<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1998
REGISTRATION 33-65816
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 4
TO
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(Exact Name of registrant as specified in governing charter)
Delaware 13-3411414
---------------------- ----------------------------------
State of Incorporation IRS Employer Identification Number
245 PARK AVENUE
NEW YORK, NEW YORK 10167
(212) 272-2000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
-------------------
WILLIAM J. MONTGORIS
SECRETARY
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
245 PARK AVENUE
NEW YORK, NEW YORK 10167
(212) 272-2000
(Name and address of agent for service)
--------------------
Copy to:
GARY BARNETT, ESQ.
O'MELVENY & MYERS LLP
CITICORP CENTER
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after this Registration Statement becomes effective.
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, please check the following box. [X]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Maximum Aggregate
Title of Securities Amount Being Offering Price Offering Amount Of
being registered Registered(1) Per Unit(2) Price(3) Registration Fee
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage
Pass-Through $1,000,000,000 100% $1,000,000,000 $344,795.50(3)
=================================================================================================
</TABLE>
(1) This Registration Statement and the registration fee pertain to the initial
offering of the Mortgage Pass-Through Certificates registered hereunder by the
Registrant and to offers and sales relating to market-making transactions by
Bear, Stearns & Co. Inc., an affiliate of the Registrant. The amount of
Mortgage Pass-Through Certificates that may be initially offered hereunder and
the registration fee shall not be affected by any offers and sales relating to
any such market-making transactions.
(2) Estimated solely for purposes of calculating the registration fee on the
basis of the proposed maximum aggregate offering price.
(3) All of which was paid previously.
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 this 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, may
determine.
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
LOCATION IN
ITEM AND CAPTION LOCATION IN PROSPECTUS
IN FORM S-3 PROSPECTUS SUPPLEMENT
- ----------- ---------- ----------
<S> <C> <C> <C>
1. Forepart of Registration Forepart of Registration Outside Front Cover
Statement and Outside Statement and Outside Page
Front Cover Page of Front Cover Page
Prospectus..........................
2. Inside Front and Outside Inside Front Cover Inside Front Cover
Back Cover Pages of Page, Outside Back Page, Outside Back
Prospectus.......................... Cover Page Cover Page
3. Summary Information, Summary of Terms, Summary of Terms,
Risk Factors and Ratio of Risk Factors Risk Factors
Earnings to Fixed Charges...........
4. Use of Proceeds..................... Use of Proceeds Use of Proceeds
5. Determination of Offering * *
Price...............................
6. Dilution............................ * *
7. Selling Security Holders............ * *
8. Plan of Distribution................ Method of Distribution Method of Distribution
9. Description of Securities to
be Registered....................... Outside Front Cover Outside Front Cover
Page; Description of the Page; Description of
Certificates; The Trust the Certificates;
Funds; Certain Legal Servicing of the
Aspects of the Mortgage Loans;
Mortgage Loans; Certain Federal Income
Certain Federal Income Tax Consequences
Tax Consequences
10. Interests of Named Experts * *
and Counsel.........................
11. Material Changes.................... * *
12. Incorporation of Certain Incorporation of Certain *
Information by Reference Documents by
Reference
13. Disclosure of Commission * *
Position on Indemnification
for Securities Act
Liabilities.........................
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Registration Statement consists of (i) a form of prospectus
supplement for a basic series of commercial mortgage pass-through certificates,
(ii) pages showing language to be inserted in the prospectus supplement and
base prospectus with respect to any series of commercial mortgage pass-through
certificates backed in part by a material concentration of certain types of
real property and (iii) a form of base prospectus for a basic series of
commercial mortgage pass-through certificates.
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ________, 199_)
$__________ (APPROXIMATE)
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.,
DEPOSITOR
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 199__-__
$_________________ Class A Certificates
$_________________ Class B Certificates
The Series 199 ___-___ Commercial Mortgage Pass-Through Certificates
(the "Certificates") will consist of four classes (each, a "Class") of
Certificates, designated as the Class A Certificates, the Class B Certificates,
the Class C Certificates and the Class R Certificates. As and to the extent
described herein, the Class B, Class C and Class R Certificates will be
subordinate to the Class A Certificates; and the Class C and Class R
Certificates will be subordinate to the Class B Certificates. Only the Class A
and Class B Certificates (collectively, the "Offered Certificates") are offered
hereby. It is a condition of their issuance that the Class A and Class B
Certificates be rated not lower than "____" and "____", respectively, by
______________________.
The Certificates will represent, in the aggregate, the entire
beneficial ownership interest in a trust fund (the "Trust Fund"), to be
established by Bear Stearns Commercial Mortgage Securities Inc. (the
"Depositor"), that will consist primarily of a segregated pool (the "Mortgage
Pool") of ____ conventional, multifamily or commercial balloon mortgage loans
(the "Mortgage Loans"). As of ____________, 199___ (the "Cut-off Date"), the
Mortgage Loans had an aggregate principal balance (the "Initial Pool Balance")
of $___________________, after application of all payments of principal due on
or before such date, whether or not received. The initial principal balance of
the Class A Certificates will be $__________________, which represents _____%
of the Initial Pool Balance; and the initial principal balance of the Class B
Certificates will be $_____________, which represents ___% of the Initial Pool
Balance.
SEE "RISK FACTORS" BEGINNING ON PAGE S-18 OF THIS PROSPECTUS
SUPPLEMENT AND "RISK FACTORS" BEGINNING ON PAGE 17 OF THE PROSPECTUS FOR
CERTAIN FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
----------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE DEPOSITOR OR ANY OF ITS AFFILIATES. NEITHER THE OFFERED
CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
<PAGE>
The Offered Certificates will be purchased by Bear, Stearns & Co. Inc.
(the "Underwriter") from the Depositor and will be offered by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the Depositor from the sale of
the Offered Certificates, before deducting expenses payable by the Depositor
estimated to be approximately $_____________, will be ______% of the initial
aggregate Certificate Balance of the Offered Certificates, plus accrued
interest.
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will also be used by the Underwriter
after the completion of the offering in connection with offers and sales
related to market-making transactions in the Offered Certificates in which the
Underwriter acts as principal. The Underwriter may also act as agent in such
transactions. Sales will be made at negotiated prices determined at the time of
sale.]
The Offered Certificates are offered by the Underwriter when, as and
if delivered to and accepted by the Underwriter and subject to prior sale and
to its right to reject any order in whole or in part. It is expected that the
Class A Certificates will be delivered in book-entry form through the Same-Day
Funds Settlement System of The Depository Trust Company and that the Class B
Certificates will be delivered at the offices of the Underwriter,
_________________________ ________________________________, on or about
_____________, 199__ (the "Delivery Date"), against payment therefor in
immediately available funds.
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the accompanying Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Depositor or by the Underwriter. This Prospectus Supplement
and the accompanying Prospectus do not constitute an offer to sell, or a
solicitation of an offer to buy, the securities offered hereby to anyone in any
jurisdiction in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make any such offer
or solicitation. Neither the delivery of this Prospectus Supplement and the
accompanying Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that information herein or therein is
correct as of any time since the date of this Prospectus Supplement or the
accompanying Prospectus.
The Mortgage Loans provide for monthly payments of principal and/or
interest ("Monthly Payments"), in all cases based on amortization schedules
that are significantly longer than their remaining terms, thereby leaving
substantial principal amounts due and payable on their respective maturity
dates. As more fully described herein, (i) ___ of the Mortgage Loans (the "ARM
Loans"), which represent ______% of the Initial Pool Balance, provide for
periodic adjustments (which may occur monthly, semi-annually or annually) to
the respective annualized rates at which they accrue interest (their "Mortgage
Rates") based on fluctuations in a base index (an "Index") and subject to the
limitations described herein, and (ii) the remaining Mortgage Loans (the "Fixed
Rate Loans") bear interest at fixed Mortgage Rates. [Describe Index]
All of the Mortgage Loans are currently held by _____________ (the
"Mortgage Loan Seller"), which either originated the Mortgage Loans or acquired
them from their respective originators. On or before the date of initial
issuance of the Certificates, the Depositor will acquire the Mortgage Loans
from the Mortgage Loan Seller and will transfer them to the Trustee in exchange
for the Certificates.
Distributions of interest on and principal of the Certificates will be
made, to the extent of available funds, on the ___ day of each month or, if any
such ___ day is not a business day, then on the next succeeding business day,
beginning in _____________ 199____ (each, a "Distribution Date"). As more fully
described herein, distributions allocable to interest accrued on each Class of
Offered Certificates will be made on each Distribution Date based on the
variable pass-through rate (the "Pass-Through Rate") then applicable to such
Class and the stated principal amount (the "Certificate Balance") of such Class
outstanding immediately prior to such Distribution Date. The Pass-Through Rate
for the Class A and Class B Certificates applicable to the first Distribution
Date will be _________% per annum. Subsequent to the initial Distribution Date,
the Pass-Through Rate for the Class A and Class B Certificates will equal from
time to time the weighted average of, subject to certain adjustments described
herein, the Net Mortgage Rates on the Mortgage Loans. The Net Mortgage Rate for
any Mortgage Loan is its Mortgage Rate less _____ basis points. Distributions
allocable to principal of each Class of Offered Certificates will be made in
the amounts and in accordance with the priorities described herein. See
"Description of the Certificates--Distributions" herein.
The yield to maturity on each Class of Offered Certificates will
depend on, among other things, fluctuations in its respective Pass-Through Rate
and the rate and timing of principal payments (including by reason of
prepayments, defaults and liquidations) on the Mortgage Loans. See "Yield and
Maturity Considerations" herein and "Yield and Maturity Considerations" and
"Risk
S-2
<PAGE>
Factors--Prepayments; Average Life of Certificates; Yields" in the Prospectus.
[The following disclosure is applicable to Stripped Interest Certificates
("Class S Certificates"). The yield to maturity on the Class S Certificates
will be extremely sensitive to the rate and timing of principal payments
(including by reasons of prepayments, defaults and liquidations) on the
Mortgage Loans, which may fluctuate significantly from time to time. A rate of
principal prepayments on the Mortgage Loans that is more rapid than expected by
investors will have a material negative effect on the yield to maturity of the
Class S Certificates. Investors in the Class S Certificates should carefully
consider the associated risks, including the risk that a rapid rate of
principal prepayments on the Mortgage Loans could result in the failure of
investors in such Certificates to recover fully their initial investments. See
"Risk Factors--Yield Sensitivity of the Class S Certificates" and "Yield and
Maturity Considerations" herein and "Yield Considerations" and "Risk
Factors--Average Life of Certificates; Prepayments; Yields" in the Prospectus.]
An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. The
Offered Certificates and the Class C Certificates (collectively, the "Regular
Certificates") will constitute "regular interests", and the Class R
Certificates will constitute the sole class of "residual interests", in the
Trust Fund. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
There is currently no secondary market for the Offered Certificates
and there can be no assurance a secondary market for the Offered Certificates
will develop. The Underwriter expects to establish a market in the Offered
Certificates, but is not obligated to do so. There is no assurance that any
such market, if established, will continue. See "Risk Factors--Limited
Liquidity" herein.
BEAR, STEARNS & CO. INC.
The date of this Prospectus Supplement is __________, 199__.
S-3
<PAGE>
THE PROSPECTUS THAT ACCOMPANIES THIS PROSPECTUS SUPPLEMENT CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL TO OBTAIN MATERIAL INFORMATION CONCERNING THE OFFERED
CERTIFICATES. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED UNLESS
THE PURCHASER HAS RECEIVED BOTH THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT.
-----------
UNTIL [NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT], ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
S-4
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page No.
<S> <C>
SUMMARY OF PROSPECTUS SUPPLEMENT..........................................S-7
RISK FACTORS.............................................................S-18
The Certificates....................................................S-18
Limited Liquidity..............................................S-18
Variability in Yield; Priority of Payments.....................S-18
Yield Sensitivity of the Class S Certificates..................S-19
The Mortgage Loans..................................................S-19
Nature of the Mortgaged Properties.............................S-19
Limited Recourse...............................................S-19
Environmental Law Considerations...............................S-19
Geographic Concentration.......................................S-20
Concentration of Mortgage Loans and Borrowers..................S-20
Adjustable Rate Mortgage Loans.................................S-20
Balloon Payments...............................................S-20
Management.....................................................S-20
Inclusion of Delinquent, Under-Performing and Non-Performing
Mortgage Loans...............................................S-20
DESCRIPTION OF THE MORTGAGE POOL.........................................S-20
General.............................................................S-20
Certain Payment Characteristics.....................................S-21
Delinquent Mortgage Loans...........................................S-22
Additional Mortgage Loan Information................................S-22
The Mortgage Loan Seller............................................S-27
Underwriting Standards..............................................S-28
Assignment of the Mortgage Loans; Repurchase........................S-28
Representations and Warranties; Repurchases.........................S-29
SERVICING OF THE MORTGAGE LOANS..........................................S-30
General.............................................................S-30
The Master Servicer.................................................S-30
Servicing and Other Compensation and Payment of Expenses............S-30
Modifications, Waivers and Amendments...............................S-31
Inspections; Collection of Operating Information....................S-32
Additional Obligations of the Master Servicer with Respect to
ARM Loans ........................................................S-32
DESCRIPTION OF THE CERTIFICATES..........................................S-32
General.............................................................S-32
Distributions.......................................................S-33
Method, Timing and Amount......................................S-33
Priority.......................................................S-34
Pass-Through Rates.............................................S-35
Distributable Certificate Interest.............................S-35
Scheduled Principal Distribution Amount and Unscheduled
Principal Distribution Amount................................S-36
Certain Calculations with Respect to Individual
Mortgage Loans...............................................S-36
Subordination.......................................................S-36
P&I Advances........................................................S-37
Reports to Certificateholders; Certain Available Information........S-38
Voting Rights.......................................................S-38
Termination.........................................................S-39
S-5
<PAGE>
YIELD AND MATURITY CONSIDERATIONS........................................S-39
Yield Considerations................................................S-39
General........................................................S-39
Pass-Through Rate..............................................S-39
Rate and Timing of Principal Payments..........................S-39
Losses and Shortfalls..........................................S-40
Certain Relevant Factors.......................................S-41
Delay in Payment of Distributions..............................S-41
Unpaid Distributable Certificate Interest......................S-41
Weighted Average Life...............................................S-41
Yield Sensitivity of the Class S Certificates.......................S-44
USE OF PROCEEDS..........................................................S-45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................S-45
ERISA CONSIDERATIONS.....................................................S-46
LEGAL INVESTMENT.........................................................S-48
METHOD OF DISTRIBUTION...................................................S-48
LEGAL MATTERS............................................................S-49
RATING...................................................................S-49
INDEX OF PRINCIPAL DEFINITIONS...........................................S-50
</TABLE>
S-6
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary may
be defined elsewhere in this Prospectus Supplement or in the Prospectus. An
"Index of Principal Definitions" is included at the end of both this Prospectus
Supplement and the Prospectus. Terms that are used but not defined in this
Prospectus Supplement will have the meanings specified in the Prospectus.
Title of Certificates............. Bear Stearns Commercial Mortgage Securities
Inc., Commercial Mortgage Pass-Through
Certificates, Series 199__-__ (the
"Certificates"), to be issued in four
Classes, designated as the Class A, Class
B, Class C and Class R Certificates. The
Class A, Class B and Class C Certificates
are herein collectively referred to from
time to time as the "Regular Certificates".
Only the Class A and Class B Certificates
(collectively, the "Offered Certificates")
are offered hereby. The Class C and Class R
Certificates are herein collectively
referred to from time to time as the
"Private Certificates".
Depositor......................... Bear Stearns Commercial Mortgage Securities
Inc., a Delaware corporation. The Depositor
is an affiliate of Bear, Stearns & Co. Inc.
(the "Underwriter"). See "The Depositor" in
the Prospectus. Neither the Depositor nor
any of its affiliates has insured or
guaranteed the Offered Certificates.
Master Servicer................... ______________________________, a
_______________. See "Servicing of the
Mortgage Loans-The Master Servicer" herein.
Trustee ......................... _____________________, a ________________.
See "Description of the Certificates-The
Trustee" herein.
Mortgage Loan Seller.............. ________________________, a
_________________. See "Description of the
Mortgage Pool-The Mortgage Loan Seller"
herein.
Cut-off Date...................... ___________________, 199__.
Delivery Date..................... On or about ___________________, 199__.
Registration of the
Class A Certificates............ The Class A Certificates will be
represented by one or more global
Certificates registered in the name of Cede
& Co., as nominee of The Depository Trust
Company ("DTC"). No person acquiring an
interest in the Class A Certificates (any
such person, a "Class A Certificate Owner")
will be entitled to receive a Class A
Certificate in fully registered,
certificated form (a "Definitive Class A
Certificate"), except under the limited
circumstances described in the Prospectus
under "Description of the
Certificates--Book Entry Registration and
Definitive Certificates". Instead, DTC will
effect payments and transfers in respect of
the Class A Certificates by means of its
electronic recordkeeping services, acting
through certain participating organizations
("Participants"). This may result in
certain delays in receipt of payments by an
investor and may restrict an investor's
ability to pledge its securities. Unless
and until Definitive Class A Certificates
are issued, all references herein to the
rights of holders of the Class A
Certificates are to the rights of Class A
Certificate Owners as they may be exercised
through DTC and its Participants, except as
otherwise specified herein. See
"Description of the Certificates--General"
herein and "Description of the
Certificates--Book-Entry Registration and
Definitive Certificates" in the Prospectus.
Denominations..................... The Class A Certificates will be issued,
maintained and transferred on the
book-entry records of DTC and its
Participants in denominations of $1,000 and
in integral multiples
S-7
<PAGE>
thereof. The Class B Certificates will be
issuable in fully registered, certificated
form in denominations of $____________ and
in integral multiples of $1,000 in excess
thereof, with one Class B Certificate
evidencing an additional amount equal to
the remainder of the initial Certificate
Balance of such Class.
The Mortgage Pool................. The Mortgage Pool will consist of _____
conventional, balloon Mortgage Loans with
an Initial Pool Balance of
$_________________. On or prior to the
Delivery Date, the Depositor will acquire
the Mortgage Loans from the Mortgage Loan
Seller pursuant to a Mortgage Loan Purchase
Agreement, dated [the date hereof], between
the Depositor and the Mortgage Loan Seller
(the "Mortgage Loan Purchase Agreement").
In the Mortgage Loan Purchase Agreement,
the Mortgage Loan Seller has made certain
representations and warranties to the
Depositor regarding the characteristics and
quality of the Mortgage Loans and, as more
particularly described herein, has agreed
to cure any material breach thereof or
repurchase the affected Mortgage Loan. In
connection with the assignment of its
interests in the Mortgage Loans to the
Trustee, the Depositor will also assign its
rights under the Mortgage Loan Purchase
Agreement insofar as they relate to or
arise out of the Mortgage Loan Seller's
representations and warranties regarding
the Mortgage Loans. See "Description of the
Mortgage Pool--Representations and
Warranties; Repurchases" herein.
Each Mortgage Loan is secured by a first
mortgage lien on a fee simple estate in a
multifamily rental or commercial property
(each, a "Mortgaged Property"). ________ of
the Mortgage Loans, which represent _____%
of the Initial Pool Balance, are secured by
liens on Mortgaged Properties located in
_______________. The remaining Mortgaged
Properties are located throughout
___________ other states. See "Description
of the Mortgage Pool--Additional Mortgage
Loan Information" herein.
___________ of the Mortgage Loans, which
represent ______% of the Initial Pool
Balance, provide for scheduled payments of
principal and/or interest ("Monthly
Payments") to be due on the first day of
each month; the remainder of the Mortgage
Loans provide for Monthly Payments to be
due on the ____, _____, _____ or _____ day
of each month (the date in any month on
which a Monthly Payment on a Mortgage Loan
is first due, the "Due Date"). The
annualized rate at which interest accrues
(the "Mortgage Rate") on ____ of the
Mortgage Loans (the "ARM Loans"), which
represent _____% of the Initial Pool
Balance, is subject to adjustment on
specified Due Dates (each such date of
adjustment, an "Interest Rate Adjustment
Date") by adding a fixed number of basis
points (a "Gross Margin") to the value of a
base index (an "Index"), subject, in ______
cases, to lifetime maximum and/or minimum
Mortgage Rates, and in _____ cases, to
periodic maximum and/or minimum Mortgage
Rates, in each case as described herein;
and the remaining Mortgage Loans (the
"Fixed Rate Loans") bear interest at fixed
Mortgage Rates. ____ of the ARM Loans,
which represent ___% of the Initial Pool
Balance, provide for Interest Rate
Adjustment Dates that occur monthly, while
the remainder of the ARM Loans provide for
adjustments of the Mortgage Rate to occur
semi-annually or annually. [Identify
Mortgage Loan Index] See "Description of
the Mortgage Pool--Certain Payment
Characteristics" herein. The amount of the
Monthly Payment on all of the ARM Loans is
subject to adjustment on specified Due
Dates (each such date, a "Payment
Adjustment Date") to an amount that would
amortize the outstanding principal balance
of the Mortgage Loan over its then
remaining amortization schedule and pay
interest at the then applicable Mortgage
Rate. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date
following each related Interest Rate
Adjustment Date.
All of the Mortgage Loans provide for
monthly payments of principal based on
amortization schedules significantly longer
than the remaining terms of such Mortgage
S-8
<PAGE>
Loans, thereby leaving substantial
principal amounts due and payable (each
such payment, a "Balloon Payment") on their
respective maturity dates, unless prepaid
prior thereto.
As of the Cut-off Date, the Mortgage Loans
had the following additional
characteristics:
(i) Mortgage Rates ranging from ____% per annum
to ____% per annum, and a weighted average
Mortgage Rate of _____% per annum;
(ii) in the case of the ARM Loans, Gross Margins
ranging from _____ basis points to _____
basis points, and a weighted average Gross
Margin of _____ basis points;
(iii) for those ___ ARM Loans as to which such
characteristic applies, minimum lifetime
Mortgage Rates ranging from ___% per annum
to ___% per annum, and a weighted average
minimum lifetime Mortgage Rate of ____% per
annum;
(iv) for those ___ ARM Loans as to which such
characteristic applies, maximum lifetime
Mortgage Rates ranging from ___% per annum
to ___% per annum, and a weighted average
maximum lifetime Mortgage Rate of ___% per
annum;
(v) Cut-off Date Balances ranging from
$____________ to $____________, and an
average Cut-off Date Balance of
$____________;
(vi) original terms to scheduled maturity
ranging from ___ months to ____ months, and
a weighted average original term to
scheduled maturity of ___ months;
(vii) remaining terms to scheduled maturity
ranging from ___ months to ____ months, and
a weighted average remaining term to
scheduled maturity of ____ months;
(viii) Cut-off Date LTV Ratios (i.e., in each
case, a loan-to-value ratio based upon (a)
the Cut-off Date Balance of the Mortgage
Loan, and (b) the appraised value of the
related Mortgaged Property determined at
the time of origination of such loan)
ranging from _____% to ____%, and a
weighted average Cut-off Date LTV Ratio of
_____%; and
(ix) for those ___ Mortgage Loans as to which
such characteristic was determinable, Debt
Service Coverage Ratios (calculated as more
particularly described under "Description
of the Mortgage Pool--Additional Mortgage
Loan Information") ranging from _______x to
______x, and a weighted average Debt
Service Coverage Ratio of _______x.
The Mortgage Loans were originated between
19__ and 19__.
<PAGE>
Description of the
Certificates.................... The Certificates will be issued pursuant to
a Pooling and Servicing Agreement, to be
dated as of the Cut-off Date, among the
Depositor, the Master Servicer and the
Trustee (the "Pooling and Servicing
Agreement"), and will represent in the
aggregate the entire beneficial ownership
interest in a trust fund (the "Trust Fund")
consisting of the Mortgage Pool and certain
related assets.
A. Certificate
Balance...................... The aggregate Certificate Balance of the
Certificates as of the Delivery Date will
equal the Initial Pool Balance. The Class A
Certificates will have an initial
Certificate Balance of $_______________,
which represents _____% of the Initial Pool
Balance; the Class B Certificates will have
an initial Certificate Balance of
$___________, which represents ___% of the
Initial Pool Balance; the Class C
Certificates will have an initial
Certificate Balance of $____________, which
represents ___% of the Initial Pool
Balance; and the
S-9
<PAGE>
Class R Certificates will have a
Certificate Balance of zero. The
Certificate Balance of each Class of
Certificates outstanding at any time
represents the maximum amount that the
holders thereof are entitled to receive as
distributions allocable to principal from
the cash flow on the Mortgage Loans and
other assets in the Trust Fund. As more
specifically described herein, the
Certificate Balance of each Class of
Regular Certificates will be adjusted from
time to time on each Distribution Date to
reflect any reductions therein resulting
from the distribution of principal of such
Class. See "Description of the Certificates
--General" herein.
Losses experienced with respect to the
Mortgage Loans or otherwise with respect to
the Trust Fund will not be applied to
reduce either the Certificate Balance or
the absolute entitlement to interest of any
Class of Regular Certificates, even though
such losses may cause one or more of such
Classes to receive less than the full
amount of principal and interest to which
it is entitled. As a result, the aggregate
Stated Principal Balance of the Mortgage
Pool at any time subsequent to the initial
Distribution Date may be less than the
aggregate Certificate Balance of the
Regular Certificates. Such deficit will be
allocated to the respective Classes of
Regular Certificates (in each case to the
extent of its Certificate Balance) in
reverse alphabetical order of their Class
designations (i.e., C, B, A). Such
allocation will not reduce the Certificate
Balance of any such Class and is intended
solely to identify the portion (the
"Uncovered Portion") of the Certificate
Balance of each such Class for which there
is at such time no corresponding principal
amount of Mortgage Loans. See "Description
of the Certificates--Subordination" herein.
The "Stated Principal Balance" of each
Mortgage Loan outstanding at any time
represents the principal balance of such
Mortgage Loan ultimately due and payable to
the Certificateholders. As more
particularly described herein, the Stated
Principal Balance of each Mortgage Loan
initially will equal the Cut-off Date
Balance thereof and, on each Distribution
Date, will be reduced by any payments or
other collections (or advances in lieu
thereof) of principal of such Mortgage Loan
that are distributed on the Certificates on
such date. See "Description of the
Certificates--Distributions--Certain
Calculations with Respect to Individual
Mortgage Loans" herein.
B. Pass-Through
Rates........................ The Pass-Through Rate applicable to the
Class A and Class B Certificates for the
initial Distribution Date will equal _____%
per annum. With respect to any Distribution
Date subsequent to the initial Distribution
Date, the Pass-Through Rate for the Class A
Certificates and the Class B Certificates
will equal the Weighted Average Effective
Net Mortgage Rate for such Distribution
Date.
[The Pass-Through Rate applicable to the
Class C Certificates for any Distribution
Date will equal the Weighted Average
Effective Net Mortgage Rate for such
Distribution Date. The Class R Certificates
will have no specified Pass-Through Rate.]
The "Weighted Average Effective Net
Mortgage Rate" for each Distribution Date
is the weighted average of the applicable
"Effective Net Mortgage Rates" for the
Mortgage Loans, weighted on the basis of
their respective Stated Principal Balances
immediately prior to such Distribution
Date. For purposes of calculating the
Weighted Average Effective Net Mortgage
Rate for any Distribution Date, the
applicable "Effective Net Mortgage Rate"
for each Mortgage Loan is an annualized
rate equal to the Mortgage Rate in effect
for such Mortgage Loan as of the
commencement of the related Due Period, (a)
reduced by ___ basis points (the Mortgage
Rate, as so reduced, the "Net Mortgage
Rate"), and (b) if the accrual of interest
on such Mortgage Loan is computed other
than on the basis of a 360-day year
consisting of twelve 30-day months (which
is the basis of accrual for interest on the
Regular Certificates), then adjusted to
reflect that difference in computation.
S-10
<PAGE>
The "Due Period" for each Distribution Date
will be the period that begins on the ____
day of the month preceding the month in
which such Distribution Date occurs and
ends on the ____ day of the month in which
such Distribution Date occurs. See
"Description of the Certificates
--Distributions--Pass-Through Rates"
herein.
C. Distributions................ Distributions on the Certificates will be
made by the Master Servicer, to the extent
of available funds, on the ___ day of
each month or, if any such ___ day is not a
business day, then on the next succeeding
business day, beginning in __________ 199__
(each, a "Distribution Date"), to the
holders of record as of the close of
business on the __________ day of the month
preceding the month of each such
distribution (each, a "Record Date").
Notwithstanding the above, the final
distribution on any Certificate will be
made after due notice by the Master
Servicer of the pendency of such
distribution and only upon presentation and
surrender of such Certificates at the
location to be specified in such notice.
The total of all payments or other
collections (or advances in lieu thereof)
on or in respect of the Mortgage Loans that
are available for distribution to
Certificateholders on any Distribution Date
is herein referred to as the "Available
Distribution Amount" for such date. See
"Description of the
Certificates--Distributions--Method, Timing
and Amount" herein.
On each Distribution Date, for so long as
the Class A and/or Class B Certificates
remain outstanding, the Master Servicer
will (except as otherwise described under
"Description of the
Certificates--Termination" herein) apply
the Available Distribution Amount for such
date for the following purposes and in the
following order of priority, in each case
to the extent of remaining available funds:
(1) to distributions of interest to the
holders of the Class A Certificates in
an amount equal to all Distributable
Certificate Interest in respect of the
Class A Certificates for such
Distribution Date and, to the extent
not previously paid, for all prior
Distribution Dates;
(2) to distributions of principal to the
holders of the Class A Certificates in
an amount equal to the sum of (a) the
product of (i) the Class A
Certificates' Ownership Percentage (as
calculated immediately prior to such
Distribution Date), multiplied by (ii)
the Scheduled Principal Distribution
Amount for such Distribution Date,
plus (b) the entire Unscheduled
Principal Distribution Amount for such
Distribution Date (but not more than
would be necessary to reduce the
Certificate Balance of the Class A
Certificates to zero);
(3) to distributions of principal to the
holders of the Class A Certificates in
an amount equal to any Uncovered
Portion of the Certificate Balance of
the Class A Certificates immediately
prior to such Distribution Date;
(4) to distributions of interest to the
holders of the Class B Certificates in
an amount equal to all Distributable
Certificate Interest in respect of the
Class B Certificates for such
Distribution Date and, to the extent
not previously paid, for all prior
Distribution Dates;
(5) to distributions of principal to the
holders of the Class B Certificates in
an amount equal to the sum of (a) the
product of (i) the Class B
Certificates' Ownership Percentage (as
calculated immediately prior to such
Distribution Date), multiplied by (ii)
the Scheduled Principal Distribution
Amount for such Distribution Date,
plus (b) if the Class A Certificates
have been retired, then to the extent
not distributed in retirement thereof
on such Distribution Date, the entire
Unscheduled Principal Distribution
Amount for such Distribution Date (but
not more than
S-11
<PAGE>
would be necessary to reduce the
Certificate Balance of the Class B
Certificates to zero);
(6) to distributions of principal to the
holders of the Class A Certificates in
an amount equal to any Uncovered
Portion of the Certificate Balance of
the Class B Certificates immediately
prior to such Distribution Date (but
not more than would be necessary to
reduce the Certificate Balance of the
Class A Certificates to zero);
(7) to distributions of principal to the
holders of the Class B Certificates in
an amount equal to any Uncovered
Portion of the Certificate Balance of
the Class B Certificates immediately
prior to such Distribution Date, net
of any distributions of principal made
on such Distribution Date in respect
of the Class A Certificates as
described in the immediately preceding
clause (6);
(8) to distributions of interest to the
holders of the Class C Certificates in
an amount equal to all Distributable
Certificate Interest in respect of the
Class C Certificates for such
Distribution Date and, to the extent
not previously distributed, for all
prior Distribution Dates;
(9) to distributions of principal to the
holders of the Class C Certificates in
an amount equal to the product of (a)
the Class C Certificates' Ownership
Percentage (as calculated immediately
prior to such Distribution Date),
multiplied by (b) the Scheduled
Principal Distribution Amount for such
Distribution Date;
(10) to distributions of principal to the
holders of the respective Classes of
Regular Certificates, in alphabetical
order of their Class designations
(i.e., A, B, C), in an aggregate
amount equal to any Uncovered Portion
of the Certificate Balance of the
Class C Certificates immediately prior
to such Distribution Date (but, in
each case, not more than would be
necessary to reduce the related
Certificate Balance to zero); and
(11) to distributions to the holders of the
Class R Certificates in an amount
equal to the remaining balance, if
any, of the Available Distribution
Amount. See "Description of the
Certificates--Distributions--Priority"
here-in.
The "Distributable Certificate Interest" in
respect of any Class of Regular
Certificates for any Distribution Date will
equal 30 days' interest at the applicable
Pass-Through Rate accrued on the
Certificate Balance of such Class of
Regular Certificates immediately prior to
such Distribution Date, reduced (to not
less than zero) by such Class of Regular
Certificates' allocable share (in each
case, calculated as described herein) of
any Net Aggregate Prepayment Interest
Shortfall (as described below) for such
Distribution Date. The "Net Aggregate
Prepayment Interest Shortfall" for any
Distribution Date will be the amount, if
any, by which (a) the aggregate of any
Prepayment Interest Shortfalls incurred
during the related Due Period exceeds (b)
the aggregate of any Prepayment Interest
Excesses and prepayment premiums collected
during the related Due Period. A
"Prepayment Interest Shortfall" is a
shortfall in the collection of a full
month's interest (net of related servicing
fees) on any Mortgage Loan by reason of a
full or partial principal prepayment made
prior to its Due Date in any Due Period. A
"Prepayment Interest Excess" is a payment
of interest (net of related servicing fees)
made in connection with any full or partial
prepayment of a Mortgage Loan subsequent to
its Due Date in any Due Period, which
payment of interest is intended to cover
the period on and after such Due Date. See
"Description of the
Certificates--Distributions--Distributable
Certificate Interest" herein.
S-12
<PAGE>
The "Scheduled Principal Distribution
Amount" for any Distribution Date will
equal the aggregate of all scheduled
payments of principal (including the
principal portion of any Balloon Payments)
due on the Mortgage Loans during or, if and
to the extent not previously received or
advanced and distributed on prior
Distribution Dates, prior to the related
Due Period that were either received from
the borrowers as of the ___ day of the
month in which such Distribution Date
occurs or advanced by the Master Servicer
in respect of such Distribution Date. The
"Unscheduled Principal Distribution Amount"
for any Distribution Date will, in general,
equal the aggregate of (i) all prepayments
of principal of the Mortgage Loans received
from the borrowers during the related Due
Period, and (ii) any other unscheduled
collections on or in respect of the
Mortgage Loans and any Mortgaged Properties
acquired in respect of defaulted Mortgage
Loans through foreclosure, deed in lieu of
foreclosure or otherwise (each, an "REO
Property"), which other unscheduled
collections were received during the
related Due Period and were identified and
applied by the Master Servicer as
recoveries of previously unadvanced
principal of the related Mortgage Loans.
The respective amounts which constitute the
Scheduled Principal Distribution Amount and
Unscheduled Principal Distribution Amount
for any Distribution Date are herein
collectively referred to from time to time
as the "Distributable Principal". The
"Ownership Percentage" evidenced by any
Class of Certificates as of any date of
determination will equal a fraction,
expressed as a percentage, the numerator of
which is the then Certificate Balance of
such Class of Certificates, net (in the
case of a Class of Regular Certificates) of
any Uncovered Portion of such Certificate
Balance, and the denominator of which is
the then aggregate Stated Principal Balance
of the Mortgage Pool. See "Description of
the Certificates--Distributions--Scheduled
Principal Distribution Amount and
Unscheduled Principal Distribution Amount"
herein.
Certain Investment Considerations; Mortgage
Loan Prepayments. The yield on the Offered
Certificates of either class will depend
on, among other things, the Pass-Through
Rate for such Certificates. The yield on
any Offered Certificate that is purchased
at a discount or premium will also be
affected by the rate and timing of
distributions in respect of principal on
such Certificate, which in turn will be
affected by (i) the rate and timing of
principal payments (including principal
prepayments) on the Mortgage Loans, (ii)
the availability from time to time of an
amount other than Distributable Principal
to amortize the Class Balances of such
Certificates and (iii) the extent to which
the items described in subclauses (i) and
(ii) are applied on any Distribution Date
in reduction of the Certificate Balance of
the Class to which such Certificate
belongs, which will be dependent, in part,
on the nature of such amounts. See
"Description of the
Certificates--Distributions--Priority" and
"Distributions--Calculation of Principal
Distributions" herein.
The actual rate of prepayment of principal
on the Mortgage Loans cannot be predicted.
The Mortgage Loans may be prepaid at any
time, subject, in the case of ____ Mortgage
Loans, which represent _____% of the
Initial Pool Balance, to payment of a
Prepayment Premium. The investment
performance of the Offered Certificates may
vary materially and adversely from the
investment expectations of investors due to
prepayments on the Mortgage Loans being
higher or lower than anticipated by
investors. The actual yield to the holder
of an Offered Certificate may not be equal
to the yield anticipated at the time of
purchase of the Certificate or,
notwithstanding that the actual yield is
equal to the yield anticipated at that
time, the total return on investment
expected by the investor or the expected
weighted average life of the Certificate
may not be realized. These effects are
summarized below. For a discussion of
certain factors affecting prepayment of the
Mortgage Loans, including the effect of
Prepayment Premiums, see "Risk Factors" and
"Yield and Maturity Considerations" herein
and "Yield Considerations" in the
Prospectus. In deciding whether to purchase
any Offered Certificates, an investor
should make an independent decision as to
the appropriate prepayment assumptions to
be used.
S-13
<PAGE>
D. Yield Considerations......... Yield. If an investor purchases an Offered
Certificate at an amount equal to its
unpaid principal balance (i.e., at "par"),
the effective yield to that investor
(assuming that there are no interest
shortfalls and assuming the full return of
the purchaser's investment principal) will
approximate the pass-through rate on that
Certificate. If an investor pays less or
more than the unpaid principal balance of
the Certificate (i.e. buys the Certificate
at a "discount" or "premium",
respectively), then, based on the
assumptions set forth in the preceding
sentence, the effective yield to the
investor will be higher or lower,
respectively, than the pass-through rate on
that Certificate, because such discount or
premium will be amortized over the life of
the Certificate. Any deviation in the
actual rate of prepayments on the Mortgage
Loans from the rate assumed by the investor
will affect the period of time over which,
or the rate at which, the discount or
premium will be amortized and,
consequently, will change the investor's
actual yield from that anticipated. An
investor that purchases an Offered
Certificate at a discount should carefully
consider the risk that a slower than
anticipated rate of principal payments on
the Mortgage Loans will result in an actual
yield that is lower than such investor's
expected yield. An investor that purchases
any Offered Certificate at a premium should
consider the risk that a faster than
anticipated rate of principal payments on
the Mortgage Loans will result in an actual
yield that is lower than such investor's
expected yield. Insofar as an investor's
initial investment in any Offered
Certificate is returned in the form of
payments of principal thereon, there can be
no assurance that such amounts can be
reinvested in a comparable alternative
investment with a comparable yield.
Reinvestment Risk. As stated above, if an
Offered Certificate is purchased at par,
fluctuations in the rate of distributions
of principal will generally not affect the
yield to maturity of that Certificate.
However, the total return on any
purchaser's investment, including that of
an investor who purchases at par, will be
reduced to the extent that principal
distributions received on its Certificate
cannot be reinvested at a rate as high as
the pass-through rate of the Certificate.
Investors in the Offered Certificates
should consider the risk that rapid rates
of prepayments on the Mortgage Loans may
coincide with periods of low prevailing
market interest rates. During periods of
low prevailing market interest rates,
mortgagors may be expected to prepay or
refinance Mortgage Loans that carry
interest rates significantly higher than
then-current interest rates for mortgage
loans. Consequently, the amount of
principal distributions available to an
investor for reinvestment at such low
prevailing interest rates may be relatively
large. Conversely, slow rates of
prepayments on the Mortgage Loans may
coincide with periods of high prevailing
market interest rates. During such periods,
it is less likely that mortgagors will
elect to prepay or refinance Mortgage Loans
and, therefore, the amount of principal
distributions available to an investor for
reinvestment at such high prevailing
interest rates may be relatively small.
Weighted Average Life Volatility. One
indication of the effect of varying
prepayment rates on a security is the
change in its weighted average life. The
"weighted average life" of an Offered
Certificate is the average amount of time
that will elapse between the date of is-
suance of the Certificate and the date on
which each dollar in reduction of the
principal balance of the Certificate is
distributed to the investor. Low rates of
prepayment may result in the extension of
the weighted average life of a Certificate;
high rates may result in the shortening of
such weighted average life. In general, if
the weighted average life of a Certificate
purchased at par is extended beyond that
initially anticipated, such Certificate's
market value may be adversely affected,
even though the yield to maturity on the
Certificate is unaffected. The weighted
average lives of the Offered Certificates,
under various prepayment scenarios, are
displayed in the table appearing under the
heading "Yield and Maturity
Considerations--Weighted Average Life"
herein. [The following disclosure is
applicable to Stripped Interest
Certificates because the Class S
Certificates are interest-only Certificates
and are not entitled to any distributions
in respect of principal, the yield to
maturity of the Class S Certificates will
be especially sensitive to the prepayment,
S-14
<PAGE>
repurchase and default experience on the
Mortgage Loans, which may fluctuate
significantly from time to time. A rate of
principal payments that is more rapid than
expected by investors will have a material
negative effect on the yield to maturity of
the Class S Certificates. See "Risk
Factors--Yield Sensitivity of the Class S
Certificates" and "Yield and Maturity
Considerations--Yield Sensitivity of the
Class S Certificates" herein.]
P&I Advances...................... [Subject to a recoverability determination
as described herein, the Master Servicer is
required to make advances (each, a "P&I
Advance") with respect to each Distribution
Date in an amount that is generally equal
to the aggregate of: (i) all delinquent
payments of principal and interest (net of
related servicing fees) on the Mortgage
Loans, other than delinquent Balloon
Payments, scheduled to be due during the
related Due Period; (ii) in the case of
each Mortgage Loan delinquent in respect of
its Balloon Payment, an amount equal to 30
days' interest thereon (net of related
servicing fees), but only to the extent
that the related borrower has not made a
payment sufficient to cover such amount
under any forbearance arrangement or
otherwise, which payment has been included
in the Available Distribution Amount for
such Distribution Date; and (iii) in the
case of each REO Property, an amount equal
to 30 days' imputed interest with respect
thereto (net of related servicing fees),
but only to the extent that such amount is
not covered by any net income from such REO
Property included in the Available
Distribution Amount for such Distribution
Date. As more fully described herein, the
Master Servicer will be entitled to
interest on any P&I Advances made, and
certain servicing expenses incurred, by it
or on its behalf. Such interest will accrue
from the date any such P&I Advance is made
or such servicing expense is incurred at an
annualized rate equal to ____% (the "Master
Servicer Reimbursement Rate") and will be
paid, contemporaneously with the
reimbursement of such P&I Advance or such
servicing expense, out of general
collections on the Mortgage Pool then on
deposit in the Certificate Account. See
"Description of the Certificates--P&I
Advances" herein and "Description of the
Certificates--Advances in Respect of
Delinquencies" and "Description of the
Pooling Agreements--Certificate Account" in
the Prospectus.]
Subordination..................... The rights of holders of the Class B
Certificates and each Class of the Private
Certificates (collectively, the
"Subordinate Certificates") to receive
distributions of amounts collected or
advanced on the Mortgage Loans will, in
each case, be subordinated, to the extent
described herein, to the rights of holders
of the Class A Certificates and each other
Class of Subordinate Certificates, if any,
with an earlier alphabetical Class
designation. This subordination is intended
to enhance the likelihood of timely receipt
by the holders of the Class A Certificates
of the full amount of Distributable
Certificate Interest payable in respect of
such Certificates on each Distribution
Date, and the ultimate receipt by such
holders of principal equal to the entire
Certificate Balance of the Class A
Certificates. Similarly, but to a lesser
degree, this subordination is also intended
to enhance the likelihood of timely receipt
by the holders of the Class B Certificates
of the full amount of Distributable
Certificate Interest payable in respect of
such Certificates on each Distribution
Date, and the ultimate receipt by such
holders of principal equal to the entire
Certificate Balance of the related Class of
Certificates. The protection afforded to
the holders of each Class of Offered
Certificates by means of the subordination
of each other Class of Certificates with a
later alphabetical Class designation will
be accomplished by the application of the
Available Distribution Amount on each
Distribution Date in the order described
above in this Summary under "Description of
the Certificates--Distributions". No other
form of Credit Support will be available
for the benefit of the holders of the
Offered Certificates.
Optional Termination.............. At its option, the Master Servicer may
purchase all of the Mortgage Loans and REO
Properties, and thereby effect termination
of the Trust Fund and early retirement of
the then outstanding Certificates, on any
Distribution Date on which the remaining
aggregate Stated
S-15
<PAGE>
Principal Balance of the Mortgage Pool is
less than ___% of the Initial Pool Balance.
See "Description of the
Certificates--Termination" herein and in
the Prospectus.
Certain Federal Income
Tax Consequences................ Beneficial owners of the Offered
Certificates will be required to report
income thereon in accordance with the
accrual method of accounting. [It is
anticipated that the Class _____
Certificates will be issued with original
issue discount in an amount equal to the
excess of the initial Class Certificate
Balances thereof (plus _____ days of
interest at the pass-through rates thereon)
over their respective issue prices
(including accrued interest). It is further
anticipated that the Class _____
Certificates will be issued at a premium
and that the Class _____ Certificates will
be issued with de minimis original issue
discount for federal income tax purposes.
Although not free from doubt, it is
anticipated that the Class _____
Certificates will be treated as issued with
original issue discount in an amount equal
to the excess of all distributions of
principal and interest thereon over their
issue price (including accrued interest),
and the Depositor intends to report income
in respect of such Class of Certificates in
this manner.] See "Certain Federal Income
Tax Consequences" in the Prospectus.
ERISA Considerations.............. A fiduciary of any employee benefit plan or
other retirement arrangement subject to
Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
or Section 4975 of the Code (a "Plan")
should review carefully with its legal
advisors whether the purchase or holding of
Offered Certificates could give rise to a
transaction that is prohibited or is not
otherwise permitted either under ERISA or
Section 4975 of the Code or whether there
exists any statutory or administrative
prohibited transaction exemption applicable
to an investment therein.
[The U.S. Department of Labor has issued to
Bear, Stearns & Co. Inc. an individual pro-
hibited transaction exemption, Prohibited
Transaction Exemption 90-33, as amended by
Prohibited Transaction Exemption 97-34,
that generally exempts from the application
of certain of the prohibited transaction
provisions of Section 406 of ERISA and the
excise taxes imposed on such prohibited
transactions by Section 4975(a) and (b) of
the Internal Revenue Code of 1986, as
amended (the "Code"), transactions relating
to the purchase, sale and holding of
pass-through certificates underwritten by
the Underwriter, Bear, Stearns & Co. Inc.,
and the servicing and operation of related
asset pools, provided that certain
conditions are satisfied.]
[The Depositor expects that Prohibited
Transaction Exemption 90-33 will generally
apply to the Class A Certificates, but it
will not apply to the Class B Certificates.
As a result,] no transfer of a [Class B]
Certificate or any interest therein may be
made to a Plan or to any person who is
directly or indirectly purchasing such
[Class B] Certificate or interest therein
on behalf of, as named fiduciary of, as
trustee of, or with assets of a Plan,
unless the prospective transferee (at its
own expense) provides the Certificate
Registrar (as identified herein) with a
certification and an opinion of counsel
which establish to the Certificate
Registrar's satisfaction that such transfer
will not result in a violation of Section
406 of ERISA or Section 4975 of the Code or
cause the Master Servicer or the Trustee to
be deemed a fiduciary of such Plan or
result in the imposition of an excise tax
under Section 4975 of the Code. See "ERISA
Considerations" herein and in the
Prospectus.
Rating ......................... It is a condition of their issuance that
the Class A and Class B Certificates be
rated not lower than "___" and "___",
respectively, by _______________________
([collectively,] the "Rating Agenc[ies]").
A security rating is not a recommendation
to buy, sell or hold securities and may be
subject to revision or withdrawal at any
time by the assigning rating organization.
A security rating does not address the
frequency of prepayments of Mortgage Loans,
or the corresponding effect on yield to
investors. [The following disclosure is
S-16
<PAGE>
applicable to Stripped Interest
Certificates... A security rating does not
address the frequency or likelihood of
prepayments (whether voluntary or
involuntary) of Mortgage Loans, or the
possibility that, as a result of
prepayments, investors in the Class S
Certificates may realize a lower than
anticipated yield or may fail to recover
fully their initial investment.] See
"Rating" herein and "Risk Factors--Limited
Nature of Ratings" in the Prospectus.
Legal Investment.................. [The Class A Certificates will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market
Enhancement Act of 1984, as amended
("SMMEA"), for so long as they are rated in
one of the two highest ratings categories
by one or more nationally recognized
statistical rating organizations and, as
such, are legal investments for certain
entities to the extent provided in SMMEA
and the Trust Fund consists of Mortgage
Loans, each of which is secured by a first
priority lien on a single parcel of real
estate upon which is located a dwelling or
a mixed residential and commercial
structure or a residential manufactured
home. Such investments, however, will be
subject to general regulatory
considerations governing investment
practices under state and federal law. In
addition, institutions whose investment
activities are subject to review by federal
or state regulatory authorities may be or
may become subject to restrictions, which
may be retroactively imposed by such
regulatory authorities, on the investment
by such institutions in certain forms of
mortgage related securities.
[The Class B Certificates will not be
"mortgage related securities" within the
meaning of the Secondary Mortgage Market
Enhancement Act of 1984. As a result, the
appropriate characterization of the Class B
Certificates under various legal investment
restrictions, and thus the ability of
investors subject to these restrictions to
purchase the Class B Certificates, may be
subject to significant interpretative
uncertainties.]
Investors should consult their own legal
advisors to determine whether and to what
extent the Offered Certificates constitute
legal investments for them. See "Legal
Investment" herein and in the Prospectus.
S-17
<PAGE>
RISK FACTORS
Prospective purchasers of Offered Certificates should consider, among
other things, the following risk factors (as well as the risk factors set forth
under "Risk Factors" in the Prospectus) in connection with an investment
therein.
THE CERTIFICATES
Limited Liquidity. There is currently no secondary market for the
Offered Certificates. The Depositor has been advised by the Underwriter that it
currently intends to make a secondary market in the Offered Certificates;
however, that the Underwriter has no obligation to do so and any market making
may be discontinued at any time. There can be no assurance that a secondary
market for the Offered Certificates will develop or, if it does develop, that
it will provide holders of Offered Certificates with liquidity of investment or
that it will continue for the life of the Offered Certificates. The Offered
Certificates will not be listed on any securities exchange.
See "Risk Factors--Secondary Market" in the Prospectus.
Variability in Yield; Priority of Payments. The yield on any Offered
Certificate will depend on, among other things, the Pass-Through Rate in effect
from time to time for such Certificate, which, for any Distribution Date, will
equal the Weighted Average Effective Net Mortgage Rate for such date.
Accordingly, the yield on the Offered Certificates will be sensitive to
adjustments to the Mortgage Rates on the ARM Loans and to changes in the
relative composition of the Mortgage Pool as a result of scheduled
amortization, voluntary prepayments and involuntary liquidations of Mortgage
Loans. See "Description of the Certificates--Distributions--Pass-Through Rate"
herein.
The yield on any Offered Certificate that is purchased at a discount
or premium will also be affected by the rate and timing of principal payments
on such Certificate, which in turn will be affected by (i) the rate and timing
of principal payments (including principal prepayments) and other principal
collections on the Mortgage Loans, (ii) the availability from time to time of
amounts other than Distributable Principal to amortize the Certificate Balances
of the respective Classes of Certificates, and (iii) the extent to which the
items described in subclauses (i) and (ii) are applied on any Distribution Date
in reduction of the Certificate Balance of the Class to which such Certificate
belongs. As and to the extent described herein, the holders of each Class of
Offered Certificates will be entitled to receive on each Distribution Date
their allocable share (calculated on the basis of the Ownership Percentage
evidenced by such Class of Certificates immediately prior to such date) of the
Scheduled Principal Distribution Amount for such Distribution Date; however,
the Unscheduled Principal Distribution Amount for each Distribution Date will
be distributable entirely to the holders of the Class A Certificates, until the
Certificate Balance thereof is reduced to zero, and will thereafter be
distributable entirely to the holders of the Class B Certificates, until the
Certificate Balance thereof is reduced to zero. The amount of the Unscheduled
Principal Distribution Amount for any Distribution Date will be dependent in
part upon the amount of principal prepayments received during the related Due
Period. See "--The Mortgage Loans--Prepayments" herein. In addition, as and to
the extent described herein, distributions in respect of an Uncovered Portion
of the Certificate Balance of any Class of Regular Certificates will be
applied, to the extent of such Uncovered Portion, in reduction of the
Certificate Balance(s) of such Class of Regular Certificates and each other
Class of Regular Certificates, if any, with an earlier alphabetical Class
designation, in alphabetical order of such Class designations. See "Description
of the Certificates--Distributions--Priority" and "--Distributions--Scheduled
Principal Distribution Amount and Unscheduled Principal Distribution Amount"
herein. Because it is impossible to predict accurately the timing and amount of
principal prepayments and other unscheduled recoveries of principal, if any,
that will be received, or the availability from time to time of any amounts
other than Distributable Principal to amortize the Certificate Balances of the
respective Classes of Certificates, investors may find it difficult to analyze
the effect that such items might have on the yield and weighted average lives
of the Offered Certificates.
Furthermore, the yield on any Offered Certificate also will be
affected by the rate and timing of delinquencies and defaults on the Mortgage
Loans and the severity of ensuing losses. As and to the extent described
herein, the Private Certificates are subordinate in right and time of payment
to the Offered Certificates and will bear shortfalls in collections and losses
incurred in respect of the Mortgage Loans prior to the Offered Certificates;
and the Class B Certificates are subordinate in right and time of payment to
the Class A Certificates and will bear shortfalls in collections and losses
incurred in respect of the Mortgage Loans prior to the Class A Certificates.
See "Description of the Mortgage Pool", "Description of the
Certificates--Distributions" and "--Subordination" and "Yield and Maturity
Considerations" herein and "Yield and Maturity Considerations" in the
Prospectus.
[The following disclosure is applicable to Stripped Interest Certificates...
S-18
<PAGE>
Yield Sensitivity of the Class S Certificates. The yield to maturity
of the Class S Certificates will be especially sensitive to the prepayment,
repurchase and default experience on the Mortgage Loans, which may fluctuate
significantly from time to time. A rate of principal payments that is more
rapid than expected by investors will have a material negative effect on the
yield to maturity of the Class S Certificates. There can be no assurance that
the Mortgage Loans will prepay at any particular rate. Further, because the
Notional Amount of the Class S Certificates is equal to the Certificate Balance
of the Class A Certificates, any amount distributable in respect of principal
of the Class A Certificates will have a negative effect on the yield to
maturity of the Class S Certificates. Prospective investors in the Class S
Certificates should fully consider the associated risks, including the risk
that such investors may not fully recover their initial investment. See "Yield
and Maturity Considerations--Yield Sensitivity of the Class S Certificates"
herein.]
THE MORTGAGE LOANS
Nature of the Mortgaged Properties. The Mortgaged Properties consist
solely of multifamily and commercial properties. Lending on the security of
multifamily residential and commercial property is generally viewed as exposing
the lender to a greater risk of loss than lending upon the security of one- to
four-family residences. In contrast to lending on the security of single-family
residences, multifamily residential and commercial lending typically involves
larger loans to a single obligor or group of related obligors. Furthermore, the
repayment of loans secured by income producing properties is typically
dependent upon the successful operation of the related real estate project,
which in turn is dependent upon, among other things, the supply and demand for
comparable rental space in the relevant locale and the performance of the
property manager. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed), the obligor's ability to repay the loan
may be impaired and the resale value of the particular property may decline. In
addition, the successful operation of a multifamily rental or commercial
property may be affected by circumstances outside the control of the borrower
or lender, such as the deterioration of the surrounding neighborhood, the
imposition of rent control or changes in the tax laws. Historical operating
results of the Mortgaged Properties may not be comparable to future operating
results. See "Factors--Risks Associated with Certain Mortgage Loans and
Mortgaged Properties" in the Prospectus.
Limited Recourse. The Mortgage Loans are not insured or guaranteed by
any governmental entity or private mortgage insurer. The Depositor has not
undertaken any evaluation of the significance of the recourse provisions of any
of a number of the Mortgage Loans that provide for recourse against the related
borrower or another person in the event of a default. Accordingly, investors
should consider all of the Mortgage Loans to be non-recourse loans as to which
recourse in the case of default will be limited to the specific property and
such other assets, if any, as were pledged to secure a Mortgage Loan.
Environmental Law Considerations. [The Mortgage Loan Seller has
represented and warranted in the Mortgage Loan Purchase Agreement that an
environmental site assessment was conducted in connection with the origination
of each Mortgage Loan. Furthermore, the Mortgage Loan Seller has agreed that,
in the event of a material breach of such representation and warranty, it will
either cure the breach or repurchase the affected Mortgage Loan. The Mortgage
Loan Seller's representations and warranties regarding the Mortgage Loans set
forth in the Mortgage Loan Purchase Agreement will be assigned, together with
the related cure and repurchase obligations, by the Depositor to the Trustee in
connection with the Depositor's assignment of its interests in the Mortgage
Loans. Furthermore, the Mortgage Loan Seller's repurchase obligation will
constitute the sole remedy to Certificateholders and the Trustee for any
material breach of such representation and warranty, and neither the Depositor
nor any of its affiliates will be obligated to repurchase the affected Mortgage
Loan if the Mortgage Loan Seller defaults on its obligation to do so. See
"Description of the Mortgage Pool--Representations and Warranties; Repurchases"
herein.]
The Pooling and Servicing Agreement requires that the Master Servicer
obtain an environmental site assessment of a Mortgaged Property prior to
acquiring title thereto or assuming its operation. Such prohibition effectively
precludes enforcement of the security for the related Mortgage Note until a
satisfactory environmental site assessment is obtained (or until any required
remedial action is thereafter taken), but will decrease the likelihood that the
Trust Fund will become liable for a material adverse environmental condition at
the Mortgaged Property. However, there can be no assurance that the
requirements of the Pooling and Servicing Agreement will effectively insulate
the Trust Fund from potential liability for a materially adverse environmental
condition at any Mortgaged Property. Given the limited scope of environmental
site assessments, an environmental condition that may affect or exist on or
around a particular Mortgaged Property may not have been discovered during the
course of such environmental site assessment (including regulatory file
reviews). Moreover, the severity of an environmental condition discovered
during an environmental site assessment may not have been revealed fully
because of the limited nature of the investigation. In addition, environmental
conditions may develop after completion of the environmental site assessments,
by operation of the property or otherwise. See "Description of the Pooling
Agreements--Realization Upon Defaulted Mortgage Loans", "Risk
Factors--Environmental Risks" and "Certain Legal Aspects of Mortgage
Loans--Environmental Legislation" in the Prospectus.
S-19
<PAGE>
Geographic Concentration. ______ Mortgage Loans, which represent ____%
of the Initial Pool Balance, are secured by liens on Mortgaged Properties
located in _____________. In general, that concentration increases the exposure
of the Mortgage Pool to any adverse economic or other developments that may
occur in _________. [In recent periods, _____________ (along with other regions
of the United States) has experienced a significant downturn in the market
value of real estate.]
Concentration of Mortgage Loans and Borrowers. Several of the Mortgage
Loans have Cut-off Date Balances that are substantially higher than the average
Cut-off Date Balance. In general, concentrations in a mortgage pool of loans
with larger-than-average balances can result in losses that are more severe,
relative to the size of the pool, than would be the case if the aggregate
balance of the pool were more evenly distributed. Concentration of borrowers
also poses increased risks. For instance, if a borrower that owns several
Mortgaged Properties experiences financial difficulty at one Mortgaged
Property, or at another income-producing property that it owns, it could
attempt to avert foreclosure by filing a bankruptcy petition that might have
the effect of interrupting Monthly Payments for an indefinite period on all of
the related Mortgage Loans.
Adjustable Rate Mortgage Loans. ________ of the Mortgage Loans, which
represent ____% of the Initial Pool Balance, are ARM Loans. Increases in the
required Monthly Payments on ARM Loans in excess of those assumed in the
original underwriting of such loans may result in a default rate higher than
that on mortgage loans with fixed mortgage rates.
Balloon Payments. None of the Mortgage Loans is fully amortizing over
its term to maturity. Thus, each Mortgage Loan will have a substantial payment
(that is, a Balloon Payment) due at its stated maturity unless prepaid prior
thereto. Loans with Balloon Payments involve a greater risk to the lender than
self-amortizing loans because the ability of a borrower to make a balloon
payment typically will depend upon its ability either to refinance the loan or
to sell the related mortgaged property. See "Risk Factors--Balloon Payments" in
the Prospectus.
In order to maximize recoveries on defaulted Mortgage Loans, the
Pooling and Servicing Agreement enables the Master Servicer to extend and
modify Mortgage Loans that are in material default or as to which a payment
default (including the failure to make a Balloon Payment) is imminent; subject,
however, to the limitations described under "Servicing of the Mortgage
Loans--Modifications, Waivers and Amendments" herein. There can be no
assurance, however, that any such extension or modification will increase the
present value of recoveries in a given case. Any delay in collection of a
Balloon Payment that would otherwise be distributable in respect of a Class of
Offered Certificates, whether such delay is due to borrower default or to
modification of the related Mortgage Loan by the Master Servicer, will likely
extend the weighted average life of such Class of Offered Certificates. See
"Yield and Maturity Considerations" herein and in the Prospectus.
Management. The successful operation of a real estate project is
dependent upon the performance and viability of the property manager of such
project. The property manager is responsible for responding to changes in the
local market, planning and implementing the rental structure, including
establishing levels of rent payments, and advising the borrowers so that
maintenance and capital improvements are carries out in a timely fashion. There
is no assurance regarding the performance of any operator and/or managers or
persons who may become operators and/or managers upon the expiration or
termination of leases or management agreements or following any default or
foreclosure under a Mortgage Loan.
[Inclusion of Delinquent Mortgage Loans. The Mortgage Pool will
include _____ Mortgage Loans, representing _____% of the Initial Pool Balance,
that [describe generally the characteristics of those delinquent Mortgage
Loans, if any, included in the Mortgage Pool]. The amount of any applicable
credit support provided to a Class of Certificates may not cover all losses and
shortfalls related to such delinquent Mortgage Loans, and prospective investors
should consider the risk that the inclusion of such Mortgage Loans in the
Mortgage Pool may adversely affect the rate of defaults and prepayments in
respect of the Mortgage Pool and the yield on the Offered Certificates. See
"Risk Factors--Delinquent Mortgage Loans" in the Prospectus.]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of ___ conventional, balloon
Mortgage Loans with an Initial Pool Balance of $_______________. Each Mortgage
Loan is evidenced by a promissory note or other evidence of indebtedness (a
"Mortgage Note")
S-20
<PAGE>
and secured by a first priority lien, created by a mortgage, deed of trust or
similar instrument (a "Mortgage"), on a fee simple estate in a multifamily
rental or commercial property (a "Mortgaged Property"). All percentages of the
Mortgage Loans, or of any specified group of Mortgage Loans, referred to herein
without further description are approximate percentages by aggregate Cut-off
Date Balance.
The Mortgage Loans will be acquired by the Depositor on or before the
Delivery Date from __________________ (the "Mortgage Loan Seller"), which
either originated the Mortgage Loans or acquired them from their respective
originators. See "--The Mortgage Loan Seller" herein.
The Mortgage Loans were originated between 19__ and 19__. [While the
Depositor has caused to be undertaken a limited review of the records and files
related to the Mortgage Loans in connection with the issuance of the
Certificates, none of the Mortgage Loans was "re-underwritten" or subjected to
the type of review that would typically be made in respect of a newly
originated mortgage loan. All of the Mortgaged Properties were inspected by or
on behalf of the Depositor within the ____ month period preceding the Cut-off
Date to assess their general condition, which in virtually all cases was
determined to be average or better. However, no Mortgaged Property was
re-appraised by or on behalf of the Depositor to assess its current value, and
no evaluation was made as to the extent of deferred maintenance at any
Mortgaged Property or whether adequate reserves, if any, have been escrowed to
cover such deferred maintenance.]
CERTAIN PAYMENT CHARACTERISTICS
___ of the Mortgage Loans, which represent ___% of the Initial Pool
Balance, have Due Dates that occur on the first day of each month. The
remaining Mortgage Loans have Due Dates that occur on the ______ (____% of the
Mortgage Loans), _____ (____% of the Mortgage Loans), _____ (____% of the
Mortgage Loans), and _______ (____% of the Mortgage Loans) day of each month,
respectively.
____________ of the Mortgage Loans (the "ARM Loans"), which represent
____% of the Initial Pool Balance, bear interest at Mortgage Rates that are
subject to adjustment on periodically occurring Interest Rate Adjustment Dates
by adding the related Gross Margin to the value of a base index (an "Index"),
subject in ______ cases to rounding conventions and lifetime minimum and/or
maximum Mortgage Rates and, in the case of ________ Mortgage Loans, which
represent ____% of the Initial Pool Balance, to periodic minimum and/or maximum
Mortgage Rates. The remaining Mortgage Loans (the "Fixed Rate Loans") bear
interest at fixed Mortgage Rates. [None of the ARM Loans is convertible into a
Fixed Rate Loan.]
[Identify Mortgage Loan Index] The adjustments to the Mortgage Rates
on the ARM Loans may in each case be based on the value of the related Index as
available a specified number of days prior to an Interest Rate Adjustment Date,
or may be based on the value of the related Index as most recently published as
of an Interest Rate Adjustment Date or as of a designated date preceding an
Interest Rate Adjustment Date. ____ of the ARM Loans, which represent ___% of
the Initial Pool Balance, provide for Interest Rate Adjustment Dates that occur
monthly; ____ of the ARM Loans, which represent ___% of the Initial Pool
Balance, provide for Interest Rate Adjustment Dates that occur semi-annually;
and the remaining ARM Loans provide for Interest Rate Adjustment Dates that
occur annually.
The Monthly Payments on each ARM Loan are subject to adjustment on
each Payment Adjustment Date to an amount that would amortize fully the
principal balance of the Mortgage Loan over its then remaining amortization
schedule and pay interest at the Mortgage Rate in effect during the one month
period preceding such Payment Adjustment Date. The ARM Loans provide for
Payment Adjustment Dates that occur on the Due Date following each related
Interest Rate Adjustment Date.
All of the Mortgage Loans provide for monthly payments of principal
based on amortization schedules that are significantly longer than the
remaining terms of such Mortgage Loans, thereby leaving substantial principal
amounts due and payable (each such payment, a "Balloon Payment") on their
respective maturity dates, unless prepaid prior thereto.
No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose fees or penalties ("Prepayment
Premiums") in connection with full or partial prepayments. Prepayment Premiums
are payable to the Master Servicer as additional servicing compensation, to the
extent not otherwise applied to offset Prepayment Interest Shortfalls, and may
be waived by the Master Servicer in accordance with the servicing standard
described under "Servicing of the Mortgage Loans--General" herein.
[The Index]
S-21
<PAGE>
[Describe Index and include 5 year history.]
DELINQUENT MORTGAGE LOANS
As of the Cut-Off Date, [no] Mortgage Loan was more than 30 days
delinquent in respect of any Monthly Payment.
[Describe those delinquent Mortgage Loans, if any, included in the
Trust Fund.]
ADDITIONAL MORTGAGE LOAN INFORMATION
The following tables set forth the specified characteristics of, in
each case as indicated, the ARM Loans, the Fixed Rate Loans or all the Mortgage
Loans. The sum in any column may not equal the indicated total due to rounding.
The following table sets forth the range of Mortgage Rates on the
Mortgage Loans as of the Cut-off Date:
MORTGAGE RATES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE CUT- PERCENT BY
RANGE OF MORTGAGE RATES MORTGAGE OFF DATE PERCENT BY AGGREGATE CUT-
(%) LOANS BALANCE NUMBER OFF DATE BALANCE
- ----------------------- ------------- ------------------ -------------- --------------------
<S> <C> <C> <C> <C>
------------- ------------------ -------------- --------------------
Total..................
============= ================== ============== ====================
</TABLE>
Weighted Average
Mortgage Rate (All Loans): ______% per annum
Weighted Average
Mortgage Rate (ARM Loans): ____% per annum
Weighted Average
Mortgage Rate (Fixed Rate Loans): _____% per annum
The following table sets forth the range of Gross Margins for the ARM
Loans:
GROSS MARGINS FOR THE ARM LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE CUT- PERCENT BY
RANGE OF GROSS MARGINS ARM OFF DATE PERCENT BY AGGREGATE CUT-
(%) LEASES BALANCE NUMBER OFF DATE BALANCE
- ---------------------- ------------- ------------------ -------------- --------------------
<S> <C> <C> <C> <C>
------------- ------------------ -------------- --------------------
Total.................
============= ================== ============== ====================
</TABLE>
Weighted Average
Gross Margin: ______%
The following table sets forth the frequency of adjustments to the
Mortgage Rates and Monthly Payments of the ARM Loans.
Frequency of Adjustments to Mortgage Rates and Monthly Payments for
the ARM Loans.
S-22
<PAGE>
<TABLE>
<CAPTION>
MONTHLY PERCENT BY
MORTGAGE RATE PAYMENT NUMBER OF AGGREGATE CUT- PERCENT BY AGGREGATE CUT-
ADJUSTMENT ADJUSTMENT MORTGAGE OFF DATE BALANCE NUMBER OFF DATE BALANCE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------
Total........
=========================================================================
</TABLE>
The following table sets forth the range of maximum lifetime Mortgage
Rates for the ARM Loans to which such characteristic applies:
Maximum Lifetime Mortgage Rates for the ARM Loans
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE CUT- PERCENT BY
RANGE OF MAXIMUM RATES ARM OFF DATE PERCENT BY AGGREGATE CUT-OFF
(%) LOANS BALANCE NUMBER DATE BALANCE
- ---------------------- ------------- ------------------ -------------- ---------------------
<S> <C> <C> <C> <C>
------------- ------------------ -------------- ---------------------
Total.................
============= ================== ============== =====================
</TABLE>
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): ______% per annum (A)
(A) This calculation does not include the __________ ARM Loans without maximum
lifetime Mortgage Rates.
The following table sets forth the range of minimum lifetime Mortgage
Rates for the ARM Loans to which such characteristic applies:
MINIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
AGGREGATE CUT- PERCENT BY
RANGE OF MINIMUM NUMBER OF OFF DATE PERCENT BY AGGREGATE CUT-OFF
MORTGAGE RATES (%) ARM LOANS BALANCE NUMBER DATE BALANCE
- ------------------ ------------- ------------------ -------------- ---------------------
<S> <C> <C> <C> <C>
------------- ------------------ -------------- ---------------------
Total.............
============= ================== ============== =====================
</TABLE>
Weighted Average Minimum Lifetime
Mortgage Rate (ARM Loans): ______% per annum (A)
- --------------
(A) This calculation does not include the _____ ARM Loans without minimum
lifetime Mortgage Rates.
The following table sets forth the range of Cut-off Date Balances of
the Mortgage Loans:
S-23
<PAGE>
CUT-OFF DATE BALANCES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE CUT- PERCENT BY
CUT-OFF DATE BALANCE RANGE MORTGAGE OFF DATE PERCENT BY AGGREGATE CUT-OFF
(%) LOANS BALANCE NUMBER DATE BALANCE
- -------------------------- ------------- ------------------ -------------- ---------------------
<S> <C> <C> <C> <C>
------------- ------------------ -------------- ---------------------
Total.....................
============= ================== ============== =====================
</TABLE>
Average Cut-off Date
Balance (All Loans): $___________
Average Cut-off Date
Balance (ARM Loans): $___________
Average Cut-off Date
Balance (Fixed Rate Loans): $___________
The following tables set forth the original and remaining terms to
stated maturity (in months) of the Mortgage Loans:
ORIGINAL TERM TO STATED MATURITY (IN MONTHS)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE CUT- PERCENT BY
RANGE OF ORIGINAL TERM (IN MORTGAGE OFF DATE PERCENT BY AGGREGATE CUT-OFF
MONTHS) LOANS BALANCE NUMBER DATE BALANCE
- -------------------------- ------------- ------------------ -------------- ---------------------
<S> <C> <C> <C> <C>
------------- ------------------ -------------- ---------------------
Total.....................
============= ================== ============== =====================
</TABLE>
Weighted Average Original
Term to Stated Maturity
(All Loans): _____ months
Weighted Average Original
Term to Stated Maturity
(ARM Loans): _____ months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): _____ months
S-24
<PAGE>
REMAINING TERM TO STATED MATURITY (IN MONTHS)
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE CUT- PERCENT BY
RANGE OF ORIGINAL TERM (IN MORTGAGE OFF DATE PERCENT BY AGGREGATE CUT-OFF
MONTHS) LOANS BALANCE NUMBER DATE BALANCE
- -------------------------- ------------- ------------------ -------------- ---------------------
<S> <C> <C> <C> <C>
------------- ------------------ -------------- ---------------------
Total.......................
============= ================== ============== =====================
</TABLE>
Weighted Average Remaining
Term to Stated Maturity
(All Loans): _____ months
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): _____ months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): _____ months
The following table sets forth the respective years in which the
Mortgage Loans were originated:
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE CUT- PERCENT BY
MORTGAGE OFF DATE PERCENT BY AGGREGATE CUT-OFF
YEAR LOANS BALANCE NUMBER DATE BALANCE
- -------------------------- ------------- ------------------ -------------- ---------------------
<S> <C> <C> <C> <C>
------------- ------------------ -------------- ---------------------
Total.....................
============= ================== ============== =====================
</TABLE>
The following table sets forth the respective years in which the
Mortgage Loans are scheduled to mature. The table provides an indication (which
does not account for any scheduled amortization or prepayments), of the
concentration of Balloon Payments that will be due in those years with respect
to the Mortgage Loans. See "Risk Factors--Balloon Payments" herein.
YEAR OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE CUT- PERCENT BY
MORTGAGE OFF DATE PERCENT BY AGGREGATE CUT-OFF
YEAR LOANS BALANCE NUMBER DATE BALANCE
- -------------------------- ------------- ------------------ -------------- ---------------------
<S> <C> <C> <C> <C>
------------- ------------------ -------------- ---------------------
Total.....................
============= ================== ============== =====================
</TABLE>
The following table sets forth the range of Cut-off Date LTV Ratios of
the Mortgage Loans. A "Cut-off Date LTV Ratio" is a fraction, expressed as a
percentage, the numerator of which is the Cut-off Date Balance of a Mortgage
Loan, and the denominator of which is the appraised value of the related
Mortgaged Property as determined by an appraisal thereof obtained in
S-25
<PAGE>
connection with the origination of such Mortgage Loan. A Cut-off Date LTV
Ratio, because it is based on the value of a Mortgaged Property determined as
of loan origination, is not necessarily a reliable measure of the borrower's
current equity in that Mortgaged Property. In a declining real estate market,
the fair market value of the Mortgaged Property could have decreased from the
value determined at origination, and the actual loan-to-value ratio of a
Mortgage Loan may be higher than its Cut-off Date LTV Ratio.
CUT-OFF DATE LTV RATIOS
<TABLE>
<CAPTION>
RANGE OF CUT-OFF DATE NUMBER OF AGGREGATE CUT- PERCENT BY
LTV MORTGAGE OFF DATE PERCENT BY AGGREGATE CUT-OFF
RATIOS (%) LOANS BALANCE NUMBER DATE BALANCE
- --------------------- ------------- ------------------ -------------- ---------------------
<S> <C> <C> <C> <C>
------------- ------------------ -------------- ---------------------
Total................
============= ================== ============== =====================
</TABLE>
Weighted Average Cut-off
Date LTV Ratio
(All Loans): _____%
Weighted Average Cut-off
Date LTV Ratio
(ARM Loans): _____%
Weighted Average Cut-off
Date LTV Ratio
(Fixed Rate Loans): _____%
The following table sets forth the range of Debt Service Coverage
Ratios for the Mortgage Loans as of the Cut-off Date. The "Debt Service
Coverage Ratio" for any Mortgage Loan is the ratio of Net Operating Income
produced by the related Mortgaged Property for the period (annualized if the
period was less than one year) covered by an operating statement to the amount
of the Monthly Payment in effect as of the Cut-off Date multiplied by 12. "Net
Operating Income" is the revenue derived from the use and operation of a
Mortgaged Property (consisting primarily of rental income and deposit
forfeitures), less operating expenses (such as utilities, general
administrative expenses, management fees, advertising, repairs and
maintenance), and further less fixed expenses (such as insurance and real
estate taxes). Net Operating Income generally does not reflect capital
expenditures. The following table was prepared using operating statements
obtained from the respective mortgagors. In each case, the information
contained in such operating statements was unaudited, and the Depositor has
made no attempt to verify its accuracy. In the case of _____ Mortgage Loans
(____ ARM Loans and ____ Fixed Rate Loans), operating statements could not be
obtained, and accordingly, Debt Service Coverage Ratios for those Mortgage
Loans were not calculated. The last day of the period (which may not correspond
to the end of the calendar year most recent to the Cut-off Date) covered by
each operating statement from which a Debt Service Coverage Ratio was
calculated is set forth in Annex A with respect to the related Mortgage Loan.
S-26
<PAGE>
DEBT SERVICE COVERAGE RATIOS
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE CUT- PERCENT BY
RANGE OF DEBT SERVICE MORTGAGE OFF DATE PERCENT BY AGGREGATE CUT-OFF
COVERAGE RATIONS LOANS BALANCE NUMBER DATE BALANCE
- --------------------- ------------- ------------------ -------------- ---------------------
<S> <C> <C> <C> <C>
------------- ------------------ -------------- ---------------------
Total................
============= ================== ============== =====================
</TABLE>
Weighted Average
Debt Service Coverage Ratio
(All Loans): _______x(B)
Weighted Average
Debt Service Coverage Ratio
(ARM Loans): _______x(C)
Weighted Average
Debt Service Coverage Ratio
(Fixed Rate Loans): _______x(D)
- -------------------
(A) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements.
(B) This calculation does not include the ________ Mortgage Loans as to
which Debt Service Coverage Ratios were not calculated.
(C) This calculation does not include the ________ ARM Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the ________ Fixed Rate Loans as to
which Debt Service Coverage Ratios were not calculated.
The Mortgage Loans are secured by Mortgaged Properties located in
_____ different states. The following table sets forth the states in which the
Mortgaged Properties are located:
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
STATE LOANS DATE BALANCE NUMBER DATE BALANCE
- ------------------- ------------- --------------------- -------------- ---------------------
<S> <C> <C> <C> <C>
Total..............
============= ===================== ============== =====================
</TABLE>
Specified in Annex A to this Prospectus Supplement are the foregoing
and certain additional characteristics of the Mortgage Loans set forth on a
loan-by-loan basis. Certain additional information regarding the Mortgage Loans
is contained herein under "--Underwriting Standards", "--Assignment of the
Mortgage Loans; Repurchases" and "--Representations and Warranties;
Repurchases" and in the Prospectus under "Description of the Trust Funds" and
"Certain Legal Aspects of Mortgage Loans".
THE MORTGAGE LOAN SELLER
On or prior to the Delivery Date, the Depositor will acquire the
Mortgage Loans from ____________ (the "Mortgage Loan Seller") pursuant to a
Mortgage Loan Purchase Agreement, dated [the date hereof], between the
Depositor and the Mortgage Loan Seller (the "Mortgage Loan Purchase
Agreement"). [The Mortgage Loan Seller originated ___ of the Mortgage Loans,
which represent ___% of the Initial Pool Balance, and acquired the remaining
Mortgage Loans from the respective originators thereof, generally in accordance
with the underwriting criteria described below under "--Underwriting
Standards".]
S-27
<PAGE>
[The Mortgage Loans Seller [, a wholly-owned subsidiary of
__________,] is a _________________ organized in ____ under the laws of
__________________ and currently holds and services for its own account a total
residential and commercial mortgage loan portfolio of approximately
$__________________, of which approximately $__________________ constitutes
multifamily mortgage loans [and approximately $___________ constitutes other
types of commercial mortgage loans].]
UNDERWRITING STANDARDS
[All of the Mortgage Loans were originated or acquired by the Mortgage
Loan Seller, generally in accordance with the underwriting criteria described
herein.]
[Description of underwriting standards.]
[The Depositor believes that the Mortgage Loans selected for inclusion
in the Mortgage Pool from the Mortgage Loan Seller's portfolio were not so
selected on any basis which would have a material adverse effect on the
Certificateholders.]
ASSIGNMENT OF THE MORTGAGE LOANS; REPURCHASE
On or prior to the Delivery Date, the Depositor will assign its
interests in the Mortgage Loans, without recourse, to the Trustee for the
benefit of the Certificateholders. In connection with such assignment, the
Depositor will require the Mortgage Loan Seller to deliver to the Trustee or to
a document custodian appointed by the Trustee (a "Custodian"), among other
things, the following documents with respect to each Mortgage Loan
(collectively, as to such Mortgage Loan, the "Mortgage File"): [(i) the
original Mortgage Note, endorsed (without recourse) to the order of Trustee;
(ii) the original Mortgage or a certified copy thereof, together with originals
or certified copies of any intervening assignments of such document, in each
case with evidence of recording thereon; (iii) the original or a certified copy
of any related assignment of leases, rents and profits (if such item is a
document separate from the Mortgage), together with originals or certified
copies of any intervening assignments of such document, in each case with
evidence of recording thereon; (iv) the original or a certified copy of any
related security agreement (if such item is a document separate from the
Mortgage), together with originals or certified copies of any intervening
assignments of such document; (v) an assignment of the Mortgage in favor of the
Trustee, in recordable form; (vi) an assignment of any related assignment of
leases, rents and profits (if such item is a document separate from the
Mortgage) in favor of the Trustee, in recordable form; (vii) an assignment of
any related security agreement (if such item is a document separate from the
Mortgage) in favor of the Trustee; (viii) originals or certified copies of all
assumption, modification and substitution agreements in those instances where
the terms or provisions of the Mortgage or Mortgage Note have been modified or
the Mortgage or Mortgage Note has been assumed; (ix) the original lender's
title insurance policy issued on the date of the origination of such Mortgage
Loan or, with respect to each Mortgage Loan as to which a lender's title
insurance policy has not yet been issued, a preliminary title report or a title
insurance commitment or binder or, with respect to each Mortgage Loan not
covered by a lender's title insurance policy, an attorney's opinion of title
given by an attorney licensed to practice law in the jurisdiction where the
Mortgaged Property is located; and (x) the original of any guaranty of the
borrower's obligations under the related Mortgage Note.]
The Trustee or a Custodian on its behalf will be required to review
each Mortgage File within a period of ___ days of the receipt thereof, and the
Trustee or a Custodian on its behalf will hold such documents in trust for the
benefit of the Certificateholders. 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 value of any Mortgage Loan or the interests of Certificateholders
therein, the Trustee will be required to notify the Master Servicer, the
Depositor and the Mortgage Loan Seller. In any such case, and if the Mortgage
Loan Seller cannot deliver the document or cure the defect within a period of
___ days following its receipt of such notice, then, except as otherwise
provided below, the Mortgage Loan Seller will be obligated pursuant to the
Mortgage Loan Purchase Agreement (the relevant rights under which will be
assigned by the Depositor to the Trustee, together with its interests in the
Mortgage Loans) to repurchase the affected Mortgage Loan within such ___day
period at a price (the "Purchase Price") equal to the sum of (i) the unpaid
principal balance of such Mortgage Loan, (ii) unpaid accrued interest on such
Mortgage Loan at the Mortgage Rate from the date to which interest was last
paid to the Due Date in the Due Period in which the purchase is to occur, (iii)
certain servicing expenses that are reimbursable to the Master Servicer, and
(iv) any unpaid accrued interest at the Master Servicer Reimbursement Rate that
may be payable to the Master Servicer in respect of related unreimbursed P&I
Advances and servicing expenses as described under "Description of the
Certificates--P&I Advances" herein. This repurchase obligation will constitute
the sole remedy available to the Certificateholders and the Trustee for any
defect in or omission from a Mortgage File, and neither the Depositor nor any
of its affiliates will be obligated to repurchase the affected Mortgage Loan if
the Mortgage Loan Seller defaults on its obligation to do so. Notwithstanding
the foregoing, if a document is missing from any Mortgage File because it has
been submitted for recording, and neither such document nor a certified
S-28
<PAGE>
copy thereof, in either case with evidence of recording thereon, can be
obtained because of delays on the part of the applicable recording office, then
the Mortgage Loan Seller will not be required to repurchase the affected
Mortgage Loan on the basis of such missing document so long as it continues in
good faith to attempt to obtain such document or such certified copy.
The Pooling and Servicing Agreement will require the Master Servicer
promptly (and in any event within ___ days of the Delivery Date) to cause each
assignment of a Mortgage described in clause (v) of the second preceding
paragraph and each assignment of an assignment of leases, rents and profits
described in clause (vi) 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 except in states where, in the written opinion of
local counsel acceptable to the Depositor and the Trustee, such recordation is
not required to protect the Trustee's interests in the related Mortgage Loans
against sale, further assignment, satisfaction or discharge by the Mortgage
Loan Seller, the Master Servicer, any sub-servicers or the Depositor. See
"Description of the Pooling Agreements--Assignment of Mortgage Loans;
Repurchases" in the Prospectus.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
In the Mortgage Loan Purchase Agreement, the Mortgage Loan Seller has
represented and warranted with respect to each Mortgage Loan, as of [the
Delivery Date], or as of such other date specifically provided in the
representation and warranty, among other things, substantially to the effect
that:
[Summarize significant representations and warranties.]
If the Master Servicer, the Trustee or the Depositor discovers a
breach of any of the foregoing representations and warranties, and such breach
materially and adversely affects the value of any Mortgage Loan or the
interests of Certificateholders therein, the party making such discovery will
be required to so notify each of the other parties and the Mortgage Loan
Seller. In any such case, and if the Mortgage Loan Seller cannot cure such
breach within a period of ____ days following its receipt of such notice, then
the Mortgage Loan Seller will be obligated pursuant to the Mortgage Loan
Purchase Agreement (the relevant rights under which will be assigned by the
Depositor to the Trustee, together with its interests in the Mortgage Loans) to
repurchase the affected Mortgage Loan within such ___ day period at the
applicable Purchase Price.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. [Thus, if the Mortgage Loan Seller were found to have breached its
representation summarized in clause __ above regarding environmental matters,
it would have no obligation to indemnify the Trust Fund for any consequent
liability that the Trust Fund might have incurred for clean-up costs at the
affected Mortgaged Property. However, because of the restrictions imposed by
the Pooling and Servicing Agreement upon the ability of the Master Servicer to
acquire title to a Mortgaged Property or to assume control of its operations,
the Depositor believes that it is unlikely that the Trust Fund will incur any
such liability. See "Risk Factors--Environmental Law Considerations" herein and
"Description of the Pooling Agreements--Realization Upon Defaulted Mortgage
Loans", "Risk Factors--Environmental Risks" and "Certain Legal Aspects of
Mortgage Loans--Environmental Legislation" in the Prospectus.]
The Mortgage Loan Seller will be the sole Warranting Party in respect
of the Mortgage Loans, and neither the Depositor nor any of its affiliates will
be obligated to repurchase any affected Mortgage Loan in connection with a
breach of the Mortgage Loan Seller's representations and warranties if the
Mortgage Loan Seller defaults on its obligation to do so. However, the
Depositor will not include any Mortgage Loan in the Mortgage Pool if anything
has come to the Depositor's attention that would cause it to believe that the
representations and warranties made by the Mortgage Loan Seller regarding such
Mortgage Loan will not be correct in all material respects. See "Description of
the Pooling Agreements--Representations and Warranties; Repurchases" in the
Prospectus.
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued, as adjusted for
the scheduled principal payments due on or before the Cut-off Date. Prior to
the issuance of the Offered Certificates, a Mortgage Loan may be removed from
the Mortgage Pool if the Depositor deems such removal necessary or appropriate
or if it is prepaid. A limited number of other mortgage loans may be included
in the Mortgage Pool prior to the issuance of the Offered Certificates, unless
including such Mortgage Loans would materially alter the characteristics of the
Mortgage Pool as described herein. The Depositor believes that the information
set forth herein will be
S-29
<PAGE>
representative of the characteristics of the Mortgage Pool as it will be
constituted at the time the Offered Certificates are issued, although the range
of Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date
and will be filed, together with the Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the Mortgage Pool as set forth in the preceding paragraph,
such removal or addition will be noted in the Form 8-K.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Master Servicer will be required to service and administer the
Mortgage Loans, either directly or through sub-servicers, on behalf of the
Trustee and in the best interests of and for the benefit of the
Certificateholders (as determined by the Master Servicer in its good faith and
reasonable judgment), in accordance with applicable law, the terms of the
Pooling and Servicing Agreement, the terms of the respective Mortgage Loans
and, to the extent consistent with the foregoing, in the same manner as would
prudent institutional mortgage lenders and loan servicers servicing mortgage
loans comparable to the Mortgage Loans in the jurisdictions where the Mortgaged
Properties are located, and with a view to the maximization of timely and
complete recovery of principal and interest, but without regard to: (i) any
relationship that the Master Servicer or any affiliate of the Master Servicer
may have with the related mortgagor; (ii) the ownership of any Certificate by
the Master Servicer or any affiliate of the Master Servicer; (iii) the Master
Servicer's obligation to make P&I Advances and advances to cover certain
servicing expenses; and (iv) the Master Servicer's right to receive
compensation for its services under the Pooling and Servicing Agreement or with
respect to any particular transaction.
Set forth below, following the subsection captioned "--The Master
Servicer", is a description of certain pertinent provisions of the Pooling and
Servicing Agreement relating to the servicing of the Mortgage Loans. Reference
is also made to the Prospectus, in particular to the section captioned
"Description of the Pooling Agreements", for important information in addition
to that set forth herein regarding the terms and conditions of the Pooling and
Servicing Agreement as they relate to the rights and obligations of the Master
Servicer thereunder.
THE MASTER SERVICER
[__________________________________, a ___________________, will act
as Master Servicer with respect to the Mortgage Pool. As of December 31, 19__,
the Master Servicer had a net worth of approximately $__________, and a total
mortgage loan servicing portfolio of approximately $___________, of which
approximately $_____________ represented multifamily mortgage loans [and
approximately $_______ represented other types of commercial mortgage loans].]
The offices of the Master Servicer that will be primarily responsible
for servicing and administering the Mortgage Pool are located at __________.
For so long as the long-term unsecured debt obligations of the Master
Servicer are rated ___ or better by _____________________, the Master Servicer
will not be required to maintain the errors and omissions policy described in
the Prospectus under "Description of the Pooling Agreements--Certain Matters
Regarding the Master Servicer and the Depositor".]
The information set forth herein concerning the Master Servicer has
been provided by the Master Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in
respect of its master servicing activities will be the Servicing Fee. The
"Servicing Fee" will be payable monthly on a loan-by-loan basis from amounts
received in respect of interest on each Mortgage Loan, will accrue in
accordance with the terms of the related Mortgage Note at a rate equal to
________% per annum (the "Servicing Fee Rate") and will be computed on the
basis of the same principal amount and for the same period respecting which any
related interest payment on the related Mortgage Loan is computed. As
additional servicing compensation, the Master Servicer will be entitled to
retain all assumption and modification fees, late charges and penalty interest
and, as and to the extent described below, Prepayment Premiums
S-30
<PAGE>
and Prepayment Interest Excesses collected from mortgagors. In addition, the
Master Servicer is authorized but not required to invest or direct the
investment of funds held in the Certificate Account in certain short-term
United States government securities and other obligations acceptable to the
Rating Agencies ("Permitted Investments"), and the Master Servicer will be
entitled to retain any interest or other income earned on such funds. Although
the Master Servicer is required to service and administer the Mortgage Pool in
accordance with the general servicing standard described under "--General"
above and, accordingly, without regard to its right to receive compensation
under the Pooling and Servicing Agreement, additional servicing compensation in
the nature of assumption and modification fees, Prepayment Premiums and
Prepayment Interest Excesses may under certain circumstances provide the Master
Servicer with an economic disincentive to comply with such standard.
[If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Due Period on a date that is prior to its Due Date in such Due
Period, the amount of interest (net of related Servicing Fees) that accrues on
the amount of such principal prepayment will be less (such shortfall, a
"Prepayment Interest Shortfall") than the corresponding amount of interest
accruing on the Certificates. If such a principal prepayment occurs during any
Due Period after the Due Date for such Mortgage Loan in such Due Period, the
amount of interest (net of related Servicing Fees) that accrues on the amount
of such principal prepayment will exceed (such excess, a "Prepayment Interest
Excess") the corresponding amount of interest accruing on the Certificates. As
to any Due Period, to the extent Prepayment Interest Excesses and Prepayment
Premiums collected for all Mortgage Loans are greater than Prepayment Interest
Shortfalls incurred, such excess will be paid to the Master Servicer as
additional servicing compensation.]
[As and to the extent described herein under "Description of the
Certificates--P&I Advances", the Master Servicer will be entitled to receive
interest on P&I Advances and reimbursable servicing expenses, such interest to
be paid, contemporaneously with the reimbursement of the related P&I Advance or
servicing expense, out of any other collections on the Mortgage Loans.]
The Master Servicer generally will be required to pay all expenses
incurred by it in connection with its servicing activities under the Pooling
and Servicing Agreement, and will not be entitled to reimbursement therefor
except as expressly provided in the Pooling and Servicing Agreement. However,
the Master Servicer will be permitted to pay certain such expenses directly out
of the Certificate Account and at times without regard to the relationship
between the expense and the funds from which it is being paid. In connection
therewith, the Master Servicer will be responsible for all fees of any
sub-servicers, other than management fees earned in connection with the
operation of an REO Property, which management fees the Master Servicer will be
authorized to pay out of revenues received from such property (thereby reducing
the portion of such revenues that would otherwise be available for distribution
to Certificateholders). See "Description of the
Certificates--Distributions--Method, Timing and Amount" herein and "Description
of the Pooling Agreements--Certificate Account" and "--Servicing Compensation
and Payment of Expenses" in the Prospectus.
MODIFICATIONS, WAIVERS AND AMENDMENTS
The Master Servicer may agree to modify, waive or amend any term of
any Mortgage Loan in a manner consistent with the servicing standard described
herein, provided that such modification, waiver or amendment will not (i)
affect the amount or timing of any scheduled payments of principal or interest
on the Mortgage Loan or (ii) in its judgment, materially impair the security
for the Mortgage Loan or reduce the likelihood of timely payment of amounts due
thereon. The Master Servicer also may agree to any other modification, waiver
or amendment of the terms of a Mortgage Loan, but only if, in its judgment, a
material default on the Mortgage Loan has occurred or a payment default is
imminent, and such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Mortgage Loan, taking into
account the time value of money, than would liquidation.
To the extent consistent with the foregoing, the Master Servicer will
be permitted: [describe permitted modification standards]
The Master Servicer is required to notify the Trustee of any
modification, waiver or amendment of any term of any Mortgage Loan, and must
deliver to the Trustee or the related Custodian, for deposit in the related
Mortgage File, an original counterpart of the agreement related to such
modification, waiver or amendment, promptly (and in any event within [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 to be available for review during normal business hours at
the offices of the Master Servicer. See "Description of the
Certificates--Reports to Certificateholders; Available Information" herein.
S-31
<PAGE>
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The Master Servicer is required to perform a physical inspection of
each Mortgaged Property at such times and in such manner as are consistent with
the servicing standard set forth herein, but in any event (i) at least once per
calendar year, commencing in the calendar year _______, and (ii), if any
scheduled payment becomes more than 60 days delinquent on the related Mortgage
Loan, as soon as practicable thereafter. The Master Servicer will be required
to prepare a written report of each such inspection describing the condition of
the Mortgaged Property and specifying the existence of any material vacancies
in the Mortgaged Property, of any sale, transfer or abandonment of the
Mortgaged Property, of any material change in the condition or value of the
Mortgaged Property, or of any waste committed thereon.
With respect to each Mortgage Loan that requires the borrower to
deliver such statements, the Master Servicer is also required to collect and
review the annual operating statements of the related Mortgaged Property.
[Most] of the Mortgages obligate the related borrower to deliver annual
property operating statements. However, there can be no assurance that any
operating statements required to be delivered will in fact be delivered, nor is
the Master 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 to be available for review by Certificateholders during normal
business hours at the offices of the [Trustee]. See "Description of the
Certificates--Reports to Certificateholders; Available Information" herein.
ADDITIONAL OBLIGATIONS OF THE MASTER SERVICER WITH RESPECT TO ARM LOANS
The Master Servicer is responsible for calculating adjustments in the
Mortgage Rate and the Monthly Payment for each ARM Loan and for notifying the
related borrower of such adjustments. If the base index for any ARM Loan is not
published or is otherwise unavailable, then the Master Servicer is required to
select a comparable alternative index over which it has no direct control, that
is readily verifiable and that is acceptable under the terms of the related
Mortgage Note. If the Mortgage Rate or the Monthly Payment with respect to any
ARM Loan is not properly adjusted by the Master Servicer pursuant to the terms
of such Mortgage Loan and applicable law, the Master Servicer is required to
deposit in the Certificate Account on or prior to the Due Date of the affected
Monthly Payment, an amount equal to the excess, if any, of (i) the amount that
would have been received from the borrower if the Mortgage Rate or Monthly
Payment had been properly adjusted, over (ii) the amount of such improperly
adjusted Monthly Payment, subject to reimbursement only out of such amounts as
are recovered from the borrower in respect of such excess.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off Date, among the Depositor, the Master
Servicer and the Trustee (the "Pooling and Servicing Agreement"), and will
represent in the aggregate the entire beneficial ownership interest in a Trust
Fund consisting of: (i) the Mortgage Loans and all payments under and proceeds
of the Mortgage Loans received after the Cut-off Date (exclusive of payments of
principal and interest due on or before the Cut-off Date); (ii) any Mortgaged
Property acquired on behalf of the Trust Fund through foreclosure, deed in lieu
of foreclosure or otherwise (upon acquisition, an "REO Property"); (iii) such
funds or assets as from time to time are deposited in the Certificate Account;
(iv) the rights of the mortgagee under all insurance policies with respect to
the Mortgage Loans; and (v) certain rights of the Depositor under the Mortgage
Loan Purchase Agreement relating to Mortgage Loan document delivery
requirements and the representations and warranties of the Mortgage Loan Seller
regarding the Mortgage Loans.
The Certificates will consist of four classes to be designated as the
Class A Certificates, the Class B Certificates, the Class C Certificates and
the Class R Certificates. The Class A Certificates will have an initial
Certificate Balance of $____________, which represents ____% of the Initial
Pool Balance; the Class B Certificates will have an initial Certificate Balance
of $____________, which represents ____% of the Initial Pool Balance; the Class
C Certificates will have an initial Certificate Balance of $____________, which
represents ___% of the Initial Pool Balance; and the Class R Certificates will
have a Certificate Balance of zero. The Certificate Balance of any Class of
Certificates outstanding at any time represents the maximum amount which the
holders thereof are entitled to receive as distributions allocable to principal
from the cash flow on the Mortgage Loans and the other assets in the Trust
Fund. On each Distribution Date, to the extent of the Available Distribution
Amount and subject to the priority of payments described in
S-32
<PAGE>
"Distributions--Priorities", the respective Certificate Balances of the Class
A, Class B and Class C Certificates (the "Regular Certificates") will in each
case be reduced by any amounts actually distributed on such Class of
Certificates on such Distribution Date that are allocable to principal.
Only the Class A and Class B Certificates (the "Offered Certificates")
are offered hereby. The Class C and Class R Certificates (the "Private
Certificates") have not been registered under the Securities Act of 1933 and
are not offered hereby. [___________________________________, has agreed with
the Depositor to purchase the Class C Certificates and, except for a nominal
interest therein, the Class R Certificates.]
The Class A Certificates will be issued, maintained and transferred on
the book-entry records of DTC and its Participants in denominations of $1,000
and in integral multiples thereof. The Class B Certificates will be issuable in
fully registered, certificated form in denominations of $____________ and
integral multiples of $1,000 in excess thereof, with one Class B Certificate
evidencing an additional amount equal to the remainder of the initial
Certificate Balance of such Class.
The Class A Certificates will initially be represented by one or more
global Certificates registered in the name of the nominee of DTC. The Depositor
has been informed by DTC that DTC's nominee will be Cede & Co. No Class A
Certificate Owner will be entitled to receive a Definitive Class A Certificate
representing its interest in such Class, except under the limited circumstances
described in the Prospectus under "Description of the Certificates--Book-Entry
Registration and Definitive Certificates". Unless and until Definitive Class A
Certificates are issued, all references to actions by holders of the Class A
Certificates will refer to actions taken by DTC upon instructions received from
Class A Certificate Owners through its Participants, and all references herein
to payments, notices, reports and statements to holders of the Class A
Certificates will refer to payments notices, reports and statements to DTC or
Cede & Co., as the registered holder of the Class A Certificates, for
distribution to Class A Certificate Owners through its Participants in
accordance with DTC procedures. See "Description of the
Certificates--Book-Entry Registration and Definitive Certificates" in the
Prospectus.
Until Definitive Class A Certificates are issued, interests in such
Class will be transferred on the book-entry records of DTC and its
Participants. The Class B Certificates may be transferred or exchanged, subject
to certain restrictions on the transfer of such Certificates to Plans (see
"ERISA Considerations" herein), at the offices of ___________________________
located at ______________________________________________, without the payment
of any service charges, other than any tax or other governmental charge payable
in connection therewith. ________________________ will initially serve as
registrar (in such capacity, the "Certificate Registrar") for purposes of
recording and otherwise providing for the registration of the Offered
Certificates and of transfers and exchanges of the Class B and, if issued, the
Definitive Class A Certificates.
DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Certificates will be
made by the Master Servicer, to the extent of available funds, on the ___ day
of each month or, if any such ___ day is not a business day, then on the next
succeeding business day, commencing in _________ 199__ (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
Certificate) will be made to the persons in whose names the Certificates are
registered at the close of business on each Record Date, which will be the last
business day of the month preceding the month in which the related Distribution
Date occurs. Each such distribution will be made by wire transfer in
immediately available funds to the account specified by the Certificateholder
at a bank or other entity having appropriate facilities therefor, if such
Certificateholder will have provided the Master Servicer with wiring
instructions [no less than five business days prior to the related Record Date
(which wiring instructions may be in the form of a standing order applicable to
all subsequent distributions) and is the registered owner of Certificates with
an aggregate initial principal amount of at least $5,000,000], or otherwise by
check mailed to such Certificateholder. The final distribution on any
Certificate will be made in like manner, but only upon presentation and
surrender of such Certificate at the location that will be specified in a
notice of the pendency of such final distribution. All distributions made with
respect to a Class of Certificates will be allocated pro rata among the
outstanding Certificates of such Class based on their respective Percentage
Interests. The "Percentage Interest" evidenced by any Offered Certificate is
equal to the initial denomination thereof as of the Delivery Date, divided by
the initial Certificate Balance of the Class to which it belongs.
The aggregate amount available for distribution to Certificateholders
on each Distribution Date (the "Available Distribution Amount") will, in
general, equal the sum of the following amounts:
(a) the total amount of all cash received on the Mortgage Loans
and any REO Properties that is on deposit in the Certificate Account
as of the related Determination Date, exclusive of:
S-33
<PAGE>
(i) all Monthly Payments collected but due on a Due Date
subsequent to the related Due Period,
(ii) all principal prepayments (together with related
payments of the interest thereon and related Prepayment
Premiums), Liquidation Proceeds, Insurance and
Condemnation Proceeds and other unscheduled recoveries
received subsequent to the related Due Period, and
(iii) all amounts in the Certificate Account that are due or
reimbursable to any person other than the
Certificateholders; and
(b) all P&I Advances made by the Master Servicer with respect to
such Distribution Date. See "Description of the Pooling Agreements--
Certificate Account" in the Prospectus.
The "Due Period" for each Distribution Date will be the period that
begins on the ______ day of the month preceding the month in which such
Distribution Date occurs and ends on the _____ day of the month in which such
Distribution Date occurs. For purposes of the discussion in the Prospectus, the
Due Period is also the Prepayment Period. The "Determination Date" for each
Distribution Date is the _______ day of the month in which such Distribution
Date occurs or, if any such ________ day is not a business day, then the next
preceding business day.
Priority. On each Distribution Date, for so long as the Class A and/or
Class B Certificates are outstanding, the Master Servicer will (except as
otherwise described under "--Termination" below) apply amounts on deposit in
the Certificate Account, to the extent of the Available Distribution Amount, in
the following order of priority:
(1) to distributions of interest to the holders of the Class A
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class A Certificates for such
Distribution Date and, to the extent not previously paid, for all
prior Distribution Dates;
(2) to distributions of principal to the holders of the Class A
Certificates in an amount equal to the sum of (a) the product of
(i) the Class A Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii)
the Scheduled Principal Distribution Amount for such Distribution
Date, plus (b) the entire Unscheduled Principal Distribution
Amount for such Distribution Date (but not more than would be
necessary to reduce the Certificate Balance of the Class A
Certificates to zero);
(3) to distributions of principal to the holders of the Class A
Certificates in an amount equal to any Uncovered Portion of the
Certificate Balance of the Class A Certificates immediately prior
to such Distribution Date;
(4) to distributions of interest to the holders of the Class B
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class B Certificates for such
Distribution Date and, to the extent not previously paid, for all
prior Distribution Dates;
(5) to distributions of principal to the holders of the Class B
Certificates in an amount equal to the sum of (a) the product of
(i) the Class B Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii)
the Scheduled Principal Distribution Amount for such Distribution
Date, plus (b) if the Class A Certificates have been retired,
then to the extent not distributed in retirement thereof on such
Distribution Date, the entire Unscheduled Principal Distribution
Amount for such Distribution Date (but not more than would be
necessary to reduce the Certificate Balance of the Class B
Certificates to zero);
(6) to distributions of principal to the holders of the Class A
Certificates in an amount equal to any Uncovered Portion of the
Certificate Balance of the Class B Certificates immediately prior
to such Distribution Date (but not more than would be necessary
to reduce the Certificate Balance of the Class A Certificates to
zero);
(7) to distributions of principal to the holders of the Class B
Certificates in an amount equal to any Uncovered Portion of the
Certificate Balance of the Class B Certificates immediately prior
to such Distribution Date, net of any distributions of principal
made on such Distribution Date in respect of the Class A
Certificates as described in the immediately preceding clause
(6);
S-34
<PAGE>
(8) to distributions of interest to the holders of the Class C
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class C Certificates for such
Distribution Date and, to the extent not previously distributed,
for all prior Distribution Dates;
(9) to distributions of principal to the holders of the Class C
Certificates in an amount equal to the product of (a) the Class C
Certificates' Ownership Percentage (as calculated immediately
prior to such Distribution Date), multiplied by (b) the Scheduled
Principal Distribution Amount for such Distribution Date;
(10) to distributions of principal to the holders of the respective
Classes of Regular Certificates, in alphabetical order of their
Class designations (i.e., A, B, C), in an aggregate amount equal
to any Uncovered Portion of the Certificate Balance of the Class
C Certificates immediately prior to such Distribution Date (but,
in each case, not more than would be necessary to reduce the
related Certificate Balance to zero); and
(11) to distributions to the holders of the Class R Certificates in an
amount equal to the remaining balance, if any, of the Available
Distribution Amount.
Pass-Through Rates. The Pass-Through Rate applicable to the Class A
and Class B Certificates for the initial Distribution Date will equal _______%
per annum. With respect to any Distribution Date subsequent to the initial
Distribution Date, the Pass-Through Rate for the Class A Certificates and the
Class B Certificates will equal the Weighted Average Effective Net Mortgage
Rate for such Distribution Date.
[The Pass-Through Rate applicable to the Class C Certificates for any
Distribution Date will equal the Weighted Average Effective Net Mortgage Rate
for such Distribution Date. The Class R Certificates will have no specified
Pass-Through Rate.]
The "Weighted Average Effective Net Mortgage Rate" for each
Distribution Date is the weighted average of the applicable Effective Net
Mortgage Rates for the Mortgage Loans, weighted on the basis of their
respective Stated Principal Balances immediately prior to such Distribution
Date. For purposes of calculating the Weighted Average Effective Net Mortgage
Rate for any Distribution Date, the applicable "Effective Net Mortgage Rate"
for each Mortgage Loan is: (a) if such Mortgage Loan accrues interest on the
basis of a 360-day year consisting of twelve 30-day months (a "360/360 basis",
which is the basis of accrual for interest on the Regular Certificates), the
Net Mortgage Rate in effect for such Mortgage Loan as of the commencement of
the related Due Period; and (b) if such Mortgage Loan does not accrue interest
on a 360/360 basis, the annualized rate at which interest would have to accrue
during the one month period preceding the Due Date for such Mortgage Loan
during the related Due Period on a 360/360 basis in order to produce the
aggregate amount of interest (adjusted to the actual Net Mortgage Rate) accrued
during such period. The "Net Mortgage Rate" for each Mortgage Loan is equal to
the related Mortgage Rate in effect from time to time less the Servicing Fee
Rate.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of Regular Certificates for each
Distribution Date represents that portion of the Accrued Certificate Interest
in respect of such Class of Certificates for such Distribution Date that is net
of such Class's allocable share (calculated as described below) of the
aggregate of any Prepayment Interest Shortfalls resulting from voluntary
principal prepayments made on the Mortgage Loans during the related Due Period
that are not offset by Prepayment Interest Excesses and Prepayment Premiums
collected during the related Due Period (the aggregate of such Prepayment
Interest Shortfalls that are not so offset or covered, as to such Distribution
Date, the "Net Aggregate Prepayment Interest Shortfall").
The "Accrued Certificate Interest" in respect of each Class of Regular
Certificates for each Distribution Date is equal to 30 days' interest at the
Pass-Through Rate applicable to such Class of Certificates for such
Distribution Date accrued on the related Certificate Balance outstanding
immediately prior to such Distribution Date.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of Regular 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 30 days'
interest at the Pass-Through Rate applicable to such Class of Regular
Certificates for such Distribution Date accrued on the related Certificate
Balance (net of any Uncovered Portion thereof) outstanding immediately prior to
such Distribution Date, and the denominator of which is equal to 30 days'
interest at the Weighted Average Effective Net Mortgage Rate for such
Distribution Date accrued on the aggregate Stated Principal Balance of the
Mortgage Pool outstanding immediately prior to such Distribution Date.
S-35
<PAGE>
Scheduled Principal Distribution Amount and Unscheduled Principal
Distribution Amount. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
Monthly Payments, including Balloon Payments, due during or, if and to the
extent not previously received or advanced and distributed to
Certificateholders on a preceding Distribution Date, prior to the related Due
Period, in each case to the extent paid by the related borrower or advanced by
the Master Servicer and included in the Available Distribution Amount for such
Distribution Date. The Scheduled Principal Distribution Amount from time to
time will include all late payments of principal made by a borrower, including
late payments in respect of a delinquent Balloon Payment, regardless of the
timing of such late payments, except to the extent such late payments are
otherwise reimbursable to the Master Servicer for prior P&I Advances.
The "Unscheduled Principal Distribution Amount" for each Distribution
Date will equal the aggregate of: (a) all voluntary prepayments of principal
received on the Mortgage Loans during the related Due Period; and (b) any other
collections (exclusive of payments by borrowers) received on the Mortgage Loans
and any REO Properties during the related Due Period, whether in the form of
Liquidation Proceeds, Insurance and Condemnation Proceeds, net income from REO
Property or otherwise, that were identified and applied by the Master Servicer
as recoveries of previously unadvanced principal of the related Mortgage Loan.
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as the
"Distributable Principal".
The "Ownership Percentage" evidenced by any Class of Certificates as
of any date of determination will equal a fraction, expressed as a percentage,
the numerator of which is the then Certificate Balance of such Class of
Certificates, net (in the case of a Class of Regular Certificates) of any
Uncovered Portion of such Certificate Balance, and the denominator of which is
the then aggregate Stated Principal Balance of the Mortgage Pool.
Certain Calculations with Respect to Individual Mortgage Loans. The
"Stated Principal Balance" of each Mortgage Loan outstanding at any time
represents the principal balance of such Mortgage Loan ultimately due and
payable to the Certificateholders. The Stated Principal Balance of each
Mortgage Loan will initially equal the Cut-off Date Balance thereof and, on
each Distribution Date, will be reduced by the portion of the Distributable
Principal for such date, which in either case is attributable to such Mortgage
Loan. 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 wherein the
related borrower is the debtor. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure--Bankruptcy Laws" in the Prospectus.
For purposes of calculating distributions on the Certificates, as well
as the amount of Servicing Fees payable each month, each REO Property will be
treated as if there exists with respect thereto an outstanding mortgage loan
(an "REO Loan"), and all references to "Mortgage Loan", "Mortgage Loans" and
"Mortgage Pool" herein and in the Prospectus, when used in such context, will
be deemed to also be references to or to also include, as the case may be, any
"REO Loans". Each REO Loan will generally be deemed to have the same
characteristics as its actual predecessor Mortgage Loan, including the same
adjustable or fixed Mortgage Rate (and, accordingly, the same Net Mortgage Rate
and Effective Net Mortgage Rate) and the same unpaid principal balance and
Stated Principal Balance. Amounts due on such predecessor Mortgage Loan,
including any portion thereof payable or reimbursable to the Master Servicer,
will continue to be "due" in respect of the REO Loan; and amounts received in
respect of the related REO Property, net of payments to be made, or
reimbursement to the Master Servicer for payments previously advanced, in
connection with the operation and management of such property, generally will
be applied by the Master Servicer as if received on the predecessor Mortgage
Loan. However, notwithstanding the terms of the predecessor Mortgage Loan, the
Monthly Payment "due" on an REO Loan will in all cases, for so long as the
related Mortgaged Property is part of the Trust Fund, equal one month's
interest thereon at the applicable Mortgage Rate.
SUBORDINATION
The rights of holders of the Class B Certificates and each Class of
the Private Certificates (collectively, the "Subordinate Certificates") to
receive distributions of amounts collected or advanced on the Mortgage Loans
will be subordinated, to the extent described herein, to the rights of holders
of the Class A Certificates and each other Class of Subordinate Certificates
with an earlier alphabetical Class designation. This subordination is intended
to enhance the likelihood of timely receipt by the holders of the Class A
Certificates of the full amount of all Distributable Certificate Interest
payable in respect of such Certificates on each Distribution Date, and the
ultimate receipt by such holders of principal in an amount equal to the entire
Certificate Balance of the Class A Certificates. Similarly, but to a lesser
degree, this subordination is also intended to enhance the likelihood of timely
receipt by the holders of the Class B Certificates of the full amount of all
Distributable Certificate Interest payable in respect of such Certificates on
each Distribution Date,
S-36
<PAGE>
and the ultimate receipt by such holders of principal in an amount equal to the
entire Certificate Balance of the Class B Certificates. The protection afforded
to the holders of each Class of Offered Certificates by means of the
subordination of each other Class of Certificates with a later alphabetical
Class designation, will be accomplished by the application of the Available
Distribution Amount on each Distribution Date in accordance with the order of
priority described under "--Distributions--Priority" above. No other form of
Credit Support will be available for the benefit of the holders of the Offered
Certificates.
Allocation to the Class A Certificates, for so long as they are
outstanding, of the entire Unscheduled Principal Distribution Amount for each
Distribution Date will generally accelerate the amortization of the Class A
Certificates relative to the actual amortization of the Mortgage Loans. To the
extent that the Class A Certificates are amortized faster than the Mortgage
Loans, the percentage interest evidenced by the Class A Certificates in the
Trust Fund will be decreased (with a corresponding increase in the interest in
the Trust Fund evidenced by the Subordinate Certificates), thereby increasing,
relative to their respective Certificate Balances, the subordination afforded
the Class A Certificates by the Subordinate Certificates. Following retirement
of the Class A Certificates, allocation to the Class B Certificates, for so
long as they are outstanding, of the entire Unscheduled Principal Distribution
Amount for each Distribution Date will provide a similar benefit to such Class
of Certificates as regards the relative amount of subordination afforded
thereto by the Private Certificates.
Losses and other shortfalls experienced with respect to the Mortgage
Loans will not, with the exception of any Net Aggregate Prepayment Interest
Shortfalls, be applied to reduce either the Certificate Balance or the absolute
entitlement to interest of any Class of Regular Certificates, even though such
losses and shortfalls may cause one or more of such Classes to receive less
than the full amount of principal and interest to which it is entitled. As a
result, the aggregate Stated Principal Balance of the Mortgage Pool at any time
may be less than the aggregate Certificate Balance of the Regular Certificates.
Such deficit will be allocated to the respective Classes of Regular
Certificates (in each case to the extent of its Certificate Balance) in reverse
alphabetical order of their Class designations (i.e., C, B, A). Such allocation
will not reduce the Certificate Balance of any such Class and is intended
solely to identify the portion (the "Uncovered Portion") of the Certificate
Balance of each such Class for which there is at such time no corresponding
principal amount of Mortgage Loans.
P&I ADVANCES
[On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated, subject to the recoverability determination
described in the next paragraph, to make advances (each, a "P&I Advance") out
of its own funds or, subject to the replacement thereof as provided in the
Pooling and Servicing Agreement, funds held in the Certificate Account that are
not required to be part of the Available Distribution Amount for such
Distribution Date, in an amount equal to the aggregate of: (i) all Monthly
Payments (net of the related Servicing Fee), other than Balloon Payments, which
were due on the Mortgage Loans during the related Due Period and delinquent as
of the related Determination Date; (ii) in the case of each Mortgage Loan
delinquent in respect of its Balloon Payment as of the related Determination
Date, an amount equal to 30 days' interest thereon at the related Mortgage Rate
in effect as of the commencement of the related Due Period (net of the related
Servicing Fee), but only to the extent that the related mortgagor has not made
a payment sufficient to cover such amount under any forbearance arrangement or
otherwise that has been included in the Available Distribution Amount for such
Distribution Date; and (iii) in the case of each REO Property, an amount equal
to thirty days' imputed interest with respect thereto at the related Mortgage
Rate in effect as of the commencement of the related Due Period (net of the
related Servicing Fee), but only to the extent that such amount is not covered
by any net income from such REO Property included in the Available Distribution
Amount for such Distribution Date. The Master Servicer's obligations to make
P&I Advances in respect of any Mortgage Loan or REO Property will continue
through liquidation of such Mortgage Loan or disposition of such REO Property,
as the case may be.
The Master Servicer will be entitled to recover any P&I Advance made
out of its own funds from any amounts collected in respect of the Mortgage Loan
as to which such P&I Advance was made, whether in the form of late payments,
Insurance and Condemnation Proceeds, Liquidation Proceeds or otherwise
("Related Proceeds"). Notwithstanding the foregoing, the Master Servicer will
not be obligated to make any P&I Advance that it determines in its reasonable
good faith judgment would, if made, not be recoverable out of Related Proceeds
(a "Nonrecoverable P&I Advance"), and the Master Servicer will be entitled to
recover any P&I Advance that it so determines to be a Nonrecoverable P&I
Advance out of general funds on deposit in the Certificate Account. See
"Description of the Certificates--Advances in Respect of Delinquencies" and
"Description of the Pooling Agreements--Certificate Account" in the Prospectus.
S-37
<PAGE>
In connection with its recovery of any P&I Advance or reimbursable
servicing expense (each, an "Advance"), the Master Servicer will be entitled to
retain, out of any amounts then on deposit in the Certificate Account, interest
at a per annum rate equal to ________________ (the "Master Servicer
Reimbursement Rate"), accrued on the amount of such Advance from the date made
to but not including the date of reimbursement.
To the extent not offset or covered by amounts otherwise payable on
the Private Certificates, interest accrued on outstanding Advances will result
in a reduction in amounts payable on the Class B Certificates; and to the
extent not offset or covered by amounts otherwise payable on the Class B and
the Private Certificates, interest accrued on outstanding Advances will result
in a reduction in amounts payable on the Class A Certificates. To the extent
that any holder of an Offered Certificate must bear the cost of the Master
Servicer's Advances, the benefits of such Advances to such holder will be
contingent on the ability of such holder to reinvest the amounts received as a
result of such Advances at a rate of return equal to or greater than the Master
Servicer Reimbursement Rate.]
REPORTS TO CERTIFICATEHOLDERS; CERTAIN AVAILABLE INFORMATION
On each Distribution Date, the [Master Servicer] [Trustee] will be
required to forward by mail to each holder of an Offered Certificate a
statement (a "Distribution Date Statement") providing various items of
information relating to distributions made on such date with respect to the
relevant Class and the recent status of the Mortgage Pool. For a more detailed
discussion of the particular items of information to be provided in each
Distribution Date Statement, as well as a discussion of certain annual
information reports to be furnished by the [Master Servicer] [Trustee] to
persons who at any time during the prior calendar year were holders of the
Offered Certificates, see "Description of the Certificates--Reports to
Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the [Master
Servicer] [Trustee] make available at its offices primarily responsible for
servicing the Mortgage Loans, during normal business hours, for review by any
holder of an Offered Certificate, originals or copies of, among other things,
the following items: (a) the Pooling and Servicing Agreement and any amendments
thereto, (b) all Distribution Date Statements delivered to holders of the
relevant Class of Offered Certificates since the Delivery Date, (c) all
officer's certificates delivered to the Trustee since the Delivery Date as
described under "Description of the Pooling Agreements--Evidence as to
Compliance" in the Prospectus, (d) all accountants' reports delivered to the
Trustee since the Delivery Date as described under "Description of the Pooling
Agreements--Evidence as to Compliance" in the Prospectus, (e) the most recent
property inspection report prepared by or on behalf of the Master Servicer in
respect of each Mortgaged Property, (f) the most recent Mortgaged Property
annual operating statements, if any, collected by or on behalf of the Master
Servicer, and (g) any and all modifications, waivers and amendments of the
terms of a Mortgage Loan entered into by the Master Servicer. Copies of any and
all of the foregoing items will be available from the [Master Servicer]
[Trustee] upon request; however, the [Master Servicer] [Trustee] will be
permitted to require payment of a sum sufficient to cover the reasonable costs
and expenses of providing such copies.
Until such time as Definitive Class A Certificates are issued, the
foregoing information will be available to Class A Certificate Owners only to
the extent it is forwarded by or otherwise available through DTC and its
Participants. Conveyance of notices and other communications by DTC to
Participants, and by Participants to Class A Certificate Owners, will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time. The Master Servicer, the
Trustee, the Depositor and the Certificate Registrar are required to recognize
as Certificateholders only those persons in whose names the Certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A Certificates will be Cede & Co. as nominee for
DTC.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement,
the Voting Rights for the series offered hereby shall be allocated among the
respective Classes of Certificateholders in proportion to the Certificate
Balances of their Certificates (net, in the case of a Class of Regular
Certificates, of any Uncovered Portion of the related Certificate Balance).
Voting Rights allocated to a Class of Certificateholders shall be allocated
among such Certificateholders in proportion to the Percentage Interests
evidenced by their respective Certificates. See "Description of the
Certificates--Voting Rights" in the Prospectus.
S-38
<PAGE>
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in
respect thereof) or other liquidation of the last Mortgage Loan or REO Property
subject thereto, and (ii) the purchase of all of the assets of the Trust Fund
by the Master Servicer. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at the office of the Certificate Registrar or other location
specified in such notice of termination.
Any such purchase by the Master Servicer of all the Mortgage Loans and
other assets in the Trust Fund is required to be made at a price equal to the
excess of (a) the sum of (i) the aggregate Purchase Price of all the Mortgage
Loans then included in the Trust Fund and (ii) the fair market value of all REO
Properties then included in the Trust Fund, as determined by an appraiser
mutually agreed upon by the Master Servicer and the Trustee, over (b) 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
to effect such termination is subject to the requirement that the then
aggregate Stated Principal Balance of the Mortgage Pool be less than __% of the
Initial Pool Balance.
On the final Distribution Date, the aggregate amount paid by the
Master Servicer for the Mortgage Loans and other assets in the Trust Fund (if
the Trust Fund is to be terminated as a result of the purchase described in the
preceding paragraph), together with all other amounts on deposit in the
Certificate Account and not otherwise payable to a person other than the
Certificateholders (see "Description of the Pooling Agreements--Certificate
Account" in the Prospectus), will be applied: first, to distributions of
interest to the holders of the Class A Certificates in an amount equal to all
Distributable Certificate Interest in respect of the Class A Certificates for
such Distribution Date and, to the extent not previously paid, for all prior
Distribution Dates; second, to distributions of principal to the holders of the
Class A Certificates in an amount equal to the sum of the Certificate Balance
of the Class A Certificates outstanding immediately prior to such Distribution
Date; third, to distributions of interest to the holders of the Class B
Certificates in an amount equal to all Distributable Certificate Interest in
respect of the Class B Certificates for such Distribution Date and, to the
extent not previously paid, for all prior Distribution Dates; fourth, to
distributions of principal to the holders of the Class B Certificates in an
amount equal to the sum of the Certificate Balance of the Class B Certificates
outstanding immediately prior to such Distribution Date; and thereafter, to
distributions to holders of the Private Certificates.
THE TRUSTEE
____________, a _____________________, will act as Trustee on behalf
of the Certificateholders. [The Master Servicer will be responsible for the
fees and normal disbursements of the Trustee.] The offices of the Trustee
primarily responsible for the administration of the Trust Fund are located at
______________________________. See "Description of the Pooling Agreements--the
Trustee", "--Duties of the Trustee", "--Certain Matters Regarding the Trustee"
and "--Resignation and Removal of the Trustee" in the Prospectus.
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
General. The yield on any Offered Certificate will depend on: (i) the
Pass-Through Rate in effect from time to time for such Certificate; (ii) the
price paid for such Certificate and, if the price was other than par, the rate
and timing of payments of principal on such Certificate; and (iii) the
aggregate amount of distributions on such Certificate.
Pass-Through Rate. The Pass-Through Rate applicable to the Class A
Certificates and the Class B Certificates for any Distribution Date will equal
the Weighted Average Effective Net Mortgage Rate for such date. Accordingly,
the yield on the Offered Certificates will be sensitive to (x) adjustments to
the Mortgage Rates on the ARM Loans and (y) changes in the relative composition
of the Mortgage Pool as a result of scheduled amortization, voluntary
prepayments and involuntary liquidations of the Mortgage Loans. See
"Description of the Mortgage Pool" herein and "--Yield Considerations--Rate and
Timing of Principal Payments" below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by
the rate and timing of principal payments on such Certificates. As and to the
extent described herein, the holders of each Class of Offered Certificates will
be entitled to receive on each Distribution Date their allocable share
(calculated on the basis of
S-39
<PAGE>
the Ownership Percentage evidenced by such Class of Certificates immediately
prior to such date) of the Scheduled Principal Distribution Amount for such
Distribution Date; however, the Unscheduled Principal Distribution Amount for
each Distribution Date will be distributable entirely in respect of the Class A
Certificates, until the Certificate Balance thereof is reduced to zero, and
will thereafter be distributable entirely in respect of the Class B
Certificates. See "Description of the Certificates--Distributions--Priority"
and "--Distributions--Scheduled Principal Distribution Amount and Unscheduled
Principal Distribution Amount" herein. Consequently, the rate and timing of
principal payments on the Offered Certificates will be directly related to the
rate and timing of principal payments on or in respect of the Mortgage Loans
(including principal prepayments on the Mortgage Loans resulting from both
voluntary prepayments by the mortgagors and involuntary liquidations). The rate
and timing of principal payments on the Mortgage Loans will in turn be affected
by the amortization schedules thereof, the dates on which Balloon Payments are
due and the rate and timing of principal prepayments and other unscheduled
collections thereon (including for this purpose, collections made in connection
with liquidations of Mortgage Loans due to defaults, casualties or
condemnations affecting the Mortgaged Properties, or purchases of Mortgage
Loans out of the Trust Fund). Prepayments and, assuming the respective stated
maturity dates therefor have not occurred, liquidations and purchases of the
Mortgage Loans, will result in distributions on the Offered Certificates of
amounts that would otherwise be distributed over the remaining terms of the
Mortgage Loans. Defaults on the Mortgage Loans, particularly at or near their
stated maturity dates, may result in significant delays in payments of
principal on the Mortgage Loans (and, accordingly, on the Offered Certificates)
while work-outs are negotiated or foreclosures are completed. See "Servicing of
the Mortgage Loans--Modifications, Waivers and Amendments" herein and
"Description of the Pooling Agreements--Realization Upon Defaulted Mortgage
Loans" and "Certain Legal Aspects of Mortgage Loans--Foreclosure" in the
Prospectus.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree to
which they are purchased at a discount or premium and when, and to what degree,
payments of principal on the Mortgage Loans are in turn distributed on 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 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 payment of principal on the Mortgage Loans is distributed on 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 (to the extent distributable on such investor's
Offered Certificates) occurring at a rate higher (or lower) than the rate
anticipated by the investor during any particular period would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments. 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.
The yield to maturity of Offered Certificates that are purchased at a
discount or premium will be similarly affected by payments of principal thereon
made with funds in excess of the Distributable Principal to which the holders
of such Certificates may be then entitled. As described herein under
"Description of the Certificates--Distributions--Priority", if there exists an
Uncovered Portion of the Certificate Balance of any Class of Regular
Certificates outstanding immediately prior to a Distribution Date,
distributions will be made, to the extent of the lesser of available funds and
such Uncovered Portion, in reduction of the Certificate Balance(s) of such
Class of Regular Certificates and each other Class of Regular Certificates, if
any, with an earlier alphabetical Class designation, in alphabetical order of
such Class designations. Accordingly, losses incurred in respect of the
Mortgage Pool, to the extent creating an Uncovered Portion of the Certificate
Balance of the Class C Certificates, could speed amortization of the Offered
Certificates, to the extent described above, beyond any positive effect on such
amortization that would generally result from liquidations of Mortgage Loans
prior to their maturity.
Losses and Shortfalls. The yield to holders of the Offered
Certificates will also depend on the extent to which such holders are required
to bear the effects of any losses or shortfalls on the Mortgage Loans. Losses
and other shortfalls on the Mortgage Loans will, with the exception of any Net
Aggregate Prepayment Interest Shortfalls, generally be borne: first, by the
holders of the Private Certificates, to the extent of amounts otherwise
distributable in respect of their Certificates; second, by the holders of the
Class B Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates; and last, by the holders of the Class A
Certificates. As more fully described herein under "Description of the
Certificates--Distributions--Distributable Certificate Interest", Net Aggregate
Prepayment Interest Shortfalls will generally be borne by the respective
Classes of Certificateholders on a pro rata basis.
S-40
<PAGE>
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, Prepayment Premiums,
adjustable Mortgage Rates and amortization terms that require balloon
payments), the demographics and relative economic vitality of the areas in
which the Mortgaged Properties are located and the general supply and demand
for rental units in such areas, the quality of management of the Mortgaged
Properties, the servicing of the Mortgage Loans, possible changes in tax laws
and other opportunities for investment. See "Risk Factors--The Mortgage Loans"
and "Description of the Mortgage Pool" herein and "Yield and Maturity
Considerations--Principal Prepayments" 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 coupon, a borrower may have an increased incentive to refinance its
mortgage loan. Although most of the Mortgage Loans are ARM Loans, adjustments
to the Mortgage Rates thereon will generally be limited by lifetime and/or
periodic caps and floors and, in each case, will be based on the related Index
(which may not rise and fall consistently with mortgage interest rates then
available) plus the related Gross Margin (which may be different from margins
then offered on adjustable rate mortgage loans). See "Description of the
Mortgage Pool--Certain Payment Characteristics" and "--The Index" herein. As a
result, the Mortgage Rates on the ARM Loans at any time may not be comparable
to prevailing market interest rates. In addition, as prevailing market interest
rates decline, and without regard to whether the Mortgage Rates on the ARM
Loans decline in a manner consistent therewith, related borrowers 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
a different index, margin or rate cap or floor on another adjustable rate
mortgage loan. The Mortgage Loans may be prepaid at any time and, in ____ cases
(approximately _____% of the Initial Pool Balance), may be prepaid in whole or
in part without payment of a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by Federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors
that will affect the rate and timing of prepayments and defaults on the
Mortgage Loans, as to the relative importance of such factors, as to the
percentage of the principal balance of the Mortgage Loans that will be prepaid
or as to which a default will have occurred as of any date or as to the overall
rate of prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will
not be made to Certificateholders until a date that is scheduled to be at least
_____ days and as many as ______ days following the Due Dates for the Mortgage
Loans during the related Due 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--Priority" herein, if the
portion of the Available Distribution Amount distributable in respect of
interest on either Class of Offered Certificates on any Distribution Date is
less than the Distributable Certificate Interest then payable for such Class,
the shortfall will be distributable to holders of such Class of Certificates on
subsequent Distribution Dates, to the extent of available funds. Any such
shortfall will not bear interest, however, and will therefore negatively affect
the yield to maturity of such Class of Certificates for so long as it is
outstanding.
WEIGHTED AVERAGE LIFE
The weighted average life of an Offered Certificate refers to the
average amount of time that will elapse from the date of its issuance until
each dollar allocable to principal of such Certificate is distributed to the
investor. The weighted average life of an Offered Certificate will be
influenced by, among other things, the rate at which principal of the Mortgage
Loans is paid or otherwise collected or advanced and by the availability of any
amounts other than Distributable Principal to amortize the Certificate Balance
of its Class. As and to the extent described herein, the holders of each Class
of Offered Certificates will be entitled to receive on each Distribution Date
their allocable share (calculated on the basis of the Ownership Percentage
evidenced by such Class of Certificates immediately prior to such date) of the
Scheduled Principal Distribution Amount for such Distribution Date; however,
the Unscheduled Principal Distribution Amount for each Distribution Date will
be distributable entirely in respect of the Class A Certificates, until the
Certificate Balance thereof is reduced to zero, and will thereafter be
distributable entirely in respect of the Class B Certificates. In addition, as
and to the extent described herein, distributions in respect of an Uncovered
Portion of the Certificate Balance of any Class of Regular Certificates will
S-41
<PAGE>
be applied, to the extent of such Uncovered Portion, in reduction of the
Certificate Balance(s) of such Class of Regular Certificates and each other
Class of Regular Certificates, if any, with an earlier alphabetical Class
designation, in alphabetical order of such Class designations. See "Description
of the Certificates--Distributions--Priority" and "--Distributions--Scheduled
Principal Distribution Amount and Unscheduled Principal Distribution Amount"
herein. As a consequence of the foregoing, the weighted average life of the
Class A Certificates will be shorter, and the weighted average life of the
Class B Certificates may be longer, than would otherwise be the case if
Distributable Principal and any other amounts being applied in reduction of the
Certificate Balances of the Regular Certificates were being distributed on a
pro rata basis among the respective Classes thereof.
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
each of the following tables, the column headed "0%" assumes that none of the
Mortgage Loans is prepaid before maturity. The columns headed "___%", "___%",
"___%" and "___%" assume that prepayments on the Mortgage Loans are made at
those CPRs. There is no assurance, however, that prepayments of the Mortgage
Loans will conform to any level of CPR, and no representation is made that the
Mortgage Loans will prepay at the CPRs shown or at any other prepayment rate.]
The following tables indicate the percentage of the initial Certificate Balance
of each Class of Offered Certificates that would be outstanding after each of
the dates shown at various CPRs and the corresponding weighted average life of
each such Class of Offered Certificates. The tables have been prepared on the
basis of the following assumptions, among others: (i) scheduled monthly
payments of principal and interest on the Mortgage Loans will be timely
received (with no defaults) and will be distributed on the ___ day of each
month commencing in ________ 199___; (ii) the Mortgage Rate in effect for each
Mortgage Loan as of the Cut-off Date will remain in effect (a) in the case of
each Fixed Rate Loan, to maturity and, (b) in the case of each ARM Loan, until
its next Interest Rate Adjustment Date, when a new Mortgage Rate that is to
remain in effect to maturity will be calculated reflecting the value of the
related Index as of ________, 199__, subject to such Mortgage Loan's lifetime
and/or periodic rate caps and floors, if any; (iii) all Mortgage Loans accrue
and pay interest on a 360/360 basis; (iv) the monthly principal and interest
payment due for each Mortgage Loan on the first Due Date following the Cut-off
Date will continue to be due (a) in the case of each Fixed Rate Loan, on each
Due Date until maturity and (b) in the case of each ARM Loan, until its next
Payment Adjustment Date, when a new payment that is to be due on each Due Date
until maturity will be calculated reflecting the appropriate Mortgage Rate and
remaining amortization term; (v) principal prepayments on the Mortgage Loans
will be received on their respective Due Dates at the respective CPRs set forth
in the tables, and there will be no Net Aggregate Prepayment Interest
Shortfalls in connection therewith; and (vi) the Mortgage Loan Seller will not
be required to repurchase any Mortgage Loan, and the Master Servicer will not
exercise its option to purchase all the Mortgage Loans and thereby cause an
early termination of the Trust Fund. To the extent that the Mortgage Loans have
characteristics that differ from those assumed in preparing the tables set
forth below, each Class of the Offered Certificates may mature earlier or later
than indicated by the tables. It is highly unlikely that the Mortgage Loans
will prepay at any constant rate until maturity or that all the Mortgage Loans
will prepay at the same rate. In addition, variations in the actual prepayment
experience and the balance of the Mortgage Loans that prepay may increase or
decrease the percentages of initial Certificate Balances (and weighted average
lives) shown in the following tables. Such variations may occur even if the
average prepayment experience of the Mortgage Loans were to equal any of the
specified CPR percentages.
Investors are urged to conduct their own analyses of the rates at
which the Mortgage Loans may be expected to prepay.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class A Certificates and sets forth the
percentage of the initial Certificate Balance of the Class A Certificates that
would be outstanding after each of the dates shown at the indicated CPRs.
S-42
<PAGE>
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS A CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
Date 0% % % % %
- -----------------------------------------------------------------------------
Delivery Date........... 100.0 100.0 100.0 100.0 100.0
- --------- ..............
- --------- ..............
- --------- ..............
- --------- ..............
- --------- ..............
- --------- ..............
- --------- ..............
- --------- ..............
Weighted Average Life (years)(A)
- --------------
(A) The weighted average life of a Class A Certificate is determined by
(i) multiplying the amount of each principal distribution thereon by
the number of years from the date of issuance of the Class A
Certificates to the related Distribution Date, (ii) summing the
results and (iii) dividing the sum by the aggregate amount of the
reductions in the principal balance of such Class A Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B Certificates and sets forth the
percentage of the initial Certificate Balance of the Class B Certificates that
would be outstanding after each of the dates shown at the indicated CPRs.
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS B CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
Date 0% % % % %
- -----------------------------------------------------------------------------
Delivery Date........... 100.0 100.0 100.0 100.0 100.0
- --------- ..............
- --------- ..............
- --------- ..............
- --------- ..............
- --------- ..............
- --------- ..............
- --------- ..............
- --------- ..............
Weighted Average Life (years)(A)
- --------------
(A) The weighted average life of a Class B Certificate is determined by
(i) multiplying the amount of each principal distribution thereon by
the number of years from the date of issuance of the Class B
Certificates to the related Distribution Date, (ii) summing the
results and (iii) dividing the sum by the aggregate amount of the
reductions in the principal balance of such Class B Certificate.
S-43
<PAGE>
[The following disclosure is applicable to Stripped Interest Certificates...
YIELD SENSITIVITY OF THE CLASS S CERTIFICATES
The yield to maturity of the Class S Certificates will be especially
sensitive to the prepayment, repurchase and default experience on the Mortgage
Loans, which may fluctuate significantly from time to time. A rapid rate of
principal payments will have a material negative effect on the yield to
maturity of the Class S Certificates. There can be no assurance that the
Mortgage Loans will prepay at any particular rate. Prospective investors in the
Class S Certificates should fully consider the associated risks, including the
risk that such investors may not fully recover their initial investment.
The following table indicates the sensitivity to various rates of
prepayment on the Mortgage Loans of the annual aggregate payments of interest
on the Class S Certificates and the pre-tax yields to maturity on a corporate
bond equivalent basis of the Class S Certificates. Such calculations are based
on the assumptions described on page __ hereof and that the Class S
Certificates are purchased on _____________, at an assumed aggregate purchase
price equal to $____________ (which includes accrued interest from
___________________).
PROJECTED ANNUAL AGGREGATE PAYMENTS OF INTEREST AND
PRE-TAX YIELD ON THE CLASS S CERTIFICATES
(IN THOUSANDS)
Twelve consecutive Percentages of [Prepayment speed model]
Distribution Dates ----------------------------------------------------------
ending % % % % %
- ------------------------------------------------------------------------------
- -------- .........
- -------- .........
- -------- .........
- -------- .........
- -------- .........
- -------- .........
- -------- .........
- -------- .........
- -------- .........
- -------- .........
- -------- .........
- -------- .........
Total Payments....
Pre-Tax Yield ....
The pre-tax yields set forth in the preceding table were calculated by
determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the Class S Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed aggregate purchase price of such Certificates and by converting such
monthly rates to corporate bond equivalent rates. Such calculation does not
take into account shortfalls in collection of interest due to prepayments (or
other liquidations) on the Mortgage Loans or the interest rates at which
investors may be able to reinvest funds received by them as distributions on
the Class S Certificates and consequently does not purport to reflect the
return on any investment in the Class S Certificates when such reinvestment
rates are considered. Such calculation does not presume receipt of any
distributions in respect of Prepayment Premiums.
The characteristics of the Mortgage Loans may differ from those
assumed in preparing the table above. 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 S Certificates will
correspond to the cash flow shown herein or that the aggregate purchase price
of the Class S Certificates will be as assumed. [Describe prepayment speed
model] In addition, it is unlikely that any Mortgage Loan will prepay at the
specified percentages of [Prepayment speed model] until maturity or that all of
the Mortgage Loans will prepay at the same rate. The timing of
S-44
<PAGE>
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 assumptions to be used in deciding
whether to purchase the Class S 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, O'Melveny & Myers LLP,
New York, New York, special counsel to the Depositor, 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, the Trust
Fund will qualify as a [REMIC] [FASIT] under the Code.
For federal income tax purposes, the Class R Certificates will be the
sole class of ["residual interests" in the REMIC] [ownership interests in the
FASIT] and the Class A, Class B and Class C Certificates will be the "regular
interests" in the [REMIC] [FASIT] and will be treated as debt instruments of
the [REMIC] [FASIT].
[See "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates" in the Prospectus.] [See "Certain Federal
Income Tax Consequences--Federal Income Tax Consequences for FASIT
Certificates" in the Prospectus.]
The Class _____ Certificates [may] [will not] be treated as having
been issued with original issue discount for federal income tax purposes. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, market discount and premium, if any, for federal
income tax purposes will be based on the assumption that subsequent to the date
of any determination the Mortgage Loans will prepay at a rate equal to ___%
[CPR] [SPA]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. [See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Original Issue Discount" in the Prospectus.]
The Class _____ 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 such class of Certificates
should consult their own tax advisors regarding the possibility of making an
election to amortize such premium. [See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Premium" in the Prospectus.] [See "Certain Federal
Income Tax Consequences--Federal Income Tax Consequences for FASIT
Certificates" in the Prospectus.]
[The Offered Certificates will be treated as [assets described in
Section 7701(a)(19)(C) of the Code] and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code generally in the same proportion that the
assets of the REMIC underlying such Certificates would be so treated. [In
addition, the Offered Certificates will be "obligation(s) ... which ... [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3) (C) of the Code generally to the extent that such Offered
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. Moreover, the Offered Certificates will be "obligation[s] ... which
... [are] principally secured by an interest in real property" within the
meaning of Section 860G(a)(3)(C) of the Code.] [The Offered Certificates will
not be considered to represent an interest in "loans ... secured by an interest
in real property" within the meaning of Section 7701(a)(19)(C)(v) of the Code.]
See "Certain Federal Income Tax Consequences--Federal Income Tax Consequences
for REMIC Certificates--Status of REMIC Certificates" in the Prospectus.] [See
"Certain Federal Income Tax Consequences--Federal Income Tax Consequences for
FASIT Certificates" in the Prospectus.]
For further information regarding the federal income tax consequences
of investing in the Class A Certificates, see ["Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates" in the
Prospectus.] ["Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for FASIT Certificates" in the prospectus.]
S-45
<PAGE>
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and insurance company general and
separate accounts in which such plans, annuities, accounts or arrangements are
invested, that is subject to Title I of 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. Moreover, each Plan fiduciary should determine whether an investment
in the Offered Certificates is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
[The U.S. Department of Labor ("DOL") issued to Bear, Stearns & Co.
Inc. an individual prohibited transaction exemption, Prohibited Transaction
Exemption 90-33, as amended by Prohibited Transaction Exemption 97-34 (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
mortgage pools, such as the Mortgage Pool, and the purchase, sale and holding
of mortgage pass-through certificates, such as the Class A Certificates,
underwritten by an Underwriter (as hereinafter defined), provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations", the term "Underwriter" shall include (a) Bear,
Stearns & Co. Inc., (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with Bear,
Stearns & Co. Inc., and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager with
respect to the Class A Certificates.
The Exemption sets forth six general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of the
Class A Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Class A Certificates by a Plan must be on terms that are at
least as favorable to the Plan as they would be in an arm's-length transaction
with an unrelated party. Second, the rights and interests evidenced by the
Class A Certificates must not be subordinated to the rights and interests
evidenced by other certificates of the same trust. Third, the Class A
Certificates at the time of acquisition by the Plan must be rated in one of the
three highest generic rating categories by Standard & Poor's Structured Rating
Group ("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff
& Phelps Credit Rating Co. ("Duff & Phelps") or Fitch IBCA, Inc. ("Fitch").
Fourth, the Trustee cannot be an affiliate of any other member of the
"Restricted Group", which consists of any Underwriter, the Depositor, the
Master Servicer, the Trustee, any sub-servicer, and any mortgagor with respect
to Mortgage Loans constituting more than 5% of the aggregate unamortized
principal balance of the Mortgage Loans as of the date of initial issuance of
the Class A Certificates. Fifth, the sum of all payments made to and retained
by the Underwriter must represent not more than reasonable compensation for
underwriting the Class A 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 and any sub-servicer must represent not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in connection
therewith. Sixth, the investing Plan must be an accredited investor as defined
in Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission
under the Securities Act of 1933, as amended. [As amended by Prohibited
Transaction Exemption 97-34, the Exemption contains a seventh restriction
applicable to a trust with a pre-funding account; that restriction is not
applicable to the Trust Fund.]
Because the Class A Certificates are not subordinated to any other
Class of Certificates, the second general condition set forth above is
satisfied with respect to such Certificates. It is a condition of the issuance
of the Class A Certificates that they be rated not lower than "__" by
__________________________ _____________. As of the Delivery Date, the fourth
general condition set forth above will be satisfied with respect to the Class A
Certificates. A fiduciary of a Plan contemplating purchasing a Class A
Certificate in the secondary market must make its own determination that, at
the time of such purchase, the Class A Certificates continue to satisfy the
third and fourth general conditions set forth above. A fiduciary of a Plan
contemplating purchasing a Class A Certificate, whether in the initial issuance
of such Certificates or in the secondary market, must make its own
determination that the first, fifth and sixth general conditions set forth
above will be satisfied with respect to such Class A Certificate.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates in such other
investment pools must have been rated in one of the three highest categories of
Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least one year prior
to the Plan's acquisition of Class A Certificates; and (iii) certificates in
such other investment pools must have been purchased by investors other than
S-46
<PAGE>
Plans for at least one year prior to any Plan's acquisition of Class A
Certificates. [The Depositor has confirmed to its satisfaction that such
requirements have been satisfied as of the date hereof.]
If the general conditions of 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 Class A Certificates in the initial issuance of Certificates
between the Depositor or an Underwriter and a Plan when the Depositor, the
Underwriter, the Trustee, the Master Servicer, a sub-servicer or a mortgagor is
a Party in Interest with respect to the investing Plan, (ii) the direct or
indirect acquisition or disposition in the secondary market of the Class A
Certificates by a Plan and (iii) the holding of Class A Certificates by a Plan.
However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
Class 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 purposes hereof, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section
4975(c)(1)(E) of the Code in connection with (1) the direct or indirect sale,
exchange or transfer of Class A Certificates in the initial issuance of
Certificates between the Depositor or an Underwriter and a Plan when the person
who has discretionary authority or renders investment advice with respect to
the investment of Plan assets in such Certificates is (a) a mortgagor with
respect to 5% or less of the fair market value of the Mortgage Loans or (b) an
affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Class A Certificates by a Plan and (3)
the holding of Class A Certificates by a Plan.
Further, if certain specific conditions of the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation of
the Mortgage Pool.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm that (i) the Class A Certificates constitute "certificates" for
purposes of the Exemption and (ii) the specific and general conditions and the
other requirements set forth in the Exemption would be satisfied. In addition
to making its own determination as to the availability of the exemptive relief
provided in the Exemption, the Plan fiduciary should consider the availability
of any other individual or class prohibited transaction exemptions. See "ERISA
Considerations" in the Prospectus. A purchaser of a Class A Certificate should
be aware, however, that even if the conditions specified in one or more
exemptions are satisfied, the scope of relief provided by an exemption may not
cover all acts which might be construed as prohibited transactions.]
[Because the characteristics of the Class B Certificates do not meet
the requirements of the Exemption, the purchase or holding of such Certificates
by a Plan may result in prohibited transactions and the imposition of excise
taxes or civil penalties. As a result,] no transfer of a [Class B] Certificate
or any interest therein may be made to a Plan or to any person who is directly
or indirectly purchasing such [Class B] Certificate or interest therein on
behalf of, as named fiduciary of, as trustee of, or with assets of a Plan,
unless the prospective transferee (at its own expense) provides the Certificate
Registrar with a certification of facts and an opinion of counsel which
establish to the satisfaction of the Certificate Registrar that such transfer
will not result in a violation of Section 406 of ERISA or Section 4975 of the
Code or cause the Master Servicer or the Trustee to be deemed a fiduciary of
such Plan or result in the imposition of an excise tax under Section 4975 of
the Code. See "ERISA Considerations" in the Prospectus.
[The Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, to define whether assets held by an insurance company general
account constitute plan assets by reason of the insurance company issuing one
or more policies to employee benefit plans. Pursuant to Section 401(c), the DOL
has proposed regulations ("401(c) Regulations") to provide guidance for the
purpose of determining, in cases where insurance policies supported by an
insurer's general account are issued to or for the benefit of a Plan on or
before December 31, 1998, which general account assets continue Plan assets.
Section 401(c) of ERISA generally provides that, until the date which is 18
months after the 401(c) Regulations become final, no person shall be subject to
liability under Part 4 of Title I of ERISA (including the prohibited
transaction requirements of Sections 406 and 407 of ERISA) or Section 4975 of
the Code on the basis of a claim that the assets of an insurance company
general account constitute Plan assets, except (i) as otherwise provided by the
Secretary of Labor in regulations intended to prevent avoidance of the 401(c)
Regulations, or (ii) in an action brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal
or state criminal law. Absent further changes
S-47
<PAGE>
to the law, any assets of an insurance company general account which support
insurance policies issued to a Plan after December 31, 1998, or issued to Plans
on or before December 31, 1998 for which the insurance company does not comply
with the 401(c) Regulations 18 months after those regulations become final may
be treated as Plan assets. In addition, because Section 401(c) does not relate
to insurance company separate accounts, separate account assets are treated as
Plan assets of any Plan invested in such separate account. Insurance companies
contemplating the investment of general account assets in the Offered
Certificates should consult with their legal counsel with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Offered Certificates after the date which is 18
months after the 401(c) Regulations become final.]
Any Plan fiduciary considering whether to purchase an Offered
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
Governmental plans as defined in Section 3(32) of ERISA 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 Title I of ERISA or
Section 4975 of the Code. However, such a governmental plans or church plans
may be subject to a federal, state or local law which is, to a material extent,
similar to the foregoing provisions of ERISA or the Code ("Similar Law"), and
to the prohibited transaction rules set forth in Section 503 of the Code. A
fiduciary of a governmental plan should make its own determination as to its
compliance with those requirements and the need for and the availability of any
exemptive relief under Similar Law.
The sale of Certificates to a Plan is in no respect a representation
by the Depositor or Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT
[As long as the Class A Certificates are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization and each Mortgage Loan is secured by a first priority lien
on a single parcel of real property upon which is located a dwelling or mixed
residential and commercial structure or a residential manufactured home, the
Class A Certificates will constitute "mortgage related securities" within the
meaning of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").]
[The Class B Certificates will not be "mortgage related securities"
for purposes of SMMEA. As a result, the appropriate characterization of the
Class B Certificates under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase the Class B
Certificates, is subject to significant interpretive uncertainties.]
[Except as to the status of the Class A Certificates as "mortgage
related securities," no] [No] representation is 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 the Offered Certificates under
applicable legal investment or other restrictions. All institutions whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the Offered Certificates constitute legal investments for them or are subject
to investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter, the Offered Certificates
will be purchased from the Depositor by the Underwriter, an affiliate of the
Depositor, upon issuance. Proceeds to the Depositor from the sale of the
Offered Certificates, before deducting expenses payable by the Depositor
estimated to be approximately $_______, will be _______% of the initial
aggregate Certificate Balance thereof, plus accrued interest.
Distribution of the Offered Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The Underwriter may effect
such transactions by selling the Offered Certificates to or through dealers,
and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriter. In connection with
the purchase and sale of the Offered Certificates, the Underwriter may be
deemed
S-48
<PAGE>
to have received compensation from the Depositor in the form of underwriting
discounts. The Underwriter and any dealers that participate with the
Underwriter in the distribution of the Offered Certificates may be deemed to be
underwriters and any profit on the resale of the Offered Certificates
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Securities Act").
Purchasers of the Offered Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of Offered Certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
The Depositor also has been advised by the Underwriter that it,
through one or more of its affiliates, currently intends to make a market in
the Offered Certificates; however, it has no obligation to do so, any market
making may be discontinued at any time and there can be no assurance that an
active public market for the Offered Certificates will develop. See "Risk
Factors--Limited Liquidity" herein and "Risk Factors--Secondary Market" in the
Prospectus.
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates in which the Underwriter acts as principal. The
Underwriter may also act as agent in such transactions. Sales may be made at
negotiated prices determined at the time of sale.]
The Depositor has agreed to indemnify the Underwriter and each person,
if any, who controls the Underwriter within the meaning of Section 15 of the
Securities Act against, or make contributions to the Underwriter and each such
controlling person with respect to, certain liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and the
Underwriter by O'Melveny & Myers LLP, New York, New York.
RATING
It is a condition to issuance that the Class A Certificates be rated
not lower than "__", and the Class B Certificates be rated not lower than "__",
by ____________________________________.
A securities rating on mortgage pass-through certificates addresses
the likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the certificates,
and the extent to which the payment stream from the mortgage pool is adequate
to make payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding the likelihood
or frequency of prepayments (whether voluntary or involuntary) on the Mortgage
Loans, [The following disclosure is applicable to Stripped Interest
Certificates... or the possibility that as a result of prepayments investors in
the Class S Certificates may realize a lower than anticipated yield or may fail
to recover fully their initial investment.]
There can be no assurance as to whether any rating agency not
requested to rate the Offered Certificates will nonetheless issue a rating to
either or both Classes thereof and, if so, what such rating or ratings would
be. A rating assigned to either Class of Offered Certificates by a rating
agency that has not been requested by the Depositor to do so may be lower than
the rating assigned thereto by___________________________.
The ratings on the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
See "Risk Factors--Limited Nature of Ratings" in the Prospectus.
S-49
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
360/360 basis..............................................................S-35
401(c) Regulations.........................................................S-47
Accrued Certificate Interest...............................................S-35
Advance....................................................................S-38
ARM Loans........................................................S-2, S-8, S-21
Available Distribution Amount........................................S-11, S-33
Balloon Payment.......................................................S-9, S-21
Certificate Balance.........................................................S-2
Certificate Registrar......................................................S-33
Certificates.....................................................S-1, S-7, S-47
Class.......................................................................S-1
Class A Certificate Owner...................................................S-7
Class S Certificates........................................................S-3
Code.......................................................................S-16
Constant Prepayment Rate...................................................S-42
CPR........................................................................S-42
Custodian..................................................................S-28
Cut-off Date................................................................S-1
Cut-off Date LTV Ratio.....................................................S-25
Debt Service Coverage Ratio................................................S-26
Definitive Class A Certificate..............................................S-7
Delivery Date...............................................................S-2
Depositor..............................................................S-1, S-7
Determination Date.........................................................S-34
Distributable Certificate Interest...................................S-12, S-35
Distributable Principal..............................................S-13, S-36
Distribution Date...............................................S-2, S-11, S-33
Distribution Date Statement................................................S-38
DOL........................................................................S-46
DTC.........................................................................S-7
Due Date ...................................................................S-8
Due Period...........................................................S-11, S-34
Duff & Phelps..............................................................S-46
Effective Net Mortgage Rate..........................................S-10, S-35
ERISA ............................................................S-16, S-46
Excluded Plan..............................................................S-47
Exemption..................................................................S-46
Fitch......................................................................S-46
Fixed Rate Loans.................................................S-2, S-8, S-21
Form 8-K ..................................................................S-30
Gross Margin................................................................S-8
Index ...........................................................S-2, S-8, S-21
Initial Pool Balance........................................................S-1
Interest Rate Adjustment Date...............................................S-8
Master Servicer Reimbursement Rate...................................S-15, S-38
Monthly Payments.......................................................S-2, S-8
Moody's....................................................................S-46
Mortgage ..................................................................S-21
Mortgage File..............................................................S-28
Mortgage Loan.........................................................S-1, S-36
Mortgage Loan Purchase Agreement......................................S-8, S-27
Mortgage Loan Seller............................................S-2, S-21, S-27
S-50
<PAGE>
Mortgage Note..............................................................S-20
Mortgage Pool.........................................................S-1, S-36
Mortgage Rate..........................................................S-2, S-8
Mortgage Related Securities..........................................S-17, S-48
Mortgaged Property....................................................S-8, S-21
Net Aggregate Prepayment Interest Shortfall..........................S-12, S-35
Net Mortgage Rate....................................................S-10, S-35
Net Operating Income.......................................................S-26
Nonrecoverable P&I Advance.................................................S-37
Offered Certificates.............................................S-1, S-7, S-33
Ownership Percentage.................................................S-13, S-36
P&I Advance..........................................................S-15, S-37
Participants................................................................S-7
Pass-Through Rate...........................................................S-2
Payment Adjustment Date.....................................................S-8
Percentage Interest........................................................S-33
Permitted Investments......................................................S-31
Plan ............................................................S-16, S-46
Pooling and Servicing Agreement.......................................S-9, S-32
Prepayment Interest Excess...........................................S-12, S-31
Prepayment Interest Shortfall........................................S-12, S-31
Prepayment Premiums........................................................S-21
Private Certificates..................................................S-7, S-33
Purchase Price.............................................................S-28
Rating Agenc[ies]..........................................................S-16
Real Estate Assets.........................................................S-45
Real Estate Mortgage Investment Conduit.....................................S-3
Record Date................................................................S-11
Regular Certificates.............................................S-3, S-7, S-33
Regular Interests.....................................................S-3, S-45
Related Proceeds...........................................................S-37
REMIC ...................................................................S-3
REO Loan ..................................................................S-36
REO Property.........................................................S-13, S-32
Residual Interests....................................................S-3, S-45
Restricted Group...........................................................S-46
Scheduled Principal Distribution Amount..............................S-13, S-36
Securities Act.............................................................S-49
Servicing Fee..............................................................S-30
Servicing Fee Rate.........................................................S-30
Similar Law................................................................S-48
SMMEA ............................................................S-17, S-48
Standard & Poor's..........................................................S-46
Stated Principal Balance.............................................S-10, S-36
Subordinate Certificates.............................................S-15, S-36
Trust Fund.............................................................S-1, S-9
Uncovered Portion....................................................S-10, S-37
Underwriter................................................S-2, S-7, S-46, S-49
Unscheduled Principal Distribution Amount............................S-13, S-36
Weighted Average Effective Net Mortgage Rate.........................S-10, S-35
Weighted Average Life......................................................S-14
S-51
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
The information set forth in this Appendix A is based on information as of
__________, 1998 with respect to mortgage loans expected to be included in the
Trust Fund. Not all the mortgage loans upon which this Appendix A is based may
be included in the Trust Fund and consequently the information set forth below
may vary from comparable information on the Mortgage Loans ultimately included
in the Trust Fund. In addition, the information set forth below may change as a
result of principal payments, Mortgage Interest Rate adjustments and other
factors relating to the Mortgage Loans prior to the Delivery Date.
S-52
<PAGE>
BEAR STEARNS COMMERCIAL MORTGAGE
SECURITIES INC.
$______________
CLASS A AND CLASS B
COMMERCIAL MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES 199_-_
VARIABLE PASS-THROUGH RATE
-----------
PROSPECTUS SUPPLEMENT
__________, 199_
-----------
[BEAR, STEARNS & CO. INC.]
<PAGE>
EXPLANATORY NOTE
Immediately following this explanatory note there are nine separate
sets of alternative pages labeled in the upper right corner as follows:
"Version 1: Multifamily Properties", "Version 2: Office Properties", "Version
3: Retail Properties", "Version 4: Hotel and Motel Properties", "Version 5:
Health Care-Related Properties", "Version 6: Industrial Properties", "Version
7: Warehouse, Mini-Warehouse and Self-Storage Facilities", "Version 8: Mobile
Home Parks and Recreational Vehicle Parks" and "Version 9: Casino Properties".
Each such "version" contains inserts to the Prospectus and each Prospectus
Supplement included herein showing the text specific to a material
concentration in each of the nine specified types of properties (i.e.
multifamily properties, office properties, retail properties, hotel and motel
properties, health care-related facilities, industrial properties, warehouse,
mini-warehouse and self-storage facilities, mobile home parks and recreational
vehicle parks and casinos).
The above described nine "versions" of changes to the Prospectus and
each Prospectus Supplement included herein are being filed with this
Registration Statement for purposes of identifying changes that will be made
thereto as a result of a material concentration in any of the nine specified
types of properties in any specific securitization transaction. Depending on
the types of properties that involve a material concentration in any particular
transaction, the respective changes to the Prospectus and each Prospectus
Supplement from one or more of the above described "versions" would be included
in the specific Prospectus and Prospectus Supplement for that transaction. When
multiple sets of inserts are to be included in the specific Prospectus and
Prospectus Supplement for any particular transaction, such inserts will be
included in each appropriate location in an order that goes from highest
material concentration to lowest material concentration (provided that
single-sentence inserts that simply identify properties that involve a material
concentration may be combined but will still present such properties in the
aforementioned order). The specific Prospectus and Prospectus Supplement for
each particular transaction reflecting such changes, together with the
corresponding Prospectus Supplement, would be filed at the time and in the
manner provided by Rule 424 under the Securities Act of 1933.
<PAGE>
Version 1: Multifamily Properties
[The following is to be inserted, as indicated by starred brackets
([** // **]) on the next page, on the cover of the Prospectus.]
Multifamily properties consisting of multiple rental or cooperatively
owned dwellings will represent security for a material concentration of the
Mortgage Loans (and the mortgage loans underlying the MBS included in a
particular Trust Fund) constituting the Trust Fund for any Series, based on
principal balance at the time such Series is issued.
<PAGE>
Version 1: Multifamily Properties
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED __________, 1998.
PROSPECTUS
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(DEPOSITOR)
---------------------
The commercial mortgage pass-through certificates (the "Offered
Certificates") offered hereby and by the supplements hereto (each, a
"Prospectus Supplement") will be offered from time to time in series (each a
"Series"). The Offered Certificates of any Series, together with any other
mortgage pass-through certificates of such Series, are collectively referred to
herein as the "Certificates".
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any Series, the
"Trust Fund") consisting primarily of a segregated pool (a "Mortgage Asset
Pool") of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage-backed securities ("MBS") that evidence interests
in, or that are secured by pledges of, one or more of the following types of
real property (each, a "Mortgaged Property"): (i) residential properties
consisting of multiple rental or cooperatively-owned dwelling units and mobile
home parks; (ii) commercial properties consisting of office buildings, retail
facilities related to the sale of goods and products and facilities related to
providing entertainment, recreation or personal services, hotels and motels,
casinos, health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, auto parks, golf courses, arenas and restaurants (or
cooperative units therein); and (iii) mixed use properties (that is, any
combination of the foregoing) and unimproved land. [**Multifamily properties
consisting of multiple rental or cooperatively owned dwellings will represent
security for a material concentration of the Mortgage Loans (and the mortgage
loans underlying the MBS included in a particular Trust Fund) constituting the
Trust Fund for any Series, based on principal balance at the time such Series
is issued.**]
-------------------
If so specified in the related Prospectus Supplement, the Trust Fund
for a Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support described in this
Prospectus, or any combination thereof (with respect to any Series,
collectively, "Credit Support"), and interest rate exchange agreements,
interest rate cap or floor agreements or currency exchange agreements described
in this
S-65
<PAGE>
Version 1: Multifamily Properties
Prospectus, or any combination thereof (with respect to any Series,
collectively, "Cash Flow Agreements"). See "Description of the Trust Funds",
"Description of the Certificates" and "Description of Credit Support".
The Depositor does not intend to list any of the Offered Certificates
on any securities exchange and has not made any other arrangement for secondary
trading of the Offered Certificates. There will have been no public market for
the Certificates of any Series prior to the offering thereof. No assurance can
be given that such a market will develop as a result of such an offering. See
"Risk Factors".
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR CERTAIN
FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
The Offered Certificates of any Series may be offered through one or
more different methods, including offerings through underwriters, which may
include Bear, Stearns & Co. Inc., an affiliate of the Depositor, as more fully
described under "Method of Distribution" and in the related 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
such Series.
The date of this Prospectus is ________, ____
As described in the related Prospectus Supplement, the Certificates of
each Series, including the Offered Certificates of such Series, may consist of
one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest; (iv) are entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such Series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology. See "Description of the
Certificates".
Distributions in respect of the Certificates of each Series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, such distributions will be made only from
the assets of the related Trust Fund.
No Series of Certificates will represent an obligation of or interest
in the Depositor or any of its affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
S-66
<PAGE>
Version 1: Multifamily Properties
Certificates of any Series nor the assets in any Trust Fund will be guaranteed
or insured by any governmental agency or instrumentality or by any other
person, unless otherwise provided in the related Prospectus Supplement. The
assets in each Trust Fund will be held in trust for the benefit of the holders
of the related Series of Certificates (the "Certificateholders") pursuant to a
Pooling Agreement, as more fully described herein.
The yield on each class of Certificates of a Series will be affected
by, among other things, the rate of payment of principal (including
prepayments) on the Mortgage Assets in the related Trust Fund and the timing of
receipt of such payments as described herein and in the related Prospectus
Supplement. See "Yield and Maturity Considerations". A Trust Fund may be
subject to early termination under the circumstances described herein and in
the related Prospectus Supplement. See "Description of the Certificates".
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" (each, a "REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
Series of Securities will specify which Class or Classes of such Series will be
considered to be regular interests in the related REMIC and which Class or
Classes will be designated as the residual interest in the related REMIC. See
"Certain Federal Income Tax Consequences".
An Index of Principal Definitions is included at the end of this
Prospectus specifying the location of definitions of important or frequently
used defined terms.
S-67
<PAGE>
Version 1: Multifamily Properties
[The following is to be inserted in the Prospectus immediately
following "Risks Associated with Certain Mortgage Loans and Mortgaged
Properties":]
RISKS PARTICULAR TO MULTIFAMILY RENTAL PROPERTIES.
Adverse economic conditions, either local, regional or national, may
limit the amount of rent that can be charged for rental units, may adversely
affect tenants' ability to pay rent and may result in a reduction in timely
rent payments or a reduction in occupancy levels without a corresponding
decrease in expenses. Occupancy and rent levels may also be affected by
construction of additional housing units, local military base closings, company
relocations and closings and national and local politics, including current or
future rent stabilization and rent control laws and agreements. Multifamily
apartment units are typically leased on a short-term basis, and consequently,
the occupancy rate of a multifamily rental property may be subject to rapid
decline, including for some of the foregoing reasons. In addition, the level of
mortgage interest rates may encourage tenants in multifamily rental properties
to purchase single-family housing rather than continue to lease housing or the
characteristics of a neighborhood may change over time or in relation to newer
developments. Further, the cost of operating a multifamily rental property may
increase, including the cost of utilities and the costs of required capital
expenditures. Also, multifamily rental properties may be subject to rent
control laws which could impact the future cash flows of such properties.
Certain multifamily rental properties are eligible to receive
low-income housing tax credits pursuant to Section 42 of the Code ("Section 42
Properties"). However, rent limitations associated therewith may adversely
affect the ability of the applicable borrowers to increase rents to maintain
such Mortgaged Properties in proper condition during periods of rapid inflation
or declining market value of such Mortgaged Properties. In addition, the income
restrictions on tenants imposed by Section 42 of the Code may reduce the number
of eligible tenants in such Mortgaged Properties and result in a reduction in
occupancy rates applicable thereto. Furthermore, some eligible tenants may not
find any differences in rents between the Section 42 Properties and other
multifamily rental properties in the same area to be a sufficient economic
incentive to reside at a Section 42 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.
RISKS PARTICULAR TO COOPERATIVELY-OWNED APARTMENT BUILDINGS.
Generally, a tenant-shareholder of a cooperative corporation must make
a monthly maintenance payment to the cooperative corporation that owns the
subject apartment building representing such tenant-shareholder's pro rata
share of the corporation's payments in respect of the Mortgage Loan secured by,
and all real property taxes, maintenance expenses and other capital and
ordinary expenses with respect to, such property, less any other income that
the cooperative corporation may realize. Adverse economic conditions, either
local regional or national, may adversely affect tenant-shareholders' ability
to make required maintenance payments, either because such adverse economic
conditions have impaired the individual financial conditions of such
tenant-shareholders or their ability to sub-let the subject apartments. To the
extent that a large number of tenant-shareholders in a cooperatively-owned
apartment building rely on sub-letting their apartments to make maintenance
payments, the lender on any mortgage loan secured by such building will be
subject to all the risks that it would have in connection with lending on the
security of a multifamily rental property. See "--Risks Particular to
Multifamily Rental Properties" above. In addition, if in connection with any
cooperative conversion of an apartment building, the sponsor holds the shares
allocated to a large number of the apartment units, any lender secured by a
mortgage on such building will be subject to a risk associated with such
sponsor's creditworthiness.
S-68
<PAGE>
Version 1: Multifamily Properties
[The following is to be inserted in the Prospectus immediately
following "Description of the Trust Funds--Mortgage Loans--General":]
MORTGAGE LOANS SECURED BY MULTIFAMILY RENTAL PROPERTIES.
Significant factors determining the value and successful operation of
a multifamily rental property are the location of the property, the number of
competing residential developments in the local market (such as apartment
buildings, manufactured housing communities and site-built single family
homes), the physical attributes of the multifamily building (such as its age
and appearance) and state and local regulations affecting such property. In
addition, the successful operation of an apartment building will depend upon
other factors such as its reputation, the ability of management to provide
adequate maintenance and insurance, and the types of services it provides.
Certain states regulate the relationship of an owner and its tenants.
Commonly, these laws require a written lease, good cause for eviction,
disclosure of fees, and notification to residents of changed land use, while
prohibiting unreasonable rules, retaliatory evictions, and restrictions on a
resident's choice of unit vendors. Apartment building owners have been the
subject of suits under state "Unfair and Deceptive Practices Acts" and other
general consumer protection statutes for coercive, abusive or unconscionable
leasing and sales practices. A few states offer more significant protection.
For example, there are provisions that limit the basis on which a landlord may
terminate a tenancy or increase its rent or prohibit a landlord from
terminating a tenancy solely by reason of the sale of the owner's building.
In addition to state regulation of the landlord-tenant relationship,
numerous counties and municipalities impose rent control on apartment
buildings. These ordinances may limit rent increases to fixed percentages, to
percentages of increases in the consumer price index, to increases set or
approved by a governmental agency, or to increases determined through mediation
or binding arbitration. In many cases, the rent control laws do not provide for
decontrol of rental rates upon vacancy of individual units. Any limitations on
a borrower's ability to raise property rents may impair such borrower's ability
to repay its Mortgage Loan from its net operating income or the proceeds of a
sale or refinancing of the related Mortgaged Property.
Adverse economic conditions, either local, regional or national, may
limit the amount of rent that can be charged, may adversely affect tenants'
ability to pay rent and may result in a reduction in timely rent payments or a
reduction in occupancy levels. Occupancy and rent levels may also be affected
by construction of additional housing units, local military base closings,
company relocations and closings and national and local politics, including
current or future rent stabilization and rent control laws and agreements.
Multifamily apartment units are typically leased on a short-term basis, and
consequently, the occupancy rate of a multifamily rental property may be
subject to rapid decline, including for some of the foregoing reasons. In
addition, the level of mortgage interest rates may encourage tenants to
purchase single-family housing rather than continue to lease housing. The
location and construction quality of a particular building may affect the
occupancy level as well as the rents that may be charged for individual units.
The characteristics of a neighborhood may change over time or in relation to
newer developments.
Mortgage Loans Secured by Cooperatively-Owned Apartment Buildings. A
cooperative apartment building and the land under the building are owned or
leased by a non-profit cooperative corporation. The cooperative corporation is
in turn owned by tenant-shareholders who, through ownership of stock, shares or
membership certificates in the corporation, receive proprietary leases or
occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-shareholder of a cooperative
corporation must make a monthly maintenance payment to the corporation
representing such tenant-shareholder's pro rata share of the corporation's
payments in respect of any mortgage loan secured by, and all real property
taxes, maintenance expenses and other capital and ordinary expenses with
respect to, the real property owned by such cooperative corporation, less any
other income that the cooperative corporation may realize. Such payments to the
cooperative corporation are in addition to any payments
S-69
<PAGE>
Version 1: Multifamily Properties
of principal and interest the tenant-shareholder must make on any loans of the
tenant-shareholder secured by its shares in the corporation.
A cooperative corporation is directly responsible for building
management and payment of real estate taxes and hazard and liability insurance
premiums. A cooperative corporation's ability to meet debt service obligations
on a mortgage loan secured by the real property owned by such corporation, as
well as all other operating expenses of such property, is dependent primarily
upon the receipt of maintenance payments from the tenant-shareholders, together
with any rental income from units or commercial space that the cooperative
corporation might control. Unanticipated expenditures may in some cases have to
be paid by special assessments on the tenant-shareholders. A cooperative
corporation's ability to pay the amount of any balloon payment due at the
maturity of a mortgage loan secured by the real property owned by such
cooperative corporation depends primarily on its ability to refinance the
mortgage loan. Neither the Depositor nor any other person will have any
obligation to provide refinancing for any of the Mortgage Loans.
In a typical cooperative conversion plan, the owner of a rental
apartment building contracts to sell the building to a newly formed cooperative
corporation. Shares are allocated to each apartment unit by the owner or
sponsor, and the current tenants have a certain period to subscribe at prices
discounted from the prices to be offered to the public after such period. As
part of the consideration for the sale, the owner or sponsor receives all the
unsold shares of the cooperative corporation. The sponsor usually also controls
the corporation's board of directors and management for a limited period of
time.
Each purchaser of shares in the cooperative corporation generally
enters into a long-term proprietary lease which provides the shareholder with
the right to occupy a particular apartment unit. However, many cooperative
conversion plans are "non-eviction" plans. Under a non-eviction plan, a tenant
at the time of conversion who chooses not to purchase shares is entitled to
reside in the unit as a subtenant from the owner of the shares allocated to
such apartment unit. Any applicable rent control or rent stabilization laws
would continue to be applicable to such subtenancy, and the subtenant may be
entitled to renew its lease for an indefinite number of times, with continued
protection from rent increases above those permitted by any applicable rent
control and rent stabilization laws. The shareholder is responsible for the
maintenance payments to the cooperative without regard to its receipt or
non-receipt of rent from the subtenant, which may be lower than maintenance
payments on the unit. Newly-formed cooperative corporations typically have the
greatest concentration of non-tenant shareholders.
S-70
<PAGE>
Version 1: Multifamily Properties
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors--Limited Recourse":]
RISKS PARTICULAR TO MULTIFAMILY PROPERTIES.
_____ of the Mortgage Loans, which represent ___% of the Initial Pool
Balance, are secured by Mortgages on fee and/or leasehold interests in
multifamily properties. Mortgage Loans that are secured by liens on such types
of properties are exposed to certain unique risks. See "Risk Factors--Certain
Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage--Risks
Particular to Multifamily Rental Properties" and "--Risks Particular to
Cooperatively-Owned Apartment Buildings".
S-71
<PAGE>
Version 2: Office Properties
[The following is to be inserted, as indicated by starred brackets
([** // **]) on the next page, on the cover of the Prospectus.]
Office properties will represent security for a material concentration
of the Mortgage Loans (and the mortgage loans underlying the MBS included in a
particular Trust Fund) constituting the Trust Fund for any Series, based on
principal balance at the time such Series is issued.
S-72
<PAGE>
Version 2: Office Properties
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED ______________, 1998.
PROSPECTUS
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(DEPOSITOR)
---------------------
The commercial mortgage pass-through certificates (the "Offered
Certificates") offered hereby and by the supplements hereto (each, a
"Prospectus Supplement") will be offered from time to time in series (each a
"Series"). The Offered Certificates of any Series, together with any other
mortgage pass-through certificates of such Series, are collectively referred to
herein as the "Certificates".
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any Series, the
"Trust Fund") consisting primarily of a segregated pool (a "Mortgage Asset
Pool") of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage-backed securities ("MBS") that evidence interests
in, or that are secured by pledges of, one or more of the following types of
real property (each, a "Mortgaged Property"): (i) residential properties
consisting of multiple rental or cooperatively-owned dwelling units and mobile
home parks; (ii) commercial properties consisting of office buildings, retail
facilities related to the sale of goods and products and facilities related to
providing entertainment, recreation or personal services, hotels and motels,
casinos, health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, auto parks, golf courses, arenas and restaurants (or
cooperative units therein); and (iii) mixed use properties (that is, any
combination of the foregoing) and unimproved land. [**Office properties will
represent security for a material concentration of the Mortgage Loans (and the
mortgage loans underlying any MBS included in a particular Trust Fund)
constituting the Trust Fund for any Series, based on a principal balance at the
time such Series is issued.**]
If so specified in the related Prospectus Supplement, the Trust Fund for a
Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support described in this
Prospectus, or any combination thereof (with respect to any Series,
collectively, "Credit Support"), and interest rate exchange agreements,
interest rate cap or floor agreements or currency exchange agreements described
in this Prospectus, or any combination thereof (with respect to any Series,
collectively, "Cash Flow Agreements"). See "Description of the Trust Funds",
"Description of the Certificates" and "Description of Credit Support".
The Depositor does not intend to list any of the Offered Certificates
on any securities exchange and has not made any other arrangement for secondary
trading of the Offered Certificates. There will have been no public market for
the
S-73
<PAGE>
Version 2: Office Properties
Certificates of any Series prior to the offering thereof. No assurance can be
given that such a market will develop as a result of such an offering. See
"Risk Factors".
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR CERTAIN
FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
(cover continued on next page)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The Offered Certificates of any Series may be offered through one or
more different methods, including offerings through underwriters, which may
include Bear, Stearns & Co. Inc., an affiliate of the Depositor, as more fully
described under "Method of Distribution" and in the related 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
such Series.
The date of this Prospectus is ________, ____
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each Series, including the Offered Certificates of such Series, may consist of
one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest; (iv) are entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such Series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology. See "Description of the
Certificates".
Distributions in respect of the Certificates of each Series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, such distributions will be made only from
the assets of the related Trust Fund.
No Series of Certificates will represent an obligation of or interest
in the Depositor or any of its affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
Certificates of any Series nor the assets in any Trust Fund will be guaranteed
or insured by any governmental agency or instrumentality or by any other
person, unless otherwise provided in the related Prospectus Supplement. The
assets in each Trust Fund will be held in trust for the benefit of the holders
of the related Series of Certificates (the "Certificateholders") pursuant to a
Pooling Agreement, as more fully described herein.
S-74
<PAGE>
Version 2: Office Properties
The yield on each class of Certificates of a Series will be affected
by, among other things, the rate of payment of principal (including
prepayments) on the Mortgage Assets in the related Trust Fund and the timing of
receipt of such payments as described herein and in the related Prospectus
Supplement. See "Yield and Maturity Considerations". A Trust Fund may be
subject to early termination under the circumstances described herein and in
the related Prospectus Supplement. See "Description of the Certificates".
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" (each, a "REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
Series of Securities will specify which Class or Classes of such Series will be
considered to be regular interests in the related REMIC and which Class or
Classes will be designated as the residual interest in the related REMIC. See
"Certain Federal Income Tax Consequences".
S-75
<PAGE>
Version 2: Office Properties
[The following is to be inserted in the Prospectus immediately
following "Risks Associated with Certain Mortgage Loans and Mortgaged
Properties":]
RISKS PARTICULAR TO OFFICE PROPERTIES.
In addition to risks generally associated with real estate, Mortgage
Loans secured by office properties are also affected significantly by adverse
changes in population and employment growth (which generally creates demand for
office space), local competitive conditions (such as the supply of office space
or the existence or construction of new competitive office buildings), the
quality and management philosophy of management, the attractiveness of the
properties to tenants and their customers or clients, the attractiveness of the
surrounding neighborhood and the need to make major repairs or improvements to
satisfy the needs of major tenants. Office properties that are not equipped to
accommodate the needs of modern business may become functionally obsolete and
thus non-competitive. In addition, office properties may be adversely affected
by an economic decline in the businesses operated by their tenants. Such
decline may result in one or more significant tenants ceasing operations at
such locations (which may occur on account of a voluntary decision not to renew
a lease, bankruptcy or insolvency of such tenants, such tenants' general
cessation of business activities or for other reasons). The risk of such an
economic decline 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.
S-76
<PAGE>
Version 2: Office Properties
[The following is to be inserted in the Prospectus immediately
following "Description of the Trust Funds--Mortgage Loans-General":]
MORTGAGE LOANS SECURED BY OFFICE PROPERTIES.
Significant factors affecting the value of office properties include
the quality of the tenants in the building, the physical attributes of the
building in relation to competing buildings, the location of the building with
respect to the central business district or population centers, demographic
trends within the metropolitan area to move away from or towards the central
business district, social trends combined with space management trends (which
may change towards options such as telecommuting ), tax incentives offered to
businesses by cities or suburbs adjacent to or near the city where the building
is located and the strength and stability of the market area as a desirable
business location. Office properties may be adversely affected by an economic
decline in the businesses operated by their tenants. The risk of such an
economic decline 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 properties are also subject to competition with other office
properties in the same market. Competition is affected by a building's age,
condition, design (including floor sizes and layout), access to transportation,
availability of parking and ability to offer certain amenities to its tenants
(including sophisticated building systems, such as fiberoptic cables, satellite
communications or other base building technological features). Office
properties that are not equipped to accommodate the needs of modern business
may become functionally obsolete and thus non-competitive.
The success of an office property 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 matters, such as schools and cultural amenities. A central
business district may have a substantially different economy from that of a
suburb. The local economy will affect an office property's ability to attract
stable tenants on a consistent basis. In addition, the cost of refitting office
space for a new tenant is often higher than for other property types.
S-77
<PAGE>
Version 2: Office Properties
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors--Limited Recourse":]
RISKS PARTICULAR TO OFFICE PROPERTIES.
_____ of the Mortgage Loans, which represent _____ % of the Initial
Pool Balance, are secured by Mortgages on fee and/or leasehold interests in
office properties. Mortgage Loans that are secured by liens on such types of
properties are exposed to certain unique risks. See "Risk Factors--Certain
Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage-Risks
Particular to Office Properties" in the Prospectus.
S-78
<PAGE>
Version 3: Retail Properties
[The following is to be inserted, as indicated by starred brackets
([** // **]) on the next page, on the cover of the Prospectus.]
Retail properties will represent security for a material concentration
of the Mortgage Loans (and the mortgage loans underlying any MBS included in a
particular Trust Fund) constituting the Trust Fund for any Series, based on
principal balance at the time such Series is issued.
S-79
<PAGE>
Version 3: Retail Properties
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED ___________, 1998.
PROSPECTUS
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(DEPOSITOR)
---------------------
The commercial mortgage pass-through certificates (the "Offered
Certificates") offered hereby and by the supplements hereto (each, a
"Prospectus Supplement") will be offered from time to time in series (each a
"Series"). The Offered Certificates of any Series, together with any other
mortgage pass-through certificates of such Series, are collectively referred to
herein as the "Certificates".
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any Series, the
"Trust Fund") consisting primarily of a segregated pool (a "Mortgage Asset
Pool") of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage-backed securities ("MBS") that evidence interests
in, or that are secured by pledges of, one or more of the following types of
real property (each, a "Mortgaged Property"): (i) residential properties
consisting of multiple rental or cooperatively-owned dwelling units and mobile
home parks; (ii) commercial properties consisting of office buildings, retail
facilities related to the sale of goods and products and facilities related to
providing entertainment, recreation or personal services, hotels and motels,
casinos, health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, auto parks, golf courses, arenas and restaurants (or
cooperative units therein); and (iii) mixed use properties (that is, any
combination of the foregoing) and unimproved land. [**Retail properties will
represent security for a material concentration of the Mortgage Loans (and the
mortgage loans underlying any MBS included in a particular Trust Fund)
constituting the Trust Fund for any Series, based on a principal balance at the
time such Series is issued.**]
If so specified in the related Prospectus Supplement, the Trust Fund for a
Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support described in this
Prospectus, or any combination thereof (with respect to any Series,
collectively, "Credit Support"), and interest rate exchange agreements,
interest rate cap or floor agreements or currency exchange agreements described
in this Prospectus, or any combination thereof (with respect to any Series,
collectively, "Cash Flow Agreements"). See "Description of the Trust Funds",
"Description of the Certificates" and "Description of Credit Support".
The Depositor does not intend to list any of the Offered Certificates
on any securities exchange and has not made any other arrangement for secondary
trading of the Offered Certificates. There will have been no public market for
the Certificates of any Series prior to the offering thereof. No assurance can
be given that such a market will develop as a result of such an offering. See
"Risk Factors".
S-80
<PAGE>
Version 3: Retail Properties
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR CERTAIN
FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
(cover continued on next page)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The Offered Certificates of any Series may be offered through one or
more different methods, including offerings through underwriters, which may
include Bear, Stearns & Co. Inc., an affiliate of the Depositor, as more fully
described under "Method of Distribution" and in the related 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
such Series.
The date of this Prospectus is ________, ____
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each Series, including the Offered Certificates of such Series, may consist of
one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest; (iv) are entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such Series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology. See "Description of the
Certificates".
Distributions in respect of the Certificates of each Series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, such distributions will be made only from
the assets of the related Trust Fund.
No Series of Certificates will represent an obligation of or interest
in the Depositor or any of its affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
Certificates of any Series nor the assets in any Trust Fund will be guaranteed
or insured by any governmental agency or instrumentality or by any other
person, unless otherwise provided in the related Prospectus Supplement. The
assets in each Trust Fund will be held in trust for the benefit of the holders
of the related Series of Certificates (the "Certificateholders") pursuant to a
Pooling Agreement, as more fully described herein.
The yield on each class of Certificates of a Series will be affected
by, among other things, the rate of payment of principal (including
prepayments) on the Mortgage Assets in the related Trust Fund and the timing of
receipt of such payments as described herein and in the related Prospectus
Supplement. See "Yield and Maturity Considerations". A Trust Fund
S-81
<PAGE>
Version 3: Retail Properties
may be subject to early termination under the circumstances described herein
and in the related Prospectus Supplement. See "Description of the
Certificates".
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" (each, a "REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
Series of Securities will specify which Class or Classes of such Series will be
considered to be regular interests in the related REMIC and which Class or
Classes will be designated as the residual interest in the related REMIC. See
"Certain Federal Income Tax Consequences".
An Index of Principal Definitions is included at the end of this
Prospectus specifying the location of definitions of important or frequently
used defined terms.
S-82
<PAGE>
Version 3: Retail Properties
[The following is to be inserted in the Prospectus immediately
following "Risk Factors--Certain Factors Affecting Delinquency, Foreclosure and
Loss of the Mortgage Loans--General":]
RISKS PARTICULAR TO RETAIL PROPERTIES.
In addition to risks generally associated with real estate, Mortgage
Loans secured by retail properties are also affected significantly by adverse
changes in consumer spending patterns, local competitive conditions (such as
the supply of retail space or the existence or construction of new competitive
shopping centers or shopping malls), alternative forms of retailing (such as
direct mail, video shopping networks and selling through the Internet, which
reduce the need for retail space by retail companies), the quality and
management philosophy of management, the attractiveness of the properties and
the surrounding neighborhood to tenants and their customers, the public
perception of the safety of customers (at shopping malls and shopping centers,
for example) and the need to make major repairs or improvements to satisfy the
needs of major tenants.
Retail properties may be adversely affected if an anchor or other
significant tenant ceases operations at such locations (which may occur on
account of a decision not to renew a lease, bankruptcy or insolvency of such
tenant, such tenant's general cessation of business activities or for other
reasons). Significant tenants at a shopping center play an important part in
generating customer traffic and making the property a desirable location for
other tenants at such property. In addition, certain tenants at retail
properties may be entitled to terminate their leases if an anchor tenant ceases
operations at such property.
S-83
<PAGE>
Version 3: Retail Properties
[The following is to be inserted in the Prospectus immediately
following "Description of the Trust Funds--Mortgage Loans--General":]
MORTGAGE LOANS SECURED BY RETAIL PROPERTIES.
Retail properties generally derive all or a substantial percentage of
their income from lease payments from commercial tenants. Income from and the
market value of retail properties is dependent on various factors including,
but not limited to, the ability to lease space in such properties, the ability
of tenants to meet their lease obligations, the possibility of a significant
tenant becoming bankrupt or insolvent, as well as fundamental aspects of real
estate such as location and market demographics.
The correlation between the success of tenant businesses and property
value is more direct with respect to retail properties than other types of
commercial property because a significant component of the total rent paid by
retail tenants is often tied to a percentage of gross sales. Declines in tenant
sales will cause a corresponding decline in percentage rents and may cause such
tenants to become unable to pay their rent or other occupancy costs. The
default by a tenant under its lease could result in delays and costs in
enforcing the lessor's rights. Repayment of the related Mortgage Loans will be
affected by the expiration of space leases and the ability of the respective
borrowers to renew or relet the space on comparable terms. Even if vacated
space is successfully relet, the costs associated with reletting, including
tenant improvements, leasing commissions and free rent, could be substantial
and could reduce cash flow from the retail properties. The correlation between
the success of tenant businesses and property value is increased when the
property is a single tenant property.
Whether a shopping center is "anchored" or "unanchored" is also an
important distinction. Anchor tenants in shopping centers traditionally have
been a major factor in the public's perception of a shopping center. The anchor
tenants at a shopping center play an important part in generating customer
traffic and making a center a desirable location for other tenants of the
center. The failure of an anchor tenant to renew its leases, 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 (notwithstanding
any continued payment of rent) can have a material negative effect on the
economic performance of a shopping center. Furthermore, the correlation between
the success of tenant businesses and property value is increased when the
property is a single tenant property.
Unlike certain other types of commercial properties, retail properties
also face competition from sources outside a given real estate market.
Catalogue retailers, home shopping networks, telemarketing, selling through the
Internet, and outlet centers all compete with more traditional retail
properties for consumer dollars. Continued growth of these alternative retail
outlets (which are often characterized by lower operating costs) could
adversely affect the retail properties.
S-84
<PAGE>
Version 3: Retail Properties
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors--Limited Recourse":]
RISKS PARTICULAR TO RETAIL PROPERTIES.
_____ of the Mortgage Loans, which represent _____ % of the Initial
Pool Balance, are secured by Mortgages on fee and/or leasehold interests in
retail properties. Mortgage Loans that are secured by liens on such types of
properties are exposed to certain unique risks. See "Risk Factors--Certain
Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage-Risks
Particular to Retail Properties" in the Prospectus.
S-85
<PAGE>
Version 4: Hotel and Motel Properties
[The following is to be inserted, as indicated by starred brackets
([** // **]) on the next page, on the cover of the Prospectus.]
Hotel and motel properties will represent security for a material
concentration of the Mortgage Loans (and the mortgage loans underlying any MBS
included in a particular Trust Fund) constituting the Trust Fund for any
Series, based on principal balance at the time such Series is issued.
S-86
<PAGE>
Version 4: Hotel and Motel Properties
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED __________, 1998.
PROSPECTUS
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(DEPOSITOR)
---------------------
The commercial mortgage pass-through certificates (the "Offered
Certificates") offered hereby and by the supplements hereto (each, a
"Prospectus Supplement") will be offered from time to time in series (each a
"Series"). The Offered Certificates of any Series, together with any other
mortgage pass-through certificates of such Series, are collectively referred to
herein as the "Certificates".
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any Series, the
"Trust Fund") consisting primarily of a segregated pool (a "Mortgage Asset
Pool") of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage-backed securities ("MBS") that evidence interests
in, or that are secured by pledges of, in one or more of the following types of
real property (each, a "Mortgaged Property"): (i) residential properties
consisting of multiple rental or cooperatively-owned dwelling units and mobile
home parks; (ii) commercial properties consisting of office buildings, retail
facilities related to the sale of goods and products and facilities related to
providing entertainment, recreation or personal services, hotels and motels,
casinos, health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, auto parks, golf courses, arenas and restaurants (or
cooperative units therein); and (iii) mixed use properties (that is, any
combination of the foregoing) and unimproved land. [**Hotel and motel
properties will represent security for a material concentration of the Mortgage
Loans (and the mortgage loans underlying any MBS included in a particular Trust
Fund) constituting the Trust Fund for any Series, based on a principal balance
at the time such Series is issued.**]
If so specified in the related Prospectus Supplement, the Trust Fund
for a Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support described in this
Prospectus, or any combination thereof (with respect to any Series,
collectively, "Credit Support"), and interest rate exchange agreements,
interest rate cap or floor agreements or currency exchange agreements described
in this Prospectus, or any combination thereof (with respect to any Series,
collectively, "Cash Flow Agreements"). See "Description of the Trust Funds",
"Description of the Certificates" and "Description of Credit Support".
The Depositor does not intend to list any of the Offered Certificates
on any securities exchange and has not made any other arrangement for secondary
trading of the Offered Certificates. There will have been no public market for
the Certificates of any Series prior to the offering thereof. No assurance can
be given that such a market will develop as a result of such an offering. See
"Risk Factors".
S-87
<PAGE>
Version 4: Hotel and Motel Properties
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR CERTAIN
FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
(cover continued on next page)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The Offered Certificates of any Series may be offered through one or
more different methods, including offerings through underwriters, which may
include Bear, Stearns & Co. Inc., an affiliate of the Depositor, as more fully
described under "Method of Distribution" and in the related 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 such Series.
The date of this Prospectus is ________, ____
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each Series, including the Offered Certificates of such Series, may consist of
one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest; (iv) are entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such Series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology. See "Description of the
Certificates".
Distributions in respect of the Certificates of each Series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, such distributions will be made only from
the assets of the related Trust Fund.
No Series of Certificates will represent an obligation of or interest
in the Depositor or any of its affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
Certificates of any Series nor the assets in any Trust Fund will be guaranteed
or insured by any governmental agency or instrumentality or by any other
person, unless otherwise provided in the related Prospectus Supplement. The
assets in each Trust Fund will be held in trust for the benefit of the holders
of the related Series of Certificates (the "Certificateholders") pursuant to a
Pooling Agreement, as more fully described herein.
The yield on each class of Certificates of a Series will be affected
by, among other things, the rate of payment of principal (including
prepayments) on the Mortgage Assets in the related Trust Fund and the timing of
receipt of such payments as described herein and in the related Prospectus
Supplement. See "Yield and Maturity Considerations". A Trust Fund
S-88
<PAGE>
Version 4: Hotel and Motel Properties
may be subject to early termination under the circumstances described herein
and in the related Prospectus Supplement. See "Description of the
Certificates".
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" (each, a "REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
Series of Securities will specify which Class or Classes of such Series will be
considered to be regular interests in the related REMIC and which Class or
Classes will be designated as the residual interest in the related REMIC. See
"Certain Federal Income Tax Consequences".
An Index of Principal Definitions is included at the end of this
Prospectus specifying the location of definitions of important or frequently
used defined terms.
S-89
<PAGE>
Version 4: Hotel and Motel Properties
[The following is to be inserted in the Prospectus immediately
following "Risks Associated with Certain Mortgage Loans and Mortgage
Properties":]
RISKS PARTICULAR TO HOTEL AND MOTEL PROPERTIES.
Hotel and motel properties are subject to operating risks common to
the lodging industry. These risks include, among other things, a high level of
continuing capital expenditures to keep necessary furniture, fixtures and
equipment updated, competition from other hotels and motels, increases in
operating costs (which increases may not necessarily in the future be offset by
increased room rates), dependence on business and commercial travelers and
tourism, increases in energy costs and other expenses of travel and adverse
effects of general and local economic conditions. These factors could adversely
affect the related borrower's ability to make payments on the related Mortgage
Loans. Since limited service hotels and motels are relatively quick and
inexpensive to construct and may quickly reflect a positive value, an
over-building of such hotels and motels could occur in any given region, which
would likely adversely affect occupancy and daily room rates. Further, because
hotel and motel rooms are generally rented for short periods of time, hotel and
motel properties tend to be more sensitive to adverse economic conditions and
competition than many other commercial properties. Additionally, the revenues
of certain hotels and motels, particularly those located in regions whose
economies depend upon tourism, may be highly seasonal in nature.
A hotel or motel property may present additional risks as compared to
other commercial property types in that: (i) hotels and motels may be operated
pursuant to franchise, management and operating agreements that may be
terminable by the franchiser, the manager or the operator; (ii) the
transferability of any operating, liquor and other licenses to the entity
acquiring such hotel or motel (either through purchase or foreclosure) is
subject to local law requirements; (iii) it may be difficult to terminate an
ineffective operator of a hotel or motel property subsequent to a foreclosure
of such property; and (iv) future occupancy rates may be adversely affected by,
among other factors, any negative perception of a hotel or motel based upon its
historical reputation.
Hotel and motel properties may be operated pursuant to franchise
agreements. The continuation of franchises is typically subject to specified
operating standards and other terms and conditions. The franchiser periodically
inspects its licensed properties to confirm adherence to its operating
standards. The failure of the hotel or motel property to maintain such
standards or adhere to such other terms and conditions could result in the loss
or cancellation of the franchise license. It is possible that the franchiser
could condition the continuation of a franchise license on the completion of
capital improvements or the making of certain capital expenditures that the
related borrower determines are too expensive or are otherwise unwarranted in
light of general economic conditions or the operating results or prospects of
the affected hotels. In that event, the related borrower may elect to allow the
franchise license to lapse. In any case, if the franchise is terminated, the
related borrower may seek to obtain a suitable replacement franchise or to
operate such hotel or motel property independently of a franchise license. The
loss of a franchise license could have a material adverse effect upon the
operations or the underlying value of the hotel or motel covered by the
franchise because of the loss of associated name recognition, marketing support
and centralized reservation systems provided by the franchiser.
S-90
<PAGE>
Version 4: Hotel and Motel Properties
[The following is to be inserted in the Prospectus immediately
following "Description of the Trust Funds--Mortgage Loans--General":]
MORTGAGE LOANS SECURED BY HOTEL AND MOTEL PROPERTIES.
Hotel and motel properties may include full service hotels, resort
hotels with many amenities, limited service hotels, hotels and motels
associated with national franchise chains, hotels and motels associated with
regional franchise chains and hotels that are not affiliated with any franchise
chain but may have their own brand identity. Various factors, including
location, quality and franchise affiliation affect the economic performance of
a hotel or motel. Adverse economic conditions, either local, regional or
national, may limit the amount that can be charged for a room and may result in
a reduction in occupancy levels. The construction of competing hotels and
motels can have similar effects. To meet competition in the industry and to
maintain economic values, continuing expenditures must be made for modernizing,
refurbishing, and maintaining existing facilities prior to the expiration of
their anticipated useful lives. Because hotel and motel rooms generally are
rented for short periods of time, hotels and motels tend to respond more
quickly to adverse economic conditions and competition than do other commercial
properties. Furthermore, the financial strength and capabilities of the owner
and operator of a hotel or motel may have an impact on quality of service and
economic performance. Additionally, the lodging industry, in certain
locations, is seasonal in nature and this seasonality can be expected to cause
periodic fluctuations in room and other revenues, occupancy levels, room rates
and operating expenses. The demand for particular accommodations may also be
affected by changes in travel patterns caused by changes in energy prices,
strikes, relocation of highways, the construction of additional highways and
other factors.
The viability of any hotel or motel property that is part of a
national or regional hotel or motel chain depends in part on the continued
existence and financial strength of the franchiser, the public perception of
the franchise service mark and the duration of the franchise licensing
agreement. The transferability of franchise license agreements may be
restricted and, in the event of a foreclosure on any such hotel or motel
property, the consent of the franchiser for the continued use the franchise
license by the hotel or motel property would be required. Conversely, a lender
may be unable to remove a franchiser that it desires to replace following a
foreclosure. Further, in the event of a foreclosure on a hotel or motel
property, it is unlikely that the purchaser of such hotel or motel property
would be entitled to the rights under any associated liquor license, and such
purchaser would be required to apply in its own right for such license. There
can be no assurance that a new license could be obtained or that it could be
obtained promptly.
S-91
<PAGE>
Version 4: Hotel and Motel Properties
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors--Limited Recourse":]
RISKS PARTICULAR TO HOTEL AND MOTEL PROPERTIES.
_____ of the Mortgage Loans, which represent _____ % of the Initial
Poll Balance, are secured by Mortgages on fee and/or leasehold interests in
hotels and motels. Mortgage Loans that are secured by liens on such types of
properties are exposed to certain unique risks. See "Risk Factors--Certain
Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage-Risks
Particular to Hotel and Motel Properties" in the Prospectus.
S-92
<PAGE>
Version 5: Health Care-Related Facilities
[The following is to be inserted, as indicated by starred brackets
([** // **]) on the next page, on the cover of the Prospectus.]
Health Care-Related Properties will represent security for a material
concentration of the Mortgage Loans (and the mortgage loans underlying the MBS
included in a particular Trust Fund) constituting the Trust Fund for any
Series, based on principal balance at the time such Series is issued.
S-93
<PAGE>
Version 5: Health Care-Related Facilities
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED ____________, 1998.
PROSPECTUS
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(DEPOSITOR)
---------------------
The commercial mortgage pass-through certificates (the "Offered
Certificates") offered hereby and by the supplements hereto (each, a
"Prospectus Supplement") will be offered from time to time in series (each a
"Series"). The Offered Certificates of any Series, together with any other
mortgage pass-through certificates of such Series, are collectively referred to
herein as the "Certificates".
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any Series, the
"Trust Fund") consisting primarily of a segregated pool (a "Mortgage Asset
Pool") of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage-backed securities ("MBS") that evidence interests
in, or that are secured by pledges of, one or more of the following types of
real property (each, a "Mortgaged Property"): (i) residential properties
consisting of multiple rental or cooperatively-owned dwelling units and mobile
home parks; (ii) commercial properties consisting of office buildings, retail
facilities related to the sale of goods and products and facilities related to
providing entertainment, recreation or personal services, hotels and motels,
casinos, health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, auto parks, golf courses, arenas and restaurants (or
cooperative units therein); and (iii) mixed use properties (that is, any
combination of the foregoing) and unimproved land. [**Health Care-Related
Properties will represent security for a material concentration of the Mortgage
Loans (and the mortgage loans underlying the MBS included in a particular Trust
Fund) constituting the Trust Fund for any Series, based on principal balance at
the time such Series is issued.**]
The Depositor does not intend to list any of the Offered Certificates
on any securities exchange and has not made any other arrangement for secondary
trading of the Offered Certificates. There will have been no public market for
the Certificates of any Series prior to the offering thereof. No assurance can
be given that such a market will develop as a result of such an offering. See
"Risk Factors".
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR CERTAIN
FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
(cover continued on next page)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES
S-94
<PAGE>
Version 5: Health Care-Related Facilities
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------------
The Offered Certificates of any Series may be offered through one or
more different methods, including offerings through underwriters, which may
include Bear, Stearns & Co. Inc., an affiliate of the Depositor, as more fully
described under "Method of Distribution" and in the related 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
such Series.
The date of this Prospectus is ________, ____
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each Series, including the Offered Certificates of such Series, may consist of
one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest; (iv) are entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such Series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology. See "Description of the
Certificates".
Distributions in respect of the Certificates of each Series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, such distributions will be made only from
the assets of the related Trust Fund.
No Series of Certificates will represent an obligation of or interest
in the Depositor or any of its affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
Certificates of any Series nor the assets in any Trust Fund will be guaranteed
or insured by any governmental agency or instrumentality or by any other
person, unless otherwise provided in the related Prospectus Supplement. The
assets in each Trust Fund will be held in trust for the benefit of the holders
of the related Series of Certificates (the "Certificateholders") pursuant to a
Pooling Agreement, as more fully described herein.
The yield on each class of Certificates of a Series will be affected
by, among other things, the rate of payment of principal (including
prepayments) on the Mortgage Assets in the related Trust Fund and the timing of
receipt of such payments as described herein and in the related Prospectus
Supplement. See "Yield and Maturity Considerations". A Trust Fund may be
subject to early termination under the circumstances described herein and in
the related Prospectus Supplement. See "Description of the Certificates".
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" (each, a "REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
Series of Securities will specify which Class or Classes of such Series will be
considered to be regular interests in the related REMIC and which Class or
Classes will be designated as the residual interest in the related REMIC. See
"Certain Federal Income Tax Consequences".
S-95
<PAGE>
Version 5: Health Care-Related Facilities
An Index of Principal Definitions is included at the end of this
Prospectus specifying the location of definitions of important or frequently
used defined terms.
S-96
<PAGE>
Version 5: Health Care-Related Facilities
[The following is to be inserted in the Prospectus immediately
following "Risks Associated with Certain Mortgage Loans and Mortgaged
Properties":]
RISKS PARTICULAR TO HEALTH CARE-RELATED PROPERTIES.
Certain types of health care-related facilities (including nursing
homes) 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, all of which can adversely
affect revenues from operation. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers and
various proposals for national health care relief could, if enacted, further
limit these payments. In addition, providers of long-term nursing care and
other medical services are highly regulated by federal, state and local law and
are subject to, among other things, federal and state licensing requirements,
facility inspections, the setting of rates and charges, governmental
reimbursement policies and laws relating to the adequacy of medical care,
distribution of pharmaceuticals, equipment, personnel operating policies and
maintenance of and additions to facilities and services, any or all of which
factors can increase the cost of operation and limit growth. In extreme cases,
violations of applicable laws can result in suspension or cessation of
operations.
Under 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 on a Mortgaged Property that is
operated as a health care-related facility, neither the Trustee nor a
subsequent lessee or operator of the Mortgaged Property would generally be
entitled to obtain any outstanding reimbursement payments relating to services
furnished prior to such foreclosure. Furthermore, in the event of foreclosure,
there can be no assurance that the Trustee or purchaser in a foreclosure sale
would be entitled to the rights under any required licenses and regulatory
approvals, that a new license could be obtained or that a new approval would be
granted. In addition, Health Care-Related Properties are generally "special
purpose" properties that are not readily converted to general residential,
retail or office use, and transfers of Health Care-Related Properties are
subject to regulatory approvals under state, and in some cases federal, law not
required for transfers of most other types of commercial operations and other
types of real estate. Any of the foregoing circumstances may adversely affect
the liquidation value.
S-97
<PAGE>
Version 5: Health Care-Related Facilities
[The following is to be inserted in the Prospectus immediately
following "Description of the Trust Funds--Mortgage Loans--General":]
MORTGAGE LOANS SECURED BY HEALTH CARE-RELATED PROPERTIES.
The Mortgaged Properties may include Senior Housing, Assisted Living
Facilities, Skilled Nursing Facilities and Acute Care Facilities (any of the
foregoing, "Health Care-Related Properties"). "Senior Housing" generally
consists of apartment-style facilities, the residents of which are ambulatory
and handle their own affairs. "Assisted Living Facilities" are typically single
or double room occupancy, dormitory-style housing facilities which provide food
service, cleaning and some personal care and assistance with certain daily
routines. "Skilled Nursing Facilities" provide services to post trauma and
frail residents with limited mobility who require sub-acute medical treatment.
"Acute Care Facilities" generally consist of hospital and other facilities
providing short-term, acute medical care services.
Certain types of Health Care-Related Properties, particularly Acute
Care Facilities and Skilled Nursing Facilities, typically receive a substantial
portion of their revenues from government reimbursement programs, primarily
Medicaid and Medicare. Medicaid and Medicare reimbursements are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings, policy interpretations, delays by fiscal intermediaries and government
funding restrictions. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers, and
there exist various proposals for national health care reform that could
further limit those payments. Accordingly, there can be no assurance that
payments under government reimbursement programs will, in the future, be
sufficient to fully reimburse the cost of caring for program beneficiaries. If
such payments are insufficient, net operating income of those Health
Care-Related Properties that receive revenues from those sources, and
consequently the ability of the related borrowers to meet their obligations
under any Mortgage Loans secured thereby, could be adversely affected.
Moreover, Health Care-Related Properties that provide medical care are
generally subject to federal and state laws that relate to the adequacy of
medical care, distribution of pharmaceuticals, rates and charges, equipment,
personnel, operating policies and additions to facilities and services. In
addition, those facilities are subject to periodic inspection by governmental
authorities to determine compliance with various standards necessary to
continued licensing under state law and continued participation in the Medicaid
and Medicare reimbursement programs. Providers of assisted living services are
also subject to state licensing requirements in certain states. The failure of
an operator to maintain or renew any required license or regulatory approval
could prevent it from continuing operations at a Health Care-Related Property
or, if applicable, prohibit it from participating in government reimbursement
programs. Furthermore, under applicable federal and state laws, 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, neither the Trustee nor a
subsequent lessee or operator of any Health Care-Related Property securing a
defaulted Mortgage Loan would generally be entitled to obtain from federal or
state governments any outstanding reimbursement payments relating to services
furnished prior to such foreclosure. Any of the aforementioned circumstances
may adversely affect the ability of the related borrowers to meet their
Mortgage Loan obligations.
Government regulation applying specifically to Acute Care Facilities,
Skilled Nursing Facilities and Assisted Living Facilities includes health
planning legislation, enacted by most states, intended, at least in part, to
regulate the supply of nursing beds. The most common method of control is the
requirement that a state authority first make a determination of need,
evidenced by its issuance of a Certificate of Need ("CON"), before a long-term
care provider can establish a new facility, add beds to an existing facility
or, in some states, take certain other actions (for example, acquire major
medical equipment, make major capital expenditures, add services, refinance
long-term debt, or transfer ownership of a facility). States also regulate
nursing bed supply in other ways. For example, some states have imposed
moratoria on the licensing of new beds, or on the certification of new Medicaid
beds, or have discouraged the construction of new nursing facilities by
limiting Medicaid reimbursements allocable to the cost of new construction and
equipment. In general, a CON is site specific and operator specific; it cannot
be transferred from one site to another, or to another operator, without the
approval of the appropriate state agency. Accordingly, if a Mortgage Loan
secured by a lien on such a Health Care-Related Property were foreclosed upon,
the purchaser at foreclosure might be required to obtain a new CON or an
appropriate exemption. In addition, compliance by a purchaser with applicable
regulations may in any case require the engagement of a new operator and the
issuance of a new operating license. Upon a foreclosure, a state regulatory
agency may be willing to expedite any necessary
S-98
<PAGE>
Version 5: Health Care-Related Facilities
review and approval process to avoid interruption of care to a facility's
residents, but there can be no assurance that any will do so or that any
necessary licenses or approvals will be issued.
Further government regulation applicable to Health Care-Related
Properties exists in the form of federal and state "fraud and abuse" laws that
generally prohibit payment or fee-splitting arrangements between health care
providers that are designed to induce or encourage the referral of patients to,
or the recommendation of, a particular provider for medical products or
services. Violation of these restrictions can result in license revocation,
civil and criminal penalties, and exclusion from participation in Medicare or
Medicaid programs. The state law restrictions in this area vary considerably
from state to state. Moreover, the federal anti-kickback law includes broad
language that potentially could be applied to a wide range of referral
arrangements, and regulations designed to create "safe harbors" under the law
provide only limited guidance. Accordingly, there can be no assurance that such
laws will be interpreted in a manner consistent with the practices of the
owners or operators of the Health Care-Related Properties that are subject to
such laws.
The operators of Health Care-Related Properties 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 Property will generally depend upon the number of competing
facilities in the local market, as well as upon other factors such as its age,
appearance, reputation and management, the types of services it provides and,
where applicable, the quality of care and the cost of that care.
S-99
<PAGE>
Version 5: Health Care-Related Facilities
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors--Limited Recourse":]
RISKS PARTICULAR TO HEALTH CARE-RELATED PROPERTIES.
_____ of the Mortgage Loans, which represent _____ % of the Initial
Pool Balance, are secured by Mortgages on fee and/or leasehold interests in
health care-related properties. Mortgage Loans that are secured by liens on
such types of properties are exposed to certain unique risks. See "Risk
Factors--Certain Factors Affecting Delinquency, Foreclosure and Loss of the
Mortgage-Risks Particular to Health Care-Related Properties" in the Prospectus.
S-100
<PAGE>
Version 6: Industrial Properties
[The following is to be inserted, as indicated by starred brackets
([** // **]) on the next page, on the cover of the Prospectus.]
Industrial properties will represent security for a material
concentration of the Mortgage Loans (and the mortgage loans underlying the MBS
included in a particular Trust Fund) constituting the Trust Fund for any
Series, based on principal balance at the time such Series is issued.
S-101
<PAGE>
Version 6: Industrial Properties
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED _______, 1998.
PROSPECTUS
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(DEPOSITOR)
---------------------
The commercial mortgage pass-through certificates (the "Offered
Certificates") offered hereby and by the supplements hereto (each, a
"Prospectus Supplement") will be offered from time to time in series (each a
"Series"). The Offered Certificates of any Series, together with any other
mortgage pass-through certificates of such Series, are collectively referred to
herein as the "Certificates".
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any Series, the
"Trust Fund") consisting primarily of a segregated pool (a "Mortgage Asset
Pool") of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage-backed securities ("MBS") that evidence interests
in, or that are secured by pledges of, one or more of the following types of
real property (each, a "Mortgaged Property"): (i) residential properties
consisting of multiple rental or cooperatively-owned dwelling units and mobile
home parks; (ii) commercial properties consisting of office buildings, retail
facilities related to the sale of goods and products and facilities related to
providing entertainment, recreation or personal services, hotels and motels,
casinos, health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, auto parks, golf courses, arenas and restaurants (or
cooperative units therein); and (iii) mixed use properties (that is, any
combination of the foregoing) and unimproved land. [**Industrial properties
will represent security for a material concentration of the Mortgage Loans (and
the mortgage loans underlying the MBS included in a particular Trust Fund)
constituting the Trust Fund for any Series, based on principal balance at the
time such Series is issued.**]
If so specified in the related Prospectus Supplement, the Trust Fund
for a Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support described in this
Prospectus, or any combination thereof (with respect to any Series,
collectively, "Credit Support"), and interest rate exchange agreements,
interest rate cap or floor agreements or currency exchange agreements described
in this Prospectus, or any combination thereof (with respect to any Series,
collectively, "Cash Flow Agreements"). See "Description of the Trust Funds",
"Description of the Certificates" and "Description of Credit Support".
The Depositor does not intend to list any of the Offered Certificates
on any securities exchange and has not made any other arrangement for secondary
trading of the Offered Certificates. There will have been no public market for
the Certificates of any Series prior to the offering thereof. No assurance can
be given that such a market will develop as a result of such an offering. See
"Risk Factors".
S-102
<PAGE>
Version 6: Industrial Properties
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR CERTAIN
FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
(cover continued on next page)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The Offered Certificates of any Series may be offered through one or
more different methods, including offerings through underwriters, which may
include Bear, Stearns & Co. Inc., an affiliate of the Depositor, as more fully
described under "Method of Distribution" and in the related 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
such Series.
The date of this Prospectus is ________, ____
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each Series, including the Offered Certificates of such Series, may consist of
one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest; (iv) are entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such Series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology. See "Description of the
Certificates".
Distributions in respect of the Certificates of each Series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, such distributions will be made only from
the assets of the related Trust Fund.
No Series of Certificates will represent an obligation of or interest
in the Depositor or any of its affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
Certificates of any Series nor the assets in any Trust Fund will be guaranteed
or insured by any governmental agency or instrumentality or by any other
person, unless otherwise provided in the related Prospectus Supplement. The
assets in each Trust Fund will be held in trust for the benefit of the holders
of the related Series of Certificates (the "Certificateholders") pursuant to a
Pooling Agreement, as more fully described herein.
The yield on each class of Certificates of a Series will be affected
by, among other things, the rate of payment of principal (including
prepayments) on the Mortgage Assets in the related Trust Fund and the timing of
receipt of such payments as described herein and in the related Prospectus
Supplement. See "Yield and Maturity Considerations". A Trust Fund
S-103
<PAGE>
Version 6: Industrial Properties
may be subject to early termination under the circumstances described herein
and in the related Prospectus Supplement. See "Description of the
Certificates".
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" (each, a "REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
Series of Securities will specify which Class or Classes of such Series will be
considered to be regular interests in the related REMIC and which Class or
Classes will be designated as the residual interest in the related REMIC. See
"Certain Federal Income Tax Consequences".
An Index of Principal Definitions is included at the end of this
Prospectus specifying the location of definitions of important or frequently
used defined terms.
S-104
<PAGE>
Version 6: Industrial Properties
[The following is to be inserted in the Prospectus immediately
following "Risks Associated with Certain Mortgage Loans and Mortgaged
Properties":]
RISKS PARTICULAR TO INDUSTRIAL PROPERTIES.
Industrial properties may be adversely affected by reduced demand for
industrial space occasioned by a decline in a particular industry segment
and/or by a general slow-down in the economy, and an industrial property that
suited the particular needs of its original tenant may be difficult to relet to
another tenant or may become functionally obsolete relative to newer
properties. Furthermore, industrial properties may be adversely affected by the
availability of labor sources or a change in the proximity of supply sources.
Because industrial properties frequently have a single tenant, any such
property is heavily dependent on the success of such tenant's business.
S-105
<PAGE>
Version 6: Industrial Properties
[The following is to be inserted in the Prospectus immediately
following "Description of the Trust Funds--Mortgage Loans--General":]
MORTGAGE LOANS SECURED BY INDUSTRIAL PROPERTIES.
Significant factors that affect the value of industrial properties are
the quality of tenants, building design and adaptability and the location of
the property. Industrial properties may be adversely affected by reduced demand
for industrial space occasioned by a decline in a particular industry segment
and/or by a general slow-down in the economy, and an industrial property that
suited the particular needs of its original tenant may be difficult to relet to
another tenant or may become functionally obsolete relative to newer
properties. Furthermore, industrial properties may be adversely affected by the
availability of labor sources or a change in the proximity of supply sources.
Because industrial properties frequently have a single tenant, any such
property is heavily dependent on the success of such tenant's business.
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, number of bays and
bay depths, divisibility, floor loading capacities, truck turning radius and
overall functionality and accessibility. Nevertheless, site characteristics of
an industrial property suitable for one tenant may not be appropriate for other
potential tenants, which may make it difficult to relet the property.
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.
Further, industrial properties may be adversely affected by economic declines
in the industry segment of their tenants.
S-106
<PAGE>
Version 6: Industrial Properties
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors--Limited Recourse":]
RISKS PARTICULAR TO INDUSTRIAL PROPERTIES.
_____ of the Mortgage Loans, which represent _____ % of the Initial
Pool Balance, are secured by Mortgages on fee and/or leasehold interests in
industrial properties. Mortgage Loans that are secured by liens on such types
of properties are exposed to certain unique risks. See "Risk Factors--Certain
Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage-Risks
Particular to Industrial Properties" in the Prospectus.
S-107
<PAGE>
Version 7: Warehouse, Mini-Warehouse and Self-Storage Facilities
[The following is to be inserted, as indicated by starred brackets
([** // **]) on the next page, on the cover of the Prospectus.]
Warehouse, mini-warehouse and self-storage facilities will represent
security for a material concentration of the Mortgage Loans (and the mortgage
loans underlying the MBS included in a particular Trust Fund) constituting the
Trust Fund for any Series, based on principal balance at the time such Series
is issued.
S-108
<PAGE>
Version 7: Warehouse, Mini-Warehouse and Self-Storage Facilities
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED _______, 1998.
PROSPECTUS
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(DEPOSITOR)
---------------------
The commercial mortgage pass-through certificates (the "Offered
Certificates") offered hereby and by the supplements hereto (each, a
"Prospectus Supplement") will be offered from time to time in series (each a
"Series"). The Offered Certificates of any Series, together with any other
mortgage pass-through certificates of such Series, are collectively referred to
herein as the "Certificates".
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any Series, the
"Trust Fund") consisting primarily of a segregated pool (a "Mortgage Asset
Pool") of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage-backed securities ("MBS") that evidence interests
in, or that are secured by pledges of, one or more of the following types of
real property (each, a "Mortgaged Property"): (i) residential properties
consisting of multiple rental or cooperatively-owned dwelling units and mobile
home parks; (ii) commercial properties consisting of office buildings, retail
facilities related to the sale of goods and products and facilities related to
providing entertainment, recreation or personal services, hotels and motels,
casinos, health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, auto parks, golf courses, arenas and restaurants (or
cooperative units therein); and (iii) mixed use properties (that is, any
combination of the foregoing) and unimproved land. [**Warehouse, mini-warehouse
and self-storage facilities will represent security for a material
concentration of the Mortgage Loans (and the mortgage loans underlying the MBS
included in a particular Trust Fund) constituting the Trust Fund for any
Series, based on principal balance at the time such Series is issued.**]
If so specified in the related Prospectus Supplement, the Trust Fund
for a Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support described in this
Prospectus, or any combination thereof (with respect to any Series,
collectively, "Credit Support"), and interest rate exchange agreements,
interest rate cap or floor agreements or currency exchange agreements described
in this Prospectus, or any combination thereof (with respect to any Series,
collectively, "Cash Flow Agreements"). See "Description of the Trust Funds",
"Description of the Certificates" and "Description of Credit Support".
The Depositor does not intend to list any of the Offered Certificates
on any securities exchange and has not made any other arrangement for secondary
trading of the Offered Certificates. There will have been no public market for
the Certificates of any Series prior to the offering thereof. No assurance can
be given that such a market will develop as a result of such an offering. See
"Risk Factors".
S-109
<PAGE>
Version 7: Warehouse, Mini-Warehouse and Self-Storage Facilities
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR CERTAIN
FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
(cover continued on next page)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The Offered Certificates of any Series may be offered through one or
more different methods, including offerings through underwriters, which may
include Bear, Stearns & Co. Inc., an affiliate of the Depositor, as more fully
described under "Method of Distribution" and in the related 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
such Series.
The date of this Prospectus is ________, ____
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each Series, including the Offered Certificates of such Series, may consist of
one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest; (iv) are entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such Series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology. See "Description of the
Certificates".
Distributions in respect of the Certificates of each Series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, such distributions will be made only from
the assets of the related Trust Fund.
No Series of Certificates will represent an obligation of or interest
in the Depositor or any of its affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
Certificates of any Series nor the assets in any Trust Fund will be guaranteed
or insured by any governmental agency or instrumentality or by any other
person, unless otherwise provided in the related Prospectus Supplement. The
assets in each Trust Fund will be held in trust for the benefit of the holders
of the related Series of Certificates (the "Certificateholders") pursuant to a
Pooling Agreement, as more fully described herein.
S-110
<PAGE>
Version 7: Warehouse, Mini-Warehouse and Self-Storage Facilities
The yield on each class of Certificates of a Series will be affected
by, among other things, the rate of payment of principal (including
prepayments) on the Mortgage Assets in the related Trust Fund and the timing of
receipt of such payments as described herein and in the related Prospectus
Supplement. See "Yield and Maturity Considerations". A Trust Fund may be
subject to early termination under the circumstances described herein and in
the related Prospectus Supplement. See "Description of the Certificates".
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" (each, a "REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
Series of Securities will specify which Class or Classes of such Series will be
considered to be regular interests in the related REMIC and which Class or
Classes will be designated as the residual interest in the related REMIC. See
"Certain Federal Income Tax Consequences".
An Index of Principal Definitions is included at the end of this
Prospectus specifying the location of definitions of important or frequently
used defined terms.
S-111
<PAGE>
Version 7: Warehouse, Mini-Warehouse and Self-Storage Facilities
[The following is to be inserted in the Prospectus immediately
following "Risks Associated with Certain Mortgage Loans and Mortgaged
Properties":]
RISKS PARTICULAR TO SELF-STORAGE FACILITIES.
Warehouse, mini-warehouse and self-storage properties ("Storage
Properties") are considered vulnerable to competition because both acquisition
costs and break-even occupancy are relatively low. The conversion of Storage
Properties to alternative uses would generally require substantial capital
expenditures. Thus, if the operation of any of the Storage Properties becomes
unprofitable due to decreased demand, competition, age of improvements or other
factors, such that the borrower becomes unable to meet its obligation on the
related Mortgage Loan, the liquidation value of that Storage Property may be
substantially less, relative to the amount owing on the Mortgage Loan, than
would be the case if the Storage Property were readily adaptable to other uses.
Tenant privacy, anonymity and efficient access are important to the success of
a Storage Property, as is building design and location.
S-112
<PAGE>
Version 7: Warehouse, Mini-Warehouse and Self-Storage Facilities
[The following is to be inserted in the Prospectus immediately
following "Description of the Trust Funds--Mortgage Loans--General":]
MORTGAGE LOANS SECURED BY WAREHOUSE, MINI-WAREHOUSE AND SELF-STORAGE FACILITIES.
Because of relatively low acquisition costs and break-even occupancy
rates, warehouse, mini-warehouse and self-storage properties ("Storage
Properties") are considered vulnerable to competition. Despite their relatively
low acquisition costs, and because of their particular building
characteristics, Storage Properties would require substantial capital
investments in order to adapt them to alternative uses. Limited adaptability to
other uses may substantially reduce the liquidation value of a Storage
Property. In addition to competition, factors that affect the success of a
Storage Property include the location and visibility of the facility, its
proximity to apartment complexes or commercial users, trends of apartment
tenants in the area moving to single-family homes, services provided (such as
security and accessibility), age of improvements, the appearance of the
improvements and the quality of management.
S-113
<PAGE>
Version 7: Warehouse, Mini-Warehouse and Self-Storage Facilities
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors--Limited Recourse":]
RISKS PARTICULAR TO WAREHOUSE, MINI-WAREHOUSE AND SELF-STORAGE FACILITIES.
______ of the Mortgage Loans, which represent _____% of the Initial
Pool Balance, are secured by Mortgages on fee and/or leasehold interests in
[warehouse, mini-warehouse and self-storage facilities. Mortgage Loans that are
secured by liens on such types of properties are exposed to certain unique
risks. See "Risk Factors--Certain Factors Affecting Delinquency, Foreclosure
and Loss of the Mortgage-Risks Particular to Warehouse, Mini-Warehouse and
Self-Storage Facilities" in the Prospectus.
S-114
<PAGE>
Version 8: Mobile Home Parks and Recreational Vehicle Parks
[The following is to be inserted, as indicated by starred brackets
([** // **]) on the next page, on the cover of the Prospectus.]
Mobile home parks and recreational vehicle parks will represent
security for a material concentration of the Mortgage Loans (and the mortgage
loans underlying the MBS included in a particular Trust Fund) constituting the
Trust Fund for any Series, based on principal balance at the time such Series
is issued.
S-115
<PAGE>
Version 8: Mobile Home Parks and Recreational Vehicle Parks
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED ________, 1998.
PROSPECTUS
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(DEPOSITOR)
---------------------
The commercial mortgage pass-through certificates (the "Offered
Certificates") offered hereby and by the supplements hereto (each, a
"Prospectus Supplement") will be offered from time to time in series (each a
"Series"). The Offered Certificates of any Series, together with any other
mortgage pass-through certificates of such Series, are collectively referred to
herein as the "Certificates".
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any Series, the
"Trust Fund") consisting primarily of a segregated pool (a "Mortgage Asset
Pool") of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage-backed securities ("MBS") that evidence interests
in, or that are secured by pledges of, one or more of the following types of
real property (each, a "Mortgaged Property"): (i) residential properties
consisting of multiple rental or cooperatively-owned dwelling units and mobile
home parks; (ii) commercial properties consisting of office buildings, retail
facilities related to the sale of goods and products and facilities related to
providing entertainment, recreation or personal services, hotels and motels,
casinos, health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, auto parks, golf courses, arenas and restaurants (or
cooperative units therein); and (iii) mixed use properties (that is, any
combination of the foregoing) and unimproved land. [**Mobile home parks and
recreational vehicle parks will represent security for a material concentration
of the Mortgage Loans (and the mortgage loans underlying the MBS included in a
particular Trust Fund) constituting the Trust Fund for any Series, based on
principal balance at the time such Series is issued.**]
---------------------
If so specified in the related Prospectus Supplement, the Trust Fund
for a Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support described in this
Prospectus, or any combination thereof (with respect to any Series,
collectively, "Credit Support"), and interest rate exchange agreements,
interest rate cap or floor agreements or currency exchange agreements described
in this Prospectus, or any combination thereof (with respect to any Series,
collectively, "Cash Flow Agreements"). See "Description of the Trust Funds",
"Description of the Certificates" and "Description of Credit Support".
The Depositor does not intend to list any of the Offered Certificates
on any securities exchange and has not made any other arrangement for secondary
trading of the Offered Certificates. There will have been no public market for
the
S-116
<PAGE>
Version 8: Mobile Home Parks and Recreational Vehicle Parks
Certificates of any Series prior to the offering thereof. No assurance can be
given that such a market will develop as a result of such an offering. See
"Risk Factors".
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR CERTAIN
FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
(cover continued on next page)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The Offered Certificates of any Series may be offered through one or
more different methods, including offerings through underwriters, which may
include Bear, Stearns & Co. Inc., an affiliate of the Depositor, as more fully
described under "Method of Distribution" and in the related 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
such Series.
The date of this Prospectus is ________, ____
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each Series, including the Offered Certificates of such Series, may consist of
one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest; (iv) are entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such Series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology. See "Description of the
Certificates".
Distributions in respect of the Certificates of each Series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, such distributions will be made only from
the assets of the related Trust Fund.
No Series of Certificates will represent an obligation of or interest
in the Depositor or any of its affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
Certificates of any Series nor the assets in any Trust Fund will be guaranteed
or insured by any governmental agency or instrumentality or by any other
person, unless otherwise provided in the related Prospectus Supplement. The
assets in each Trust Fund will be held in trust for
S-117
<PAGE>
Version 8: Mobile Home Parks and Recreational Vehicle Parks
the benefit of the holders of the related Series of Certificates (the
"Certificateholders") pursuant to a Pooling Agreement, as more fully described
herein.
The yield on each class of Certificates of a Series will be affected
by, among other things, the rate of payment of principal (including
prepayments) on the Mortgage Assets in the related Trust Fund and the timing of
receipt of such payments as described herein and in the related Prospectus
Supplement. See "Yield and Maturity Considerations". A Trust Fund may be
subject to early termination under the circumstances described herein and in
the related Prospectus Supplement. See "Description of the Certificates".
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" (each, a "REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
Series of Securities will specify which Class or Classes of such Series will be
considered to be regular interests in the related REMIC and which Class or
Classes will be designated as the residual interest in the related REMIC. See
"Certain Federal Income Tax Consequences".
An Index of Principal Definitions is included at the end of this
Prospectus specifying the location of definitions of important or frequently
used defined terms.
S-118
<PAGE>
Version 8: Mobile Home Parks and Recreational Vehicle Parks
[The following is to be inserted in the Prospectus immediately
following "Risks Associated with Certain Mortgage Loans and Mortgaged
Properties":]
RISKS PARTICULAR TO MOBILE HOME PARKS AND RECREATIONAL VEHICLE PARKS.
The successful operation of a Mortgaged Property operated as a mobile
home park or recreational vehicle park will generally depend upon the number of
competing parks in the local market, as well as upon other factors such as its
age, appearance, reputation, management and the types of facilities and
services it provides.
Mobile home parks also compete against alternative forms of residential
housing, including multifamily rental properties, cooperatively-owned apartment
buildings, condominium complexes and single-family residential developments.
Recreational vehicle parks also compete against alternative forms of recreation
and short-term lodging (for example, staying at a hotel at the beach).
Mobile home parks and recreational vehicle parks are "special purpose"
properties that cannot be readily converted to general residential, retail or
office use. Thus, if the operation of a mobile home park or recreational
vehicle park becomes unprofitable due to competition, age of the improvements
or other factors such that the borrower becomes unable to meet its obligations
on the related Mortgage Loan, the liquidation value of the park may be
substantially less, relative to the amount owing on such Mortgage Loan, than
would be the case if the park were readily adaptable to other uses.
S-119
<PAGE>
Version 8: Mobile Home Parks and Recreational Vehicle Parks
[The following is to be inserted in the Prospectus immediately
following "Description of the Trust Funds--General":]
MORTGAGE LOANS SECURED BY MOBILE HOME PARKS AND RECREATIONAL VEHICLE PARKS.
Mobile home parks consist of land that is divided into "spaces" or
"homesites" that are primarily leased to mobile home owners. Accordingly, the
related Mortgage Loans will be secured by mortgage liens on the real estate (or
a leasehold interest therein) upon which the mobile homes are situated, but not
the mobile homes themselves. The mobile home owner often invests in
site-specific improvements such as carports, steps, fencing, skirts around the
base of the mobile home, and landscaping. The park owner typically provides
private roads within the park, common facilities and, in many cases, utilities.
Park amenities may include driveways, visitor parking, recreational vehicle and
pleasure boat storage, laundry facilities, community rooms, swimming pools,
tennis courts, security systems and healthclubs. Due to relocation costs and,
in some cases, demand for mobile home spaces, the value of a mobile home in
place in a park is generally higher, and can be significantly higher, than the
value of the same unit not placed in a park. As a result, a well-operated
mobile home park that has achieved stabilized occupancy is typically able to
maintain occupancy at or near that level. For the same reason, a lender that
provided financing for the mobile home of a tenant who defaulted in his or her
space rent generally has an incentive to keep rental payments current until the
mobile home can be resold in place, rather than to allow the unit to be removed
from the park.
Recreational vehicle parks lease spaces primarily or exclusively for
motor homes, travel trailers and portable truck campers primarily designed for
recreational, camping or travel use. In general, parks that lease recreational
vehicle spaces can be viewed as having a less stable tenant population than
parks occupied predominantly by mobile homes. However, it is not unusual for
the owner of a recreational vehicle to leave the vehicle at the park on a
year-round basis or to use the vehicle as low cost housing and reside in the
park indefinitely.
Mortgage Loans secured by liens on mobile home parks and recreational
vehicle parks are affected by factors not associated with loans secured by
liens on other types of income-producing real estate. The successful operation
of such types of properties will generally depend upon the number of competing
parks, as well as upon other factors such as its age, appearance, reputation,
the ability of management to provide adequate maintenance and insurance, and
the types of facilities and services it provides. Mobile home parks also
compete against alternative forms of residential housing, including multifamily
rental properties, cooperatively-owned apartment buildings, condominium
complexes and single-family residential developments. Recreational vehicle
parks also compete against alternative forms of recreation and short-term
lodging (for example, staying at a hotel at the beach). Mobile home parks and
recreational vehicle parks are "special purpose" properties that cannot be
readily converted to general residential, retail or office use. Thus, if the
operation of a mobile home park or recreational vehicle park becomes
unprofitable due to competition, age of the improvements or other factors such
that the borrower becomes unable to meet its obligations on the related
Mortgage Loan, the liquidation value of the park may be substantially less,
relative to the amount owing on the Mortgage Loan, than would be the case if
the park were readily adaptable to other uses.
Certain states regulate the relationship of a mobile home park owner
and its tenants. Commonly, these laws require a written lease, good cause for
eviction, disclosure of fees, and notification to residents of changed land
use, while prohibiting unreasonable rules, retaliatory evictions, and
restrictions on a resident's choice of unit vendors. Mobile home park owners
have been the subject of suits under state "Unfair and Deceptive Practices
Acts" and other general consumer protection statutes for coercive, abusive or
unconscionable leasing and sales practices. A few states offer more significant
protection. For example, there are provisions that limit the basis on which a
landlord may terminate a mobile home owner's tenancy or increase its rent or
prohibit a landlord from terminating a tenancy solely by reason of the sale of
the owner's mobile home. Certain states also regulate changes in mobile home
park use and require that the landlord give written notice to its tenants a
substantial period of time prior to the projected change.
In addition to state regulation of the landlord-tenant relationship,
numerous counties and municipalities impose rent control on mobile home parks.
These ordinances may limit rent increases to fixed percentages, to percentages
of increases in the consumer price index, to increases set or approved by a
governmental agency, or to increases determined through
S-120
<PAGE>
Version 8: Mobile Home Parks and Recreational Vehicle Parks
mediation or binding arbitration. In many cases, the rent control laws do not
provide for decontrol of rental rates upon vacancy of individual units or
permit such decontrol only in the relatively rare event that the mobile home is
removed from the homesite. Any limitations on a borrower's ability to raise
property rents may impair such borrower's ability to repay its Mortgage Loan
from its net operating income or the proceeds of a sale or refinancing of the
related Mortgaged Property.
S-121
<PAGE>
Version 8: Mobile Home Parks and Recreational Vehicle Parks
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors--Limited Recourse":]
RISKS PARTICULAR TO MOBILE HOME PARKS AND RECREATIONAL VEHICLE PARKS.
______ of the Mortgage Loans, which represent _____ % of the Initial
Pool Balance, are secured by Mortgages on fee and/or leasehold interests in
mobile home parks and recreational vehicle parks. Mortgage Loans that are
secured by liens on such types of properties are exposed to certain unique
risks. See "Risk Factors--Certain Factors Affecting Delinquency, Foreclosure
and Loss of the Mortgage-Risks Particular to Mobile Home Parks and Recreational
Vehicle Parks" in the Prospectus.
S-122
<PAGE>
Version 9: Casino Properties
[The following is to be inserted, as indicated by starred brackets
([** // **]) on the next page, on the cover of the Prospectus.]
Casino properties will represent security for a material concentration
of the Mortgage Loans (and the mortgage loans underlying the MBS included in a
particular Trust Fund) constituting the Trust Fund for any Series, based on
principal balance at the time such Series is issued.
S-123
<PAGE>
Version 9: Casino Properties
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED ________, 1998.
PROSPECTUS
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(DEPOSITOR)
---------------------
The commercial mortgage pass-through certificates (the "Offered
Certificates") offered hereby and by the supplements hereto (each, a
"Prospectus Supplement") will be offered from time to time in series (each a
"Series"). The Offered Certificates of any Series, together with any other
mortgage pass-through certificates of such Series, are collectively referred to
herein as the "Certificates".
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any Series, the
"Trust Fund") consisting primarily of a segregated pool (a "Mortgage Asset
Pool") of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage-backed securities ("MBS") that evidence interests
in, or that are secured by pledges of, one or more of the following types of
real property (each, a "Mortgaged Property"): (i) residential properties
consisting of multiple rental or cooperatively-owned dwelling units and mobile
home parks; (ii) commercial properties consisting of office buildings, retail
facilities related to the sale of goods and products and facilities related to
providing entertainment, recreation or personal services, hotels and motels,
casinos, health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, auto parks, golf courses, arenas and restaurants (or
cooperative units therein); and (iii) mixed use properties (that is, any
combination of the foregoing) and unimproved land. [**Casino properties will
represent security for a material concentration of the Mortgage Loans (and the
mortgage loans underlying the MBS included in a particular Trust Fund)
constituting the Trust Fund for any Series, based on principal balance at the
time such Series is issued.**]
---------------------
If so specified in the related Prospectus Supplement, the Trust Fund
for a Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support described in this
Prospectus, or any combination thereof (with respect to any Series,
collectively, "Credit Support"), and interest rate exchange agreements,
interest rate cap or floor agreements or currency exchange agreements described
in this Prospectus, or any combination thereof (with respect to any Series,
collectively, "Cash Flow Agreements"). See "Description of the Trust Funds",
"Description of the Certificates" and "Description of Credit Support".
The Depositor does not intend to list any of the Offered Certificates
on any securities exchange and has not made any other arrangement for secondary
trading of the Offered Certificates. There will have been no public market for
the
S-124
<PAGE>
Version 9: Casino Properties
Certificates of any Series prior to the offering thereof. No assurance can be
given that such a market will develop as a result of such an offering. See
"Risk Factors".
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR CERTAIN
FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
(cover continued on next page)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The Offered Certificates of any Series may be offered through one or
more different methods, including offerings through underwriters, which may
include Bear, Stearns & Co. Inc., an affiliate of the Depositor, as more fully
described under "Method of Distribution" and in the related 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
such Series.
The date of this Prospectus is ________, ____
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each Series, including the Offered Certificates of such Series, may consist of
one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest; (iv) are entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such Series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology. See "Description of the
Certificates".
Distributions in respect of the Certificates of each Series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, such distributions will be made only from
the assets of the related Trust Fund.
No Series of Certificates will represent an obligation of or interest
in the Depositor or any of its affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
Certificates of any Series nor the assets in any Trust Fund will be guaranteed
or insured by any governmental agency or instrumentality or by any other
person, unless otherwise provided in the related Prospectus Supplement. The
assets in each Trust Fund will be held in trust for
S-125
<PAGE>
Version 9: Casino Properties
the benefit of the holders of the related Series of Certificates (the
"Certificateholders") pursuant to a Pooling Agreement, as more fully described
herein.
The yield on each class of Certificates of a Series will be affected
by, among other things, the rate of payment of principal (including
prepayments) on the Mortgage Assets in the related Trust Fund and the timing of
receipt of such payments as described herein and in the related Prospectus
Supplement. See "Yield and Maturity Considerations". A Trust Fund may be
subject to early termination under the circumstances described herein and in
the related Prospectus Supplement. See "Description of the Certificates".
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" (each, a "REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
Series of Securities will specify which Class or Classes of such Series will be
considered to be regular interests in the related REMIC and which Class or
Classes will be designated as the residual interest in the related REMIC. See
"Certain Federal Income Tax Consequences".
An Index of Principal Definitions is included at the end of this
Prospectus specifying the location of definitions of important or frequently
used defined terms.
S-126
<PAGE>
Version 9: Casino Properties
[The following is to be inserted in the Prospectus immediately
following "Risks Associated with Certain Mortgage Loans and Mortgaged
Properties":]
RISKS PARTICULAR TO CASINO PROPERTIES.
The income generated by a casino is subject to several factors such as
local, regional and national economic conditions. Casinos are dependent on the
willingness of patrons to gamble and, accordingly, the availability of
disposable income for such purposes. Additional risks include, among others, a
high level of continuing capital expenditure to maintain attractive facilities,
competition from other casinos, increases in operating costs (which may not be
able to be passed through to patrons) and, depending on the geographic
location, a dependency on tourism. Competition among major casinos may involve
attracting patrons by providing alternate forms of entertainment (e.g.,
performers and sporting events), which may materially increase operating
expenses, and low-priced or free food and lodging. In addition, to avoid
criminal influence, the ownership and operation of casino properties is often
subject to local or state governmental regulation. A government agency or
authority may have jurisdiction over or influence with respect to the
foreclosure of a casino property and/or the bankruptcy of its owner or
operator. In some jurisdictions, it may be necessary to receive governmental
approval before foreclosing, thereby resulting in substantial delays. Gaming
licenses are not transferable (including in connection with a foreclosure), and
there can be no assurance that the Trustee or other purchaser in foreclosure or
otherwise will be able to obtain the requisite approvals to operate the subject
property as a casino. The loss of a gaming license could have a material
adverse effect on the value of a casino property. In addition, any given state
or municipality that currently allows legalized gambling could pass legislation
prohibiting it.
S-127
<PAGE>
Version 9: Casino Properties
[The following is to be inserted in the Prospectus immediately
following "Description of the Trust Funds--Mortgage Loans--General":]
MORTGAGE LOANS SECURED BY CASINO PROPERTIES.
Various factors, including location and appearance, affect the
economic performance of a casino. Adverse economic conditions, either local,
regional or national, may limit the amount of disposable income that potential
patrons may have for gambling. The construction of competing casinos can also
have an adverse affect on the performance of a casino property. To meet
competition, continuing expenditures must be made for modernizing, refurbishing
and maintaining existing facilities. In addition, competition among major
casinos may involve attracting patrons by providing alternate forms of
entertainment (e.g., performers and sporting events), which may materially
increase operating expenses, and low-priced or free food and lodging. Because
of the nature of the business, casinos tend to respond more quickly to adverse
economic conditions and competition then do certain other commercial
properties. Depending on the geographic location of a casino property, it may
be heavily dependent on tourism for its clientele. In addition, to avoid
criminal influence, the ownership and operation of casino properties is often
subject to local or state governmental regulation. For public policy reasons,
applicable government agencies are given substantial powers in this regard. A
government agency or authority may also have jurisdiction over or influence
with respect to the foreclosure of a casino property and/or the bankruptcy of
its owner or operator. In some jurisdictions, it may be necessary to receive
governmental approval before foreclosing, thereby resulting in substantial
delays. Gaming licenses are not transferable (including in connection with
foreclosure), and there can be no assurance that the Trustee, Special Servicer
or other purchaser in foreclosure or otherwise will be able to obtain the
requisite approvals to operate the subject property as a casino. The loss of a
gaming license could have a material adverse affect on the value of a casino
property. Further, any given state or municipality that currently allows
legalized gambling could pass legislation banning it. Depending upon what
alternative use may be made of a casino property, such legislation could have a
material adverse affect on the value of such property.
S-128
<PAGE>
Version 9: Casino Properties
[The following is to be inserted in the Prospectus Supplement
immediately following "Risk Factors--Limited Recourse":]
RISKS PARTICULAR TO CASINO PROPERTIES.
____ of the Mortgage Loans, which represent _____% of the Initial Pool
Balance, are secured by Mortgages on fee and/or leasehold interests in casinos.
Mortgage Loans that are secured by liens on such types of properties are
exposed to certain unique risks. See "Risk Factors--Certain Factors Affecting
Delinquency, Foreclosure and Loss of the Mortgage-Risks Particular to Casino
Properties" in the Prospectus.
S-129
<PAGE>
PROSPECTUS
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(DEPOSITOR)
-----------------
The commercial mortgage pass-through certificates (the "Offered
Certificates") offered hereby and by the supplements hereto (each, a
"Prospectus Supplement") will be offered from time to time in series (each a
"Series"). The Offered Certificates of any Series, together with any other
mortgage pass-through certificates of such Series, are collectively referred to
herein as the "Certificates".
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any Series, the
"Trust Fund") consisting primarily of a segregated pool (a "Mortgage Asset
Pool") of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage-backed securities ("MBS") that evidence interests
in, or that are secured by pledges of, one or more of the following types of
real property (each, a "Mortgaged Property"): (i) residential properties
consisting of multiple rental or cooperatively-owned dwelling units and mobile
home parks; (ii) commercial properties consisting of office buildings, retail
facilities related to the sale of goods and products and facilities related to
providing entertainment, recreation or personal services, hotels and motels,
casinos, health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, auto parks, golf courses, arenas and restaurants (or
cooperatively owned units therein); and (iii) mixed use properties (that is,
any combination of the foregoing) and unimproved land.
-----------------
If so specified in the related Prospectus Supplement, the
Trust Fund for a Series of Certificates may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support
described in this Prospectus, or any combination thereof (with respect to any
Series, collectively, "Credit Support"), and interest rate exchange agreements,
interest rate cap or floor agreements or currency exchange agreements described
in this Prospectus, or any combination thereof (with respect to any Series,
collectively, "Cash Flow Agreements"). See "Description of the Trust Funds",
"Description of the Certificates" and "Description of Credit Support".
The Depositor does not intend to list any of the Offered Certificates
on any securities exchange and has not made any other arrangement for secondary
trading of the Offered Certificates. There will have been no public market for
the Certificates of any series prior to the offering thereof. No assurance can
be given that such a market will develop as a result of such an offering. See
"Risk Factors".
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR CERTAIN
FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
(cover continued on next page)
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
-----------------
The Offered Certificates of any series may be offered through one or
more different methods, including offerings through underwriters, which may
include Bear, Stearns & Co. Inc., an affiliate of the Depositor, as more fully
described under "Method of Distribution" and in the related 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
such series.
The date of this Prospectus is ________, ____
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each series, including the Offered Certificates of such series, may consist of
one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest; (iv) are entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology. See "Description of the
Certificates".
Distributions in respect of the Certificates of each series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, such distributions will be made only from
the assets of the related Trust Fund.
No series of Certificates will represent an obligation of or interest
in the Depositor or any of its affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
Certificates of any series nor the assets in any Trust Fund will be guaranteed
or insured by any governmental agency or instrumentality or by any other
person, unless otherwise provided in the related Prospectus Supplement. The
assets in each Trust Fund will be held in trust for the benefit of the holders
of the related series of Certificates (the "Certificateholders") pursuant to a
Pooling Agreement, as more fully described herein.
The yield on each class of Certificates of a series will be affected
by, among other things, the rate of payment of principal (including
prepayments) on the Mortgage Assets in the related Trust Fund and the timing of
receipt of such payments as described herein and in the related Prospectus
Supplement. See "Yield and Maturity Considerations". A Trust Fund may be
subject to early termination under the circumstances described herein and in
the related Prospectus Supplement. See "Description of the Certificates".
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Collateral or Trust Fund, as the
case may be, or a designated portion thereof as a "real estate mortgage
investment conduit" (each, a "REMIC") for federal income tax purposes. If
applicable, the Prospectus Supplement for a Series of Securities will specify
which Class or Classes of such Series will be considered to be regular
interests in the related REMIC and which Class or Classes will be designated as
the residual interest in the related REMIC. See "Certain Federal Income Tax
Consequences".
2
<PAGE>
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement
relating to each series of Offered Certificates will, among other things, set
forth, as and to the extent appropriate: (i) a description of the class or
classes of such Offered Certificates, including the payment provisions with
respect to each such class, the aggregate principal amount of each such class
(the "Certificate Balance"), the rate at which interest accrues from time to
time, if at all, with respect to each such class (the "Pass-Through Rate") or
the method of determining such rate, and whether interest with respect to each
such class will accrue from time to time on its aggregate principal amount or a
specified notional amount, if at all; (ii) information with respect to any
other classes of Certificates of the same series; (iii) the respective dates on
which distributions are to be made; (iv) information as to the assets
constituting the related Trust Fund, including the general characteristics of
the assets included therein, including the Mortgage Assets and any Credit
Support and Cash Flow Agreements (with respect to the Certificates of any
series, the "Trust Assets"); (v) the circumstances, if any, under which the
related Trust Fund may be subject to early termination; (vi) additional
information with respect to the method of distribution of such Offered
Certificates; (vii) whether one or more REMIC elections will be made and the
designation of the "regular interests" and "residual interests" in each REMIC
to be created; (viii) the initial percentage ownership interest in the related
Trust Fund to be evidenced by each class of Certificates of such series; (ix)
information concerning the trustee (as to any series, the "Trustee") of the
related Trust Fund; (x) if the related Trust Fund includes Mortgage Loans,
information concerning the master servicer (as to any series, the "Master
Servicer") and any special servicer (as to any series, the "Special Servicer")
of such Mortgage Loans; (xi) information as to the nature and extent of
subordination of any class of Certificates of such series, including a class of
Offered Certificates; and (xii) whether such Offered Certificates will be
initially issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended, with respect to the Offered
Certificates. This Prospectus and the Prospectus Supplement relating to each
series of Offered Certificates contain summaries of the material terms of the
documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the rules and
regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: Chicago Regional Office, 500 West Madison,
14th Floor, Chicago, Illinois 60661; and New York Regional Office, Seven World
Trade Center, New York, New York 10048. The Commission also maintains a World
Wide Web site which provides on-line access to reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission at the address "http://www.sec.gov."
No person has been authorized to give any information or to make any
representation not contained in this Prospectus and any related Prospectus
Supplement and, if given or made, such information or representation must not
be relied upon. This Prospectus and any related Prospectus Supplement do not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the Offered Certificates, or an offer of the Offered Certificates to
any person in any state or other jurisdiction in which such offer would be
unlawful. The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to its date; however,
if any material change occurs while this Prospectus is required by law to be
delivered, this Prospectus will be amended or supplemented accordingly.
The Master Servicer or Trustee for each series will be required to
mail to holders of the Offered Certificates of each series periodic unaudited
reports concerning the related Trust Fund. If beneficial interests in a class
of Offered Certificates are being held and transferred in book-entry format
through the facilities of The Depository Trust Company ("DTC") as described
herein, then unless otherwise provided in the related Prospectus Supplement,
such reports will be sent on behalf of the related Trust Fund to a nominee of
DTC as the registered holder of such Offered Certificates. Conveyance of
notices and other communications by DTC to its participating organizations, and
directly or indirectly through such participating organizations to the
beneficial owners of the applicable Offered Certificates, will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time. See "Description of the
Certificates--Reports to Certificateholders" and "--Book-Entry Registration and
Definitive Certificates" and "Description of the Pooling Agreements--Evidence
as to Compliance". The Depositor will file or cause to be filed with the
Commission such periodic
3
<PAGE>
reports with respect to each Trust Fund as are required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of an offering of Offered Certificates evidencing interests
therein. The Depositor will provide or cause to be provided without charge to
each person to whom this Prospectus is delivered in connection with the
offering of one or more classes of Offered Certificates, upon written or oral
request of such person, a copy of any or all documents or reports incorporated
herein by reference, in each case to the extent such documents or reports
relate to one or more of such classes of such Offered Certificates, other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to its principal executive offices at 245 Park Avenue,
New York, New York 10167, Attention: James G. Reichek, or by telephone at
212-272-2000. The Depositor has determined that its financial statements will
not be material to the offering of any Offered Certificates.
4
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PROSPECTUS SUPPLEMENT....................................................... 3
AVAILABLE INFORMATION....................................................... 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........................... 4
SUMMARY OF PROSPECTUS....................................................... 10
RISK FACTORS................................................................ 17
Secondary Market........................................................ 17
Limited Assets.......................................................... 17
Prepayments; Average Life of Certificates; Yields....................... 18
Limited Nature of Ratings............................................... 19
Risks Associated with Certain Mortgage Loans and Mortgaged Properties... 19
Balloon Payments; Borrower Default...................................... 21
Credit Support Limitations.............................................. 21
Leases and Rents........................................................ 21
Environmental Risks..................................................... 22
Special Hazard Losses................................................... 22
ERISA Considerations.................................................... 23
Certain Federal Tax Considerations Regarding Residual Certificates...... 23
Certain Federal Tax Considerations Regarding Original Issue Discount.... 23
Book-Entry Registration................................................. 23
Delinquent Mortgage Loan................................................ 24
DESCRIPTION OF THE TRUST FUNDS.............................................. 24
General................................................................. 24
Mortgage Loans.......................................................... 24
General............................................................ 24
Default and Loss Considerations with Respect to the
Mortgage Loans................................................... 25
Payment Provisions of the Mortgage Loans........................... 26
Mortgage Loan Information in Prospectus Supplements................ 27
MBS..................................................................... 27
Certificate Accounts.................................................... 28
Credit Support.......................................................... 28
Cash Flow Agreements.................................................... 28
YIELD AND MATURITY CONSIDERATIONS........................................... 29
General................................................................. 29
Pass-Through Rate....................................................... 29
Payment Delays.......................................................... 29
Certain Shortfalls in Collections of Interest........................... 29
Yield and Prepayment Considerations..................................... 30
Weighted Average Life and Maturity...................................... 31
Controlled Amortization Classes and Companion Classes................... 32
Other Factors Affecting Yield, Weighted Average Life and Maturity ...... 33
Balloon Payments; Extensions of Maturity........................... 33
Negative Amortization.............................................. 33
Foreclosures and Payment Plans..................................... 33
Losses and Shortfalls on the Mortgage Assets....................... 34
5
<PAGE>
Additional Certificate Amortization................................ 34
Optional Early Termination......................................... 34
THE DEPOSITOR............................................................... 35
USE OF PROCEEDS............................................................. 35
DESCRIPTION OF THE CERTIFICATES............................................. 35
General................................................................. 35
Distributions........................................................... 36
Distributions of Interest on the Certificates........................... 36
Distributions of Principal on the Certificates.......................... 37
Distributions on the Certificates in Respect of Prepayment Premiums
or in Respect of Equity Participations................................ 38
Allocation of Losses and Shortfalls..................................... 38
Advances in Respect of Delinquencies.................................... 38
Reports to Certificateholders........................................... 39
Voting Rights........................................................... 40
Termination............................................................. 40
Book-Entry Registration and Definitive Certificates..................... 41
DESCRIPTION OF THE POOLING AGREEMENTS....................................... 42
General................................................................. 42
Assignment of Mortgage Loans; Repurchases............................... 43
Representations and Warranties; Repurchases............................. 44
Collection and Other Servicing Procedures............................... 45
Sub-Servicers........................................................... 45
Special Servicers....................................................... 45
Certificate Account..................................................... 46
General............................................................ 46
Deposits........................................................... 46
Withdrawals........................................................ 47
Modifications, Waivers and Amendments of Mortgage Loans................. 49
Realization Upon Defaulted Mortgage Loans............................... 49
Hazard Insurance Policies............................................... 51
Due-on-Sale and Due-on-Encumbrance Provisions........................... 51
Servicing Compensation and Payment of Expenses.......................... 52
Evidence as to Compliance............................................... 52
Certain Matters Regarding the Master Servicer and the Depositor ........ 52
Events of Default....................................................... 53
Rights Upon Event of Default............................................ 54
Amendment............................................................... 54
List of Certificateholders.............................................. 55
The Trustee............................................................. 55
Duties of the Trustee................................................... 55
Certain Matters Regarding the Trustee................................... 55
Resignation and Removal of the Trustee.................................. 56
DESCRIPTION OF CREDIT SUPPORT............................................... 56
General................................................................. 56
Subordinate Certificates................................................ 57
Cross-Support Provisions................................................ 57
Insurance or Guarantees with Respect to Mortgage Loans.................. 57
6
<PAGE>
Letter of Credit........................................................ 57
Certificate Insurance and Surety Bonds.................................. 58
Reserve Funds........................................................... 58
Credit Support with respect to MBS...................................... 58
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS..................................... 58
General................................................................. 59
Types of Mortgage Instruments........................................... 59
Leases and Rents........................................................ 59
Personalty.............................................................. 60
Foreclosure............................................................. 60
General............................................................ 60
Foreclosure procedures vary from state to state.................... 60
Judicial Foreclosure............................................... 60
Equitable Limitations on Enforceability of Certain Provisions...... 60
Non-Judicial Foreclosure/Power of Sale............................. 61
Public Sale........................................................ 61
Rights of Redemption............................................... 62
Anti-Deficiency Legislation........................................ 62
Leasehold Risks......................................................... 63
Cooperative Shares...................................................... 63
Bankruptcy Laws......................................................... 64
Environmental Risks..................................................... 66
Due-on-Sale and Due-on-Encumbrance Provisions........................... 68
Subordinate Financing................................................... 68
Default Interest and Limitations on Prepayments......................... 68
Adjustable Rate Loans................................................... 68
Applicability of Usury Laws............................................. 69
Soldiers' and Sailors' Civil Relief Act of 1940......................... 69
Type of Mortgaged Property.............................................. 69
Americans with Disabilities Act......................................... 70
Forfeitures in Drug and RICO Proceedings................................ 70
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................... 70
Federal Income Tax Consequences for REMIC Certificates ................. 71
General............................................................ 71
Status of REMIC Certificates....................................... 71
Qualification as a REMIC........................................... 72
Taxation of Regular Certificates........................................ 73
General............................................................ 73
Original Issue Discount............................................ 73
Acquisition Premium................................................ 76
Variable Rate Regular Certificates................................. 76
Deferred Interest.................................................. 77
Market Discount.................................................... 77
Premium............................................................ 78
Election to Treat All Interest Under the Constant Yield Method..... 78
Sale or Exchange of Regular Certificates........................... 79
Treatment of Losses................................................ 79
Taxation of Residual Certificates....................................... 80
Taxation of REMIC Income........................................... 80
Basis and Losses................................................... 81
Treatment of Certain Items of REMIC Income and Expense............. 82
7
<PAGE>
Original Issue Discount and Premium................................ 82
Deferred Interest.................................................. 82
Market Discount.................................................... 82
Premium............................................................ 82
Limitations on Offset or Exemption of REMIC Income................. 82
Tax-Related Restrictions on Transfer of Residual Certificates ..... 83
Disqualified Organizations......................................... 83
Noneconomic Residual Interests..................................... 84
Foreign Investors.................................................. 85
Sale or Exchange of a Residual Certificate......................... 85
Mark to Market Regulations......................................... 86
Taxes That May Be Imposed on the REMIC Pool............................. 86
Prohibited Transactions............................................ 86
Contributions to the REMIC Pool After the Startup Day.............. 86
Net Income from Foreclosure Property............................... 87
Liquidation of the REMIC Pool........................................... 87
Administrative Matters.................................................. 87
Limitations on Deduction of Certain Expenses............................ 87
Taxation of Certain Foreign Investors................................... 88
Regular Certificates............................................... 88
Residual Certificates.............................................. 88
Backup Withholding...................................................... 89
Reporting Requirements.................................................. 89
Federal Income Tax Consequences For Certificates as to Which No
REMIC Election Is Made................................................ 90
Standard Certificates.............................................. 90
General....................................................... 90
Tax Status.................................................... 90
Premium and Discount............................................... 91
Premium....................................................... 91
Original Issue Discount....................................... 91
Market Discount............................................... 91
Recharacterization of Servicing Fees............................... 91
Sale or Exchange of Standard Certificates.......................... 92
Stripped Certificates................................................... 92
General............................................................ 92
Status of Stripped Certificates.................................... 94
Taxation of Stripped Certificates.................................. 94
Original Issue Discount............................................ 94
Sale or Exchange of Stripped Certificates.......................... 94
Purchase of More Than One Class of Stripped Certificates........... 95
Possible Alternative Characterizations............................. 95
Federal Income Tax Consequences for FASIT Certificates.................. 95
Reporting Requirements and Backup Withholding........................... 96
Taxation of Certain Foreign Investors................................... 96
STATE AND OTHER TAX CONSIDERATIONS.......................................... 96
ERISA CONSIDERATIONS........................................................ 96
General................................................................. 96
Plan Asset Regulations.................................................. 97
Administrative Exemptions............................................... 98
Unrelated Business Taxable Income; Residual Certificates................ 98
8
<PAGE>
LEGAL INVESTMENT............................................................ 98
METHOD OF DISTRIBUTION......................................................100
LEGAL MATTERS...............................................................101
FINANCIAL INFORMATION.......................................................102
RATING......................................................................102
INDEX OF PRINCIPAL DEFINITIONS..............................................103
</TABLE>
9
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the more detailed information appearing elsewhere
in this Prospectus and by reference to the information with respect to each
series of Certificates contained in the Prospectus Supplement to be prepared
and delivered in connection with the offering of Offered Certificates of such
series. An Index of Principal Definitions is included at the end of this
Prospectus.
TITLE OF CERTIFICATES........... Mortgage Pass-Through Certificates, issuable
in series (the "Certificates").
DEPOSITOR....................... Bear Stearns Commercial Mortgage Securities
Inc., a Delaware corporation. See "The
Depositor".
MASTER SERVICER ................ The master servicer (the "Master Servicer"),
if any, for a series of Certificates will be
named in the related Prospectus Supplement.
The Master Servicer for any series of
Certificates may be an affiliate of the
Depositor or a Special Servicer. See
"Description of the Pooling
Agreements--Collection and Other Servicing
Procedures".
SPECIAL SERVICER................ One or more special servicers (each, a
"Special Servicer"), if any, for a series of
Certificates will be named, or the
circumstances under which a Special Servicer
will be appointed will be described, in the
related Prospectus Supplement. A Special
Servicer for any series of Certificates may
be an affiliate of the Depositor or the
Master Servicer. See "Description of the
Pooling Agreements--Special Servicers".
TRUSTEE......................... The trustee (the "Trustee") for each series
of Certificates will be named in the related
Prospectus Supplement. See "Description of
the Pooling Agreements--The Trustee".
THE TRUST ASSETS................ Each series of Certificates will represent in
the aggregate the entire beneficial ownership
interest in a Trust Fund consisting primarily
of:
A. MORTGAGE ASSETS............. The Mortgage Assets with respect to each
series of Certificates will, in general,
consist of a pool of loans or participations
therein, together with installment sales
contracts, or any combination thereof
(collectively, the "Mortgage Loans") secured
by liens on, or security interests in, (i)
residential properties consisting of five or
more rental or cooperatively-owned dwelling
units or by shares allocable to a number of
such units and proprietary leases appurtenant
thereto (the "Multifamily Properties") or and
mobile home parks, (ii) commercial properties
consisting of office buildings, retail
facilities related to the sale of goods and
products and facilities related to providing
entertainment, recreation or personal
services, hotels and motels, casinos, health
care-related facilities, recreational vehicle
parks, warehouse facilities, mini-warehouse
facilities, self-storage facilities,
industrial facilities, parking lots, auto
parks, golf courses, arenas and restaurants
(or cooperatively owned units therein) and
(iii) mixed use properties (that is, any
combination of the foregoing) and unimproved
land (the "Commercial Properties"). If so
specified in the related Prospectus
Supplement, a Trust Fund may include Mortgage
Loans secured by liens on real estate
projects under
10
<PAGE>
construction. The Mortgage Loans will not be
guaranteed or insured by the Depositor or any
of its affiliates or, unless otherwise
provided in the related Prospectus
Supplement, by any governmental agency or
instrumentality or by any other person. If so
specified in the related Prospectus
Supplement, some Mortgage Loans may be
delinquent or non-performing as of the date
the related Trust Fund is formed.
As and to the extent described in the related
Prospectus Supplement, a Mortgage Loan (i)
may provide for no accrual of interest or for
accrual of interest thereon at an interest
rate (a "Mortgage Rate") that is fixed over
its term or that adjusts from time to time,
or that may be converted at the borrower's
election from an adjustable to a fixed
Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, (ii) may provide
for level payments to maturity or for
payments that adjust from time to time to
accommodate changes in the Mortgage Rate or
to reflect the occurrence of certain events,
and may permit negative amortization, (iii)
may be fully amortizing or partially
amortizing or non-amortizing, with a balloon
payment due on its stated maturity date, (iv)
may prohibit over its term or for a certain
period prepayments and/or require payment of
a premium or a yield maintenance penalty in
connection with certain prepayments and (v)
may provide for payments of principal,
interest or both, on due dates that occur
monthly, quarterly, semi-annually or at such
other interval as is specified in the related
Prospectus Supplement. Unless otherwise
provided in the related Prospectus
Supplement, each Mortgage Loan will have had
a principal balance at origination of not
less than $25,000 and an original term to
maturity of not more than 40 years. Unless
otherwise provided in the related Prospectus
Supplement, no Mortgage Loan will have been
originated by the Depositor; however, some or
all of the Mortgage Loans in any Trust Fund
may have been originated by an affiliate of
the Depositor. See "Description of the Trust
Funds--Mortgage Loans".
If and to the extent specified in the related
Prospectus Supplement, the Mortgage Assets
with respect to a series of Certificates may
also include, or consist of, (i) private
mortgage pass-through certificates or other
mortgage-backed securities or (ii)
certificates insured or guaranteed by the
Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage
Association ("FNMA"), the Governmental
National Mortgage Association ("GNMA") or the
Federal Agricultural Mortgage Corporation
("FAMC") (collectively, the mortgage-backed
securities referred to in clauses (i) and
(ii), "MBS"), provided that each MBS will
evidence an interest in, or will be secured
by a pledge of, one or more mortgage loans
that conform to the descriptions of the
Mortgage Loans contained herein. See
"Description of the Trust Funds--MBS".
B. CERTIFICATE ACCOUNT.......... Each Trust Fund will include one or more
accounts (collectively, the "Certificate
Account") established and maintained on
behalf of the Certificateholders into which
the person or persons designated in the
related Prospectus Supplement will, to the
extent described herein and in such
Prospectus Supplement, deposit all payments
and other collections received or advanced
with respect to the Mortgage Assets and other
assets
11
<PAGE>
in such 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 obligations acceptable to each Rating
Agency (as defined below) rating one or more
classes of the related series of Offered
Certificates. See "Description of the Trust
Funds--Certificate Accounts" and "Description
of the Pooling Agreements--Certificate
Account".
C. CREDIT SUPPORT............... If so provided in the related Prospectus
Supplement, partial or full protection
against certain defaults and losses on the
Mortgage Assets in the related Trust Fund may
be provided to one or more classes of
Certificates of the related series in the
form of subordination of one or more other
classes of Certificates of such series, which
other classes may include one or more classes
of Offered Certificates, or by one or more
other types of credit support, such as a
letter of credit, insurance policy,
guarantee, reserve fund or another type of
credit support described in this Prospectus,
or a combination thereof (any such coverage
with respect to the Certificates of any
series, "Credit Support"). The amount and
types of any Credit Support, the
identification of the entity providing it (if
applicable) and related information will be
set forth in the Prospectus Supplement for a
series of Offered Certificates. See "Risk
Factors--Credit Support Limitations",
"Description of the Trust Funds--Credit
Support" and "Description of Credit Support".
D. CASH FLOW AGREEMENTS......... If so provided in the related Prospectus
Supplement, a Trust Fund may include
guaranteed investment contracts pursuant to
which moneys held in the funds and accounts
established for the related series will be
invested at a specified rate. The Trust Fund
may also include interest rate exchange
agreements, interest rate cap or floor
agreements, or currency exchange agreements,
which agreements are designed to reduce the
effects of interest rate or currency exchange
rate fluctuations on the Mortgage Assets or
on one or more classes of Certificates. The
principal terms of any such guaranteed
investment contract or other agreement (any
such agreement, a "Cash Flow Agreement"),
including, without limitation, provisions
relating to the timing, manner and amount of
payments thereunder and provisions relating
to the termination thereof, will be described
in the Prospectus Supplement for the related
series. In addition, the related Prospectus
Supplement will contain certain information
that pertains to the obligor or counterparty
under any such Cash Flow Agreement. See
"Description of the Trust Funds--Cash Flow
Agreements".
DESCRIPTION OF CERTIFICATES..... Each series of Certificates will be issued in
one or more classes pursuant to a pooling and
servicing agreement or other agreement
specified in the related Prospectus
Supplement (in either case, a "Pooling
Agreement") and will represent in the
aggregate the entire beneficial ownership
interest in the related Trust Fund.
As described in the related Prospectus
Supplement, the Certificates of each series,
including the Offered Certificates of such
series, may consist of one or more classes of
Certificates that, among other things: (i)
are senior (collectively, "Senior
Certificates") or subordinate (collectively,
12
<PAGE>
"Subordinate Certificates") to one or more
other classes of Certificates in entitlement
to certain distributions on the Certificates;
(ii) are entitled to distributions of
principal, with disproportionately small,
nominal or no distributions of interest
(collectively, "Stripped Principal
Certificates"); (iii) are entitled to
distributions of interest, with
disproportionately small, nominal or no
distributions of principal (collectively,
"Stripped Interest Certificates"); (iv)
provide for distributions of interest thereon
or principal thereof that commence only after
the occurrence of certain events, such as the
retirement of one or more other classes of
Certificates of such series; (v) provide for
distributions of principal thereof to be
made, from time to time or for designated
periods, at a rate that is faster (and, in
some cases, substantially faster) or slower
(and, in some cases, substantially slower)
than the rate at which payments or other
collections of principal are received on the
Mortgage Assets in the related Trust Fund;
(vi) provide for distributions of principal
thereof to be made, subject to available
funds, based on a specified principal payment
schedule or other methodology; or (vii)
provide for distribution based on collections
on the Mortgage Assets in the related Trust
Fund attributable to prepayment premiums,
yield maintenance penalties or equity
participations.
Each class of Certificates, other than
certain classes of Stripped Interest
Certificates and certain classes of Residual
Certificates (as defined herein), will have a
stated principal amount (a "Certificate
Balance"); and each class of Certificates,
other than certain classes of Stripped
Principal Certificates and certain classes of
Residual Certificates, will accrue interest
on its Certificate Balance or, in the case of
certain classes of Stripped Interest
Certificates, on a notional amount (a
"Notional Amount"), based on a fixed,
variable or adjustable interest rate (a
"Pass-Through Rate"). The related Prospectus
Supplement will specify the Certificate
Balance and/or Notional Amount and the
Pass-Through Rate (or, in the case of a
variable or adjustable Pass-Through Rate, the
method for determining such rate), as
applicable, for each class of Offered
Certificates.
The Certificates will not be guaranteed or
insured by the Depositor or any of its
affiliates, by any governmental agency or
instrumentality or by any other person or
entity, unless otherwise provided in the
related Prospectus Supplement. See "Risk
Factors--Limited Assets" and "Description of
the Certificates".
DISTRIBUTIONS OF INTEREST
ON THE CERTIFICATES............. Interest on each class of Offered
Certificates (other than certain classes of
Stripped Principal Certificates and certain
classes of Residual Certificates) of each
series will accrue at the applicable
Pass-Through Rate on the Certificate Balance
or, in the case of certain classes of
Stripped Interest Certificates, the Notional
Amount thereof outstanding from time to time
and will be distributed to Certificateholders
as provided in the related Prospectus
Supplement (each of the specified dates on
which distributions are to be made, a
"Distribution Date"). Distributions of
interest with respect to one or more classes
of Certificates (collectively, "Accrual
13
<PAGE>
Certificates") may not commence until the
occurrence of certain events, such as the
retirement of one or more other classes of
Certificates, and interest accrued with
respect to a class of Accrual Certificates
prior to the occurrence of such an event will
either be added to the Certificate Balance
thereof or otherwise deferred. Distributions
of interest with respect to one or more
classes of Certificates may be reduced to the
extent of certain delinquencies, losses and
other contingencies described herein and in
the related Prospectus Supplement. See "Risk
Factors--Prepayments; Average Life of
Certificates; Yields", "Yield and Maturity
Considerations" and "Description of the
Certificates--Distributions of Interest on
the Certificates".
DISTRIBUTIONS OF PRINCIPAL
OF THE CERTIFICATES............. Each class of Certificates of each series
(other than certain classes of Stripped
Interest Certificates and certain classes of
Residual Certificates) will have a
Certificate Balance. The Certificate Balance
of a class of Certificates outstanding from
time to time will represent the maximum
amount that the holders thereof are 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 related Prospectus
Supplement, the initial aggregate Certificate
Balance of all classes of Certificates of a
series will not be greater than the
outstanding principal balance of the related
Mortgage Assets as of a specified date (the
"Cut-off Date"), after application of
scheduled payments due on or before such
date, whether or not received. As and to the
extent described in each Prospectus
Supplement, distributions of principal with
respect to the related series of Certificates
will be made on each Distribution Date to the
holders of the class or classes of
Certificates of such series entitled thereto
until the Certificate Balances of such
Certificates have been reduced to zero.
Distributions of principal with respect to
one or more classes of Certificates may be
made at a rate that is faster (and, in some
cases, substantially faster) than the rate at
which payments or other collections of
principal are received on the Mortgage Assets
in the related Trust Fund. Distributions of
principal with respect to one or more classes
of Certificates may not commence until the
occurrence of certain events, such as the
retirement of one or more other classes of
Certificates of the same series, or may be
made at a rate that is slower (and, in some
cases, substantially slower) than the rate at
which payments or other collections of
principal are received on the Mortgage Assets
in the related Trust Fund. Distributions of
principal with respect to one or more classes
of Certificates (each such class, a
"Controlled Amortization Class") may be made,
subject to certain limitations, based on a
specified principal payment schedule.
Distributions of principal with respect to
one or more classes of Certificates (each
such class, a "Companion Class") may be
contingent on the specified principal payment
schedule for a Controlled Amortization Class
of the same series and the rate at which
payments and other collections of principal
on the Mortgage Assets in the related Trust
Fund are received. Unless otherwise specified
in the related Prospectus Supplement,
distributions of principal of any class of
Offered Certificates will be made on a pro
rata basis among all of the Certificates of
such class. See
14
<PAGE>
"Description of the Certificates--
Distributions of Principal of the
Certificates".
ADVANCES........................ If and to the extent provided in the related
Prospectus Supplement, if a Trust Fund
includes Mortgage Loans, the Master Servicer,
a Special Servicer, the Trustee, any provider
of Credit Support and/or any other specified
person may be obligated to make, or have the
option of making, certain advances with
respect to delinquent scheduled payments of
principal and/or interest on such Mortgage
Loans. Any such advances made with respect to
a particular Mortgage Loan will be
reimbursable from subsequent recoveries in
respect of such Mortgage Loan and otherwise
to the extent described herein and in the
related Prospectus Supplement. If and to the
extent provided in the Prospectus Supplement
for a series of Certificates, any entity
making such advances maybe entitled to
receive interest thereon for the period that
such advances are outstanding, payable from
amounts in the related Trust Fund. See
"Description of the Certificates--Advances in
Respect of Delinquencies". If a Trust Fund
includes MBS, any comparable advancing
obligation of a party to the related Pooling
Agreement, or of a party to the related MBS
Agreement, will be described in the related
Prospectus Supplement.
TERMINATION..................... If so specified in the related Prospectus
Supplement, a series of Certificates may be
subject to optional early termination through
there purchase of the Mortgage Assets in the
related Trust Fund by the party or parties
specified therein, under the circumstances
and in the manner set forth therein. If so
provided in the related Prospectus
Supplement, upon the reduction of the
Certificate Balance of a specified class or
classes of Certificates by a specified
percentage or amount, a party specified
therein may be authorized or required to
solicit bids for the purchase of all of the
Mortgage Assets of the related Trust Fund, or
of a sufficient portion of such Mortgage
Assets to retire such class or classes, under
the circumstances and in the manner set forth
therein. See "Description of the
Certificates--Termination".
REGISTRATION OF BOOK-ENTRY
CERTIFICATES.................... If so provided in the related Prospectus
Supplement, one or more classes of the
Offered Certificates of any series will be
offered in book-entry format (collectively,
"Book-Entry Certificates") through the
facilities of The Depository Trust Company
("DTC"). Each class of Book-Entry
Certificates will be initially represented by
one or more Certificates registered in the
name of a nominee of DTC. No person acquiring
an interest in a class of Book-Entry
Certificates (a "Certificate Owner") will be
entitled to receive Certificates of such
class in fully registered, definitive form
("Definitive Certificates"), except under the
limited circumstances described herein. See
"Risk Factors--Book-Entry Registration" and
"Description of the Certificates--Book-Entry
Registration and Definitive Certificates".
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES................ The federal income tax consequences to
Certificateholders will vary depending on
whether one or more elections are made to
treat the Trust
15
<PAGE>
Fund or specified portions thereof as one or
more "real estate mortgage investment
conduits" (each, a "REMIC") under the
provisions of the Internal Revenue Code of
1986, as amended (the "Code"). The Prospectus
Supplement for each series of Certificates
will specify whether one or more such
elections will be made. See "Certain Federal
Income Tax Consequences".
ERISA CONSIDERATIONS............ Fiduciaries of employee benefit plans and
certain other retirement plans and
arrangements, including individual retirement
accounts, annuities, Keogh plans, and
collective investment funds and insurance
company general and separate accounts in
which such plans, accounts, annuities or
arrangements are invested, that are subject
to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or Section
4975 of the Code, should carefully review
with their legal advisors whether the
purchase and holding of Offered Certificates
could give rise to a transaction that is
prohibited or is not otherwise permissible
under either ERISA or Section 4975 of the
Code. See "ERISA Considerations" herein and
in the related Prospectus Supplement.
LEGAL INVESTMENT................ The Offered Certificates will constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984, as amended ("SMMEA") only if so
specified in the related Prospectus
Supplement. Investors whose investment
authority is subject to legal restrictions
should consult their own legal advisors to
determine whether and to what extent the
Offered Certificates constitute legal
investments for them. See "Legal Investment"
herein and in the related Prospectus
Supplement.
RATING.......................... At their respective dates of issuance, each
class of Offered Certificates will be rated
not lower than investment grade by one or
more nationally recognized statistical rating
agencies (each, a "Rating Agency"). See
"Rating" herein and in the related Prospectus
Supplement.
16
<PAGE>
RISK FACTORS
In considering an investment in the Offered Certificates of any
series, investors should consider, among other things, the following risk
factors and any other factors set forth under the heading "Risk Factors" in the
related Prospectus Supplement. In general, to the extent that the factors
discussed below pertain to or are influenced by the characteristics or behavior
of Mortgage Loans included in a particular Trust Fund, they would similarly
pertain to and be influenced by the characteristics or behavior of the mortgage
loans underlying any MBS included in such Trust Fund.
SECONDARY MARKET
There can be no assurance that a secondary market for the Offered
Certificates of any series will develop or, if it does develop, that it will
provide holders with liquidity of investment or will continue for as long as
such Certificates remain outstanding. The Prospectus Supplement for any series
of Offered Certificates may indicate that an underwriter specified therein
intends to make a secondary market in such Offered Certificates; however, no
underwriter will be obligated to do so. Any such secondary market may provide
less liquidity to investors than any comparable market for securities that
evidence interests in single-family mortgage loans.
The primary source of ongoing information regarding the Offered
Certificates of any series, including information regarding the status of the
related Mortgage Assets and any Credit Support for such Certificates, will be
the periodic reports to Certificateholders to be delivered pursuant to the
related Pooling Agreement as described herein under the heading "Description of
the Certificates--Reports to Certificateholders". There can be no assurance
that any additional ongoing information regarding the Offered Certificates of
any series will be available through any other source. The limited nature of
such information in respect of a series of Offered Certificates may adversely
affect the liquidity thereof, even if a secondary market for such Certificates
does develop.
Insofar as a secondary market does develop with respect to any series
of Offered Certificates or class thereof, the market value of such Certificates
will be affected by several factors, including the perceived liquidity thereof,
the anticipated cash flow thereon (which may vary widely depending upon the
prepayment and default assumptions applied in respect of the underlying
Mortgage Loans) and prevailing interest rates. The price payable at any given
time in respect of certain classes of Offered Certificates (in particular, a
class with a relatively long average life, a Companion Class or a class of
Stripped Interest Certificates or Stripped Principal Certificates) may be
extremely sensitive to small fluctuations in prevailing interest rates; and the
relative change in price for an Offered Certificate in response to an upward or
downward movement in prevailing interest rates may not necessarily equal the
relative change in price for such Offered Certificate in response to an equal
but opposite movement in such rates. Accordingly, the sale of Offered
Certificates by a holder in any secondary market that may develop may be at a
discount from the price paid by such holder. The Depositor is not aware of any
source through which price information about the Offered Certificates will be
generally available on an ongoing basis.
Except to the extent described herein and in the related Prospectus
Supplement, Certificateholders will have no redemption rights, and the Offered
Certificates of each series are subject to early retirement only under certain
specified circumstances described herein and in the related Prospectus
Supplement. See "Description of the Certificates--Termination".
LIMITED ASSETS
Unless otherwise specified in the related Prospectus Supplement,
neither the Offered Certificates of any series nor the Mortgage Assets in the
related Trust Fund will be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other
person or entity; and no Offered Certificate of any series will represent a
claim against or security interest in the Trust Funds for any other series.
Accordingly, if the related Trust Fund has insufficient assets to make payments
on a series of Offered Certificates, no other assets will be available for
payment of the deficiency. Additionally, certain amounts on deposit from time
to time in certain funds or accounts constituting part of a Trust Fund,
including the Certificate Account and any accounts maintained as Credit
17
<PAGE>
Support, may be withdrawn under certain conditions, as described in the related
Prospectus Supplement, for purposes other than the payment of principal of or
interest on the related series of Certificates. If and to the extent 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, all or a portion of the amount of such losses or shortfalls
will be borne first by one or more classes of the Subordinate Certificates,
and, thereafter, by the remaining classes of Certificates in the priority and
manner and subject to the limitations specified in such Prospectus Supplement.
PREPAYMENTS; AVERAGE LIFE OF CERTIFICATES; YIELDS
As a result of, among other things, prepayments on the Mortgage Loans
in any Trust Fund, the amount and timing of distributions of principal and/or
interest on the Offered Certificates of the related series may be highly
unpredictable. Prepayments on the Mortgage Loans in any Trust Fund will result
in a faster rate of principal payments on one or more classes of the related
series of Certificates than if payments on such Mortgage Loans were made as
scheduled. Thus, the prepayment experience on the Mortgage Loans in a Trust
Fund may affect the average life of one or more classes of Certificates of the
related series, including a class of Offered Certificates. The rate of
principal payments on pools of mortgage loans varies among pools and from time
to time is influenced by a variety of economic, demographic, geographic,
social, tax, legal and other factors. For example, if prevailing interest rates
fall significantly below the Mortgage Rates borne by the Mortgage Loans
included in a Trust Fund, then, subject to, among other things, the particular
terms of the Mortgage Loans (e.g., provisions that prohibit voluntary
prepayments during specified periods or impose penalties in connection
therewith) and the ability of borrowers to get new financing, principal
prepayments on such Mortgage Loans are likely to be higher than if prevailing
interest rates remain at or above the rates borne by those Mortgage Loans.
Conversely, if prevailing interest rates rise significantly above the Mortgage
Rates borne by the Mortgage Loans included in a Trust Fund, then principal
prepayments on such Mortgage Loans are likely to be lower than if prevailing
interest rates remain at or below the rates borne by those Mortgage Loans.
There can be no assurance as to the actual rate of prepayment on the Mortgage
Loans in any Trust Fund or that such rate of prepayment will conform to any
model described herein or in any Prospectus Supplement. As a result, depending
on the anticipated rate of prepayment for the Mortgage Loans in any Trust Fund,
the retirement of any class of Certificates of the related series could occur
significantly earlier or later than expected.
The extent to which prepayments on the Mortgage Loans in any Trust
Fund ultimately affect the average life of any class of Certificates of the
related series will depend on the terms of such Certificates. A class of
Certificates, including a class of Offered Certificates, may provide that on
any Distribution Date the holders of such Certificates are entitled to a pro
rata share of the prepayments on the Mortgage Loans in the related Trust Fund
that are distributable on such date, to a disproportionately large share
(which, in some cases, may be all) of such prepayments, or to a
disproportionately small share (which, in some cases, may be none) of such
prepayments. A class of Certificates that entitles the holders thereof to a
disproportionately large share of the prepayments on the Mortgage Loans in the
related Trust Fund increases the likelihood of early retirement of such class
("call risk") if the rate of prepayment is relatively fast; while a class of
Certificates that entitles the holders thereof to a disproportionately small
share of the prepayments on the Mortgage Loans in the related Trust Fund
increases the likelihood of an extended average life of such class ("extension
risk") if the rate of prepayment is relatively slow. As and to the extent
described in the related Prospectus Supplement, the respective entitlements of
the various classes of Certificateholders of any series to receive payments
(and, in particular, prepayments) of principal of the Mortgage Loans in the
related Trust Fund may vary based on the occurrence of certain events (e.g.,
the retirement of one or more classes of Certificates of such series) or
subject to certain contingencies (e.g., prepayment and default rates with
respect to such Mortgage Loans).
A series of Certificates may include one or more Controlled
Amortization Classes, which will entitle the holders thereof to receive
principal distributions according to a specified principal payment schedule.
Although prepayment risk cannot be eliminated entirely for any class of
Certificates, a Controlled Amortization Class will generally provide a
relatively stable cash flow so long as the actual rate of prepayment on the
Mortgage Loans in the related Trust Fund remains relatively constant at the
rate, or within the range of rates, of prepayment used to establish the
specific principal payment schedule for such Certificates. Prepayment risk with
respect to a given Mortgage Asset Pool does not disappear, however, and the
stability afforded to a Controlled Amortization Class comes at the expense
18
<PAGE>
of one or more Companion Classes of the same series, any of which Companion
Classes may also be a class of Offered Certificates. In general, and as more
specifically described in the related Prospectus Supplement, a Companion Class
may entitle the holders thereof to a disproportionately large share of
prepayments on the Mortgage Loans in the related Trust Fund when the rate of
prepayment is relatively fast, and/or may entitle the holders thereof to a
disproportionately small share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively slow. As and to
the extent described in the related Prospectus Supplement, a Companion Class
absorbs some (but not all) of the "call risk" and/or "extension risk" that
would otherwise belong to the related Controlled Amortization Class if all
payments of principal of the Mortgage Loans in the related Trust Fund were
allocated on a pro rata basis.
A series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Mortgage Loans in the related Trust Fund and, where the
amount of interest payable with respect to a class is disproportionately large,
as compared to the amount of principal, as with certain classes of Stripped
Interest Certificates, a holder might fail to recover its original investment
under some prepayment scenarios. The extent to which the yield to maturity of
any class of Offered Certificates may vary from the anticipated yield will
depend upon the degree to which they are purchased at a discount or premium and
the amount and timing of distributions thereon. An investor should consider, in
the case of any Offered Certificate purchased at a discount, the risk that a
slower than anticipated rate of principal payments on the Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of any Offered Certificate purchased at a premium, the
risk that a faster than anticipated rate of principal payments could result in
an actual yield to such investor that is lower than the anticipated yield. See
"Yield and Maturity Considerations" herein.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Offered
Certificates will reflect only its assessment of the likelihood that holders of
such Offered Certificates will receive payments to which such
Certificateholders are entitled under the related Pooling Agreement. Such
rating will not constitute an assessment of the likelihood that principal
prepayments on the related Mortgage Loans will be made, the degree to which the
rate of such prepayments might differ from that originally anticipated or the
likelihood of early optional termination of the related Trust Fund.
Furthermore, such rating will not address the possibility that prepayment of
the related Mortgage Loans at a higher or lower rate than anticipated by an
investor may cause such investor to experience a lower than anticipated yield
or that an investor that purchases an Offered Certificate at a significant
premium might fail to recover its initial investment under certain prepayment
scenarios.
The amount, type and nature of Credit Support, if any, provided with
respect to a series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating classes of the Certificates of such
series. Those criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. However, there can be no
assurance that the historical data supporting any such actuarial analysis will
accurately reflect future experience, or that the data derived from a large
pool of mortgage loans will accurately predict the delinquency, foreclosure or
loss experience of any particular pool of Mortgage Loans. In other cases, such
criteria may be based upon determinations of the values of the Mortgaged
Properties that provide security for the Mortgage Loans. However, no assurance
can be given that those values will not decline in the future. See "Description
of Credit Support" and "Rating".
RISKS ASSOCIATED WITH CERTAIN MORTGAGE LOANS AND MORTGAGED PROPERTIES
A description of risks associated with investments in mortgage loans
is included herein under "Certain Legal Aspects of Mortgage Loans". Mortgage
loans made on the security of multifamily or commercial property may entail
risks of delinquency and foreclosure, and risks of loss in the event thereof,
that are greater than similar risks associated with loans made on the security
of an owner-occupied single-family property. See "Description of the Trust
Funds--Mortgage Loans". The ability of a borrower to repay a loan secured by
an income-producing property typically is dependent primarily upon the
successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an income-
producing property is directly related to the net
19
<PAGE>
operating income derived from such property. If the net operating income of the
property is reduced (for example, if rental or occupancy rates decline or real
estate tax rates or other operating expenses increase), the borrower's ability
to repay the loan may be impaired. A number of the Mortgage Loans may be
secured by liens on owner-occupied Mortgaged Properties or on Mortgaged
Properties leased to a single tenant or a small number of significant tenants.
Accordingly, a decline in the financial condition of the borrower or a
significant tenant, as applicable, may have a disproportionately greater effect
on the net operating income from such Mortgaged Properties than would be the
case with respect to Mortgaged Properties with multiple tenants. Furthermore,
the value of any Mortgaged Property may be adversely affected by risks
generally incident to interests in real property, including changes in general
or local economic conditions and/or specific industry segments; declines in
real estate values; declines in rental or occupancy rates; increases in
interest rates, real estate tax rates and other operating expenses; changes in
governmental rules, regulations and fiscal policies, including environmental
legislation; acts of God; and other factors beyond the control of the Master
Servicer. In the case of Mortgage Loans that represent participation interests
in a mortgage loan, the Trustee's or the Master Servicer's enforcement rights
may be limited in the event of default by the related borrower.
In addition, additional risk may be presented by the type and use of a
particular Mortgaged Property. For instance, Mortgaged Properties that operate
as hospitals and nursing homes may present special risks to lenders due to the
significant governmental regulation of the ownership, operation, maintenance
and financing of health care institutions. Hotel and motel properties are often
operated pursuant to franchise, management or operating agreements that may be
terminable by the franchisor or operator. Moreover, the transferability of a
hotel's operating, liquor and other licenses upon a transfer of the hotel,
whether through purchase or foreclosure, is subject to local law requirements.
The ability of a borrower to repay a Mortgage Loan secured by shares allocable
to one or more cooperative dwelling units may be dependent upon the ability of
the dwelling units to generate sufficient rental income, which may be subject
to rent control or stabilization laws, to cover both debt service on the loan
as well as maintenance charges to the cooperative. Further, a Mortgage Loan
secured by cooperative shares is subordinate to the mortgage, if any, on the
cooperative apartment building.
Other multifamily and commercial properties located in the areas of
the Mortgaged Properties and of the same types as the Mortgaged Properties
compete with the Mortgaged Properties to attract residents and customers. The
leasing of real estate is highly competitive. The principal means of
competition are price, location and the nature and condition of the facility to
be leased. A borrower under a Mortgage Loan competes with all lessors and
developers of comparable types of real estate in the area in which the
Mortgaged Property is located. Such lessors or developers could have lower
rentals, lower operating costs, more favorable locations or better facilities.
While a borrower under a Mortgaged Property may renovate, refurbish or expand
the Mortgaged Property to maintain it and remain competitive, such renovation,
refurbishment or expansion may itself entail significant risk. Increased
competition could adversely affect income from and market value of the
Mortgaged Properties. In addition, the business conducted at each Mortgaged
Property may face competition from other industries and industry segments.
It is anticipated that some or all of the Mortgage Loans included in
any Trust Fund will be nonrecourse loans or loans for which recourse may be
restricted or unenforceable. As to any such Mortgage Loan, recourse in the
event of borrower default will be limited to the specific real property and
other assets, if any, that were pledged to secure the Mortgage Loan. However,
even with respect to those Mortgage Loans that provide for recourse against the
borrower and its assets generally, there can be no assurance that enforcement
of such recourse provisions will be practicable, or that the assets of the
borrower will be sufficient to permit a recovery in respect of a defaulted
Mortgage Loan in excess of the liquidation value of the related Mortgaged
Property. See "Certain Legal Aspects of Mortgage Loans--Foreclosure".
Further, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans in a particular Trust Fund will generally be greater
than for pools of single-family loans because Mortgage Loans in a Trust Fund
will generally consist of a smaller number of higher balance loans than would a
pool of single-family loans of comparable aggregate unpaid principal balance.
20
<PAGE>
BALLOON PAYMENTS; BORROWER DEFAULT
Certain of the Mortgage Loans included in a Trust Fund may be non-
amortizing or only partially amortizing over their terms to maturity and, thus,
will require substantial principal payments (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a borrower to make a
balloon payment typically will depend upon its ability either to refinance the
loan or to sell the related Mortgaged Property. The ability of a borrower to
accomplish either of these goals will be affected by a number of factors,
including the value of the related Mortgaged Property, the level of available
mortgage rates at the time of sale or refinancing, the borrower's equity in the
related Mortgaged Property, the financial condition and operating history of
the borrower and the related Mortgaged Property, tax laws, rent control laws
(with respect to certain residential properties), Medicaid and Medicare
reimbursement rates (with respect to hospitals and nursing homes), prevailing
general economic conditions and the availability of credit for loans secured by
multifamily or commercial, as the case may be, real properties generally.
Neither the Depositor nor any of its affiliates will be required to refinance
any Mortgage Loan.
If and to the extent described herein and in the related Prospectus
Supplement, in order to maximize recoveries on defaulted Mortgage Loans, the
Master Servicer or a Special Servicer will be permitted (within prescribed
limits) to extend and modify Mortgage Loans that are in default or as to which
a payment default is imminent. While the Master Servicer or a Special Servicer
generally will be required to determine that any such extension or modification
is reasonably likely to produce a greater recovery, taking into account the
time value of money, than liquidation, there can be no assurance that any such
extension or modification will in fact increase the present value of receipts
from or proceeds of the affected Mortgage Loans.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Certificates will describe
any Credit Support provided with respect thereto. Use of Credit Support will be
subject to the conditions and limitations described herein and in the related
Prospectus Supplement. Moreover, such Credit Support may not cover all
potential losses or risks; for example, Credit Support may or may not cover
fraud or negligence by a mortgage loan originator or other parties.
A series of Certificates may include one or more classes of
Subordinate Certificates (which may include Offered Certificates), if so
provided in the related Prospectus Supplement. Although subordination is
intended to reduce the risk to holders of Senior Certificates of delinquent
distributions or ultimate losses, the amount of subordination will be limited
and may decline under certain circumstances. In addition, if principal payments
on one or more classes of Certificates of a series are made in a specified
order of priority, any limits with respect to the aggregate amount of claims
under any related Credit Support may be exhausted before the principal of the
later paid classes of Certificates of such series has been repaid in full. 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
later right of payment. Moreover, if an instrument of Credit Support covers
more than one series of Certificates, holders of Certificates of one series
will be subject to the risk that such Credit Support will be exhausted by the
claims of the holders of Certificates of one or more other series.
The amount of any applicable Credit Support supporting one or more
classes of Offered Certificates, including the subordination of one or more
classes of Certificates, will be determined on the basis of criteria
established by each Rating Agency rating such classes of Certificates based on
an assumed level of defaults, delinquencies and losses on the underlying
Mortgage Assets and certain other factors. There can, however, be no assurance
that the loss experience on the related Mortgage Assets will not exceed such
assumed levels. See "--Limited Nature of Ratings", "Description of the
Certificates" and "Description of Credit Support".
LEASES AND RENTS
Each Mortgage Loan included in any Trust Fund secured by Mortgaged
Property that is subject to leases typically will be secured by an assignment
of leases and rents pursuant to which the borrower assigns to the lender its
21
<PAGE>
right, title and interest as landlord under the leases of the related Mortgaged
Property, and the income derived therefrom, as further security for the related
Mortgage Loan, while retaining a license to collect rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect rents. Some state laws may require that the lender take
possession of the Mortgaged Property and obtain a judicial appointment of a
receiver before becoming entitled to collect the rents. In addition, if
bankruptcy or similar proceedings are commenced by or in respect of the
borrower, the lender's ability to collect the rents may be adversely affected.
See "Certain Legal Aspects of Mortgage Loans--Leases and Rents".
ENVIRONMENTAL RISKS
Under the laws of certain states, contamination of real property may
give rise to a lien on the property to assure the costs of cleanup. In several
states, such a lien has priority over an existing mortgage lien on such
property. In addition, under various federal, state and local laws, ordinances
and regulations, an owner or operator of real estate may be liable for the
costs of removal or remediation of hazardous substances or toxic substances on,
in or beneath such property. Such liability may be imposed without regard to
whether the owner knew of, or was responsible for, the presence of such
hazardous or toxic substances. The cost of any required remediation and the
owner or operator's liability therefor as to any property is generally not
limited under such laws, ordinances and regulations and could exceed the value
of the mortgaged property and the aggregate assets of the owner or operator. In
addition, as to the owners or operators of mortgaged properties that generate
hazardous substances that are disposed of at "off-site" locations, such owners
or operators may be held strictly, jointly and severally liable if there are
releases or threatened releases of hazardous substances at the off-site
locations where such person's hazardous substances were disposed.
Although the federal Comprehensive Environmental Response Compensation
and Liability Act of 1980, as amended ("CERCLA"), provides an exemption from
the definition of "owner" for lenders whose primary indicia of ownership in a
particular property is the holding of a security interest, lenders may forfeit,
as a result of their actions with respect to particular borrowers, their
secured creditor exemption and be deemed an owner or operator of property such
that they are liable for remediation costs. See "Certain Legal Aspects of
Mortgage Loans--Environmental Risks" herein. A lender also risks such
liability on foreclosure of the mortgage. Unless otherwise specified in the
related Prospectus Supplement, if a Trust Fund includes Mortgage Loans, then
the related Pooling Agreement will contain provisions generally to the effect
that the Master Servicer, acting on behalf of the Trust Fund, may not acquire
title to a Mortgaged Property or assume control of its operation unless the
Master Servicer, based upon a report prepared by a person who regularly
conducts environmental audits, has made the determination that it is
appropriate to do so, as described under "Description of the Pooling
Agreements--Realization Upon Defaulted Mortgage Loans". See "Certain Legal
Aspects of Mortgage Loans--Environmental Risks". There can be no assurance that
any such requirements of a Pooling Agreement will effectively insulate the
related Trust Fund from potential liability for a materially adverse
environmental condition at a Mortgaged Property.
SPECIAL HAZARD LOSSES
Unless otherwise specified in a Prospectus Supplement, the Master
Servicer for the related Trust Fund will be required to cause the borrower on
each Mortgage Loan in such Trust Fund to maintain such insurance coverage in
respect of the related Mortgaged Property as is required under the related
Mortgage, including hazard insurance; provided that, as and to the extent
described herein and in the related Prospectus Supplement, the Master Servicer
may satisfy its obligation to cause hazard insurance to be maintained with
respect to any Mortgaged Property through acquisition of a blanket policy. In
general, the standard form of fire and extended coverage policy covers physical
damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the Mortgaged Properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds of
risks. Unless the related Mortgage specifically requires the mortgagor to
insure against physical damage arising from such causes, then, to the extent
any consequent losses are
22
<PAGE>
not covered by Credit Support, such losses may be borne, at least in part, by
the holders of one or more classes of Offered Certificates of the related
series. See "Description of the Pooling Agreements--Hazard Insurance Policies".
ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee benefit plans
and transactions involving the assets of such plans. In addition, certain other
retirement plans and arrangments, including individual retirement accounts and
Keogh plans, are subject to Section 4975 of the Code. Due to the complexity of
regulations that govern such plans, prospective investors that are subject to
ERISA or Section 4975 of the Code are urged to consult their own counsel
regarding the consequences under ERISA or the Code of acquisition, ownership
and disposition of the Offered Certificates of any series. See "ERISA
Considerations".
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING RESIDUAL CERTIFICATES
Holders of Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their
receipt of cash payments, as described in "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates".
Accordingly, under certain circumstances, holders of Offered Certificates that
constitute Residual Certificates may have taxable income and tax liabilities
arising from such investment during a taxable year in excess of the cash
received during such period. The requirement that holders of Residual
Certificates report their pro rata share of the taxable income and net loss of
the REMIC will continue until the Certificate Balances of all classes of
Certificates of the related series have been reduced to zero, even though
holders of Residual Certificates have received full payment of their stated
interest and principal. A portion (or, in certain circumstances, all) of such
Certificateholder's share of the REMIC taxable income may be treated as "excess
inclusion" income to such holder which (i) generally, will not be subject to
offset by losses from other activities, (ii) for a tax-exempt holder, will be
treated as unrelated business taxable income and (iii) for a foreign holder,
will not qualify for exemption from withholding tax. Individual holders of
Residual Certificates may be limited in their ability to deduct servicing fees
and other expenses of the REMIC. In addition, Residual Certificates are subject
to certain restrictions on transfer. Because of the special tax treatment of
Residual Certificates, the taxable income arising in a given year on a Residual
Certificate will not be equal to the taxable income associated with investment
in a corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on the
Residual Certificate may be significantly less than that of a corporate bond or
stripped instrument having similar cash flow characteristics.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING ORIGINAL ISSUE DISCOUNT
Accrual Certificates will be, and certain of the other Classes of
Certificates of a series may be, issued with "original issue discount" for
federal income tax purposes, which generally will result in recognition of some
taxable income in advance of the receipt of cash attributable to such income.
See "Certain Federal Income Tax Consequences--Federal Income Tax Consequences
for REMIC Certificates--Taxation of Regular Certificates".
BOOK-ENTRY REGISTRATION
If so provided in the related Prospectus Supplement, one or more
classes of the Offered Certificates of any series will be issued as Book-Entry
Certificates. Each class of Book-Entry Certificates will be initially
represented by one or more Certificates registered in the name of a nominee for
DTC. As a result, unless and until corresponding Definitive Certificates are
issued, the Certificate Owners with respect to any class of Book-Entry
Certificates will be able to exercise the rights of Certificateholders only
indirectly through DTC and its participating organizations ("Participants"). In
addition, the access of Certificate Owners to information regarding the
Book-Entry Certificates in which they hold interests may be limited. Conveyance
of notices and other communications by DTC to its Participants, and directly
and indirectly through such Participants to Certificate Owners, will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time. Furthermore, as described
herein, Certificate Owners may suffer delays in the receipt of payments on the
Book-Entry Certificates, and the ability of any Certificate Owner to pledge or
otherwise take actions with respect to its interest in the Book-Entry
23
<PAGE>
Certificates may be limited due to the lack of a physical certificate
evidencing such interest. See "Description of the Certificates--Book-Entry
Registration and Definitive Certificates".
DELINQUENT MORTGAGE LOANS
If so provided in the related Prospectus Supplement, the Trust Fund
for a particular Series of Certificates may include Mortgage Loans that are
past-due (i.e. beyond any applicable grace period); provided, however, that
such delinquent Mortgage Loans may only constitute up to, but not including,
20% (by principal balance) of the Trust Fund. If so specified in the related
Prospectus Supplement, the servicing of such Mortgage Loans may be performed
by a Special Servicer. When a Mortgage Loan has a loan-to-value ratio of 100%
or more, the related borrower wil have no equity in the related Mortgaged
Property. In such cases, the related borrower may not have an incentive to
continue to perform under the subject Mortgage Loan. In addition, when the
debt service coverage ratio of a Mortgage Loan is below 1.0x, the revenue
derived from the use and operation of the related Mortgaged Property is
insufficient to cover the operating expenses of such Mortgaged Property and to
pay debt service on such Mortgage Loan and all mortgage loans senior thereto.
In such cases, the related borrower will be required to pay a portion of such
items from sources other than cash flow from the related Mortgaged Property.
If the related borrower ceases to use such alternative cash sources at a time
when operating revenue from the related Mortgaged Property is still
insufficient to cover such items, deferred maintenance at the related
Mortgaged Property and/or a default under the subject Mortgage Loan may occur.
Credit Support provided with respect to a particular 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 Assets in such Trust Fund and the yield on the Offered
Certificates of such series. See "Description of the Trust Funds--Mortgage
Loans--General".
DESCRIPTION OF THE TRUST FUNDS
GENERAL
The primary assets of each Trust Fund will consist of (i) various
types of multifamily or commercial mortgage loans or participations therein
(the "Mortgage Loans"), (ii) pass-through certificates or other mortgage-backed
securities ("MBS") that evidence interests in, or that are secured by pledges
of, one or more of various types of multifamily or commercial mortgage loans or
(iii) a combination of Mortgage Loans and MBS (collectively, "Mortgage
Assets"). Each Trust Fund will be established by Bear Stearns Commercial
Mortgage Securities Inc. (the "Depositor"). Each Mortgage Asset will be
selected by the Depositor for inclusion in a Trust Fund from among those
purchased, either directly or indirectly, from a prior holder thereof (a
"Mortgage Asset Seller"), which prior holder may or may not be the originator
of such Mortgage Loan or the issuer of such MBS and may be an affiliate of the
Depositor. The Mortgage Assets will not be guaranteed or insured by the
Depositor or any of its affiliates or, unless otherwise provided in the related
Prospectus Supplement, by any governmental agency or instrumentality or by any
other person. The discussion below under the heading "--Mortgage Loans", unless
otherwise noted, applies equally to mortgage loans underlying any MBS included
in a particular Trust Fund.
MORTGAGE LOANS
General. The Mortgage Loans will be evidenced by promissory notes or
other evidences of indebtedness (the "Mortgage Notes") secured by liens on fee
or leasehold estates in properties (the "Mortgaged Properties") consisting of
(i) residential properties consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or other residential structures ("Multifamily Properties") and mobile
home parks, (ii) commercial properties consisting of office buildings, retail
facilities related to the sale of goods and products and facilities related to
providing entertainment, recreation or personal services, hotels and motels,
casinos, health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, auto parks, golf courses, arenas and restaurants (or
cooperatively owned units therein)
24
<PAGE>
and (iii) mixed use properties (that is, any combination of the foregoing) and
unimproved land (the "Commercial Properties"). The Multifamily Properties may
include mixed commercial and residential structures, apartment buildings owned
by private cooperative housing corporations ("Cooperatives"), and shares of the
Cooperative allocable to one or more dwelling units occupied by non-owner
tenants or to vacant units. Such liens may be created by mortgages, deeds of
trust and similar security instruments (the "Mortgages"). Each Mortgage will
create a first priority or junior priority mortgage lien on a borrower's fee
estate in a Mortgaged Property. If a Mortgage creates a lien on a borrower's
leasehold estate in a property, then, unless otherwise specified in the related
Prospectus Supplement, the term of any such leasehold will exceed the term of
the Mortgage Note by at least two years. Unless otherwise specified in the
related Prospectus Supplement, each Mortgage Loan will have been originated by
a person (the "Originator") other than the Depositor; however, the Originator
may be or may have been an affiliate of the Depositor.
If so specified in the related Prospectus Supplement, Mortgage Assets
for a series of Certificates may include Mortgage Loans made on the security of
real estate projects under construction. In that case, the related Prospectus
Supplement will describe the procedures and timing for making disbursements
from construction reserve funds as portions of the related real estate project
are completed. In addition, some of the Mortgage Loans included in the Trust
Fund for a particular Series of Certificates may be delinquent or
non-performing as of the date such Certificates are issued. In that case, the
related Prospectus Supplement will set forth, as to each such Mortgage Loan,
available information as to the period of such delinquency or non-performance,
any forbearance arrangement then in effect, the condition of the related
Mortgaged Property and the ability of the Mortgaged Property to generate income
to service the mortgage debt.
Default and Loss Considerations with Respect to the Mortgage Loans.
Mortgage loans secured by liens on income-producing properties are
substantially different from loans made on the security of owner-occupied
single-family homes. The repayment of a loan secured by a lien on an
income-producing property is typically dependent upon the successful operation
of such property (that is, its ability to generate income). Moreover, some or
all of the Mortgage Loans included in a particular Trust Fund may be
non-recourse loans, which means that, absent special facts, recourse in the
case of default will be limited to the Mortgaged Property and such other
assets, if any, that were pledged to secure repayment of the Mortgage Loan.
Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important factor in evaluating the
risk of default on such a loan. Unless otherwise defined in the related
Prospectus Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan at
any given time is the ratio of (i) the Net Operating Income derived from the
related Mortgaged Property for a twelve-month period to (ii) the annualized
scheduled payments on the Mortgage Loan and any other loans senior thereto that
are secured by the related Mortgaged Property. Unless otherwise defined in the
related Prospectus Supplement, "Net Operating Income" means, for any given
period, the total operating revenues derived from a Mortgaged Property during
such period, minus the total operating expenses incurred in respect of such
Mortgaged Property during such period other than (i) non-cash items such as
depreciation and amortization, (ii) capital expenditures and (iii) debt service
on the related Mortgage Loan or on any other loans that are secured by such
Mortgaged Property. The Net Operating Income of a Mortgaged Property will
fluctuate over time and may or may not be sufficient to cover debt service on
the related Mortgage Loan at any given time. As the primary source of the
operating revenues of a non-owner occupied, income-producing property, rental
income (and, with respect to a Mortgage Loan secured by a Cooperative apartment
building, maintenance payments from tenant-stockholders of a Cooperative) may
be affected by the condition of the applicable real estate market and/or the
economy of the area in which the Mortgaged Property is located or the industry
that it services. In addition, properties typically leased, occupied or used on
a short-term basis, such as certain healthcare-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 for longer periods, such as warehouses, retail stores, office
buildings and industrial plants. Commercial Properties may be owner-occupied or
leased to a small number of tenants. Thus, the Net Operating Income of such a
Mortgaged Property may depend substantially on the financial condition of the
borrower or a tenant, and Mortgage Loans secured by liens on such properties
may pose greater risks than loans secured by liens on Multifamily Properties or
on multi-tenant Commercial Properties.
25
<PAGE>
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 to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Mortgage Loan. As may
be further described in the related Prospectus Supplement, in some cases leases
of Mortgaged Properties may provide that the lessee, rather than the borrower/
landlord, is responsible for payment of operating expenses ("Net Leases").
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.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a
factor in evaluating risk of loss if a property must be liquidated following a
default. Unless otherwise defined in the related Prospectus Supplement, the
"Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of (i) the then outstanding principal balance of
the Mortgage Loan and any other loans senior thereto that are secured by the
related Mortgaged Property to (ii) the Value of the related Mortgaged Property.
The "Value" of a Mortgaged Property is generally its fair market value
determined in an appraisal obtained by the Originator at the origination of
such loan. The lower the Loan-to-Value Ratio, the greater the percentage of the
borrower's equity in a Mortgaged Property, and thus (a) the greater the
incentive of the borrower to perform under the terms of the related Mortgage
Loan (in order to protect such equity) and (b) the greater the cushion provided
to the lender against loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate
measure of the risk of liquidation loss in a pool of Mortgage Loans. For
example, the value of a Mortgaged Property as of the date of initial issuance
of the related series of Certificates may be less than the Value determined at
loan origination, and will likely continue to fluctuate from time to time based
upon changes in economic conditions, the real estate market and other factors
described herein. 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 and discount 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 can be no
assurance that all of such factors will in fact have been prudently considered
by the Originators of the Mortgage Loans, or that, for a particular Mortgage
Loan, they are complete or relevant. See "Risk Factors--Risks Associated with
Certain Mortgage Loans and Mortgaged Properties" and "--Balloon Payments;
Borrower Default".
Payment Provisions of the Mortgage Loans. Unless otherwise specified
in the related Prospectus Supplement, all of the Mortgage Loans will (i) have
had individual principal balances at origination of not less than $25,000, (ii)
have had original terms to maturity of not more than 40 years and (iii) provide
for scheduled payments of principal, interest or both, to be made on specified
dates ("Due Dates") that occur monthly, quarterly, semi-annually or annually. A
Mortgage Loan (i) may provide for no accrual of interest or for accrual of
interest thereon at an interest rate (a "Mortgage Rate") that is fixed over its
term or that adjusts from time to time, or that may be converted at the bor-
rower's election from an adjustable to a fixed Mortgage Rate, or from a fixed
to an adjustable Mortgage Rate, (ii) may provide for level payments to maturity
or for payments that adjust from time to time to accommodate changes in the
Mortgage Rate or to reflect the occurrence of certain events, and may permit
negative amortization, (iii) may be fully amortizing or partially amortizing or
non-amortizing, with a balloon payment due on its stated maturity date, and
(iv) may prohibit over its term or for a certain period prepayments (the period
of such prohibition, a "Lock-out Period"
26
<PAGE>
and its date of expiration, a "Lock-out Date") and/or require payment of a
premium or a yield maintenance penalty (a "Prepayment Premium") in connection
with certain prepayments, in each case as described in the related Prospectus
Supplement. A Mortgage Loan may also contain a provision that entitles the
lender to a share of appreciation of the related Mortgaged Property, or profits
realized from the operation or disposition of such Mortgaged Property or the
benefit, if any, resulting from the refinancing of the Mortgage Loan (any such
provision, an "Equity Participation"), as described in the related Prospectus
Supplement. If holders of any class or classes of Offered Certificates of a
series will be entitled to all or a portion of an Equity Participation in
addition to payments of interest on and/or principal of such Offered
Certificates, the related Prospectus Supplement will describe the Equity
Participation and the method or methods by which distributions in respect
thereof will be made to such holders.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans in
the related Trust Fund, which will generally be current as of a date specified
in the related Prospectus Supplement and which, to the extent then applicable
and specifically known to the Depositor, will include the following: (i) the
aggregate outstanding principal balance and the largest, smallest and average
outstanding principal balance of the Mortgage Loans, (ii) the type or types of
property that provide security for repayment of the Mortgage Loans, (iii) the
earliest and latest origination date and maturity date of the Mortgage Loans,
(iv) the original and remaining terms to maturity of the Mortgage Loans, or the
respective ranges thereof, and the weighted average original and remaining
terms to maturity of the Mortgage Loans, (v) the original Loan-to-Value Ratios
of the Mortgage Loans, or the range thereof, and the weighted average original
Loan-to-Value Ratio of the Mortgage Loans, (vi) the Mortgage Rates borne by
the Mortgage Loans, or range thereof, and the weighted average Mortgage Rate
borne by the Mortgage Loans, (vii) with respect to Mortgage Loans with
adjustable Mortgage Rates ("ARM Loans"), the index or indices upon which such
adjustments are based, the adjustment dates, the range of gross margins and the
weighted average gross margin, and any limits on Mortgage Rate adjustments at
the time of any adjustment and over the life of the ARM Loan, (viii)
information regarding the payment characteristics of the Mortgage Loans,
including, without limitation, balloon payment and other amortization
provisions, Lock-out Periods and Prepayment Premiums, (ix) the Debt Service
Coverage Ratios of the Mortgage Loans (either at origination or as of a more
recent date), or the range thereof, and the weighted average of such Debt
Service Coverage Ratios, and (x) the geographic distribution of the Mortgaged
Properties on a state-by-state basis. In appropriate cases, the related
Prospectus Supplement will also contain certain information available to the
Depositor that pertains to the provisions of leases and the nature of tenants
of the Mortgaged Properties. If the Depositor is unable to tabulate the
specific information described above at the time Offered Certificates of a
series are initially offered, more general information of the nature described
above will be provided in the related Prospectus Supplement, and specific
information will be set forth in a report which will be available to purchasers
of those Certificates at or before the initial issuance thereof and will be
filed as part of a Current Report on Form 8-K with the Commission within
fifteen days following such issuance.
MBS
MBS may include (i) private (that is, not guaranteed or insured by
the United States or any agency or instrumentality thereof) mortgage
pass-through certificates or other mortgage-backed securities or (ii)
certificates insured or guaranteed by FHLMC, FNMA, GNMA or FAMC provided that,
unless otherwise specified in the related Prospectus Supplement, each MBS will
evidence an interest in, or will be secured by a pledge of, mortgage loans that
conform to the descriptions of the Mortgage Loans contained herein.
Any MBS will have been issued pursuant to a participation and
servicing agreement, a pooling and servicing agreement, an indenture or similar
agreement (an "MBS Agreement"). The issuer of the MBS (the "MBS Issuer") and/or
the servicer of the underlying mortgage loans (the "MBS Servicer") will have
entered into the MBS Agreement, generally with a trustee (the "MBS Trustee")
or, in the alternative, with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with
characteristics similar to the classes of Certificates described herein.
Distributions in respect of the MBS will be made by the MBS Issuer, the MBS
Servicer or the MBS Trustee on the dates specified in the related Prospectus
Supplement. The MBS Issuer or the MBS Servicer
27
<PAGE>
or another person specified in the related Prospectus Supplement may have the
right or obligation to repurchase or substitute assets underlying the MBS after
a certain date or under other circumstances specified in the related Prospectus
Supplement.
Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the MBS. 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 MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust Fund, (ii) the original and remaining term to stated
maturity of the MBS, if applicable, (iii) the pass-through or bond rate of the
MBS or the formula for determining such rates, (iv) the payment characteristics
of the MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
(vi) a description of the credit support, if any, (vii) the circumstances under
which the related underlying mortgage loans, or the MBS themselves, may be
purchased prior to their maturity, (viii) the terms on which mortgage loans may
be substituted for those originally underlying the MBS, (ix) the type of
mortgage loans underlying the MBS and, to the extent available to the Depositor
and appropriate under the circumstances, such other information in respect of
the underlying mortgage loans described under "--Mortgage Loans--Mortgage Loan
Information in Prospectus Supplements", and (x) the characteristics of any cash
flow agreements that relate to the MBS.
CERTIFICATE ACCOUNTS
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which the person or persons designated in the related
Prospectus Supplement will, to the extent described herein and in such
Prospectus Supplement, deposit all payments and collections received or
advanced with respect to the Mortgage Assets and other assets in the Trust
Fund. A Certificate Account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain obligations acceptable to each Rating Agency rating one or
more classes of the related series of Offered Certificates.
CREDIT SUPPORT
If so provided in the Prospectus Supplement for a series of
Certificates, partial or full protection against certain defaults and losses on
the Mortgage Assets in the related Trust Fund may be provided to one or more
classes of Certificates of such series in the form of subordination of one or
more other classes of Certificates of such series or by one or more other types
of credit support arrangements, such as letters of credit, insurance policies,
guarantees, surety bonds or reserve funds, among others, or a combination
thereof (any such coverage with respect to the Certificates of any series,
"Credit Support"). The amount and types of Credit Support, the identification
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 a series of Certificates. See "Risk Factors--Credit Support
Limitations" and "Description of Credit Support".
CASH FLOW AGREEMENTS
If so provided in the Prospectus Supplement for a series of
Certificates, the related Trust Fund may include guaranteed investment
contracts pursuant to which moneys held in the funds and accounts established
for such series will be invested at a specified rate. The Trust Fund may also
include interest rate exchange agreements, interest rate cap or floor
agreements, or currency exchange agreements, which agreements are designed to
reduce the effects of interest rate or currency exchange rate fluctuations on
the Mortgage Assets on one or more classes of Certificates. The principal terms
of any such guaranteed investment contract or other agreement (any such
agreement, a "Cash Flow
28
<PAGE>
Agreement"), and the identity of the Cash Flow Agreement obligor or
counterparty, will be described in the Prospectus Supplement for a series of
Certificates.
YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by
the Certificateholder, the Pass-Through Rate of the Certificate and the amount
and timing of distributions on the Certificate. See "Risk Factors--Prepayments;
Average Life of Certificates; Yields". The following discussion contemplates a
Trust Fund that consists solely of Mortgage Loans. While the characteristics
and behavior of mortgage loans underlying an MBS can generally be expected to
have the same effect on the yield to maturity and/or weighted average life of a
class of Certificates as will the characteristics and behavior of comparable
Mortgage Loans, the effect may differ due to the payment characteristics of the
MBS. If a Trust Fund includes MBS, the related Prospectus Supplement will
discuss the effect that the MBS payment characteristics may have on the yield
to maturity and weighted average lives of the Offered Certificates of the
related series.
PASS-THROUGH RATE
The Certificates of any class within a series may have a fixed,
variable or adjustable Pass-Through Rate, which may or may not be based upon
the interest rates borne by the Mortgage Loans in the related Trust Fund. The
Prospectus Supplement with respect to any series of Certificates will specify
the Pass-Through Rate for each class of Offered Certificates of such series or,
in the case of a class of Offered Certificates with a variable or adjustable
Pass-Through Rate, the method of determining the Pass-Through Rate; the
effect, if any, of the prepayment of any Mortgage Loan on the Pass-Through Rate
of one or more classes of Offered Certificates; and whether the distributions
of interest on the Offered Certificates of any class will be dependent, in
whole or in part, on the performance of any obligor under a Cash Flow
Agreement.
PAYMENT DELAYS
With respect to any series of Certificates, a period of time will
elapse between the date upon which payments on the Mortgage Loans in the
related Trust Fund are due and the Distribution Date on which such payments are
passed through to Certificateholders. That delay will effectively reduce the
yield that would otherwise be produced if payments on such Mortgage Loans were
distributed to Certificateholders on or near the date they were due.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full or in part is made on a Mortgage
Loan, the borrower is generally charged interest on the amount of such
prepayment only through the date of such prepayment, instead of through the Due
Date for the next succeeding 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 Mortgage Loans to their
respective Due Dates during the related Due Period. Unless otherwise specified
in the Prospectus Supplement for a series of Certificates, a "Due Period" is a
specified time period generally corresponding in length to the time period
between Distribution Dates, and all scheduled payments on the Mortgage Loans in
the related Trust Fund that are due during a given Due Period will, to the
extent received by a specified date (the "Determination Date") or otherwise
advanced by the related Master Servicer or other specified person, be
distributed to the holders of the Certificates of such series on the next
succeeding Distribution Date. 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 to the Due Date for
such Mortgage Loan in the related Due Period, then the interest charged to the
borrower (net of servicing and administrative fees) may be less (such
shortfall, a "Prepayment Interest Shortfall") than the corresponding amount of
interest accrued and otherwise payable on the Certificates of the related
series. If and to the extent that any such shortfall is allocated to a class of
Offered Certificates, the yield thereon will be adversely affected. The
Prospectus Supplement for each series of Certificates will describe the manner
in which any such Prepayment Interest
29
<PAGE>
Shortfalls will be allocated among the classes of such Certificates. If so
specified in the Prospectus Supplement for a series of Certificates, the Master
Servicer for such series will be required to apply some or all of its servicing
compensation for the corresponding period to offset the amount of any such
Prepayment Interest Shortfalls. The related Prospectus Supplement will also
describe any other amounts available to offset such shortfalls. See
"Description of the Pooling Agreements--Servicing Compensation and Payment of
Expenses".
YIELD AND PREPAYMENT CONSIDERATIONS
A Certificate's yield to maturity will be affected by the rate of
principal payments on the Mortgage Loans in the related Trust Fund and the
allocation thereof to reduce the principal balance (or notional amount, if
applicable) of such Certificate. The rate of principal payments on the Mortgage
Loans in any Trust Fund will in turn be affected by the amortization schedules
thereof (which, in the case of ARM Loans, may change periodically to
accommodate adjustments to the Mortgage Rates thereon), 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 related 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 described
more fully below), no assurance can be given as to such rate.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend upon
the degree to which they are purchased at a discount or premium and when, and
to what degree, payments of principal on the Mortgage Loans in the related
Trust Fund are in turn distributed on such Certificates (or, in the case of a
class of Stripped Interest Certificates, result in the reduction of the
Notional Amount thereof). An investor should consider, in the case of any
Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans in the related
Trust Fund could result in an actual yield to such investor that is lower than
the anticipated yield and, in the case of any Offered Certificate purchased at
a premium, the risk that a faster than anticipated rate of principal payments
on such Mortgage Loans could result in an actual yield to such investor that is
lower than the anticipated yield. In addition, if an investor purchases an
Offered Certificate at a discount (or premium), and principal payments are made
in reduction of the principal balance or notional amount of such investor's
Offered Certificates at a rate slower (or faster) than the rate anticipated by
the investor during any particular period, the consequent adverse effects on
such investor's yield would not be fully offset by a subsequent like increase
(or decrease) in the rate of principal payments.
A class of Certificates, including a class of Offered Certificates,
may provide that on any Distribution Date the holders of such Certificates are
entitled to a pro rata share of the prepayments on the Mortgage Loans in the
related Trust Fund that are distributable on such date, to a disproportionately
large share (which, in some cases, may be all) of such prepayments, or to a
disproportionately small share (which, in some cases, may be none) of such
prepayments. As and to the extent described in the related Prospectus
Supplement, the respective entitlements of the various classes of Certificates
of any series to receive distributions in respect of payments (and, in
particular, prepayments) of principal of the Mortgage Loans in the related
Trust Fund may vary based on the occurrence of certain events (e.g., the
retirement of one or more classes of Certificates of such series) or subject to
certain contingencies (e.g., prepayment and default rates with respect to such
Mortgage Loans).
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or all
of the Mortgage Assets in the related Trust Fund or (ii) equal the Certificate
Balances of one or more of the other classes of Certificates of the same
series. Accordingly, the yield on such Stripped Interest Certificates will be
inversely related to the rate at which payments and other collections of
principal are received on such Mortgage Assets or distributions are made in
reduction of the Certificate Balances of such classes of Certificates, as the
case may be.
Consistent with the foregoing, if a class of Certificates of any
series consists of Stripped Interest Certificates or Stripped Principal
Certificates, a lower than anticipated rate of principal prepayments on the
Mortgage Loans in the related Trust Fund will negatively affect the yield to
investors in Stripped Principal Certificates, and a higher than anticipated
rate of principal prepayments on such Mortgage Loans will negatively affect the
yield to investors in
30
<PAGE>
Stripped Interest Certificates. If the Offered Certificates of a series include
any such Certificates, the related Prospectus Supplement will include a table
showing the effect of various assumed levels of prepayment on yields on such
Certificates. Such tables will be intended to illustrate the sensitivity of
yields to various assumed prepayment rates and will not be intended to predict,
or to provide information that will enable investors to predict, yields or
prepayment rates.
The Depositor is not aware of any relevant publicly available or
authoritative statistics with respect to the historical prepayment experience
of a 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 Lock-out 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. Even in the case of ARM Loans, as prevailing market interest rates
decline, and without regard to whether the Mortgage Rates on such ARM Loans
decline in a manner consistent therewith, the related borrowers 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
a different index, margin or rate cap or floor on another adjustable rate
mortgage loan.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits. The
Depositor will make no representation as to the particular factors that will
affect the prepayment of the Mortgage Loans in any Trust Fund, as to the
relative importance of such factors, as to the percentage of the principal
balance of such Mortgage Loans that will be paid as of any date or as to the
overall rate of prepayment on such Mortgage Loans.
WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the Mortgage
Loans in any Trust Fund will affect the ultimate maturity and the weighted
average life of one or more classes of the Certificates of such series.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of an instrument until each dollar allocable as
principal of such instrument is repaid to the investor.
The weighted average life and maturity of a class of Certificates of
any series will be influenced by the rate at which principal on the related
Mortgage Loans, whether in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes voluntary prepayments,
liquidations due to default and purchases of Mortgage Loans out of the related
Trust Fund) is paid to such class. Prepayment rates on loans are commonly
measured relative to a prepayment standard or model, such as the Constant
Prepayment Rate ("CPR") prepayment model or the Standard Prepayment Assumption
("SPA") prepayment model. CPR represents an assumed constant rate of prepayment
each month (expressed as an annual percentage) relative to the then outstanding
principal balance of a pool of loans for the life of such loans. SPA represents
an assumed variable rate of prepayment each month (expressed as an annual
percentage) relative to the then outstanding principal balance of a pool of
loans, with different prepayment assumptions often expressed as percentages of
SPA. For example, a prepayment assumption of 100% of SPA assumes prepayment
rates of 0.2% per annum of the then outstanding principal balance of such loans
in the first month of the life of the loans and an additional 0.2% per annum in
each month thereafter until the thirtieth month. Beginning in the thirtieth
month, and in each month thereafter during the life of the loans, 100% of SPA
assumes a constant prepayment rate of 6% per annum each month.
31
<PAGE>
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any particular pool of
loans. Moreover, the CPR and SPA models were developed based upon historical
prepayment experience for single-family loans. Thus, it is unlikely that the
prepayment experience of the Mortgage Loans included in any Trust Fund will
conform to any particular level of CPR or SPA.
The Prospectus Supplement with respect to each series of Certificates
will contain tables, if applicable, setting forth the projected weighted
average life of each class of Offered Certificates of such series and the
percentage of the initial Certificate Balance of each such class that would be
outstanding on specified Distribution Dates based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
related Mortgage Loans are made at rates corresponding to various percentages
of CPR or SPA, or at such other rates specified in such Prospectus Supplement.
Such tables and assumptions will illustrate the sensitivity of the weighted
average lives of the Certificates to various assumed prepayment rates and will
not be intended to predict, or to provide information that will enable
investors to predict, the actual weighted average lives of the Certificates.
CONTROLLED AMORTIZATION CLASSES AND COMPANION CLASSES
A series of Certificates may include one or more Controlled
Amortization Classes, which will entitle the holders thereof to receive
principal distributions according to a specified principal payment schedule,
which schedule is supported by creating priorities, as and to the extent
described in the related Prospectus Supplement, to receive principal payments
from the Mortgage Loans in the related Trust Fund. Unless otherwise specified
in the related Prospectus Supplement, each Controlled Amortization Class will
either be a Planned Amortization Class (a "PAC") or a Targeted Amortization
Class (a "TAC"). In general, a PAC has a "prepayment collar" (that is, a range
of prepayment rates that can be sustained without disruption) that determines
the principal cash flow of such Certificates. Such a prepayment collar is not
static, and may expand or contract after the issuance of the PAC depending on
the actual prepayment experience for the underlying Mortgage Loans.
Distributions of principal on a PAC would be made in accordance with the
specified schedule so long as prepayments on the underlying Mortgage Loans
remain at a relatively constant rate within the prepayment collar and, as
described below, Companion Classes exist to absorb "excesses" or "shortfalls"
in principal payments on the underlying Mortgage Loans. If the rate of
prepayment on the underlying Mortgage Loans from time to time falls outside the
prepayment collar, or fluctuates significantly within the prepayment collar,
especially for any extended period of time, such an event may have material
consequences in respect of the anticipated weighted average life and maturity
for a PAC. A TAC is structured so that principal distributions generally will
be payable thereon in accordance with its specified principal payments schedule
so long as the rate of prepayments on the related Mortgage Assets remains
relatively constant at the particular rate used in establishing such schedule.
A TAC will generally afford the holders thereof some protection against early
retirement or some protection against an extended average life, but not both.
Although prepayment risk cannot be eliminated entirely for any class
of Certificates, a Controlled Amortization Class will generally provide a
relatively stable cash flow so long as the actual rate of prepayment on the
Mortgage Loans in the related Trust Fund remains relatively constant at the
rate, or within the range of rates, of prepayment used to establish the
specific principal payment schedule for such Certificates. Prepayment risk with
respect to a given Mortgage Asset Pool does not disappear, however, and the
stability afforded to a Controlled Amortization Class comes at the expense of
one or more Companion Classes of the same series, any of which Companion
Classes may also be a class of Offered Certificates. In general, and as more
particularly described in the related Prospectus Supplement, a Companion Class
will entitle the holders thereof to a disproportionately large share of
prepayments on the Mortgage Loans in the related Trust Fund when the rate of
prepayment is relatively fast, and will entitle the holders thereof to a
disproportionately small share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively slow. A class of
Certificates that entitles the holders thereof to a disproportionately large
share of the prepayments on the Mortgage Loans in the related Trust Fund
enhances the risk of early retirement of such class ("call risk") if the rate
of prepayment is relatively fast; while a class of Certificates that entitles
the holders thereof to a disproportionately small share of the prepayments on
the Mortgage Loans in the related Trust Fund enhances the risk of an extended
average life of such class ("extension risk") if the rate of prepayment is
relatively slow. Thus, as and to the extent described in the related Prospectus
Supplement, a Companion Class absorbs some (but
32
<PAGE>
not all) of the "call risk" and/or "extension risk" that would otherwise belong
to the related Controlled Amortization Class if all payments of principal of
the Mortgage Loans in the related Trust Fund were allocated on a pro rata
basis.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
Balloon Payments; Extensions of Maturity. Some or all of the Mortgage
Loans included in a particular Trust Fund may require that balloon payments be
made at maturity. Because the ability of a borrower to make a balloon payment
typically will depend upon its ability either to refinance the loan or to sell
the related Mortgaged Property, there is a risk that Mortgage Loans that
require balloon payments may default at maturity, or that the maturity of such
a Mortgage Loan may be extended in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things,
bankruptcy of the borrower or adverse conditions in the market where the
property is located. In order to minimize losses on defaulted Mortgage Loans,
the Master Servicer or a Special Servicer, to the extent and under the
circumstances set forth herein and in the related Prospectus Supplement, may be
authorized to modify Mortgage Loans that are in default or as to which a
payment default is imminent. Any defaulted balloon payment or modification that
extends the maturity of a Mortgage Loan may delay distributions of principal on
a class of Offered Certificates and thereby extend the weighted average life of
such Certificates and, if such Certificates were purchased at a discount,
reduce the yield thereon.
Negative Amortization. The weighted average life of a class of
Certificates can be affected by Mortgage Loans that permit negative
amortization to occur. A Mortgage Loan that provides for the payment of
interest calculated at a rate lower than the rate at which interest accrues
thereon would be expected during a period of increasing interest rates to
amortize at a slower rate (and perhaps not at all) than if interest rates were
declining or were remaining constant. Such slower rate of Mortgage Loan
amortization would correspondingly be reflected in a slower rate of
amortization for one or more classes of Certificates of the related series. In
addition, negative amortization on one or more Mortgage Loans in any Trust Fund
may result in negative amortization on the Certificates of the related series.
The related Prospectus Supplement will describe, if applicable, the manner in
which negative amortization in respect of the Mortgage Loans in any Trust Fund
is allocated among the respective classes of Certificates of the related
series. The portion of any Mortgage Loan negative amortization allocated to a
class of Certificates may result in a deferral of some or all of the interest
payable thereon, which deferred interest may be added to the Certificate
Balance thereof. 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 that would bear the
effects of a slower rate of amortization on such Mortgage Loans) may increase
as a result of such feature.
Negative amortization also may occur in respect of an ARM Loan that
limits the amount by which its scheduled payment may adjust in response to a
change in its Mortgage Rate, provides that its scheduled payment will adjust
less frequently than its Mortgage Rate or provides for constant scheduled
payments notwithstanding adjustments to its Mortgage Rate. Conversely, during a
period of declining interest rates, the scheduled payment on such a Mortgage
Loan may exceed the amount necessary to amortize the loan fully over its
remaining amortization schedule and pay interest at the then applicable
Mortgage Rate, thereby resulting in the accelerated amortization of such
Mortgage Loan. Any such acceleration in amortization of its principal balance
will shorten the weighted average life of such Mortgage Loan and,
correspondingly, the weighted average lives of those classes of Certificates
entitled to a portion of the principal payments on such Mortgage Loan.
The extent to which the yield on any Offered Certificate will be
affected by the inclusion in the related Trust Fund of Mortgage Loans that
permit negative amortization, will depend upon (i) whether such Offered
Certificate was purchased at a premium or a discount and (ii) the extent to
which the payment characteristics of such Mortgage Loans delay or accelerate
the distributions of principal on such Certificate (or, in the case of a
Stripped Interest Certificate, delay or accelerate the amortization of the
notional amount thereof). See "--Yield and Prepayment Considerations" above.
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
33
<PAGE>
lives of and yields on the Certificates of the related series. Servicing
decisions made with respect to the Mortgage Loans, including the use of payment
plans prior to a demand for acceleration and the restructuring of Mortgage
Loans in bankruptcy proceedings, may also have an effect upon the payment
patterns of particular Mortgage Loans and thus the weighted average lives of
and yields on the Certificates of the related series.
Losses and Shortfalls on the Mortgage Assets. The yield to holders of
the Offered Certificates of any series will directly depend on the extent to
which such holders are required to bear the effects of any losses or shortfalls
in collections arising out of defaults on the Mortgage Loans in the related
Trust Fund and the timing of such losses and shortfalls. In general, the
earlier that any such loss or shortfall occurs, the greater will be the
negative effect on yield for any class of Certificates that is required to bear
the effects thereof.
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority
and manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may be effected by a reduction in the entitlements to interest and/or
Certificate Balances of one or more such classes of Certificates, or by
establishing a priority of payments among such classes of Certificates.
The yield to maturity on a class of Subordinate Certificates may be
extremely sensitive to losses and shortfalls in collections on the Mortgage
Loans in the related Trust Fund.
Additional Certificate Amortization. In addition to entitling the
holders thereof to a specified portion (which may during specified periods
range from none to all) of the principal payments received on the Mortgage
Assets in the related Trust Fund, one or more classes of Certificates of any
series, including one or more classes of Offered Certificates of such series,
may provide for distributions of principal thereof from (i) amounts
attributable to interest accrued but not currently distributable on one or more
classes of Accrual Certificates, (ii) Excess Funds or (iii) any other amounts
described in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, "Excess Funds" will, in general, represent
that portion of the amounts distributable in respect of the Certificates of any
series on any Distribution Date that represent (i) interest received or
advanced on the Mortgage Assets in the related Trust Fund that is in excess of
the interest currently accrued on the Certificates of such series, or (ii)
Prepayment Premiums, payments from Equity Participations or any other amounts
received on the Mortgage Assets in the related Trust Fund that do not
constitute interest thereon or principal thereof.
The amortization of any class of Certificates out of the sources
described in the preceding paragraph would shorten the weighted average life of
such Certificates and, if such Certificates were purchased at a premium, reduce
the yield thereon. The related Prospectus Supplement will discuss the relevant
factors to be considered in determining whether distributions of principal of
any class of Certificates out of such sources would have any material effect on
the rate at which such Certificates are amortized.
Optional Early Termination. If so specified in the related Prospectus
Supplement, a series of Certificates may be subject to optional early
termination through the repurchase of the Mortgage Assets in the related Trust
Fund by the party or parties specified therein, under the circumstances and in
the manner set forth therein. If so provided in the related Prospectus
Supplement, upon the reduction of the Certificate Balance of a specified class
or classes of Certificates by a specified percentage or amount, a party
specified therein may be authorized or required to solicit bids for the
purchase of all of the Mortgage Assets of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets to retire such class or classes,
under the circumstances and in the manner set forth therein. In the absence of
other factors, any such early retirement of a class of Offered Certificates
would shorten the weighted average life thereof and, if such Certificates were
purchased at premium, reduce the yield thereon.
34
<PAGE>
THE DEPOSITOR
Bear Stearns Commercial Mortgage Securities Inc., the Depositor, is a
Delaware corporation organized on April 20, 1987. It has remained inactive
until the filing of the Registration Statement of which this Prospectus is a
part. The primary business of the Depositor is to acquire Mortgage Assets and
sell interests therein or bonds secured thereby. It is a wholly owned
subsidiary of CMC Commercial Assets Corporation, which is a wholly owned
subsidiary of The Bear Stearns Companies Inc., a Delaware corporation, and an
affiliate of Bear, Stearns & Co. Inc. The Depositor maintains its principal
office at 245 Park Avenue, New York, New York 10167. Its telephone number is
(212) 272-2000. The Depositor does not have, nor is it expected in the future
to have, any significant assets.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of
any series will be applied by the Depositor to the purchase of Trust Assets or
will be used by the Depositor for general corporate purposes. The Depositor
expects to sell the Certificates from time to time, but the timing and amount
of offerings of Certificates will depend on a number of factors, including the
volume of Mortgage Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each series of Certificates will represent the entire beneficial
ownership interest in the Trust Fund created pursuant to the related Pooling
Agreement. As described in the related Prospectus Supplement, the Certificates
of each series, including the Offered Certificates of such series, may consist
of one or more classes of Certificates that, among other things: (i) provide
for the accrual of interest thereon at a fixed, variable or adjustable rate;
(ii) are senior (collectively, "Senior Certificates") or subordinate
(collectively, "Subordinate Certificates") to one or more other classes of
Certificates in entitlement to certain distributions on the Certificates; (iii)
are entitled to distributions of principal, with disproportionately small,
nominal or no distributions of interest (collectively, "Stripped Principal
Certificates"); (iv) are entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal
(collectively, "Stripped Interest Certificates"); (v) provide for distributions
of interest thereon or principal thereof 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 thereof 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 thereof to be made,
subject to available funds, based on a specified principal payment schedule or
other methodology; or (viii) provide for distributions based on collections on
the Mortgage Assets in the related Trust Fund attributable to Prepayment
Premiums and Equity Participations.
Each class of Offered Certificates of a series will be issued in
minimum denominations corresponding to the principal balances or, in case of
certain classes of Stripped Interest Certificates or Residual Certificates,
notional amounts or percentage interests, specified in the related Prospectus
Supplement. As provided in the related Prospectus Supplement, one or more
classes of Offered Certificates of any series may be issued in fully
registered, definitive form (such Certificates, "Definitive Certificates") or
may be offered in book-entry format (such Certificates, "Book-Entry
Certificates") through the facilities of The Depository Trust Company ("DTC").
The Offered Certificates of each series (if issued as Definitive Certificates)
may be transferred or exchanged, subject to any restrictions on transfer
described in the related Prospectus Supplement, at the location specified in
the related Prospectus Supplement, without the payment of any service charges,
other than any tax or other governmental charge payable in connection
therewith. Interests in a class of Book-Entry Certificates will be transferred
on the book-entry records of DTC and its participating organizations. See "Risk
Factors--Limited Liquidity" and "--Book-Entry Registration".
35
<PAGE>
DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the related Trustee or Master Servicer on each Distribution Date as
specified in the related Prospectus Supplement from the Available Distribution
Amount for such series and such Distribution Date. Unless otherwise provided in
the related Prospectus Supplement, the "Available Distribution Amount" for any
series of Certificates and any Distribution Date will refer to the total of all
payments or other collections (or advances in lieu thereof) on, under or in
respect of the Mortgage Assets and any other assets included in the related
Trust Fund that are available for distribution to the holders of Certificates
of such series on such date. The particular components of the Available
Distribution Amount for any series on each Distribution Date will be more
specifically described in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the persons
in whose names such Certificates are registered at the close of business on the
last business day of the month preceding the month in which the applicable
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates in such
class. Payments will be made either by wire transfer in immediately available
funds to the account of a Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder has provided the
person required to make such payments with wiring instructions (which may be
provided in the form of a standing order applicable to all subsequent
distributions) no later than the date specified in the related Prospectus
Supplement (and, if so provided in the related Prospectus Supplement, such
Certificateholder holds Certificates in the requisite amount or denomination
specified therein), or by check mailed to the address of such Certificateholder
as it appears on the Certificate Register; provided, however, that the final
distribution in retirement of any class of Certificates (whether Definitive
Certificates or Book-Entry Certificates) will be made only upon presentation
and surrender of such Certificates at the location specified in the notice to
Certificateholders of such final distribution.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes
of Stripped Principal Certificates and certain classes of Residual Certificates
that have no Pass-Through Rate) may have a different Pass-Through Rate, which
in each case may be fixed, variable or adjustable. The related Prospectus
Supplement will specify the Pass-Through Rate or, in the case of a variable or
adjustable Pass-Through Rate, the method for determining the Pass-Through
Rate, for each class. Unless otherwise specified in the related Prospectus
Supplement, interest on the Certificates of each series will be calculated on
the basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of any class of Certificates
(other than certain classes of Certificates that will be entitled to
distributions of accrued interest commencing only on the Distribution Date, or
under the circumstances, specified in the related Prospectus Supplement
("Accrual Certificates"), and other than any class of Stripped Principal
Certificates or Residual Certificates that is not entitled to any distributions
of interest) will be made on each Distribution Date based on the Accrued
Certificate Interest for such class and such Distribution Date, subject to the
sufficiency of the portion of the Available Distribution Amount allocable to
such class on such Distribution Date. Prior to the time interest is
distributable on any class of Accrual Certificates, the amount of Accrued
Certificate Interest otherwise distributable on such class will be added to the
Certificate Balance thereof on each Distribution Date. With respect to each
class of Certificates (other than certain classes of Stripped Interest
Certificates and certain classes of Residual Certificates), the "Accrued
Certificate Interest" for each Distribution Date will be equal to interest at
the applicable Pass-Through Rate accrued for a specified period (generally
equal to the time period between Distribution Dates) on the outstanding
Certificate Balance of such class of Certificates immediately prior to such
Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the Accrued Certificate Interest for each Distribution Date on a
class of Stripped Interest Certificates will be similarly calculated except
that it will accrue on a notional amount (a "Notional Amount") that is either
(i) based on the principal balances of some or all of the Mortgage Assets in
the related Trust Fund or (ii) equal to the Certificate Balances of one or more
other classes of Certificates of the
36
<PAGE>
same series. Reference to a Notional Amount with respect to a class of Stripped
Interest Certificates is solely for convenience in making certain calculations
and does not represent the right to receive any distributions of principal. If
so specified in the related Prospectus Supplement, the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Certificates, that may otherwise be added to the Certificate Balance
of) one or more classes of the Certificates of a series will be reduced to the
extent that any Prepayment Interest Shortfalls, as described under "Yield and
Maturity Considerations--Certain Shortfalls in Collections of Interest", exceed
the amount of any sums (including, if and to the extent specified in the
related Prospectus Supplement, all or a portion of the Master Servicer's
servicing compensation) that are applied to offset the amount of such
shortfalls. The particular manner in which such shortfalls will be allocated
among some or all of the classes of Certificates of that series will be
specified in the related Prospectus Supplement. The related Prospectus
Supplement will also describe the extent to which the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Certificates, that may otherwise be added to the Certificate Balance
of) a class of Offered Certificates may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on or in
respect of the Mortgage Assets in the related Trust Fund. Unless otherwise
provided in the related Prospectus Supplement, any reduction in the amount of
Accrued Certificate Interest otherwise distributable on a class of Certificates
by reason of the allocation to such class of a portion of any deferred interest
on or in respect of the Mortgage Assets in the related Trust Fund will result
in a corresponding increase in the Certificate Balance of such class. See "Risk
Factors--Prepayments; Average Life of Certificates; Yields" and "Yield and
Maturity Considerations".
DISTRIBUTIONS OF PRINCIPAL ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes
of Stripped Interest Certificates and certain classes of Residual Certificates)
will have a "Certificate Balance" which, at any time, will equal the then
maximum amount that the holders of Certificates of such class will be entitled
to receive in respect of principal out of the future cash flow on the Mortgage
Assets and other assets included in the related Trust Fund. The outstanding
Certificate Balance of a class of Certificates will be reduced by distributions
of principal made thereon from time to time and, if so provided in the related
Prospectus Supplement, will be further reduced by any losses incurred in
respect of the related Mortgage Assets allocated thereto from time to time. In
turn, the outstanding Certificate Balance of a class of Certificates may be
increased as a result of any deferred interest on or in respect of the related
Mortgage Assets being allocated thereto from time to time, and will be
increased, in the case of a class of Accrual Certificates prior to the
Distribution Date on which distributions of interest thereon are required to
commence, by the amount of any Accrued Certificate Interest in respect thereof
(reduced as described above). Unless otherwise provided in the related
Prospectus Supplement, the initial aggregate Certificate Balance of all classes
of a series of Certificates will not be greater than the aggregate outstanding
principal balance of the related Mortgage Assets as of the applicable Cut-off
Date, after application of scheduled payments due on or before such date,
whether or not received. The initial Certificate Balance of each class of a
series of Certificates will be specified in the related Prospectus Supplement.
As and to the extent described in the related Prospectus Supplement,
distributions of principal with respect to a series of Certificates will be
made on each Distribution Date to the holders of the class or classes of
Certificates of such series entitled thereto until the Certificate Balances of
such Certificates have been reduced to zero. Distributions of principal with
respect to one or more classes of Certificates may be made at a rate that is
faster (and, in some cases, substantially faster) than the rate at which
payments or other collections of principal are received on the Mortgage Assets
in the related Trust Fund. Distributions of principal with respect to one or
more classes of Certificates may not commence until the occurrence of certain
events, such as the retirement of one or more other classes of Certificates of
the same series, or may be made at a rate that is slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on the Mortgage Assets in the related Trust Fund.
Distributions of principal with respect to one or more classes of Certificates
(each such class, a "Controlled Amortization Class") may be made, subject to
available funds, based on a specified principal payment schedule. Distributions
of principal with respect to one or more classes of Certificates (each such
class, a "Companion Class") may be contingent on the specified principal
payment schedule for a Controlled Amortization Class of the same series and the
rate at which payments and other collections of principal on the Mortgage
Assets in the related Trust Fund are received. Unless otherwise specified in
the related Prospectus Supplement, distributions of principal of any class of
Offered Certificates will be made on a pro rata basis among all of the
Certificates of such class.
37
<PAGE>
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS OR IN
RESPECT OF EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment
Premiums or payments in respect of Equity Participations received on or in
connection with the Mortgage Assets in any Trust Fund will be distributed on
each Distribution Date to the holders of the class of Certificates of the
related series entitled thereto in accordance with the provisions described in
such Prospectus Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority
and manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may be effected by a reduction in the entitlements to interest and/or
Certificate Balances of one or more such classes of Certificates, or by
establishing a priority of payments among such classes of Certificates.
ADVANCES IN RESPECT OF DELINQUENCIES
If and to the extent provided in the related Prospectus Supplement, if
a Trust Fund includes Mortgage Loans, the Master Servicer, a Special Servicer,
the Trustee, any provider of Credit Support and/or any other specified person
may be obligated to advance, or have the option of advancing, on or before each
Distribution Date, from its or their own funds or from excess funds held in the
related Certificate Account that are not part of the Available Distribution
Amount for the related series of Certificates for such Distribution Date, an
amount up to the aggregate of any payments of principal (other than any balloon
payments) and interest that were due on or in respect of such Mortgage Loans
during the related Due Period and were delinquent on the related Determination
Date.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses.
Accordingly, all advances made out of a specific entity's own funds will be
reimbursable out of related recoveries on the Mortgage Loans (including amounts
received under any instrument of Credit Support) respecting which such advances
were made (as to any Mortgage Loan, "Related Proceeds") and such other specific
sources as may be identified in the related Prospectus Supplement, including in
the case of a series that includes one or more classes of Subordinate
Certificates, collections on other Mortgage Loans in the related Trust Fund
that would otherwise be distributable to the holders of one or more classes of
such Subordinate Certificates. No advance will be required to be made by the
Master Servicer, a Special Servicer or the Trustee if, in the good faith
judgment of the Master Servicer, a Special Servicer or the Trustee, as the case
may be, such advance would not be recoverable from Related Proceeds or another
specifically identified source (any such advance, a "Nonrecoverable Advance");
and, if previously made by the Master Servicer, a Special Servicer or the
Trustee, a Nonrecoverable Advance will be reimbursable thereto from any amounts
in the related Certificate Account prior to any distributions being made to the
related series of Certificateholders.
If advances have been made by the Master Servicer, Special Servicer,
Trustee or other entity from excess funds in a Certificate Account, such Master
Servicer, Special Servicer, Trustee or other entity, as the case may be, will
be required to replace such funds in such Certificate Account on any future
Distribution Date to the extent that funds in such Certificate Account on such
Distribution Date are less than payments required to be made to the related
series of Certificateholders on such date. If so specified in the related
Prospectus Supplement, the obligation of the Master Servicer, Special Servicer,
Trustee or other entity to make advances may be secured by a cash advance
reserve fund or a surety bond. If applicable, information regarding the
characteristics of, and the identity of any obligor on, any such surety bond,
will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement,
any entity making advances will be entitled to receive interest thereon for the
period that such advances are outstanding at the rate specified in such
Prospectus Supplement, and such entity will be entitled to payment of such
interest periodically from general collections
38
<PAGE>
on the Mortgage Loans in the related Trust Fund prior to any payment to the
related series of Certificateholders or as otherwise provided in the related
Pooling Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling Agreement or of a party
to the related MBS Agreement.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, together with the distribution to the
holders of each class of the Offered Certificates of a series, the Master
Servicer or Trustee, as provided in the related Prospectus Supplement, will
forward to each such holder, a statement (a "Distribution Date Statement")
that, unless otherwise provided in the related Prospectus Supplement, will set
forth, among other things, in each case to the extent applicable:
(i) the amount of such distribution to holders of such class of
Offered Certificates that was applied to reduce the Certificate Balance
thereof;
(ii) the amount of such distribution to holders of such class of
Offered Certificates that is allocable to Accrued Certificate Interest;
(iii) the amount, if any, of such distribution to holders of such
class of Offered Certificates that is allocable to (A) Prepayment Premiums and
(B) payments on account of Equity Participations;
(iv) the amount, if any, by which such distribution is less than the
amounts to which holders of such class of Offered Certificates are entitled;
(v) if the related Trust Fund includes Mortgage Loans, the aggregate
amount of advances included in such distribution;
(vi) if the related Trust Fund includes Mortgage Loans, the amount of
servicing compensation received by the related Master Servicer (and, if payable
directly out of the related Trust Fund, by any Special Servicer and any
Sub-Servicer) and such other customary information as the reporting party deems
necessary or desirable, or that a Certificateholder reasonably requests, to
enable Certificateholders to prepare their tax returns;
(vii) information regarding the aggregate principal balance of the
related Mortgage Assets on or about such Distribution Date;
(viii) if the related Trust Fund includes Mortgage Loans, information
regarding the number and aggregate principal balance of such Mortgage Loans
that are delinquent in varying degrees (including specific indentification of
Mortgage Loans that are more than 60 days delinquent or in foreclosure;
(ix) if the related Trust Fund includes Mortgage Loans, information
regarding the aggregate amount of losses incurred and principal prepayments
made with respect to such Mortgage Loans during the related Prepayment Period
(that is, the specified period, generally equal in length to the time period
between Distribution Dates, during which prepayments and other unscheduled
collections on the Mortgage Loans in the related Trust Fund must be received in
order to be distributed on a particular Distribution Date);
(x) the Certificate Balance or Notional Amount, as the case may be, of
each class of Certificates (including any class of Certificates not offered
hereby) at the close of business on such Distribution Date, separately
identifying any reduction in such Certificate Balance or Notional Amount due to
the allocation of any losses in respect of the related Mortgage Assets, any
increase in such Certificate Balance or Notional Amount due to the allocation
of any negative amortization in respect of the related Mortgage Assets and any
increase in the Certificate Balance of a class of Accrual Certificates, if any,
in the event that Accrued Certificate Interest has been added to such balance;
39
<PAGE>
(xi) 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;
(xii) the amount deposited in or withdrawn from any reserve fund on
such Distribution Date, and the amount remaining on deposit in such reserve
fund as of the close of business on such Distribution Date;
(xiii) if the related Trust Fund includes one or more instruments of
Credit Support, such as a letter of credit, an insurance policy and/or a surety
bond, the amount of coverage under each such instrument as of the close of
business on such Distribution Date; and
(xiv) to the extent not otherwise reflected through the information
furnished pursuant to subclauses (x) and (xiii) above, the amount of Credit
Support being afforded by any classes of Subordinate Certificates.
In the case of information furnished pursuant to subclauses (i)-(iii)
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 Certificates may describe additional information to be included in reports
to the holders of the Offered Certificates of such series.
Within a reasonable period of time after the end of each calendar
year, the Master Servicer or Trustee for a series of Certificates, 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 of such series a statement
containing the information set forth in subclauses (i)-(iii) 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 MBS, 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 MBS will depend on the reports received with respect to
such MBS. In such cases, the related Prospectus Supplement will describe the
loan-specific information to be included in the Distribution Date Statements
that will be forwarded to the holders of the Offered Certificates of that
series in connection with distributions made to them.
VOTING RIGHTS
The voting rights evidenced by each series of Certificates (as to such
series, the "Voting Rights") will be allocated among the respective classes of
such series in the manner described in the related Prospectus Supplement.
Certificateholders will generally not have a right to vote, except
with respect to required consents to certain amendments to the related Pooling
Agreement and as otherwise specified in the related Prospectus Supplement. See
"Description of the Pooling Agreements--Amendment". The holders of specified
amounts of Certificates of a particular series will have the right to act as a
group to remove the related Trustee and also upon the occurrence of certain
events which if continuing would constitute an Event of Default on the part of
the related 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 following (i) the final payment or other
liquidation of the last Mortgage Asset subject thereto or the disposition of
all property acquired upon foreclosure of any Mortgage Loan subject thereto and
(ii) the payment to the Certificateholders of that series of all amounts
required to be paid to them pursuant to such Pooling Agreement. Written notice
of termination
40
<PAGE>
of a Pooling Agreement will be given to each Certificateholder of the related
series, and the final distribution will be made only upon presentation and
surrender of the Certificates of such series at the location to be specified in
the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the
repurchase of the Mortgage Assets in the related Trust Fund by the party or
parties specified therein, under the circumstances and in the manner set forth
therein. If so provided in the related Prospectus Supplement, upon the
reduction of the Certificate Balance of a specified class or classes of
Certificates by a specified percentage or amount, a party designated therein
may be authorized or required to solicit bids for the purchase of all the
Mortgage Assets of the related Trust Fund, or of a sufficient portion of such
Mortgage Assets to retire such class or classes, under the circumstances and in
the manner set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the Prospectus Supplement for a series of
Certificates, one or more classes of the Offered Certificates of such series
will be offered in book-entry format through the facilities of The Depository
Trust Company ("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 Exchange Act. DTC
was created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic computerized book-entry
changes in their accounts, thereby eliminating the need for physical movement
of securities certificates. "Direct Participants", which maintain accounts with
DTC, include securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. DTC is owned
by a number of its Direct Participants and by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc. Access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Direct Participant, either directly or
indirectly ("Indirect Participants"). The rules applicable to DTC and its
Participants are on file with the Commission.
Purchases of Book-Entry Certificates under the DTC system must be made
by or through Direct Participants, which will receive a credit for the
Book-Entry Certificates on DTC's records. The ownership interest of each actual
purchaser of a Book-Entry Certificate (a "Certificate Owner") is in turn to be
recorded on the Direct and Indirect Participants' records. Certificate Owners
will not receive written confirmation from DTC of their purchases, but
Certificate Owners are expected to receive written confirmations providing
details of such transactions, as well as periodic statements of their holdings,
from the Direct or Indirect Participant through which each Certificate Owner
entered into the transaction. Transfers of ownership interest in the Book-Entry
Certificates are to 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.
To facilitate subsequent transfer, all Offered Certificates deposited
by Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co. The deposit of Offered Certificates with DTC and their
registration with Cede & Co. effect no change in beneficial ownership. DTC has
no knowledge of the actual Certificate Owners of the Book-Entry Certificates;
DTC's records reflect only the identity of the Direct Participants to whose
accounts such Certificates are credited, which may or may not be the
Certificate Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
41
<PAGE>
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Certificate Owners will be governed
by arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time.
Distributions on the Book-Entry Certificates will be made to DTC.
DTC's practice is to credit Direct Participants' accounts on the related
Distribution Date in accordance with their respective holdings shown on DTC's
records unless DTC has reason to believe that it will not receive payment on
such date. Disbursement of such distributions by Participants to Certificate
Owners will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form or
registered in "street name", and will be the responsibility of each such
Participant (and not of DTC, the Depositor or any Trustee or Master Servicer),
subject to any statutory or regulatory requirements as may be in effect from
time to time. Under a book-entry system, Certificate Owners may receive
payments after the related Distribution Date.
Unless otherwise provided in the related Prospectus Supplement, the
only "Certificateholder" (as such term is used in the related Pooling
Agreement) will be the nominee of DTC, and the Certificate Owners will not be
recognized as Certificateholders under the Pooling Agreement. Certificate
Owners will be permitted to exercise the rights of Certificateholders under the
related Pooling Agreement only indirectly through the Participants who in turn
will exercise their rights through DTC. The Depositor is informed that DTC will
take action permitted to be taken by a Certificateholder under a Pooling
Agreement only at the direction of one or more Participants to whose account
with DTC interests in the Book-Entry Certificates are credited.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain Certificate Owners, the ability of
a Certificate Owner to pledge its interest in Book-Entry Certificates to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of its interest in Book-Entry Certificates, may be
limited due to the lack of a physical certificate evidencing such interest.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued as Definitive
Certificates to Certificate Owners or their nominees, rather than to DTC or its
nominee, only if (i) the Depositor advises the Trustee in writing that DTC is
no longer willing or able to discharge properly 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 for the related series
or other designated party will be required to issue to the Certificate Owners
identified in such instructions the Definitive Certificates to which they are
entitled, and thereafter the holders of such Definitive Certificates will be
recognized as Certificateholders under the related Pooling Agreement.
DESCRIPTION OF THE POOLING AGREEMENTS
GENERAL
The Certificates of each series will be issued pursuant to a pooling
and servicing agreement or other agreement specified in the related Prospectus
Supplement (in either case, a "Pooling Agreement"). In general, the parties to
a Pooling Agreement will include the Depositor, the Trustee, the Master
Servicer and, in some cases, a Special Servicer appointed as of the date of the
Pooling Agreement. However, a Pooling Agreement may include a Mortgage Asset
Seller as a party, and a Pooling Agreement that relates to a Trust Fund that
consists solely of MBS may not include the Master Servicer or other servicer as
a party. All parties to each Pooling Agreement under which Certificates of a
series are issued will be identified in the related Prospectus Supplement. If
so specified in the related Prospectus Supplement, an affiliate of the
Depositor, or the Mortgage Asset Seller or an affiliate thereof, may perform
the functions of Master Servicer or Special Servicer. Any party to a Pooling
Agreement may own Certificates issued thereunder; however, except with respect
to required consents to certain amendments to a Pooling Agreement,
42
<PAGE>
Certificates issued thereunder that are held by the Master Servicer or a
Special Servicer for the related series will not be allocated Voting Rights.
A form of a pooling and servicing agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
However, the provisions of each Pooling Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the
related Trust Fund. The following summaries describe certain provisions that
may appear in a Pooling Agreement under which Certificates that evidence
interests in Mortgage Loans will be issued. The Prospectus Supplement for a
series of Certificates will describe any provision of the related Pooling
Agreement that materially differs from the description thereof contained in
this Prospectus and, if the related Trust Fund includes MBS, will summarize all
of the material provisions of the related Pooling Agreement. The summaries
herein do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all of the provisions of the Pooling Agreement
for each series of Certificates and the description of such provisions in the
related Prospectus Supplement. As used herein with respect to any series, the
term "Certificate" refers to all of the Certificates of that series, whether or
not offered hereby and by the related Prospectus Supplement, unless the context
otherwise requires. The Depositor will provide a copy of the Pooling Agreement
(without exhibits) that relates to any series of Certificates without charge
upon written request of a holder of a Certificate of such series addressed to
Bear Stearns Commercial Mortgage Securities Inc., 245 Park Avenue, New York,
New York 10167, Attention:
James G. Reichek.
ASSIGNMENT OF MORTGAGE LOANS; REPURCHASES
At the time of issuance of any series of Certificates, the Depositor
will assign (or cause to be assigned) to the designated Trustee the Mortgage
Loans to be included in the related Trust Fund, together with, unless otherwise
specified in the related Prospectus Supplement, all principal and interest to
be received on or with respect to such Mortgage Loans after the Cut-off Date,
other than principal and interest due on or before the Cut-off Date. The
Trustee will, concurrently with such assignment, deliver the Certificates to or
at the direction of the Depositor in exchange for the Mortgage Loans and the
other assets to be included in the Trust Fund for such series. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the related
Pooling Agreement. Such schedule generally will include detailed information
that pertains to each Mortgage Loan included in the related Trust Fund, which
information will typically include the address of the related Mortgaged
Property and type of such property; the Mortgage Rate and, if applicable, the
applicable index, gross margin, adjustment date and any rate cap information;
the original and remaining term to maturity; the original amortization term;
and the original and outstanding principal balance.
With respect to each Mortgage Loan to be included in a Trust Fund, the
Depositor will deliver (or cause to be delivered) to the related Trustee (or to
a custodian appointed by the Trustee) certain loan documents which, unless
otherwise specified in the related Prospectus Supplement, will include the
original Mortgage Note endorsed, without recourse, to the order of the Trustee,
the original Mortgage (or a certified copy thereof) with evidence of recording
indicated thereon and an assignment of the Mortgage to the Trustee in
recordable form. Unless otherwise provided in the Prospectus Supplement for a
series of Certificates, the related Pooling Agreement will require that the
Depositor or another party thereto promptly cause each such assignment of
Mortgage to be recorded in the appropriate public office for real property
records.
The Trustee (or a custodian appointed by the Trustee) for a series of
Certificates will be required to review the Mortgage Loan documents delivered
to it within a specified period of days after receipt thereof, and the Trustee
(or such custodian) will hold such documents in trust for the benefit of the
Certificateholders of such series. Unless otherwise specified in the related
Prospectus Supplement, if any such document is found to be missing or
defective, and such omission or defect, as the case may be, materially and
adversely affects the interests of the Certificateholders of the related
series, the Trustee (or such custodian) will be required to notify the Master
Servicer and the Depositor, and one of such persons will be required to notify
the relevant Mortgage Asset Seller. In that case, and if the Mortgage Asset
Seller cannot deliver the document or cure the defect within a specified number
of days after receipt of such notice, then, except as otherwise specified below
or in the related Prospectus Supplement, the Mortgage Asset Seller will be
obligated to repurchase the related Mortgage Loan from the Trustee at a price
that will be specified in the related Prospectus Supplement. If so provided in
the Prospectus Supplement for a series of Certificates, a Mortgage
43
<PAGE>
Asset Seller, in lieu of repurchasing a Mortgage Loan as to which there is
missing or defective loan documentation, will have the option, exercisable upon
certain conditions and/or within a specified period after initial issuance of
such series of Certificates, to replace such Mortgage Loan with one or more
other mortgage loans, in accordance with standards that will be described in
the Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, this repurchase or substitution obligation will constitute the sole
remedy to holders of the Certificates of any series or to the related Trustee
on their behalf for missing or defective loan documentation and neither the
Depositor nor, unless it is the Mortgage Asset Seller, the Master Servicer will
be obligated to purchase or replace a Mortgage Loan if a Mortgage Asset Seller
defaults on its obligation to do so. Notwithstanding the foregoing, if a
document has not been delivered to the related Trustee (or to a custodian
appointed by the Trustee) because such document has been submitted for
recording, and neither such document nor a certified copy thereof, in either
case with evidence of recording thereon, can be obtained because of delays on
the part of the applicable recording office, then, unless otherwise specified
in the related Prospectus Supplement, the Mortgage Asset Seller will not be
required to repurchase or replace the affected Mortgage Loan on the basis of
such missing document so long as it continues in good faith to attempt to
obtain such document or such certified copy.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, the Depositor will, with respect to each Mortgage Loan in the
related Trust Fund, make or assign, or cause to be made or assigned, certain
representations and warranties (the person making such representations and
warranties, the "Warranting Party") covering, by way of example: (i) the
accuracy of the information set forth for such Mortgage Loan on the schedule of
Mortgage Loans appearing as an exhibit to the related Pooling Agreement; (ii)
the enforceability of the related Mortgage Note and Mortgage and the existence
of title insurance insuring the lien priority of the related Mortgage; (iii)
the Warranting Party's title to the Mortgage Loan and the authority of the
Warranting Party to sell the Mortgage Loan; and (iv) the payment status of the
Mortgage Loan. It is expected that in most cases the Warranting Party will be
the Mortgage Asset Seller; however, the Warranting Party may also be an
affiliate of the Mortgage Asset Seller, the Depositor or an affiliate of the
Depositor, the Master Servicer, a Special Servicer or another person acceptable
to the Depositor. The Warranting Party, if other than the Mortgage Asset
Seller, will be identified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will provide that the Master Servicer and/or Trustee will be
required to notify promptly any Warranting Party of any breach of any
representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Certificateholders of the
related series. If such Warranting Party cannot cure such breach within a
specified period following the date on which it was notified of such breach,
then, unless otherwise provided in the related Prospectus Supplement, it will
be obligated to repurchase such Mortgage Loan from the Trustee at a price that
will be specified in the related Prospectus Supplement. If so provided in the
Prospectus Supplement for a series of Certificates, a Warranting Party, in lieu
of repurchasing a Mortgage Loan as to which a breach has occurred, will have
the option, exercisable upon certain conditions and/or within a specified
period after initial issuance of such series of Certificates, to replace such
Mortgage Loan with one or more other mortgage loans, in accordance with
standards that will be described in the Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, this repurchase or substitution
obligation will constitute the sole remedy available to holders of the
Certificates of any series or to the related Trustee on their behalf for a
breach of representation and warranty by a Warranting Party and neither the
Depositor nor the Master Servicer, in either case unless it is the Warranting
Party, will be obligated to purchase or replace a Mortgage Loan if a Warranting
Party defaults on its obligation to do so.
In some cases, representations and warranties will have been made in
respect of a Mortgage Loan 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 the date of
issuance. The date as of which the representations and warranties regarding the
Mortgage Loans in any Trust Fund were made will be specified in the related
Prospectus Supplement.
44
<PAGE>
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer for any Trust Fund, directly or through
Sub-Servicers, will be required to make reasonable efforts to collect all
scheduled payments under the Mortgage Loans in such Trust Fund, and will be
required to follow such collection procedures as it would follow with respect
to mortgage loans that are comparable to the Mortgage Loans in such Trust Fund
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 such Trust Fund, (ii) applicable law and (iii) the
servicing standard specified in the related Pooling Agreement and Prospectus
Supplement (the "Servicing Standard").
The Master Servicer for any Trust Fund, directly or through
Sub-Servicers, will also be required to perform as to the Mortgage Loans in
such Trust Fund various other customary functions of a servicer of comparable
loans, including maintaining escrow or impound accounts, if required under the
related Pooling Agreement, for payment of taxes, insurance premiums, ground
rents and similar items, or otherwise monitoring the timely payment of those
items; attempting to collect delinquent payments; supervising foreclosures;
negotiating modifications; conducting property inspections on a periodic or
other basis; managing (or overseeing the management of) Mortgaged Properties
acquired on behalf of such Trust Fund through foreclosure, deed-in-lieu of
foreclosure or otherwise (each, an "REO Property"); and maintaining servicing
records relating to such Mortgage Loans. Unless otherwise specified in the
related Prospectus Supplement, the Master Servicer will be responsible for
filing and settling claims in respect of particular Mortgage Loans under any
applicable instrument of Credit Support. See "Description of Credit Support".
SUB-SERVICERS
The Master Servicer may delegate its servicing obligations in respect
of the Mortgage Loans serviced thereby to one or more third-party servicers
(each, a "Sub-Servicer"); provided that, unless otherwise specified in the
related Prospectus Supplement, such Master Servicer will remain obligated under
the related Pooling Agreement. A Sub-Servicer for any series of Certificates
may be an affiliate of the Depositor or Master Servicer. Unless otherwise
provided in the related Prospectus Supplement, each sub-servicing agreement
between the Master Servicer and a Sub-Servicer (a "Sub-Servicing Agreement")
will 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.
The Master Servicer will be required to monitor the performance of
Sub-Servicers retained by it and will have the right to remove a Sub-Servicer
retained by it at any time it considers such removal to be in the best
interests of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Pooling Agreement is sufficient to pay such fees. Each
Sub-Servicer will be reimbursed by the Master Servicer that retained it for
certain expenditures which it makes, generally to the same extent the Master
Servicer would be reimbursed under a Pooling Agreement. See "--Certificate
Account" and "--Servicing Compensation and Payment of Expenses".
SPECIAL SERVICERS
To the extent so specified in the related Prospectus Supplement, one
or more special servicers (each, a "Special Servicer") may be a party to the
related Pooling Agreement or may be appointed by the Master Servicer or another
specified party. A Special Servicer for any series of Certificates may be an
affiliate of the Depositor or the Master Servicer. A Special Servicer may be
entitled to any of the rights, and subject to any of the obligations, described
herein in respect of the Master Servicer. The related Prospectus Supplement
will describe the rights, obligations and compensation of any Special Servicer
for a particular Series of Certificates. The Master Servicer will be liable for
the performance of a Special Servicer only if, and to the extent, set forth in
the related Prospectus Supplement.
45
<PAGE>
CERTIFICATE ACCOUNT
General. The Master Servicer, the Trustee and/or a Special Servicer
will, as to each Trust Fund that includes Mortgage Loans, establish and
maintain or cause to be established and maintained one or more separate
accounts for the collection of payments on or in respect of such Mortgage Loans
(collectively, the "Certificate Account"), 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. A Certificate Account may be
maintained as an interest-bearing or a non-interest-bearing account and the
funds held therein may be invested pending each succeeding Distribution Date in
United States government securities and other obligations that are acceptable
to each Rating Agency that has rated any one or more classes of Certificates of
the related series ("Permitted Investments"). Unless otherwise provided in the
related Prospectus Supplement, any interest or other income earned on funds in
a Certificate Account will be paid to the related Master Servicer, Trustee or
Special Servicer (if any) as additional compensation. A Certificate Account may
be maintained with the related Master Servicer, Special Servicer or Mortgage
Asset Seller or with a depository institution that is an affiliate of any of
the foregoing or of the Depositor, provided that it complies with applicable
Rating Agency standards. If permitted by the applicable Rating Agency or
Agencies and so specified in the related Prospectus Supplement, a Certificate
Account may contain funds relating to more than one series of mortgage
pass-through certificates and may contain other funds representing payments on
mortgage loans owned by the related Master Servicer or Special Servicer (if
any) or serviced by either on behalf of others.
Deposits. Unless otherwise provided in the related Pooling Agreement
and described in the related Prospectus Supplement, the Master Servicer,
Trustee or Special Servicer will be required to deposit or cause to be
deposited in the Certificate Account for each Trust Fund that includes Mortgage
Loans, within a certain period following receipt (in the case of collections on
or in respect of the Mortgage Loans) or otherwise as provided in the related
Pooling Agreement, the following payments and collections received or 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 or any Special Servicer as its
servicing compensation or as compensation to the Trustee;
(iii) all proceeds received under any hazard, title or other insurance
policy that provides coverage with respect to a Mortgaged Property or the
related Mortgage Loan or in connection with the full or partial condemnation of
a Mortgaged Property (other than proceeds applied to the restoration of the
property or released to the related borrower in accordance with the customary
servicing practices of the Master Servicer (or, if applicable, a Special
Servicer) and/or the terms and conditions of the related Mortgage)
(collectively, "Insurance and Condemnation Proceeds") and all other amounts
received and retained in connection with the liquidation of defaulted Mortgage
Loans or property acquired in respect thereof, by foreclosure or otherwise
("Liquidation Proceeds"), together with the net operating income (less
reasonable reserves for future expenses) derived from the operation of any
Mortgaged Properties acquired by the Trust Fund through foreclosure or
otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Certificates as described
under "Description of Credit Support";
(v) any advances made as described under "Description of the
Certificates--Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements";
(vii) all proceeds of the purchase of any Mortgage Loan, or property
acquired in respect thereof, by the Depositor, any Mortgage Asset Seller or any
other specified person as described under "--Assignment of Mortgage
46
<PAGE>
Loans; Repurchases" and "--Representations and Warranties; Repurchases", all
proceeds of the purchase of any defaulted Mortgage Loan as described under
"--Realization Upon Defaulted Mortgage Loans", and all proceeds of any Mortgage
Asset purchased as described under "Description of the
Certificates--Termination" (all of the foregoing, also "Liquidation Proceeds");
(viii) any amounts paid by the Master Servicer to cover Prepayment
Interest Shortfalls arising out of the prepayment of Mortgage Loans as
described under "--Servicing Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or a Special Servicer, any
payments on account of modification or assumption fees, late payment charges,
Prepayment Premiums or Equity Participations with respect to the Mortgage
Loans;
(x) all payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance policy described
under "--Hazard Insurance Policies";
(xi) any amount required to be deposited by the Master Servicer or the
Trustee in connection with losses realized on investments for the benefit of
the Master Servicer or the Trustee, as the case may be, of funds held in the
Certificate Account; and
(xii) any other amounts required to be deposited in the Certificate
Account as provided in the related Pooling Agreement and described in the
related Prospectus Supplement.
Withdrawals. Unless otherwise provided in the related Pooling
Agreement and described in the related Prospectus Supplement, the Master
Servicer, Trustee or Special Servicer may make withdrawals from the Certificate
Account for each Trust Fund that includes Mortgage Loans for any of the
following purposes:
(i) to make distributions to the Certificateholders on each
Distribution Date;
(ii) to pay the Master Servicer, the Trustee or a Special Servicer any
servicing fees not previously retained thereby, such payment to be made out of
payments on the particular Mortgage Loans as to which such fees were earned;
(iii) to reimburse the Master Servicer, a Special Servicer, the
Trustee or any other specified person for any 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 that were
identified and applied by the Master Servicer or a Special Servicer, as
applicable, as late collections of interest on and principal of the particular
Mortgage Loans with respect to which the advances were made or out of amounts
drawn under any instrument of Credit Support with respect to such Mortgage
Loans;
(iv) to reimburse the Master Servicer, the Trustee 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 and
Condemnation 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 instrument of Credit Support with respect to such Mortgage
Loans and properties;
(v) to reimburse the Master Servicer, a Special Servicer, the Trustee
or other specified person for any advances described in clause (iii) above made
by it and/or any servicing expenses referred to in clause (iv) above incurred
by it that, in the good faith judgment of the Master Servicer, Special
Servicer, Trustee or other specified person, as applicable, will not be
recoverable from the amounts described in clauses (iii) and (iv), respectively,
such reimbursement to be made from amounts collected on other Mortgage Loans in
the same Trust Fund or, if and to the extent so provided by the related Pooling
Agreement and described in the related Prospectus Supplement, only from
47
<PAGE>
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;
(vi) if and to the extent described in the related Prospectus
Supplement, to pay the Master Servicer, a Special Servicer, the Trustee or any
other specified person interest accrued on the advances described in clause
(iii) above made by it and the servicing expenses described in clause (iv)
above incurred by it while such remain outstanding and unreimbursed;
(vii) 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";
(viii) to reimburse the Master Servicer, the Special 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";
(ix) if and to the extent described in the related Prospectus
Supplement, to pay the fees of Trustee;
(x) 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";
(xi) if and to the extent described in the related Prospectus
Supplement, to pay the fees of any provider of Credit Support;
(xii) if and to the extent described in the related Prospectus
Supplement, to reimburse prior draws on any instrument of Credit Support;
(xiii) to pay the Master Servicer, a Special Servicer or the Trustee,
as appropriate, interest and investment income earned in respect of amounts
held in the Certificate Account as additional compensation;
(xiv) 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;
(xv) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions, as and to the
extent described under "Certain Federal Income Tax Consequences--Federal Income
Tax Consequences for REMIC Certificates--Taxes That May Be Imposed on the REMIC
Pool";
(xvi) 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;
(xvii) to pay for the cost of various opinions of counsel obtained
pursuant to the related Pooling Agreement for the benefit of
Certificateholders;
(xviii) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xix) to clear and terminate the Certificate Account upon the
termination of the Trust Fund.
48
<PAGE>
MODIFICATIONS, WAIVERS AND AMENDMENTS OF MORTGAGE LOANS
The Master Servicer may agree to modify, waive or amend any term of
any Mortgage Loan serviced by it in a manner consistent with the applicable
Servicing Standard; provided that, unless otherwise set forth in the related
Prospectus Supplement, the modification, waiver or amendment (i) will not
affect the amount or timing of any scheduled payments of principal or interest
on the Mortgage Loan, (ii) will not, 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 and (iii) will not adversely affect
the coverage under any applicable instrument of Credit Support. Unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
also may agree to any other modification, waiver or amendment if, in its
judgment, (i) a material default on the Mortgage Loan has occurred or a payment
default is imminent, (ii) such modification, waiver or amendment is reasonably
likely to produce a greater recovery with respect to the Mortgage Loan, taking
into account the time value of money, than would liquidation and (iii) such
modification, waiver or amendment will not adversely affect the coverage under
any applicable instrument of Credit Support.
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 insurance premiums and to
otherwise maintain the related Mortgaged Property. In general, the Master
Servicer for a series of Certificates will be required to monitor any Mortgage
Loan in the related Trust Fund that is in default, evaluate whether the causes
of the default can be corrected over a reasonable period without significant
impairment of the value of the related Mortgaged Property, initiate corrective
action in cooperation with the borrower if cure is likely, inspect the related
Mortgaged Property and take such other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the Master
Servicer is able to assess the success of any such corrective action or the
need for additional initiatives.
The time within which the Master Servicer can make the initial
determination of appropriate action, evaluate the success of corrective action,
develop additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Certificateholders may vary considerably depending on the
particular Mortgage Loan, the Mortgaged Property, the borrower, the presence of
an acceptable party to assume the Mortgage Loan and the laws of the
jurisdiction in which the Mortgaged Property is located. If a borrower files a
bankruptcy petition, the Master Servicer may not be permitted to accelerate the
maturity of the related Mortgage Loan or to foreclose on the related Mortgaged
Property for a considerable period of time, and such Mortgage Loan may be
restructured in the resulting bankruptcy proceedings. See "Certain Legal
Aspects of Mortgage Loans".
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 the related series of Certificates a right of first refusal to
purchase from the Trust Fund, at a predetermined purchase price (which, if
insufficient to fully fund the entitlements of Certificateholders to principal
and interest thereon, will be specified in the related Prospectus Supplement),
any Mortgage Loan as to which a specified number of scheduled payments are
delinquent. In addition, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer may offer to sell any defaulted Mortgage Loan
if and when the Master Servicer determines, consistent with the applicable
Servicing Standard, that such a sale would produce a greater recovery, taking
into account the time value of money, than would liquidation of the related
Mortgaged Property. Unless otherwise provided in the related Prospectus
Supplement, the related Pooling Agreement will require that the Master Servicer
accept the highest cash bid received from any person (including itself, the
Depositor or any affiliate of either of them 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 against the related
Mortgaged Property, subject to the discussion below.
49
<PAGE>
If a default on a Mortgage Loan has occurred or, in the Master
Servicer's judgment, a payment default is imminent, the Master Servicer, on
behalf of the Trustee, may at any time institute foreclosure proceedings,
exercise any power of sale contained in the related Mortgage, obtain a deed in
lieu of foreclosure, or otherwise acquire title to the related Mortgaged
Property, by operation of law or otherwise, if such action is consistent with
the Servicing Standard. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer may not, however, acquire title to any
Mortgaged Property, have a receiver of rents appointed with respect to any
Mortgaged Property or take any other action with respect to any Mortgaged
Property that would cause the Trustee, for the benefit of the related series of
Certificateholders, 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 either:
(i) 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, taking into account the time
value of money, than not taking such actions; and
(ii) there are no circumstances or conditions present at the Mortgaged
Property that have resulted in any contamination for which investigation,
testing, monitoring, containment, clean-up or remediation could be required
under any applicable environmental laws and regulations or, if such
circumstances or conditions are present for which any such action could be
required, taking such actions with respect to the Mortgaged Property is
reasonably likely to produce a greater recovery, taking into account the time
value of money, than not taking such actions. See "Certain Legal Aspects of
Mortgage Loans--Environmental Risks".
Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which one or
more REMIC elections have been made, the Master Servicer (or a Special
Servicer), on behalf of the Trust Fund, will be required to sell the Mortgaged
Property within two years of acquisition, unless (i) the Internal Revenue
Service grants an extension of time to sell such property or (ii) the Trustee
receives an opinion of independent counsel to the effect that the holding of
the property by the Trust Fund for more than two years after its acquisition
will not result in the imposition of a tax on the Trust Fund or cause the Trust
Fund (or any designated portion thereof) to fail to qualify as a REMIC under
the Code at any time that any Certificate is outstanding. Subject to the
foregoing, the Master Servicer will generally be required to solicit bids for
any Mortgaged Property so acquired in such a manner as will be reasonably
likely to realize a fair price for such property. If the Trust Fund acquires
title to any Mortgaged Property, the Master Servicer, on behalf of the Trust
Fund, may retain an independent contractor to manage and operate such property.
The retention of an independent contractor, however, will not relieve the
Master Servicer of its obligation to manage such Mortgaged Property in a manner
consistent with the Servicing Standard.
If Liquidation Proceeds collected with respect to a defaulted Mortgage
Loan are less than the outstanding principal balance of the defaulted Mortgage
Loan plus interest accrued thereon plus the aggregate amount of reimbursable
expenses incurred by the Master Servicer in connection with such Mortgage Loan,
the Trust Fund will realize a loss in the amount of such shortfall. The Master
Servicer will be entitled to reimbursement out of 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 such that the proceeds, if
any, of the related hazard insurance policy are insufficient to restore fully
the damaged property, the Master Servicer will not be required to expend its
own funds to effect such restoration unless (and to the extent not otherwise
provided in the related Prospectus Supplement) it determines (i) that such
restoration will increase the proceeds to Certificateholders on liquidation of
the Mortgage Loan after reimbursement of the Master Servicer for its expenses
and (ii) that such expenses will be recoverable by it from related Insurance
and Condemnation Proceeds or Liquidation Proceeds.
50
<PAGE>
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will require the Master Servicer to cause each Mortgage Loan
borrower to maintain a hazard insurance policy that provides for such coverage
as is required under the related Mortgage or, if the Mortgage permits the
holder thereof to dictate to the borrower the insurance coverage to be
maintained on the related Mortgaged Property, such coverage as is consistent
with the requirements of the Servicing Standard. Unless otherwise specified in
the related Prospectus Supplement, such coverage generally will be in an amount
equal to the lesser of the principal balance owing on such Mortgage Loan and
the replacement cost of the related Mortgaged Property. The ability of the
Master Servicer to assure that hazard insurance proceeds are appropriately
applied may be dependent upon its being named as an additional insured under
any hazard insurance policy and under any other insurance policy referred to
below, or upon the extent to which information concerning covered losses is
furnished by borrowers. All amounts collected by the Master Servicer under any
such policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the borrower in accordance with the
Master Servicer's normal servicing procedures and/or to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
related Certificate Account. The Pooling Agreement may provide that the Master
Servicer may satisfy its obligation to cause each borrower to maintain such a
hazard insurance policy by maintaining a blanket policy insuring against hazard
losses on all of the Mortgage Loans in a Trust Fund. If such blanket policy
contains a deductible clause, the Master Servicer will be required, in the
event of a casualty covered by such blanket policy, to deposit in the related
Certificate Account all sums that would have been deposited therein but for
such deductible clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies covering the Mortgaged Properties will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms, and therefore will not contain identical
terms and conditions, most such policies typically do not cover any physical
damage resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds of
risks. Accordingly, a Mortgaged Property may not be insured for losses arising
from any such cause unless the related Mortgage specifically requires, or
permits the holder thereof to require, such coverage.
The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clauses generally provide that the
insurer's liability in the event of partial loss does not exceed the lesser of
(i) the replacement cost of the improvements less physical depreciation and
(ii) such proportion of the loss as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such improvements.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale or
other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage Loan
upon the creation of any other lien or encumbrance upon the Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will determine whether to exercise any right the Trustee may have
under any such provision in a manner consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will be entitled to retain as additional servicing compensation any
fee collected in connection with the permitted transfer of a Mortgaged
Property. See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale and
Due-on-Encumbrance".
51
<PAGE>
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a specified portion
of the interest payments on each Mortgage Loan in the related Trust Fund.
Because 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, the Master
Servicer may be required, to the extent provided in the related Prospectus
Supplement, to pay from amounts that represent its servicing compensation
certain expenses incurred in connection with the administration of the related
Trust Fund, including, without limitation, payment of the fees and
disbursements of independent accountants and payment of expenses incurred in
connection with distributions and reports to Certificateholders. Certain other
expenses, including certain expenses related to Mortgage Loan defaults and
liquidations and, to the extent so provided in the related Prospectus
Supplement, interest on such expenses at the rate specified therein, and the
fees of any Special Servicer, may be required to be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement,
the Master Servicer may be required to apply a portion of the servicing
compensation otherwise payable to it in respect of any period to Prepayment
Interest Shortfalls. See "Yield and Maturity Considerations--Certain Shortfalls
in Collections of Interest".
EVIDENCE AS TO COMPLIANCE
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will require, on or before a specified date in each year, the
Master Servicer to cause a firm of independent public accountants to furnish to
the Trustee a statement to the effect that, on the basis of the examination by
such firm conducted substantially in compliance with either the Uniform Single
Audit Program for Mortgage Bankers or the Audit Program for Mortgages serviced
for FHLMC, the servicing by or on behalf of the Master Servicer of mortgage
loans under pooling and servicing agreements substantially similar to each
other (which may include such 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 the firm, either the Audit Program
for Mortgages serviced for FHLMC, or paragraph 4 of the Uniform Single Audit
Program for Mortgage Bankers, requires it to report.
Each Pooling Agreement will also require, on or before a specified
date in each year, the Master Servicer to furnish to the Trustee 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 such Pooling
Agreement throughout the preceding calendar year or other specified twelve
month period.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The entity serving as Master Servicer under a Pooling Agreement may be
an affiliate of the Depositor and may have other normal business relationships
with the Depositor or the Depositor's affiliates. Unless otherwise specified in
the Prospectus Supplement for a series of Certificates, the related Pooling
Agreement will permit the Master Servicer to resign from its obligations
thereunder only upon (a) the appointment of, and the acceptance of such
appointment by, a successor thereto and receipt by the Trustee of written
confirmation from each applicable Rating Agency that such resignation and
appointment will not have an adverse effect on the rating assigned by such
Rating Agency to any class of Certificates of such series or (b) 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.
52
<PAGE>
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Master Servicer's obligations and duties under the
Pooling Agreement. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer for each Trust Fund will be required to
maintain a fidelity bond and errors and omissions policy or their equivalent
that provides coverage against losses that may be sustained as a result of an
officer's or employee's misappropriation of funds or errors and omissions,
subject to certain limitations as to amount of coverage, deductible amounts,
conditions, exclusions and exceptions permitted by the related Pooling
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will further provide that none of the Master Servicer, the
Depositor or 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 or any such person will be protected against any breach of a
representation, warranty or covenant made in such Pooling Agreement, or against
any expense or liability that such person is specifically required to bear
pursuant to the terms of such Pooling Agreement, or against any liability that
would otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of obligations or duties thereunder or by reason
of reckless disregard of such obligations and duties. Unless otherwise
specified in the related Prospectus Supplement, each Pooling Agreement will
further provide that the Master Servicer, the Depositor and any director,
officer, employee or agent of either of them will be entitled to
indemnification by the related Trust Fund against any loss, liability or
expense incurred in connection with any legal action that relates to such
Pooling Agreement or the related series of Certificates; provided, however,
that such indemnification will not extend to any loss, liability or expense (i)
that such person is specifically required to bear pursuant to the terms of such
agreement, or is incidental to the performance of obligations and duties
thereunder and is not otherwise reimbursable pursuant to such Pooling
Agreement; (ii) incurred in connection with any breach of a representation,
warranty or covenant made in such Pooling Agreement; (iii) incurred by reason
of misfeasance, bad faith or gross negligence in the performance of obligations
or duties under such Pooling Agreement, or by reason of reckless disregard of
such obligations or duties; or (iv) incurred in connection with any violation
of any state or federal securities law. In addition, each Pooling Agreement
will provide that neither the Master Servicer nor the Depositor will be under
any obligation to appear in, prosecute or defend any legal action that is not
incidental to its respective responsibilities under the Pooling Agreement and
that in its opinion may involve it in any expense or liability. However, each
of the Master Servicer and the Depositor will be permitted, in the exercise of
its discretion, to undertake any such action that it may deem necessary or
desirable with respect to the enforcement and/or protection of the rights and
duties of the parties to the Pooling Agreement and the interests of the related
series of 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 related series of Certificateholders, and the
Master Servicer or the Depositor, as the case may be, will be entitled to
charge the related Certificate Account therefor.
Any person into which the Master Servicer or the Depositor may be
merged or consolidated, or any person resulting from any merger or
consolidation to which the Master Servicer or the Depositor is a party, or any
person succeeding to the business of the Master Servicer or the Depositor, will
be the successor of the Master Servicer or the Depositor, as the case may be,
under the related Pooling Agreement.
EVENTS OF DEFAULT
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, "Events of Default" under the related Pooling Agreement will
include (i) any failure by the Master Servicer to distribute or cause to be
distributed to the Certificateholders of such series, or to remit to the
Trustee for distribution to such Certificateholders, any amount required to be
so distributed or remitted, which failure continues unremedied for five days
after written notice thereof has been given to the Master Servicer by the
Trustee or the Depositor, or to the Master Servicer, the Depositor and the
Trustee by Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series; (ii) any failure by the Master Servicer duly to observe or
perform in any material respect any of its other covenants or obligations under
the related Pooling Agreement, which failure continues unremedied for sixty
days after written notice thereof has been given to the Master Servicer by the
Trustee or the Depositor, or to the Master Servicer, the Depositor and the
Trustee by Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series;
53
<PAGE>
and (iii) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities, or similar proceedings in respect of or relating to the
Master Servicer and certain actions by or on behalf of the Master Servicer
indicating its insolvency or inability to pay its obligations. Material
variations to the foregoing Events of Default (other than to add thereto or
shorten cure periods or eliminate notice requirements) will be specified in the
related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
If an Event of Default occurs with respect to the Master Servicer
under a Pooling Agreement, then, in each and every such case, so long as the
Event of Default remains unremedied, the Depositor or the Trustee will be
authorized, and at the direction of Certificateholders of the related series
entitled to not less than 51% (or such other percentage specified in the
related Prospectus Supplement) of the Voting Rights for such series, the
Trustee will be required, to terminate all of the rights and obligations of the
Master Servicer as master servicer under the Pooling Agreement, whereupon the
Trustee will succeed to all of the responsibilities, duties and liabilities of
the Master Servicer under the Pooling Agreement (except that if the Master
Servicer is required to make advances thereunder regarding delinquent Mortgage
Loans, but the Trustee is prohibited by law from obligating itself to do so, or
if the related Prospectus Supplement so specifies, the Trustee will not be
obligated to make such advances) and will be entitled to similar compensation
arrangements. Unless otherwise specified in the related Prospectus Supplement,
if the Trustee is unwilling or unable so to act, it may (or, at the written
request of Certificateholders of the related series entitled to not less than
51% (or such other percentage specified in the related Prospectus Supplement)
of the Voting Rights for such series, it will be required to) appoint, or
petition a court of competent jurisdiction to appoint, a loan servicing
institution that (unless otherwise provided in the related Prospectus
Supplement) is acceptable to each applicable Rating Agency to act as successor
to the Master Servicer under the Pooling Agreement. Pending such appointment,
the Trustee will be obligated to act in such capacity.
No Certificateholder will have the right under any Pooling Agreement
to institute any proceeding with respect thereto unless such holder previously
has given to the Trustee written notice of default and unless
Certificateholders of the same series entitled to not less than 25% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such 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 sixty days (or
such other period specified in the related Prospectus Supplement) shall have
neglected or refused to institute any such proceeding. The Trustee, however,
will be under no obligation to exercise any of the trusts or powers vested in
it by the related 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 respective parties
thereto, without the consent of any of the holders of the related series of
Certificates, (i) to cure any ambiguity, (ii) to correct a defective provision
therein or to correct, modify or supplement any provision therein that may be
inconsistent with any other provision therein, (iii) to add any other
provisions with respect to matters or questions arising under the Pooling
Agreement that are not inconsistent with the provisions thereof, (iv) to comply
with any requirements imposed by the Code, or (v) for any other purpose;
provided that such amendment (other than an amendment for the specific purpose
referred to 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; and provided further that
such amendment (other than an amendment for one of the specific purposes
referred to in clauses (i) through (iv) above) must be acceptable to each
applicable Rating Agency. Unless otherwise specified in the related Prospectus
Supplement, each Pooling Agreement may also be amended by the respective
parties thereto, with the consent of the holders of the related series of
Certificates entitled to not less than 51% (or such other percentage specified
in the related Prospectus Supplement) of the Voting Rights for such series
allocated to the affected classes, for any purpose; provided that, unless
otherwise specified in the related Prospectus Supplement, no such amendment may
(i) reduce in any manner the amount of, or
54
<PAGE>
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, (ii) 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 (i), without the consent of the holders of all
Certificates of such class or (iii) modify the provisions of the Pooling
Agreement described in this paragraph without the consent of the holders of all
Certificates of the related series. However, unless otherwise specified in the
related Prospectus Supplement, the Trustee will be prohibited from consenting
to any amendment of a Pooling Agreement pursuant to which one or more REMIC
elections are to be or have 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 (or designated portion thereof) to fail to qualify as a
REMIC at any time that the related Certificates are outstanding.
LIST OF CERTIFICATEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, upon
written request of three or more Certificateholders 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 Certificateholders access during normal
business hours to the most recent list of Certificateholders of that series
held by such person. If such list is of a date more than 90 days prior to the
date of receipt of such Certificateholders' request, then such person, if not
the registrar for such series of Certificates, will be required to request from
such registrar a current list and to afford such requesting Certificateholders
access thereto promptly upon receipt.
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 or Special Servicer and its affiliates. If and to the extent specified
under the related Pooling Agreement, certain functions of the Trustee may be
performed by a fiscal agent under certain circumstances.
DUTIES OF THE TRUSTEE
The Trustee for each series of Certificates will make no
representation as to the validity or sufficiency of the related Pooling
Agreement, the Certificates or any underlying Mortgage Loan or related document
and will not be accountable for the use or application by or on behalf of the
Master Servicer for such series of any funds paid to the Master Servicer or any
Special Servicer in respect of the Certificates or the underlying Mortgage
Loans, or any funds deposited into or withdrawn from the Certificate Account or
any other account for such series by or on behalf of the Master Servicer or any
Special Servicer. If no Event of Default has occurred and is continuing, the
Trustee for each series of Certificates will be required to perform only those
duties specifically required under the related Pooling Agreement. However, upon
receipt of any of the various certificates, reports or other instruments
required to be furnished to it pursuant to the related Pooling Agreement, a
Trustee will be required to examine such documents and to determine whether
they conform to the requirements of such agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement,
the fees and normal disbursements of any Trustee may be the expense of the
related Master Servicer or other specified person or may be required to be
borne by the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, 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 related Pooling Agreement, or to
55
<PAGE>
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless disregard of
such obligations or duties, or as may arise from a breach of any
representation, warranty or covenant of the Trustee made therein.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to execute any of its
trusts or powers under the related Pooling Agreement or perform any of its
duties thereunder either directly or by or through agents or attorneys, and the
Trustee will not be responsible for any willful misconduct or gross negligence
on the part of any such agent or attorney appointed by it with due care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
A Trustee will be permitted at any time to resign from its obligations
and duties under the related Pooling Agreement by giving written notice thereof
to the Depositor. Upon receiving such notice of resignation, the Depositor (or
such other person as may be specified in the related Prospectus Supplement)
will be required to use its best efforts to promptly appoint a successor
trustee. If no successor trustee shall have accepted an appointment within a
specified period after the giving of such notice of resignation, the resigning
Trustee may petition any court of competent jurisdiction to appoint a successor
trustee.
If at any time a Trustee ceases to be eligible to continue as such
under the related Pooling Agreement, or if at any time the Trustee becomes
incapable of acting, or if certain events of (or proceedings in respect of)
bankruptcy or insolvency occur with respect to the Trustee, the Depositor will
be authorized to remove the Trustee and appoint a successor trustee. In
addition, holders of the Certificates of any series entitled to at least 51%
(or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights for such series may at any time (with or without cause)
remove the Trustee under the related Pooling Agreement and appoint a successor
trustee.
Any resignation or removal of a 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 letters of credit, overcollateralization,
the subordination of one or more classes of Certificates, insurance policies,
surety bonds, guarantees or reserve funds, or any combination of the foregoing.
If so provided in the related Prospectus Supplement, any instrument of Credit
Support may provide credit enhancement for more than one series of Certificates
to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Certificates, the Credit Support will not provide protection against
all risks of loss and will not guarantee payment to Certificateholders of all
amounts to which they are entitled under the related Pooling Agreement. If
losses or shortfalls occur that exceed the amount covered by the related Credit
Support or that are not covered by such Credit Support, Certificateholders will
bear their allocable share of deficiencies. Moreover, if an instrument of
Credit Support covers more than one series of Certificates, holders of
Certificates of one series will be subject to the risk that such Credit Support
will be exhausted by the claims of the holders of Certificates of one or more
other series before the former receive their intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature and
amount of coverage under such Credit Support, (ii) any conditions to payment
thereunder not otherwise described herein, (iii) the conditions (if any) under
which the amount of coverage under such Credit Support may be reduced and under
which such Credit Support may be terminated or replaced and (iv) the material
provisions relating to such Credit
56
<PAGE>
Support. Additionally, the related Prospectus Supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including (i) a brief description of its principal business activities, (ii)
its principal place of business, place of incorporation and the jurisdiction
under which it is chartered or licensed to do business, (iii) if applicable,
the identity of regulatory agencies that exercise primary jurisdiction over the
conduct of its business and (iv) its total assets, and its stockholders' equity
or policyholders' surplus, if applicable, as of a date that will be specified
in the Prospectus Supplement. See "Risk Factors--Credit Support Limitations".
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more
classes of Certificates of a series may be Subordinate Certificates. To the
extent specified in the related Prospectus Supplement, the rights of the
holders of Subordinate Certificates to receive distributions from the
Certificate Account on any Distribution Date will be subordinated to the
corresponding rights of the holders of Senior Certificates. If so provided in
the related Prospectus Supplement, the subordination of a class may apply only
in the event of (or may be limited to) certain types of losses or shortfalls.
The related Prospectus Supplement will set forth information concerning the
method and amount of subordination provided by a class or classes of
Subordinate Certificates in a series and the circumstances under which such
subordination will be 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 the
related 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
deemed by the Depositor to be material, a copy of each such instrument will
accompany the Current Report on Form 8-K to be filed with the Commission within
15 days of issuance of the Certificates of the related series.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by one or more letters of credit,
issued by a bank or financial institution specified in such Prospectus
Supplement (the "L/C Bank"). Under a letter of credit, the L/C Bank will be
obligated to honor draws thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, generally equal to a percentage specified in
the related Prospectus Supplement of the aggregate principal balance of the
Mortgage Assets on the related Cut-off Date or of the initial aggregate
Certificate Balance of one or more classes of Certificates. If so specified in
the related Prospectus Supplement, the letter of credit may permit draws only
in the event of certain types of losses and shortfalls. The amount available
under the letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each series of Certificates will expire at the earlier of
the date specified in the related Prospectus Supplement or the termination of
the Trust Fund. A copy of any such letter of credit will accompany the Current
Report on Form 8-K to be filed with the Commission within 15 days of issuance
of the Certificates of the related series.
57
<PAGE>
CERTIFICATE INSURANCE AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by insurance policies and/or surety
bonds provided by one or more insurance companies or sureties. Such instruments
may cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest and/or full distributions of principal
on the basis of a schedule of principal distributions set forth in or
determined in the manner specified in the related Prospectus Supplement. The
related Prospectus Supplement will describe any limitations on the draws that
may be made under any such instrument. A copy of any such instrument will
accompany the Current Report on Form 8-K to be filed with the Commission within
15 days of issuance of the Certificates of the related series.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered (to the extent of available funds) by
one or more reserve funds in which cash, a letter of credit, Permitted
Investments, a demand note or a combination thereof will be deposited, in the
amounts specified in such Prospectus Supplement. If so specified in the related
Prospectus Supplement, the reserve fund for a series may also be funded over
time by a specified amount of the collections received on the related Mortgage
Assets.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, reserve funds may be
established to provide protection only against certain types of losses and
shortfalls. Following each Distribution Date, amounts in a reserve fund in
excess of any amount required to be maintained therein may be released from the
reserve fund under the conditions and to the extent specified in the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, amounts
deposited in any reserve fund will be invested in Permitted Investments. Unless
otherwise specified in the related Prospectus Supplement, any reinvestment
income or other gain from such investments will be credited to the related
reserve fund for such series, and any loss resulting from such investments will
be charged to such reserve fund. However, such income may be payable to any
related Master Servicer or another service provider as additional compensation
for its services. The reserve fund, if any, for a series will not be a part of
the Trust Fund unless otherwise specified in the related Prospectus Supplement.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of
Certificates, any MBS included in the related Trust Fund and/or the related
underlying mortgage loans may be covered by one or more of the types of Credit
Support described herein. The related Prospectus Supplement will specify, as to
each such instrument of Credit Support, the information indicated above with
respect thereto, to the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
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
MBS) 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". For purposes of the following discussion, "Mortgage
Loan" includes a mortgage loan underlying an MBS.
58
<PAGE>
GENERAL
Each Mortgage Loan will be evidenced by a note or bond and secured by
an instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the prevailing
practice and law in the state in which the related Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages". A mortgage creates a lien upon, or
grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of
separate subordination agreements or intercreditor agreements with others that
hold interests in the real property, the knowledge of the parties to the
mortgage and, generally, the order of recordation of the mortgage in the
appropriate public recording office. However, the lien of a recorded mortgage
will generally be subordinate to later-arising liens for real estate taxes and
assessments and other charges imposed under governmental police powers.
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
contrast, 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, irrevocably until the debt is
paid, in trust and generally with a power of sale, to the trustee to secure
repayment of the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. The grantor (the borrower) conveys title to the
real property to the grantee (the 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 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 executes
a separate undertaking to make payments on the related 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 (including, without limitation, the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended) 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.
In most states, hotel and motel room revenues are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the 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 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 revenues is perfected under the UCC, it may be required to commence a
foreclosure action or otherwise take possession of the property in order to
collect the room revenues following a default. See "--Bankruptcy Laws".
59
<PAGE>
PERSONALTY
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the
borrower and not previously pledged) may constitute a significant portion of
the property's value as security. The creation and enforcement of liens on
personal property are governed by the UCC. Accordingly, if a borrower pledges
personal property as security for a mortgage loan, the lender generally must
file UCC financing statements in order to perfect its security interest
therein, and must file continuation statements, generally every five years, to
maintain that perfection.
FORECLOSURE
General. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage. 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 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 several years to complete. Moreover, as discussed below,
even a non-collusive, regularly conducted foreclosure sale may be challenged as
a fraudulent conveyance, regardless of the parties' intent, if a court
determines that the sale was for less than fair consideration and such sale
occurred while the borrower was insolvent and within a specified period prior
to the borrower's filing for bankruptcy protection.
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 defendants. When the lender's
right to foreclose is contested, the legal proceedings can be time-consuming.
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.
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
that of the lenders 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 an impermissible
further encumbrance of 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.
60
<PAGE>
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 allows a non-judicial public
sale to be conducted generally following a request from the beneficiary/lender
to the trustee to sell the property upon default by the borrower and after
notice of sale is given in accordance with the terms of the mortgage and
applicable state law. In some states, prior to such sale, the trustee under the
deed of trust must record a notice of default and notice of sale and send a
copy to the borrower and to any other party who has recorded a request for a
copy of a notice of default and notice of sale. In addition, in some states the
trustee must provide notice to any other party having an interest of record in
the real property, including junior lienholders. A notice of sale must be
posted in a public place and, in most states, published for a specified period
of time in one or more newspapers. The borrower or 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. Generally,
state law governs the procedure for public sale, the parties entitled to
notice, the method of giving notice and the applicable time periods.
Public Sale. A third party may be unwilling to purchase a Mortgaged
Property at a public sale because of the difficulty in determining the value of
such property at the time of sale, due to, among other things, redemption
rights which may exist and the possibility of physical deterioration of the
property during the foreclosure proceedings. Potential buyers may be reluctant
to purchase property at a foreclosure sale as a result of the 1980 decision of
the United States Court of Appeals for the Fifth Circuit in Durrett v.
Washington National Insurance Company and other decisions that have followed
its reasoning. The court in Durrett held that even a non-collusive, regularly
conducted foreclosure sale was a fraudulent transfer under the federal
Bankruptcy Code, as amended from time to time (11 U.S.C.) and, therefore, could
be rescinded in favor of the bankrupt's estate, if (i) the foreclosure sale was
held while the debtor was insolvent and not more than one year prior to the
filing of the bankruptcy petition and (ii) the price paid for the foreclosed
property did not represent "fair consideration" ("reasonably equivalent value"
under the Bankruptcy Code). Although the reasoning and result of Durrett in
respect of the Bankruptcy Code was rejected by the United States Supreme Court
in May 1994, the case could nonetheless be persuasive to a court applying a
state fraudulent conveyance law which has provisions similar to those construed
in Durrett. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to the lesser of fair market value and
the underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will have the obligation to pay debt service on any senior
mortgages, to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale.
Frequently, the lender employs a third party management company to manage and
operate the property. 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 costs of management and operation of
those mortgaged properties which are hotels, motels or nursing or convalescent
homes or hospitals may be particularly significant because of the expertise,
knowledge and, with respect to nursing or convalescent homes or hospitals,
regulatory compliance, required to run such operations and the effect which
foreclosure and a change in ownership may have on the public's and the
industry's (including franchisors') perception of the quality of such
operations. The lender will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the sale
of the property may not equal the amount of the mortgage against the property.
Moreover, a lender commonly incurs substantial legal fees and court costs in
acquiring a mortgaged property through contested foreclosure and/or bankruptcy
proceedings. Furthermore, a few states require that any environmental
contamination at certain types of properties be cleaned up before a property
may be resold. In addition, a lender may be responsible under federal or state
law for the cost of cleaning up a mortgaged property that is environmentally
contaminated. See "--Environmental Risks". Generally state law controls the
amount of foreclosure expenses and costs, including attorneys' fees, that may
be recovered by a lender.
61
<PAGE>
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 or face foreclosure.
The proceeds received by the referee or trustee from a foreclosure
sale are generally applied first to the costs, fees and expenses of sale and
then in satisfaction of the indebtedness secured by the mortgage under which
the sale was conducted. Any proceeds remaining after satisfaction of senior
mortgage debt are generally payable to the holders of junior mortgages and
other liens and claims in order of their priority, whether or not the borrower
is in default. Any additional proceeds are generally payable to the borrower.
The payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgage or a subsequent ancillary proceeding
or may require the institution of separate legal proceedings by such holders.
Rights of Redemption. The purposes of a foreclosure action are to
enable the lender to realize upon its security and to bar the borrower, and all
persons who have interests in the property that are subordinate to that of the
foreclosing lender, from exercise of their "equity of redemption". The doctrine
of equity of redemption provides that, until the property encumbered by a
mortgage has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having interests that are subordinate to that of the
foreclosing lender have an equity of redemption and may redeem the property by
paying the entire debt with interest. Those having an equity of redemption must
generally be made parties and joined in the foreclosure proceeding in order for
their equity of redemption to be terminated.
The equity of redemption is a common-law (non-statutory) right which
should be distinguished from post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the borrower and foreclosed junior lienors are given a statutory period in
which to redeem the property. In some states, statutory redemption may occur
only upon payment of the foreclosure sale price. In other states, redemption
may be permitted if the former borrower pays only a portion of the sums due.
The effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property because the exercise of a right of
redemption would defeat the title of any purchaser through a foreclosure.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Anti-Deficiency Legislation. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be limited
to the Mortgaged Property and such other assets, if any, that were pledged to
secure the Mortgage Loan. However, even if a mortgage loan by its terms
provides for recourse to the borrower's other assets, a lender's ability to
realize upon those assets may be limited by state law. For example, in some
states a lender cannot obtain a deficiency judgment against the borrower
following foreclosure or sale under a deed of trust. 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 fair market
value of the property at the time of the sale.
62
<PAGE>
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, the leasehold
mortgagee would lose its security. This risk may be lessened if the ground
lease requires the lessor to give the leasehold mortgagee notices of lessee
defaults and an opportunity to cure them, permits the leasehold estate to be
assigned to and by the leasehold mortgagee or the purchaser at a foreclosure
sale, and contains certain other protective provisions typically included in a
"mortgageable" ground lease. The ground leases that secure the Mortgage Loans
at issue may not contain some of these protective provisions, and the related
mortgages may not contain the other protections discussed in the next
paragraph. Protective ground lease provisions include the right of the
leasehold mortgagee to receive notices from the ground lessor of any defaults
by the borrower under the ground lease; the right to cure such defaults, with
adequate cure periods; if a default is not susceptible of cure by the leasehold
mortgagee, the right to acquire the leasehold estate through foreclosure or
otherwise; the ability of the ground lease to be assigned to and by the
leasehold mortgagee or purchaser at a foreclosure sale and for the concomitant
release of the ground lessee's liabilities thereunder; and the right of the
leasehold mortgagee to enter into a new ground lease with the ground lessor on
the same terms and conditions as the old ground lease in the event of a
termination of the ground lease.
In addition to the foregoing protections, a leasehold mortgagee may
prohibit the ground lessee from treating the ground lease as terminated in the
event of the ground lessor's bankruptcy and rejection of the ground lease in
the lessor's bankruptcy case. As further protection, a leasehold mortgage may
provide for the assignment of the debtor-ground lessee's right to reject the
lease in a ground lessee bankruptcy case, although the enforceability of such a
provision has not been established. Without the protections described in this
and the foregoing paragraph, a leasehold mortgagee may be more likely to lose
the collateral securing its leasehold mortgage. In addition, the terms and
conditions of a leasehold mortgage are subject to the terms and conditions of
the ground lease. Although certain rights given to a ground lessee can be
limited by the terms of a leasehold mortgage, the rights of a ground lessee or
a leasehold mortgagee with respect to, among other things, insurance, casualty
and condemnation proceeds will ordinarily be governed by the provisions of the
ground lease, unless otherwise agreed to by the ground lessee and leasehold
mortgagee.
COOPERATIVE SHARES.
Mortgage Loans may be secured by a security interest on the borrower's
ownership interest in shares, and the proprietary leases appurtenant thereto,
allocable to cooperative dwelling units that may be vacant or occupied by
non-owner tenants. Such loans are subject to certain risks not associated with
mortgage loans secured by a lien on the fee estate of a borrower in real
property. Such a loan typically is subordinate to the mortgage, if any, on the
Cooperative's building which, if foreclosed, could extinguish the equity in the
building and the proprietary leases of the dwelling units derived from
ownership of the shares of the Cooperative. Further, transfer of shares in a
Cooperative are subject to various regulations as well as to restrictions under
the governing documents of the Cooperative, and the shares may be cancelled in
the event that associated maintenance charges due under the related proprietary
leases are not paid. Typically, a recognition agreement between the lender and
the Cooperative provides, among other things, the lender with an opportunity to
cure a default under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on Cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner,
which may be dependent upon, among other things, the notice given the debtor
and the method, manner, time, place and terms of the sale. Article 9 of the UCC
provides that the proceeds of the sale will be applied first to pay the costs
and expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. A recognition agreement, however, generally
provides that the lender's right to reimbursement is subject to the right of
the Cooperative to receive sums due under the proprietary leases. If, following
payment to the lender, there are proceeds remaining, the lender must account to
63
<PAGE>
the tenant-stockholder for the surplus. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder may be responsible for the
deficiency. See "--Anti-Deficiency Legislation".
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere
with or affect the ability of a secured 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 such automatic stay can be significant. Also,
under the Bankruptcy Code, the filing of a petition in bankruptcy by or on
behalf of a junior lienor may stay the senior lender from taking action to
foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified. For example,
the lender's lien may be transferred to other collateral and/or the outstanding
amount of the secured loan may be reduced to the then-current value of the
property (with a corresponding partial reduction of the amount of the lender's
security interest) pursuant to a confirmed plan or lien avoidance proceeding,
thus leaving the lender a general unsecured creditor for the difference between
such value and the outstanding balance of the loan. Other modifications may
include the reduction in the amount of each scheduled payment, by means of a
reduction in the rate of interest and/or an alteration of the repayment
schedule (with or without affecting the unpaid principal balance of the loan),
and/or by an extension (or shortening) of the term to maturity. The priority of
a mortgage loan may also be subordinated to bankruptcy court-approved
financing. Some bankruptcy courts have approved plans, based on the particular
facts of the reorganization case, that effected the cure of a mortgage loan
default by paying arrearages over a number of years. Also, a bankruptcy court
may permit a debtor, through its rehabilitative plan, to reinstate a loan
mortgage payment schedule even if the lender has obtained a final judgment of
foreclosure prior to the filing of the debtor's petition.
The bankruptcy court can also reinstate accelerated indebtedness and
also, in effect, invalidate due-on-sale clauses through confirmed Chapter 11
plans of reorganization. Under Section 363(b) and (f) of the Bankruptcy Code, a
trustee for a lessor, or a lessor as debtor-in-possession, may, despite the
provisions of the related Mortgage Loan to the contrary, sell the Mortgaged
Property free and clear of all liens, which liens would then attach to the
proceeds of such sale.
The Bankruptcy Code provides that a lender's perfected pre-petition
security interest in leases, rents and hotel revenues continues in the
post-petition leases, rents and hotel revenues, unless a bankruptcy court
orders to the contrary "based on the equities of the case." Thus, unless a
court orders otherwise, revenues from a Mortgaged Property generated after the
date the bankruptcy petition is filed will constitute "cash collateral" under
the Bankruptcy Code. Debtors may only use cash collateral upon obtaining the
lender's consent or a prior court order finding that the lender's interest in
the Mortgaged Properties and the cash collateral is "adequately protected" and
such term is defined and interpreted under the Bankruptcy Code. It should be
noted, however, that the court may find that the lender has no security
interest in either pre-petition or post-petition revenues if the court finds
that the loan documents do not contain language covering accounts, room rents,
or other forms of personalty necessary for a security interest to attach to
hotel revenues.
Lessee bankruptcies at the Mortgaged Properties could have an adverse
impact on the borrowers' ability to meet their obligations. For example,
Section 365(e) of the Bankruptcy Code provides generally that rights and
obligations under an unexpired lease may not be terminated or modified at any
time after the commencement of a case under the Bankruptcy Code solely because
of a provision in the lease conditioned upon the commencement of a case under
the Bankruptcy Code or certain other similar events. In addition, Section 362
of the Bankruptcy Code operates as an automatic stay of, among other things,
any act to obtain possession of property of or from a debtor's estate, which
may delay the borrower's exercise of such remedies in the event that a lessee
becomes the subject of a proceeding under the Bankruptcy Code.
64
<PAGE>
Section 365(a) of the Bankruptcy Code generally provides that a
trustee or a debtor-in-possession in a case under the Bankruptcy Code has the
power to assume or to reject an executory contract or an unexpired lease of the
debtor, in each case subject to the approval of the bankruptcy court
administering such case. If the trustee or debtor-in-possession rejects an
executory contract or an unexpired lease, such rejection generally constitutes
a breach of the executory contract or unexpired lease immediately before the
date of the filing of the petition. As a consequence, the other party or
parties to such executory contract or unexpired lease, such as the lessor or
borrower, 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. Moreover, under Section 502(b)(6)
of the Bankruptcy Code, the claim of a lessor for such damages from the
termination of a lease of real property will be limited to the sum of (i) the
rent reserved by such lease, without acceleration, for the greater of one year
or 15 percent, not to exceed three years, of the remaining term of such lease,
following the earlier of the date of the filing of the petition and the date on
which such lender repossessed, or the lessee surrendered, the leased property,
and (ii) any unpaid rent due under such lease, without acceleration, on the
earlier of such dates.
Under Section 365(f) of the Bankruptcy Code, if a trustee or
debtor-in-possession assumes an executory contract or an unexpired lease of
the debtor, the trustee or debtor-in-possession generally may assign such
executory contract or unexpired lease, notwithstanding any provision therein or
in applicable law that prohibits, restricts or conditions such assignment,
provided that the trustee or debtor-in-possession provides "adequate assurance
of future performance" by the assignee. The Bankruptcy Code specifically
provides, however, that adequate assurance of future performance for purposes
of a lease of real property in a shopping center includes adequate assurance of
the source of rent and other consideration due under such lease, and in the
case of an assignment, that the financial condition and operating performance
of the proposed assignee and its guarantors, if any, shall be similar to the
financial condition and operating performance of the debtor and its guarantors,
if any, as of the time the debtor became the lessee under the lease, that any
percentage rent due under such lease will not decline substantially, that the
assumption and assignment of the lease is subject to all the provisions
thereof, including (but not limited to) provisions such as a radius location,
use or exclusivity provision, and will not breach any such provision contained
in any other lease, financing agreement, or master agreement relating to such
shopping center, and that the assumption or assignment of such lease will not
disrupt the tenant mix or balance in such shopping center. Thus, an
undetermined third party may assume the obligations of the lessee under a lease
in the event of commencement of a proceeding under the Bankruptcy Code with
respect to the lessee.
Under Section 365(h) of the Bankruptcy Code, if a trustee for a lessor
as a 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, 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 against rents reserved under the lease for the balance of the
term after the date of rejection of the lease, and any such renewal or
extension thereof, any damages occurring after such date caused by the
nonperformance of any obligation of the lessor under the lease after such date.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related Mortgage Loan to the related 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. In addition, some court decisions
suggest that even a non-collusive, regularly conducted foreclosure sale could
be challenged in a bankruptcy case as a "fraudulent conveyance," regardless of
the parties' intent, if a bankruptcy court determines that the mortgaged
property has been sold for less than fair consideration while the mortgagor was
insolvent and within one year (or within any longer state statutes of
limitations periods if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of the bankruptcy.
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
65
<PAGE>
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.
Pursuant to the federal doctrine of "substantive consolidation" or to
the (predominantly state law) doctrine of "piercing the corporate veil", a
bankruptcy court, in the exercise of its equitable powers, also has the
authority to order that the assets and liabilities of a related entity be
consolidated with those of an entity before it. Thus, property ostensibly the
property of one entity may be determined to be the property of a different
entity in bankruptcy, the automatic stay applicable to the second entity may be
extended to the first and the rights of creditors of the first entity may be
impaired in the fashion set forth above in the discussion of bankruptcy
principles. Depending on facts and circumstances not wholly in existence at the
time a Mortgage Loan is originated or transferred to the related Trust Fund,
the application of any of these doctrines to one or more of the mortgagors in
the context of the bankruptcy of one or more of their affiliates could result
in material impairment of the rights of the Certificateholders.
For each mortgagor that is described as a "special purpose entity",
"single purpose entity" or "bankruptcy-remote entity" in the Prospectus
Supplement, the activities that may be conducted by such mortgagor and its
ability to incur debt are restricted by the applicable Mortgage or the
organizational documents of such mortgagor in such manner as is intended to
make the likelihood of a bankruptcy proceeding being commenced by or against
such mortgagor remote, and such mortgagor has been organized and is designed to
operate in a manner such that its separate existence should be respected
notwithstanding a bankruptcy proceeding in respect of one or more affiliated
entities of such mortgagor. However, the Depositor makes no representation as
to the likelihood of the institution of a bankruptcy proceeding by or in
respect of any mortgagor or the likelihood that the separate existence of any
mortgagor would be respected if there were to be a bankruptcy proceeding in
respect of any affiliated entity of a mortgagor.
ENVIRONMENTAL RISKS
A lender may be subject to unforeseen environmental risks with respect
to loans secured by real or personal property, such as the Mortgage Loans. Such
environmental risks may give rise to (i) a diminution in value of property
securing a Mortgage Loan or the inability to foreclose against such property or
(ii) in certain circumstances as more fully described below, liability for
clean-up costs or other remedial actions, which liability could exceed the
value of such property or the principal balance of the related Mortgage Loan.
Under the laws of many states, contamination on a property may give rise to a
lien on the property for cleanup costs. In several states, such a lien has
priority over all existing liens (a "superlien"), including those of existing
mortgages; in these states, the lien of the mortgage for any Mortgage Loan may
lose its priority to such a superlien.
Under the federal Comprehensive Response Compensation and Liability
Act ("CERCLA"), a lender may be liable either to the government or to private
parties for cleanup costs on a property securing a loan, even if the lender
does not cause or contribute to the contamination. CERCLA imposes strict, as
well as joint and several, liability on several classes of potentially
responsible parties ("PRPs"), including current owners and operators of the
property who did not cause or contribute to the contamination. Many states have
laws similar to CERCLA.
Lenders may be held liable under CERCLA as owners or operators unless
they qualify for the secured creditor exemption to CERCLA. A 1990 decision of
the United States Court of Appeals for the Eleventh Circuit, United States v.
Fleet Factors Corp., 901 F.2d 1550 (11th Cir. 1990), narrowly construed the
security interest exemption under CERCLA to hold lenders liable if they had the
capacity to influence their borrower's management of hazardous waste. In
response to the Fleet Factors case, the Environmental Protection Agency ("EPA")
promulgated a rule in 1992 intended to reduce interpretive uncertainties that
surrounded the scope of the secured lender exemption to liability under CERCLA.
The rule, which the EPA stated would be entitled to deference in CERCLA cost
recovery actions brought against lenders by private parties, clarified the
scope of the secured creditor exemption and identified specific types of
actions that, if taken by a lender, would preclude application of the
exemption. In the decision of Kelley v. EPA,
66
<PAGE>
15 F.3d 1100 (D.C. Cir. 1994), the Court of Appeals for the District of
Columbia vacated the EPA's lender liability rule. On September 30, 1996,
President Clinton signed into law the "Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996" (the "Asset Conservation Act"), which
substantially protects lenders and fiduciaries from liability for the
environmental obligations of borrowers and beneficiaries. The Asset
Conservation Act includes amendments to CERCLA and to the underground storage
tank provisions of the Resource Conservation and Recovery Act and applies to
any claim that was not finally adjudicated as of September 30, 1996. The Act
offers substantial protection to lenders by defining the activities in which a
lender can engage and still have the benefit of a secured creditor exemption.
However, the secured creditor exemption is not available to a lender that
participates in management of mortgaged property prior to a foreclosure. In
order for a lender to be deemed to have participated in the management of a
mortgaged property, the lender must actually participate in the operational
affairs of the property of the borrower. The Act provides that "merely having
the capacity to influence, or unexercised right to control" operations does not
constitute participation in management. A lender will be deemed to have
participated in management and will lose the protection of the secured creditor
exemption only if it exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling and disposal
practices, or assumes day-to-day management of all operational functions of the
mortgaged property. The Act also provides that a lender will continue to have
the benefit of the secured creditor exemption even if it forecloses on a
mortgaged property, purchases it at a foreclosure sale or accepts a
deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Environment clean-up costs may be substantial. It is possible that
such costs could become a liability of the related Trust Fund and occasion a
loss to Certificateholders if such remedial costs were incurred.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. It is possible that a property
securing a Mortgage Loan could be subject to such transfer restrictions. In
such a case, if the lender becomes the owner upon foreclosure, it may be
required to clean up the contamination before selling the property.
The cost of remediating hazardous substance contamination at a
property can be substantial. If a lender is or becomes liable, it can bring an
action for contribution against the owner or operator that created the
environmental hazard, but that person or entity may be without substantial
assets. Accordingly, it is possible that such costs could become a liability of
a Trust Fund and occasion a loss to Certificateholders of the related series.
To reduce the likelihood of such a loss, and unless otherwise provided
in the related Prospectus Supplement, the related Pooling Agreement will
provide that the Master Servicer, acting on behalf of the related Trust Fund,
may not acquire title to a Mortgaged Property or take over its operation unless
the Master Servicer, based on a report prepared by a person who regularly
conducts environmental site assessments, has made the determination that it is
appropriate to do so, as described under "Description of the Pooling
Agreements--Realization Upon Defaulted Mortgage Loans". There can be no
assurance that any environmental site assessment obtained by the Master
Servicer will detect all possible environmental contamination or conditions or
that the other requirements of the related Pooling Agreement, even if fully
observed by the Master Servicer, will in fact insulate the related Trust Fund
from liability with respect to environmental matters.
Even when a lender is not directly liable for cleanup costs on
property securing loans, if a property securing a loan is contaminated, the
value of the security is likely to be affected. In addition, a lender bears the
risk that unanticipated cleanup costs may jeopardize the borrower's repayment.
Neither of these two issues is likely to pose risks exceeding the amount of
unpaid principal and interest of a particular loan secured by a contaminated
property, particularly if the lender declines to foreclose on a mortgage
secured by the property.
If a lender forecloses on a mortgage secured by a property the
operations of which are subject to environmental laws and regulations, the
lender will be required to operate the property in accordance with those laws
and regulations. Compliance may entail some expense.
67
<PAGE>
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers
(including prospective buyers at a foreclosure sale or following foreclosure).
Such disclosure may decrease the amount that prospective buyers are willing to
pay for the affected property and thereby lessen the ability of the lender to
recover its investment in a loan upon foreclosure.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
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), the 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.
ADJUSTABLE RATE LOANS
The laws of certain states may provide that mortgage notes relating to
adjustable rate loans are not negotiable instruments under the UCC. In such
event, the related Trust Fund will not be deemed to be a "holder in due course"
within the meaning of the UCC and may take such a mortgage note subject to
certain restrictions on the ability to foreclose and to certain contractual
defenses available to a mortgagor.
68
<PAGE>
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("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
under the laws of such state or (ii) such Mortgage Loan provides that the terms
thereof are to be construed in accordance with the laws of another state under
which such interest rate, discount points and charges would not be usurious and
the borrower's counsel has rendered an opinion that such choice of law
provision would be given effect.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower
who was in reserve status and is called to active duty after origination of the
Mortgage Loan), may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to individuals who are members of the Army, Navy, Air Force, Marines,
National Guard, Reserves, Coast Guard and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of any servicer to
collect full amounts of interest on certain of the Mortgage Loans. Any
shortfalls in interest collections resulting from the application of the Relief
Act would result in a reduction of the amounts distributable to the holders of
the related series of Certificates, and would not be covered by advances or,
unless otherwise specified in the related Prospectus Supplement, any instrument
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. Thus, in the event such a Mortgage Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Mortgaged Property in a timely fashion.
TYPE OF MORTGAGED PROPERTY
The lender may be subject to additional risk depending upon the type
and use of the Mortgaged Property in question. For instance, Mortgaged
Properties which are hospitals, nursing homes or convalescent homes may present
special risks to lenders in large part due to significant governmental
regulation of the operation, maintenance, control and financing of health care
institutions. Mortgages on Mortgaged Properties which are owned by the borrower
under a condominium form of ownership are subject to the declaration, by-laws
and other rules and regulation of the condominium association. Mortgaged
Properties which are hotels or motels may present additional risk to the lender
in that: (i) hotels and motels are typically operated pursuant to franchise,
management and operating agreements which may be terminable by the operator;
and (ii) the transferability of the hotel's operating, liquor and other
licenses to the entity acquiring the hotel either through purchase or
foreclosure is subject to the vagaries of local law requirements. In addition,
Mortgaged Properties which are multifamily properties or cooperatively owned
multifamily properties may be subject to rent control laws, which could impact
the future cash flows of such properties.
69
<PAGE>
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, shopping
centers, hospitals, schools and social service center establishments) must
remove architectural and communication barriers which 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, each 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. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, 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 "Crime
Control Act"), 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
established 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.
In addition, there may be other state or municipal laws providing for
forfeiture of mortgaged properties.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
Certificates. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as regulations
(the "REMIC Regulations") promulgated by the U.S. Department of Treasury (the
"Treasury"). Investors should consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of Certificates.
For purposes of this discussion, (i) references to the Mortgage Loans
include references to the mortgage loans underlying MBS included in the
Mortgage Assets and (ii) where the applicable Prospectus Supplement provides
for a fixed retained yield with respect to the Mortgage Loans underlying a
series of Certificates, references to the Mortgage Loans will be deemed to
refer to that portion of the Mortgage Loans held by the Trust Fund which does
not include the Retained Interest. References to a "holder" or
"Certificateholder" in this discussion generally mean the beneficial owner of a
Certificate.
70
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
General. With respect to a particular Series of Certificates, an
election may be made to treat the Trust Fund or one or more segregated pools of
assets therein as one or more REMICs within the meaning of Code Section 860D. A
Trust Fund or a portion thereof as to which a REMIC election will be made will
be referred to as a "REMIC Pool". For purposes of this discussion, Certificates
of a series as to which one or more REMIC elections are made are referred to as
"REMIC Certificates" and will consist of one or more Classes of "Regular
Certificates" and one Class of "Residual Certificates" in the case of each
REMIC Pool. Qualification as a REMIC requires ongoing compliance with certain
conditions. With respect to each series of REMIC Certificates, O'Melveny &
Myers LLP, counsel to the Depositor, has advised the Depositor that in the
firm's opinion, assuming (i) the making of such an election, (ii) compliance
with the Pooling Agreement and (iii) compliance with any changes in the law,
including any amendments to the Code or applicable Treasury regulations
thereunder, each REMIC Pool will qualify as a REMIC. In such case, the Regular
Certificates will be considered to be "regular interests" in the REMIC Pool and
generally will be treated for federal income tax purposes as if they were newly
originated debt instruments, and the Residual Certificates will be considered
to be "residual interests" in the REMIC Pool. The Prospectus Supplement for
each series of Certificates will indicate whether one or more REMIC elections
will be made with respect to the related Trust Fund, in which event references
to "REMIC" or "REMIC Pool" herein shall be deemed to refer to each such REMIC
Pool. If so specified in the applicable Prospectus Supplement, the portion of a
Trust Fund as to which a REMIC election is not made may be treated as either a
financial asset securitization investment trust (a "FASIT") a grantor trust for
federal income tax purposes. See "--Federal Income Tax Consequences for FASIT
Certificates and "--Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made".
Status of REMIC Certificates. REMIC Certificates held by a domestic
building and loan association will constitute "a regular or residual interest
in a REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi), but only in
the same proportion that the assets of the REMIC Pool would be treated as
"loans . . . secured by an interest in real property which is . . . residential
real property" (such as single family or multifamily properties, but not
commercial properties) within the meaning of Code Section 7701(a)(19)(C)(v) or
as other assets described in Code Section 7701(a)(19)(C), and otherwise will
not qualify for such treatment. REMIC Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), and interest on the Regular Certificates and income
with respect to Residual Certificates will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets of the REMIC Pool would be so
treated. If at all times 95% or more of the assets of the REMIC Pool qualify
for each of the foregoing respective treatments, the REMIC Certificates will
qualify for the corresponding status in their entirety. For purposes of Code
Section 856(c)(4)(A), payments of principal and interest on the Mortgage Loans
that are reinvested pending distribution to holders of REMIC Certificates
qualify for such treatment. Where two REMIC Pools are a part of a tiered
structure they will be treated as one REMIC for purposes of the tests described
above respecting asset ownership of more or less than 95%. In addition, if the
assets of the REMIC include Buy-Down Mortgage Loans, it is possible that the
percentage of such assets constituting "loans . . . secured by an interest in
real property which is . . . residential real property" for purposes of Code
Section 7701(a)(19)(C)(v) may be required to be reduced by the amount of the
related Buy-Down Funds. REMIC Certificates held by a regulated investment
company will not constitute "Government Securities" within the meaning of Code
Section 851(b)(3)(A)(i). REMIC Certificates held certain financial institutions
will constitute an "evidence of indebtedness" within the meaning of Code
Section 582(c)(1). The Small Business Job Protection Act of 1996 (the "SBJPA of
1996") repealed the reserve method for bad debts of domestic building and loan
associations and mutual savings banks, and thus has eliminated the asset
category of "qualifying real property loans" in former Code Section 593(d) for
taxable years beginning after December 31, 1995. The requirement in the SBJPA
of 1996 that such institutions must "recapture" a portion of their existing bad
debt reserves is suspended if a certain portion of their assets are maintained
in "residential loans" under Code Section 7701(a)(19)(C)(v), but only if such
loans were made to acquire, construct or improve the related real property and
not for the purpose of refinancing. However, no effort will be made to identify
the portion of the Mortgage Loans of any Series meeting this requirement, and
no representation is made in this regard.
71
<PAGE>
Qualification as a REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a de minimis portion of the assets of the
REMIC Pool, as of the close of the third calendar month beginning after the
"Startup Day" (which for purposes of this discussion is the date of issuance of
the REMIC Certificates) and at all times thereafter, may consist of assets
other than "qualified mortgages" and "permitted investments". The REMIC
Regulations provide a safe harbor pursuant to which the de minimis requirement
is met if at all times the aggregate adjusted basis of the nonqualified assets
is less than 1% of the aggregate adjusted basis of all the REMIC Pool's assets.
An entity that fails to meet the safe harbor may nevertheless demonstrate that
it holds no more than a de minimis amount of nonqualified assets. A REMIC also
must provide "reasonable arrangements" to prevent its residual interest from
being held by "disqualified organizations" and must furnish applicable tax
information to transferors or agents that violate this requirement. The Pooling
Agreement for each Series will contain a provision designed to meet this
requirement. See "Taxation of Residual Certificates--Tax-Related Restrictions
on Transfer of Residual Certificates--Disqualified Organizations".
A qualified mortgage is any obligation that is principally secured by
an interest in real property and that is either transferred to the REMIC Pool
on the Startup Day in exchange for Regular Certificates or Residual
Certificates or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
certificates of beneficial interest in a grantor trust that holds mortgage
loans, including certain of the MBS, regular interests in another REMIC, such
as MBS in a trust as to which a REMIC election has been made, loans secured by
timeshare interests and loans secured by shares held by a tenant stockholder in
a cooperative housing corporation, provided, in general, (i) the fair market
value of the real property securing the mortgage (including buildings and
structural components thereof) is at least 80% of the principal balance of the
related Mortgage Loan or mortgage loan underlying the Mortgage Certificate
either at origination of the relevant loan or as of the Startup Day (an
original loan-to-value ratio of not more than 125% with respect to the real
property securing the mortgage) or (ii) substantially all the proceeds of the
Mortgage Loan or the underlying mortgage loan were used to acquire, improve or
protect an interest in real property that, at the origination date, was the
only security for the Mortgage Loan or underlying mortgage loan. If the
Mortgage Loan has been substantially modified other than in connection with a
default or reasonably foreseeable default, it must meet the loan-to-value test
in (i) of the preceding sentence as of the date of the last such modification
or at closing. A qualified mortgage includes a qualified replacement mortgage,
which is any property that would have been treated as a qualified mortgage if
it were transferred to the REMIC Pool on the Startup Day and that is received
either (i) in exchange for any qualified mortgage within a three-month period
thereafter or (ii) in exchange for a "defective obligation" within a two-year
period thereafter. A "defective obligation" includes (i) a mortgage in default
or as to which default is reasonably foreseeable, (ii) a mortgage as to which a
customary representation or warranty made at the time of transfer to the REMIC
Pool has been breached, (iii) a mortgage that was fraudulently procured by the
mortgagor, and (iv) a mortgage that was not in fact principally secured by real
property (but only if such mortgage is disposed of within 90 days of
discovery). A Mortgage Loan that is "defective" as described in clause (iv)
that is not sold or, if within two years of the Startup Day, exchanged, within
90 days of discovery, ceases to be a qualified mortgage after such 90-day
period. A qualified mortgage also includes any regular interest in a FASIT
transferred to the REMIC Pool on the Startup Day in exchange for Regular
Certificates or Residual Certificates, or purchased by the REMIC Pool within
three months after the Startup Day pursuant to a fixed price contract in effect
on the Startup Day, provided that at least 95% of the value of the FASIT assets
is at all times attributable to obligations principally secured by interests in
real property and which are transferred to, or purchased by, a REMIC as
provided in this sentence.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until distributed to holders of interests in the REMIC Pool. A qualified
reserve asset is any intangible property (other than a REMIC residual interest)
held for investment that is part of any reasonably required reserve maintained
by the REMIC Pool to provide for payments of expenses of the REMIC Pool or
amounts due on the regular or residual interests in the event of defaults
(including delinquencies) on the qualified mortgages, lower than expected
reinvestment returns, prepayment interest shortfalls and certain other
contingencies. The reserve fund will be disqualified if more than 30% of the
gross income from the assets in such fund for the year is derived from the sale
or other disposition of property held for less than three months,
72
<PAGE>
unless required to prevent a default on the regular interests caused by a
default on one or more qualified mortgages. A reserve fund must be reduced
"promptly and appropriately" as payments on the Mortgage Loans are received.
Foreclosure property is real property acquired by the REMIC Pool in connection
with the default or imminent default of a qualified mortgage and generally held
beyond the close of the third calendar year following the acquisition of the
property by REMIC Pool for not more than two years, with possible extensions
granted by the Internal Revenue Service (the "Service") of up to an additional
four years.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a REMIC
Pool must be either of the following: (i) one or more classes of regular
interests or (ii) a single class of residual interests on which distributions,
if any, are made pro rata. A regular interest is an interest in a REMIC Pool
that is issued on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest payments
(or other similar amounts), if any, at or before maturity either are payable
based on a fixed rate or a qualified variable rate, or consist of a specified,
nonvarying portion of the interest payments on qualified mortgages. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of the total interest, or a fixed or qualified variable or inverse
variable rate on some or all of the qualified mortgages minus a different fixed
or qualified variable rate. The specified principal amount of a regular
interest that provides for interest payments consisting of a specified,
nonvarying portion of interest payments on qualified mortgages may be zero. A
residual interest is an interest in a REMIC Pool other than a regular interest
that is issued on the Startup Day and that is designated as a residual
interest. An interest in a REMIC Pool may be treated as a regular interest even
if payments of principal with respect to such interest are subordinated to
payments on other regular interests or the residual interest in the REMIC Pool,
and are dependent on the absence of defaults or delinquencies on qualified
mortgages or permitted investments, lower than reasonably expected returns on
permitted investments, unanticipated expenses incurred by the REMIC Pool or
prepayment interest shortfalls. Accordingly, the Regular Certificates of a
series will constitute one or more classes of regular interests, and the
Residual Certificates with respect to that series will constitute a single
class of residual interests on which distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more
of the ongoing requirements of the Code for REMIC status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In this event, an entity with multiple classes of
ownership interests may be treated as a separate association taxable as a
corporation under Treasury regulations, and the Regular Certificates may be
treated as equity interests therein. The Code, however, authorizes the Treasury
Department to issue regulations that address situations where failure to meet
one or more of the requirements for REMIC status occurs inadvertently and in
good faith, and disqualification of the REMIC Pool would occur absent
regulatory relief. Investors should be aware, however, that the Conference
Committee Report to the Tax Reform Act of 1986 (the "1986 Act") indicates that
the relief may be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the REMIC Pool's income for the period of
time in which the requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
General
In general, interest, original issue discount and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder") as they accrue, and
principal payments on a Regular Certificate will be treated as a return of
capital to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto. Regular Certificateholders must use the accrual
method of accounting with regard to Regular Certificates, regardless of the
method of accounting otherwise used by such Regular Certificateholders.
Original Issue Discount
Accrual Certificates and principal-only Certificates will be, and
other Classes of Regular Certificates may be, issued with "original issue
discount" within the meaning of Code Section 1273(a). Holders of any Class of
Regular
73
<PAGE>
Certificates having original issue discount generally must include original
issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with the constant yield method that takes into account
the compounding of interest, in advance of receipt of the cash attributable to
such income. The following discussion is based in part on temporary and final
Treasury regulations issued on February 2, 1994, as amended on June 14, 1996,
(the "OID Regulations") under Code Sections 1271 through 1273 and 1275 and in
part on the provisions of the 1986 Act. Regular Certificateholders should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Regular Certificates. To
the extent such issues are not addressed in such regulations, the Depositor
intends to apply the methodology described in the Conference Committee Report
to the 1986 Act. No assurance can be provided that the Service will not take a
different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Service to apply or depart from the OID Regulations where necessary or
appropriate to ensure a reasonable tax result in light of the applicable
statutory provisions. A tax result will not be considered unreasonable under
the anti-abuse rule in the absence of a substantial effect on the present value
of a taxpayer's tax liability. Investors are advised to consult their own tax
advisors as to the discussion herein and the appropriate method for reporting
interest and original issue discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which principal is distributed by random
lot ("Random Lot Certificates")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible
in a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price". The issue price
of a Class of Regular Certificates offered pursuant to this Prospectus
generally is the first price at which a substantial amount of Regular
Certificates of that Class is sold to the public (excluding bond houses,
brokers and underwriters). Although unclear under the OID Regulations, the
Depositor intends to treat the issue price of a Class as to which there is no
substantial sale as of the issue date or that is retained by the Depositor as
the fair market value of that Class as of the issue date. The issue price of a
Regular Certificate also includes the amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate, unless the Regular Certificateholder
elects on its federal income tax return to exclude such amount from the issue
price and to recover it on the first Distribution Date. The stated redemption
price at maturity of a Regular Certificate always includes the original
principal amount of the Regular Certificate, but generally will not include
distributions of stated interest if such interest distributions constitute
"qualified stated interest". Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a qualified
variable rate (as described below) provided that such interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the Regular Certificate. Because there is no penalty or default remedy in
the case of nonpayment of interest with respect to a Regular Certificate, it is
possible that no interest on any Class of Regular Certificates will be treated
as qualified stated interest. However, except as provided in the following
three sentences or in the applicable Prospectus Supplement, because the
underlying Mortgage Loans provide for remedies in the event of default, the
Depositor intends to treat interest with respect to the Regular Certificates as
qualified stated interest. Distributions of interest on an Accrual Certificate,
or on other Regular Certificates with respect to which deferred interest will
accrue, will not constitute qualified stated interest, in which case the stated
redemption price at maturity of such Regular Certificates includes all
distributions of interest as well as principal thereon. Likewise, the Depositor
intends to treat an "interest only" class, or a class on which interest is
substantially disproportionate to its principal amount (a so-called
"super-premium" class) as having no qualified stated interest. Where the
interval between the issue date and the first Distribution Date on a Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
the interest attributable to the additional days will be included in the stated
redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted average maturity of the Regular
Certificate is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until all distributions in reduction of are scheduled to be made by a fraction,
the numerator of which is the amount of each distribution included in the
stated redemption price at maturity of the Regular Certificate and the
denominator of which is the stated redemption price at maturity of the
74
<PAGE>
Regular Certificate. The Conference Committee Report to the 1986 Act provides
that the schedule of such distributions should be determined in accordance with
the assumed rate of prepayment of the Mortgage Loans (the "Prepayment
Assumption") and the anticipated reinvestment rate, if any, relating to the
Regular Certificates. The Prepayment Assumption with respect to a Series of
Regular Certificates will be set forth in the related Prospectus Supplement.
Holders generally must report de minimis original issue discount pro rata as
principal payments are received, and such income will be capital gain if the
Regular Certificate is held as a capital asset. However, under the OID
Regulations, Regular Certificateholders may elect to accrue all de minimis
original issue discount as well as market discount and market premium under the
constant yield method. See "Election to Treat All Interest Under the Constant
Yield Method".
A Regular Certificateholder generally must include in gross income for
any taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Certificate accrued during an accrual
period for each day on which it holds the Regular Certificate, including the
date of purchase but excluding the date of disposition. The Depositor will
treat the monthly period ending on the day before each Distribution Date as the
accrual period. With respect to each Regular Certificate, a calculation will be
made of the original issue discount that accrues during each successive full
accrual period (or shorter period from the date of original issue) that ends on
the day before the related Distribution Date on the Regular Certificate. The
Conference Committee Report to the 1986 Act states that the rate of accrual of
original issue discount is intended to be based on the Prepayment Assumption.
Other than as discussed below with respect to a Random Lot Certificate, the
original issue discount accruing in a full accrual period would be the excess,
if any, of (i) the sum of (a) the present value of all of the remaining
distributions to be made on the Regular Certificate as of the end of that
accrual period that are included in the Regular Certificate's stated redemption
price at maturity and (b) the distributions made on the Regular Certificate
during the accrual period that are included in the Regular Certificate's stated
redemption price at maturity, over (ii) the adjusted issue price of the Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence is calculated
based on (i) the yield to maturity of the Regular Certificate at the issue
date, (ii) events (including actual prepayments) that have occurred prior to
the end of the accrual period and (iii) the Prepayment Assumption. For these
purposes, the adjusted issue price of a Regular Certificate at the beginning of
any accrual period equals the issue price of the Regular Certificate, increased
by the aggregate amount of original issue discount with respect to the Regular
Certificate that accrued in all prior accrual periods and reduced by the amount
of distributions included in the Regular Certificate's stated redemption price
at maturity that were made on the Regular Certificate in such prior periods.
The original issue discount accruing during any accrual period (as determined
in this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Random Lot Certificate, the Depositor intends to
determine the yield to maturity of such Certificate based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment
Assumption. In general, the original issue discount accruing on each Random Lot
Certificate in a full accrual period would be its allocable share of the
original issue discount with respect to the entire Class, as determined in
accordance with the preceding paragraph. However, in the case of a distribution
in retirement of the entire unpaid principal balance of any Random Lot
Certificate (or portion of such unpaid principal balance), (a) the remaining
unaccrued original issue discount allocable to such Certificate (or to such
portion) will accrue at the time of such distribution, and (b) the accrual of
original issue discount allocable to each remaining Certificate of such Class
(or the remaining unpaid principal balance of a partially redeemed Random Lot
Certificate after a distribution of principal has been received)
75
<PAGE>
will be adjusted by reducing the present value of the remaining payments on
such Class and the adjusted issue price of such Class to the extent
attributable to the portion of the unpaid principal balance thereof that was
distributed. The Depositor believes that the foregoing treatment is consistent
with the "pro rata prepayment" rules of the OID Regulations, but with the rate
of accrual of original issue discount determined based on the Prepayment
Assumption for the Class as a whole. Investors are advised to consult their tax
advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its
adjusted issue price but less than its stated redemption price at maturity will
be required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, such
a subsequent purchaser may elect to treat all such acquisition premium under
the constant yield method, as described below under the heading "Election to
Treat All Interest Under the Constant Yield Method".
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable
rate. Under the OID Regulations, interest is treated as payable at a variable
rate if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified de minimis amount and (ii) the interest
compounds or is payable at least annually at current values of (a) one or more
"qualified floating rates", (b) a single fixed rate and one or more qualified
floating rates, (c) a single "objective rate", or (d) a single fixed rate and a
single objective rate that is a "qualified inverse floating rate". A floating
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds, or where such rate is subject to a fixed multiple that is greater than
0.65, but not more than 1.35. Such rate may also be increased or decreased by a
fixed spread or subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the instrument
significantly. Two or more qualified floating rates will be treated as a single
qualified floating rate if all such qualified floating rates can reasonably be
expected to have approximately the same values throughout the terms of the
instrument. This requirement will be conclusively presumed to be satisfied if
the values of all such qualified floating rates are within 0.25% of each other
on the issue date. An objective rate (other than a qualified floating rate) is
a rate that is determined using a single fixed formula and that is based on
objective financial or economic information, provided that such information is
not (i) within the control of the issuer or a related party or (ii) unique to
the circumstances of the issuer or a related party. A qualified inverse
floating rate is an objective rate that is equal to a fixed rate minus a
qualified floating rate that inversely reflects contemporaneous variations in
the cost of newly borrowed funds; an inverse floating rate that is not a
qualified floating rate may nevertheless be an objective rate. A Class of
Regular Certificates may be issued under this Prospectus that does not have a
variable rate under the OID Regulations, for example, a Class that bears
different rates at different times during the period it is outstanding such
that it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID Regulations. It is possible that such a Class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Certificates. However,
if final regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion than would be the case under
the OID Regulations. Furthermore, application of such principles could lead to
the characterization of gain on the sale of contingent interest Regular
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate treatment of any Regular Certificate that does not
pay interest at a fixed rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate
that qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two or
more variable rates), including a rate based on the average cost of funds of
one or more financial institutions, or a positive or negative multiple of such
a rate (plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans which bear
interest at a fixed rate or at a qualifying variable
76
<PAGE>
rate under the REMIC Regulations, including such a rate that is subject to one
or more caps or floors, or (ii) bearing one or more such variable rates for one
or more periods or one or more fixed rates for one or more periods, and a
different variable rate or fixed rate for other periods qualifies as a regular
interest in a REMIC. Accordingly, unless otherwise indicated in the applicable
Prospectus Supplement, the Depositor intends to treat Regular Certificates that
qualify as regular interests under this rule in the same manner as obligations
bearing a variable rate for original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular
Certificate bearing a variable rate of interest will accrue in the manner
described above under "Original Issue Discount" with the yield to maturity and
future payments on such Regular Certificate generally to be determined by
assuming that interest will be payable for the life of the Regular Certificate
based on the initial rate (or, if different, the value of the applicable
variable rate as of the pricing date) for the relevant Class. Unless otherwise
specified in the applicable Prospectus Supplement, the Depositor intends to
treat such variable interest as qualified stated interest, other than variable
interest on an interest-only or super-premium Class, which will be treated as
non-qualified stated interest includible in the stated redemption price at
maturity. Ordinary income reportable for any period will be adjusted based on
subsequent changes in the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise
by applicable final regulations, the Depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on Mortgage Loans or Mortgage Certificates having fixed or
adjustable rates, as having qualified stated interest, except to the extent
that initial "teaser" rates cause sufficiently "back-loaded" interest to create
more than de minimis original issue discount. The yield on such Regular
Certificates for purposes of accruing original issue discount will be a
hypothetical fixed rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates, in
the case of adjustable rate Mortgage Loans. In the case of adjustable rate
Mortgage Loans, the applicable index used to compute interest on the Mortgage
Loans in effect on the pricing date (or possibly the issue date) will be deemed
to be in effect beginning with the period in which the first weighted average
adjustment date occurring after the issue date occurs. Adjustments will be made
in each accrual period either increasing or decreasing the amount of ordinary
income reportable to reflect the actual Pass-Through Rate on the Regular
Certificates.
Deferred Interest
Under the OID Regulations, all interest on a Regular Certificate as to
which there may be Deferred Interest is includible in the stated redemption
price at maturity thereof. Accordingly, any Deferred Interest that accrues with
respect to a Class of Regular Certificates may constitute income to the holders
of such Regular Certificates prior to the time distributions of cash with
respect to such Deferred Interest are made.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Section 1276 through 1278. Under these Code sections and
the principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate or (ii) in the case of a Regular Certificate
having original issue discount, is exceeded by the adjusted issue price of such
Regular Certificate at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on such Regular Certificate as distributions includible in the stated
redemption price at maturity thereof are received, in an amount not exceeding
any such distribution. Such market discount would accrue in a manner to be
provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
such regulations are issued, such market discount would accrue either (i) on
the basis of a constant interest rate or (ii) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for such period
plus the remaining interest as of the end of such period, or in the case of a
Regular Certificate issued with original issue discount, in the ratio of
original issue discount accrued for the relevant period to the sum of the
original issue discount accrued for such period plus the remaining original
issue discount as of the end
77
<PAGE>
of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular 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 as partial distributions in
reduction of the stated redemption price at maturity were received. Such
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a
Regular Certificate over the interest distributable thereon. The deferred
portion of such interest expense in any taxable year generally will not exceed
the accrued market discount on the Regular Certificate for such year. Any such
deferred interest expense is, in general, allowed as a deduction not later than
the year in which the related market discount income is recognized or the
Regular Certificate is disposed of. As an alternative to the inclusion of
market discount in income on the foregoing basis, the Regular Certificateholder
may elect to include market discount in income currently as it accrues on all
market discount instruments acquired by such Regular Certificateholder in that
taxable year or thereafter, in which case the interest deferral rule will not
apply. See "Election to Treat All Interest Under the Constant Yield Method"
below regarding an alternative manner in which such election may be deemed to
be made.
Market discount with respect to a Regular Certificate will be
considered to be zero if such market discount is less than 0.25% of the
remaining stated redemption price at maturity of such Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate
(determined as described above in the third paragraph under "Original Issue
Discount") remaining after the date of purchase. It appears that de minimis
market discount should be reported in a manner similar to de minimis original
issue discount. See "Original Issue Discount" above. Treasury regulations
implementing the market discount rules have not yet been issued, and therefore
investors should consult their own tax advisors regarding the application of
these rules. Investors should also consult Revenue Procedure 92-67 concerning
the elections to include market discount in income currently and to accrue
market discount on the basis of the constant yield method.
Premium
A Regular Certificate purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at
a premium. If the Regular Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. The Conference Committee Report to the 1986
Act indicates a Congressional intent that the same rules that will apply to the
accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations such
as the Regular Certificates, although it is unclear whether the alternatives to
the constant yield method described above under "Market Discount" are
available. Amortizable bond premium will be treated as an offset to interest
income on a Regular Certificate rather than as a separate deduction item. See
"Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect
to treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were
issued on the holder's acquisition date in the amount of the holder's adjusted
basis immediately after acquisition. It is unclear whether, for this purpose,
the initial Prepayment Assumption would continue to apply or if a new
prepayment assumption as of the date of the holder's acquisition would apply. A
holder generally may make such an election on an instrument by instrument basis
or for a class or group of debt instruments. However, if the holder makes such
an election with respect to a debt instrument with amortizable bond premium or
with market discount, the holder is deemed to have made elections to amortize
bond premium or to report market discount income currently as it accrues under
the constant yield method, respectively, for all debt instruments acquired by
the holder in the same taxable year or thereafter. The election is made on the
holder's federal income tax return for the year in
78
<PAGE>
which the debt instrument is acquired and is irrevocable except with the
approval of the Service. Investors should consult their own tax advisors
regarding the advisability of making such an election.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular
Certificate, the Regular Certificateholder will recognize gain or loss equal to
the difference, if any, between the amount received and its adjusted basis in
the Regular Certificate. The adjusted basis of a Regular Certificate generally
will equal the cost of the Regular Certificate to the seller, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Regular Certificate and reduced by amounts
included in the stated redemption price at maturity of the Regular Certificate
that were previously received by the seller, by any amortized premium and by
previously recognized losses.
Except as described above with respect to market discount, and except
as provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Such gain
will be treated as ordinary income (i) if a Regular Certificate is held as part
of a "conversion transaction" as defined in Code Section 1258(c), up to the
amount of interest that would have accrued on the Regular Certificateholder's
net investment in the conversion transaction at 120% of the appropriate
applicable Federal rate under Code Section 1274(d) in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior distribution of property that was
held as a part of such transaction, (ii) in the case of a non-corporate
taxpayer, to the extent such taxpayer has made an election under Code Section
163(d)(4) to have net capital gains taxed as investment income at ordinary
rates, or (iii) to the extent that such gain does not exceed the excess, if
any, of (a) the amount that would have been includible in the gross income of
the holder if its yield on such Regular Certificate were 110% of the applicable
Federal rate as of the date of purchase, over (b) the amount of income actually
includible in the gross income of such holder with respect to the Regular
Certificate. In addition, gain or loss recognized from the sale of a Regular
Certificate by certain banks or thrift institutions will be treated as ordinary
income or loss pursuant to Code Section 582(c). Capital gains of certain
non-corporate taxpayers are subject to a lower maximum tax rate (28%) than
ordinary income of such taxpayers (39.6%), and still a lower maximum rate (20%)
for property held for more than 18 months. The maximum tax rate for
corporations is the same with respect to both ordinary income and capital
gains.
Treatment of Losses
Holders of Regular Certificates will be required to report income with
respect to Regular Certificates on the accrual method of accounting, without
giving effect to delays or reductions in distributions attributable to defaults
or delinquencies on the Mortgage Loans allocable to a particular class of
Regular Certificates, except to the extent it can be established that such
losses are uncollectible. Accordingly, the holder of a Regular Certificate may
have income, or may incur a diminution in cash flow as a result of a default or
delinquency, but may not be able to take a deduction (subject to the discussion
below) for the corresponding loss until a subsequent taxable year. In this
regard, investors are cautioned that while they may generally cease to accrue
interest income if it reasonably appears that the interest will be
uncollectible, the Internal Revenue Service may take the position that original
issue discount must continue to be accrued in spite of its uncollectibility
until the debt instrument is disposed of in a taxable transaction or becomes
worthless in accordance with the rules of Code Section 166. To the extent the
rules of Code Section 166 regarding bad debts are applicable, it appears that
holders of Regular Certificates that are corporations or that otherwise hold
the Regular Certificates in connection with a trade or business should in
general be allowed to deduct as an ordinary loss any such loss sustained during
the taxable year on account of any such Regular Certificates becoming wholly or
partially worthless, and that, in general, holders of Regular Certificates that
are not corporations and do not hold the Regular Certificates in connection
with a trade or business will be allowed to deduct as a short-term capital loss
any loss with respect to principal sustained during the taxable year on account
of a portion of any class or subclass of such Regular Certificates becoming
wholly worthless. Although the matter is not free from doubt, non-corporate
holders of Regular Certificates should be allowed a bad debt deduction at such
time as the principal balance of any class or
79
<PAGE>
subclass of such Regular Certificates is reduced to reflect losses resulting
from any liquidated Mortgage Loans. The Service, however, could take the
position that non-corporate holders will be allowed a bad debt deduction to
reflect such losses only after all Mortgage Loans remaining in the Trust Fund
have been liquidated or such class of Regular Certificates has been otherwise
retired. The Service could also assert that losses on the Regular Certificates
are deductible based on some other method that may defer such deductions for
all holders, such as reducing future cash flow for purposes of computing
original issue discount. This may have the effect of creating "negative"
original issue discount which would be deductible only against future positive
original issue discount or otherwise upon termination of the Class. Holders of
Regular Certificates are urged to consult their own tax advisors regarding the
appropriate timing, amount and character of any loss sustained with respect to
such Regular Certificates. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate
and non-corporate holders, the Internal Revenue Service may take the position
that losses attributable to accrued original issue discount may only be
deducted as short-term capital losses by non-corporate holders not engaged in a
trade or business. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Regular Certificates.
TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss
will be includible as ordinary income or loss in determining the federal
taxable income of holders of Residual Certificates ("Residual
Certificateholders"), and will not be taxed separately to the REMIC Pool. The
daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and
by allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using the accrual method of
accounting, except that (i) the limitations on deductibility of investment
interest expense and expenses for the production of income do not apply, (ii)
all bad loans will be deductible as business bad debts and (iii) the limitation
on the deductibility of interest and expenses related to tax-exempt income will
apply. The REMIC Pool's gross income includes interest, original issue discount
income and market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income from
amortization of issue premium, if any, on the Regular Certificates, plus income
on reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the Regular
Certificates. The REMIC Pool's deductions include interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Loans, other administrative expenses of the REMIC Pool and realized losses on
the Mortgage Loans. The requirement that Residual Certificateholders report
their pro rata share of taxable income or net loss of the REMIC Pool will
continue until there are no Certificates of any class of the related series
outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates or income from amortization of
issue premium on the Regular Certificates, on the other hand. In the event that
an interest in the Mortgage Loans is acquired by the REMIC Pool at a discount,
and one or more of such Mortgage Loans is prepaid, the Residual
Certificateholder may recognize taxable income without being entitled to
receive a corresponding amount of cash because (i) the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Certificates and (ii) the discount on the Mortgage Loans which is
includible in income may exceed the deduction allowed upon such distributions
on those Regular Certificates on account of any unaccrued original issue
discount relating to those Regular Certificates. When there is more than one
class of Regular Certificates that distribute principal sequentially, this
mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Certificates when distributions
in reduction of principal are being made in respect of earlier classes of
Regular Certificates to the extent that such classes are not issued with
substantial discount. If taxable income attributable to such a mismatching is
realized, in general, losses would be allowed in later years as
80
<PAGE>
distributions on the later classes of Regular Certificates are made. Taxable
income may also be greater in earlier years than in later years as a result of
the fact that interest expense deductions, expressed as a percentage of the
outstanding principal amount of such a series of Regular Certificates, may
increase over time as distributions in reduction of principal are made on the
lower yielding classes of Regular Certificates, whereas to the extent that the
REMIC Pool includes fixed rate Mortgage Loans, interest income with respect to
any given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual
Certificateholders must have sufficient other sources of cash to pay any
federal, state or local income taxes due as a result of such mismatching or
unrelated deductions against which to offset such income, subject to the
discussion of "excess inclusions" below under "Limitations on Offset or
Exemption of REMIC Income". The timing of such mismatching of income and
deductions described in this paragraph, if present with respect to a series of
Certificates, may have a significant adverse effect upon the Residual
Certificateholder's after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during certain periods may exceed the income
reflected by such Residual Certificateholder for such periods in accordance
with generally accepted accounting principles. Investors should consult their
own accountants concerning the accounting treatment of their investment in
Residual Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Certificateholder is limited to the adjusted basis of
the Residual Certificate as of the close of the quarter (or time of disposition
of the Residual Certificate if earlier), determined without taking into account
the net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for such Residual Certificate. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Certificateholder and will be decreased (but
not below zero), first, by a cash distribution from the REMIC Pool and, second,
by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. Any loss that is disallowed on account of this limitation
may be carried over indefinitely with respect to the Residual Certificateholder
as to whom such loss was disallowed and may be used by such Residual
Certificateholder only to offset any income generated by the same REMIC Pool.
A Residual Certificateholder will not be permitted to amortize
directly the cost of its Residual Certificate as an offset to its share of the
taxable income of the related REMIC Pool. However, that taxable income will not
include cash received by the REMIC Pool that represents a recovery of the REMIC
Pool's basis in its assets. Such recovery of basis by the REMIC Pool will have
the effect of amortization of the issue price of the Residual Certificates over
their life. However, in view of the possible acceleration of the income of
Residual Certificateholders described above under "Taxation of REMIC Income",
the period of time over which such issue price is effectively amortized may be
longer than the economic life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present
value of anticipated tax liabilities exceeds the present value of anticipated
cash flows. The REMIC Regulations appear to treat the issue price of such a
residual interest as zero rather than such negative amount for purposes of
determining the REMIC Pool's basis in its assets. The preamble to the REMIC
Regulations states that the Service may provide future guidance on the proper
tax treatment of payments made by a transferor of such a residual interest to
induce the transferee to acquire the interest, and Residual Certificateholders
should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater that the corresponding portion of the REMIC Pool's basis in the
Mortgage Loans, the Residual Certificateholder will not recover a portion of
such basis until termination of the REMIC Pool unless future Treasury
regulations provide for periodic adjustments to the REMIC income otherwise
reportable by such holder. The REMIC Regulations currently in effect do not so
provide. See "Treatment of Certain Items of REMIC Income and Expense--Market
Discount" below regarding the basis of Mortgage Loans to the REMIC Pool and
"Sale or Exchange of a Residual Certificate" below regarding possible treatment
of a loss upon termination of the REMIC Pool as a capital loss.
81
<PAGE>
Treatment of Certain Items of REMIC Income and Expense
Although the Depositor intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities regarding
the determination of specific items of income and expense are subject to
differing interpretations. The Depositor makes no representation as to the
specific method that it will use for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Certificates, and
different methods could result in different timing of reporting of taxable
income or net loss to Residual Certificateholders or differences in capital
gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of issue
premium will be determined in the same manner as original issue discount income
on Regular Certificates as described above under "Taxation of Regular
Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates", without regard to the de minimis rule described therein, and
"--Premium".
Deferred Interest. Any Deferred Interest that accrues with respect to
any adjustable rate Mortgage Loans held by the REMIC Pool will constitute
income to the REMIC Pool and will be treated in a manner similar to the
Deferred Interest that accrues with respect to Regular Certificates as
described above under "Taxation of Regular Certificates--Deferred Interest".
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool allocable
to such Mortgage Loans is exceeded by their unpaid principal balances. The
REMIC Pool's basis in such Mortgage Loans is generally the fair market value of
the Mortgage Loans immediately after the transfer thereof to the REMIC Pool.
The REMIC Regulations provide that such basis is equal in the aggregate to the
issue prices of all regular and residual interests in the REMIC Pool (or the
fair market value thereof at the Closing Date, in the case of a retained
Class). In respect of Mortgage Loans that have market discount to which Code
Section 1276 applies, the accrued portion of such market discount would be
recognized currently as an item of ordinary income in a manner similar to
original issue discount. Market discount income generally should accrue in the
manner described above under "Taxation of Regular Certificates--Market
Discount".
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Loans exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate of
the issue prices (or the fair market value of retained Classes) of the regular
and residual interests in the REMIC Pool immediately after the transfer thereof
to the REMIC Pool. In a manner analogous to the discussion above under
"Taxation of Regular Certificates--Premium", a REMIC Pool that holds a Mortgage
Loan as a capital asset under Code Section 1221 may elect under Code Section
171 to amortize premium on whole mortgage loans or mortgage loans underlying
MBS that were originated after September 27, 1985 or MBS that are REMIC regular
interests under the constant yield method. Amortizable bond premium will be
treated as an offset to interest income on the Mortgage Loans, rather than as a
separate deduction item. To the extent that the mortgagors with respect to the
Mortgage Loans are individuals, Code Section 171 will not be available for
premium on Mortgage Loans (including underlying mortgage loans) originated on
or prior to September 27, 1985. Premium with respect to such Mortgage Loans may
be deductible in accordance with a reasonable method regularly employed by the
holder thereof. The allocation of such premium pro rata among principal
payments should be considered a reasonable method; however, the Service may
argue that such premium should be allocated in a different manner, such as
allocating such premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion or all of the REMIC taxable income includible in determining
the federal income tax liability of a Residual Certificateholder will be
subject to special treatment. That portion, referred to as the "excess
inclusion", is equal to the excess of REMIC taxable income for the calendar
quarter allocable to a Residual Certificate over the daily accruals for such
quarterly period of (i) 120% of the long-term applicable Federal rate that
would have applied to the Residual Certificate (if it were a debt instrument)
on the Startup Day under Code Section 1274(d), multiplied
82
<PAGE>
by (ii) the adjusted issue price of such Residual Certificate at the beginning
of such quarterly period. For this purpose, the adjusted issue price of a
Residual Certificate at the beginning of a quarter is the issue price of the
Residual Certificate, plus the amount of such daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to such Residual Certificate prior to the
beginning of such quarterly period. Accordingly, the portion of the REMIC
Pool's taxable income that will be treated as excess inclusions will be a
larger portion of such income as the adjusted issue price of the Residual
Certificates diminishes.
The portion of a Residual Certificateholder's REMIC taxable income
consisting of the excess inclusions generally may not be offset by other
deductions, including net operating loss carry forwards, on such Residual
Certificateholder's return. However, net operating loss carryovers are
determined without regard to excess inclusion income. Further, if the Residual
Certificateholder is an organization subject to the tax on unrelated business
income imposed by Code Section 511, the Residual Certificateholder's excess
inclusions will be treated as unrelated business taxable income of such
Residual Certificateholder for purposes of Code Section 511. In addition, REMIC
taxable income is subject to 30% withholding tax with respect to certain
persons who are not U.S. Persons (as defined below under "Tax-Related
Restrictions on Transfer of Residual Certificates--Foreign Investors"), and the
portion thereof attributable to excess inclusions is not eligible for any
reduction in the rate of withholding tax (by treaty or otherwise). See
"Taxation of Certain Foreign Investors--Residual Certificates" below. Finally,
if a real estate investment trust or a regulated investment company owns a
Residual Certificate, a portion (allocated under Treasury regulations yet to be
issued) of dividends paid by the real estate investment trust or a regulated
investment company could not be offset by net operating losses of its
shareholders, would constitute unrelated business taxable income for tax-exempt
shareholders, and would be ineligible for reduction of withholding to certain
persons who are not U.S. Persons. The SBJPA of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from Residual Certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to Residual Certificates
continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining
the effect of excess inclusions on the alternative minimum taxable income of a
Residual Certificateholder. First, alternative minimum taxable income for a
Residual Certificateholder is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions.
Second, a Residual Certificateholder's alternative minimum taxable income for a
taxable year cannot be less than the excess inclusions for the year. Third, the
amount of any alternative minimum tax net operating loss deduction must be
computed without regard to any excess inclusions. These rules are effective for
taxable years beginning after December 31, 1996, unless a Residual
Certificateholder elects to have such rules apply only to taxable years
beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below) other than in connection with the formation of a REMIC Pool, if the
Disqualified organization is required, pursuant to a binding contract, to sell
such Residual Certificate, which sale occurs within seen days after the Startup
Days, a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value rate equals the applicable
Federal rate under Code Section 1274(d) as of the date of the transfer for a
term ending with the last calendar quarter in which excess inclusions are
expected to accrue. Such a tax generally would be imposed on the transferor of
the Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a 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. The tax also may be waived by the Treasury Department if
the Disqualified
83
<PAGE>
Organization promptly disposes of the residual interest and the transferor pays
income tax at the highest corporate rate on the excess inclusions for the
period the Residual Certificate is actually held by the Disqualified
Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
corporate income tax rate. Such tax would be deductible from the ordinary gross
income of the Pass-Through Entity for the taxable year. The Pass-Through Entity
would not be liable for such tax if it has received an affidavit from such
record holder that it is not a Disqualified Organization or stating such
holder's taxpayer identification number and, during the period such person is
the record holder of the Residual Certificate, the Pass-Through Entity does not
have actual knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and, except in the case of the Federal
Home Loan Mortgage Corporation, a majority of its board of directors is not
selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity.
The Pooling Agreement with respect to a series of Certificates will
provide that no legal or beneficial interest in a Residual Certificate may be
transferred unless (i) the proposed transferee provides to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual
Certificate, is not a Disqualified Organization and is not purchasing such
Residual Certificates on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof), and (ii) the transferor provides a
statement in writing to the Depositor and the Trustee that it has no actual
knowledge that such affidavit is false. Moreover, the Pooling Agreement will
provide that any attempted or purported transfer in violation of these transfer
restrictions will be null and void and will vest no rights in any purported
transferee. Each Residual Certificate with respect to a series will bear a
legend referring to such restrictions on transfer, and each Residual
Certificateholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling Agreement required under the
Code or applicable Treasury regulations to effectuate the foregoing
restrictions. Information necessary to compute an applicable excise tax must be
furnished to the Service and to the requesting party within 60 days of the
request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Certificateholder (other than a
Residual Certificateholder who is not a U.S. Person, as defined below under
"Foreign Investors") is disregarded for all federal income tax purposes if a
significant purpose of the transferor is to impede the assessment or collection
of tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) is a "noneconomic residual interest" unless, at the
time of the transfer, (i) the present value of the expected future
distributions on the residual interest at least equals the product of the
present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs, and (ii)
the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. The anticipated excess
84
<PAGE>
inclusions and the present value rate are determined in the same manner as set
forth above under "Disqualified Organizations". The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have
known that the transferee would be unwilling or unable to pay taxes due on its
share of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation
of the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of the noneconomic residual
interest, the transferee may incur tax liabilities in excess of cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Pooling
Agreement with respect to each series of Certificates will require the
transferee of a Residual Certificate to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading
"Disqualified Organizations". The transferor must have no actual knowledge or
reason to know that such statements are false.
Foreign Investors. The REMIC Regulations provide that the transfer of
a Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless
such transferee's income is effectively connected with the conduct of a trade
or business within the United States or not otherwise subject to a withholding
tax. A Residual Certificate is deemed to have tax avoidance potential unless,
at the time of the transfer, (i) the future value of expected distributions
equals at least 30% of the anticipated excess inclusions after the transfer,
and (ii) the transferor reasonably expects that the transferee will receive
sufficient distributions from the REMIC Pool at or after the time at which the
excess inclusions accrue and prior to the end of the next succeeding taxable
year for the accumulated withholding tax liability to be paid. If the non-U.S.
Person transfers the Residual Certificate back to a U.S. Person, the transfer
will be disregarded and the foreign transferor will continue to be treated as
the owner unless arrangements are made so that the transfer does not have the
effect of allowing the transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any State, an estate that is subject to United States federal
income tax regardless of the source of its income or a trust if (A) for taxable
years beginning after December 31, 1996 (or for taxable years ending after
August 20, 1996, if the trustee has made an applicable election), a court
within the United States is able to exercise primary supervision over the
administration of such trust, and one or more United States persons have the
authority to control all substantial decisions of such trust, or (B) for all
other taxable years, such trust is subject to United States federal income tax
regardless of the source of its income (or, to the extent provided in
applicable Treasury Regulations, certain trusts in existence on August 20, 1996
which are eligible to elect to be treated as U.S. Persons).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under "Taxation
of Residual Certificates--Basis and Losses") of such Residual Certificateholder
in such Residual Certificate at the time of the sale or exchange. In addition
to reporting the taxable income of the REMIC Pool, a Residual Certificateholder
will have taxable income to the extent that any cash distribution to it from
the REMIC Pool exceeds such adjusted basis on that Distribution Date. Such
income will be treated as gain from the sale or exchange of the Residual
Certificate. It is possible that the termination of the REMIC Pool may be
treated as a sale or exchange of a Residual Certificateholder's Residual
Certificate, in which case, if the Residual Certificateholder has an adjusted
basis in such Residual Certificateholder's Residual Certificate remaining when
its interest in the REMIC Pool terminates, and if such Residual
Certificateholder holds such Residual Certificate as a capital asset under Code
Section 1221, then such Residual Certificateholder will recognize a capital
loss at that time in the amount of such remaining adjusted basis.
85
<PAGE>
Any gain on the sale of a Residual Certificate will be treated as
ordinary income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii) in
the case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss
recognized from the sale of a Residual Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except
as provided in Treasury regulations yet to be issued, the wash sale rules of
Code Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark to Market Regulations
The Service has issued regulations (the "Mark to Market Regulations")
under Code Section 475 relating to the requirement that a securities dealer
mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that
the dealer has specifically identified a security as held for investment. The
Mark to Market Regulations provide that, for purposes of this mark-to-market
requirement, a Residual Certificate is not treated as a security and thus may
not be marked to market. The Mark to Market Regulations apply to all Residual
Certificates acquired on or after January 4, 1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Certificateholders, but rather
will be taxed directly to the REMIC Pool at a 100% rate. Prohibited
transactions generally include (i) the disposition of a qualified mortgage
other than pursuant to a (a) substitution within two years of the Startup Day
for a defective (including a defaulted) obligation (or repurchase in lieu of
substitution of a defective (including a defaulted) obligation at any time) or
for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool or (d) qualified (complete)
liquidation, (ii) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold, (iii) the
receipt of compensation for services or (iv) the receipt of gain from
disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is outstanding). The REMIC
Regulations indicate that the modification of a Mortgage Loan generally will
not be treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the Mortgage Loan, the waiver of a
due-on-sale or due-on-encumbrance clause or the conversion of an interest rate
by a mortgagor pursuant to the terms of a convertible adjustable rate Mortgage
Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on
the value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund
by a Residual Certificateholder, (iii)
86
<PAGE>
in the nature of a guarantee, (iv) made to facilitate a qualified liquidation
or clean-up call and (v) as otherwise permitted in Treasury regulations yet to
be issued.
Net Income from Foreclosure Property
The REMIC Pool will be 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. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions of
up to an additional four years. 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.
It is not anticipated that the REMIC Pool will receive income or
contributions subject to tax under the preceding three paragraphs, except as
described in the applicable Prospectus Supplement with respect to net income
from foreclosure property on a commercial or multifamily residential property
that secured a Mortgage Loan. In addition, unless otherwise disclosed in the
applicable Prospectus Supplement, it is not anticipated that any material state
income or franchise tax will be imposed on a REMIC Pool.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC Pool's final tax return a date on which such adoption
is deemed to occur, and sells all of its assets (other than cash) within a
90-day period beginning on the date of the adoption of the plan of liquidation,
the REMIC Pool will not be subject to the prohibited transaction rules on the
sale of its assets, provided that the REMIC Pool credits or distributes in
liquidation all of the sale proceeds plus its cash (other than amounts retained
to meet claims) to holders of Regular Certificates and Residual
Certificateholders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual
Certificateholder for an entire taxable year, the REMIC Pool will be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination by the Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction or credit in a unified
administrative proceeding. The Residual Certificateholder owning the largest
percentage interest in the Residual Certificates will be obligated to act as
"tax matters person", as defined in applicable Treasury regulations, with
respect to the REMIC Pool. Each Residual Certificateholder will be deemed, by
acceptance of such Residual Certificates, to have agreed (i) to the appointment
of the tax matters person as provided in the preceding sentence and (ii) to the
irrevocable designation of the Master Servicer as agent for performing the
functions of the tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $124,500 for the taxable year
beginning in 1998 ($62,250 in the case of a married individual filing a
separate return) (subject to adjustments for inflation in subsequent years) or
(ii) 80% of the amount of itemized deductions otherwise allowable for such
year. In the case of a REMIC Pool, such deductions may include deductions under
Code Section 212 for the servicing fee and all administrative and other
expenses relating to the
87
<PAGE>
REMIC Pool, or any similar expenses allocated to the REMIC Pool with respect to
a regular interest it holds in another REMIC. Such investors who hold REMIC
Certificates either directly or indirectly through certain pass-through
entities may have their pro rata share of such expenses allocated to them as
additional gross income, but may be subject to such limitation on deductions.
In addition, such expenses are not deductible at all for purposes of computing
the alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Temporary Treasury regulations provide
that the additional gross income and corresponding amount of expenses generally
are to be allocated entirely to the holders of Residual Certificates in the
case of a REMIC Pool that would not qualify as a fixed investment trust in the
absence of a REMIC election. However, such additional gross income and
limitation on deductions will apply to the allocable portion of such expenses
to holders of Regular Certificates, as well as holders of Residual
Certificates, where such Regular Certificates are issued in a manner that is
similar to pass-through certificates in a fixed investment trust. In general,
such allocable portion will be determined based on the ratio that a REMIC
Certificateholder's income, determined on a daily basis, bears to the income of
all holders of Regular Certificates and Residual Certificates with respect to a
REMIC Pool. As a result, individuals, estates or trusts holding REMIC
Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Certificates that are issued in a single Class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the
related period on Residual Certificates. Unless otherwise indicated in the
applicable Prospectus Supplement, all such expenses will be allocable to the
Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
Trustee, or the person who would otherwise be required to withhold tax from
such distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial owner
and stating, among other things, that the beneficial owner of the Regular
Certificate is a Non-U.S. Person. If such statement, or any other required
statement, is not provided, 30% withholding will apply unless reduced or
eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Certificate is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Prepayment Premiums distributable to Regular Certificateholders
who are Non-U.S. Persons may be subject to 30% United States withholding tax.
Investors who are Non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Certificateholders who are Non-U.S. Persons are treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Certificateholders may qualify as "portfolio interest", subject to the
conditions described in "Regular Certificates" above, but only to the extent
that (i) the Mortgage Loans (including mortgage loans underlying MBS) were
issued after July 18, 1984 and (ii) the Trust Fund or segregated pool of assets
therein (as to which a separate REMIC election will be made), to which the
Residual Certificate relates, consists of obligations issued in "registered
form" within the meaning of Code Section 163(f)(1). Generally, whole mortgage
loans will not be, but MBS and regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, a Residual
Certificateholder will not be entitled to any exemption from the 30%
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion". See "Taxation of
Residual Certificates--Limitations on Offset or Exemption of
88
<PAGE>
REMIC Income". If the amounts paid to Residual Certificateholders who are
Non-U.S. Persons are effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Persons, 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
Non-U.S. Persons will be subject to United States federal income tax at regular
rates. If 30% (or lower treaty rate) withholding is applicable, such amounts
generally will be taken into account for purposes of withholding only when paid
or otherwise distributed (or when the Residual Certificate is disposed of)
under rules similar to withholding upon disposition of debt instruments that
have original issue discount. See "Tax-Related Restrictions on Transfer of
Residual Certificates--Foreign Investors" above concerning the disregard of
certain transfers having "tax avoidance potential". Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the
sale of the Regular Certificates to or through certain brokers, may be subject
to a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from distribution
on the Regular Certificates would be refunded by the Service or allowed as a
credit against the Regular Certificateholder's federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of any market discount on the Regular
Certificates will be made annually to the Service and to individuals, estates,
non-exempt and non-charitable trusts, and partnerships who are either holders
of record of Regular Certificates or beneficial owners who own Regular
Certificates through a broker or middleman as nominee. All brokers, nominees
and all other non-exempt holders of record of Regular Certificates (including
corporations, non-calendar year taxpayers, securities or commodities dealers,
real estate investment trusts, investment companies, common trust funds, thrift
institutions and charitable trusts) may request such information for any
calendar quarter by telephone or in writing by contacting the person designated
in Service Publication 938 with respect to a particular Series of Regular
Certificates. Holders through nominees must request such information from the
nominee.
The Service's Form 1066 has an accompanying Schedule Q, Quarterly
Notice to Residual Interest Holders of REMIC Taxable Income or Net Loss
Allocation. Treasury regulations require that Schedule Q be furnished by the
REMIC Pool to each Residual Certificateholder by the end of the month following
the close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Service concerning Code Section 67
expenses (see "Limitations on Deduction of Certain Expenses" above) allocable
to such holders. Furthermore, under such regulations, information must be
furnished quarterly to Residual Certificateholders, furnished annually to
holders of Regular Certificates, and filed annually with the Service concerning
the percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Status of REMIC Certificates".
89
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC ELECTION
IS MADE
STANDARD CERTIFICATES
General
In the event that no election is made to treat a Trust Fund (or a
segregated pool of assets therein) with respect to a series of Certificates
that are not designated as "Stripped Certificates", as described below, as a
REMIC (Certificates of such a series hereinafter referred to as "Standard
Certificates"), the Trust Fund will be classified as a grantor trust under
subpart E, Part 1 of subchapter J of the Code and not as an association taxable
as a corporation or a "taxable mortgage pool" within the meaning of Code
Section 7701(i). Where there is no fixed retained yield with respect to the
Mortgage Loans underlying the Standard Certificates, the holder of each such
Standard Certificate (a "Standard Certificateholder") in such series will be
treated as the owner of a pro rata undivided interest in the ordinary income
and corpus portions of the Trust Fund represented by its Standard Certificate
and will be considered the beneficial owner of a pro rata undivided interest in
each of the Mortgage Loans, subject to the discussion below under
"Recharacterization of Servicing Fees". Accordingly, the holder of a Standard
Certificate of a particular series will be required to report on its federal
income tax return its pro rata share of the entire income from the Mortgage
Loans represented by its Standard Certificate, including interest at the coupon
rate on such Mortgage Loans, original issue discount (if any), prepayment fees,
assumption fees, and late payment charges received by the Master Servicer, in
accordance with such Standard Certificateholder's method of accounting. A
Standard Certificateholder generally will be able to deduct its share of the
servicing fee and all administrative and other expenses of the Trust Fund in
accordance with its method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Trust Fund. However,
investors who are individuals, estates or trusts who own Standard Certificates,
either directly or indirectly through certain pass-through entities, will be
subject to limitation with respect to certain itemized deductions described in
Code Section 67, including deductions under Code Section 212 for the servicing
fee and all such administrative and other expenses of the Trust Fund, to the
extent that such deductions, in the aggregate, do not exceed two percent of an
investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser of (i) 3% of the excess, if any, of
adjusted gross income over $124,500 for the taxable year beginning in 1998
($62,250 in the case of a married individual filing a separate return) (subject
to adjustments for inflation in subsequent years), or (ii) 80% of the amount of
itemized deductions otherwise allowable for such year. As a result, such
investors holding Standard Certificates, directly or indirectly through a
pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Standard Certificates with respect to
interest at the pass-through rate on such Standard Certificates. In addition,
such expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is fixed retained
yield with respect to the Mortgage Loans underlying a series of Standard
Certificates or where the servicing fee is in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Certificates" and "Recharacterization of Servicing Fees",
respectively.
Tax Status
Standard Certificates will have the following status for federal
income tax purposes:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be considered
to represent "loans ... secured by an interest in real property which is ...
residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage Loans
represented by that Standard Certificate is of the type described in such
section of the Code.
2. A Standard Certificate owned by a real estate investment trust will
be considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Trust Fund
90
<PAGE>
consist of qualified assets, and interest income on such assets will be
considered "interest on obligations secured by mortgages on real property" to
such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Certificate owned by a REMIC will be considered to
represent an "obligation . . . which is principally secured by an interest in
real property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Trust Fund consist of "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
Premium and Discount
Standard Certificateholders are advised to consult with their tax
advisors as to the federal income tax treatment of premium and discount arising
either upon initial acquisition of Standard Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase
of a Standard Certificate will be determined generally as described above under
"Certain Federal Income Tax Consequences for REMIC Certificates--Taxation of
Residual Certificates--Treatment of Certain Items of REMIC Income and
Expense--Premium".
Original Issue Discount. The original issue discount rules
will be applicable to a Standard Certificateholder's interest in those Mortgage
Loans as to which the conditions for the application of those sections are met.
Rules regarding periodic inclusion of original issue discount income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984.
Under the OID Regulations, such original issue discount could arise by the
charging of points by the originator of the mortgages in an amount greater than
a statutory de minimis exception, including a payment of points currently
deductible by the borrower under applicable Code provisions or, under certain
circumstances, by the presence of "teaser rates" on the Mortgage Loans.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to such
income. Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires
the obligation after its initial issuance at a price greater than the sum of
the original issue price and the previously accrued original issue discount,
less prior payments of principal. Accordingly, if such Mortgage Loans acquired
by a Standard Certificateholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Loans, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by
such holder.
Market Discount. Standard Certificateholders also will be
subject to the market discount rules to the extent that the conditions for
application of those sections are met. Market discount on the Mortgage Loans
will be determined and will be reported as ordinary income generally in the
manner described above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Market Discount", except that
the ratable accrual methods described therein will not apply and it is unclear
whether a Prepayment Assumption would apply. Rather, the holder will accrue
market discount pro rata over the life of the Mortgage Loans, unless the
constant yield method is elected. Unless indicated otherwise in the applicable
Prospectus Supplement, no prepayment assumption will be assumed for purposes of
such accrual.
Recharacterization of Servicing Fees. If the servicing fee paid to the
Master Servicer were deemed to exceed reasonable servicing compensation, the
amount of such excess would represent neither income nor a deduction to
Certificateholders. In this regard, there are no authoritative guidelines for
federal income tax purposes as to either the maximum amount of servicing
compensation that may be considered reasonable in the context of this or
similar transactions or whether, in the case of the Standard Certificate, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that
91
<PAGE>
such amount would exceed reasonable servicing compensation as to some of the
Mortgage Loans would be increased. Service guidance indicates that a servicing
fee in excess of reasonable compensation ("excess servicing") will cause the
Mortgage Loans to be treated under the "stripped bond" rules. Such guidance
provides safe harbors for servicing deemed to be reasonable and requires
taxpayers to demonstrate that the value of servicing fees in excess of such
amounts is not greater than the value of the services provided.
Accordingly, if the Service's approach is upheld, a servicer who
receives a servicing fee in excess of such amounts would be viewed as retaining
an ownership interest in a portion of the interest payments on the Mortgage
Loans. Under the rules of Code Section 1286, the separation of ownership of the
right to receive some or all of the interest payments on an obligation from the
right to receive some or all of the principal payments on the obligation would
result in treatment of such Mortgage Loans as "stripped coupons" and "stripped
bonds". Subject to the de minimis rule discussed below under "--Stripped
Certificates", each stripped bond or stripped coupon could be considered for
this purpose as a non-interest bearing obligation issued on the date of issue
of the Standard Certificates, and the original issue discount rules of the Code
would apply to the holder thereof. While Standard Certificateholders would
still be treated as owners of beneficial interests in a grantor trust for
federal income tax purposes, the corpus of such trust could be viewed as
excluding the portion of the Mortgage Loans the ownership of which is
attributed to the Master Servicer, or as including such portion as a second
class of equitable interest. Applicable Treasury regulations treat such an
arrangement as a fixed investment trust, since the multiple classes of trust
interests should be treated as merely facilitating direct investments in the
trust assets and the existence of multiple classes of ownership interests is
incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
Standard Certificateholder, except that the income reported by a cash method
holder may be slightly accelerated. See "Stripped Certificates" below for a
further description of the federal income tax treatment of stripped bonds and
stripped coupons.
Sale or Exchange of Standard Certificates Upon sale or exchange of a
Standard Certificate, a Standard Certificateholder will recognize gain or loss
equal to the difference between the amount realized on the sale and its
aggregate adjusted basis in the Mortgage Loans and the other assets represented
by the Standard Certificate. In general, the aggregate adjusted basis will
equal the Standard Certificateholder's cost for the Standard Certificate,
increased by the amount of any income previously reported with respect to the
Standard Certificate and decreased by the amount of any losses previously
reported with respect to the Standard Certificate and the amount of any
distributions received thereon. Except as provided above with respect to market
discount on any Mortgage Loans, and except for certain financial institutions
subject to the provisions of Code Section 582(c), any such gain or loss would
be capital gain or loss if the Standard Certificate was held as a capital
asset. However, gain on the sale of a Standard Certificate will be treated as
ordinary income (i) if a Standard Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Standard Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii) in
the case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. Capital gains of certain
non-corporate taxpayers are subject to a lower maximum tax rate (28%) than
ordinary income of such taxpayers (39.6%) for property held for more than one
year but not more than 18 months, and a still lower maximum rate (20%) for
property held for more than 18 months. The maximum tax rate for corporations is
the same with respect to both ordinary income and capital gains.
STRIPPED CERTIFICATES
General
Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates that are subject to those rules will be referred to as
"Stripped
92
<PAGE>
Certificates". Stripped Certificates include "Stripped Interest Certificates"
and "Stripped Principal Certificates" (as defined in this Prospectus) as to
which no REMIC election is made.
The Certificates will be subject to those rules if (i) the Depositor
or any of its affiliates retains (for its own account or for purposes of
resale), in the form of fixed retained yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Loans, (ii) the Master
Servicer is treated as having an ownership interest in the Mortgage Loans to
the extent it is paid (or retains) servicing compensation in an amount greater
than reasonable consideration for servicing the Mortgage Loans (see "Standard
Certificates--Recharacterization of Servicing Fees" above) and (iii)
Certificates are issued in two or more classes or subclasses representing the
right to non-pro-rata percentages of the interest and principal payments on the
Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to
own "stripped bonds" with respect to its pro rata share of all or a portion of
the principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid to the Master Servicer, to the extent that such fees
represent reasonable compensation for services rendered. See discussion above
under "Standard Certificates--Recharacterization of Servicing Fees". Although
not free from doubt, for purposes of reporting to Stripped Certificateholders,
the servicing fees will be allocated to the Stripped Certificates in proportion
to the respective entitlements to distributions of each class (or subclass) of
Stripped Certificates for the related period or periods. The holder of a
Stripped Certificate generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "Standard
Certificates--General", subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon as an
obligation issued at an original issue discount on the date that such stripped
interest is purchased. Although the treatment of Stripped Certificates for
federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, the Depositor has been
advised by counsel that (i) the Trust Fund will be treated as a grantor trust
under subpart E, Part 1 of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i), and (ii) each Stripped Certificate should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and
the OID Regulations. While under Code Section 1286 computations with respect to
Stripped Certificates arguably should be made in one of the ways described
below under "Taxation of Stripped Certificates--Possible Alternative
Characterizations," the OID Regulations state, in general, that two or more
debt instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument for original issue
discount purposes. The Pooling Agreement requires that the Trustee make and
report all computations described below using this aggregate approach, unless
substantial legal authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 assume that
a Stripped Certificate will be treated as a single debt instrument issued on
the date it is purchased for purposes of calculating any original issue
discount and that the interest component of such a Stripped Certificate would
be treated as qualified stated interest under the OID Regulations. Further
pursuant to these final regulations the purchaser of such a Stripped
Certificate will be required to account for any discount as market discount
rather than original issue discount unless either (i) the initial discount with
respect to the Stripped Certificate was treated as zero under the de minimis
rule of Code Section 1273(a)(3), or (ii) no more than 100 basis points in
excess of reasonable servicing is stripped off the related Mortgage Loans. Any
such market discount would be reportable as described under "Certain Federal
Income Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Market Discount," without regard to the de minimis rule therein,
assuming that a prepayment assumption is employed in such computation.
93
<PAGE>
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as
that of the Mortgage Loans. Although the issue is not free from doubt, counsel
has advised the Depositor that Stripped Certificates owned by applicable
holders should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A), "obligation[s] principally secured by an
interest in real property" within the meaning of Code Section 860G(a)(3)(A),
and "loans . . . secured by an interest in real property which is . . .
residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "General",
each Stripped Certificate will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, the amount of original issue discount required to be included in the
income of a holder of a Stripped Certificate (referred to in this discussion as
a "Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under "Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates". However, with the apparent exception of
a Stripped Certificate qualifying as a market discount obligation, as described
above under "General", the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments, other than
qualified stated interest to be made on the Stripped Certificate to such
Stripped Certificateholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Certificateholder's
recognition of original issue discount will be either accelerated or
decelerated and the amount of such original issue discount will be either
increased or decreased depending on the relative interests in principal and
interest on each Mortgage Loan represented by such Stripped Certificateholder's
Stripped Certificate. While the matter is not free from doubt, the holder of a
Stripped Certificate should be entitled in the year that it becomes certain
(assuming no further prepayments) that the holder will not recover a portion of
its adjusted basis in such Stripped Certificate to recognize an ordinary loss
equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or
all of the interest payments with respect to the Stripped Certificates will not
be made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as
the Stripped Certificates. However, if final regulations dealing with
contingent interest with respect to the Stripped Certificates apply the same
principles as the OID Regulations, such regulations may lead to different
timing of income inclusion that would be the case under the OID Regulations.
Furthermore, application of such principles could lead to the characterization
of gain on the sale of contingent interest Stripped Certificates as ordinary
income. Investors should consult their tax advisors regarding the appropriate
tax treatment of Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a
Stripped Certificate prior to its maturity will result in gain or loss equal to
the difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Sale or Exchange of Regular
Certificates". To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Certificates, such
subsequent purchaser will be required for federal income tax purposes to accrue
and report such excess as if it were
94
<PAGE>
original issue discount in the manner described above. It is not clear for this
purpose whether the assumed prepayment rate that is to be used in the case of a
Stripped Certificateholder other than an original Stripped Certificateholder
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Stripped Certificateholder
may be treated as the owner of (i) one installment obligation consisting of
such Stripped Certificate's pro rata share of the payments attributable to
principal on each Mortgage Loan and a second installment obligation consisting
of such Stripped Certificate's pro rata share of the payments attributable to
interest on each Mortgage Loan, (ii) as many stripped bonds or stripped coupons
as there are scheduled payments of principal and/or interest on each Mortgage
Loan or (iii) a separate installment obligation for each Mortgage Loan,
representing the Stripped Certificate's pro rata share of payments of principal
and/or interest to be made with respect thereto. Alternatively, the holder of
one or more classes of Stripped Certificates may be treated as the owner of a
pro rata fractional undivided interest in each Mortgage Loan to the extent that
such Stripped Certificate, or classes of Stripped Certificates in the
aggregate, represent the same pro rata portion of principal and interest on
each such Mortgage Loan, and a stripped bond or stripped coupon (as the case
may be), treated as an installment obligation or contingent payment obligation,
as to the remainder. Final regulations issued on December 28, 1992 regarding
original issue discount on stripped obligations make the foregoing
interpretations less likely to be applicable. The preamble to those regulations
states that they are premised on the assumption that an aggregation approach is
appropriate for determining whether original issue discount on a stripped bond
or stripped coupon is de minimis, and solicits comments on appropriate rules
for aggregating stripped bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
FEDERAL INCOME TAX CONSEQUENCES FOR FASIT CERTIFICATES
If and to the extent set forth in the Prospectus Supplement relating
to a particular Series of Certificates, an election may be made to treat the
related Trust Fund or one or more segregated pools of assets therein as one or
more financial asset securitization investment trusts ("FASITs") within the
meaning of Code Section 860L(a). Qualification as a FASIT requires ongoing
compliance with certain conditions. With respect to each series of FASIT
Certificates, O'Melveny & Myers LLP, counsel to the Depositor, will advise the
Depositor that in the firm's opinion, assuming (i) the making of such an
election, (ii) compliance with the Pooling Agreement and (iii) compliance with
any changes in the law, including any amendments to the Code or applicable
Treasury Regulations thereunder, each FASIT Pool will qualify as a FASIT. In
such case, the Regular Certificates will be considered to be "regular
interests" in the FASIT and will be treated for federal income tax purposes as
if they were newly originated debt instruments, and the Residual Certificate
will be considered the "ownership interest" in the FASIT Pool. The Prospectus
Supplement for each series of Certificates will indicate whether one or more
FASIT elections will be made with respect to the related Trust Fund.
FASIT treatment has become available pursuant to recently enacted
legislation, and no Treasury Regulations have as yet been issued detailing the
circumstances under which a FASIT election may be made or the consequences of
such an election. If a FASIT election is made with respect to any Trust Fund or
as to any segregated pool of assets therein, the related Prospectus Supplement
will describe the Federal income tax consequences of such election.
95
<PAGE>
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Standard Certificateholder or Stripped
Certificateholder at any time during such year, such information (prepared on
the basis described above) as the Trustee deems to be necessary or desirable to
enable such Certificateholders to prepare their federal income tax returns.
Such information will include the amount of original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amounts required to be reported by the Trustee may
not be equal to the proper amount of original issue discount required to be
reported as taxable income by a Certificateholder, other than an original
Certificateholder that purchased at the issue price. In particular, in the case
of Stripped Certificates, unless provided otherwise in the applicable
Prospectus Supplement, such reporting will be based upon a representative
initial offering price of each class of Stripped Certificates. The Trustee will
also file such original issue discount information with the Service. If a
Certificateholder fails to supply an accurate taxpayer identification number or
if the Secretary of the Treasury determines that a Certificateholder has not
reported all interest and dividend income required to be shown on his federal
income tax return, 31% backup withholding may be required in respect of any
reportable payments, as described above under "Certain Federal Income Tax
Consequences for REMIC Certificates--Backup Withholding".
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Standard Certificateholder or Stripped
Certificateholder on original issue discount recognized by the Standard
Certificateholder or Stripped Certificateholders on the sale or exchange of
such a Certificate also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under
"Certain Federal Income Tax Consequences for REMIC Certificates--Taxation of
Certain Foreign Investors--Regular Certificates".
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences", potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State tax law may differ substantially
from the corresponding federal law, and the discussion above does not purport
to describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Offered
Certificates.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Code impose certain requirements on employee
benefit plans, and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, collective
investment funds, insurance company and separate accounts and some insurance
company general accounts in which such plans, accounts or arrangements are
invested (all of which are hereinafter referred to as "Plans"), and on persons
who are fiduciaries with respect to Plans in connection with the investment of
Plan assets.
96
<PAGE>
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. 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. Special caution should be
exercised before the assets of a Plan are used to purchase a Certificate if,
with respect to such assets, the Depositor, the Master Servicer, a Special
Servicer or any Sub-Servicer or the Trustee or an affiliate thereof, either:
(a) has discretionary authority or control with respect to the investment of
such assets of such Plan; or (b) has authority or responsibility to give, or
regularly gives, investment advice with respect to such assets of such Plan for
a fee and pursuant to an agreement or understanding that such advice will serve
as a primary basis for investment decisions with respect to such assets and
that such advice will be based on the particular investment needs of the Plan.
Before purchasing any Offered Certificates, a Plan fiduciary should
consult with its counsel and determine whether there exists any prohibition to
such purchase under the requirements of ERISA, whether any prohibited
transaction class exemption or any individual prohibited transaction exemption
(as described below) applies, including whether the appropriate conditions set
forth therein would be met, or whether any statutory prohibited transaction
exemption is applicable, and further should consult the applicable Prospectus
Supplement relating to such Series of Certificates.
Certain employee benefit plans, such as governmental plans (as defined
in ERISA Section 3(32)), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA) are not
subject to ERISA requirements. Accordingly, assets of such governmental and
church plans may be invested in Offered Certificates without regard to the
ERISA considerations described below, subject to the provisions of other
applicable federal and state law. Any such plan which is qualified and exempt
from taxation under Sections 401(a) and 501(a) of the Code, however, is subject
to the prohibited transaction rules set forth in Section 503 of the Code.
PLAN ASSET REGULATIONS
A Plan's investment in Offered Certificates may cause the Trust Assets
to be deemed Plan assets. Section 2510.3-101 of the regulations ("Plan Asset
Regulations") of the United States Department of Labor ("DOL") provides that
when a Plan acquires an equity interest in an entity, the Plan's assets include
both such equity interest and an undivided interest in each of the underlying
assets of the entity, unless certain exceptions not applicable to this
discussion apply, or unless the equity participation in the entity by "benefit
plan investors" (that is, Plans, certain employee benefit plans not subject to
ERISA, and entities whose underlying assets include plan assets) is not
"significant". For this purpose, the Plan Asset Regulations provide, in
general, that participation in an entity, such as a Trust Fund, is
"significant" if, immediately after the most recent acquisition of any equity
interest, 25% or more of any class of equity interests, such as Certificates,
is held by benefit plan investors. Unless restrictions on ownership of and
transfer to Plans apply with respect to a Series of Certificates, there can be
no assurance that benefit plan investors will not own at least 25% of a class
of Certificates.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides
investment advice with respect to such assets for a fee, is a fiduciary of the
investing Plan. If the Trust Assets constitute Plan assets, then any party
exercising management or discretionary control regarding those assets, such as
a Master Servicer, a Special Servicer or any Sub-Servicer, may be deemed to be
a Plan "fiduciary" with respect to the investing Plan, and thus subject to the
fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code. In addition, if the Trust Assets constitute Plan assets,
the purchase of Certificates by a Plan, as well as the operation of the Trust
Fund, may constitute or involve one or more prohibited transactions under ERISA
and the Code.
97
<PAGE>
ADMINISTRATIVE EXEMPTIONS
Several underwriters of mortgage-backed securities have applied for
and obtained from DOL individual administrative ERISA prohibited transaction
exemptions that apply to the purchase and holding of mortgage-backed securities
which, among other conditions, are sold in an offering with respect to which
such underwriter serves as the sole or a managing underwriter or as a selling
or placement agent. If such an exemption may be applicable to a Series of
Certificates, the related Prospectus Supplement will refer to such possibility,
as well as provide a summary of the conditions to the exemption's
applicability.
UNRELATED BUSINESS TAXABLE INCOME; RESIDUAL CERTIFICATES
The purchase of a Residual Certificate by any employee benefit plan
qualified under Code Section 401(a) and exempt from taxation under Code Section
501(a), including most varieties of ERISA Plans, may give rise to "unrelated
business taxable income" as described in Code Sections 511-515 and 860E.
Further, prior to the purchase of Residual Certificates, a prospective
transferee may be required to provide an affidavit to a transferor that it is
not, nor is it purchasing a Residual Certificate on behalf of, a "Disqualified
Organization," which term as defined above includes certain tax-exempt entities
not subject to Code Section 511 including certain governmental plans, as
discussed above under the caption "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates--Disqualified Organizations."
Due to the complexity of these rules and the penalties that may be
imposed upon persons involved in prohibited transactions, it is particularly
important that potential investors who are Plan fiduciaries consult with their
counsel regarding the consequences under ERISA of their acquisition and
ownership of Certificates.
The sale of Certificates to an employee benefit plan is in no respect
a representation by the Depositor or the Underwriter that this investment meets
all relevant legal requirements with respect to investments by plans generally
or by any particular plan, or that this investment is appropriate for plans
generally or for any particular plan.
LEGAL INVESTMENT
The Offered Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"), only if so specified in the related Prospectus Supplement.
The appropriate characterization of those Certificates not qualifying as
"mortgage related securities" ("Non-SMMEA Certificates") under various legal
investment restriction, and thus the ability of investors subject to these
restrictions to purchase such 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 (i) are rated in
one of the two highest rating categories by one or more Rating Agencies, (ii)
are part of a series evidencing interests in a Trust Fund consisting of loans
originated by certain types of Originators as specified in SMMEA and (iii) are
part of a series evidencing interests in a Trust Fund consisting of mortgage
loans each of which is secured by a first lien on (a) a single parcel of real
estate on which is located a residential and/or mixed residential and
commercial structure or (b) one or more parcels of real estate upon which are
located one or more commercial structures will be "mortgage related securities"
for purposes of SMMEA. As "mortgage related securities," such classes will
constitute legal investments, for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, insurance companies, trustees 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 same extent that obligations issued by or
guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities under
applicable law. Under SMMEA, a number of states enacted legislation on or prior
to the October 3, 1991 cut-off for such enactments limiting to various extends
the ability of certain entities (in particular, insurance companies) to invest
in "mortgage related securities," secured by
98
<PAGE>
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, states are authorized to enact
legislation, on or before September 23, 2001, prohibiting or restricting the
purchase, holding or investment by state regulated entities in 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. Accordingly, the investors
affected by such legislation 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. Section 24 (Seventh), subject in each case to
such regulations as the applicable federal regulatory authority may prescribe.
In this connection, effective December 31, 1996, the Office of the Comptroller
of the Currency (the "OCC") has amended 12 C.F.R. Part 1 to authorize national
banks to purchase and sell for their own account, without limitation as to a
percentage of the bank's capital and surplus (but subject to compliance with
certain general standards 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 Certificates will qualify as "commercial mortgage-related securities," and
thus as "Type IV securities," for investment by national banks. federal credit
unions should review NCUA Letter to Credit Unions No. 96, as modified by Letter
to Credit Unions No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities. The NCUA
has adopted rules, codified as 12 C.F.R. ss.ss.703.5(f)-(k), which prohibit
federal credit unions from investing in certain mortgage related securities
(including securities such as certain classes of the Offered Certificates),
except under limited circumstances. Effective January 1, 1998, the NCUA has
amended its rules governing investments by federal credit unions at 12 C.F.R.
Part 703; the revised rules will permit investments in "mortgage related
securities" under certain limited circumstances, but will prohibit investments
in 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.
All depository institutions considering an investment in the Offered
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992, as revised April 15, 1994 (the "Policy
Statement") of the Federal Financial Institutions Examination Council (the
"FFIEC"). The Policy Statement, which has been adopted by the Board of
Governors of the Federal Reserve System, the OCC, the Federal Depository
Insurance Company and the Office of Thrift Supervision, and by the NCUA (with
certain modifications), prohibits depository institutions from investing in
certain "high-risk mortgage securities" (including securities such as certain
classes of the Offered Certificates), except under limited circumstances, and
sets forth certain investment practices deemed to be unsuitable for regulated
institutions. On September 29, 1997, the FFEIC released for public comment a
proposed "Supervisory Policy Statement on Investment Securities and End-User
Derivatives Activities" (the "1997 Statement"), which would replace the Policy
Statement. As proposed, the 1997 Statement would delete the specific "high-risk
mortgage securities" tests, and substitute general guidelines which depository
institutions should follow in managing risks (including market, credit,
liquidity, operational (transactional), and legal risks) applicable to all
securities (including mortgage pass-through securities and mortgage-derivative
products) used for investment purposes.
99
<PAGE>
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any class of
the Offered Certificates, as certain 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 class of the 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 any class of Offered Certificates for legal investment
purposes, financial institution regulatory purposes, or other purposes, or as
to the ability of particular investors to purchase any class of Offered
Certificates under applicable legal investment restrictions. These
uncertainties (and any unfavorable future determinations concerning legal
investment or financial institution regulatory characteristics of the Offered
Certificates) may adversely affect the liquidity of any class of 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 own 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.
METHOD OF DISTRIBUTION
The Offered Certificates offered hereby and by Prospectus Supplements
hereto will be offered in series through one or more of the methods described
below. The Prospectus Supplement prepared for each series will describe the
method of offering being utilized for that series and will state the net
proceeds to the Depositor from such sale.
The Depositor intends that Offered Certificates will be offered
through the following methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of a
particular Series of Offered Certificates may be made through a combination of
two or more of these methods. Such methods are as follows:
1. by negotiated firm commitment underwriting and public offering by
one or more underwriters specified in the related Prospectus Supplement;
2. by placements through one or more placement agents specified in the
related Prospectus Supplement primarily with institutional investors and
dealers; and
3. through direct offerings by the Depositor.
If specified in the Prospectus Supplement relating to a Series of
Offered Certificates, the Depositor, any affiliate thereof or any other person
or persons specified therein (including Originators of Mortgage Loans) may
purchase some or all of one or more Classes of Offered Certificates of such
Series from the underwriter or underwriters or such other person or persons
specified in such Prospectus Supplement. Pursuant to this Prospectus and the
related Prospectus Supplement, such purchaser may thereafter from time to time
offer and sell some or all of such Certificates directly, or through one or
more underwriters to be designated at the time of the offering of such
Certificates, or through dealers (whether acting as agent or as principal) or
in such other manner as may be specified in the related Prospectus Supplement.
Such offering may be restricted in the manner specified in the related
Prospectus Supplement. Such transactions may be effected at market prices
prevailing at the time of sale, at negotiated prices or at fixed prices.
100
<PAGE>
If underwriters are used in a sale of any Offered Certificates (other
than in connection with an underwriting on a best efforts basis), such
Certificates will be acquired by the underwriters for their own account and may
be resold from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. Such
underwriters may be broker-dealers affiliated with the Depositor whose
identities and relationships to the Depositor will be as set forth in the
related Prospectus Supplement. The managing underwriter or underwriters with
respect to the offer and sale of a particular Series of Offered Certificates
will be set forth in the cover of the Prospectus Supplement relating to such
Series and the members of the underwriting syndicate, if any, will be named in
such Prospectus Supplement.
In connection with the sale of the Offered Certificates, underwriters
may receive compensation from the Depositor or from purchasers of the Offered
Certificates in the form of discounts, concessions or commissions. Underwriters
and dealers participating in the distribution of the Offered Certificates may
be deemed to be underwriters in connection with such Offered Certificates, and
any discounts or commissions received by them from the Depositor and any profit
on the resale of Offered Certificates by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended (the
"Securities Act").
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Certificates will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all Offered Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that the Depositor will indemnify the several underwriters, and each
person, if any, who controls any such underwriter within the meaning of Section
15 of the Securities Act, against certain civil liabilities, including
liabilities under the Securities Act, or will contribute to payments required
to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of
such offering and any agreements to be entered into between the Depositor and
purchasers of Offered Certificates of such series.
The Depositor anticipates that the Offered Certificates offered hereby
will be sold primarily to institutional investors. Purchasers of Offered
Certificates, including dealers, may, depending on the facts and circumstances
of such purchases, be deemed to be "underwriters" within the meaning of the
Securities Act in connection with reoffers and sales by them of Offered
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any such reoffer or sale.
As to each series of Certificates, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any unrated class may be initially retained by the Depositor, and may be sold
by the Depositor at any time to one or more institutional investors.
If and to the extent required by applicable law or regulation, this
Prospectus will be used by Bear, Stearns & Co. Inc., an affiliate of the
Depositor, in connection with offers and sales related to market-making
transactions in the Offered Certificates previously offered hereunder in
transactions in which Bear, Stearns & Co. Inc. acts as principal. Bear, Stearns
& Co. Inc. may also act as agent in such transactions. Sales may be made at
negotiated prices determined at the time of sale.
LEGAL MATTERS
The validity of the Certificates of each series will be passed upon
for the Depositor by O'Melveny & Myers LLP, New York, New York.
101
<PAGE>
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates, and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by at least one Rating Agency.
Ratings on 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 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.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
102
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
1986 Act ...................................................................73
1997 Statement...............................................................99
Accrual Certificates.....................................................13, 36
Accrued Certificate Interest.................................................36
ADA..........................................................................70
ARM Loans ...................................................................27
Asset Conservation Act.......................................................67
Book-Entry Certificates..................................................15, 35
Call risk ...............................................................18, 32
Capital asset................................................................78
Cash Flow Agreement......................................................12, 28
Cash Flow Agreements..........................................................1
CERCLA...................................................................22, 66
Certificate..................................................................43
Certificate Account..................................................11, 28, 46
Certificate Balance.......................................................3, 13
Certificate Owner........................................................15, 41
Certificateholder............................................................42
Certificateholders............................................................2
Certificates..............................................................1, 10
Code.....................................................................16, 70
Commercial mortgage-related security.........................................99
Commercial Properties....................................................10, 25
Commission....................................................................3
Companion Class..........................................................14, 37
Controlled Amortization Class............................................14, 37
Cooperatives.................................................................25
CPR..........................................................................31
Credit Support........................................................1, 12, 28
Crime Control Act............................................................70
Cut-off Date.................................................................14
Definitive Certificates..................................................15, 35
Depositor ...................................................................24
Determination Date.......................................................29, 36
Direct Participants..........................................................41
Disqualified Organization....................................................84
Distribution Date............................................................13
Distribution Date Statement..................................................39
DOL..........................................................................97
DTC...............................................................3, 15, 35, 41
Due Dates ...................................................................26
Due Period...................................................................29
EPA..........................................................................66
Equity Participation.........................................................27
ERISA....................................................................16, 96
Events of Default............................................................53
Excess inclusion.............................................................23
Exchange Act..................................................................4
Extension risk...........................................................18, 32
FAMC.........................................................................11
FASIT....................................................................71, 95
103
<PAGE>
FFIEC........................................................................99
FHLMC........................................................................11
FNMA.........................................................................11
Garn Act.....................................................................68
GNMA.........................................................................11
Indirect Participants........................................................41
Insurance and Condemnation Proceeds..........................................46
L/C Bank ...................................................................57
Liquidation Proceeds.....................................................46, 47
Lock-out Date................................................................27
Lock-out Period..............................................................26
Mark to Market Regulations...................................................86
Master Servicer...........................................................3, 10
MBS...................................................................1, 11, 24
MBS Agreement................................................................27
MBS Issuer...................................................................27
MBS Servicer.................................................................27
MBS Trustee..................................................................27
Mortgage Asset Pool...........................................................1
Mortgage Asset Seller........................................................24
Mortgage Assets..............................................................24
Mortgage Loan................................................................58
Mortgage Loans........................................................1, 10, 24
Mortgage Notes...............................................................24
Mortgage Rate............................................................11, 26
Mortgage related securities..............................................16, 98
Mortgage related security....................................................99
Mortgaged Properties.........................................................24
Mortgagee-in-possession......................................................50
Mortgages ...............................................................25, 59
Multifamily Properties...................................................10, 24
Net Leases...................................................................26
Net of expense...............................................................26
Net Operating Income.........................................................25
Non-SMMEA Certificates.......................................................98
Non-U.S. Person..............................................................88
Nonrecoverable Advance.......................................................38
Notional Amount..........................................................13, 36
Numerous obligors............................................................99
OCC..........................................................................99
Offered Certificates..........................................................1
OID Regulations..............................................................74
Operator.....................................................................50
Original Issue Discount......................................................78
Originator...................................................................25
Owner....................................................................22, 50
PAC..........................................................................32
Participants.............................................................23, 41
Pass-Through Entity..........................................................84
Pass-Through Rate.........................................................3, 13
Permitted Investments........................................................46
Policy Statement.............................................................99
Pooling Agreement........................................................12, 42
104
<PAGE>
Portfolio interest...........................................................88
Prepayment...................................................................31
Prepayment Assumption.......................................................75
Prepayment Interest Shortfall................................................29
Prepayment Premium...........................................................27
Prospectus Supplement.........................................................1
PRPs.........................................................................66
Random Lot Certificates......................................................74
Rating Agency................................................................16
real estate mortgage investment conduits.....................................16
Record Date..................................................................36
Regular Certificateholder....................................................73
Regular Certificates.........................................................71
Related Proceeds.............................................................38
Relief Act...................................................................69
REMIC........................................................................16
REMIC Certificates...........................................................71
REMIC Pool...................................................................71
REMIC Regulations............................................................70
REO Property.................................................................45
Residual Certificateholders..................................................80
Residual Certificates........................................................71
RICO.........................................................................70
SBJPA of 1996................................................................71
Securities Act..............................................................101
Senior Certificates......................................................12, 35
Service......................................................................73
Servicing Standard...........................................................45
SMMEA....................................................................16, 98
SPA..........................................................................31
Special Servicer......................................................3, 10, 45
Standard Certificateholder...................................................90
Standard Certificates........................................................90
Stripped Certificateholder...................................................94
Stripped Certificates........................................................90
Stripped Interest Certificates...........................................13, 35
Stripped Principal Certificates..........................................13, 35
Sub-Servicer.................................................................45
Sub-Servicing Agreement......................................................45
Subordinate Certificates.................................................13, 35
Super-premium................................................................74
Superlien ...................................................................66
TAC..........................................................................32
Thrift institutions..........................................................83
Title V......................................................................69
Treasury.....................................................................70
Trust Assets..................................................................3
Trust Fund....................................................................1
Trustee...................................................................3, 10
U.S. Person..................................................................85
UCC..........................................................................59
Voting Rights................................................................40
Warranting Party.............................................................44
105
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the Offered Certificates, other than
underwriting discounts and commissions:
SEC Registration Fee..................................... $ 43,099.44
Engraving Fees........................................... 50,000.00
Legal Fees and Expenses.................................. 125,000.00
Accounting Fees and Expenses............................. 17,000.00
Trustee Fees and Expenses................................ 25,000.00
Blue Sky Qualification Fees and Expenses................. 15,000.00
Rating Agency Fees....................................... 25,000.00
Miscellaneous............................................ 10,000.00
-----------
Total.................................................... $310,099.44
ITEM 15 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 7 of the proposed form of Underwriting Agreement, the
Underwriters are obligated under certain circumstances to indemnify certain
controlling persons of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933.
The Registrant's By-laws provide for indemnification of directors and
officers of the Registrant to the full extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they are
- --------------
(1) All amounts are estimates of expenses incurred or to be incurred in
connection with the issuance and distribution of a Series of Certificates
in an aggregate principal amount assumed for these purposes to be
one-eighth of the Certificates registered hereby. Accordingly, only
one-eighth of the SEC Registration Fee paid upon the filing of this
Registration Statement is included in the table above.
II-1
<PAGE>
or were such directors, officers, employees or agents, against expenses
incurred in any such action, suit or proceeding.
The Pooling and Servicing Agreements may provide that no director,
officer, employee or agent of the Registrant is liable to the Trust Fund or the
Certificateholders, except for such person's own willful misfeasance, bad faith
or gross negligence in the performance of duties or reckless disregard of
obligations and duties; provided, however, that the Pooling and Servicing
Agreements may provide that such indemnification will not extend to any loss,
liability or expense (i) that such person is specifically required to bear
pursuant to the terms of such Pooling and Servicing Agreement, or is incidental
to the performance of obligations and duties thereunder and is not otherwise
reimbursable pursuant to such Pooling and Servicing Agreement; (ii) incurred in
connection with any breach of a representation, warranty or covenant made in
such Pooling and Servicing Agreement; (iii) incurred by reason of misfeasance,
bad faith or gross negligence in the performance of obligations or duties under
such Pooling and Servicing Agreement, or by reason of reckless disregard of
such obligations or duties; or (iv) incurred in connection with any violation
of any state or federal securities law.
ITEM 16 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
All financial statements, schedules and historical financial
information of the Registrant have been omitted as they are not
applicable.
(b) Exhibits:
1.1 Form of Underwriting Agreement*
4.1 Form of Pooling and Servicing Agreement*
5.1 Opinion of O'Melveny & Myers LLP as to legality of the
Certificates*
8.1 Opinion of O'Melveny & Myers LLP as to certain tax matters
(included in Exhibit 5.1)*
23.1 Consent of O'Melveny & Myers LLP (included in Exhibits 5.1 and
8.1 hereto)*
24.1 Power of Attorney*
* Previously filed
II-2
<PAGE>
ITEM 17 UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change of such information in the Registration
Statement.
provided, however, that paragraphs (i) and (ii) do not apply if the information
required to be included in the post-effective amendment is contained in
periodic reports filed by the Issuer pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in the
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.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the Registration Statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described in
Item 15 above, 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
II-3
<PAGE>
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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
Post-Effective Amendment No. 4 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 22nd day of April, 1998.
BEAR STEARNS COMMERCIAL
MORTGAGE SECURITIES INC.
By: /S/ JAMES G. REICHEK
Name: James G. Reichek
Title: Executive Vice President
II-5
