to credit direct participants' accounts on the related distribution
date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on such date.
Disbursement of such distributions by participants to certificate owners will be
governed by standing instructions and customary practices, as is the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of each such participant (and not
of DTC, the depositor or any trustee or master servicer), subject to any
statutory or regulatory requirements as may be in effect from time to time.
Under a book-entry system, certificate owners may receive payments after the
related distribution date.
As may be provided in the 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 direct participants in the DTC system,
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 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 registration, 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 prospectus supplement.
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 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
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the related trust fund includes CMBS, will summarize all of the material
provisions of the related pooling agreement. The summaries in this prospectus 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
prospectus supplement. As used in this prospectus 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 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., 201 South College Street,
Charlotte, N.C. 28288-0166, Attention: Securitization Services.
ASSIGNMENT OF MORTGAGE ASSETS; REPURCHASES
As set forth in the 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 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 interest 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 prospectus supplement, if any 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 seller of the
mortgage asset. 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 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
prospectus supplement.
If so provided in the 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
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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 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 made by the
warranting party, covering, by way of example: (i) the accuracy of the
information set forth for such mortgage loan on the schedule of mortgage loans
appearing as an exhibit to the related pooling agreement; (ii) the
enforceability of the related mortgage note and mortgage and the existence of
title insurance insuring the lien priority of the related mortgage; (iii) the
warranting party's title to the mortgage loan and the authority of the
warranting party to sell the mortgage loan; and (iv) the payment status of the
mortgage loan. Each warranting party will be identified in the 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 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 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 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 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 permitted investments, such as
United States government securities and other investment grade obligations
specified in the related pooling agreement. 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 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 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
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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 insurance proceeds received under any hazard, title or other
insurance policy that provides coverage with respect to a mortgaged
property or the related mortgage loan (other than proceeds applied to
the restoration of the property or released to the related borrower in
accordance with the customary servicing practices of the master
servicer (or, if applicable, a special servicer) and/or the terms and
conditions of the related mortgage and all other liquidation proceeds
received and retained in connection with the liquidation of defaulted
mortgage loans or property acquired in respect thereof, by foreclosure
or otherwise, 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 liquidation proceeds resulting from 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 liquidation proceeds resulting from
the purchase of any defaulted mortgage loan as described under
"--Realization Upon Defaulted Mortgage Loans," and all liquidation
proceeds resulting from any mortgage asset purchased as described under
"Description of the Certificates--Termination;"
(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 lenders' 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
prospectus supplement.
Withdrawals. Unless otherwise provided in the related pooling agreement and
described in the prospectus supplement, the master servicer, trustee or special
servicer may make withdrawals from the certificate account for each trust fund
for any of the following purposes:
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(i) to make distributions to the certificateholders on each distribution
date;
(ii) to reimburse the master servicer or any other specified person for
unreimbursed amounts advanced by it as described under "Description of
the Certificates--Advances in Respect of Delinquencies," such
reimbursement to be made out of amounts received which were identified
and applied by the master servicer as late collections of interest (net
of related servicing fees) on and principal of the particular mortgage
loans with respect to which the advances were made or out of amounts
drawn under any form of credit support with respect to such mortgage
loans;
(iii) to reimburse the master servicer or a special servicer for unpaid
servicing fees earned by it and certain unreimbursed servicing expenses
incurred by it with respect to mortgage loans in the trust fund and
properties acquired in respect thereof, such reimbursement to be made
out of amounts that represent liquidation proceeds and insurance
proceeds collected on the particular mortgage loans and properties, and
net income collected on the particular properties, with respect to
which such fees were earned or such expenses were incurred or out of
amounts drawn under any form of credit support with respect to such
mortgage loans and properties;
(iv) to reimburse the master servicer or any other specified person for any
advances described in clause (ii) above made by it, 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 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 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 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 and, to the extent described in the prospectus
supplement, prepayment interest excesses collected from borrowers in
connection with prepayments of mortgage loans and late charges and
default interest collected from borrowers;
(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
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and to the extent described under "Material Federal Income Tax
Consequences--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 pay for the cost of recording the pooling and servicing agreement if
recorded in accordance with the pooling and servicing agreement;
(xvi) to make any other withdrawals permitted by the related pooling
agreement and described in the prospectus supplement; and
(xvii) to clear and terminate the certificate account upon the termination of
the trust fund.
COLLECTION AND OTHER SERVICING PROCEDURES
Master Servicer. The master servicer for any mortgage pool, directly or
through sub-servicers, will be required to make reasonable efforts to collect
all scheduled mortgage loan payments and will be required to follow such
collection procedures as it would follow with respect to mortgage loans that are
comparable to such mortgage loans and held for its own account, provided such
procedures are consistent with (i) the terms of the related pooling agreement
and any related instrument of credit support included in the related trust fund,
(ii) applicable law and (iii) the servicing standard specified in the pooling
agreement.
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."
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
specified in the pooling agreement; 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
sub-servicers, but the master servicer will remain liable for such obligations
under the related pooling agreement unless otherwise provided in the prospectus
supplement. Unless otherwise provided in the prospectus supplement, each
sub-servicing agreement between a master servicer and a sub-servicer 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."
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Special Servicers. If and to the extent specified in the prospectus
supplement, a 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 special
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 master servicer will be liable for the performance of a special
servicer only if, and to the extent, set forth in the prospectus supplement.
Each pooling agreement may provide that neither the special servicer nor any
director, officer, employee or agent of the special servicer 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 neither the special servicer nor 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 misfeasance, bad faith or negligence in the performance of obligations
or duties thereunder.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
A borrower's failure to make required mortgage loan payments may mean that
operating income is insufficient to service the mortgage debt, or may reflect
the diversion of that income from the servicing of the mortgage debt. In
addition, a borrower that is unable to make mortgage loan payments may also be
unable to make timely payment of taxes and to otherwise maintain and insure the
related mortgaged property. In general, the related master servicer will be
required to monitor any mortgage loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related mortgaged property, initiate
corrective action in cooperation with the borrower if cure is likely, inspect
the related mortgaged property and take such other actions as are consistent
with the servicing standard specified in the pooling agreement. 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 prospectus supplement), any mortgage loan as to which a
specified number of scheduled payments are delinquent. In addition, unless
otherwise specified in the 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 specified in the pooling agreement, 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 specified in the pooling
agreement. Unless otherwise specified in the prospectus supplement, the master
servicer may not, however, acquire title to any mortgaged property or take any
other action that would cause the trustee, for the benefit of certificateholders
of the related series, or any other specified person to be considered to hold
title to, to be a "mortgagee-in-possession" of, or to be an "owner" or an
"operator" of, such mortgaged property within the meaning of certain federal
environmental laws, unless the master servicer has previously determined, based
on a report prepared by a person who regularly conducts environmental audits
(which report will be an expense of the trust fund), that:
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(i) either the mortgaged property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions as
are necessary to bring the mortgaged property into compliance therewith is
reasonably likely to produce a greater recovery on a present value basis than
not taking such actions; and
(ii) either there are no circumstances or conditions present at the
mortgaged property 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 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 specified in the pooling agreement.
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 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 specified in the pooling
agreement. 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
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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, riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the mortgaged properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds of
risks.
The hazard insurance policies covering the mortgaged properties will
typically contain co-insurance clauses that in effect require an insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the improvements on the property in order to recover
the full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clauses generally provide that the insurer's
liability in the event of partial loss does not exceed the lesser of (i) the
replacement cost of the improvements less physical depreciation and (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the mortgage loans may contain a due-on-sale clause that entitles
the lender to accelerate payment of the mortgage loan upon any sale or other
transfer of the related mortgaged property made without the lender's consent.
Certain of the mortgage loans may also contain a due-on-encumbrance clause that
entitles the lender to accelerate the maturity of the mortgage loan upon the
creation of any other lien or encumbrance upon the mortgaged property. 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
specified in the pooling agreement. Unless otherwise specified in the 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 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
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.
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If and to the extent provided in the 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 Considerations--Shortfalls in Collections of Interest Resulting
from Prepayments."
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 Freddie Mac, 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 Freddie Mac 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.
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 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. Unless applicable law requires
the master servicer's resignation to be effective immediately, 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. The related pooling and servicing agreement may also provide that the
master servicer may resign at any other time provided that (i) a willing
successor master servicer has been found, (ii) each of the rating agencies that
has rated any one or more classes of certificates of the related series confirms
in writing that the successor's appointment will not result in a withdrawal,
qualification or downgrade of any rating or ratings assigned to any such class
of certificates, (iii) the resigning party pays all costs and expenses in
connection with such transfer, and (iv) the successor accepts appointment prior
to the effectiveness of such resignation. Unless otherwise specified in the
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 misfeasance, bad faith or negligence in
the performance of obligations or duties thereunder. Unless otherwise specified
in the 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
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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,
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
negligence in the performance of obligations or duties under the pooling
agreement. 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 unless such action is related to its
respective duties under the pooling agreement and, unless it is specifically
required under the pooling and servicing agreement to bear the costs of such
legal action, in its opinion does not 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 master servicer 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, provided that one such failure is
permitted in every consecutive twelve-month period so long as the failure is
corrected by 10:00 a.m. on the related distribution date, (ii) any failure by
the master servicer or the special 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 30 days after written notice of such
failure has been given to the master servicer or the special servicer, as
applicable, by any party to the pooling agreement, or to the master servicer or
the special servicer, as applicable, by certificateholders entitled to not less
than 25% (or such other percentage specified in the prospectus supplement) of
the voting rights for such series; and (iii) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings in respect of or relating to the master servicer or the special
servicer and certain actions by or on behalf of the master servicer or the
special 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 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 25% (or such other percentage
specified in the 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
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 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 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.
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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 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 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, modify or supplement any provision in the pooling
agreement 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 prospectus supplement) of
the voting rights for the related series allocated to the affected classes;
provided, however, that no such amendment may (x) reduce in any manner the
amount of, or delay the timing of, payments received or advanced on mortgage
loans that are required to be distributed in respect of any certificate without
the consent of the holder of such certificate, (y) adversely affect in any
material respect the interests of the holders of any class of certificates, in a
manner other than as described in clause (x), without the consent of the holders
of all certificates of such class or (z) modify the provisions of the pooling
agreement described in this paragraph without the consent of the holders of all
certificates of the related series. However, unless otherwise specified in the
related 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 under a related pooling agreement has
occurred and is continuing, the trustee will be required to perform only those
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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 in the pooling
agreement. As and to the extent described in the 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 prospectus supplement) will 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 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 prospectus supplement, holders of the certificates of any series entitled
to at least 51% (or such other percentage specified in the 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 over-collateralization, 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 prospectus
supplement, or any combination of the foregoing. If so provided in the
prospectus supplement, any form of credit support may provide credit enhancement
for more than one series of certificates to the extent described in the
prospectus supplement.
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
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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
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 in this prospectus, (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 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 May Not Cover Losses or Risks Which Could Adversely
Affect Payment on Your Certificates."
SUBORDINATE CERTIFICATES
If so specified in the prospectus supplement, one or more classes of
certificates of a series may be subordinate certificates which are subordinated
in right of payment to one or more other classes of senior certificates. If so
provided in the 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 prospectus supplement will set forth information concerning the
amount of subordination provided by a class or classes of subordinate
certificates in a series, the circumstances under which such subordination will
be available and the manner in which the amount of subordination will be made
available.
CROSS-SUPPORT PROVISIONS
If the mortgage assets in any trust fund are divided into separate groups,
each supporting a separate class or classes of certificates of a series, credit
support may be provided by cross-support provisions requiring that distributions
be made on senior certificates evidencing interests in one group of mortgage
assets prior to distributions on subordinate certificates evidencing interests
in a different group of mortgage assets within the trust fund. The prospectus
supplement for a series that includes a cross-support provision will describe
the manner and conditions for applying such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
If so provided in the prospectus supplement for a series of certificates,
mortgage loans included in the related trust fund will be covered for certain
default risks by insurance policies or guarantees. To the extent material, a
copy of each such instrument will accompany the Current Report on Form 8-K to be
filed with the Securities and Exchange 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. Under a
letter of credit, the bank or financial institution providing the letter of
credit 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 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 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 prospectus supplement. The obligations of the bank or financial institution
providing the letter of credit for each series of certificates will expire at
the earlier of the date specified in the prospectus supplement or the
termination of the trust fund. A copy of any such letter of credit will
accompany
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the Current Report on Form 8-K to be filed with the Securities and Exchange
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 prospectus supplement. A copy of any such
instrument will accompany the Current Report on Form 8-K to be filed with the
Securities and Exchange 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 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 prospectus supplement. If so
specified in the prospectus supplement, reserve funds may be established to
provide protection only against certain types of losses and shortfalls.
Following each distribution date, amounts in a reserve fund in excess of any
amount required to be maintained in the reserve fund may be released from the
reserve fund under the conditions and to the extent specified in the prospectus
supplement.
If so specified in the prospectus supplement, amounts deposited in any
reserve fund will be invested in permitted investments, such as United States
government securities and other investment grade obligations specified in the
related pooling agreement. Unless otherwise specified in the 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
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 in
this prospectus. The 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 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
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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 collectively
referred to as "mortgages" in this prospectus and, unless otherwise specified,
in any prospectus supplement. 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 beneficiary'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 trustee's authority is further limited by
the directions of the beneficiary.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In a mortgage,
the mortgagor grants a lien on the subject property in favor of the mortgagee. A
deed of trust is a three-party instrument, among a trustor (the equivalent of a
borrower), a trustee to whom the real property is conveyed, and a beneficiary
(the lender) for whose benefit the conveyance is made. Under a deed of trust,
the trustor grants the property to the trustee, in trust, irrevocably until the
debt is paid, and generally with a power of sale. A deed to secure debt
typically has two parties. The borrower, or grantor, conveys title to the real
property to the grantee, or lender, generally with a power of sale, until such
time as the debt is repaid. In a case where the borrower is a land trust, there
would be an additional party to a mortgage instrument because legal title to the
property is held by a land trustee under a land trust agreement for the benefit
of the borrower. At origination of a mortgage loan involving a land trust, the
borrower generally executes a separate undertaking to make payments on the
mortgage note. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a deed to
secure debt are governed by the express provisions of the related instrument,
the law of the state in which the real property is located, certain federal laws
and, in some deed of trust transactions, the directions of the beneficiary.
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. Lenders that actually take possession of
the property, however, may incur potentially substantial risks attendant to
being a mortgagee in possession. Such risks include liability for environmental
clean-up costs and other risks inherent in property ownership. See
"--Environmental Considerations."
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In most states, hotel and motel room receipts/revenues are considered
accounts receivable under the Uniform Commercial Code; in cases where hotels or
motels constitute loan security, the receipts/revenues 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
receipts/revenues 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 receipts/revenues is perfected under the Uniform
Commercial Code, it will generally be required to commence a foreclosure action
or otherwise take possession of the property in order to collect the room
receipts/revenues 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 Uniform Commercial Code. Accordingly, if a borrower pledges
personal property as security for a mortgage loan, the lender generally must
file Uniform Commercial Code 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 prospectus supplement, the mortgage loans may consist of
loans secured by "blanket mortgages" on the property owned by cooperative
housing corporations. If specified in the prospectus supplement, the mortgage
loans may consist of cooperative loans secured by security interests in shares
issued by private cooperative housing corporations and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the cooperatives' buildings. The security agreement
will create a lien upon, or grant a title interest in, the property which it
covers, the priority of which will depend on the terms of the particular
security agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
A cooperative generally owns in fee or has a leasehold interest in land and
owns in fee or leases the building or buildings thereon and all separate
dwelling units in the buildings. The cooperative is owned by tenant-stockholders
who, through ownership of stock or shares in the corporation, receive
proprietary leases 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 and termination of all proprietary
leases and occupancy agreements. 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
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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 financing statements
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 satisfies the defaulted senior
loan or, if permitted, asserts its subordinate interest in a property in
foreclosure litigation. As discussed more fully below, in many states a junior
lender may satisfy a defaulted senior loan in full, adding the amounts expended
to the balance due on the junior loan. Absent a provision in the senior mortgage
instrument, no notice of default is required to be given to the junior lender.
The form of the mortgage instrument used by many institutional lenders
confers on the lender the right both to receive all proceeds collected under any
hazard insurance policy and all awards made in connection with any condemnation
proceedings, and (subject to any limits imposed by applicable state law) to
apply such proceeds and awards to any indebtedness secured by the mortgage
instrument in such order as the lender may determine. Thus, if improvements on a
property are damaged or destroyed by fire or other casualty, or if the property
is taken by condemnation, the holder of the senior mortgage instrument will have
the prior right to collect any insurance proceeds payable under a hazard
insurance policy and any award of damages in connection with the condemnation
and to apply the same to the senior indebtedness. Accordingly, only the proceeds
in excess of the amount of senior indebtedness will be available to be applied
to the indebtedness secured by a junior mortgage instrument.
The form of mortgage instrument used by many institutional lenders typically
contains a "future advance" clause, which provides, in general, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee or
beneficiary are to be secured by the mortgage instrument. While such a clause is
valid under the laws of most states, the priority of any advance made under the
clause depends, in some states, on whether the advance was an "obligatory" or an
"optional" advance. If the lender is obligated to advance the additional
amounts, the advance may be entitled to receive the same priority as the amounts
advanced at origination, notwithstanding that intervening junior liens may have
been recorded between the date of recording of the senior mortgage instrument
and the date of the future advance, and notwithstanding that the senior lender
had actual knowledge of such intervening junior liens at the time of the
advance. Where the senior lender is not obligated to advance the additional
amounts and has actual knowledge of the intervening junior 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
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repair the property) upon a failure of the borrower to do so, with all sums so
expended by the lender becoming part of the indebtedness secured by the mortgage
instrument.
The form of mortgage instrument used by many institutional lenders typically
requires the borrower to obtain the consent of the lender in respect of actions
affecting the mortgaged property, including the execution of new leases and the
termination or modification of existing leases, the performance of alterations
to buildings forming a part of the mortgaged property and the execution of
management and leasing agreements for the mortgaged property. Tenants will often
refuse to execute leases unless the lender executes a written agreement with the
tenant not to disturb the tenant's possession of its premises in the event of a
foreclosure. A senior lender may refuse to consent to matters approved by a
junior lender, with the result that the value of the security for the junior
mortgage instrument is diminished.
FORECLOSURE
General. Foreclosure is a legal procedure that allows the lender to seek to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage in respect of the mortgaged property. If the borrower
defaults in payment or performance of its obligations under the note or
mortgage, the lender has the right to institute foreclosure proceedings to sell
the real property at public auction to satisfy the indebtedness.
Foreclosure Procedures Vary From State to State. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale usually granted in the
mortgage instrument. Other foreclosure procedures are available in some states,
but they are either infrequently used or available only in limited
circumstances.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses are raised or counterclaims are interposed, and sometimes
requires years to complete. Moreover, the filing by or against the
borrower-mortgagor of a bankruptcy petition would impose an automatic stay on
such proceedings and could further delay a foreclosure sale.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action is
initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating proper defendants. As stated
above, if the lender's right to foreclose is contested by any defendant, the
legal proceedings may be time-consuming. In addition, judicial foreclosure is a
proceeding in equity and, therefore, equitable defenses may be raised against
the foreclosure. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints a
referee or other officer to conduct a public sale of the mortgaged property, the
proceeds of which are used to satisfy the judgment. Such sales are made in
accordance with procedures that vary from state to state.
Non-Judicial Foreclosure/Power of Sale. Foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale pursuant to a power of
sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument if applicable law so permits.
A 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 which 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
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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. 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
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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 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 all or some of 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
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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
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 Uniform Commercial
Code and the security agreement relating to those shares. Article 9 of the
Uniform Commercial Code 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 Uniform Commercial Code 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 lienholder 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 secured 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
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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 under
federal bankruptcy law, a bankruptcy court may permit a debtor through its
rehabilitative plan to de-accelerate a secured loan and to reinstate the loan
even though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the property
had yet occurred) prior to the filing of the debtor's petition. This may be done
even if the full amount due under the original loan is never repaid.
Federal bankruptcy law provides generally that rights and obligations under
an unexpired lease of the debtor/lessee may not be terminated or modified at any
time after the commencement of a case under the Bankruptcy Code solely on the
basis of a provision in the lease to such effect or because of certain other
similar events. This prohibition could limit the ability of the trustee for a
series of certificates to exercise certain contractual remedies with respect to
the leases. In addition, Section 362 of the Bankruptcy Code operates as an
automatic stay of, among other things, any act to obtain possession of property
from a debtor's estate. This may delay a trustee's exercise of such remedies for
a related series of certificates in the event that a related lessee or a related
mortgagor becomes the subject of a proceeding under the Bankruptcy Code. For
example, a mortgagee would be stayed from enforcing a lease assignment by a
mortgagor related to a mortgaged property if the related mortgagor was in a
bankruptcy proceeding. The legal proceedings necessary to resolve the issues
could be time-consuming and might result in significant delays in the receipt of
the assigned rents. Similarly, the filing of a petition in a bankruptcy by or on
behalf of a lessee of a mortgaged property would result in a stay 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. Rents and other proceeds of a mortgage loan may also escape an
assignment thereof if the assignment is not fully perfected under state law
prior to commencement of the bankruptcy proceeding. See "--Leases and Rents."
In addition, the Bankruptcy Code generally provides that a trustee or
debtor-in-possession may, subject to approval of the court, (a) assume the lease
and retain it or assign it to a third party or (b) reject the lease. If the
lease is assumed, the trustee in bankruptcy on behalf of the lessee, or the
lessee as debtor-in-possession, or the 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, however, as the lessor may be forced to continue under the lease
with a lessee that is poor credit risk or an unfamiliar tenant if the lease was
assigned, and any assurances provided to the lessor may, in fact, be inadequate.
If the lease is rejected, such rejection generally constitutes a breach of the
executory contract or unexpired lease immediately before the date of filing the
petition. As a consequence, the other party or parties to such lease, such as
the mortgagor, as lessor under a lease, would have only an unsecured claim
against the debtor for damages resulting from such breach which could adversely
affect the security for the related mortgage loan. In addition, pursuant to
Section 502(b)(6) of the Bankruptcy Code, a lessor's damages for lease rejection
in respect of future rent installments are limited to the rent reserved by the
lease, without acceleration, for the greater of one year or 15% of the remaining
term of the lease, but not more than three years.
If a trustee in bankruptcy on behalf of a lessor, or a lessor as
debtor-in-possession, rejects an unexpired lease of real property, the lessee
may treat such lease as terminated by such rejection or, in the alternative, the
lessee may remain in possession of the leasehold for the balance of such term,
and for any renewal or extension of such term that is enforceable by the lessee
under applicable nonbankruptcy law. The Bankruptcy Code provides that if a
lessee elects to remain in possession after such a rejection of a lease, the
lessee may offset any damages occurring after such date caused by the
nonperformance of any obligation of the lessor under the lease after such date
against rents reserved under the lease. To the extent provided in the related
prospectus supplement, the lessee will agree under certain leases to pay all
amounts owing thereunder to the master servicer without offset. To the extent
that such a contractual obligation remains enforceable against the lessee, the
lessee would not be able to avail itself of the rights of offset generally
afforded to lessees of real property under the Bankruptcy Code.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor, or made directly by the related
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lessee, under the related mortgage loan to the trust fund. Payments on long-term
debt may be protected from recovery as preferences if they are payments in the
ordinary course of business made on debts incurred in the ordinary course of
business. Whether any particular payment would be protected depends upon the
facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of payment to
the lender. In certain circumstances, a debtor in bankruptcy may have the power
to grant liens senior to the lien of a mortgage, and analogous state statutes
and general principles of equity may also provide a mortgagor with means to halt
a foreclosure proceeding or sale and to force a restructuring of a mortgage loan
on terms a lender would not otherwise accept. Moreover, the laws of certain
states also give priority to certain tax liens over the lien of a mortgage or
deed of trust. Under the Bankruptcy Code, if the court finds that actions of the
mortgagee have been unreasonable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
To the extent described in the related prospectus supplement, certain of the
mortgagors may be partnerships. The laws governing limited partnerships in
certain states provide that the commencement of a case under the Bankruptcy Code
with respect to a general partner will cause a person to cease to be a general
partner of the limited partnership, unless otherwise provided in writing in the
limited partnership agreement. This provision may be construed as an "ipso
facto" clause and, in the event of the general partner's bankruptcy, may not be
enforceable. To the extent described in the related prospectus supplement,
certain limited partnership agreements of the mortgagors may provide that the
commencement of a case under the Bankruptcy Code with respect to the related
general partner constitutes an event of withdrawal (assuming the enforceability
of the clause is not challenged in bankruptcy proceedings or, if challenged, is
upheld) that might trigger the dissolution of the limited partnership, the
winding up of its affairs and the distribution of its assets, unless (i) at the
time there was at least one other general partner and the written provisions of
the limited partnership agreement permit the business of the limited partnership
to be carried on by the remaining general partner and that general partner does
so or (ii) the written provisions of the limited partnership agreement permit
the limited partner to agree within a specified time frame (often 60 days) after
such withdrawal to continue the business of the limited partnership and to the
appointment of one or more general partners and the limited partners do so. In
addition, the laws governing general partnerships in certain states provide that
the commencement of a case under the Bankruptcy Code or state bankruptcy laws
with respect to a general partner of such partnerships triggers the dissolution
of such partnership, the winding up of its affairs and the distribution of its
assets. Such state laws, however, may not be enforceable or effective in a
bankruptcy case. The dissolution of a mortgagor, the winding up of its affairs
and the distribution of its assets could result in an acceleration of its
payment obligation under a related mortgage loan, which may reduce the yield on
the related series of certificates in the same manner as a principal prepayment.
In addition, the bankruptcy of the general partner of a mortgagor that is a
partnership may provide the opportunity for a trustee in bankruptcy for such
general partner, such general partner as a debtor-in-possession, or a creditor
of such general partner to obtain an order from a court consolidating the assets
and liabilities of the general partner with those of the mortgagor pursuant to
the doctrines of substantive consolidation or piercing the corporate veil. In
such a case, the mortgaged property could become property of the estate of such
bankrupt general partner. Not only would the mortgaged property be available to
satisfy the claims of creditors of such general partner, but an automatic stay
would apply to any attempt by the trustee to exercise remedies with respect to
such mortgaged property. However, such an occurrence should not affect the
trustee's status as a secured creditor with respect to the mortgagor or its
security in the mortgaged property.
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 activities. 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.
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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 secured creditor exemption is intended to provide a lender
protection from liability under CERCLA as an owner or operator of contaminated
property. However, 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 actually 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,
if incurred, would not be limited to, and could substantially exceed, 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.
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 enter into an agreement with the state providing for the cleanup of
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 a party seeking to hold a lender
liable in such cases may face litigation difficulties, 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
prospectus supplement, the pooling 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
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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 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.
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CERTAIN LAWS AND REGULATIONS; TYPES OF MORTGAGED PROPERTIES
The mortgaged properties will be subject to compliance with various federal,
state and local statutes and regulations. Failure to comply (together with an
inability to remedy any such failure) could result in material diminution in the
value of a mortgaged property which could, together with the possibility of
limited alternative uses for a particular mortgaged property (e.g., a nursing or
convalescent home or hospital), result in a failure to realize the full
principal amount of the related mortgage loan. Mortgages on properties which are
owned by the mortgagor under a condominium form of ownership are subject to the
declaration, by-laws and other rules and regulations of the condominium
association. Mortgaged properties which are hotels or motels may present
additional risk in that hotels and motels are typically operated pursuant to
franchise, management and operating agreements which may be limited by the
operator. In addition, the transferability of the hotel's liquor and other
licenses to an entity acquiring the hotel either through purchases or
foreclosure is subject to the vagaries of local law requirements. In addition,
mortgaged properties which are multifamily residential properties may be subject
to rent control laws, which could impact the future cash flows of such
properties.
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 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.
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AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers that are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. The requirements of the ADA may also
be imposed on a foreclosing lender who succeeds to the interest of the borrower
as owner or landlord. Since the "readily achievable" standard may vary depending
on the financial condition of the owner or landlord, a foreclosing lender who is
financially more capable than the borrower of complying with the requirements of
the ADA may be subject to more stringent requirements than those to which the
borrower is subject.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of drug-related
crimes or of criminal violations of the Racketeer Influenced and Corrupt
Organizations ("RICO") statute can be seized by the government if the property
was used in, or purchased with the proceeds of, such crimes. Under procedures
contained in the Comprehensive Crime Control Act of 1984, the government may
seize the property even before conviction. The government must publish notice of
the forfeiture proceeding and may give notice to all parties "known to have an
alleged interest in the property," including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
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
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 (e.g.,
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 is given with
respect to the consequences of contemplated actions and 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) REMIC
Certificates representing interests in a trust, 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) grantor trust certificates representing
interests in a grantor trust fund as to which no such election will be made. If
no REMIC election is made, 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
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for the classification of the trust as a FASIT and the consequences to a holder
of owning certificates 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 or applicable portion thereof and, if such an
election is to be made, will identify all "regular interests" and "residual
interests" in each 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, 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, the tax consequences associated
with any 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 Cadwalader, Wickersham & Taft,
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 will qualify as a REMIC and the REMIC Certificates
offered will be considered to evidence ownership of "regular interests" ("REMIC
Regular Certificates") or "residual interests" ("REMIC Residual Certificates")
under 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 status as a REMIC under the REMIC
provisions. It is not anticipated that the status of any trust as a REMIC will
be terminated.
Characterization of Investments in REMIC Certificates. In general, with
respect to each series of certificates for which a REMIC election is made,
certificates held by a real estate investment trust will constitute "real estate
assets" within the meaning of section 856(c)(5)(B) of the Code, and each such
series of certificates will constitute 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 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)(B) 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.
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The servicer or the trustee will report those determinations to
certificateholders in the manner and at the times required by the applicable
Treasury regulations.
The assets of the REMIC will include, in addition to mortgage loans, payments
on mortgage loans held pending distribution on the REMIC Certificates and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the mortgage loans, or whether such assets otherwise would receive the same
treatment as the mortgage loans for purposes of all of the foregoing sections.
The related prospectus supplement will describe whether any mortgage loans
included in the trust fund will not be treated as assets described in the
foregoing sections. The REMIC regulations do provide that payments on mortgage
loans held pending distribution are considered part of the mortgage.
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 separate or 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.
For purposes of determining whether the REMIC Certificates are "real estate
assets" within the meaning of section 856(c)(5)(B) of the Code, "loans secured
by an interest in real property" under section 7701(a)(19)(C) of the Code, and
whether the income generated by these 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
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. 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 issue price will be the fair market value on the issuance date. Under the
OID regulations, the stated redemption price of a REMIC Regular Certificate
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is equal to the total of all payments to be made on such certificate other than
"qualified stated interest." "Qualified stated interest" includes interest
payable unconditionally at least annually at a single fixed rate, at a
"qualified floating rate," or at an "objective rate", or a combination of a
single fixed rate and one or more "qualified floating rates," or one "qualified
inverse floating rates," or a combination of "qualified floating rates" that
does not operate in a manner that accelerates or defers interest payments on
such REMIC Regular Certificates.
It is not entirely clear under the Code that interest paid to the REMIC
Regular Certificates that are subject to early termination through prepayments
and that have limited enforcement rights should be considered "qualified stated
interest". However, unless disclosed otherwise in the prospectus supplement, the
trust fund intends to treat stated interest as "qualified stated interest" for
determining if, and to what extent, the REMIC Regular Certificates have been
issued with original issue discount. Nevertheless, holders of the REMIC Regular
Certificates should consult their own tax advisors with respect to whether
interest in the REMIC Regular Certificates qualifies as "qualified stated
interest" under the Code.
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 these rules will be applied 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 issuance of
the certificates, a portion of the purchase price paid for a REMIC Regular
Certificate will reflect accrued interest. 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 the number of
complete years, rounding down for partial years, from the issue date until any
payment is expected to be made (presumably taking into account the prepayment
assumption) by a fraction, the numerator of which is the amount of the payment,
and the denominator of which is the stated redemption price at maturity. Under
the OID Regulations, original issue discount of only a de minimis amount 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, 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
the 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 assuming that distributions on the REMIC Regular
Certificate will be received in future
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periods based on the mortgage loans being prepaid at a rate equal to the
prepayment assumption and using a discount rate equal to the original yield to
maturity of the certificate. For these purposes, the original yield to maturity
of the certificate will be calculated based on its issue price and assuming that
distributions on the certificate will be made in all accrual periods based on
the mortgage loans being prepaid at a rate equal to the prepayment assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of the certificate at the beginning of the accrual
period, including the first day and (ii) the daily portions of original issue
discount for all days during the related accrual period up to the day of
determination.
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 the election is made, it will apply to all
market discount bonds acquired by such certificateholder on or after the first
day of the taxable year to which the election applies. In addition, the OID
regulations permit a certificateholder to elect to accrue all interest, 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.
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 full 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, the rules described in the committee
report accompanying the Tax Reform
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Act of 1986 apply. That committee report indicates that REMIC Regular
Certificates should accrue market discount either:
o on the basis of a constant yield method;
o in the case of a REMIC Regular Certificate issued without original issue
discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid during the accrual period
bears to the total amount of stated interest remaining to be paid as of
the beginning of the accrual period; or
o 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.
Furthermore, 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 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 against qualified stated interest under the constant yield method over
the life of the certificate. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument, rather than as a separate interest deduction. The
OID regulations also permit certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the certificateholder as having made the election to amortize premium
generally. See "--Taxation of Owners of REMIC Regular Certificates--Market
Discount." The committee report accompanying the Tax Reform Act of 1986 states
that the same rules that apply to accrual of market discount will also apply in
amortizing bond premium under section 171 of the Code.
Realized Losses. Under section 166 of the Code, both noncorporate holders of
the REMIC Regular Certificates that acquire such certificates in connection with
a trade or business and corporate holders of the REMIC Regular Certificates
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 and that the loss will be characterized as a short-term
capital loss. Losses sustained on the mortgage loans may be "events which have
occurred before the close of the accrued period" that
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can be taken into account under Code section 1272(a)(6) for purposes of
determining the amount of OID that accrues on a certificate.
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, but 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 included in a trust fund 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 the related prospectus supplement
states otherwise. 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 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, 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.
It is uncertain how payments received by a holder of a REMIC Residual
interest in connection with the acquisition of such REMIC Residual interest
should be treated and 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
distributions 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 on the REMIC Regular Certificates, 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.
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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 by this prospectus and the related prospectus supplement will be
determined in the manner described above under "--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount." 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 the REMIC's
interests in its mortgage loans and other property in order to determine the
basis to the REMIC of the mortgage loans and other property held by such 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. 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) if the REMIC's basis in that mortgage loan 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, 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. However, this
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 on the REMIC Regular
Certificates equal to the deductions that would be allowed if the REMIC Regular
Certificates 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 Certificate--Original Issue Discount," except that the
de minimis rule and the adjustments for subsequent holders of REMIC Regular
Certificates 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, 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 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.
The limitation on miscellaneous itemized deductions imposed on individuals by
section 67 of the Code will not be applied at the REMIC level so that the REMIC
will be allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be allocated
as a separate item to the holders of REMIC Certificates, subject to the
limitation of section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions." If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such excess will be the net loss
for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such REMIC Residual Certificateholder.
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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. 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 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:
o the sum of the daily portions of REMIC taxable income allocable to such
REMIC Residual Certificate; over
o the sum of the "daily accruals" 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 date the certificates were issued. For this purpose, the adjusted
issue price of a REMIC Residual Certificate as of the beginning of any calendar
quarter will be equal to the issue price of the REMIC Residual Certificate,
increased by the sum of the daily accruals for all prior quarters and decreased
(but not below zero) by any distributions made with respect to such REMIC
Residual Certificate before the beginning of such quarter. The issue price of a
REMIC Residual Certificate is the initial offering price to the public
(excluding bond houses and brokers) at which a substantial amount of the REMIC
Residual Certificates were sold. The "long-term Federal rate" is an average of
current yields on Treasury securities with a remaining term of greater than nine
years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion:
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o will not be permitted to be offset by deductions, losses or loss
carryovers from other activities;
o will be treated as "unrelated business taxable income" to an otherwise
tax-exempt organization and; and
o will not be eligible for any rate reduction or exemption under any tax
treaty with respect to the 30% United States withholding tax imposed on
distributions to foreign investors. See, however, "--Foreign Investors in
REMIC Certificates" below.
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, 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. The Treasury could issue regulations
which 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 assumptions and on
any required or permitted cleanup calls, or required liquidation provisions, the
present value of the expected future distributions discounted at the "applicable
Federal rate" on the REMIC Residual Certificate equals at least the present
value of the expected tax on the anticipated excess inclusions and the
transferor reasonably expects that the transferee will receive distributions
with respect to the REMIC Residual Certificate at or after the time the taxes
accrue on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes. Accordingly, all transfers of REMIC Residual Certificates
that may constitute noneconomic residual interests will be subject to certain
restrictions under the terms of the related pooling agreement that are intended
to reduce the possibility of any such transfer being disregarded. Such
restrictions will require each party to a transfer to provide an affidavit that
no purpose of such transfer is to impede the assessment or collection of tax,
including certain representations as to the financial condition of the
prospective transferee, as to which the transferor is also required to make a
reasonable investigation to determine such transferee's historic payment of its
debts and ability to continue to pay its debts as they come due in the future.
In addition to the transferor's investigation of the transferee's financial
condition and the transferee's affidavit, a third requirement has been added
that must be satisfied in one of two alternative ways for the transferor to have
a "safe harbor" against ignoring the transfer. First, proposed Treasury
Regulations (the "Proposed Regulations") would require that the present value of
the anticipated tax liabilities associated with holding the noneconomic residual
interest not exceed the sum of:
(i) the present value of any consideration given the transferee to acquire
the interest;
(ii) the present value of the expected future distributions on the interest;
and
(iii) the present value of the anticipated tax savings associated with
holding the interest as the REMIC generates losses.
For purposes of the computations under this alternative, the transferee is
assumed to pay tax at the highest rate of tax specified in Section 11(b)(1) of
the Code (currently 35%). Further, present values are generally computed using a
discount rate equal to the applicable Federal rate set forth in Section 1274(d)
of the Code compounded semi-annually. However, a lower rate may be used if the
transferee can demonstrate that it regularly borrows, in the course of its trade
or business, substantial funds at such lower rate from unrelated third parties.
In some situations, to satisfy this "minimum transfer price" alternative, the
transferor of a noneconomic residual interest may have to pay more consideration
to the transferee than would otherwise be the case if the Proposed Regulations
were not applicable.
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The second alternative appears in Revenue Procedure 2001-12, to be published
on January 8, 2001 (the "Revenue Procedure"). The Revenue Procedure restates the
minimum transfer price alternative described in the proposed Treasury
regulations discussed above and adds an "eligible transferee" test as the second
alternative test for meeting the safe harbor. To meet the second alternative,
(i) the transferee must be a domestic "C" corporation (other than a corporation
exempt from taxation of a regulated investment company or real estate investment
trust) that meets certain gross and net asset tests (generally, $100 million of
gross assets and $10 million of net assets for the current year and the two
preceding fiscal years); (ii) the transferee must agree in writing that any
subsequent transferee of the residual interest would meet the requirements for a
safe harbor transfer under the Revenue Procedure; and (iii) the facts and
circumstances known to the transferor on or before the date of the transfer must
not reasonably indicate that the taxes associated with ownership of the residual
interest will not be paid by the transferee. The eligible transferee test, as
well as the minimum transfer price test, are effective retroactive to February
4, 2000.
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. Section 475 provides a 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 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 cannot 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
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 certain "pass-through entity," an amount equal to these fees and expenses
will be added to the certificateholder's gross income and the certificateholder
will treat such fees and expenses as a miscellaneous itemized deduction subject
to the limitation of section 67 of the Code 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:
o 3% of the excess of the individual's adjusted gross income over such
amount; or
o 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
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,
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estates or trusts. Such prospective investors should carefully consult with
their own tax advisors prior to making an investment in such certificates.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the selling
certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Certificate.
The adjusted basis of a REMIC Regular Certificate generally will equal the cost
of such REMIC Regular Certificate to such certificateholder, increased by income
reported by such certificateholder with respect to such REMIC Regular
Certificate, including original issue discount and market discount income, and
reduced (but not below zero) by distributions on such REMIC Regular Certificate
received by such certificateholder and by any amortized premium. The adjusted
basis of a REMIC Residual Certificate will be determined as described under
"--Basis Rules, Net Losses and Distributions". Except as provided in the
following two paragraphs, any such gain or loss will be capital gain or loss,
provided such REMIC Certificate is held as a capital asset within the meaning of
section 1221 of the Code.
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:
o 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"
determined as of the date of purchase of such REMIC Regular Certificate,
over
o 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 and substantially all of the
taxpayer's return is attributable to the time value of money. 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" 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" 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.
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Prohibited Transactions Tax and Other Taxes. The Code imposes a tax on REMICs
equal to 100% of the net income derived from "prohibited transactions". In
general, subject to certain specified exceptions, a prohibited transaction
means:
o the disposition of a mortgage loan;
o the receipt of income from a source other than a mortgage loan or certain
other permitted investments;
o the receipt of compensation for services; or
o 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. The pooling
agreement will include provisions designed to prevent the acceptance of any
contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income 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.
A REMIC may recognize "net income from foreclosure property" subject to federal
income tax if the Trustee or applicable servicer determines that the recovery to
certificateholders is likely to be greater on an after tax basis than earning
qualifying income that is not subject to 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 tax on prohibited transactions,
contributions, "net income from foreclosure property" or state or local tax
imposed on the REMIC will be borne by the related servicer or trustee in any
case out of its own funds, if such tax arose out of a breach of such person's
obligations under the related pooling and servicing agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by a
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," a tax would be imposed in an amount equal to the product of:
o the present value discounted using the "applicable Federal rate" of the
total anticipated excess inclusions with respect to such REMIC Residual
Certificate for periods after the transfer; and
o 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, required or
permitted cleanup calls, or required liquidation provisions. 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
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REMIC unless there are reasonable arrangements designed to ensure that residual
interests are not held by disqualified organizations and information necessary
for the application of the tax are 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 each 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" includes in income excess inclusions
with respect to a REMIC Residual Certificate, and 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 the amount of excess inclusions allocable to
the interest in the pass-through entity held by such disqualified organization
and 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 such holder's social security number and a statement under
penalty of perjury that such social security number is that of the recordholder
or a statement under penalty of perjury that such record holder is not a
disqualified organization.
For these purposes, a "disqualified organization" generally means:
o 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 exclude as instrumentalities
entities not treated as instrumentalities under section 168(h)(2)(D) of
the Code or the Freddie Mac), or any organization (other than a
cooperative described in section 521 of the Code);
o any organization that is exempt from federal income tax, unless it is
subject to the tax imposed by section 511 of the Code; or
o any organization described in section 1381(a)(2)(C) of the Code.
For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
Termination. A REMIC will terminate immediately after the distribution date
following receipt by the REMIC of the final payment in respect of the mortgage
loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in such REMIC Residual Certificate, such REMIC Residual
Certificateholder should 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 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 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 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
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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 servicer, unless otherwise stated in the
related prospectus supplement.
Backup Withholding with Respect to REMIC Certificates. Payments of interest
and principal, and proceeds from the sale of REMIC Certificates, may be subject
to the "backup withholding tax" 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" 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
stated 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
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:
o a citizen or resident of the United States;
o a corporation or partnership (or other entity treated as a corporation or
a partnership for United States Federal income tax purposes created or
organized in, or under the laws of, the United States, any State thereof
or the District of Columbia (unless, in the case of a partnership,
Treasury regulations are enacted that provide otherwise);
o an estate whose income is includible in gross income for United States
federal income tax purposes regardless of its source; and
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o a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust, and 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:
o a REMIC Residual Certificateholder that owns directly or indirectly a 10%
or greater interest in the REMIC Residual Certificates; or
o to the extent of the amount of interest paid by the related mortgagor on a
particular mortgage loan, a REMIC Regular Certificateholder that owns a
10% or greater ownership interest in such mortgage or a controlled foreign
corporation 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.
On October 6, 1997, the Treasury Department issued new regulations which make
certain modifications to the withholding, backup withholding and information
reporting rules described above. The new regulations attempt to unify
certification requirements and modify reliance standards. New regulations are
effective for payments made after December 31, 2000, subject to certain
transition rules. Prospective investors are urged to consult their own tax
advisors regarding the new regulations.
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 the pooling agreement, the 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
represents 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 less normal
administration fees and any spread and interest paid to the holders of grantor
trust fractional interest certificates issued with respect to a grantor trust
fund will be referred to as a "grantor trust strip certificate." A grantor trust
strip certificate may also evidence a nominal ownership interest in the
principal of the mortgage loans constituting the related grantor trust fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
Grantor Trust Fractional Interest Certificates. Except as discussed in the
related prospectus supplement, in the case of grantor trust fractional interest
certificates, counsel to the depositor will deliver an opinion that, in general,
grantor trust fractional interest certificates will represent interests in:
o assets described in section 7701(a)(19)(C) of the Code;
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o "obligation[s] which . . . [are] principally secured by an interest in
real property" within the meaning of section 860G(a)(3)(A) of the Code;
and
o "real estate assets" within the meaning of section 856(c)(5)(B) 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, "real estate assets"
within the meaning of section 856(c)(5)(B) 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 they produce, will be so
characterized. Although the policies underlying such sections may suggest that
such characterization is appropriate, counsel to the depositor will not deliver
any opinion on the characterization of these certificates. Prospective
purchasers of grantor trust strip certificates should consult their tax advisors
regarding whether the grantor trust strip certificates, and the income they
produce, 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
reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. In some
situations, the taxpayer's deduction may be subject to itemized deduction
limitations and be limited if the taxpayer is subject to the corporate
alternative minimum tax. For a more detailed discussion of these limitations,
see "--Taxation of Owners of REMIC Residual Certificates--Possible Pass-Through
of Miscellaneous Itemized Deductions".
Although it is not entirely clear, it appears that in transactions in which
multiple classes of grantor trust 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 further guidance, it is intended to base information
returns or reports 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 a class of grantor trust
strip certificates is issued as part of the same series of Certificates or the
depositor or any of its affiliates retains 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 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 de minimis market discount
discussion below. See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--Market Discount." Under the stripped bond rules, the holder of a
grantor trust fractional
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interest certificate will be required to report "qualified stated interest
income" from its grantor trust fractional interest certificate for each month,
as such amounts are received or accrued (based on the holder's method of
accounting) and will be required to report an amount equal to the original issue
discount 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," and the certificate's share of reasonable servicing 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 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 servicer, or their respective affiliates, but will
include such certificateholder's share of any reasonable servicing fees and
other expenses.
With respect to certain categories of debt instruments, section 1272(a)(6) of
the Code requires the use of a reasonable prepayment assumption and conforms to
the prepayment assumption used in pricing the instrument. 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, the use of a reasonable prepayment assumption
would increase or decrease such yield, and thus accelerate or decelerate,
respectively, the reporting of income.
If a prepayment assumption is not used, then when a mortgage loan prepays in
full, the holder of a grantor trust fractional interest certificate acquired at
a discount or a premium generally will recognize income or loss, which under
amendments to the Code adopted in 1997 would be capital except to the extent of
any accrued market discount 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, although there is no guidance, logically 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 that will be disclosed in the related prospectus
supplement and on a constant yield computed using a
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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 1.1286-1(b), 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, there is less than a
de minimis amount of original issue discount or 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. Original issue discount or
market discount on a grantor trust fractional interest certificate are de
minimis if less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the mortgage loans. 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" generally includes interest that
is unconditionally payable at least annually at a single fixed rate, at a
"qualified floating rate" or at an "objective rate." 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 provide for an initial below-market rate of
interest or the acceleration or the deferral of interest payments.
In the case of mortgage loans bearing adjustable or variable interest rates,
the related prospectus supplement will describe the manner in which such rules
will be applied with respect to those mortgage loans in preparing information
returns to the certificateholders and the IRS.
Notwithstanding the general definition of original issue discount, original
issue discount will be considered to be de minimis if such original issue
discount is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the mortgage loan. For this purpose, the weighted
average maturity of the mortgage loan will be computed by multiplying the number
of full years from the issue date until such payment is expected to be made by 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 will
generally 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
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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 the adjusted issue
price of such mortgage loan at the beginning of the accrual period that includes
such day plus 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 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." If market discount is in excess of a de minimis amount, the holder
generally will be required to include in income in each month the amount of such
discount that has accrued 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 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 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 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 where principal 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. For a more detailed discussion of the
treatment of market discount, see "Taxation of Owners of REMIC Regular
Certificates--Market Discount".
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 full years to maturity remaining after the date of its
purchase. In interpreting a
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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. Amortizable premium is
treated as an offset to interest income on the related debt instrument, rather
than as a separate interest deduction.
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 in so far as they describe the application of the
constant yield method, do not apply to instruments to which section 1272(a)(6)
applies, which may include grantor trust strip certificates as well as grantor
trust fractional interest certificates, 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
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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 guidance, it 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. 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 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. In addition, any loss may be treated as a capital loss.
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 non contingent payments. Final regulations
have been promulgated with respect to contingent payment debt instruments.
However, these regulations do not specifically address the grantor trust strip
certificates or other securities 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. The adjusted basis of a grantor trust certificate generally
will equal its cost, increased by any income reported by the seller and reduced
(but not below zero) by any previously reported losses, any amortized premium
and by any distributions with respect to such grantor.
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 and the taxpayer's
return is substantially attributable to the time value of money. 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" 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
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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 servicer, as applicable, will furnish to each holder
of a grantor trust certificate, with each distribution, a statement setting
forth the amount of such distribution allocable to principal on the underlying
mortgage loans and to interest thereon at the related pass-through interest
rate. In addition, within a reasonable time after the end of each calendar year,
the trustee or servicer 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 servicer's information reports. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial certificateholders that bought their certificates at the
representative initial offering price used in preparing such reports.
Backup Withholding. In general, the rules described in "--Taxation of Owners
of REMIC Residual Certificates--Backup Withholding with Respect to REMIC
Certificates" will also apply to grantor trust certificates.
Foreign Investor. In general, the discussion with respect to REMIC Regular
Certificates in "--Taxation of Owners of REMIC Residual Certificates--Foreign
Investors in REMIC Certificates" applies to grantor trust certificates except
that grantor trust certificates will, unless otherwise disclosed in the related
prospectus supplement, be eligible for exemption from United States withholding
tax, subject to the conditions described in such discussion, only to the extent
the related mortgage loans were originated after July 18, 1984. However, to the
extent the grantor trust certificate represents an interest in real property
(e.g., because of foreclosures), it would be treated as representing a United
States real property interest for United States federal income tax purposes.
This could result in withholding consequences to non-U.S. certificateholders and
potential U.S. taxation.
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
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 referred to in this prospectus 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. However, such plans may be subject
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to the provisions of other applicable federal and state law (which may contain
restrictions substantially similar to those in ERISA and the Code).
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties-in-Interest") who
have certain specified relationships to the Plan, unless a statutory or
administrative exemption is available. Certain Parties-in-Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code, unless a statutory or administrative
exemption is available. These prohibited transactions generally are set forth in
Section 406 of ERISA and Section 4975 of the Code.
Plan Asset Regulations. A Plan's investment in offered certificates may cause
the trust assets to be deemed "plan assets" of a Plan. 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" (defined to include Plans and certain employee benefit plans not
subject to ERISA, including foreign and governmental plans) 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 (excluding for this calculation any person, other than
a benefit plan investor, who has discretionary authority or control, or provides
investment advice (direct or indirect) for a fee with respect to the assets of
the trust fund).
Any person who has discretionary authority or control respecting the
management or disposition of plan assets of a Plan, and any person who provides
investment advice with respect to such assets for a fee, will generally be 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, 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 five general conditions which, among others, must be
satisfied for a transaction involving the purchase, sale and holding of offered
certificates by a Plan 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 at the time of acquisition by the Plan must
be rated in one of the three (or, for Designated Transactions, four) highest
generic rating categories by Standard & Poor's Rating Services, a division of
The McGraw-Hill Companies, Inc. ("Standard & Poor's"), Moody's Investors
Service, Inc. ("Moody's"), or Fitch, Inc. ("Fitch").
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Third, the trustee cannot be an affiliate of any other member of the
"Restricted Group," which consists of any underwriter, the depositor, the
trustee, the master servicer, the special servicer, any sub-servicer, the
provider of any credit support and any obligor with respect to mortgage assets
(including mortgage loans underlying a CMBS not issued by Fannie Mae, Freddie
Mac or Ginnie Mae) 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.
Fourth, the sum of all payments made to and retained by the underwriter(s) in
connection with the distribution or placement of certificates 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.
Fifth, 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 of 1933, as amended.
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 may be transferred to
the trust fund in exchange for the amounts credited to the Pre-Funding Account
during a period required by the Exemption, 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. In
addition, the amount in the Pre-Funding Account may not exceed 25% of the
aggregate principal amount of the offered certificates. Certain other conditions
of the Exemption relating to pre-funding accounts must also be met, in order for
the exemption to apply. The prospectus supplement will discuss whether
pre-funding accounts will be used.
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 four highest categories of
Standard & Poor's, 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 Exemption generally applies to mortgage loans such as the mortgage loans
to be included in any trust fund, but it is not clear whether the Exemption
would apply to a trust fund that included mortgage loans secured by liens on
real estate projects under construction or cash flow agreements. In addition, it
is not clear whether the Exemption applies to participant directed plans as
described in Section 404(c) of ERISA or plans that are subject to Section 4975
of the Code but that are not subject to Title I of ERISA, such as certain Keogh
plans and certain individual retirement accounts. If mortgage loans are secured
by leasehold interests, each lease term must be at least 10 years longer than
the term of the relevant mortgage loan.
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.
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If certain specific conditions set forth in the Exemption are also satisfied,
the Exemption may provide relief 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 to an obligor acting
as a fiduciary with respect to the investment of a Plan's assets in the
certificates (or such obligor's affiliate) only if, among other requirements (i)
such obligor (or its affiliate) is an obligor with respect to 5% percent or less
of the fair market value of the assets contained in the trust fund and is
otherwise not a member of the Restricted Group, (ii) a Plan's investment in
certificates does not exceed 25% of all of the certificates outstanding at the
time of the acquisition, (iii) immediately after the acquisition, no more than
25% of the assets of the Plan are invested in certificates representing an
interest in trusts (including the trust fund) containing assets sold or serviced
by the depositor or a servicer and (iv) in the case of the acquisition of the
certificates in connection with their initial issuance, at least 50% of the
certificates are acquired by persons independent of the Restricted Group and at
least 50% of the aggregate interest in the trust fund is acquired by persons
independent of the Restricted Group.
The Exemption also applies to transactions in connection with the servicing,
management and operation of the trust fund, provided that, in addition to the
general requirements described above, (a) such transactions are carried out in
accordance with the terms of a binding pooling agreement and (b) the pooling
agreement is provided to, or described in all material respects in the
prospectus or private placement memorandum provided to, investing Plans before
their purchase of certificates issued by the trust fund. The pooling agreements
will each be a "Pooling and Servicing Agreement" as defined in the Exemption.
Each pooling agreement will provide that all transactions relating to the
servicing, management and operations of the trust fund must be carried out in
accordance with the pooling agreement.
The DOL has issued a Prohibited Transaction Class Exemption 95-60 (the "Class
Exemption"), which provides relief from the application of the prohibited
transaction provisions of Sections 406(a), 406(b) and 407(a) of ERISA and
Section 4975 of the Code for 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
such trust, provided that certain conditions are satisfied. Insurance company
general accounts meeting the specified conditions may generally purchase, in
reliance on the Class Exemption, classes of certificates that do not meet the
requirements of the Exemption solely because they have not received a rating at
the time of the acquisition in one of the three (or, for Designated
Transactions, four) highest rating categories from Standard & Poor's, Moody's,
or Fitch. In addition to the foregoing Class Exemption, relief may be available
to 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, under regulations published by the DOL on January 5, 2000 under
Section 401(c) of ERISA, that will generally become applicable on July 5, 2001.
Any Plan fiduciary considering the purchase of certificates should consult
with its counsel with respect to the applicability of the Exemption and other
issues and determine on its own whether all conditions have been satisfied and
whether the certificates are an appropriate investment for a Plan under ERISA
and the Code (or, in the case of governmental plans, under applicable Federal,
state or local law). The prospectus supplement will specify the representations
required by purchasers of certificates, but generally, each purchaser using the
assets of one or more Plans to purchase a certificate shall be deemed to
represent that each such Plan qualifies as an "accredited investor" as defined
in Rule 501(a)(1) of Regulation D under the Securities Act of 1933, and no Plan
will be permitted to purchase or hold such certificates unless such certificates
are rated in one of the top four rating categories by at least one rating agency
at the time of such purchase, unless such Plan is an insurance company general
account that represents and warrants that it is eligible for, and meets all of
the requirements of, Part III of Prohibited Transaction Class Exemption 95-60.
Each purchaser of classes of certificates that are not rated at the time of
purchase in one of the top four rating categories by at least one rating agency
shall be deemed to represent that it is eligible for, and meets all of the
requirements of, Section III of Prohibited Transaction Class Exemption 95-60.
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.
LEGAL INVESTMENT
If so specified in the related Prospectus Supplement, the offered
certificates will constitute "mortgage related securities" for purposes of
SMMEA. The appropriate characterization of those offered certificates not
qualifying as "mortgage related securities" ("Non-SMMEA Certificates") under
various legal investment restrictions, and thus the
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ability of investors subject to these restrictions to purchase such offered
certificates, may be subject to significant interpretive uncertainties.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Non-SMMEA Certificates constitute legal investments for them.
Generally, only classes of offered certificates that (1) are rated in one of
the two highest rating categories by one or more rating agencies and (2) are
part of a series evidencing interests in a trust fund consisting of loans
originated by certain types of originators specified in SMMEA and secured by
first liens on real estate, will be "mortgage related securities" for purposes
of SMMEA. Classes of offered certificates qualifying as "mortgage related
securities" will 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 (including
the District of Columbia and Puerto Rico) whose authorized investments are
subject to state regulation, to the extent that, under applicable law,
obligations issued by or granted as to principal and interest by the United
States or any agency or instrumentality thereof constitute legal investments for
such entities. Under SMMEA, a number of states enacted legislation, on or before
the October 3, 1991 cutoff for such enactments, limiting to varying extents the
ability of certain entities (in particular, insurance companies) to invest in
"mortgage related securities" secured by liens on residential, or mixed
residential and commercial properties, in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA. Pursuant to
Section 347 of the Riegle Community Development and Regulatory Improvement Act
of 1994, which amended the definition of "mortgage related security" (effective
December 31, 1996) to include, in relevant part, offered certificates satisfying
the rating and qualified originator requirements for "mortgage related
securities," but evidencing interests in a trust fund consisting, in whole or in
part, of first liens on one or more parcels of real estate upon which are
located one or more commercial structures, states were authorized to enact
legislation, on or before September 23, 2001, specifically referring to Section
347 and prohibiting or restricting the purchase, holding or investment by
state-regulated entities in such types of offered certificates. Section 347 also
provides that the enactment by a state of any such legislative restrictions
shall not affect the validity of any contractual commitment to purchase, hold or
invest in securities qualifying as "mortgage related securities" solely by
reason of Section 347 that was made, and shall not require the sale or
disposition of any securities acquired, prior to the enactment of such state
legislation. Accordingly, the investors affected by any such state legislation,
when and if enacted, will be authorized to invest in offered certificates
qualifying as "mortgage related securities" only to the extent provided in such
legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "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.
ss.24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, the Office of
the Comptroller of the Currency (the "OCC") has amended 12 C.F.R. Part I 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 in 12 C.F.R.. ss. 1.5 concerning
"safety and soundness" and retention of credit information), certain "Type IV
securities," defined in 12 C.F.R. ss. 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. The National Credit Union
Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part 703, which
permit federal credit unions to invest in "mortgage related securities" under
certain limited circumstances, other than stripped mortgage related securities,
residual interests in mortgage related securities, and commercial mortgage
related securities, unless the credit union has obtained written approval from
the NCUA to participate in the "investment pilot program" described in 12 C.F.R.
ss.703.140. The Office of Thrift Supervision (the "OTS") has issued Thrift
Bulletin 13a (December 1, 1998). "Management of Interest Rate Risk,
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Investment Securities, and Derivative Activities," which thrift institutions
subject to the jurisdiction of the OTS should consider before investing in any
of the offered certificates.
All depository institutions considering an investment in the offered
certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivative Activities" (the "1998 Policy Statement") of
the Federal Financial Institutions Examination Council, which has been adopted
by the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the OCC and the OTS effective May 26, 1998, and by the
NCUA effective October 1, 1998. The 1998 Policy Statement sets forth general
guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
Institutions whose investment activities are subject to regulation by federal
and state authorities should review rules, policies and guidelines adopted from
time to time by such authorities before purchasing any offered certificates, as
certain series or classes may be deemed unsuitable investments, or may otherwise
be restricted, under such rules, policies or guidelines (in certain instances
irrespective of SMMEA).
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, provisions which may
restrict or prohibit investment in securities which are not "interest bearing"
or "income paying," and, with regard to any offered certificates issued in
book-entry form, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Except as to the status of certain classes of offered certificates as
"mortgage related securities," no representations are made as to the proper
characterization of the offered certificates for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase offered certificates under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the offered certificates) may
adversely affect the liquidity of the offered certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent the offered certificates of any class constitute
legal investments or are subject to investment, capital or other restrictions
and, if applicable, whether SMMEA has been overridden in any jurisdiction
relevant to such investor.
METHOD OF DISTRIBUTION
The offered certificates offered by the prospectus and the related prospectus
supplements 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, any class or classes of offered certificates, or portions thereof,
that will be sold to affiliates of the depositor, 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 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 Securities, Inc., acting as underwriter with other underwriters, if any,
named in the prospectus supplement. Alternatively, the prospectus supplement may
specify that offered certificates will be distributed by First Union Securities,
Inc. acting as agent. If First Union Securities, Inc. acts as agent in the sale
of offered certificates, First Union Securities, Inc. 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
prospectus supplement. To the extent that First Union Securities, Inc. elects to
purchase offered certificates as principal, First Union Securities, Inc. may
realize losses or
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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 or any
affiliate of the depositor and purchasers of offered certificates of such
series.
This prospectus and prospectus supplements also may be used by the depositor,
First Union 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 Securities, Inc.
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.
If so specified in a prospectus supplement, all or a portion of one or more
classes of the offered certificates identified in the prospectus supplement may
be retained or sold by the depositor either directly or indirectly through an
underwriter, including First Union Securities, Inc. to one or more affiliates of
the depositor. This prospectus and prospectus supplements may be used by any
such affiliate to resell offered certificates publicly or privately to
affiliated or unaffiliated parties either directly or indirectly through an
underwriter, including First Union Securities, Inc.
The depositor will agree to indemnify First Union Securities, Inc. and any
underwriters and their respective controlling persons against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
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 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 which may include affiliates of the
depositor. 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 of 1933, as amended, in connection with
reoffers and sales by them of offered certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
As to each series of certificates, only those classes rated in an investment
grade rating category by any rating agency will be offered hereby. Any class of
certificates not offered by this prospectus 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 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
Cadwalader, Wickersham & Taft, Charlotte, North Carolina.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of certificates,
and no trust fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of certificates.
Accordingly, no financial statements with respect to any trust fund will be
included in this prospectus or in the prospectus supplement.
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RATINGS
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 to a class of
offered certificates by one or more of the rating agencies that has been
requested by the depositor to rate the offered certificates.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to qualification, revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of another security rating.
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INDEX OF PRINCIPAL DEFINITIONS
"Accrual Certificates" means certificates which provide for distributions of
accrued interest thereon commencing only following the occurrence of certain
events, such as the retirement of one or more other classes of certificates of
such series.
"Accrued Certificate Interest" means, with respect to each class of
certificates and each distribution date, other than certain classes of Stripped
Interest Certificates and REMIC Residual certificates, the amount equal to the
interest accrued for a specified period (generally the period between
distribution dates) on the outstanding certificate balance of those certificates
immediately prior to such distribution date, at the applicable pass-through
rate, as described under "Distributions of Interest on the Certificates" in this
prospectus.
"Available Distribution Amount" means, for any series of certificates and any
distribution date, 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 that series on that date. The particular components of
the Available Distribution Amount for any series on each distribution date will
be more specifically described in the prospectus supplement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Constant Prepayment Rate" or "CPR" means a rate that represents an assumed
constant rate of prepayment each month (which is expressed on a per annum basis)
relative to the outstanding principal balance of a pool of mortgage loans for
the life of such mortgage loans.
"Cut-Off Date" means the date on which the ownership of the mortgage loans of
a related series of certificates and rights to payment thereon are deemed
transferred to the trust fund, as specified in the related prospectus supplement
"Debt Service Coverage Ratio" means, with respect to a mortgage loan at any
given time and as more fully set forth in the prospectus supplement, the ratio
of (i) the Net Operating Income of the 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 mortgage.
"DTC" means The Depository Trust Company.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Farmer Mac" or "FAMC" means the Federal Agricultural Mortgage Corporation.
"Loan-to-Value Ratio" means, as more fully set forth in the prospectus
supplement, 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 mortgaged property prior to the lien of the
mortgage, to (ii) the value of the mortgaged property, which is generally its
fair market value determined in an appraisal obtained by the originator at the
origination of such loan.
"Net Operating Income" means, as more fully set forth in the prospectus
supplement and for any given period, the total operating revenues derived from a
mortgaged property, minus the total operating expenses incurred in respect of
the mortgaged property other than (i) non-cash items such as depreciation and
amortization, (ii) capital expenditures and (iii) debt service on loans
(including the mortgage loan) secured by liens on the mortgaged property.
"REMIC" means a "real estate mortgage investment conduit" under the Code.
"REMIC Certificate" means a certificate issued by a trust fund relating to a
series of certificate where an election is made to treat the trust fund as a
REMIC.
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"REO Property" means any mortgaged property acquired on behalf of the trust
fund in respect of a defaulted mortgage loan through foreclosure, deed in lieu
of foreclosure or otherwise.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
"Standard Prepayment Assumption" or "SPA" means a rate that represents an
assumed variable rate of prepayment each month (which is expressed on a per
annum basis) relative to the then outstanding principal balance of a pool of
loans, with different prepayment assumptions often expressed as percentages of
SPA.
"Stripped Interest Certificates" means certificates which are entitled to
interest distributions with disproportionately small, nominal or no principal
distributions.
"Stripped Principal Certificates" means certificates which are entitled to
principal distributions with disproportionately small, nominal or no interest
distributions.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses and costs expected to be incurred
in connection with the issuance and distribution of the Certificates being
registered hereby.
Registration Fee.............................................. $ 600,000*
Rating Agency Fees............................................ $ 3,000,000
Printing and Engraving Expenses............................... $ 300,000
Accounting Fees and Expenses.................................. $ 250,000
Legal Fees and Expenses....................................... $ 1,500,000
Blue Sky and Legal Investment Fees and Expenses............... $ 20,000
Trustee Fees and Expenses..................................... $ 200,000
Miscellaneous................................................. $ 500,000
Total......................................................... $ 6,370,000
-----------------
* Includes the $250 registration fee previously paid in connection with the
January 5, 2001, filing of the Registration Statement pursuant to which the
Registrant registered $1,000,000 of Commercial Mortgage Pass-Through
Certificates.
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.
<PAGE>
First Union Corporation maintains directors and officers liability insurance
for the benefit of its subsidiaries. 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 condition contained in the policy.
In connection with an agreement between the Registrant and Juliana C.
Johnson, an independent director of the Registrant, the Registrant has agreed to
indemnify and hold harmless Ms. Johnson from any and all loss, claim, damage or
cause of action, including reasonable attorneys' fees related thereto
(collectively, "Claims"), incurred by Ms. Johnson in the performance of her
duties as a director; provided, however, that Ms. Johnson shall not be so
indemnified for such Claims if they arise from her own negligence or wilful
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 DESCRIPTION OF DOCUMENT
-------- -----------------------
1(a) Form of Underwriting Agreement.*
4(a) Form of Pooling and Servicing Agreement.*
5(a) Opinion of Cadwalader, Wickersham & Taft with respect to
legality.**
5(b) Opinion of Senior Vice President and Assistant General Counsel
of First Union Corporation.**
8(a) Opinion of Cadwalader, Wickersham & Taft with respect to certain
tax matters (included as part of Exhibit 5(a)).**
23(a) Consent of Cadwalader, Wickersham & Taft (included as part of
Exhibit 5(a) and Exhibit 8(a)).**
23(b) Consent of Senior Vice President and Assistant General Counsel
of First Union Corporation (included as part of Exhibit
5(b)).**
24(a) Powers of Attorney.***
-----------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (33-97994).
** Previously filed as an exhibit to the filing made on January 5, 2001.
*** Previously filed; included as part of the signature page to the filing made
on January 5, 2001.
ITEM 17. UNDERTAKINGS
(A) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this 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 this
registration statement. Notwithstanding the foregoing, any increase or
decrease in 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 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;
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<PAGE>
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or
any material change to such information in this registration statement;
provided, however, that paragraphs (A)(1)(i) and (A)(1)(ii) of this section
do not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(B) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d)
of the 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 herein, 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 liability 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 defence of any
action, suit or proceeding) is asserted by such director, office 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.
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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
Pre-Effective Amendment No. 1 to the 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 January 16, 2001.
FIRST UNION COMMERCIAL MORTGAGE
SECURITIES, INC.
By: /s/*
-------------------------------
Brian E. Simpson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form S-3 has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
By: /s/* President and Director January 16, 2001
-----------------------------
Brian E. Simpson
By: /s/* Senior Vice President January 16, 2001
----------------------------- and Treasurer (Chief
James H. Hatch Financial Officer and
Chief Accounting Officer)
By: /s/* Director January 16, 2001
-----------------------------
Juliana C. Johnson
By: /s/* Director January 16, 2001
-----------------------------
Benjamin F. Williams, Jr.
*By:/s/ Timothy F. Danello January 16, 2001
-----------------------------
Timothy F. Danello
as attorney-in-fact
