As filed with the Securities and Exchange Commission on October 22, 1999
Registration No. 333-87381
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(Exact name of registrant as specified in governing instruments)
Delaware 13-3411414
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
245 Park Avenue
New York, New York 10167
(212) 272-2000
(Address of principal executive office)
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Samuel L. Molinaro, Jr.
Bear Stearns Commercial Mortgage Securities Inc.
245 Park Avenue
New York, New York 10167
(212) 272-2000
(Name and address of agent for service)
Copies to:
Gary Barnett, Esq.
Shearman & Sterling
599 Lexington Avenue
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 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
<PAGE>
continuous basis pursuant to Rule 415 under the Securities Act of 1933, please
check the following box. /X/
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CALCULATION OF REGISTRATION FEE
================================================== =================== ============== ==================== ====================
Proposed
maximum
offering Proposed maximum Amount of
Title of securities Amount being price aggregate registration
being registered registered(1) per unit(2) offering price(2) fee(1),(3)
- -------------------------------------------------- ------------------- -------------- -------------------- --------------------
================================================== =================== ============== ==================== ====================
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates $1,585,704,194 100% $1,585,704,194 $467,782.74
================================================== =================== ============== ==================== ====================
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(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 in addition cover 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 which may be initially offered
hereunder and the registration fee shall not be reduced by any offers and sales
relating to any such market-making transactions.
(2) Estimated solely for purpose of calculating the registration fee on the
basis of the proposed maximum aggregate offering price.
(3) All of which has been previously paid.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that the
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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CROSS REFERENCE SHEET
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ITEM AND CAPTION LOCATION IN PROSPECTUS LOCATION IN PROSPECTUS SUPPLEMENT
IN FORM S-3
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<S> <C> <C>
1. Forepart of Registration Statement and Forepart of Registration Statement Outside Front Cover Page
Outside Front Cover Page of Prospectus and Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages Inside From Cover Page, Outside Inside Front Cover Page, Outside Back
of Prospectus Back Cover Page Cover Page
3. Summary Information, Risk Factors and Ratio Summary of Prospectus, Risk Factors Summary of Prospectus Supplement, Risk
of Earnings to Fixed Charges Factors
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 Page; Outside Front Cover Page; Description
Description of the Certificates; of the Certificates; Servicing of the
The Trust Funds; Certain Legal Mortgage Loans; Certain Federal Income
Aspects of the Mortgage Loans; Tax Consequences
Certain Federal Income Tax
Consequences
10. Interests of Named Experts and Counsel * *
11. Material Changes * *
12. Incorporation of Certain Information by Incorporation of Certain *
Reference Information by Reference
13. Disclosure of Commission Position on * *
Indemnification for Securities Act
Liabilities
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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
Commercial Mortgage Pass-Through Certificates
(Issuable in Series)
Bear Stearns Commercial Mortgage Securities Inc.
(Depositor)
- ------------------------------------------
Consider carefully the risk factors
beginning on page 9 in this
prospectus.
The securities to be issued are
mortgage backed certificates issued by
a trust. The securities represent
interests only in the related trust fund
and do not represent interests in or
obligations of Bear Stearns
Commercial Mortgage Securities Inc.
Unless otherwise specified in the
applicable prospectus supplement,
neither the certificates nor the
underlying assets are insured or
guaranteed by any governmental
agency or other person.
This prospectus may be used to offer
and sell any series of certificates only
if accompanied by the prospectus
supplement for that series.
- ------------------------------------------
The Trust Funds--
(1) A new trust fund will be established to issue each series of
certificates.
(2) Each trust fund will consist primarily of loans secured by pledges
of commercial, multifamily residential or mixed use properties.
(3) A new trust fund may also include letters of credit, insurance
policies, guarantees, reserve funds or other types of credit support,
and interest rate exchange agreements, interest rate cap or floor
agreements or currency exchange agreements.
The Certificates--
(1) Each series of certificates will be issued as part of a designated
series that may include one or more classes.
(2) Each series of certificates will represent the entire beneficial
ownership interest in the related trust fund and will be paid only from
the related trust fund assets.
(3) Each series of certificates will receive distributions on a
monthly, quarterly, semi-annual or other periodic basis as specified in
the related prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these certificates or determined that
this prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is __________, 1999.
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<PAGE>
Important Notice About Information Presented in this
Prospectus and the Applicable Prospectus Supplement
We provide information about the certificates in two separate documents
that progressively provide more detail. These documents are:
o this prospectus, which provides general information, some of which may not
apply to a particular series of certificates, including your series; and
o the prospectus supplement for a series of certificates, which will describe
the specific terms of that series of certificates.
You should rely only on the information provided in this prospectus and
the applicable prospectus supplement, including the information incorporated by
reference. We have not authorized anyone to provide you with different
information. We are not offering the certificates in any state where the offer
is not permitted.
If we describe the terms of any series of certificates differently in
the related prospectus supplement than we do in this prospectus, you should rely
on the information in the prospectus supplement.
We have included cross-references to captions in these materials where
you can find related discussions that we believe will enhance your understanding
of the topic being discussed. The table of contents of this prospectus and the
table of contents included in the applicable prospectus supplement list the
pages on which these captions are located. You can also find references to key
topics in the table of contents on the preceding page.
You can find the definitions of capitalized terms that are used in this
prospectus beginning on page 149 of this prospectus under the caption
"Glossary."
2
<PAGE>
TABLE OF CONTENTS
Important Notice About Information Presented In This..........................2
Prospectus And The Applicable Prospectus Supplement...........................2
Summary Of Prospectus.........................................................7
Risk Factors..................................................................9
Risks Relating to the Certificates.........................................9
Risks Relating to the Mortgage Loans......................................15
Description Of The Trust Funds...............................................24
General...................................................................24
Mortgage Loans............................................................24
General...................................................................24
Mortgage Loans Secured By Multifamily Rental Properties...................25
Mortgage Loans Secured By Cooperatively-Owned Apartment Buildings.........26
Mortgage Loans Secured By Retail Properties...............................27
Default And Loss Considerations With Respect To The Mortgage Loans........28
Payment Provisions Of The Mortgage Loans..................................30
Mortgage Loan Information In Prospectus Supplements.......................31
MBS..........................................................................32
Certificate Accounts......................................................34
Credit Support............................................................34
Cash Flow Agreements......................................................34
Yield And Maturity Considerations............................................35
General...................................................................35
Pass-Through Rate.........................................................35
Payment Delays............................................................35
Some Shortfalls In Collections Of Interest................................35
Yield And Prepayment Considerations.......................................36
Weighted Average Life And Maturity........................................38
Controlled Amortization Classes And Companion Classes.....................39
Other Factors Affecting Yield, Weighted Average Life And Maturity.........40
Balloon Payments; Extensions Of Maturity................................40
Negative Amortization...................................................41
Foreclosures And Payment Plans..........................................42
Losses And Shortfalls On The Mortgage Loans.............................42
Additional Certificate Amortization.....................................42
Optional Early Termination..............................................43
The Depositor................................................................43
Use Of Proceeds..............................................................43
Description Of The Certificates..............................................44
General...................................................................44
Distributions.............................................................45
Distributions Of Interest On The Certificates.............................45
Distributions Of Principal On The Certificates............................46
Distributions On The Certificates In Respect Of Prepayment Premiums
Or In Respect Of Equity Participations..................................47
Allocation Of Losses And Shortfalls.......................................47
Advances In Respect Of Delinquencies......................................47
3
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Reports To Certificateholders.............................................49
Voting Rights.............................................................51
Termination...............................................................51
Book-Entry Registration And Definitive Certificates.......................52
Description Of The Pooling Agreements........................................54
General...................................................................54
Assignment Of Mortgage Loans; Repurchases.................................55
Representations And Warranties; Repurchases...............................56
Collection And Other Servicing Procedures.................................57
Sub-Servicers.............................................................58
Special Servicers.........................................................59
Certificate Account.......................................................59
General.................................................................59
Deposits................................................................59
Withdrawals.............................................................61
Modifications, Waivers And Amendments Of Mortgage Loans...................63
Realization Upon Defaulted Mortgage Loans.................................64
Hazard Insurance Policies.................................................67
Due-On-Sale And Due-On-Encumbrance Provisions.............................68
Servicing Compensation And Payment Of Expenses............................69
Evidence As To Compliance.................................................69
Some Matters Regarding The Master Servicer And The Depositor..............70
Events Of Default.........................................................72
Rights Upon Event Of Default..............................................72
Amendment.................................................................73
List Of Certificateholders................................................74
The Trustee...............................................................75
Duties Of The Trustee.....................................................75
Some Matters Regarding The Trustee........................................75
Resignation And Removal Of The Trustee....................................76
Description Of Credit Support................................................76
General...................................................................76
Subordinate Certificates..................................................77
Cross-Support Provisions..................................................78
Insurance Or Guarantees With Respect To Mortgage Loans....................78
Letter Of Credit..........................................................78
Certificate Insurance And Surety Bonds....................................78
Reserve Funds.............................................................79
Credit Support With Respect To MBS........................................79
Some Legal Aspects Of Mortgage Loans.........................................80
General...................................................................80
Types Of Mortgage Instruments.............................................80
Leases And Rents..........................................................81
Personal Property.........................................................81
Foreclosure...............................................................82
General.................................................................82
Foreclosure Procedures Vary From State To State.........................82
Judicial Foreclosure....................................................82
Equitable Limitations On Enforceability Of Some Provisions..............82
4
<PAGE>
Non-Judicial Foreclosure/Power Of Sale..................................83
Public Sale.............................................................83
Rights Of Redemption....................................................85
Anti-Deficiency Legislation.............................................85
Leasehold Risks...........................................................86
Cooperative Shares........................................................87
Bankruptcy Laws...........................................................88
Environmental Risks.......................................................92
Due-On-Sale And Due-On-Encumbrance Provisions.............................94
Subordinate Financing.....................................................94
Default Interest And Limitations On Prepayments...........................95
Adjustable Rate Loans.....................................................95
Applicability Of Usury Laws...............................................95
Soldiers'And Sailors'Civil Relief Act Of 1940.............................96
Type Of Mortgaged Property................................................96
Americans With Disabilities Act...........................................97
Forfeitures In Drug And Rico Proceedings..................................97
Some Federal Income Tax Consequences.........................................98
Federal Income Tax Consequences For Remic Certificates....................98
General.................................................................98
Status Of Remic Certificates............................................99
Qualification As A Remic...............................................100
Taxation Of Regular Certificates.........................................103
General..................................................................103
Original Issue Discount..................................................103
Acquisition Premium......................................................107
Variable Rate Regular Certificates.......................................107
Deferred Interest........................................................109
Market Discount..........................................................109
Premium..................................................................111
Election To Treat All Interest Under The Constant Yield Method...........111
Sale Or Exchange Of Regular Certificates.................................112
Treatment Of Losses......................................................113
Taxation Of Residual Certificates........................................114
Taxation Of Remic Income.................................................114
Basis And Losses.........................................................115
Treatment Of Some Items Of Remic Income And Expense......................116
Original Issue Discount And Premiu.....................................116
Deferred Interest......................................................116
Market Discount........................................................117
Premium................................................................117
Limitations On Offset Or Exemption Of Remic Income.......................117
Tax-Related Restrictions On Transfer Of Residual Certificates............119
Disqualified Organizations.............................................119
Noneconomic Residual Interests.........................................120
Foreign Investors......................................................121
Sale Or Exchange Of A Residual Certificate...............................122
Mark-To-Market Regulations...............................................123
Taxes That May Be Imposed On The Remic Pool..............................123
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Prohibited Transactions..................................................123
Contributions To The Remic Pool After The Startup Day....................124
Net Income From Foreclosure Property.....................................124
Liquidation Of The Remic Pool............................................124
Administrative Matters...................................................125
Limitations On Deduction Of Some Expenses................................125
Taxation Of Some Foreign Investors.......................................126
Regular Certificates.....................................................126
Residual Certificates....................................................127
Backup Withholding.......................................................127
Reporting Requirements...................................................128
Federal Income Tax Consequences For Certificates As To Which No Remic
Election Is Made.......................................................128
Standard Certificates....................................................128
General..................................................................128
Tax Status...............................................................130
Premium And Discount.....................................................130
Premium................................................................130
Original Issue Discount................................................130
Market Discount........................................................131
Recharacterization Of Servicing Fees...................................131
Sale Or Exchange Of Standard Certificates..............................132
Stripped Certificates....................................................133
General..................................................................133
Status Of Stripped Certificates..........................................135
Taxation Of Stripped Certificates........................................135
Original Issue Discount................................................135
Sale Or Exchange Of Stripped Certificates..............................136
Purchase Of More Than One Class Of Stripped Certificates...............136
Possible Alternative Characterizations.................................136
Federal Income Tax Consequences For Fasit Certificates...................137
Reporting Requirements And Backup Withholding............................138
Taxation Of Some Foreign Investors.......................................138
State And Other Tax Considerations..........................................138
Erisa Considerations........................................................139
General..................................................................139
Plan Asset Regulations...................................................140
Administrative Exemptions................................................140
Unrelated Business Taxable Income; Residual Certificates.................141
Legal Investment............................................................141
Method Of Distribution......................................................144
Where You Can Find More Information.........................................146
Incorporation Of Some Information By Reference..............................146
Reports.....................................................................147
Financial Information.......................................................147
Legal Matters...............................................................148
Ratings.....................................................................148
Glossary....................................................................149
6
<PAGE>
SUMMARY OF PROSPECTUS
This summary includes selected information from this prospectus. It
does not contain all of the information you need to consider in deciding whether
to buy any class of the offered certificates. To understand the terms of the
offering of the offered certificates, you should read carefully this entire
prospectus and the applicable prospectus supplement.
Title of Certificates.................Commercial/Multifamily Mortgage Pass-
Through Certificates, issuable in series.
Depositor.............................Bear Stearns Commercial Mortgage
Securities Inc., a Delaware corporation.
Our telephone number is (212) 272-2000.
Description of Certificates; Ratings..The certificates of each series will be
issued pursuant to a pooling and servicing
agreement and may be issued in one or more
classes. The certificates of each series
will represent in the aggregate the entire
beneficial ownership interest in the
property of the related trust fund. Each
trust fund will consist primarily of a
segregated pool of commercial or
multifamily mortgage loans, or mortgage-
backed securities that evidence interests
in, or that are secured by commercial or
multifamily mortgage loans. Each class
or certificate will be rated not lower
than investment grade by one or more
nationally recognized statistical rating
agencies at the date of issuance.
The prospectus supplement for a series of certificates includes important
information on the trust funds, certificates, and risks, including information
on the following:
(1) the name of the master
servicer and special
servicer, the
circumstances when a
special servicer will
be appointed and their
respective obligations
(if any) to make
advances to cover
delinquent payments on
the assets of the
trust fund, taxes,
assessments or
insurance premiums;
(2) the assets in the
trust fund, including
a description of the
pool of mortgage loans
or mortgage-backed
securities;
(3) the identity and
attributes of each
class within a series
of certificates,
including whether (and to
7
<PAGE>
what extent) any
credit enhancement
benefits any class of
a series of
certificates;
(4) the tax status of certificates;and
(5) whether the
certificates will be
eligible to be
purchased by investors
subject to ERISA or
will be mortgage
related securities for
purposes of SMMEA.
8
<PAGE>
RISK FACTORS
You should carefully 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 mortgage-backed securities included in the trust fund. If
any of the following risks are realized, your investment could be materially and
adversely affected. In addition, other risks unknown to us or which we currently
consider immaterial may also impair your investment.
Risks Relating to the Certificates.
Lack of a secondary market for the certificates may make it difficult
for you to resell your certificates at all or at an attractive price. We cannot
assure you that a secondary market will develop for certificates. Even if a
secondary market develops, we cannot assure you that it will provide you with
liquidity of investment or will continue for as long as the offered certificates
remain outstanding. The absence of a secondary market for your certificates
means that you may not be able to find a buyer for your certificates or, if you
find a buyer, that the selling price may be less than it would have been if a
secondary market existed for the certificates. The underwriter for a series of
certificates will not be obligated to make a market for that series of
certificates even if it intends to do so. Even if a secondary market for your
certificates develops, it may provide less liquidity than any comparable market
for securities that evidence interests in single-family mortgage loans.
Insofar as a secondary market does develop with respect to any series
of offered certificates or class of any series of offered certificates, other
factors may affect their market value. These include:
o the perceived liquidity of the offered certificates;
o their anticipated cash flow, which may vary widely depending upon the
prepayment and default assumptions applied in respect of the
underlying mortgage loans; and
o prevailing interest rates.
For example, small fluctuations in prevailing interest rates may affect at
any given time the price payable of some of the 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. In
addition, 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 the offered certificate in response to an
equal but opposite movement in the rates. Accordingly, you may only be able to
sell your certificates at a discount from the price
9
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that you paid for them even if a secondary market develops for the certificates.
We are not aware of any source through which holders of the certificates may
obtain price information about the offered certificates on an ongoing basis.
You will have no right to redeem your certificates except to the extent
described in this prospectus and the related prospectus supplement. Offered
certificates are subject to early retirement only under some specified
circumstances described in this prospectus and in the related prospectus
supplicant.
You will receive periodic reports pursuant to the related pooling and
servicing agreement regarding the status of the related mortgage assets and any
credit support for your certificates and any subordination of your certificates
to other classes of certificates. The periodic reports will be the primary
source of ongoing information regarding the offered certificates of any series.
The certificateholders may not receive any additional information from any other
source. The limited nature of the information may adversely affect the liquidity
of your certificates, even if a secondary market does develop for them.
Since mortgage loans are not guaranteed, you may not receive full
payment on your certificates to the extent there is a shortfall in payment on
the assets or the related trust fund. The only sources of funds for payment on a
series of certificates will generally be the assets of the related trust fund
and, to the extent provided in the applicable prospectus supplement, any credit
enhancement. The certificates will not be guaranteed by us or any of our
affiliates, by any governmental agency or instrumentality or by any other person
or entity unless otherwise stated in the related prospectus supplement. A
portion of the amounts remaining in some funds or accounts constituting part of
a trust fund, including any certificate account and any accounts maintained as
credit support, may be withdrawn under conditions described in the applicable
prospectus supplement for purposes other than the payment of principal or
interest in the related series of certificates. A series of certificates will
have no claim against or security interest in the trust funds for another
series. As a result, you may suffer a loss on your certificates if the sources
for payment are insufficient to pay all the principal of and interest on the
certificates of your series. If you are a holder of a subordinate certificate,
you may bear a portion of the amount of the losses or shortfalls in collections
on the mortgage assets before the holders of the remaining classes of
certificates in the priority and manner and subject to the limitations specified
in the applicable prospectus supplement.
The rate of principal prepayments on the mortgage loans and the rate of
repurchase of the mortgage loans may adversely affect the yield on your
investment. In deciding whether to purchase any offered certificates, you should
make an independent decision as to the appropriate prepayment assumptions to be
used. The pre-tax return on your investment will change from time to time for a
number of reasons, including the following:
o The amount of distributions of principal of the certificates and the times
when you receive those distributions depends on the amount and the times at
which borrowers make
10
<PAGE>
principal payments of the underlying mortgage loans, and on whether we or
the servicer purchases the underlying mortgage loans.
o Prepayments of the mortgage loans in any trust fund by the related
borrowers generally will result in a faster rate of principal payments on
one or more classes of the related certificates than if payment on those
mortgage loans are made as scheduled. The prepayment rate on mortgage loans
may be influenced by a variety of economic, tax, legal and social factors.
While one prepayment rate may be used for the purpose of pricing the
certificates, there can be no assurance that the actual prepayment rate
will be faster or slower than any assumed prepayment rate.
In addition, to the extent described in this prospectus 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 extension
or modification is reasonably likely to produce a greater recovery than
liquidation, we can give you no assurance that any extension or modification
will increase the present value of receipts from or proceeds of the affected
mortgage loans.
We will be required to repurchase a mortgage loan from the trust if we
breach our representations and warranties with respect to that mortgage loan. In
addition, the servicer may have the option to purchase the mortgage loans in the
trust fund and may be obligated to purchase mortgage loans from the trust fund
under the circumstances described in the prospectus supplement.
If you buy your certificates at a premium or discount your yield to
maturity will be sensitive to prepayments on the mortgage loans in the related
trust fund. If the amount of interest payable with respect to your class is
disproportionately large, as compared to the amount of principal, as with some
classes of stripped interest certificates, you might fail to recover your
original investment under some prepayment scenarios. The extent to which the
yield to maturity of your certificates may vary from the anticipated yield will
depend upon the degree to which you purchased them at a discount or premium and
the amount and timing of distributions on those certificates. If you purchase a
certificate at a discount, you should consider the risk that a slower than
anticipated rate of principal payments on the mortgage loans could result in an
actual yield to you that is lower than the anticipated yield, and if you
purchase a certificate at a premium, you should consider the risk that a faster
than anticipated rate of principal payments could result in an actual yield to
you that is lower than the anticipated yield. For more detailed information
regarding these risks, you should refer to the section in this prospectus titled
"Yield and Maturity Considerations."
Average Life of Certificates. The terms of your certificates will
determine the extent to which prepayments on the mortgage loans in any trust
fund ultimately affect the average life of your certificates. For example, a
class of certificates, including a class of offered certificates,
11
<PAGE>
may provide that on any distribution date you are entitled to a pro rata share
of the prepayments on the mortgage loans in the related trust fund that are
distributable on that date, to a disproportionately large share -- which in some
cases, may be all -- of the prepayments, or to a disproportionately small share
- -- which in some cases, may be none -- of the prepayments. A class of
certificates that entitles you to a disproportionately large share of the
prepayments on the mortgage loans in the related trust fund increases the
likelihood of early retirement of that class if the rate of prepayment is
relatively fast. A class of certificates that entitles you 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 that
class if the rate of prepayment is relatively slow. 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 some events, e.g., the retirement of
one or more classes of certificates of the series, or subject to some
contingencies, e.g., prepayment and default rates with respect to the mortgage
loans.
Controlled Amortization Classes and Companion Classes. A series of
certificates may include one or more controlled amortization classes, which will
entitle you 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 of 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 the certificates. However,
prepayment risk will not disappear.
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, a
companion class may entitle you 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 you 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 companion class absorbs some, but
not all, of the 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.
Ratings on your certificates do not guarantee that you will receive
payment under the pooling agreement. Ratings assigned by a rating agency to a
class of certificates reflect the rating agency's assessment of the likelihood
that the holders of certificates of that class will receive all payments to
which they are entitled. The ratings are based on the structural, legal and
issuer-related aspects associated with these certificates, the nature of the
underlying mortgage loans and the extent and quality of any credit enhancement.
Ratings will not constitute an assessment of the following:
o the likelihood that principal prepayments on the related mortgage loans
will be made;
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<PAGE>
o the degree to which the rate of prepayments might differ from that
originally anticipated;
o the likelihood of early optional termination of the related trust fund; or
o the possibility that prepayment of the related mortgage loans may be made
at any particular rate.
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 the
series. Those criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. However, we can not assure you
that the historical data supporting any the 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. These criteria may also be
based upon determinations of the values of the mortgaged properties that provide
security for the mortgage loans. However, we cannot assure you that those values
will not decline in the future. For more detailed information regarding these
risks, you should refer to the section in this prospectus titled "Description of
Credit Support" and "Ratings."
ERISA imposes limitations on who can purchase the certificates; failure
to comply with ERISA may materially and adversely affect the trust fund and
result in reduced payments on your certificates. Generally, ERISA applies to
investments made by employee benefit plans and transactions involving the assets
of those plans. In addition, some other retirement plans and arrangements,
including individual retirement accounts and Keogh plans, are subject to Section
4975 of the Internal Revenue Code. Due to the complexity of regulations that
govern the plans, if you are subject to ERISA or Section 4975 you are urged to
consult your own counsel regarding the consequences under ERISA or the Internal
Revenue Code of acquisition, ownership and disposition of the offered
certificates of any series.
For more detailed information regarding ERISA restrictions, you should
review the section in this prospectus titled "ERISA Considerations".
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If you acquire residual certificates you may be subject to additional
tax liabilities. If you are a holder of residual certificates you will be
required to report on your federal income tax returns as ordinary income your
pro rata share of the taxable income of the REMIC, regardless of the amount or
timing of your receipt of cash payments. Accordingly, you may have taxable
income and tax liabilities arising from your investment during a taxable year in
excess of the cash received during that period. The requirement that you report
your 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 you, as a holder of
residual certificates, have received full payment of their stated interest and
principal. A portion -- or, in some circumstances, all -- of your share of the
REMIC taxable income may be treated as "excess inclusion" income to you which:
o generally, will not be subject to offset by losses from other activities;
o for a tax-exempt holder, will be treated as unrelated business taxable
income; and
o for a foreign holder, will not qualify for exemption from withholding tax.
As a holder of residual certificates, you may be limited in your
ability to deduct servicing fees and other expenses of the REMIC. In addition,
residual certificates are subject to some 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 that you receive may be
significantly less than that of a corporate bond or stripped instrument having
similar cash flow characteristics.
You may be allocated taxable income in excess of distributions received
if you acquire certificates with "original issue discount." Accrual certificates
will be, and some of the other classes of certificates of a series may be,
issued with "original issue discount" for federal income tax purposes. This will
generally result in recognition of some taxable income to you in advance of the
receipt of cash attributable to the income.
For more detailed information regarding "original issue discount" you
should review the section in this prospectus titled "Some Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates".
If your certificates are issued in book-entry form, you will only be
able to exercise your rights indirectly through DTC and you may also have
limited access to information regarding those certificates. One or more classes
of the offered certificates of any series may 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, you will be able to exercise your rights only indirectly through DTC and
its participating organizations. In addition, your access to
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information regarding the book-entry certificates may be limited. Conveyance of
notices and other communications by DTC to its participating organizations, and
directly and indirectly through these organizations to you 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 in this
prospectus, you may suffer delays in the receipt of payments on the book-entry
certificates. In addition, your ability to pledge or otherwise take actions with
respect to your interest in the book-entry certificates may be limited due to
the lack of a physical certificate evidencing that interest.
For more detailed information regarding book-entry registration, you
should review the section in this prospectus titled "Description of the
Certificates--Book-Entry Registration and Definitive Certificates".
Risks Relating to the Mortgage Loans.
Mortgage loans are susceptible to numerous risks that may result in
losses to you.
(1) Mortgage loans made on the security of multifamily or commercial
property may entail risks of delinquency and foreclosure that are greater than
similar risks associated with loans made on the security of an owner-occupied
single-family property. The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of that property rather than upon the existence of independent income
or assets of the borrower. Thus, the value of an income-producing property is
directly related to the net operating income derived from that 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 the 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 the following:
o changes in general or local economic conditions and/or specific industry
segments;
o declines in real estate values;
o declines in rental or occupancy rates;
o increases in interest rates, real estate tax rates and other operating
expenses;
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o changes in governmental rules, regulations and fiscal policies, including
environmental legislation; and
o 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.
(2) The type and use of a particular mortgaged property may present
additional risks. 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.
(3) 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. The 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, the 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.
(4) 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 the 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, we can give you no assurance that enforcement of the recourse
provisions will be practicable, or
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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.
(5) 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. 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.
Some risks that affect occupancy and rent levels of multifamily rental
properties such as adverse economic conditions, construction of additional
housing, military base closings, company relocations and rent control laws may
affect the ability of the borrower to meet its obligations under the mortgage
loan. Adverse economic conditions, either local, regional or national, may limit
or reduce the following:
o the amount of rent that can be charged for rental units;
o tenants' ability to pay rent;
o timeliness of rent payments;
o occupancy levels without a corresponding decrease in expenses -- occupancy
and rent levels may also be affected by construction of additional housing
units;
o local military base closings;
o company relocations and closings; and
o 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. 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, rent
control laws could impact the future cash flows of multifamily rental properties
that are subject to rental control laws.
Some multifamily rental properties are eligible to receive low-income
housing tax credits pursuant to Section 42 of the Internal Revenue Code.
However, Section 42 properties are subject to some restrictions that may affect
a borrower's ability to meet its obligations under a mortgage loan. This
includes the following:
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o rent limitations associated with those properties may adversely affect the
ability of the applicable borrowers to increase rents to maintain those
properties in proper condition during periods of rapid inflation or
declining market value of those properties;
o the income restrictions on tenants imposed by Section 42 of the Internal
Revenue Code may reduce the number of eligible tenants;
o 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; and
o Section 42 properties may also have fewer amenities or otherwise be less
attractive as a residence making it less attractive to eligible tenants.
All of the foregoing conditions and events may increase the possibility
that a borrower may be unable to meet its obligations under its mortgage loan.
Mortgage lenders secured by cooperatively-owned apartment buildings are
subject to the risk that tenant-shareholders of a cooperatively-owned apartment
building will be unable to make the required maintenance payments. Generally, a
tenant-shareholder of a cooperative corporation must make a monthly maintenance
payment to the cooperative corporation that owns the apartment building
representing that tenant-shareholder's pro rata share of the corporation's
payments in respect of the mortgage loan secured by that apartment building. The
tenant-shareholder must also pay its pro rata share of all real property taxes,
maintenance expenses and other capital and ordinary expenses with respect to
that apartment building, 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 adverse economic conditions have impaired the
individual financial conditions of the 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 that building will be subject to all the risks that it
would have in connection with lending on the security of a multifamily rental
property. 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 the building will be
subject to a risk associated with the sponsor's creditworthiness.
Mortgage lenders secured by retail properties may be adversely affected
by changes in consumer spending patterns, alternative forms of retailing and
changes in tenants occupying the retail properties. In addition to risks
generally associated with real estate, mortgage loans secured by retail
properties are also affected significantly by a number of factors, including:
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o adverse changes in consumer spending patterns;
o local competitive conditions, including the supply of retail space or the
existence or construction of new competitive shopping centers or shopping
malls;
o alternative forms of retailing, including direct mail, video shopping
networks and selling through the Internet, which reduce the need for retail
space by retail companies;
o the quality and management philosophy of management;
o the attractiveness of the properties and the surrounding neighborhood to
tenants and their customers;
o the public perception of the safety of customers, e.g., at shopping malls
and shopping centers;
o the need to make major repairs or improvements to satisfy the needs of
major tenants; and
o if an anchor or other significant tenant ceases operations at the
locations, which may occur on account of a decision not to renew a lease,
bankruptcy or insolvency of the tenant, the 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 the property. In
addition, some tenants at retail properties may be entitled to terminate
their leases if an anchor tenant ceases operations at the property.
Mortgage loans with balloon payments involve the risk that borrowers
may not be able to refinance the loan or sell the related property. Mortgage
loans may be non-amortizing or only partially amortizing over their terms to
maturity. Those Mortgage loans 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:
o value of the related mortgaged property;
o the level of available mortgage rates at the time of sale or refinancing;
o the borrower's equity in the related mortgaged property;
o the financial condition and operating history of the borrower and the
related mortgaged property;
o tax laws and rent control laws, with respect to some residential
properties;
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o Medicaid and Medicare reimbursement rates, with respect to hospitals and
nursing homes; and
o 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 we nor any of our affiliates will be required to refinance any
mortgage loan.
Credit support for a series of certificates may cover some of your
losses or risks but may not cover all potential risks to you. The prospectus
supplement for a series of certificates will describe any credit support
provided for these certificates. Use of credit support will be subject to the
conditions and limitations described in this prospectus and in the related
prospectus supplement. Moreover, the available 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, in turn, include offered certificates. Subordination is
intended to reduce the risk to holders of each more senior class of certificates
of delinquent distributions or ultimate losses on the mortgage assets. However,
the amount of subordination will be limited and may decline. Since the senior
certificateholders are paid principal before subordinate certificateholders,
subordinate certificateholders may not be paid any principal if the available
credit support is exhausted. As a result, if you are a holder of subordinate
certificates, you will primarily experience the impact of losses and shortfalls.
Moreover, if the available credit support covers more than one series of
certificates, you will be subject to the risk that the credit support will be
exhausted by the claims of the holders of certificates of one or more other
series.
Rating agencies rating the certificates will determine the level of
credit support based on an assumed level of defaults, delinquencies and losses
on the underlying mortgage assets and some other factors. We cannot, however,
assure you that the loss experience on the related mortgage assets will not
exceed the assumed levels.
For more detail information regarding credit support of certificates
you should review the sections in this prospectus titled "--Limited Nature of
Ratings", "Description of the Certificates" and "Description of Credit Support".
If the mortgaged property is subject to a lease, the lender is subject
to the risk that if the borrower defaults, the mortgage lender may have to
obtain a court order appointing a receiver before being able to collect rents.
Each mortgage loan secured by mortgaged property that is subject to leases
typically will be secured by an assignment of leases and rents. This means that
the borrower assigns to the lender its right, title and interest as landlord
under the leases of the related mortgaged property, and the income derived from
it, as further security for the related mortgage loan. The borrower may continue
to collect rents for so long as there is no default. If the borrower defaults,
the lender is entitled to collect rents. Some state laws may
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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.
For more detailed information regarding leases and rents, you should
review the section in this prospectus titled "Some Legal Aspects of Mortgage
Loans--Leases and Rents".
Owners and operators of a mortgaged property and mortgage lenders may
become liable for the costs of environmental cleanup. Under the laws of some
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 that 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 that property. The owner may
become liable without regard to whether the owner knew of, or was responsible
for, the presence of hazardous or toxic substances on the property. The cost of
any required remediation and the owner or operator's liability as to any
property could exceed the value of the mortgaged property and the aggregate
assets of the owner or operator. In addition, owners or operators of mortgaged
properties that generate hazardous substances that are disposed of at "off-site"
locations may be held strictly, jointly and severally liable if there are
releases or threatened releases of hazardous substances at the off-site
locations where the hazardous substances were disposed.
Lenders whose primary indicia of ownership in a particular property is
the holding of a security interest are exempted from the definition of "owner"
under the federal Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended. However, lenders may forfeit their secured
creditor exemption, as a result of their actions with respect to particular
borrowers, and be deemed an owner or operator of property so that they are
liable for remediation costs. A lender also risks liability for remediation
costs 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. We cannot assure you that any requirements of a pooling and servicing
agreement will effectively insulate the related trust fund from potential
liability for a materially adverse environmental condition at a mortgaged
property.
For more detailed information regarding environmental risks, you should
review the section in this prospectus titled "Some Legal Aspects of Mortgage
Loans -- Environmental Risks".
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Hazard insurance policies on mortgaged properties may not fully cover
all types of damage to the mortgaged properties. Unless otherwise specified in a
prospectus supplement, the master servicer will be required to cause the
borrower on each mortgage loan to maintain insurance coverage in respect of the
related mortgaged property, including hazard insurance. However, the master
servicer may be able to satisfy its obligation to cause hazard insurance to be
maintained 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. The insurance policies 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 insurance policies, however, 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 some
other kinds of risks. Unless the related mortgage specifically requires the
mortgagor to insure against physical damage arising from causes not typically
covered by an insurance policy, then, to the extent any consequent losses are
not covered by the available credit support, you may in part bear the resulting
losses.
For more detailed information regarding insurance policies, you should
review the section in this prospectus titled "Description of the Pooling
Agreements--Hazard Insurance Policies".
The yield on your certificates may be adversely affected to the extent
that the related trust fund may include delinquent mortgage loans because the
available credit support may not cover all losses related to the delinquent
mortgage loans. The trust fund for a particular series of certificates may
include mortgage loans that are past-due, i.e., beyond any applicable grace
period. However, delinquent mortgage loans may only constitute up to, but not
including, 20% (by principal balance) of the trust fund. A special servicer may
perform the servicing of delinquent mortgage loans. When a mortgage loan has a
loan-to-value ratio of 100% or more, the related borrower will have no equity in
the related mortgaged property. In the cases, the related borrower may not have
an incentive to continue to perform under that 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 the mortgaged property and to
pay debt service on that mortgage loan and all mortgage loans senior to that
mortgage loan. In those cases, the related borrower will be required to pay from
sources other than cash flow from the related mortgaged property. If the related
borrower ceases to use alternative cash sources at a time when operating revenue
from the related mortgaged property is still insufficient to cover all expenses
and debt service, deferred maintenance at the related mortgaged property and/or
a default under the subject mortgage loan may occur. Available credit may not
cover all losses related to delinquent mortgage loans. You should therefore
consider the risk that the inclusion of delinquent mortgage loans in the trust
fund may adversely affect the rate of defaults and prepayments on the mortgage
assets in the trust fund and the yield on the offered certificates.
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For more detailed information regarding delinquent mortgage loans, you
should review the section in this prospectus titled "Description of the Trust
Funds--Mortgage Loans--General".
A Word About Forward Looking Statements. Whenever we use words like
"intends," "anticipates" or "expects" or similar words in this prospectus, we
are making a forward-looking statement, or a projection of what we think will
happen in the future. Forward-looking statements are inherently subject to a
variety of circumstances, many of which are beyond our control that could cause
actual results to differ materially from what we think they might be. Any
forward-looking statements in this prospectus speak only as of the date of this
prospectus. We do not assume any responsibility to update or review any
forward-looking statement or to reflect any change in events, conditions or
circumstances on which we have based any forward-looking statement.
Defined terms in the rest of the Prospectus appear in initial capitals
and are defined in the Glossary beginning at page 149.
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DESCRIPTION OF THE TRUST FUNDS
General
The primary assets of each trust fund will consist of the following:
o various types of multifamily or commercial mortgage loans or participations
in those mortgage loans;
o 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
o a combination of the foregoing called mortgage assets. Each trust fund will
be established by us. We will select each mortgage asset for inclusion in a
trust fund from among those purchased, either directly or indirectly, from
a mortgage asset seller, which may or may not be the originator of a
mortgage loan or the issuer of a MBS and may be our affiliate. Unless
otherwise provided in the related prospectus supplement, neither we nor any
of our affiliates and no governmental agency or instrumentality or any
other person will guarantee or insure any of the mortgage assets included
in a trust fund. 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 called mortgage notes, secured by liens on fee
or leasehold estates in properties called mortgaged properties consisting of the
following:
o 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, called multifamily
properties, and mobile home parks;
o 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 any cooperatively owned units therein; and
o mixed use properties -- that is, any combination of the foregoing -- and
unimproved land, both called commercial properties.
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The multifamily properties may include mixed commercial and residential
structures, apartment buildings owned by private cooperative housing
corporation, with shares of the cooperative allocable to one or more dwelling
units occupied by non-owner tenants or to vacant units. The liens may be created
by mortgages, deeds of trust and similar security instruments. 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 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
other than us; however, the originator may be or may have been one of our
affiliates.
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 those certificates are issued. In
that case, the related prospectus supplement will set forth, available
information as to the period of the 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.
Mortgage Loans Secured by Multifamily Rental Properties. Significant
factors determining the value and successful operation of a multifamily rental
property are the following:
o location of the property;
o the number of competing residential developments in the local market, such
as apartment buildings, manufactured housing communities and site-built
single family homes;
o the physical attributes of the multifamily building, such as its age and
appearance; and
o state and local regulations affecting the 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.
Some 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
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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 the 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. The proprietary leases and occupancy agreements 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 the tenant-shareholder's pro rata share
of the corporation's payments in respect of any mortgage loan secured by,
including all real property taxes, maintenance expenses and other capital and
ordinary expenses with respect to, the real property owned by the cooperative
corporation, less any other income that the cooperative corporation may realize.
Payments to the cooperative corporation are in addition to any payments of
principal and interest the tenant-shareholder must make on any loans of the
tenant-shareholder secured by its shares in the corporation.
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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 the cooperative
corporation, as well as all other operating expenses of the 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 the cooperative corporation depends primarily on its ability
to refinance the mortgage loan. Neither we 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. The owner or sponsor allocates shares to each apartment unit, and
the current tenants have a fixed period to subscribe at prices discounted from
the prices to be offered to the public after that 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 that
apartment unit. Any applicable rent control or rent stabilization laws would
continue to be applicable to that subtenancy. 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.
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
following:
o the ability to lease space in the properties,
o the ability of tenants to meet their lease obligations,
o the possibility of a significant tenant becoming bankrupt or
insolvent,
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o and 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 these
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 some 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.
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 that 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. Absent special
facts, recourse in the case of default of non-recourse loans will be limited to
the mortgaged property and the 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.
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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 some 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 the properties may pose greater
risks than loans secured by liens on multifamily properties or on multi-tenant
commercial properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or 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. However,
the existence of "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. 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 the 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 in this prospectus. 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, i.e., recent
resale value of comparable properties at the date of the appraisal, the cost
replacement method, i.e., the cost of replacing the property at the date, the
income capitalization method, i.e., a projection of value based upon the
property's projected net cash
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flow, or upon a selection from or interpolation of the values derived from the
foregoing 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 we believe 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 the foregoing 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. For additional information regarding risks
associated with mortgage loans, you should review the sections in this
prospectus titled "Risk Factors--Risks Associated with Some Mortgage Loans and
Mortgaged Properties" and "--Balloon Payments; Borrower Default".
Payment Provisions of the Mortgage Loans. Unless otherwise specified in
the related prospectus supplement, all of the mortgage loans will have the
following characteristics:
o have had individual principal balances at origination of not less than
$25,000;
o have had original terms to maturity of not more than 40 years; and
o 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 may also have the following characteristics:
o 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;
o 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 some events, and may permit negative amortization;
o be fully amortizing or partially amortizing or non-amortizing, with a
balloon payment due on its stated maturity date; and
o prohibit over its term or for a certain period prepayments (the period of
the prohibition, a "lock-out period" and its date of expiration, a
"lock-out date") and/or require payment of
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a premium or a yield maintenance penalty (a "prepayment premium") in
connection with some 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 the mortgaged property or the
benefit, if any, resulting from the refinancing of the mortgage loan as
described in the related prospectus supplement under the heading " ________ --
Equity Participation". 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 the
offered certificates, the related prospectus supplement will describe the equity
participation and the method or methods by which distributions relating to the
equity participation will be made to the holders.
Mortgage Loan Information in Prospectus Supplements. Each prospectus
supplement will contain some 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. To the extent then applicable and
specifically known to us, the prospectus supplement will include the following:
1. the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the mortgage loans;
2. the type or types of property that provide security for repayment of
the mortgage loans;
3. the earliest and latest origination date and maturity date of the
mortgage loans;
4. the original and remaining terms to maturity of the mortgage loans, or
the respective ranges those terms to maturity, and the weighted
average original and remaining terms to maturity of the mortgage
loans;
5. the original Loan-to-Value Ratios of the mortgage loans, or the range
of those Loan-to-Value Ratios, and the weighted average original
Loan-to-Value Ratio of the mortgage loans;
6. the mortgage rates borne by the mortgage loans, or range of those
mortgage rates, and the weighted average mortgage rate borne by the
mortgage loans;
7. with respect to mortgage loans with adjustable mortgage rates ("ARM
Loans"), the index or indices upon which the 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;
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8. information regarding the payment characteristics of the mortgage
loans, including, without limitation, balloon payment and other
amortization provisions, lock-out periods and prepayment premiums;
9. the Debt Service Coverage Ratios of the mortgage loans, either at
origination or as of a more recent date, or the range of those Debt
Service Coverage Ratios, and the weighted average of the Debt Service
Coverage Ratios; and
10. the geographic distribution of the mortgaged properties on a
state-by-state basis.
In appropriate cases, the related prospectus supplement will also
contain some information available to us that pertains to the provisions of
leases and the nature of tenants of the mortgaged properties. If we are 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 their initial issuance and will
be filed as part of a Current Report on Form 8-K with the SEC within fifteen
days following their issuance.
MBS
MBS may include:
o private -- that is, not guaranteed or insured by the United States or any
of its agencies or instrumentalities -- mortgage pass-through certificates
or other mortgage-backed securities; or
o 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 in this prospectus.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement.
The issuer of the MBS and/or the servicer of the underlying mortgage loans will
have entered into the MBS agreement, generally with a 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 in this
prospectus. 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 or another person
specified in the related prospectus supplement may have the right or obligation
to repurchase or substitute
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ssets 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" in this
prospectus may have been provided with respect to the MBS. The type,
characteristics and amount of 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, the following:
1. the aggregate approximate initial and outstanding principal amount and
type of the MBS to be included in the trust fund;
2. the original and remaining term to stated maturity of the MBS, if
applicable;
3. the pass-through or bond rate of the MBS or the formula for
determining those rates;
4. the payment characteristics of the MBS;
5. the MBS issuer, MBS servicer and MBS trustee, as applicable;
6. a description of the credit support, if any;
7. the circumstances under which the related underlying mortgage loans,
or the MBS themselves, may be purchased prior to their maturity;
8. the terms on which mortgage loans may be substituted for those
originally underlying the MBS;
9. the type of mortgage loans underlying the MBS and, to the extent
available to us and appropriate under the circumstances, any other
information in respect of the underlying mortgage loans described
under "--Mortgage Loans--Mortgage Loan Information in Prospectus
Supplements"; and
10. the characteristics of any cash flow agreements that relate to the
MBS.
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Certificate Accounts
Each trust fund will include one or more accounts 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 in
this prospectus and in the prospectus supplement, deposit all payments and
collections received or advanced with respect to the mortgage assets and other
assets in the trust fund. A certificate account may be maintained as an interest
bearing or a non-interest bearing account, and funds held a certificate account
may be held as cash or invested in some 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 some defaults and losses on the
mortgage assets in the related trust fund may be provided to one or more classes
of certificates of that series in the form of subordination of one or more other
classes of certificates of the series or by one or more other types of credit
support arrangements. Other types of credit support arrangements may include
letters of credit, insurance policies, guarantees, surety bonds or reserve
funds, among others, or a combination. 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. For additional
information regarding credit support, you should review the sections in this
prospectus titled "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 that
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
guaranteed investment contract or other agreement, and the identity of an
obligor or counterparty under the agreement, will be described in the prospectus
supplement for a series of certificates.
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YIELD AND MATURITY CONSIDERATIONS
General
The yield on any offered certificate will depend on the price paid by
the certificateholder, the pass-through rate of the certificate and the amount
and timing of distributions on the certificate. 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 the series or,
in the case of a class of offered certificates with a variable or adjustable
pass-through rate the prospectus supplement will specify, the method of
determining the pass-through rate. The prospectus supplement will also discuss
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
guaranteed investment contract or other 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 the payments are passed
through to certificateholders. That delay will effectively reduce the yield that
would otherwise be produced if payments on those mortgage loans were distributed
to certificateholders on or near the date they were due.
Some 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 the prepayment
only through the date of the prepayment, instead of through the Due Date for the
next succeeding scheduled payment. However, interest accrued on any series of
certificates and distributable on any distribution date will generally
correspond to interest accrued on the mortgage loans to their respective Due
Dates
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during the related Due Period. Consequently, if a prepayment on any mortgage
loan is distributable to certificateholders on a particular distribution date,
but the prepayment is not accompanied by interest to the Due Date for the
mortgage loan in the related Due Period, then the interest charged to the
borrower, net of servicing and administrative fees, may be less than the
corresponding amount of interest accrued and otherwise payable on the
certificates of the related series. If and to the extent that any shortfall is
allocated to a class of offered certificates, the yield on those certificates
will be adversely affected. The prospectus supplement for each series of
certificates will describe the manner in which any prepayment interest
shortfalls will be allocated among the classes of certificates. If so specified
in the prospectus supplement for a series of certificates, the master servicer
for that series will be required to apply some or all of its servicing
compensation for the corresponding period to offset the amount of any prepayment
interest shortfalls. The related prospectus supplement will also describe any
other amounts available to offset shortfalls.
For additional information regarding prepayment interest shortfalls,
you should review the section in this prospectus titled "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 of those payments to reduce the principal balance -- or notional
amount, if applicable -- of that certificate. The rate of principal payments on
the mortgage loans in any trust fund will in turn be affected by their
amortization schedules (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 (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 the 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 the certificates or, in the case of a class of
stripped interest certificates, result in the reduction of its notional amount.
You 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
you 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 the mortgage loans could result in an actual yield to
you that is lower than the anticipated yield. In addition, if you purchase an
offered certificate at a discount, or a premium,
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and principal payments are made in reduction of the principal balance or
notional amount of your offered certificates at a rate slower, or faster, than
the rate anticipated by you during any particular period, the consequent adverse
effects on your 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 those certificates are
entitled to a pro rata share of the prepayments on the mortgage loans in the
related trust fund that are distributable on the date, to a disproportionately
large share -- which, in some cases, may be all -- of the prepayments, or to a
disproportionately small share -- which, in some cases, may be none -- of the
prepayments. As and to the extent described in the 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 some events, e.g., the retirement of
one or more classes of certificates of the series, or subject to some
contingencies, e.g., prepayment and default rates with respect to the mortgage
loans.
In general, the notional amount of a class of stripped interest
certificates will either:
o be based on the principal balances of some or all of the mortgage assets in
the related trust fund; or
o equal the certificate balances of one or more of the other classes of
certificates of the same series. Accordingly, the yield on stripped
interest certificates will be inversely related to the rate at which
payments and other collections of principal are received on mortgage assets
or distributions are made in reduction of the certificate balances of the
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 the mortgage loans will negatively affect the yield to investors
in stripped interest certificates. If the offered certificates of a series
include any of those certificates, the related prospectus supplement will
include a table showing the effect of various assumed levels of prepayment on
yields on those certificates. The 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 you to predict,
yields or prepayment rates.
We are 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
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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 the 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 the ARM Loans
decline in a manner consistent therewith, the related borrowers may have an
increased incentive to refinance for purposes of either:
o converting to a fixed rate loan and thereby "locking in" the rate; or
o 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. We
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 the factors, as to the percentage of the principal balance of
mortgage loans that will be paid as of any date or as to the overall rate of
prepayment on those 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 the 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 the
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 that class. Prepayment rates on loans are commonly
measured relative to a prepayment standard or model, such as the Constant
Prepayment Rate prepayment model or the Standard prepayment assumption
prepayment model. CPR represents an assumed
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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 the 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 the 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.
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 the series. The prospectus
supplement will also contain the percentage of the initial certificate balance
of each class that would be outstanding on specified distribution dates based on
the assumptions stated in that 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 the other rates specified in the
prospectus supplement. The tables and assumptions will illustrate the
sensitivity of the weighted average lives of the certificates to various assumed
prepayment rates and will not be intended to predict, or to provide information
that will enable investors to predict, the actual weighted average lives of the
certificates.
Controlled Amortization Classes and Companion Classes
A series of certificates may include one or more controlled
amortization classes, which will entitle the holders of those certificates to
receive principal distributions according to a specified principal payment
schedule. The principal payment 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 or a targeted
amortization class. In general, a planned amortization class has a "prepayment
collar" -- that is, a range of prepayment rates that can be sustained without
disruption -- that determines the principal cash flow of the certificates. A
prepayment collar is not static, and may expand or contract after the issuance
of the planned amortization class depending on the actual prepayment experience
for the underlying mortgage loans. Distributions of principal on a planned
amortization class would be made in accordance with the specified schedule so
long as prepayments on the underlying mortgage loans remain at a relatively
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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 planned amortization class.
A targeted amortization class is structured so that principal distributions
generally will be payable 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 the
schedule. A targeted amortization class will generally afford the holders 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 those 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
of certificates in that class 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 those holders 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 to a disproportionately large share of the prepayments on the mortgage
loans in the related trust fund enhances the risk of early retirement of the
class ("call risk") if the rate of prepayment is relatively fast; while a class
of certificates that entitles its holders 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 the 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 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
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adverse conditions in the market where the property is
located. In order to minimize losses on defaulted mortgage loans, the master
servicer or a special servicer, to the extent and under the circumstances set
forth in this prospectus and in the 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 the
certificates and, if the 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 on those mortgage loan
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. A 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. Negative
amortization allocated to a class of certificates may result in a deferral of
some or all of the interest payable on those certificates, which deferred
interest may be added to the certificate balance of those certificates.
Accordingly, the weighted average lives of mortgage loans that permit negative
amortization, and that of the classes of certificates to which any the negative
amortization would be allocated or that would bear the effects of a slower rate
of amortization on the mortgage loans, may increase as a result of the 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 a mortgage loan may
exceed the amount necessary to amortize the loan fully over its remaining
amortization schedule thereby resulting in the accelerated amortization of the
mortgage loan. Any the acceleration in amortization of its principal balance
will shorten the weighted average life of a mortgage loan and, correspondingly,
the weighted average lives of those classes of certificates entitled to a
portion of the principal payments on the 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:
o whether the offered certificate was purchased at a premium or a discount;
and
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o the extent to which the payment characteristics of those mortgage loans
delay or accelerate the distributions of principal on the certificate, or,
in the case of a Stripped interest certificate, delay or accelerate the
amortization of its notional amount.
For additional information on the effects of negative amortization on
the yield of certificates, you should review the section titled "--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 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 Loans. The yield to holders of
the offered certificates of any series will directly depend on the extent to
which the 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 the losses and shortfalls. In general, the earlier
that any loss or shortfall occurs, the greater will be the negative effect on
yield for any class of certificates that is required to bear its effects.
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, allocations of
losses and shortfalls may be effected by a reduction in the entitlements to
interest and/or certificate balances of one or more classes of certificates, or
by establishing a priority of payments among those 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 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 the series, may provide for
distributions of principal. Distributions may be provided from:
o amounts attributable to interest accrued but not currently distributable on
one or more classes of accrual certificates;
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o Excess Funds; or
o any other amounts described in the related prospectus supplement.
The amortization of any class of certificates out of the sources
described in the preceding paragraph would shorten the weighted average life of
the certificates and, if those certificates were purchased at a premium, reduce
the yield on those certificates. 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 any of the foregoing sources would
have any material effect on the rate at which the 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 under the circumstances and in the manner set forth in the prospectus
supplement. 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 the
mortgage assets to retire the class or classes, under the circumstances and in
the manner set forth in the related prospectus supplement. In the absence of
other factors, any early retirement of a class of offered certificates would
shorten the weighted average life of the certificates and, if the certificates
were purchased at premium, reduce the yield on those certificates.
THE DEPOSITOR
We are Bear Stearns Commercial Mortgage Securities Inc., a Delaware
corporation organized on April 20, 1987, and we function as the depositor. Our
primary business is to acquire mortgage loans, mortgage-backed securities and
related assets and sell interests therein or bonds secured thereby. We are an
affiliate of Bear, Stearns & Co. Inc. We maintain our principal office at 245
Park Avenue, New York, New York 10167. Our telephone number is (212) 272-2000.
We do not have, nor do we expect 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 us to the purchase of trust assets or will be used
by us for general corporate purposes. We expect 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 us,
prevailing interest rates, availability of funds and general market conditions.
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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 the series, may consist of
one or more classes of certificates that, among other things:
o provide for the accrual of interest thereon at a fixed, variable or
adjustable rate;
o are senior or subordinate to one or more other classes of certificates in
entitlement to some distributions on the certificates;
o are stripped principal certificates;
o are stripped interest certificates;
o provide for distributions of interest or principal that commence only after
the occurrence of some events, such as the retirement of one or more other
classes of certificates of the series;
o provide for distributions of principal to be made, from time to time or for
designated periods, at a rate that is faster -- and, in some cases,
substantially faster -- or slower -- and, in some cases, substantially
slower -- than the rate at which payments or other collections of principal
are received on the mortgage assets in the related trust fund;
o provide for distributions of principal to be made, subject to available
funds, based on a specified principal payment schedule or other
methodology; or
o 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
some 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 or may be offered in book-entry format through the facilities of
the 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 with the transfer. Interests in a class of book-entry certificates
will be transferred on the book-entry records of DTC and its participating
organizations.
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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 the series and the distribution 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 certificate, will be made to the persons in
whose names the 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 amount of each distribution will be determined as
of the close of business on the 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 the 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. Payment will be made by wire transfer if
certificateholder has provided the person required to make 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,
the certificateholder holds certificates in the requisite amount or denomination
specified therein. If the certificateholder does not provide any wiring
instructions, payments will be made by check mailed to the address of the
certificateholder as it appears on the certificate register. 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 the certificates at the location specified in the notice to
certificateholders of the final distribution.
Distributions of Interest on the Certificates
Each class of certificates of each series, other than some classes of
stripped principal certificates and some 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 some classes of 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 the class and the distribution date,
subject to the sufficiency of the portion of the Available Distribution Amount
allocable to that class on the
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distribution date. Prior to the time interest is distributable on any class of
accrual certificates, the amount of Accrued Certificate Interest otherwise
distributable on that class will be added to the certificate balance of that
class on each distribution date. Reference to a notional amount with respect to
a class of stripped interest certificates is solely for convenience in making
some 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 those certificates -- 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--Some 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 the shortfalls. The particular manner in which 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 the class of a portion of any deferred interest
on or in respect of the mortgage assets in the related trust fund will result in
a corresponding increase in the certificate balance of that class.
Distributions of Principal on the Certificates
Each class of certificates of each series, other than some classes of
stripped interest certificates and some 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 the 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 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 to these certificates from time to time. In turn, the
outstanding certificate balance of a class of certificates may be increased as a
result of any deferred interest on or in respect of the related mortgage assets
being allocated to them 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, 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 the 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
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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 the series who are
entitled to receive those distributions until the certificate balances of the
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 some 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 that class.
Distributions on the Certificates in Respect of Prepayment Premiums or
in Respect of Equity Participations
If so provided in the related prospectus supplement, prepayment
premiums or payments in respect of equity participations received on or in
connection with the mortgage assets in any trust fund will be distributed on
each distribution date to the holders of the class of certificates of the
related series who are entitled in accordance with the provisions described in
the 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, the allocations
may be effected by a reduction in the entitlements to interest and/or
certificate balances of one or more classes of certificates, or by establishing
a priority of payments among 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
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and/or any other specified person may be obligated to advance, or have the
option of advancing, on or before each distribution date, the amount may be
advanced 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 the distribution date.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of certificates who
are entitled, 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 the advances were made (as to
any mortgage loan, "related proceeds"). Advances may also be reimbursed from
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 those 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, the advance would not be recoverable from related proceeds or
another specifically identified source (any such advance, a "nonrecoverable
advance"). If an advance was previously made by the master servicer, a special
servicer or the trustee, a nonrecoverable advance will be reimbursable from any
amounts in the related certificate account prior to any distributions being made
to the related series of certificateholders.
If advances have been made by the master servicer, special servicer,
trustee or other entity from excess funds in a certificate account, the master
servicer, special servicer, trustee or other entity, as the case may be, will be
required to replace the funds in the certificate account on any future
distribution date to the extent that funds in the certificate account on the
distribution date are less than payments required to be made to the related
series of certificateholders on that 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 the 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 on the advances
made by that entity. Interest will be payable for the period that the advances
are outstanding at the rate specified in the related prospectus supplement, and
the entity making advances will be entitled to payment of interest periodically
from general collections 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 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.
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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 holder 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:
1. the amount of distribution to holders of the class of offered
certificates that was applied to reduce the certificate balance of
those certificates;
2. the amount of distribution to holders of the class of offered
certificates that is allocable to Accrued Certificate Interest;
3. the amount, if any, of distribution to holders of that class of
offered certificates that is allocable to both prepayment premiums and
payments on account of equity participations;
4. the amount, if any, by which the distribution is less than the amounts
to which holders of a class of offered certificates are entitled;
5. if the related trust fund includes mortgage loans, the aggregate
amount of advances included in the distribution;
6. 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 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;
7. information regarding the aggregate principal balance of the related
mortgage assets on or about the distribution date;
8. if the related trust fund includes mortgage loans, information
regarding the number and aggregate principal balance of those mortgage
loans that are delinquent in varying degrees, including specific
identification of mortgage loans that are more than 60 days delinquent
or in foreclosure;
9. if the related trust fund includes mortgage loans, information
regarding the aggregate amount of losses incurred and principal
prepayments made with respect to those mortgage loans during the
related period. The related period is generally equal in length to the
time period between distribution dates, during which prepayments and
other unscheduled collections on the mortgage loans in the
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related trust fund must be received in order to be distributed on a
particular distribution date;
10. 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 a distribution date,
separately identifying any reduction in the certificate balance or
notional amount due to the allocation of any losses in respect of the
related mortgage assets, any increase in the 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 the balance;
11. if a class of offered certificates has a variable pass-through rate or
an adjustable pass-through rate, the applicable pass-through rate for
the distribution date and, if determinable, for the next succeeding
distribution date;
12. the amount deposited in or withdrawn from any reserve fund on the
distribution date, and the amount remaining on deposit in the reserve
fund as of the close of business on the distribution date;
13. 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 instrument as of the
close of business on the distribution date; and
14. to the extent not otherwise reflected through the information
furnished pursuant to subclauses 10 and 13 above, the amount of credit
support being afforded by any classes of subordinate certificates.
In the case of information furnished pursuant to subclauses 1-3 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 the 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 a 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 you at any time during the calendar year you were
a holder of an offered certificate of a series a statement containing the
information set forth in subclauses 1-3 above. The information will be
aggregated for that calendar year or the applicable portion of that calendar
year during which the person was a certificateholder. The obligation to furnish
information to a certificateholder will be deemed to have been satisfied to the
extent that substantially comparable information is provided pursuant to any
requirements of the Internal Revenue Code as are from time to time in force.
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For other information regarding information provided to a
certificateholder, you should review the section in the prospectus titled
"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 the MBS will depend on the reports received with respect to the
MBS. In those cases, the related prospectus supplement will describe the
loan-specific information to be included in the distribution date Statements
that will be forwarded to the holders of the offered certificates of that series
in connection with distributions made to them.
Voting Rights
The voting rights evidenced by each series of certificates will be
allocated among the respective classes of that series in the manner described in
the related prospectus supplement.
You will generally not have a right to vote, except with respect to
required consents to some amendments to the related pooling agreement and as
otherwise specified in the related prospectus supplement. For additional
information, you should review the section in this prospectus titled
"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 some events
which if continuing would constitute an event of default on the part of the
related master servicer. For further information, you should also review the
section in this prospectus titled "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:
o the final payment or other liquidation of the last mortgage asset or the
disposition of all property acquired upon foreclosure of any mortgage loan;
and
o the payment to the certificateholders of that series of all amounts
required to be paid to them pursuant to that pooling agreement.
Written notice of termination of a pooling agreement will be given to each
certificateholder of the related series, and the final distribution will be made
only upon presentation and surrender of the certificates of that series at the
location to be specified in the notice of termination.
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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 under the circumstances and in
the manner set forth in that prospectus supplement. 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 in that prospectus supplement 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 the mortgage assets to retire
the class or classes.
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 that series
will be offered in book-entry format through the facilities of DTC, and each
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 Internal Revenue 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 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 some 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.
The rules applicable to DTC and its participants are on file with SEC.
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. Your ownership interest of a
book-entry certificate is in turn to be recorded on the direct and indirect
participants' records. You will not receive written confirmation from DTC of
your purchases, but you are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the direct or indirect participant through which you 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 your behalf.
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.
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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 the 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.
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 that date.
Disbursement of the distributions by participants to you 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 participant -- and not of DTC, us
as the depositor, 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, you may receive payments after the related distribution date.
Unless otherwise provided in the related prospectus supplement, the
only "certificateholder", as the term is used in the related pooling agreement,
will be the nominee of DTC, and you will not be recognized as
"certificateholders" under the pooling agreement. You will be permitted to
exercise your rights under the related pooling agreement only indirectly through
the participants who in turn will exercise their rights through DTC. We will be
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 some of you, your ability to pledge your
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 the interest.
Unless otherwise specified in the related prospectus supplement,
certificates initially issued in book-entry form will be issued as definitive
certificates to you or your nominees, rather than to DTC or its nominee, only
if:
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o we advise the trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as depository with respect to those
certificates and we are unable to locate a qualified successor; or
o we, at our option, elect to terminate the book-entry system through DTC
with respect to those 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 our instructions the definitive certificates to which they are entitled, and
thereafter the holders of those 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 general, the parties to a pooling agreement will include the us,
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, our affiliate, or the mortgage asset seller or its affiliate, may
perform the functions of master servicer or special servicer. Any party to a
pooling agreement may own certificates issued under that pooling agreement.
However, except with respect to required consents to some amendments to a
pooling agreement, certificates 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 some 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 contained in this prospectus. If the related trust
fund includes MBS, it will summarize all of the material provisions of the
related pooling agreement. The summaries in this prospectus do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the pooling agreement for each series of
certificates and the description of the
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provisions in the related prospectus supplement. As used in this prospectus with
respect to any series, the term "certificate" refers to all of the certificates
of that series, whether or not offered hereby and by the related prospectus
supplement, unless the context otherwise requires. We 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 that 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, we will assign,
or cause to be assigned, to the designated trustee the mortgage loans to be
included in the related trust fund. Unless otherwise specified in the related
prospectus supplement, we will assign, or cause to be assigned, all principal
and interest to be received on or with respect to those 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 the assignment, deliver the
certificates to or at our direction in exchange for the mortgage loans and the
other assets to be included in the trust fund for the series. Each mortgage loan
will be identified in a schedule appearing as an exhibit to the related pooling
agreement. The schedule generally will include detailed information that
pertains to each mortgage loan included in the related trust fund. The
information will typically include the address of the related mortgaged property
and type of the 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, we
will deliver, or cause to be delivered, to the related trustee, or to a
custodian appointed by the trustee, some loan documents. Unless otherwise
specified in the related prospectus supplement, the loan documents will include
the original mortgage note endorsed, without recourse, to the order of the
trustee, the original Mortgage, or a certified copy, with evidence of recording
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 we or another party to the
pooling agreement promptly cause each 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. The trustee, or the
custodian, will hold the mortgage loan documents in trust for the benefit of the
certificateholders of that series. Unless otherwise specified in the related
prospectus supplement, if any document is found to be missing or defective, and
that omission or defect, as the case may be, materially and adversely affects
the interests of the certificateholders of the related series, the trustee, or
custodian, will be required to notify the master servicer and us, and one of us
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
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number of days after receipt of 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 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 the
occurrence of conditions, and/or within a specified period, specified in the
pooling and servicing agreement, after initial issuance of the series of
certificates, to replace that 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. Neither we 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 that
document has been submitted for recording, and neither that document nor a
certified copy, in either case with evidence of recording, 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 that missing document so long as it continues in good faith to
attempt to obtain that document or a certified copy of that document.
Representations and Warranties; Repurchases
Unless otherwise provided in the prospectus supplement for a series of
certificates, we will, with respect to each mortgage loan in the related trust
fund, make or assign, or cause to be made or assigned, some representations and
warranties covering, by way of example:
o the accuracy of the information set forth for the mortgage loan on the
schedule of mortgage loans appearing as an exhibit to the related pooling
agreement;
o the enforceability of the related mortgage note and Mortgage and the
existence of title insurance insuring the lien priority of the related
Mortgage;
o the warranting party's title to the mortgage loan and the authority of the
warranting party to sell the mortgage loan; and
o 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 master servicer, a special servicer or another
person acceptable to us, or us or our affiliate. The warranting party, if other
than the mortgage asset seller, will be identified in the related prospectus
supplement.
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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 your interests. If a warranting party cannot
cure the breach within a specified period following the date on which it was
notified of that breach, then, unless otherwise provided in the related
prospectus supplement, it 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 warranting party, in lieu of repurchasing a mortgage loan as
to which a breach has occurred, will have the option, exercisable upon some
conditions and/or within a specified period after initial issuance of a series
of certificates, to replace the related mortgage loan with one or more other
mortgage loans. Unless otherwise specified in the related prospectus supplement,
this repurchase or substitution obligation will constitute the sole remedy
available to you or to the related trustee on your behalf for a breach of
representation and warranty by a warranting party. Neither we nor the master
servicer, in either case unless we or the master servicer 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. Consequently, those representations and
warranties may not address events that may occur following the date as of which
they were made. However, we will not include any mortgage loan in the trust fund
for any series of certificates if anything has come to our attention that would
cause it to believe that the representations and warranties made in respect of a
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.
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 a trust fund. The master servicer
will be required to follow collection procedures as it would follow with respect
to mortgage loans that are comparable to the mortgage loans in the trust fund
and held for its own account, provided the procedures are consistent with:
o the terms of the related pooling agreement and any related instrument of
credit support included in the trust fund;
o applicable law; and
o the servicing standard specified in the related pooling agreement and
prospectus supplement.
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The master servicer for any trust fund, directly or through
sub-servicers, will also be required to perform as to the mortgage loans in the
trust fund various other customary functions of a servicer of comparable loans.
These obligations include the following:
o 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;
o attempting to collect delinquent payments; supervising foreclosures;
negotiating modifications; conducting property inspections on a periodic or
other basis;
o managing, or overseeing the management of, mortgaged properties acquired on
behalf of the trust fund through foreclosure, deed-in-lieu of foreclosure
or otherwise (each, an "REO property"); and
o maintaining servicing records relating to the mortgage loans.
Unless otherwise specified in the related prospectus supplement, the
master servicer will be responsible for filing and settling claims in
respect of particular mortgage loans under any applicable instrument of
credit support.
For additional information regarding credit support, you should review
the section in this prospectus titled "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.
However, unless otherwise specified in the related prospectus supplement, the
master servicer will remain obligated under the related pooling agreement. A
sub-servicer for any series of certificates may be our affiliate or an affiliate
of the master servicer. Unless otherwise provided in the related prospectus
supplement, each sub-servicing agreement between the master servicer and a
sub-servicer will provide that, if for any reason the master servicer is no
longer acting in the capacity, the trustee or any successor master servicer may
assume the master servicer's rights and obligations under the 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 the removal to be in your best interest.
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 the
sub-servicer's fees. Each sub-servicer will be reimbursed by the master servicer
that retained it for some expenditures which it makes, generally to the same
extent the master servicer would be reimbursed under a pooling agreement.
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For additional information regarding payment of fees and expenses to a
sub-servicer, you should review the sections in this prospectus titled
"--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 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 our affiliate or an affiliate of the
master servicer. A special servicer may be entitled to any of the rights, and
subject to any of the obligations, described in this prospectus in respect of
the master servicer including the ability to appoint subservicers to the extent
specified in the related prospectus supplement. 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.
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 the mortgage loans. Those certificate
accounts 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. The funds held in a certificate account 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. 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 our affiliate or an affiliate of any of the foregoing. Any
entity that maintains a certificate account must comply 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
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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:
1. all payments on account of principal, including principal prepayments,
on the mortgage loans;
2. all payments on account of interest on the mortgage loans, including
any default interest collected, in each case net of any portion
retained by the master servicer or any special servicer as its
servicing compensation or as compensation to the trustee;
3. 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 with respect to the liquidation, 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;
4. 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";
5. any advances made as described under "Description of the
Certificates--Advances in Respect of Delinquencies";
6. any amounts paid under any cash flow agreement, as described under
"Description of the trust funds--Cash Flow Agreements";
7. all proceeds of the purchase of any mortgage loan, or property
acquired with respect to the liquidation, by us, any mortgage asset
seller or any other specified person as described under "--Assignment
of Mortgage 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");
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8. 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";
9. to the extent that any the 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;
10. 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";
11. 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
12. 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:
1. to make distributions to you on each distribution date;
2. to pay the master servicer, the trustee or a special servicer any
servicing fees not previously retained thereby, the payment to be made
out of payments on the particular mortgage loans as to which the fees
were earned;
3. 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", the 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 those mortgage loans;
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4. to reimburse the master servicer, the trustee or a special servicer
for unpaid servicing fees earned by it and some unreimbursed servicing
expenses incurred by it with respect to mortgage loans in the trust
fund and properties acquired in respect thereof, the 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 their fees were earned or
their expenses were incurred or out of amounts drawn under any
instrument of credit support with respect to the mortgage loans and
properties;
5. to reimburse the master servicer, a special servicer, the trustee or
other specified person for any advances described in clause (3) above
made by it and/or any servicing expenses referred to in clause (4)
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 (3) and (4), respectively, the 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 that portion
of amounts collected on the other mortgage loans that is otherwise
distributable on one or more classes of subordinate certificates of
the related series;
6. 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 (3) above made by it and the servicing expenses described in
clause (4) above incurred by it while the remain outstanding and
unreimbursed;
7. 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 the mortgaged properties, as described under
"--Realization Upon Defaulted mortgage loans";
8. 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 some expenses, costs and liabilities incurred
thereby, as and to the extent described under "--Some Matters
Regarding the Master Servicer and the Depositor";
9. if and to the extent described in the related prospectus supplement,
to pay the fees of trustee;
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10. to reimburse the trustee or any of its directors, officers, employees
and agents, as the case may be, for some expenses, costs and
liabilities incurred thereby, as and to the extent described under
"--Some Matters Regarding the trustee";
11. if and to the extent described in the related prospectus supplement,
to pay the fees of any provider of credit support;
12. if and to the extent described in the related prospectus supplement,
to reimburse prior draws on any instrument of credit support;
13. 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;
14. 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;
15. if one or more elections have been made to treat the trust fund or its
designated portions 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 "Some Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxes That May Be Imposed on the REMIC Pool";
16. 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 with respect to a
defaulted mortgage loan in connection with the liquidation of the
mortgage loan or property;
17. to pay for the cost of various opinions of counsel obtained pursuant
to the related pooling agreement for the benefit of
certificateholders;
18. to make any other withdrawals permitted by the related pooling
agreement and described in the related prospectus supplement; and
19. to clear and terminate the certificate account upon the termination of
the trust fund.
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 set forth in the related pooling agreement. However, unless
otherwise set forth in the related prospectus supplement, the modification,
waiver or amendment will not do the following:
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o affect the amount or timing of any scheduled payments of principal or
interest on the mortgage loan;
o 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
on that mortgage loan; and
o 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,
o a material default on the mortgage loan has occurred or a payment default
is imminent;
o the 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
o the 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 special 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 the other actions as are consistent with the servicing
standard set forth in the pooling agreement. A significant period of time may
elapse before the special servicer is able to assess the success of any the
corrective action or the need for additional initiatives.
The time within which the special 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
your behalf 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 special
servicer may not be permitted to
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accelerate the maturity of the related mortgage loan or to foreclose on the
related mortgaged property for a considerable period of time, and the mortgage
loan may be restructured in the resulting bankruptcy proceedings. For additional
information regarding the restructuring of a mortgage loan, you should review
the Section in this prospectus titled "Some 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 some
classes of the related series of certificates a right of first refusal to
purchase from the trust fund, at a predetermined purchase price any mortgage
loan as to which a specified number of scheduled payments are delinquent. If the
predetermined purchase price is insufficient to fully fund the entitlements of
certificateholders to principal and interest, it will be so specified in the
related prospectus supplement. In addition, unless otherwise specified in the
related prospectus supplement, the special servicer may offer to sell any
defaulted mortgage loan if and when the special 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
special servicer accept the highest cash bid received from any person, including
itself, us or any affiliate of either of us or any certificateholder, that
constitutes a fair price for the defaulted mortgage loan. In the absence of any
bid determined in accordance with the related pooling agreement to be fair, the
special servicer will generally be required to proceed against the related
mortgaged property, subject to the discussion below.
If a default on a mortgage loan has occurred or, in the special
servicer's judgment, a payment default is imminent, the special servicer, on
behalf of the trustee, may at any time do the following so long as it is
consistent with the servicing standard:
o institute foreclosure proceedings;
o exercise any power of sale contained in the related Mortgage;
o obtain a deed in lieu of foreclosure; or
o otherwise acquire title to the related mortgaged property.
Unless otherwise specified in the related prospectus supplement, the
special 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 the
mortgaged property within the meaning of some federal environmental laws. The
special servicer may do so only if the special servicer has previously
determined, based on a report prepared by a person who regularly conducts
environmental audits, which report will be an expense of the trust fund, that:
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o either the mortgaged property is in compliance with applicable
environmental laws and regulations or, if not, that taking the 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 the actions; and
o 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 the circumstances
or conditions are present for which any the action could be required,
taking the 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 the actions.
For additional information regarding environmental risks associated
with mortgage loans, you should review the section in this prospectus titled
"Some 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 special servicer, on behalf of the
trust fund, will be required to sell the mortgaged property within two years of
acquisition, unless one of the following events occurs:
o the Internal Revenue Service grants an extension of time to sell the
property or
o 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 of its designated portions to fail to
qualify as a REMIC under the Internal Revenue Code at any time that any
certificate is outstanding.
Subject to the foregoing, the special servicer will generally be
required to solicit bids for any mortgaged property so acquired in such amanner
as will be reasonably likely to realize a fair price for the property. If the
trust fund acquires title to any mortgaged property, the special servicer, on
behalf of the trust fund, may retain an independent contractor to manage and
operate that property. The retention of an independent contractor, however, will
not relieve the special servicer of its obligation to manage that mortgaged
property in a manner consistent with the servicing standard set forth in the
related pooling agreement.
If Liquidation Proceeds collected with respect to a defaulted mortgage
loan are less than the outstanding principal balance of the defaulted mortgage
loan plus interest accrued on that mortgage loan and the aggregate amount of
reimbursable expenses incurred by the special servicer in connection with that
mortgage loan, the trust fund will realize a loss in the amount of the
shortfall. The special servicer will be entitled to reimbursement out of the
Liquidation
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Proceeds recovered on any defaulted mortgage loan, prior to the distribution of
Liquidation Proceeds to you. The reimbursement amount will 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 special servicer will not be required to expend its
own funds to effect the restoration unless, and to the extent not otherwise
provided in the related prospectus supplement, it determines:
o that the restoration will increase the proceeds to certificateholders on
liquidation of the mortgage loan after reimbursement of the special
servicer for its expenses; and
o that the expenses will be recoverable by it from related Insurance and
Condemnation Proceeds or Liquidation Proceeds.
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 the coverage as
is required under the related Mortgage. Alternatively, if the Mortgage permits
the holder to dictate to the borrower the insurance coverage to be maintained on
the related mortgaged property, the hazard insurance policy coverage should be
consistent with the requirements of the servicing standard. Unless otherwise
specified in the related prospectus supplement, the hazard insurance policy
coverage generally will be in an amount equal to the lesser of the principal
balance owing on the 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 depend 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 policy will be deposited in the related
certificate account. 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 otherwise distributed. The pooling
agreement may provide that the master servicer may satisfy its obligation to
cause each borrower to maintain a hazard insurance policy by maintaining a
blanket policy insuring against hazard losses on all of the mortgage loans in a
trust fund. If a blanket policy contains a deductible clause, the master
servicer will be required, in the event of a casualty covered by that blanket
policy, to deposit in the related certificate account all sums that would have
been deposited in that certificate account but for the deductible clause.
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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. 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. Nevertheless, most the 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 some 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 its holder to require, that type of 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, the clauses generally provide that the insurer's liability
in the event of partial loss does not exceed the lesser of:
o the replacement cost of the improvements less physical depreciation; and
o the proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of the improvements.
Due-on-Sale and Due-on-Encumbrance Provisions
Some 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. Some 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 the provision in a manner consistent with the servicing standard set forth
in the related pooling agreement. 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.
For additional information regarding due-on-sale and due-on-encumbrance
clauses relating to mortgage loans, you should review the section in this
prospectus titled "Some Legal Aspects of Mortgage Loans--Due-on-Sale and
Due-on-Encumbrance".
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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. Any
special servicer's compensation with respect to a series of certificates will
come from payments or other collections on or with respect to specially serviced
mortgage loans and REO Properties. Because compensation is generally based on a
percentage of the principal balance of each 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 some expenses
incurred in connection with the administration of the related trust fund. Those
expenses may include, without limitation, payment of the fees and disbursements
of independent accountants and payment of expenses incurred in connection with
distributions and reports to certificateholders. Some other expenses, including
some expenses related to mortgage loan defaults and liquidations and, to the
extent so provided in the related prospectus supplement, interest on those
expenses at the rate specified in the related prospectus supplement, 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. For further information regarding prepayment interest shortfalls,
you should review the section in the prospectus titled "Yield and Maturity
Considerations--Some 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. The statement should provide that, on the basis of the
examination by that firm conducted substantially in compliance with either the
Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC, the servicing by or on behalf of the master
servicer of mortgage loans under pooling and servicing agreements substantially
similar to each other, which may include the pooling agreement, was conducted
through the preceding calendar year or other specified twelve month period in
compliance with the terms of those agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, neither the
Audit
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Program for Mortgages serviced for FHLMC, nor 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 the applicable pooling
agreement throughout the preceding calendar year or other specified twelve month
period.
Some Matters Regarding the Master Servicer and the Depositor
The entity serving as master servicer under a pooling agreement may be
our affiliate and may have other normal business relationships with us or our
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 only upon the following conditions:
o the appointment of, and the acceptance of the appointment by, a successor
to it and receipt by the trustee of written confirmation from each
applicable rating agency that the resignation and appointment will not have
an adverse effect on the rating assigned by the rating agency to any class
of certificates of the series; or
o a determination that the master servicer's 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.
No resignation by the master servicer 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 some 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, any
special servicer, the depositor or any director, officer, employee or agent of
any 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. However, none of the master
servicer, us or any other person will be protected against any of the following:
o breach of a representation, warranty or covenant made in the pooling
agreement;
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o any expense or liability that that person is specifically required to bear
pursuant to the terms of the pooling agreement; and
o any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of
obligations or duties or by reason of reckless disregard of the obligations
and duties.
Unless otherwise specified in the related prospectus supplement, each
pooling agreement will further provide that the master servicer, the depositor
and any director, officer, employee or agent of either of them will be entitled
to indemnification by the related trust fund against any loss, liability or
expense incurred in connection with any legal action that relates to the pooling
agreement or the related series of certificates. However, indemnification will
not extend to any loss, liability or expense:
o that the person is specifically required to bear pursuant to the terms of
the agreement, or is incidental to the performance of obligations and
duties thereunder and is not otherwise reimbursable pursuant to the pooling
agreement;
o those that are incurred in connection with any breach of a representation,
warranty or covenant made in the pooling agreement;
o that are incurred by reason of misfeasance, bad faith or gross negligence
in the performance of obligations or duties under the pooling agreement, or
by reason of reckless disregard of the obligations or duties; or
o that are 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
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. In that
event, the legal expenses and costs of the 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 for those
expenses, costs and liabilities.
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.
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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 the following:
o any failure by the master servicer to distribute or cause to be distributed
to the certificateholders of that series, or to remit to the trustee for
distribution to those certificateholders, any amount required to be so
distributed or remitted, which failure continues unremedied for five days
after written notice 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 the other
percentage specified in the related prospectus supplement, of the voting
rights for that series;
o 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 of the failure has been given to the master
servicer by the trustee or the depositor, or to the master servicer, the
depositor and the trustee by certificateholders entitled to not less than
25%, or the other percentage specified in the related prospectus
supplement, of the voting rights for that series; and
o some events of insolvency, readjustment of debt, marshalling of assets and
liabilities, or similar proceedings in respect of or relating to the master
servicer and some 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 to it 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 the 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 the other percentage specified in the related prospectus
supplement, of the voting rights for the series, the trustee will be required,
to terminate all of the rights and obligations of the master servicer under the
pooling agreement. Upon termination of the master servicer's rights and
obligations, the trustee will succeed to all of the responsibilities, duties and
liabilities of the master servicer under the pooling agreement and will be
entitled to similar compensation arrangements. However, if the master servicer
is required to make advances under the pooling agreement 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 the advances. Unless
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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 the
other percentage specified in the related prospectus supplement, of the voting
rights for the 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 the appointment, the trustee will be obligated to act
in the capacity.
You will not have the right under any pooling agreement to institute
any proceeding with respect to the pooling agreement. You may do so only if the
following has occurred:
o you previously have given to the trustee written notice of default and
other certificateholders of the same series entitled to not less than 25%,
or the other percentage specified in the related prospectus supplement, of
the voting rights for the series shall have made written request upon the
trustee to institute the proceeding in its own name as trustee;
o you shall have offered to the trustee reasonable indemnity; and
o the trustee for sixty days, or the other period specified in the related
prospectus supplement, shall have neglected or refused to institute any the
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 to it at the request, order or
direction of any of the holders of certificates of the related series, unless
the 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 to it,
without your consent, to do the following:
1. to cure any ambiguity;
2. to correct a defective provision therein or to correct, modify or
supplement any provision in the pooling agreement that may be
inconsistent with any other provision in the pooling agreement;
3. to add any other provisions with respect to matters or questions
arising under the pooling agreement that are not inconsistent with its
provisions;
4. to comply with any requirements imposed by the Internal Revenue Code;
or
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5. for any other purpose; provided that the amendment, other than an
amendment for the specific purpose referred to in clause 4 above, may
not, as evidenced by an opinion of counsel to the effect satisfactory
to the trustee, adversely affect in any material respect your
interests; and provided further that the amendment, other than an
amendment for one of the specific purposes referred to in clauses 1
through 4 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 to the pooling
agreement, with the consent of the holders of the related series of certificates
entitled to not less than 51% (or the other percentage specified in the related
prospectus supplement) of the voting rights for the series allocated to the
affected classes, for any purpose. However, unless otherwise specified in the
related prospectus supplement, no the amendment may:
o reduce in any manner the amount of, or delay the timing of, payments
received or advanced on mortgage loans that are required to be distributed
in respect of any Certificate without the consent of the holder of the
certificate,
o 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 the class or
o 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 the amendment will not result in the imposition of a
tax on the related trust fund or cause the related trust fund, or any of its
designated portions, 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 the certificateholders access during normal
business hours to the most recent list of certificateholders of that series held
by the person. If the list is of a date more than 90 days prior to the date of
receipt of the certificateholders' request, then the person, if not the
registrar for that series of certificates, will be required to request from the
registrar a current list and to afford the requesting certificateholders access
to it promptly upon receipt.
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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 us or our affiliates and with any master servicer or
special servicer and its affiliates. If and to the extent specified under the
related pooling agreement, some functions of the trustee may be performed by a
fiscal agent under some 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. The trustee
will not be accountable for the use or application by or on behalf of the master
servicer for that 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 that 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 those documents and to determine whether they conform to the
requirements of the pooling agreement.
Some 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 that series. The trustee may be
indemnified 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. However, the indemnification will not extend to
any loss, liability or expense that:
o constitutes a specific liability imposed on the trustee pursuant to the
related pooling agreement,
o constitutes 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 or by reason of its reckless
disregard of its obligations or duties; or
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o may arise from a breach of any representation, warranty or covenant of the
trustee made in the pooling agreement.
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 either directly or by or through agents or attorneys. The trustee will
not be responsible for any willful misconduct or gross negligence on the part of
any other 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 to us.
Upon receiving a notice of resignation, we, or any other person as may be
specified in the related prospectus supplement, will be required to use our 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 the
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 the under
the related pooling agreement, or if at any time the trustee becomes incapable
of acting, or if some events of, or proceedings in respect of, bankruptcy or
insolvency occur with respect to the trustee, we 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 the other percentage
specified in the related prospectus supplement, of the voting rights for the
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 loans or
mortgage backed securities backing the certificates. 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 in that instrument.
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
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guarantee payment to you of all amounts to which you 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 the credit
support, you 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 that
credit support will be exhausted by the claims of the holders of certificates of
one or more other series before they receive their intended share of the credit
support 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 mortgage loans
or mortgage backed securities backing the certificates, the related prospectus
supplement will include a description of the following:
o the nature and amount of coverage under the credit support;
o any conditions to payment thereunder not otherwise described in this
prospectus;
o the conditions, if any, under which the amount of coverage under the credit
support may be reduced and under which the credit support may be terminated
or replaced; and
o the material provisions relating to the credit support.
Additionally, the related prospectus supplement will set forth some
information with respect to the obligor under any instrument of credit support,
including the following:
o a brief description of its principal business activities;
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business;
o if applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business; and
o its total assets, and its stockholders' equity or policyholders' surplus,
if applicable, as of a date that will be specified in the prospectus
supplement.
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, some 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 the subordination
will be available.
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Cross-Support Provisions
If the mortgage loans or mortgage backed securities 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 loans or mortgage
backed securities prior to distributions on subordinate certificates evidencing
interests in a different group of mortgage loans or mortgage backed securities
within the trust fund. The prospectus supplement for a series that includes a
cross-support provision will describe the manner and conditions for applying the
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 some default risks by insurance policies or guarantees. To the extent deemed
by us to be material, a copy of each instrument will accompany the Current
Report on Form 8-K to be filed with the SEC 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 those certificates or
some classes of those certificates will be covered by one or more letters of
credit, issued by a bank or financial institution specified in the prospectus
supplement. Under a letter of credit, the issuing bank will be obligated to
honor draws in an aggregate fixed dollar amount, net of unreimbursed payments,
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 some 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 issuing 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 the
letter of credit will accompany the Current Report on Form 8-K to be filed with
the SEC within 15 days of issuance of the certificates of the related series.
Certificate Insurance and Surety Bonds
If so provided in the prospectus supplement for a series of
certificates, deficiencies in amounts otherwise payable on those certificates or
some classes of those certificates will be covered by insurance policies and/or
surety bonds provided by one or more insurance companies or sureties. The
instruments may cover, with respect to one or more classes of certificates of
the
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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 insurance policies and/or surety bonds. A copy of any the
instrument will accompany the Current Report on Form 8-K to be filed with the
SEC 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 the certificates or
some classes of those certificates will be covered, to the extent of available
funds, by one or more reserve funds. Cash, a letter of credit, permitted
investments, a demand note or a combination of the following will be deposited
into the reserve funds, in the amounts specified in the 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 some 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 the investments will be credited to the related reserve fund for the
series, and any loss resulting from the investments will be charged to that
reserve fund. However, any reinvestment income or gain from investments 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 in this prospectus. The related prospectus supplement will
specify, as to each credit support instrument, the information indicated above,
to the extent the information is material and available.
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SOME LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of some legal
aspects of loans secured by commercial and multifamily residential properties.
Because the 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.
For additional information regarding legal aspects of mortgage loans,
you should review the section in this prospectus titled "Description of the
Trust Funds--Mortgage Loans". For purposes of the following discussion,
"mortgage loan" includes a mortgage loan underlying an MBS.
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 the
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
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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, some 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 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
its 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.
For additional information regarding foreclosure action with respect to
revenue from income-producing properties, you should also review the section in
the prospectus titled "--Bankruptcy Laws".
Personal Property
In the case of some 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.
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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 the 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. Public sales of mortgaged property are
made in accordance with procedures that vary from state to state.
Equitable Limitations on Enforceability of Some 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 the 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,
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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.
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 the 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
that 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:
o 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
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o 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 the 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 the 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 the 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 some
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. Generally state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
For additional information regarding environmental costs associated
with a mortgaged property, you should review the section in this prospectus
titled "--Environmental Risks".
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
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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 the 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 the 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
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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 some other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting that
security. However, in some of those states, the lender, following judgment on
the 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.
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 some 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 under some circumstances such
as the following:
o if the ground lease requires the lessor to give the leasehold mortgagee
notices of lessee defaults and an opportunity to cure them;
o permits the leasehold estate to be assigned to and by the leasehold
mortgagee or the purchaser at a foreclosure sale; and
o contains some 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 following:
o the right of the leasehold mortgagee to receive notices from the ground
lessor of any defaults by the borrower under the ground lease;
o the right to cure the defaults, with adequate cure periods;
o if a default is not susceptible of cure by the leasehold mortgagee, the
right to acquire the leasehold estate through foreclosure or otherwise;
o 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
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o 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 some 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 to those
shares, allocable to cooperative dwelling units that may be vacant or occupied
by non-owner tenants. The loans are subject to some 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
the
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tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness
remains unpaid, the tenant-stockholder may be responsible for the deficiency.
For additional information regarding payment of deficiencies, you
should review the sections in this prospectus titled "--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 caused
by an 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 the junior lien.
Under the Bankruptcy Code, provided some 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
the 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 the 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,
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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." The 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 personality necessary for a security interest to attach
to hotel revenues.
Bankruptcies of tenants of 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 some 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 the remedies in the event that a lessee becomes
the subject of a proceeding under the Bankruptcy Code.
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 the
case. If the trustee or debtor-in-possession rejects an executory contract or an
unexpired lease, the 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 the 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
the 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 the damages from the termination of a lease of real property will be
limited to the sum of: (a) the rent reserved by the lease, without acceleration,
for the greater of one year or 15 percent, not to exceed three years, of the
remaining term of the lease, following the earlier of the date of the filing of
the petition and the date on which the lender repossessed, or the lessee
surrendered, the leased property, and (b) any unpaid rent due under that lease,
without acceleration, on the earlier of those 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 the executory
contract or unexpired lease, notwithstanding any provision in that executory
contract or unexpired lease or in applicable law that prohibits, restricts or
conditions the assignment, provided that the trustee or debtor-in-possession
provides "adequate assurance of future performance" by the assignee. The
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Bankruptcy Code specifically provides, however, that adequate assurance of
future performance for purposes of a lease of real property in a shopping center
includes the following:
o adequate assurance of the source of rent and other consideration due under
the 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,
o that any percentage rent due under the lease will not decline
substantially;
o that the assumption and assignment of the lease is subject to all the
provisions in that lease, including, but not limited to, provisions such as
a radius location, use or exclusivity provision, and will not breach any
provision contained in any other lease, financing agreement, or master
agreement relating to that shopping center; and
o that the assumption or assignment of the lease will not disrupt the tenant
mix or balance in that 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 that lease as terminated by that rejection or, in the
alternative, may remain in possession of the leasehold for the balance of the
term of the lease and for any renewal or extension of that 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 a rejection
of a lease, the lessee may offset against rents reserved under the lease for
o the balance of the term after the date of rejection of the lease, and any
renewal or extension and
o any damages occurring after the date of rejection caused by the
nonperformance of any obligation of the lessor under the lease after that
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
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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 some circumstances, a debtor in bankruptcy may have
the power to grant liens senior to the lien of a mortgage, and analogous state
statutes and general principles of equity may also provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring of a
mortgage loan on terms a lender would not otherwise accept. Moreover, the laws
of some states also give priority to some 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 that is
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 the mortgagor and its
ability to incur debt are restricted by the applicable Mortgage or the
organizational documents of that mortgagor. The activities of the mortgagor is
restricted in a manner as is intended to make the likelihood of a bankruptcy
proceeding being commenced by or against that mortgagor remote, and that
mortgagor has been organized and is designed to operate in a manner that its
separate existence should be respected notwithstanding a bankruptcy proceeding
in respect of one or more affiliated entities of that mortgagor. However, we
make 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.
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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. The
environmental risks may give rise to:
o a diminution in value of property securing a mortgage loan or the inability
to foreclose against the property; or
o in some circumstances as more fully described below, liability for clean-up
costs or other remedial actions, which liability could exceed the value of
the 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 alien has
priority over all existing liens, including those of existing mortgages. In
these states, the lien of the mortgage for any mortgage loan may lose its
priority to that type of lien.
Under the federal Comprehensive Response Compensation and Liability
Act, 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
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, 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," 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
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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
environmental clean-up costs could become a liability of the related trust fund
and occasion a loss to certificateholders if 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 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 the 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
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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.
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. The
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
Some 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 the clauses
in many states. By virtue, however, of the Garn-St Germain Depository
Institutions Act of 1982, 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 some loans made after the
effective date of the Garn Act are enforceable, within some 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
Some 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
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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 some states, there are or may be specific limitations
upon the late charges which a lender may collect from a borrower for delinquent
payments. Some 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 some states may provide that mortgage notes relating to
adjustable rate loans are not negotiable instruments under the UCC. In that
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 a mortgage note subject to
restrictions on the ability to foreclose and to contractual defenses available
to a mortgagor.
Applicability of Usury Laws
Title V of the depository Institutions Deregulation and Monetary
Control Act of 1980, as amended, provides that state usury limitations shall not
apply to some types of residential (including multifamily) first mortgage loans
originated by some 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. Some 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:
o the mortgage loan provides for an interest rate, discount points and
charges as are permitted under the laws of the state; or
o the mortgage loan provides that the terms of that mortgage loan are to be
construed in accordance with the laws of another state under which its
interest rate, discount points
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and charges would not be usurious and the borrower's counsel has
rendered an opinion that the 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, a borrower who enters military service after the origination of the
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 the 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 some 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. The
shortfalls would not be covered by advances or, unless otherwise specified in
the related prospectus supplement, any instrument of credit support provided in
connection with the 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 some circumstances, during an additional three-month period thereafter.
Thus, in the event 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:
o hotels and motels are typically operated pursuant to franchise, management
and operating agreements which may be terminable by the operator; and
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o 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 the properties.
Americans with Disabilities Act
Under Title III of the Americans with Disabilities Act of 1990 and
rules promulgated thereunder, 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 the 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 statute can be seized by the government if the property
was used in, or purchased with the proceeds of, the crimes. Under procedures
contained in the Comprehensive Crime Control Act of 1984, the government may
seize the property even before conviction. The government must publish notice of
the forfeiture proceeding and may give notice to all parties "known to have an
alleged interest in the property", including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
established that:
o its mortgage was executed and recorded before commission of the crime upon
which the forfeiture is based; or
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o 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.
SOME 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 the change or interpretation could apply retroactively.
This discussion reflects the applicable provisions of the Internal Revenue Code
of 1986, as amended, as well as the REMIC regulations promulgated by the U.S.
Department of 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, (a) references to the mortgage loans
include references to the mortgage loans underlying MBS included in the mortgage
assets and (b) 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.
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 Internal Revenue Code
Section 860D. A trust fund or any of its portions 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 some conditions. With respect to each series of REMIC
certificates, Shearman & Sterling, our counsel, has advised us that in the
firm's opinion, assuming (a) the making of such an election, (b) compliance with
the pooling agreement and (c) compliance with any changes in the law, including
any amendments to the Internal Revenue Code or applicable Treasury regulations
thereunder, each REMIC pool will qualify as a REMIC. In the 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
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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, or FASIT, a
grantor trust for federal income tax purposes.
For additional information regarding federal income tax consequences on
the certificates, you should also review the sections in this prospectus titled
"--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 Internal Revenue 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 Internal Revenue Code Section
7701(a)(19)(C)(v) or as other assets described in Internal Revenue Code Section
7701(a)(19)(C), and otherwise will not qualify for the treatment. REMIC
certificates held by a real estate investment trust will constitute "real estate
assets" within the meaning of Internal Revenue Code Section 856(c)(4)(A).
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 Internal
Revenue 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 Internal Revenue 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 the
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 the
assets constituting "loans . . . secured by an interest in real property which
is . . . residential real property" for purposes of Internal Revenue 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
Internal Revenue Code Section 851(b)(3)(A)(i). REMIC certificates held by some
financial institutions will constitute an "evidence of indebtedness" within the
meaning of Internal Revenue Code Section 582(c)(1). The Small Business Job
Protection Act 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 Internal
Revenue Code Section
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593(d) for taxable years beginning after December 31, 1995. The requirement in
the SBJPA of 1996 that the 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 Internal Revenue Code Section
7701(a)(19)(C)(v), but only if the 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.
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 Internal Revenue 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.
For further information, you should review the section in this
prospectus titled "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 the following:
o whole mortgage loans, such as the mortgage loans;
o certificates of beneficial interest in a grantor trust that holds mortgage
loans, including some of the MBS;
o regular interests in another REMIC, such as MBS in a trust as to which a
REMIC election has been made;
o loans secured by timeshare interests; and
o loans secured by shares held by a tenant stockholder in a cooperative
housing corporation.
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However, in general:
o the fair market value of the real property securing the mortgage (including
any buildings and structural components) must be 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
o 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 the first bullet point of the preceding sentence as of the date of the
last the 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:
o in exchange for any qualified mortgage within a three-month period
thereafter; or
o in exchange for a "defective obligation" within a two-year period
thereafter. A "defective obligation" includes the following:
1. a mortgage in default or as to which default is reasonably
foreseeable;
2. a mortgage as to which a customary representation or warranty made at
the time of transfer to the REMIC pool has been breached;
3. a mortgage that was fraudulently procured by the mortgagor; and
4. a mortgage that was not in fact principally secured by real property
(but only if the mortgage is disposed of within 90 days of discovery).
A mortgage loan that is "defective" as described in clause 4 in the
immediately preceding sentence 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 that 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
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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 some other contingencies. The reserve fund will be disqualified
if more than 30% of the gross income from the assets in the fund for the year is
derived from the sale or other disposition of property held for less than three
months, 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. They are generally
held beyond the close of the third calendar year following the acquisition of
the property by a REMIC pool for not more than two years, with possible
extensions granted by the Internal Revenue Service of up to an additional four
years.
In addition to the foregoing requirements, the various interests in a
REMIC pool also must meet some requirements. All of the interests in a REMIC
pool must be either of the following:
o one or more classes of regular interests; or
o 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. Thespecified 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 that 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
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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 Internal Revenue Code for REMIC status during
any taxable year, the Internal Revenue Code provides that the entity will not be
treated as a REMIC for that 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 Internal Revenue
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. You should be aware, however,
that the Conference Committee Report to the Tax Reform Act of 1986 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 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 to it. regular
certificateholders must use the accrual method of accounting with regard to
regular certificates, regardless of the method of accounting otherwise used by
the 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 Internal Revenue Code Section 1273(a). Holders of any
Class of regular 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 the 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, under Internal Revenue 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
some issues relevant to repayable securities, such as the regular certificates.
To the extent the issues are not addressed in the regulations, we intend 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,
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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. You are advised to consult your own tax advisors as to the discussion
in this prospectus 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, 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, we intend 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 us 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 that 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 the 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 the 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, we intend 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 the regular certificates includes all distributions of interest
as well as principal thereon. Likewise, we intend to treat an "interest only"
class, or a class on which interest is substantially disproportionate to its
principal amount 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.
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Under a de minimis rule, original issue discount on a regular
certificate will be considered to be zero if the 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 regular certificate. The Conference
Committee Report to the 1986 Act provides that the schedule of the distributions
should be determined in accordance with the assumed rate of prepayment of the
mortgage loans 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 the 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.
For additional information regarding an election to treat interest
under the constant yield method, you should review the section in this
prospectus titled "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. We 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 the
following:
o 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
o the adjusted issue price of the regular certificate at the beginning of the
accrual period.
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The present value of the remaining distributions referred to in the
preceding sentence is calculated based on:
o the yield to maturity of the regular certificate at the issue date;
o events, including actual prepayments, that have occurred prior to the end
of the accrual period; and
o 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
those 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. The daily portions 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 some classes of regular certificates and
either an increase or decrease in the daily portions of original issue discount
with respect to the regular certificates.
In the case of a random lot certificate, we intend to determine the
yield to maturity of that 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 the
unpaid principal balance:
o the remaining unaccrued original issue discount allocable to the
Certificate, or to the portion, will accrue at the time of the
distribution; and
o the accrual of original issue discount allocable to each remaining
certificate of that class, or the remaining unpaid principal balance of a
partially redeemed random lot certificate
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after a distribution of principal has been received, will be adjusted
by reducing the present value of the remaining payments on the class
and the adjusted issue price of that class to the extent attributable
to the portion of its unpaid principal balance that was distributed.
We believe 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. You are advised to consult your 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 the 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, a
subsequent purchaser may elect to treat all 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:
o the issue price does not exceed the original principal balance by more than
a specified de minimis amount; and
o 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 the rate is subject to a fixed multiple that is
greater than 0.65, but not more than 1.35. The 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 the 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 the 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,
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provided that the information is not (a) within the control of the issuer or a
related party or (b) 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 may be issued 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 theclass 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, the final regulations may lead to different timing of income
inclusion than would be the case under the OID regulations. Furthermore,
application of those principles could lead to the characterization of gain on
the sale of contingent interest regular certificates as ordinary income. You
should consult your 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 qualifies as a
regular interest in a REMIC if:
o it bears a rate that qualifies as a variable rate under the OID regulations
(a) 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 the rate (plus or minus a specified number
of basis points), or (b) 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 rate under the REMIC regulations, including the rate
that is subject to one or more caps or floors; or
o it bears one or more 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.
Accordingly, unless otherwise indicated in the applicable prospectus
supplement, we intend 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 that 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, we intend to treat variable
interest as qualified stated interest, other than variable interest on an
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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, we intend 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 the 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. Accordingly, any Deferred Interest that accrues with respect
to a class of regular certificates may constitute income to the holders of those
regular certificates prior to the time distributions of cash with respect to the
Deferred Interest are made.
Market Discount
A purchaser of a regular certificate also may be subject to the market
discount rules of Internal Revenue Code Sections 1276 through 1278. Under these
Internal Revenue 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:
o is exceeded by the then-current principal amount of the regular
certificate; or
o in the case of a regular certificate having original issue discount, is
exceeded by the adjusted issue price of the regular certificate at the time
of purchase.
The purchaser generally will be required to recognize ordinary income to the
extent of accrued market discount on the regular certificate as distributions
includible in its stated redemption price at maturity are received, in an amount
not exceeding any the distribution. The market discount
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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 the
Treasury regulations are issued, market discount would accrue either:
o on the basis of a constant interest rate or
o in the ratio of stated interest allocable to the relevant period to the sum
of the interest for the period plus the remaining interest as of the end of
the 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 that
period plus the remaining original issue discount as of the end of that
period.
The 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. The 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 on that certificate. The deferred portion of the interest
expense in any taxable year generally will not exceed the accrued market
discount on the regular certificate for that year. Any 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 that regular certificateholder in that taxable year or thereafter,
in which case the interest deferral rule will not apply.
For additional information, you should also review the section in this
prospectus titled "Election to Treat All Interest Under the Constant Yield
Method" below regarding an alternative manner in which the election may be
deemed to be made.
Market discount with respect to a regular certificate will be
considered to be zero if the market discount is less than 0.25% of the remaining
stated redemption price at maturity of that 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. You
should also consult Revenue Procedure 92-67 concerning the elections to include
market
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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 the regular certificate as a
"capital asset" within the meaning of Internal Revenue Code Section 1221, the
regular certificateholder may elect under Internal Revenue Code Section 171 to
amortize the 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 Internal Revenue 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.
For additional information, you should also review the section in this
prospectus titled "Election to Treat All Interest Under the Constant Yield
Method" below regarding an alternative manner in which the Internal Revenue 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:
o "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
o 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 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
which the debt instrument is acquired and is irrevocable except
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with the approval of the Service. You should consult your 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. The gain will be
treated as ordinary income in the following instances:
o if a regular certificate is held as part of a "conversion transaction" as
defined in Internal Revenue 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 Internal Revenue 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 the transaction;
o in the case of a non-corporate taxpayer, to the extent the taxpayer has
made an election under Internal Revenue Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary rates; or
o to the extent that the 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 the 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 the holder with respect to the regular
certificate.
In addition, gain or loss recognized from the sale of a regular
certificate by some banks or thrift institutions will be treated as ordinary
income or loss pursuant to Internal Revenue Code Section 582(c). Capital gains
of some non-corporate taxpayers are subject to a lower maximum tax rate (28%)
than ordinary income of those taxpayers (39.6%), and still a lower maximum rate
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(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 the 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, you are cautioned that while you may generally cease to accrue interest
income if it reasonably appears that the interest will be uncollectible, the
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
Internal Revenue Code Section 166. To the extent the rules of Internal Revenue
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 loss sustained during the taxable year on
account of any regular certificates becoming wholly or partially worthless. 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 the 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 the time as the principal balance of
any class or subclass of the 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 those losses only after all mortgage loans remaining in the trust fund
have been liquidated or the 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 the 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
the 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 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. You are advised to consult
your tax advisors regarding the treatment of losses on regular certificates.
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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, 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 the quarter
and by allocating the daily portion among the residual certificateholders in
proportion to their respective holdings of residual certificates in the REMIC
pool on the 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 for the following:
o the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply;
o all bad loans will be deductible as business bad debts; and
o 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 the mortgage loans is prepaid, the residual certificateholder may
recognize taxable income without being entitled to receive a corresponding
amount of cash because (a) the prepayment may be used in whole or in part to
make distributions in reduction of principal on the regular certificates and (b)
the discount on the mortgage loans which is includible in income may exceed the
deduction allowed upon the
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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 those classes are not issued with substantial
discount. If taxable income attributable to the mismatching is realized, in
general, losses would be allowed in later years as 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 the
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 the mismatching or unrelated deductions against which to offset the income,
subject to the discussion of "excess inclusions" below under "Limitations on
Offset or Exemption of REMIC Income". The timing of the 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 some periods may exceed the income
reflected by the residual certificateholder for the periods in accordance with
generally accepted accounting principles. You should consult your own
accountants concerning the accounting treatment of your 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 that residual certificate. The
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 the loss was disallowed and may be used by the 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. The recovery of basis by the REMIC pool
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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 the 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 a residual
interest as zero rather than the 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 the 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 the basis
until termination of the REMIC pool unless future Treasury regulations provide
for periodic adjustments to the REMIC income otherwise reportable by the holder.
The REMIC regulations currently in effect do not so provide.
You should review the sections titled "Treatment of Some 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.
Treatment of Some Items of REMIC Income and Expense
Although we intend to compute REMIC income and expense in accordance
with the Internal Revenue Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. We make no representation as to the specific
method that we 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
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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 the mortgage loans is exceeded by their unpaid principal balances. The REMIC
pool's basis in the mortgage loans is generally the fair market value of the
mortgage loans immediately after its transfer to the REMIC pool. The REMIC
regulations provide that the basis is equal in the aggregate to the issue prices
of all regular and residual interests in the REMIC pool, or its fair market
value at the Closing Date, in the case of a retained class. In respect of
mortgage loans that have market discount to which Internal Revenue Code Section
1276 applies, the accrued portion of the 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 its unpaid principal balances, the REMIC pool will be considered
to have acquired the mortgage loans at a premium equal to the amount of the
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 its transfer 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 Internal Revenue Code Section 1221 may elect under Internal Revenue
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, Internal Revenue 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 the mortgage loans may be deductible in accordance with a reasonable
method regularly employed by its holder. The allocation of the premium pro rata
among principal payments should be considered a reasonable method; however, the
Service may argue that the premium should be allocated in a different manner,
such as allocating the 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 the quarterly period of:
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o 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 Internal Revenue Code Section 1274(d); multiplied by
o the adjusted issue price of the residual certificate at the beginning of
the 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 the daily accruals of REMIC income described in this paragraph for all
prior quarters, decreased by any distributions made with respect to that
residual certificate prior to the beginning of the 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 the 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 the 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 Internal Revenue Code Section 511, the residual
certificateholder's excess inclusions will be treated as unrelated business
taxable income of that residual certificateholder for purposes of Internal
Revenue Code Section 511. In addition, REMIC taxable income is subject to 30%
withholding tax with respect to some persons who are not U.S. Persons (as
defined below under "Tax-Related Restrictions on Transfer of Residual
Certificates--Foreign Investors"), and its portion attributable to excess
inclusions is not eligible for any reduction in the rate of withholding tax, by
treaty or otherwise. See "Taxation of Some 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 some persons who are not U.S. Persons. The SBJPA of
1996 has eliminated the special rule permitting Section 593 institutions, called
"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
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inclusions. These rules are effective for taxable years beginning after December
31, 1996, unless a residual certificateholder elects to have the 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 other than in
connection with the formation of a REMIC pool, if the Disqualified Organization
is required, pursuant to a binding contract, to sell that residual certificate,
which sale occurs within seven days after the startup day, a tax would be
imposed in an amount equal to the product of:
o the present value of the total anticipated excess inclusions with respect
to the residual certificate for periods after the transfer; and
o 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 Internal Revenue 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. The tax generally would be imposed on
the transferor of the residual certificate, except that where the transfer is
through an agent (including a broker, nominee or other middleman) for a
Disqualified Organization, the tax would instead be imposed on the agent.
However, a transferor of a residual certificate would in no event be liable for
the 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 the
affidavit is false. The tax also may be waived by the Treasury Department if the
Disqualified 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 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 the entity, then a
tax is imposed on the entity equal to the product of (a) the amount of excess
inclusions on the residual certificate that are allocable to the interest in the
Pass-Through Entity during the period the interest is held by the Disqualified
Organization, and (b) the highest marginal federal corporate income tax rate.
The 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 the
tax if it has received an affidavit from the record holder that it is not a
Disqualified Organization or stating the holder's taxpayer identification number
and, during the period the person is the record holder of the residual
certificate, the Pass-Through Entity does not have actual knowledge that the
affidavit is false.
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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 the following occurs:
o the proposed transferee provides to the transferor and the trustee an
affidavit providing its taxpayer identification number and stating that the
transferee is the beneficial owner of the residual certificate, is not a
Disqualified Organization and is not purchasing the residual certificates
on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman on its behalf); and
o the transferor provides a statement in writing to us and the trustee that
it has no actual knowledge that the 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 the
restrictions on transfer, and each residual certificateholder will be deemed to
have agreed, as a condition of ownership, to any amendments to the related
pooling agreement required under the Internal Revenue 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 we or the trustee
may charge a fee for computing and providing the information.
Noneconomic Residual Interests. The REMIC regulations would disregard
some 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, 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, (a) 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 (b) 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 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:
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o 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;
o 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 the 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," unless the 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:
o the future value of expected distributions equals at least 30% of the
anticipated excess inclusions after the transfer; and
o 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 the transfer may be made.
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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 the residual certificateholder
in the 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 the adjusted basis on that distribution date. The 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 the residual
certificateholder's residual certificate remaining when its interest in the
REMIC pool terminates, and if the residual certificateholder holds the residual
certificate as a capital asset under Internal Revenue Code Section 1221, then
the residual certificateholder will recognize a capital loss at that time in the
amount of the remaining adjusted basis.
Any gain on the sale of a residual certificate will be treated as
ordinary income:
o if a residual certificate is held as part of a "conversion transaction" as
defined in Internal Revenue 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 the
transaction; or
o in the case of a non-corporate taxpayer, to the extent the taxpayer has
made an election under Internal Revenue 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
some banks or thrift institutions will be treated as ordinary income or loss
pursuant to Internal Revenue 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
Internal Revenue 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 the 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.
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Mark-to-Market Regulations
The Service has issued Mark-to-Market regulations under Internal
Revenue 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 some 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:
1. 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;
2. the receipt of income from assets that are not the type of mortgages
or investments that the REMIC pool is permitted to hold;
3. the receipt of compensation for services; or
4. the receipt of gain from disposition of cash flow investments other
than pursuant to a qualified liquidation.
Notwithstanding (1) and (4), 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.
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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 made under the
following circumstances:
o during the three months following the startup day;
o if made to a qualified reserve fund by a residual certificateholder;
o if in the nature of a guarantee;
o if made to facilitate a qualified liquidation or clean-up call; and
o if 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 Internal Revenue 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
the 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.
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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 the 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 Internal Revenue 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 the residual certificates, to have agreed to:
o the appointment of the tax matters person as provided in the preceding
sentence; and
o the irrevocable designation of the master servicer as agent for performing
the functions of the tax matters person.
Limitations on Deduction of Some Expenses
An investor who is an individual, estate or trust will be subject to
limitation with respect to some itemized deductions described in Internal
Revenue Code Section 67, to the extent that the itemized deductions, in the
aggregate, do not exceed 2% of the investor's adjusted gross income. In
addition, Internal Revenue Code Section 68 provides that itemized deductions
otherwise allowable for a taxable year of an individual taxpayer will be reduced
by the lesser of the following:
o 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
o 80% of the amount of itemized deductions otherwise allowable for the year.
In the case of a REMIC pool, the deductions may include deductions
under Internal Revenue Code Section 212 for the servicing fee and all
administrative and other expenses relating to the REMIC pool, or any similar
expenses allocated to the REMIC pool with respect to a regular interest it holds
in another REMIC. Investors who hold REMIC certificates either directly or
indirectly through some pass-through entities may have their pro rata share of
the expenses allocated to them as additional gross income, but may be subject to
the limitation on deductions. In addition, those expenses are not deductible at
all for purposes of computing the alternative minimum tax, and may cause
investors to be subject to significant additional tax
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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, the additional gross income and limitation on deductions will
apply to the allocable portion of the expenses to holders of regular
certificates, as well as holders of residual certificates, where regular
certificates are issued in a manner that is similar to pass-through certificates
in a fixed investment trust. In general, the 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 some 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 the expenses
will be allocable to the residual certificates.
Taxation of Some 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, will be considered "portfolio interest" and, therefore,
generally will not be subject to 30% United States withholding tax, provided
that the Non-U.S. Person:
o is not a "10-percent shareholder" within the meaning of Internal Revenue
Code Section 871(h)(3)(B) or a controlled foreign corporation described in
Internal Revenue Code Section 881(c)(3)(C); and
o provides the trustee, or the person who would otherwise be required to
withhold tax from the distributions under Internal Revenue 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 the 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 the Non-U.S. Person. In the latter case, the 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.
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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:
o the mortgage loans, including mortgage loans underlying MBS, were issued
after July 18, 1984; and
o 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
Internal Revenue 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 REMIC
Income" for further information. 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 the Non-U.S. Persons,
30% (or lower treaty rate) withholding will not apply. Instead, the amounts paid
to the 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, the
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 some
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 some brokers, may be subject to a
"backup" withholding tax under Internal Revenue Code Section 3406 of 31% on
"reportable payments" (including interest distributions, original issue
discount, and, under some circumstances, principal distributions) unless the
regular certificateholder complies with some 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 the certificateholder is otherwise an exempt recipient under
applicable provisions of the Internal Revenue Code. Any amounts to be withheld
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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 the 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 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 Internal Revenue
Code Section 67 expenses (see "Limitations on Deduction of Some Expenses" above)
allocable to the holders. Furthermore, under the 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".
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," or as a REMIC, the trust fund
will be classified as a grantor trust under subpart E, Part 1 of subchapter J of
the Internal Revenue Code and not as an association taxable as a corporation or
a "taxable mortgage pool" within the meaning of Internal Revenue Code Section
7701(i). Where
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there is no fixed retained yield with respect to the mortgage loans underlying
the standard certificates, the holder of each the Standard Certificate in the
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 the mortgage loans, original issue discount, if any,
prepayment fees, assumption fees, and late payment charges received by the
master servicer, in accordance with the 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 the
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 some pass-through entities,
will be subject to limitation with respect to some itemized deductions described
in Internal Revenue Code Section 67, including deductions under Internal Revenue
Code Section 212 for the servicing fee and all the administrative and other
expenses of the trust fund, to the extent that the deductions, in the aggregate,
do not exceed two percent of an investor's adjusted gross income. In addition,
Internal Revenue Code Section 68 provides that itemized deductions otherwise
allowable for a taxable year of an individual taxpayer will be reduced by the
lesser of:
o 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
o 80% of the amount of itemized deductions otherwise allowable for the
year.
As a result, 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 the standard certificates with respect
to interest at the pass-through rate on the standard certificates. In addition,
the expenses are not deductible at all for purposes of computing the alternative
minimum tax, and may cause the 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 Internal Revenue Code, as described below under "Stripped
Certificates" and "Recharacterization of Servicing Fees", respectively.
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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 Internal Revenue 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 Internal Revenue 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
the section of the Internal Revenue Code.
2. A Standard Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of
Internal Revenue Code Section 856(c)(4)(A) to the extent that the
assets of the related trust fund consist of qualified assets, and
interest income on the assets will be considered "interest on
obligations secured by mortgages on real property" to the extent
within the meaning of Internal Revenue 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 Internal Revenue 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
Internal Revenue 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 "Some
Federal Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Treatment of Some 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, the 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
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deductible by the borrower under applicable Internal Revenue Code provisions or,
under some 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 the income.
Unless indicated otherwise in the applicable prospectus supplement, no
prepayment assumption will be assumed for purposes of the accrual. However,
Internal Revenue 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 the mortgage loans
acquired by a standard certificateholder are purchased at a price equal to the
then unpaid principal amount of the mortgage loans, no original issue discount
attributable to the difference between the issue price and the original
principal amount of the mortgage loans (i.e., points) will be includible by the
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 "Some 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 the accrual.
Recharacterization of Servicing Fees. If the servicing fee paid to the
master servicer were deemed to exceed reasonable servicing compensation, the
amount of the 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 the 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. The
guidance provides safe harbors for servicing deemed to be reasonable and
requires taxpayers to demonstrate that the value of servicing fees in excess of
the 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 the amounts would be viewed as retaining
an ownership interest in a portion of the
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interest payments on the mortgage loans. Under the rules of Internal Revenue
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 the
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 Internal Revenue Code would apply to
its holder. While standard certificateholders would still be treated as owners
of beneficial interests in a grantor trust for federal income tax purposes, the
corpus of the 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 the 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, the 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.
You should also review "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 some financial institutions subject to the
provisions of Internal Revenue Code Section 582(c), any the 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:
o if a Standard Certificate is held as part of a "conversion transaction" as
defined in Internal Revenue 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 the
transaction; or
o in the case of a non-corporate taxpayer, to the extent the taxpayer has
made an election under Internal Revenue Code Section 163(d)(4) to have net
capital gains taxed as
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investment income at ordinary income rates. Capital gains of some
non-corporate taxpayers are subject to a lower maximum tax rate (28%)
than ordinary income of the 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 Internal Revenue 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 certificates. Stripped certificates include stripped
interest certificates and stripped principal certificates as to which no REMIC
election is made.
The certificates will be subject to those rules if the following occur:
o we or any of our 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;
o 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
o 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 the 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
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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.
Internal Revenue Code Section 1286 treats a stripped bond or a stripped
coupon as an obligation issued at an original issue discount on the date that
the stripped interest is purchased. Although the treatment of stripped
certificates for federal income tax purposes is not clear in some respects at
this time, particularly where the stripped certificates are issued with respect
to a Mortgage Pool containing variable-rate mortgage loans, we have has been
advised by counsel that:
o the trust fund will be treated as a grantor trust under subpart E, Part 1
of subchapter J of the Internal Revenue Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Internal Revenue Code Section 7701(i); and
o 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
Internal Revenue Code Section 1286, Internal Revenue Code Sections 1272
through 1275, and the OID regulations. While under Internal Revenue 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 the stripped certificate would be treated as
qualified stated interest under the OID regulations. Further pursuant to these
final regulations the purchaser of the stripped certificate will be required to
account for any discount as market discount rather than original issue discount
unless either:
o the initial discount with respect to the stripped certificate was treated
as zero under the de minimis rule of Internal Revenue Code Section
1273(a)(3); or
o no more than 100 basis points in excess of reasonable servicing is stripped
off the related mortgage loans. Any the market discount would be reportable
as described under "Some 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 the computation.
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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, our counsel
has advised us that stripped certificates owned by applicable holders should be
considered to represent "real estate assets" within the meaning of Internal
Revenue Code Section 856(c)(4)(A), "obligation[s] principally secured by an
interest in real property" within the meaning of Internal Revenue Code Section
860G(a)(3)(A), and "loans . . . secured by an interest in real property which is
. . . residential real property" within the meaning of Internal Revenue 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 Internal Revenue Code Section 856(c)(3)(B), provided that in each
case the mortgage loans and interest on the mortgage loans qualify for the
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 the income. Based in part on the OID regulations and the
amendments to the original issue discount sections of the Internal Revenue 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 of a stripped
certificate, 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 the 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 the original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each mortgage
loan represented by the 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
the stripped certificate to recognize an ordinary loss equal to the portion of
unrecoverable basis.
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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
the 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, the regulations may lead to different timing of income
inclusion that would be the case under the OID regulations. Furthermore,
application of the principles could lead to the characterization of gain on the
sale of contingent interest stripped certificates as ordinary income. You should
consult your 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 the stripped certificate, as described
above under "Some 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, the subsequent
purchaser will be required for federal income tax purposes to accrue and report
the excess as if it were 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 the 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 Internal Revenue Code provisions. For example, the stripped
certificateholder may be treated as the owner of any of the following:
o one installment obligation consisting of the Stripped Certificate's pro
rata share of the payments attributable to principal on each mortgage loan
and a second installment obligation consisting of the Stripped
Certificate's pro rata share of the payments attributable to interest on
each mortgage loan;
o as many stripped bonds or stripped coupons as there are scheduled payments
of principal and/or interest on each mortgage loan; or
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o 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 to it.
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 the Stripped Certificate, or
classes of stripped certificates in the aggregate, represent the same pro rata
portion of principal and interest on each the 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 Internal Revenue 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, or FASITs, within the
meaning of Internal Revenue Code Section 860L(a). Qualification as a FASIT
requires ongoing compliance with some conditions. With respect to each series of
FASIT Certificates, Shearman & Sterling, our counsel, will advise us that in the
firm's opinion, assuming (a) the making of such an election, (b) compliance with
the pooling agreement and (c) compliance with any changes in the law, including
any amendments to the Internal Revenue Code or applicable Treasury Regulations
thereunder, each FASIT Pool will qualify as a FASIT. In the 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 the election.
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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 the year, the information, prepared on the
basis described above, as the trustee deems to be necessary or desirable to
enable the certificateholders to prepare their federal income tax returns. The
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, the reporting will be based upon a representative initial offering
price of each class of stripped certificates. The trustee will also file the
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 "Some Federal Income Tax Consequences for
REMIC Certificates--Backup Withholding".
Taxation of Some 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 Internal Revenue 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 the
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 the
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 the persons will be
subject to the same certification requirements, described above under "Some
Federal Income Tax Consequences for REMIC Certificates--Taxation of Some Foreign
Investors--Regular Certificates".
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Some
Federal Income Tax Consequences," you 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
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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, you should consult your 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, and
Section 4975 of the Internal Revenue Code impose some requirements on employee
benefit plans, and on some other retirement plans and arrangements, including
individual retirement accounts and annuities, Keogh plans, collective investment
funds, insurance company separate accounts and some insurance company general
accounts in which the plans, accounts or arrangements are invested, and on
persons who are fiduciaries with respect to plans in connection with the
investment of Plan assets.
ERISA generally imposes on Plan fiduciaries some 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 Internal Revenue Code prohibit a
broad range of transactions involving assets of a Plan and parties in interest
who have some 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 Internal Revenue 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 Internal Revenue Code. Special
caution should be exercised before the assets of a Plan are used to purchase a
Certificate if, with respect to the assets, we, 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 the
assets of the Plan; or (b) has authority or responsibility to give, or regularly
gives, investment advice with respect to the assets of the Plan for a fee and
pursuant to an agreement or understanding that the advice will serve as a
primary basis for investment decisions with respect to the assets and that the
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
the 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 the series of certificates.
Some 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 Internal Revenue Code,
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church plans, as defined in Section 3(33) of ERISA, are not subject to ERISA
requirements. Accordingly, assets of the 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 the plan which is qualified and exempt from taxation under Sections
401(a) and 501(a) of the Internal Revenue Code, however, is subject to the
prohibited transaction rules set forth in Section 503 of the Internal Revenue
Code.
Plan Asset Regulations
A Plan's investment in offered certificates may cause the trust assets
to be deemed Plan assets. Section 2510.3-101 of the regulations of the United
States Department of Labor provides that when a Plan acquires an equity interest
in an entity, the Plan's assets include both the equity interest and an
undivided interest in each of the underlying assets of the entity, unless some
exceptions not applicable to this discussion apply, or unless the equity
participation in the entity by "benefit plan investors," i.e., plans, some
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, we cannot assure you 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 the 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 Internal Revenue 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 Internal Revenue Code.
Administrative Exemptions
Several underwriters of mortgage-backed securities have applied for and
obtained from DOL individual 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 that 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 the possibility, as well as provide a
summary of the conditions to the exemption's applicability.
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Unrelated Business Taxable Income; Residual Certificates
The purchase of a residual certificate by any employee benefit plan
qualified under Internal Revenue Code Section 401(a) and exempt from taxation
under Internal Revenue Code Section 501(a), including most varieties of ERISA
plans, may give rise to "unrelated business taxable income" as described in
Internal Revenue 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 some tax-exempt entities not subject to Internal Revenue Code
Section 511 including some governmental plans, as discussed above under the
caption "Some 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 us 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, only if so specified in the related prospectus supplement. The
appropriate characterization of those certificates not qualifying as "mortgage
related securities," called non-SMMEA eligible certificates, under various legal
investment restriction, and thus the ability of investors subject to these
restrictions to purchase the 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 eligible certificates
constitute legal investments for them.
Generally, only classes of offered certificates that meet the following
criteria will be mortgage related securities for purposes of SMMEA:
o are rated in one of the two highest rating categories by one or more rating
agencies;
o are part of a series evidencing interests in a trust fund consisting of
loans originated by some types of originators as specified in SMMEA; and
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o 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.
As "mortgage related securities," the 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 of its agencies or
instrumentalities constitute legal investments for the entities under applicable
law. Under SMMEA, a number of states enacted legislation on or prior to the
October 3, 1991 cut-off for the enactments limiting to various extends the
ability of some entities (in particular, insurance companies) to invest in
"mortgage related securities," secured by liens on residential, or mixed
residential and commercial properties, in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA. Pursuant to
Section 347 of the Riegle Community Development and Regulatory Improvement Act
of 1994, 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 the legislation will be
authorized to invest in offered certificates qualifying as "mortgage related
securities" only to the extent provided in the legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows:
o 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;
o federal credit unions may invest in the securities; and
o national banks may purchase the 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 the
regulations as the applicable federal regulatory authority may prescribe.
In this connection, effective December 31, 1996, the Office of the
Comptroller of the Currency, called 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 some general standards in 12 C.F.R. ss.1.5 concerning
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"safety and soundness" and retention of credit information), some "Type IV
securities," defined in 12 C.F.R. ss.1.2(1) to include some "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 some mortgage related securities (including securities such as some
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 some 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. Section
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, of the Federal
Financial Institutions Examination Council, or 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 some modifications), prohibits depository
institutions from investing in some "high-risk mortgage securities" (including
securities such as some classes of the offered certificates), except under
limited circumstances, and sets forth some 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," 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.
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 the authorities before purchasing any class of the
offered certificates, as some classes may be
143
<PAGE>
deemed unsuitable investments, or may otherwise be restricted, under the rules,
policies or guidelines, in some 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 some 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, if your investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities, you should consult with your 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 certificates offered hereby and by related prospectus supplements
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 us
from that sale.
We intend that 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. The methods are as follows:
o by negotiated firm commitment underwriting and public offering by one or
more underwriters specified in the related prospectus supplement;
o by placements through one or more placement agents specified in the related
prospectus supplement primarily with institutional investors and dealers;
and
o through direct offerings by us.
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If specified in the prospectus supplement relating to a series of
offered certificates, we or any of our affiliates or any other person or persons
specified in the prospectus supplement (including originators of mortgage loans)
may purchase some or all of one or more classes of offered certificates of that
series from the underwriter or underwriters or any other person or persons
specified in the prospectus supplement. Pursuant to this Prospectus and the
related prospectus supplement, a purchaser may thereafter from time to time
offer and sell some or all of the certificates directly, or through one or more
underwriters to be designated at the time of the offering of the certificates,
or through dealers (whether acting as agent or as principal) or in any other
manner that may be specified in the related prospectus supplement. The offering
may be restricted in the manner specified in the related prospectus supplement.
The transactions may be effected at market prices prevailing at the time of
sale, at negotiated prices or at fixed prices.
If underwriters are used in a sale of any offered certificates, other
than in connection with an underwriting on a best efforts basis, the
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. The
underwriters may be broker-dealers affiliated with us whose identities and
relationships to us 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 that series and the members of the
underwriting syndicate, if any, will be named in the prospectus supplement.
In connection with the sale of the offered certificates, underwriters
may receive compensation from us or from purchasers of the offered certificates
in the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the certificates may be deemed to be
underwriters in connection with those certificates, and any discounts or
commissions received by them from us and any profit on the resale of
certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
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 some conditions precedent, including the
following:
o that the underwriters will be obligated to purchase all certificates if any
are purchased, other than in connection with an underwriting on a best
efforts basis; and
o that we will indemnify the several underwriters, and each person, if any,
who controls any the underwriters within the meaning of Section 15 of the
Securities Act, against some civil liabilities, including liabilities under
the Securities Act, or will contribute to payments required to be made in
respect to the Securities Act.
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<PAGE>
The prospectus supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of the
offering and any agreements to be entered into between us and purchasers of
certificates of those series.
We anticipate that the certificates offered hereby will be sold
primarily to institutional investors. Purchasers of offered certificates,
including dealers, may, depending on the facts and circumstances of their
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 the 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 us, and may be sold by us 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., our affiliate, 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 those transactions. Sales may be made at negotiated prices determined
at the time of sale.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement, including this
prospectus and form of the prospectus supplement, under the Securities Act of
1933, as amended, with respect to the offered certificates. This prospectus and
the applicable prospectus supplement relating to each series of offered
certificates contain summaries of the material terms of the documents referred
to, but do not contain all of the information contained in the registration
statement. For further information regarding the documents referred to in this
prospectus and the applicable prospectus supplement, you should refer to the
registration statement and the exhibits to the registration statement. The
registration statement and the exhibits can be inspected and copied at the
Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 and the SEC's regional offices at Seven World Trade Center, 13th Floor,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1500, Chicago, Illinois 60661. Copies of these materials can be obtained at
prescribed rates from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, the SEC maintains a public
access site on the Internet through the World Wide Web at which provides on-line
access to reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at the address
http://www.sec.gov.
INCORPORATION OF SOME INFORMATION BY REFERENCE
The SEC allows us to "incorporate by reference" information that we
file with the SEC, which allows us to disclose important information to you by
referring you to those documents.
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<PAGE>
The information incorporated by reference is considered to be part of this
prospectus and the applicable prospectus supplement. Information that we file
later with the SEC will automatically update the information in this prospectus
and the applicable prospectus supplement. In all cases, you should rely on the
later information over different information included in this prospectus or the
applicable prospectus supplement. As a recipient of this prospectus, you may
request a copy of any document we incorporate by reference, except exhibits to
the documents (unless the exhibits are specifically incorporated by reference),
at no cost, by writing or calling: Bear Stearns Commercial Mortgage Securities
Inc., 245 Park Avenue, New York, New York 10167, Attention: James G. Reichek
(212) 272-2000. We have determined that our financial statements will not be
material to the offering of any offered certificates.
REPORTS
We have not authorized anybody to give you any information or to make
any representation not contained in this prospectus and any related prospectus
supplement and you should not rely on any the information or representation that
is not contained in this document. 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 certificates being offered pursuant to the
related prospectus supplement. They also do not constitute an offer of the
offered certificates to any person in any state or other jurisdiction in which
the offer would be unlawful. The delivery of this prospectus to you at any time
does not imply that information contained in this document is correct as of any
time subsequent to the date of this document; however, if any material change
occurs while this prospectus is required by law to be delivered, we will amend
or supplement this prospectus accordingly.
The master servicer or trustee for each series will be required to mail
to holders of the certificates of each series periodic unaudited reports
concerning the related trust fund. If holders of beneficial interests in a class
of offered certificates are holding and transferring in book-entry form through
the facilities of the DTC, then unless otherwise provided in the related
prospectus supplement, the reports will be sent on behalf of the related trust
fund to a nominee of DTC as the registered holder of the offered certificates.
Conveyance of notices and other communications by DTC to its participating
organizations, and directly or indirectly through the 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. We will file or
cause to be filed with the SEC the periodic reports with respect to each trust
fund as are required under the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC thereunder.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of
certificates. 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.
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<PAGE>
LEGAL MATTERS
The validity of the certificates of each series will be passed upon for
us by Shearman & Sterling, New York, New York.
RATINGS
It is a condition to the issuance of any class of offered certificates
that they shall have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by at least one rating agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by you of all collections on the underlying mortgage assets to which you
are entitled. Ratings address the structural, legal and issuer-related aspects
associated with those certificates, the nature of the underlying mortgage loans
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 prepayments might
differ from those originally anticipated. As a result, you 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.
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<PAGE>
GLOSSARY
Definition
Accrued Certificate Interest - With respect to each class of certificates (other
than some classes of stripped interest certificates and some 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 the class of certificates immediately
prior to the 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 that is either (a) based on the
principal balances of some or all of the mortgage assets in the related trust
fund or (b) equal to the certificate balances of one or more other classes of
certificates of the same series.
ARM Loans - mortgage loans with adjustable mortgage rates.
Available Distribution Amount - 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 the series on
the date.
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<PAGE>
Debt Service Coverage Ratio - 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: (a) the Net Operating Income derived from the related
mortgaged property for a twelve-month period; to (b) the annualized scheduled
payments on the mortgage loan and any other loans senior to it that are secured
by the related mortgaged property.
Disqualified Organization - any of the following: (a) the United States, any of
its state or political subdivisions; (b) any foreign government; (c) any
international organization; (d) any agency or instrumentality of any of the
foregoing, provided, that the 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 the governmental entity; (e) any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas as
described in Internal Revenue Code Section 1381(a)(2)(C); and (f) any
organization (other than a farmers' cooperative described in Internal Revenue
Code Section 521) that is exempt from taxation under the Internal Revenue Code
unless the organization is subject to the tax on unrelated business income
imposed by Internal Revenue Code Section 511.
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,
called the determination date, or otherwise advanced by the related master
servicer or other specified person, be distributed to the holders of the
certificates of the series on the next succeeding distribution date.
Excess Funds - 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: (a) 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; or (b) 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 or principal.
Loan-to-Value Ratio - 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: (a) the then outstanding principal
balance of the mortgage loan and any other loans senior to it that are secured
by the related mortgaged property; to (b) the Value of the related mortgaged
property.
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<PAGE>
MBS - 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.
Net Operating Income - 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 the period, minus
the total operating expenses incurred in respect of the mortgaged property
during the period other than: (a) non-cash items such as depreciation and
amortization; (b) capital expenditures; and (c) debt service on the related
mortgage loan or on any other loans that are secured by the mortgaged property.
Non-U.S. Person - The term "Non-U.S. Person" means any person who is not a U.S.
Person.
Pass-Through Entity - "Pass-Through Entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust or
estate and some 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 the interest,
be treated as a Pass-Through Entity.
SMMEA - The Secondary Market Mortgage Enhancement Act.
U.S. Person - 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 the trust, and one or more United States
persons have the authority to control all substantial decisions of the trust, or
(b) for all other taxable years, the 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, some trusts in existence on August 20, 1996
which are eligible to elect to be treated as U.S. Persons).
Value - The "Value" of a mortgaged property is generally its fair market value
determined in an appraisal obtained by the originator at the origination of the
loan.
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PROSPECTUS SUPPLEMENT (To Prospectus dated ____________, 1999)
Approximately $__________
Bear Stearns Commercial Mortgage Securities Inc., Depositor
Commercial Mortgage Pass-Through Certificates, Series 20__-__
$________ Class A Certificates
$________ Class B Certificates
- ----------------------------------------------
You should carefully consider the risk
factors beginning on page S-20 of this
prospectus supplement and on page __
of the accompanying prospectus.
Payments on the mortgage loans backing
these securities represent the sole source
of payment on these securities. These
Securities do not represent an interest in or
an obligation of us or any of our affiliates.
Neither these securities nor the underlying
mortgage loans are insured or guaranteed
by any governmental agency or any other
person.
- ----------------------------------------------
The Trust:
o The trust will primarily consist of a pool
of conventional, monthly pay mortgage loans.
o The mortgage loans are secured by first
priority liens on fee simple or leasehold
interests in commercial, multifamily,
manufactured housing, hospitality,
healthcare related and credit tenant
properties;
o Multifamily, office, retail, hotel,
industrial and credit tenant properties will
represent security for a material
concentration of the mortgage loans included
in the trust.
The Certificates:
o The offered certificates consist of two
classes of pass-through certificates
described in the table below. The offered
certificates are the only securities offered
pursuant to this supplement and the
accompanying prospectus.
o We are also issuing __ classes of privately
placed securities that are not being offered
pursuant to this supplement. The privately
placed certificates are subordinate to the
offered certificates.
<TABLE>
===========================================================================================================
<CAPTION>
Initial Class
Certificate Balance Pass-Through Assumed Final Rated Final Anticipated
Class (+/-5%) Rate Distribution Date Distribution Date Ratings
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A $ % ______, 20__ ______, 20__
- -----------------------------------------------------------------------------------------------------------
Class B $ % ______, 20__ ______, 20__
===========================================================================================================
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these offered certificates or determined
that this supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
We expect that [__________________________________________________] will
sell the offered certificates to
[__________________________________________________] on or about
[____________] and that they will sell the offered certificates from time
to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale.
_____________ __, 20__
- --------------------------------------------------------------------------------
The information contained herein is not complete and may be changed. Neither
this Prospectus Supplement nor the accompanying Prospectus is an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
- --------------------------------------------------------------------------------
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We tell you about the offered certificates in two separate documents
that progressively provide more detail. These documents are:
o the prospectus, which provides general information, some of which may
not apply to a particular series of certificates, including your
series; and
o this supplement, which describes the specific terms of your series of
certificates.
If we describe terms of the offered certificates differently in this
supplement than we do in the prospectus, you should rely on the information in
this supplement rather than on the more general information in the prospectus.
However, you should carefully review this supplement and the prospectus
together, because neither one by itself provides complete information about the
offered certificates.
This supplement and the prospectus include cross-references to sections
in these materials where you can find further related discussions. The table of
contents in this supplement and the prospectus identify the pages where these
cross-referenced sections are located.
[The photographs of the mortgaged properties included in this
Supplement are not representative of all of the mortgaged properties or of any
particular type of mortgaged property.]
You can find the definitions of capitalized terms that are used in this
supplement beginning on page S-72 under the caption "Glossary" and under the
caption "Glossary" beginning on page 149 of the prospectus.
S-2
<PAGE>
TABLE OF CONTENTS
Page No.
--------
Summary of Prospectus Supplement...............................................5
General...............................................................5
Risk Factors..................................................................20
The Certificates.....................................................20
The Mortgage Loans...................................................24
Description of the Mortgage Pool..............................................34
General..............................................................34
Certain Payment Characteristics......................................34
Delinquent Mortgage Loans............................................35
Additional Mortgage Loan Information.................................35
The Mortgage Loan Seller......................................................39
Underwriting Standards...............................................40
Assignment of the Mortgage Loans; Repurchase..................................40
Representations and Warranties; Repurchases...................................42
Changes in Mortgage Pool Characteristics......................................43
Servicing of the Mortgage Loans...............................................43
General..............................................................43
The Master Servicer..................................................44
Servicing And Other Compensation And Payment Of Expenses.............44
Modifications, Waivers And Amendments................................45
Inspections; Collection Of Operating Information.....................46
Additional Obligations of the Master Servicer with Respect
to ARM Loans.........................................................46
Description of the Certificates...............................................47
General..............................................................47
Distributions........................................................48
Method, Timing and Amount...................................48
Priority....................................................49
Pass-Through Rates..........................................50
Certain Calculations with Respect to Individual
Mortgage Loans..............................................51
Subordination........................................................51
P&I Advances.........................................................52
Reports To Certificateholders; Certain Available Information.........53
Voting Rights........................................................55
Termination..........................................................55
The Trustee...................................................................56
Yield and Maturity Considerations.............................................56
Yield Considerations.................................................56
General.....................................................56
Pass-Through Rate...........................................56
Rate and Timing of Principal Payments.......................56
S-3
<PAGE>
Losses and Shortfalls.......................................58
Certain Relevant Factors....................................58
Delay in Payment of Distributions...........................59
Unpaid Distributable Certificate Interest...................59
Weighted Average Life................................................59
Yield Sensitivity Of The Class S Certificates........................62
Pre-Tax Yield........................................................63
Use of Proceeds...............................................................63
Certain Federal Income Tax Consequences.......................................63
ERISA Considerations..........................................................65
Legal Investment..............................................................69
Method of Distribution........................................................70
Legal Matters.................................................................70
Rating........................................................................71
Glossary......................................................................72
Annex A.......................................................................77
Certain Characteristics of the Mortgage Loans.................................77
S-4
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
This summary highlights selected information from this supplement. It does not
contain all of the information you need to consider in making your investment
decisions. To understand all of the terms of the offering of the offered
certificates, you should read this entire document and the accompanying
prospectus carefully.
General
Title of Certificates....................... Bear Stearns Commercial Mortgage
Securities Inc., Commercial
Mortgage Pass-Through
Certificates, Series 20__-__. The
certificates will be issued in
four classes, designated as the
Class A, Class B, and Class C and
Class R Certificates. Only the
Class A and Class B Certificates
are being offered in this
supplement.
Cut-off Date................................ _______________, 20__.
Closing Date of the Securitization.......... On or about _______________, 20__.
Distribution Date........................... The ____ day of each month or, if
the ___ day is not a business day
then the next succeeding business
day, beginning on
__________, 20___.
Due Period.................................. The period that begins on the ___
day of the month preceding the
month in which the Distribution
Date occurs and ends on the ___
day of the month in which that
Distribution Date occurs.
Registration of the The Class A Certificates will be
Class A Certificates..................... represented by one or more global
certificates registered in the
name of Cede & Co., as
nominee of DTC. If you are
acquiring an interest in the
Class A Certificates you will
not be entitled to receive a
Class A Certificate in fully
registered, certificated
form, except under the
limited circumstances
described in the prospectus.
Instead, DTC will effect
payments and transfers in
respect of the Class A
Certificates, acting through
certain participating
organizations.
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 of $1,000. The
Class B Certificates will be
issuable in fully registered,
certificated form in denominations
of $____________ and in integral
S-5
<PAGE>
multiples of $1,000 in excess of
$_______, with one Class B
Certificate evidencing an
additional amount equal to the
remainder of the initial
certificate balance of Class B
Certificates.
The Mortgage Pool
Characteristics of the Mortgage The mortgage pool will consist of
Pool..................................... ____ conventional, monthly pay
mortgage loans with an initial
pool balance of $________________.
Each mortgage loan in the
pool is secured by a first
mortgage lien on a fee simple
estate in a multifamily or
commercial 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.
___________ of the mortgage
loans, which represent
______% of the initial pool
balance, provide for
scheduled payments of
principal and/or interest 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.
ARM Loans represent _____% of
the initial pool balance and
is subject to adjustment on
specified Due Dates by adding
a fixed number of basis
points to the value of a base
index. ARM Loans are subject
to lifetime maximum and/or
minimum Mortgage Rates, and
ARM Loans are subject to
periodic maximum and/or
minimum Mortgage Rates. The
remaining mortgage loans in
the pool bear interest at
fixed Mortgage Rates.
Some of the mortgage loans
provide for monthly payments
of principal based on
amortization schedules
significantly longer than the
remaining terms of the
mortgage loans in the pool.
Therefore, there may be a
substantial principal amount
due and payable on their
respective maturity dates,
unless prepaid thereto. As of
the Cut-off Date, the
mortgage loans in the pool
had the following additional
characteristics:
S-6
<PAGE>
(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 the
above characteristics
apply, 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 the
above characteristics
apply, 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 ranging from
_____% to ____%, and a
weighted average
Cut-off Date LTV Ratio
of _____%; and
(ix) for those ___ mortgage
loans in the pool as
to which the Cut-off
Date LTV Ratio was
determinable, Debt
Service Coverage
Ratios ranging from
_______x to ______x,
and a weighted average
Debt Service Coverage
Ratio
S-7
<PAGE>
of _______x.
The mortgage loans were
originated between 19__ and 20__.
The Certificates
Description of the Certificats.............. The certificates will be
issued pursuant to a pooling
and servicing agreement, to
be dated as of the Cut-off
Date, among us, the master
servicer and the trustee. The
certificates will represent
in the aggregate the entire
beneficial ownership interest
in a trust fund consisting of
the mortgage pool and some
other assets that are related
to the mortgage loans.
A. Certificate Balance...................... The aggregate certificate
balance of the certificates
as of the closing date of the
securitization 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; and 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
each class of certificates
outstanding at any time
represents the maximum amount
that the certificateholders
are entitled to receive as
distributions allocable to
principal from the cash flow
on the mortgage loans and
other assets in the trust
fund. The certificate balance
of each class of Regular
Certificates will be adjusted
from time to time on each
Distribution Date to reflect
any reductions resulting from
the distribution of principal
of those classes.
S-8
<PAGE>
The stated principal balance
of each mortgage loan
outstanding at any time
represents the principal
balance of that mortgage loan
ultimately due and payable to
the certificateholders. The
stated principal balance of
each mortgage loan initially
will equal the Cut-off Date
balance of that mortgage
loan. On each Distribution
Date it will be reduced by
any payments or other
collections or advances of
principal of that mortgage
loan that are distributed on
the certificates on that
date.
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.
C. Distributions............................ If you are a holder of record
of a certificate, you will
receive distributions on the
certificates to the extent of
available funds, on each
Distribution Date. The final
distribution on any
certificate will be made
after due notice by the
master servicer and only upon
presentation and surrender of
your certificates at the
location to be specified in
that notice.
In general, on each
Distribution Date, for so
long as the Class A and/or
Class B Certificates remain
outstanding, the master
servicer will apply the
Available Distribution Amount
for that 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 that
Distribution Date
S-9
<PAGE>
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 the applicable
Distribution Date,
multiplied by (ii)
the Scheduled
Principal
Distribution
Amount for that
Distribution Date,
plus
(b) the entire
Unscheduled
Principal
Distribution
Amount for the
applicable
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
that 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 the applicable
Distribution Date,
multiplied by (ii)
the Scheduled
Principal
Distribution
Amount for that
Distribution Date,
plus
(b) if the Class A
Certificates have
been retired, then
to the extent not
distributed in
S-10
<PAGE>
retirement of the
Class A
Certificates on
the applicable
Distribution Date,
the entire
Unscheduled
Principal
Distribution
Amount for that
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
the 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
the Distribution Date,
net of any
distributions of
principal made on the
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 the
Distribution Date and,
to the extent not
previously distributed,
for all prior
Distribution Dates;
<PAGE>
(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
the applicable
Distribution Date,
multiplied by (b) the
Scheduled Principal
Distribution Amount for
that Distribution Date;
(10) to distributions of
principal to the
holders of the
respective Classes of
Regular Certificates,
in alphabetical order
of their Class
designations in an
aggregate amount equal
to any Uncovered
Portion of the
certificate balance of
the Class C
Certificates
immediately prior to
the applicable
Distribution Date but,
in each case, not more
than
S-11
<PAGE>
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" in this
supplement.
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 the
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 that
certificate, which in turn
will be affected by
following:
(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 the offered
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 the
offered 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" in this
supplement.
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. In deciding whether
to purchase any offered
certificates, you should make
an independent decision as to
the appropriate prepayment
assumptions to be used.
S-12
<PAGE>
D. Yield Considerations................... Yield. If you purchase an offered
certificate at an amount equal to
its unpaid principal balance, the
effective yield to you (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 you pay
less or more than the unpaid
principal balance of the
certificate, then, based on the
assumptions set forth in the
preceding sentence, the effective
yield to you 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 you will affect
the period of time over
which, or the rate at which,
the discount or premium will
be amortized and,
consequently, will change
your actual yield from that
anticipated.
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. You 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 you 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
S-13
<PAGE>
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 issuance of the
certificate and the date on
which each dollar in
reduction of the principal
balance of the certificate is
distributed to you. 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
the weighted average life of
a certificate. In general, if
the weighted average life of
a certificate purchased at
par is extended beyond that
initially anticipated, the
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" in this
supplement. [The following
disclosure is applicable to
stripped interest
certificates. 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, 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" in this
supplement.]
P&I Advances................................ [Subject to a recoverability
determination, the master
servicer is required to make
advances with respect to each
Distribution Date in an
amount that is generally
equal to the aggregate of:
S-14
<PAGE>
(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 on the mortgage
loan, net of related
servicing fees, but only to
the extent that the related
borrower has not made a
payment sufficient to cover
30 days' interest on the
mortgage loan under any
forbearance arrangement or
otherwise, which payment has
been included in the
Available Distribution
Amount for that Distribution
Date; and
(iii) in the case of each REO
Property, an amount
equal to 30 days'
imputed interest with
respect to each REO
Property, 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
that Distribution Date.
The master servicer will be
entitled to interest on any
advances made, and certain
servicing expenses incurred
at an annualized rate equal
to ____% and will be paid,
contemporaneously with the
reimbursement of such 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" in this supplement
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 to receive
distributions of amounts
collected or advanced on the
mortgage loans will be
subordinated 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.
S-15
<PAGE>
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 the Class A
Certificates on each
Distribution Date, and the
ultimate receipt by Class A
Certificate 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 the Class B
certificates on each
Distribution Date, and the
ultimate receipt by Class B
certificate holders of
principal equal to the entire
certificate balance of the
Class B Certificates.
We use subordination to
protect more senior classes
of certificates by applying
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.
Option Termination.......................... At its option, the master
servicer may purchase all of
the mortgage loans and REO
Properties, and effect
termination of the trust fund
and early retirement of the
then outstanding
certificates, on any
Distribution Date on which
the remaining aggregate
stated principal balance of
the Mortgage Pool is less
than ___% of the initial pool
balance. See "Description of
the Certificates--Termination" in
this supplement.
Certain Federal Income Tax
Consequences.............................. You will be required to
report income derived from
the offered certificates in
accordance with the accrual
method of accounting.
[We anticipate 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.
We also anticipate that the
Class _____ Certificates will
be issued at a
S-16
<PAGE>
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 on the
principal over their issue
price (including accrued
interest), and we intend to
report income in respect of
the Class __ Certificates in
this manner.] See "Certain
Federal Income Tax
Consequences" in the
prospectus.
ERISA Considerations........................ If you are a fiduciary of
any employee benefit plan or
other retirement arrangement
subject to ERISA, or Section
4975 of the Internal Revenue
Code of 1986, as amended, you
should review carefully with
your 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 Internal Revenue Code
or whether there exists any
statutory or administrative
prohibited transaction
exemption applicable to an
investment in the offered
certificates.
[The U.S. Department of
Labor has issued to Bear,
Stearns & Co. Inc. an
individual prohibited
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,
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.]
[We expect 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
in the Class B Certificate
may be made to a Plan or to
any person who is directly or
indirectly purchasing the
[Class B] Certificate or
interest in the
S-17
<PAGE>
Class B Certificate 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 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
Internal Revenue Code or
cause the master servicer or
the trustee to be deemed a
fiduciary of Section 406 of
ERISA or Section 4975 of the
Internal Revenue Code Plan or
result in the imposition of
an excise tax under Section
4975 of the Internal Revenue
Code. See "ERISA
Considerations" in this
supplement 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
_________________. 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
applicable to stripped
interest certificates. A
security rating does not
address the frequency or
likelihood of voluntary or
involuntary prepayments 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" in this prospectus
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, for
so long as they are rated in
one of the two highest
ratings categories by one or
more nationally recognized
statistical rating
organizations. Therefore,
they 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
S-18
<PAGE>
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
federal or state regulatory
authorities, on the
investment by theses types of
institutions in some kinds 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.]
You should consult your own
legal advisors to determine
whether and to what extent
the offered certificates
constitute legal investments
for them. See "Legal
Investment" in this
supplement and in the
prospectus.
S-19
<PAGE>
RISK FACTORS
In deciding whether to purchase any offered certificates, you should
consider the following risk factors as well as the risk factors that begin on
page 12 of the prospectus.
Risk Factors Relating to the Certificates
The certificates are supported by limited assets. If the distributable
amount is insufficient to make payments on your certificates in accordance with
the priority of payments and the subordination arrangements described in this
supplement, no other assets will be available to you for payment of the
deficiency.
The rate of prepayment of the mortgage loans in the pool may adversely
affect the yield on your investment. The yield on your certificates will be
affected by a variety of factors described in greater detail in the prospectus
under "Risk Factors -- Prepayments, Average Life of Certificates, Yields." These
include:
o the related pass-through rate;
o the purchase price paid for the certificates, and whether that price
represents a premium over or discount to the principal amount
represented by that certificate;
o the rate and timing of principal payments , including voluntary and
involuntary principal prepayments of the mortgage loans, delinquent
payments on the mortgage loans and principal losses on the mortgage
loans; and
o the extent to which principal payments are allocated on any
Distribution Date in reduction of the certificate balance of the class
to which the certificates belong.
We cannot predict the actual rate of prepayment of principal of the
mortgage loans in the pool. See "Risks Relating to the Certificates -
Enforcement of Prepayment Restrictions" below for a more complete discussion of
prepayment issues.
If you purchase your certificates at a discount, you should consider
the risk that a slower than anticipated rate of principal payments on the
mortgage loans in the pool will result in an actual yield that is lower than
your expected yield. Conversely, if you purchase your certificates at a premium,
you should consider the risk that a faster than anticipated rate of principal
payments on the mortgage loans in the pool will result in an actual yield that
is lower than your expected yield. Insofar as your initial investment in any
offered certificate is repaid, you may not be able to reinvest your initial
investment in an alternative investment with a yield comparable to the yield on
your offered certificates.
The investment performance of your certificates may vary materially and
adversely from your investment expectations due to voluntary or involuntary
prepayments on the mortgage loans being higher or lower than you anticipated.
Even if the actual yield is equal to your anticipated yield, you may not realize
your expected total return on investment or the expected weighted average life
of your certificates.
S-20
<PAGE>
[The following disclosure is applicable to stripped interest
certificates. If you purchase Class S Certificates, your yield to maturity will
be extremely sensitive to the rate and timing of principal payments (including
prepayments) and principal losses with respect to the mortgage loans. Investors
should fully consider the associated risks, including the risk that a rapid rate
of principal payments and/or principal losses on the Mortgage Pool could result
in the failure by investors in the Class S Certificates to fully recoup their
initial investments. For additional information regarding the yield on Class S
Certificates, you should also review the sections in this supplement titled
"Description of the Mortgage Pool", "Description of the
Certificates--Distributions" and "--Subordination" and "Yield and Maturity
Considerations".]
Enforcement of Prepayment Restrictions will generally result in a lower
rate of prepayment but may not be effective in all circumstances to protect the
lender's yield. All of the mortgage loans in the pool contain provisions
prohibiting voluntary prepayments for a specified amount of time after
origination and/or allow voluntary prepayments only with the payment of an
additional charge intended to compensate the lender for foregone interest for a
specified amount of time from origination. The existence of Prepayment Premiums
generally will result in prepayments of the mortgage loans in the pool occurring
at a lower rate than would have been the case if the borrowers were not required
to pay that additional amount. However, Prepayment Premiums may not be effective
in all circumstances to protect the lender's yield. For example:
o in some circumstances, such as markedly low interest rate
environments, the terms of refinancing or sale may be so attractive
that borrowers will prepay their mortgage loans notwithstanding the
obligation to pay Prepayment Premiums,
o Prepayment Premiums may be unenforceable under state or federal law,
including federal bankruptcy law, in some cases, particularly if they
are required to be paid following a default,
o state or federal laws, including federal bankruptcy law, may limit the
amount that may be collected from a borrower.
Even if the requirement to pay a Prepayment Premium following default
is enforceable, the foreclosure proceeds received with respect to a defaulted
mortgage loan may be insufficient to make the required payment. For a
description of Prepayment Premiums, see "Yield and Maturity Considerations" in
this supplement.
Changes in concentrations in the types of properties securing the
mortgage loans in the pool may result as a result of prepayments which may
affect the yield on your investment. To the extent that any borrower pays down
the principal of a mortgage loan, including balloon payments, the remaining
mortgage loans in the pool as a group may exhibit increased concentration with
respect to the type of properties, property characteristics, number of borrowers
and affiliated borrowers or geographic location.
The trust may become liable for the costs of environmental clean-up.
[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
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mortgage loan in the pool. Furthermore, the mortgage loan seller has agreed
that, in the event there is a material breach of its 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 us to
the trustee in connection with our assignment of its interests in the mortgage
loans. Furthermore, the mortgage loan seller's repurchase obligation will
constitute the sole remedy to you and the trustee if there is any material
breach of the mortgage loan seller's representation and warranty, and neither we
nor any of our affiliates will be obligated to repurchase the affected mortgage
loan if the mortgage loan seller defaults on its obligation to do so. You should
also review "Description of the Mortgage Pool--Representations and Warranties;
Repurchases" in this supplement.]
[A "Phase I" environmental site assessment was performed at each of the
mortgaged properties during the 12-month period prior to the date of origination
of the related mortgage loan. In some cases, the environmental consultant
identified a condition or circumstance:
o which was remediated or for which an escrow for remediation costs has
been established and/or
o for which an entity other than the related borrower is responsible for
remediation or the cost of such remediation and/or
o for which the consultant recommended an operations and maintenance
plan or periodic monitoring of the subject properties and/or nearby
properties, which recommendations were required to be implemented in a
manner consistent with industry-wide practices.]
["Phase II" testing was performed with respect to __ mortgaged
properties, and with respect to ___ of the mortgaged properties that were
tested, the environmental consultant concluded that no further action was
necessary.]
Federal law requires owners of multifamily housing constructed prior to
1978 to disclose to potential residents or purchasers any condition on the
property that causes exposure to lead-based paint and the related hazards to
pregnant women and young children. Property owners may be liable for tenant
injuries from exposure to lead-based paint under federal and state laws that
impose affirmative discovery and remediation obligations on owners of
multifamily housing containing lead-based paint. The environmental assessments
revealed the existence of lead-based paint at some of the multifamily
properties. In these cases, the borrowers have either implemented operations and
maintenance programs or have removed or are in the process of removing the
lead-based paint.
[The pooling and servicing agreement requires the special servicer to
obtain an environmental site assessment of a mortgaged property securing a
defaulted Mortgaged Loan prior to acquiring title to the mortgaged property or
assuming its operation. This restriction may delay enforcement of the security
for the related mortgage note and will interfere with the ability of the master
servicer or special servicer to foreclose on a mortgaged property if a
satisfactory environmental site assessment is not obtained or if required
remedial action is not taken. This
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prohibition is meant to decrease the likelihood that the trust will become
liable for an environmental condition at any mortgaged property. However, we
cannot assure you that the requirements of the pooling and servicing agreement
will completely protect the assets of the trust from liability for an
environmental condition.
For additional information regarding environmental risks associated
with mortgaged properties, you should also review the sections in this
supplement titled "Description of the Pooling Agreements--Realization Upon
Defaulted Mortgage Loans" and "Risk Factors--Environmental Risks" and "Certain
Legal Aspects of Mortgage Loans--Environmental Risks" in the prospectus.
A tax may be imposed on the trust if the trust acquires a mortgaged
property subsequent to a default which will receive the net proceeds available
to you. If the trust were to acquire a mortgaged property subsequent to a
default on the related mortgage loan pursuant to a foreclosure or deed in lieu
of foreclosure, the special servicer would be required to retain an independent
contractor to operate and manage the REO Property. Any "net income from
foreclosure property" arising from such operation and management, other than
qualifying "rents from real property", as defined in Section 856(d) of the
Internal Revenue Code, will subject the trust to federal and possibly state or
local tax on such income at the highest marginal corporate tax rate (currently
35%) and in some cases may subject the trust to a "prohibited transaction" tax
on any net income from foreclosure property at a rate of 100%. Any such tax will
reduce net proceeds available for distribution to you and to other
certificateholders. The trust will generally be permitted to receive such
taxable "net income from foreclosure property" if the special servicer
determines that the net after-tax recovery to the trust would be greater than it
would be if such REO Property were leased to a third party at a fixed rental so
as to produce qualifying "rents from real property" or if such property could
not reasonably be so leased.
You have very limited rights to participate in decisions regarding the
trust. Your certificates generally do not entitle you to vote, except with
respect to required consents to certain amendments to the pooling and servicing
agreement and, if certain conditions are met, with respect to votes to replace
parties to the pooling and servicing agreement. Generally, you have only very
limited rights to participate in decisions with respect to the administration of
the trust because the pooling and servicing agreement provides that decisions
are generally made by the master servicer, the trustee or the special servicer,
as applicable.
Any decision made by one of those parties in respect of the trust, even
if, as determined by that party in its good faith and reasonable judgment to be
in your best interest, may be contrary to the decision that would have been made
by you and may negatively affect your interests.
If the master servicer and/or special servicer purchase all or a
portion of the certificates, the master servicer and/or special servicer may be
subject to a conflict of interest. The master servicer, the special servicer or
one or more of their respective affiliates may purchase all or a portion of the
certificates. In the event the master servicer and/or special servicer purchase
all or a portion of the certificates, the master servicer and/or special
servicer may be subject to a conflict of interest because it would have an
economic interest in the trust that is distinct from that of holders of other
classes of certificates. However, the pooling and
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servicing agreement requires the master servicer and the special servicer to
service mortgage loans in accordance with specified objective standards and
without regard to ownership of any certificate by the master servicer, the
special servicer or any affiliate of either.
For additional information regarding the obligations of the master
servicer and special servicer, you should also review the section in this
supplement titled "Servicing of the Mortgage Loans".
The underwriters may be affiliated with the mortgage loan sellers and
may be subject to conflicts of interest arising from the related mortgage loan
seller's desire to consummate a sale of its mortgage loans to the trust.
If you hold subordinate certificates, the sequential pay and
subordination features of these certificates may result in delays and reductions
in payments to you. The sequential pay and subordination features governing the
priority of distributions to certificateholders may result in delays in the
payment of interest and/or principal to any subordinated class of certificates
or to the reduction of the related certificate balance in connection with the
allocation of a collateral support deficit which may remain unreimbursed. Any
such delay or reduction will adversely effect the yield to maturity of such
class of certificates. See "Description of the Certificates--Subordination" in
this supplement for more information.
Computer systems may malfunction and affect the ability of the master
servicer, the special servicer and the trustee to perform basic functions if
they do not attain Year 2000 readiness. The change of date on January 1, 2000
may have a disruptive effect on the ability of computerized systems relied on by
the master servicer, the special servicer and the trustee to perform basic
functions. Such disruptions could affect the following functions among others:
o processing information with respect to the mortgage loans in the pool
and the certificates;
o collecting payments on the Mortgaged Loans;
o remitting payments to certificateholders; and
o servicing the mortgage loans in the pool.
You could be adversely affected if the computer systems of the master
servicer, the special servicer or the trustee are not fully Year 2000 capable
before January 1, 1999. The master servicer, the special servicer and the
trustee have made representations in the pooling and servicing agreement with
respect to the steps that they are taking to address the Year 2000 problem.
Risk Factors Relating to the Mortgage Loans
Some or all of the mortgage loans in the pool will be non-recourse
loans for which recourse will be restricted or unenforceable. The mortgage loans
in the pool will not be an obligation of, or be insured or guaranteed by, any
governmental entity, or private mortgage insurer.
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Each mortgage loan in the pool generally is a nonrecourse loan as to
which, in the event of a default under such mortgage loan (other than a default
resulting from fraud or other willful misconduct of the borrower), recourse
generally may be had only against the specific properties and other assets that
have been pledged to secure such mortgage loan. Consequently, payment on each
mortgage loan prior to maturity is dependent primarily on the income from, and
the value of, the related mortgaged property. Moreover, even if a mortgage loan
provides for recourse to a borrower or its affiliates, there can be no assurance
that the trust ultimately could collect sums due under such mortgage loan. We
have not evaluated the significance of the recourse provisions of any of a
number of mortgage loans in the pool that may provide for recourse against the
related borrower or another person in the event of a default. Accordingly, you
should consider all of the mortgage loans in the pool to be non-recourse loans.
Repayment of the mortgage loans in the pool may depend on the
successful operation of the mortgaged properties. The mortgaged properties
consist entirely of income producing real estate. Lending on the security of
commercial and multifamily properties is generally viewed as riskier than
lending on the security of single-family residential real estate. This is
because commercial and multifamily real estate lending typically involves larger
loans than single-family lending and because repayment is dependent on the
successful operation of the related real estate project.
The ability of a mortgaged property to generate sufficient net
operating income to pay debt service on the related mortgage loan may be
adversely affected by a number of factors, including:
o the age, design and construction quality of the property;
o perceptions regarding the safety, convenience and attractiveness of
the property;
o the proximity and attractiveness of competing properties;
o new construction in the same real estate market as the property;
o the adequacy of the property's management and maintenance;
o an increase in operating expenses for the property;
o an increase in the capital expenditures needed to maintain the
property or make improvements;
o a decline in the financial condition of a major tenant;
o an increase in vacancy rates; and
o a decline in rental rates as leases are renewed or replaced.
Other factors that may adversely affect the ability of a mortgaged
property to generate net cash flow are more general in nature, such as:
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o national, regional or local economic conditions, including plant
closings, industry slowdowns and unemployment rates;
o local real estate conditions such as an oversupply of retail space,
office space or multifamily housing;
o demographic factors;
o customer tastes and preferences; and
o retroactive changes in building codes.
The volatility of net cash flow generated by a mortgaged property will
be influenced by many of the foregoing factors, as well as by:
o the length of tenant leases;
o the creditworthiness of tenants;
o the rate at which new rentals occur;
o the percentage of total property expenses in relation to revenues;
o the ratio of fixed operating expenses to those that vary with
revenues; and
o the level of capital expenditures required to maintain the property
and to maintain or replace tenants.
mortgaged properties with short-term or less creditworthy sources of
revenue and/or relatively high operating costs, such as health-care facilities
and hotel properties, can be expected to have more volatile cash flows than
mortgaged properties with medium to long-term leases from creditworthy tenants
and/or relatively low operating costs. A decline in the real estate market will
tend to have a more immediate effect on the net cash flow of those mortgaged
properties with short-term revenue sources than on mortgaged properties with
more sources of revenue and may lead to higher rates of delinquency or defaults
than would be experienced by those properties with medium to long-term leases
from creditworthy tenants.
Mortgage loans may have balloon payments which involve a greater risk
to the lender because the ability of the borrower to make the balloon payment
depends upon its ability to refinance the loan or sell the related mortgaged
property. ___ of the mortgage loans in the pool, representing approximately
____% of the initial pool balance, do not fully amortize over their stated term
to maturity and will have substantial payments of principal due at maturity
unless previously prepaid.
Loans that require balloon payments involve a greater risk to the
lender than fully amortizing loans because the ability of a borrower to make a
balloon payment will depend on its ability either
o to refinance the mortgage loan; or
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o to sell the related mortgaged property.
The ability of a borrower to accomplish either of these goals will be
affected by all of the factors described in this supplement affecting property
value and cash flow, as well as a number of other factors at the time of
attempted sale or refinancing, including:
o the level of available mortgage rates; and
o the availability of credit for properties of the applicable type
generally.
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" in this supplement. 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 that class of offered certificates. For more
information, you should also review "Yield and Maturity Considerations" in this
supplement and in the prospectus.
The success of each mortgaged property depends on the performance and
viability of the property manager. Each mortgaged property is managed by a
property manager or by the borrower itself. In many cases the property manager
is an affiliate of the borrower. The successful operation of a real estate is
largely dependent on the performance and viability of the property manager. The
property manager is responsible for responding to changes in the local market,
planning and implementing the rental structure, including establishing rental
rates and advising the borrowers so that maintenance and capital improvements
can be carried out in a timely fashion.
We cannot give you any assurance regarding the performance of any
property manager or operator that is currently in place or that may be put in
place upon the expiration or termination of current management agreements or
following any default or foreclosure under a mortgage loan. In addition, the
property managers generally are operating companies and, unlike limited purpose
entities, may not be restricted from incurring debt and other liabilities in the
ordinary course of business or otherwise. We cannot assure you that the property
managers will always be in a financial condition to continue to fulfill their
management responsibilities under the related management agreements throughout
their respective terms.
Default rates may be higher for borrowers of adjustable rate mortgage
loans. _____ of the mortgage loans in the pool, 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 those
loans may result in a default rate higher than that on mortgage loans in the
pool with fixed mortgage rates.
Tenant concentration entails risk because a single tenant's or a few
tenants' financial condition may adversely affect the net cash flow generated by
the mortgage pool as a whole.
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In those cases where a mortgaged property is leased to a single tenant or is
primarily leased to one or a small number of major tenants, a deterioration in
the financial condition or a change in the plan of operations of such a tenant
can have particularly significant effect on the net cash flow generated by such
mortgaged property. If any major tenant defaults under or fails to renew its
lease, the resulting adverse financial effect on the operation of such mortgaged
property will be substantially more severe than would otherwise be the case with
respect to a property occupied by a large number of less significant tenants.
__ of the mortgaged properties, representing security for approximately
___% of the initial pool balance, are each leased to a single tenant.
In addition, retail, office or industrial properties also may be
adversely effected if there is a concentration of tenants in a particular
business or industry at any such property and that particular business or
industry declines.
These adverse financial effects could result in insufficient cash flow
received by a borrower with respect to a mortgaged property which could, in
turn, result in the inability of the borrower to make required payments on its
mortgage loan.
Tenant bankruptcy entails special risk. The bankruptcy or insolvency of
a major tenant, or a number of smaller tenants, at any particular mortgaged
property may adversely affect the income produced by the particular mortgaged
property.
Under the federal bankruptcy code, a tenant has the option of assuming
or rejecting an unexpired lease. If the tenant rejects the lease, the landlord's
claim for breach of the lease would be a general unsecured claim against the
tenant unless the tenant has pledged collateral to secure the landlord's claim.
The claim would be limited to the unpaid rent reserved under the lease for the
periods prior to the bankruptcy petition (or earlier surrender of the leased
premises) which are unrelated to the rejection, plus the lesser of (a) the
greater of one year's rent or 15% of the remaining reserved rent and (b) three
years' rent.
The bankruptcy or insolvency of a tenant could result in a substantial
delay in receipt by the landlord of the amount of its claim, as well as a
substantial delay in the ability of the landlord to relet the tenant's space. In
addition, depending on the assets of the bankrupt tenant, the full amount of the
landlord's claim for breach of the lease may never be ultimately paid.
Certain additional risks relating to tenants. The mortgaged properties
will be affected by the expiration of leases and the ability of the respective
borrowers to renew the leases or relet the space on comparable terms. Most of
the mortgaged properties are in whole or in part occupied under leases that
expire during the respective terms of the related mortgage loans. Moreover, if a
tenant at any mortgaged property defaults in its lease obligations, or if a
tenant attempts to use a foreclosure by a lender to avoid paying above-market
rental payments notwithstanding its obligation to attorn to the lender, the
borrower may incur substantial costs and experience significant delays
associated with enforcing its rights and protecting its investment, potentially
including costs incurred in renovating and reletting the property.
We cannot give you any assurance that tenants will renew leases upon
expiration or, in the case of such renewal, whether the renewal rent will be
equal to the rent previously paid or, in
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the case of a commercial tenant, that it will continue to operate throughout the
term of its lease. A borrower would be adversely affected if its tenants were
unable to pay rent or if the borrower could not rent space on favorable terms or
at all. In addition, upon reletting or renewing existing leases, the borrower
under a mortgage loan secured by commercial properties will likely be required
to pay leasing commissions and tenant improvement costs, which may adversely
affect cash flow from the mortgaged property. We cannot give you any assurances
as to whether, or to what extent, economic, legal or social factors will affect
future rental or repayment patterns.
Certain risks relating to ground leases. Upon the bankruptcy of a
landlord or a tenant under a ground lease, the bankrupt entity has the right to
assume (that is, continue) or reject (that is, terminate) the ground lease.
Pursuant to Section 365(h) of the bankruptcy code, a tenant under a
ground lease that has been rejected by the bankrupt ground lessor has the right
to remain in possession of its leased premises under the rent reserved in the
lease for the term (including renewals) of the ground lease but is not entitled
to enforce the obligation of the ground lessor to provide any services required
under the ground lease. If a bankrupt tenant under a ground lease rejects the
related ground lease, the holder of a mortgage secured by the leasehold interest
would have the right to succeed to the ground lessee's position under the ground
lease only if the ground lessor had specifically granted such right to the
ground lessee. In the event of concurrent bankruptcy proceedings involving the
ground lessor and the ground lessee, the master servicer may be unable to
enforce the bankrupt ground lessee's obligation to refuse to treat a ground
lease rejected by a bankrupt ground lessor as having been terminated. In such
circumstances, the ground lease could be terminated notwithstanding lender
protection provisions contained in the ground lease or in the mortgage.
Geographic concentration of mortgaged properties in a particular area
increases the exposure of the mortgage pool as a whole to adverse conditions in
that area and may affect the yield on your investment. A concentration of
mortgaged properties in a particular state, region or locale increases the
exposure of the mortgaged pool to adverse conditions in that state, region or
locale that may reduce the mortgaged property's income and its foreclosure
value. Adverse conditions may include:
o general economic or demographic conditions in the state, region or
locale or adverse developments affecting an industry that is
concentrated in the state or region;
o real estate market conditions in the state or region;
o state or local government regulations;
o natural disasters, such as earthquakes, floods, tornadoes and
hurricanes, which may not be fully covered by insurance; and
o other factors that are beyond the control of the related borrower.
Certain states or geographic regions may be more severely affected by
the above factors than other states or regions, and to the extent that there is
a concentration of mortgaged
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properties or borrowers in such state or region, the impact on the Trust may be
more significant than would be the case if the properties were more
geographically diversified.
___ mortgaged properties, representing security for approximately ____%
of the initial pool balance, are located in _________.
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 if the pool was more evenly distributed and you may therefore
experience less yield on your investment as a result. Several of the mortgage
loans in the pool have Cut-off Date balances that are substantially higher than
the average Cut-off Date balance of the mortgage loans, which is approximately
$__________.
The largest mortgage loan has a Cut-off Date balance of approximately
$__________ and represents approximately ____% of the initial pool balance.
The ten largest mortgage loans have an aggregate Cut-off Date balance
of approximately $__________ and represent, in the aggregate, approximately
____% of the initial pool balance.
If there is a high concentration of loans to related borrowers, the
financial condition of these borrowers will have a significant impact on the
mortgage pool. Certain groups of mortgage loans in the pool consist of
non-cross-collateralized and non-cross-defaulted mortgage loans that have been
made to the same borrower or to separate borrowers with common principals.
If a mortgage pool has a high concentration of loans to related
borrowers, the financial difficulties of such a borrower could have a greater
impact on the mortgage pool than it would if the borrower and its affiliates
represented a smaller proportion of the mortgage pool.
mortgaged properties that are owned by a group of related borrowers are
likely to have common management. To the extent that mortgaged properties owned
by a group of related borrowers have common property management, any financial
or other difficulties experienced by the property manager would have a greater
impact on the mortgaged properties than would be the case if the properties did
not have common management.
In addition, a financial failure or bankruptcy filing involving an
affiliate of a group of affiliated borrowers, such as a common general partner
or the owner of a common general partner, would have a greater impact on the
Mortgage Pool than a financial failure or bankruptcy filing involving only one
of several borrowers without such an affiliation. Nonetheless, the filing of a
bankruptcy petition should not invalidate the first lien position held by the
trustee on the related mortgaged property, and the master servicer is required
to make advances through liquidation unless the master servicer determines that
such advances will not be recoverable.
Mortgage loans with cross-collateralization arrangements may be
susceptible to "fraudulent conveyance" risk. _____ separate groups of mortgage
loans in the pool with an aggregate Cut-off Date balance of approximately
$____________, representing approximately _____% of the initial pool balance,
provide for some form of cross-collateralization between the mortgage loans in
each such group.
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The purpose of cross-collateralization arrangements is to reduce the
risk of default or ultimate loss as a result of the inability of a mortgaged
property to generate sufficient net cash flow to pay debt service on the related
mortgage loan. However, cross-collateralization arrangements involving more than
one borrower could be challenged as a "fraudulent conveyance" by creditors of an
insolvent borrower or its bankruptcy trustee. Such a challenge could eliminate
or reduce the benefits of cross-collateralization with respect to one or more
groups of cross-collateralized mortgage loans.
In general, a pledge or transfer may be set aside as a "fraudulent
conveyance" if a court finds that the following circumstances exist:
o Insufficient Consideration. The pledgor or transferor did not receive
fair consideration or reasonably equivalent value in exchange for its
agreement to pledge its property for the equal benefit of the other
borrower; and
o Insolvency. The pledgor or transferor either (a) was insolvent at the
time of granting the lien on its property or (b) was rendered
insolvent as a result of granting the lien on its property or (c)
intended to, or believed that it would, incur debts that would be
beyond the person's ability to pay as such debts matured.
A borrower may be maintaining other financing that could reduce cash
flow from the related property and increase the risk or borrower default and
bankruptcy. _____ mortgage loans, with an aggregate Cut-off Date balance of
approximately [$__________], representing approximately _____% of the initial
pool balance, permit the related borrower to maintain subordinate financing
secured by a lien on an interest in the related mortgaged property that was in
existence on the date of origination of the related mortgage loan in the pool.
Each lender of existing subordinate secured debt has entered into a
subordination and standstill agreement pursuant to which, among other
provisions, such lender has agreed to subordinate all payments due under the
related subordinate debt, including assignments of leases and rents, to the
payment obligations under the related mortgage loan, and the subordinate lender
has agreed that it will not take any action to enforce its rights under the
related subordinate mortgage until the related mortgage loan has been paid in
full, even if there is a default under the subordinate debt.
The existence of additional debt may increase the riskiness of a
mortgage loan for several reasons, including the following:
o Reduced Cash Flow. Additional debt service requirements may reduce
cash available for property maintenance, thereby reducing the value of
the mortgaged property.
o Refinancing. A borrower with additional debt outstanding when a
mortgage loan matures may have more difficulty refinancing the
mortgage loan and, if the mortgage loan requires the borrower to make
a significant payment of principal at maturity, the borrower could be
at risk of defaulting on that payment.
o Bankruptcy Risks. Additional debt increases the risk that the borrower
could become insolvent or subject to bankruptcy or similar proceedings
or might complicate bankruptcy proceedings delaying foreclosure on the
mortgaged property. In addition, if the holder of additional debt
becomes bankrupt or insolvent, the trustee's ability to
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foreclose on the related mortgage loan could be delayed. See "Certain
Legal Aspects of the Mortgage Loans--Due-on-Sale and
Due-on-Encumbrance Provisions" and "--Subordinate Financing" in the
prospectus.
Recently constructed properties do not have operating histories. [____]
of the mortgaged properties securing mortgage loans in the pool with a Cut-off
Date balance of approximately $__________, representing approximately _____% of
the initial pool balance, were constructed after January 1, 1998 and
consequently do not have significant operating histories. There can be no
assurance that the businesses operated at these recently constructed mortgaged
properties will be successful. There can be no assurances that current occupancy
levels of these recently constructed mortgaged properties will be maintained or
that full occupancy will be achieved or maintained. There also can be no
assurance that as yet undiscovered physical or design problems with the recently
constructed mortgaged properties will not adversely affect occupancy levels of
any of the ___ mortgaged properties.
Changes in zoning laws may adversely affect the borrower's property and
as a result adversely affect that borrower's ability to meet its mortgage loan
obligations. Due to changes in applicable building and zoning ordinances and
codes affecting some of the mortgaged properties which have come into effect
after the construction of improvements on such mortgaged properties and for
other reasons, some of these improvements may not comply fully with current
zoning laws, including density, use, parking and setback requirements, but in
certain cases qualify as permitted non-conforming uses. The changes in the
applicable zoning laws may limit the ability of the borrower to rebuild the
premises "as is" in the event of a substantial casualty loss with respect to the
premises and, to the extent law and ordinance insurance coverage is not in
place, may adversely affect the ability of the borrower to meet its mortgage
loan obligations from cash flow.
Compliance with the American with Disabilities Act may impose
additional costs on a borrower and adversely affect its ability to meet its
mortgage loan obligations. Under the Americans with Disabilities Act of 1990,
public accommodations are required to meet applicable federal requirements
related to access and use by disabled persons. If a mortgaged property does not
currently comply with the Americans with Disabilities Act, the related borrower
may be required to incur significant costs in order to bring the property into
compliance. In addition, noncompliance could result in the imposition of fines
by the federal government or an award or damages to private litigants. These
costs could have an adverse effect on a borrower's ability to pay debt service
on the related mortgage loan.
Litigation involving a borrower may have an adverse effect on its
ability to meet its mortgage loan obligations. There may be legal proceedings
pending and, from time to time, threatened against the borrowers and their
affiliates relating to the business of, or arising out of the ordinary course of
business of, the borrowers and their affiliates. We cannot assure you that such
litigation will not have a material adverse effect on the performance of the
related mortgaged properties and, thus, the distributions to Certificateholders.
The mortgage pool may include delinquent mortgage loans that may affect
the yield on your investment. The mortgage pool will include ___ mortgage loans,
representing ____% of the initial pool balance, that [describe generally the
characteristics of those delinquent mortgage
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<PAGE>
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 you should consider
the risk that the inclusion of these 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. You should also review "Risk
Factors--Delinquent Mortgage Loans" in the prospectus.
Forward Looking Statements. Whenever we use words like "intends",
"anticipates" or "expects" or similar words in this supplement, we are making a
forward-looking statement, or a projection of what we think will happen in the
future. Forward-looking statements are inherently subject to a variety of
circumstances, many of which are beyond our control, that could cause actual
results to differ materially from what we think they will be. Any
forward-looking statements in this supplement speak only as of the date of this
supplement. We do not assume any responsibility to update or review any
forward-looking statement contained in this supplement to reflect any change in
our expectation with respect to the subject of such forward-looking statement or
to reflect any change in events, conditions or circumstances on which any such
forward-looking statement is based.
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<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
General
The trust fund will consist primarily of ___ conventional, mortgage
loans with an initial pool balance of $_______________. Each mortgage loan is
evidenced by a mortgage note and secured by one or more first lien mortgages,
deeds of trust or similar instruments on a mortgaged property consisisting of a
fee simple estate, a leasehold estate or a mixed fee simple and leasehold estate
in a multifamily or commercial property. Generally whenever we refer to
"mortgage loans," "mortgaged properties" "mortgages" and the like we are only
referring to those that relate to the mortgage loans that are in the mortgage
pool unless the context makes clear otherwise.
. All percentages of the mortgage loans, or of any specified group of
mortgage loans, referred to in this supplement without further description are
approximate percentages by aggregate Cut-off Date balance.
The mortgage loans will be acquired by us on or before the closing date
of the securitization from __________________ , the mortgage loan seller, which
either originated the mortgage loans or acquired them from their respective
originators. See "--The Mortgage Loan Seller" in this supplement.
The mortgage loans in the pool were originated between 19__ and 20__.
[While we have 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
us 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 us 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.
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, 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 are Fixed
Rate Loans. [None of the ARM Loans is convertible into a Fixed Rate Loan.]
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<PAGE>
[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 in the pool 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 on their respective maturity dates, unless prepaid prior
thereto.
No mortgage loan currently prohibits principal prepayments; however,
[some] of the mortgage loans in the pool impose 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" in this prospectus.
[The Index]
[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:
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<PAGE>
Mortgage Rates As Of The Cut-Off Date
<TABLE>
<CAPTION>
Number of mortgage Aggregate Cut-off Percent By Aggregate
Range of Mortgage Rates loans Date Balance Percent By Number Cut-off Date Balance
<S> <C>
Total
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
</TABLE>
The following table sets forth the range of Gross Margins for the ARM
Loans:
Gross Margins For The ARM Loans
<TABLE>
<CAPTION>
Aggregate Cut-off Percent By Aggregate
Range of Gross Margins (%) Number of Arm Date Balance Percent By Number Cut-off Date Balance
<S> <C>
Total.
Weighted Average
Gross Margin: ______%
</TABLE>
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.
<TABLE>
<CAPTION>
Percent By
Aggregate Aggregate
Mortgage Rate Monthly Payment Cut-Off Date Cut-off Date
Adjustment Adjustment Number of Mortgage Balance Percent By Number Balance
<S> <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 Arm Aggregate Cut-off Percent By Aggregate Cut-off Date
Range of Maximum Rates (%) Loans Date Balance Balance
<S> <C>
Total.
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.
</TABLE>
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<PAGE>
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
Total
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:
Cut-Off Date Balances
<TABLE>
<CAPTION>
Percentage By
Cut-off Date Balance Range Number of Mortgage Aggregate Cut-off Aggregate Cut-off
(%) Loans Date Balance Percent By Number Date Balance
<S> <C>
Total
Average Cut-off Date balance (All Loans): $___________
Average Cut-off Date balance (ARM Loans): $___________
Average Cut-off Date balance (Fixed Rate Loans): $___________
</TABLE>
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>
Percent By
Range of Original Term (In Number of Mortgage Aggregate Cut-off Date Percent By Aggregate Cut-off
Months) Loans Balance Number Date Balance
<S> <C>
Total
Weighted Average Original Term to Stated Maturity (All Loans): _____ months
Weighted Average Original Term to Stated Maturity (ARM Loans): _____ month
Weighted Average Original Term to Stated Maturity (Fixed Rate Loans): _____ months
</TABLE>
Remaining Term to Stated Maturity (in Months)
As Of The Cut-Off Date
<TABLE>
<CAPTION>
Range of Original Term Number of Mortgage Aggregate Cut-off Percent By Aggregate
(In Months) Loans Date Balance Percent By Number Cut-off Date Balance
<S> <C>
Total
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
</TABLE>
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<PAGE>
The following table sets forth the respective years in which the
mortgage loans were originated:
Year of Origination
<TABLE>
<CAPTION>
Number of Mortgage Aggregate Cut-off Percent By Aggregate
Year Loans Date Balance Percent By Number Cut-off Date Balance
<S> <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" in this supplement.
Year of Scheduled Maturity
<TABLE>
<CAPTION>
Number of Mortgage Aggregate Cut-off Percent By Aggregate
Year Loans Date Balance Percent By Number Cut-off Date Balance
<S> <C>
Total
The following table sets forth the range of Cut-off Date LTV Ratios of
the mortgage loans. 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
Number of Aggregate Cut-off Percent By Percent By Aggregate
Range of Cut-off Date Mortgage Loans Date Balance Number Cut-off Date Balance
Total
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. 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 we have 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
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<PAGE>
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.
Debt Service Coverage Ratios
As Of The Cut-off Date
<CAPTION>
T Number of Aggregate Cut-off Percent By Percent By Aggregate
Range of Cut-off Date Mortgage Loans Date Balance Number Cut-off Date Balance
<S> <C>
Total
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)
<FN>
(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.
</FN>
</TABLE>
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 Mortgage Aggregate Cut-off Percent By Aggregate
State Loans Date Balance Percent By Number Cut-Off Date Balance
<S> <C>
Total
</TABLE>
Specified in Annex A to this 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
in this supplement 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 closing date of the securitization, we will acquire
the mortgage loans from the mortgage loan seller pursuant to a mortgage loan
purchase agreement, dated [the date hereof], between us and the mortgage loan
seller. [The mortgage loan seller originated ___ of the mortgage loans, which
represent ___% of the initial pool balance, and acquired the remaining
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<PAGE>
mortgage loans from the respective originators thereof, generally in accordance
with the underwriting criteria described below under "--Underwriting
Standards".]
[The mortgage loan 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 in
this supplement.]
[Description of underwriting standards.]
[We believe 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 you.]
ASSIGNMENT OF THE MORTGAGE LOANS; REPURCHASE
On or prior to the closing date of the securitization, we will assign
our interests in the mortgage loans, without recourse, to the trustee for your
benefit. In connection with such assignment, we will require the mortgage loan
seller to deliver to the trustee or to a document custodian appointed by the
trustee a mortgage file consisting of, among other things, the following
documents with respect to each mortgage loan:
[(1) the original mortgage note, endorsed (without recourse) to the order
of trustee;
(2) the original Mortgage or a certified copy thereof, together with
original or certified copies of any intervening assignments of such
document, in each case with evidence of recording thereon;
(3) 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;
(4) 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;
(5) an assignment of the Mortgage in favor of the trustee, in recordable
form;
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<PAGE>
(6) 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;
(7) an assignment of any related security agreement (if such item is a
document separate from the Mortgage) in favor of the trustee;
(8) 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;
(9) 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
(10) the original of any guaranty of the borrower's obligations under
the related mortgage note.]
(11) 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 your benefit. 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
your interests, the trustee will be required to notify the master
servicer, us 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 us to
the trustee, together with its interests in the mortgage loans) to
repurchase the affected mortgage loan within such ___day period at the
Purchase Price.
This repurchase obligation will constitute the sole remedy available to
you and the trustee for any defect in or omission from a mortgage file, and we
nor any of our 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 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.
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<PAGE>
The pooling and servicing agreement will require the master servicer
promptly (and in any event within ___ days of the closing date of the
securitization) to cause each assignment of a mortgage described in clause (5)
of the second preceding paragraph and each assignment of an assignment of
leases, rents and profits described in clause (6) 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 us 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
us. 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 in the pool, as of
[the closing date of the securitization], 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 we discover a breach of any of
the foregoing representations and warranties, and such breach materially and
adversely affects the value of any mortgage loan or your interests, 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 us 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 you 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, we believe that it is
unlikely that the trust fund will incur any such liability. See "Risk
Factors--Environmental Law Considerations" in this supplement 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 we nor any of our affiliates will be
obligated to repurchase any affected mortgage loan in connection with a breach
of the mortgage loan seller's representations and
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<PAGE>
warranties if the mortgage loan seller defaults on its obligation to do so.
However, we will not include any mortgage loan in the mortgage pool if anything
has come to our attention that would cause us 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 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 we deem 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 in this supplement. We believe that the information
set forth in this supplement will be representative of the characteristics of
the mortgage pool as it will be constituted at the time the offered certificates
are issued, although the range of Mortgage Rates and maturities and certain
other characteristics of the mortgage loans in the mortgage pool may vary.
A Current Report on Form 8-K will be available to purchasers of the
offered certificates on or shortly after the closing date of the securitization
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 in the pool, 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 the
following:
o any relationship that the master servicer or any affiliate of the
master servicer may have with the related mortgagor;
o the ownership of any certificate by the master servicer or any
affiliate of the master servicer;
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<PAGE>
o the master servicer's obligation to make P&I Advances and advances to
cover certain servicing expenses; and
o 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 in this supplement 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 __________, 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 in this supplement concerning the master
servicer has been provided by the master servicer, and neither we 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 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
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 Permitted Investments,
and the master servicer will be entitled to retain any interest or other income
earned on such funds. Although the master
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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 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 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 in this supplement 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" in this supplement 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 in
this supplement, provided that such modification, waiver or amendment will not
(1) affect the amount or timing of any scheduled payments of principal or
interest on the mortgage loan or (2) 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
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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" in this supplement.
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 in this supplement, but in any event (1) at
least once per calendar year, commencing in the calendar year _______, and (2),
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 in the pool 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 you during normal business hours at the
offices of the [trustee]. See "Description of the Certificates--Reports to
Certificateholders; Available Information" in this supplement.
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
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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 us, the master servicer
and the trustee, and will represent in the aggregate the entire beneficial
ownership interest in a trust fund consisting of:
o 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);
o such funds or assets as from time to time are deposited in the
certificate account;
o the rights of the mortgagee under all insurance policies with respect
to the mortgage loans; and
o some of our rights 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, including the right to enforce the obligation of
the mortgage loan seller to repurchase defective 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
"Distributions--Priorities", the respective certificate balances of 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.
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Only the Class A and Class B Certificates are being offered pursuant to
this supplement. The Private Certificates have not been registered under the
Securities Act of 1933 and are not being offered pursuant to this supplement.
[___________________________________, has agreed with us 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. We have 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 in this
supplement 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
restrictions on the transfer of such certificates to Plans (see "ERISA
Considerations" in this supplement), 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 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__. 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
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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 closing date
of the securitization, divided by the initial certificate balance of the class
to which it belongs.
For purposes of the discussion in the prospectus, the Due Period is
also the Prepayment Period.
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,
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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);
(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.]
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Certain Calculations with Respect to Individual Mortgage Loans. The
stated principal balance of each mortgage loan in the pool 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,
and all references to "mortgage loan", "mortgage loans" and "mortgage pool" in
this supplement 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 Subordinate Certificates to receive
distributions of amounts collected or advanced on the mortgage loans will be
subordinated, to the extent described in this supplement, 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 the Class A 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 the Class B
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 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,
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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 Uncovered Portion.
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 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
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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 in the pool 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.
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 late payments, insurance and condemnation
proceeds, liquidation proceeds or otherwise. The master servicer will be
entitled to recover any P&I Advance that it so determines would not be
recoverable out of late payments, insurance and condemnation proceeds,
liquidation proceeds or otherwise out of general funds on deposit in the
certificate account. See "Description of the Certificates--Advances in Respect
of Delinquencies" and "Description of the Pooling Agreements--Certificate
Account" in the prospectus.
In connection with its recovery of any P&I Advance or reimbursable
servicing expense, the master servicer will be entitled to retain, out of any
amounts then on deposit in the certificate account, interest at 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
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
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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 closing date of the
securitization,
(c) all officer's certificates delivered to the trustee since the closing
date of the securitization 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 closing
date of the securitization 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. We are required and the
master servicer, the trustee 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.
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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.
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 in
the pool 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;
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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 the following:
(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" in this supplement 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 in this supplement, 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
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respect of the Class B Certificates. See "Description of the
Certificates--Distributions--Priority" in this supplement. 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" in this
supplement and "Description of the Pooling Agreements--Realization Upon
Defaulted mortgage loans" and "Certain Legal Aspects of Mortgage
Loans--Foreclosure" in the prospectus.
The extent to which the yield to maturity of any class of offered
certificates may vary from the anticipated yield will depend upon the degree to
which 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. We are 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 in this supplement 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
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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 in this supplement under "Description of the
Certificates--Distributions--Distributable Certificate Interest", Net Aggregate
Prepayment Interest Shortfalls will generally be borne by the respective classes
of certificateholders on a pro rata basis.
Certain Relevant Factors. The rate and timing of principal payments and
defaults and the severity of losses on the mortgage loans may be affected by a
number of factors, including, without limitation, prevailing interest rates, the
terms of the mortgage loans (for example, 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" in this supplement 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" in this supplement. 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
S-58
<PAGE>
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.
We make 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" in this supplement,
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 you. 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 in this supplement, 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
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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 in this
supplement, 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 in this supplement. 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 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:
(1) 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___;
(2) 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;
(3) all mortgage loans accrue and pay interest on a 360/360 basis;
(4) 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
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to be due on each Due Date until maturity will be calculated
reflecting the appropriate Mortgage Rate and remaining amortization
term;
(5) 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
(6) 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 in the pool 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.
You are urged to conduct your 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.
Percent Of The Initial Certificate Balance of the
Class A Certificates at the Respective CPRS
Set Forth Below:
<TABLE>
<CAPTION>
Date 0% % % % %
- ---- -- - - - -
<S> <C> <C> <C> <C> <C>
Delivery Date....................... 100.0 100.0 100.0 100.0 100.0
- -------------
Weighted Average Life (years)(A):
</TABLE>
(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.
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Percent Of The Initial Certificate Balance of
the Class B Certificates at the Respective CPRS
Set Forth Below:
<TABLE>
<CAPTION>
Date 0% % % % %
- ---- -- - - - -
<S> <C> <C> <C> <C> <C>
Delivery Date....................... 100.0 100.0 100.0 100.0 100.0
- -------------
Weighted Average Life (years)(A):
</TABLE>
(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.
[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)
<TABLE>
<CAPTION>
Twelve consecutive Percentages of [Prepayment speed model]
<S> <C> <C> <C> <C> <C>
Distribution Dates ending
% % % % %
Total Payments
</TABLE>
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<PAGE>
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 in this supplement 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 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 us 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, Shearman & Sterling, New
York, New York, our special counsel, 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 Internal Revenue 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].
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<PAGE>
[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 Internal Revenue Code] and "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Internal Revenue 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 Internal Revenue
Code generally to the extent that such offered certificates are treated as "real
estate assets" under Section 856(c)(5)(A) of the Internal Revenue 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 Internal Revenue 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 Internal Revenue 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.]
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<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, or Section 4975 of the Internal Revenue Code 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 Internal Revenue
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 issued to Bear, Stearns & Co. Inc. an
individual prohibited transaction exemption, Prohibited Transaction Exemption
90-33, as amended by Prohibited Transaction Exemption 97-34, 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 Internal Revenue 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 individual 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 individual 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, Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc.
Fourth, the trustee cannot be an affiliate of any other member of the
"Restricted Group", which consists of any underwriter, us, 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 us 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
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<PAGE>
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 SEC under the
Securities Act of 1933, as amended. [As amended by Prohibited Transaction
Exemption 97-34, the individual 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 closing date of the
securitization, 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 individual exemption also requires that the trust fund meet the
following requirements:
o the trust fund must consist solely of assets of the type that have
been included in other investment pools;
o 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
o certificates in such other investment pools must have been purchased
by investors other than Plans for at least one year prior to any
Plan's acquisition of Class A Certificates.
[We have confirmed to our satisfaction that such requirements have been
satisfied as of the date hereof.]
If the general conditions of the individual exemption are satisfied,
the individual 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 Internal Revenue Code by reason of Sections
4975(c)(1) (A) through (D) of the Internal Revenue Code) in connection with:
o the direct or indirect sale, exchange or transfer of Class A
Certificates in the initial issuance of Certificates between us or an
underwriter and a Plan when the we, the underwriter, the trustee, the
master servicer, a sub-servicer or a mortgagor is a Party in Interest
with respect to the investing Plan;
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o the direct or indirect acquisition or disposition in the secondary
market of the Class A Certificates by a Plan; and
o 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 individual exemption are also
satisfied, the individual 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 Internal Revenue Code in connection with
(1) the direct or indirect sale, exchange or transfer of Class A Certificates in
the initial issuance of certificates between us 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 individual exemption are
satisfied, the individual 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 Internal Revenue Code by reason
of Section 4975(c) of the Internal Revenue 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 individual exemption and (ii) the specific and general
conditions and the other requirements set forth in the individual exemption
would be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in the individual 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 individual 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 in the Class B Certificate may be made to a Plan or
to any person who is directly or indirectly purchasing such [Class B]
Certificate or interest in the Class B Certificate 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
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Section 4975 of the Internal Revenue 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 Internal Revenue 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
Department of Labor has proposed 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
regulations proposed by the Department of Labor 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 Internal Revenue Code on the basis of a claim that the assets of an
insurance company general account constitute Plan assets, except (1) as
otherwise provided by the Secretary of Labor in regulations intended to prevent
avoidance of the regulations proposed by the Department of Labor, or (2) 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 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 regulations proposed by the Department of Labor 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 regulations proposed by
the Department of Labor 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 Internal Revenue 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 Internal Revenue Code, church
plans as defined in Section 3(33) of ERISA are not subject to Title I of ERISA
or Section 4975 of the Internal Revenue 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 Internal
Revenue Code, and to the prohibited transaction rules set forth in Section 503
of the Internal Revenue 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 federal, state or local law
which is, to a material extent, similar to the foregoing provisions of ERISA or
the Internal Revenue Code.
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The sale of certificates to a Plan is in no respect a representation by
us or the 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 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.
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METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between us and the underwriter, the offered certificates will be
purchased from us by the underwriter, an affiliate of us, upon issuance.
Proceeds to us from the sale of the offered certificates, before deducting
expenses payable by us 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 to have
received compensation from us 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.
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 of 1933 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.
We have also 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" in this supplement and "Risk Factors--Secondary Market" in the
prospectus.
[If and to the extent required by applicable law or regulation, this
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.]
We have agreed to indemnify the underwriter and each person, if any,
who controls the underwriter within the meaning of Section 15 of the Securities
Act of 1933 against, or make contributions to the underwriter and each such
controlling person with respect to, certain liabilities, including liabilities
under the Securities Act of 1933.
LEGAL MATTERS
Certain legal matters will be passed upon for us and the underwriter by
Shearman & Sterling, New York, New York.
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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 us to do so may be lower than the rating assigned thereto by
____________________.
The ratings on the offered certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
See "Risk Factors--Limited Nature of Ratings" in the prospectus.
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GLOSSARY
"360/360 basis" means interest that accrues on the basis of a 360-day
year consisting of twelve 30-day months.
"Accrued Certificate Interest" is equal to 30 days' interest at the
pass-through rate applicable to Regular Certificates on each Distribution Date
accrued on the related certificate balance outstanding immediately prior to the
applicable Distribution Date.
"Advance" means a P&I Advance or reimbursable servicing expense.
"ARM Loans" means the mortgage loans which 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, subject in ______ cases to rounding conventions and lifetime minimum
and/or maximum Mortgage Rates.
"Available Distribution Amount" means the aggregate amount available
for distribution to certificateholders on each Distribution Date which, in
general, will 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:
(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 on the principal 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 the
related Distribution Date. See "Description of the Pooling
Agreements--Certificate Account" in the prospectus.
"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 connection with the origination
of such mortgage loan.
"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.
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"Depositor" means Bear Stearns Commercial Mortgage Securities Inc., a
Delaware corporation.
"Determination Date" means, for each Distribution Date, 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.
"Distributable Certificate Interest" means, for each Distribution Date,
that portion of the Accrued Certificate Interest in respect of each class of
Regular Certificates on the applicable Distribution Date that is net of such
class's allocable share (calculated as described below) of Net Aggregate
Prepayment Interest Shortfall.
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.
"Distributable Principal" means, collectively, the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date
"Due Date" means the date in any month on which a monthly payment on a
mortgage loan is first due.
"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.
"Effective Net Mortgage Rate" for each mortgage loan is:
(a) if such mortgage loan accrues interest on a 360/360 basis, 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.
"Fixed Rate Loans means mortgage loans which bear interest at fixed
Mortgage Rates.
"Gross Margin" means a fixed number of basis points.
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"Index" means a base index.
"Interest Rate Adjustment Date" means the date of adjustment each month
of the ARM Loans.
"Master Servicer Reimbursement Rate" means a per annum rate equal to
___________,
"Mortgage Rate" means an interest rate on each of the mortgage loans.
____________ of the mortgage 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, 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
bear interest at fixed Mortgage Rates.
"Net Aggregate Prepayment Interest Shortfall" means, for each Due Date,
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.
"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.
"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.
"Permitted Investments" means certain short-term United States
government securities and other obligations acceptable to the rating agencies.
"Plan" means any plan subject to Title I of the Employee Retirement
Income Security Act of 1974, as amended, or Section 4975 of the Internal Revenue
Code.
"Prepayment Excess" means the amount of interest (net of related
servicing fees) that accrues on the amount of a principal prepayment of a
mortgage loan during any Due Period after the Due Date that exceeds the
corresponding amount of interest accruing on the certificates.
"Prepayment Interest Shortfall" means the amount of interest (net of
related servicing fees) that accrues on the amount of a principal prepayment of
a mortgage loan during any Due Period that is less than the corresponding amount
of interest accruing on the certificates.
"Prepayment Premiums" means fees or penalties in connection with full
or partial prepayments of the mortgage loans.
"Private Certificates" means, collectively, the Class C and Class R
Certificates.
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"Purchase Price" is equal to the sum of:
(1) the unpaid principal balance of the affected mortgage loan,
(2) unpaid accrued interest on the affected 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,
(3) certain servicing expenses that are reimbursable to the master
servicer, and
(4) 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" in this supplement.
"Regular Certificates" means, collectively, the Class A, Class B and
Class C Certificates.
"REO Loan" means the outstanding mortgage loan that is deemed to exist
with respect to each REO Property.
"REO Property" means any mortgaged property acquired on behalf of the
trust fund through foreclosure, deeds in lieu of foreclosure or otherwise.
"Scheduled Principal Distribution Amount" for each Distribution Date
equals 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.
"Servicing Fee Rate" means a rate equal to ________% per annum.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
"Subordinate Certificates" means, collectively, the Class B
Certificates and each class of the Private Certificates.
"Uncovered Portion" means the portion of the certificate balance of
each class of Regular Certificates for which there is at any time no
corresponding principal amount of mortgage loans.
"Unscheduled Principal Distribution Amount" for each Distribution Date
will equal the aggregate of:
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(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.
"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 that Distribution Date.
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ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
The information set forth in this Appendix A is based on information as
of __________, 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 closing date of the
securitization.
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BEAR STEARNS COMMERCIAL MORTGAGE
SECURITIES INC.
$______________
CLASS A AND CLASS B
COMMERCIAL MORTGAGE PASS-THROUGH
CERTIFICATES
BEAR STEARNS COMMERCIAL MORTGAGE
SECURITIES INC.
SERIES 20___
VARIABLE PASS-THROUGH RATE
PROSPECTUS SUPPLEMENT
__________, 20___
[BEAR, STEARNS & CO. INC.]
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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.
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Version 1: Multifamily Properties
[The following is to be inserted in the prospectus immediately at the
end of the section titled "Risk Factors--Factors Affecting Delinquency,
Foreclosure and Loss of Mortgage Loans--General--Risks Particular to Multifamily
Rental 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 Internal Revenue
Code. 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 Internal Revenue 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 multifamily rental
properties eligible to receive low-income housing tax credits pursuant to
Section 42 of the Internal Revenue Code and other multifamily rental properties
in the same area to be a sufficient economic incentive to reside at property
eligible to receive tax credits pursuant to Section 42 of the Internal Revenue
Code, 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
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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.
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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
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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 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. We will not have any obligation nor will any other person 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
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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.
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Version 1: Multifamily Properties
[The following is to be inserted in the prospectus supplement
immediately following "Risk Factors--The Mortgage Loans--Some or all of the
mortgage loans will be non-recourse loans for which recourse will be restricted
or unenforceable":]
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--Factors
Affecting Delinquency, Foreclosure and Loss of the Mortgage--Risks Particular to
Multifamily Rental Properties" and "--Risks Particular to Cooperatively-Owned
Apartment Buildings" in the prospectus.
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Version 2: Office Properties
[The following is to be inserted in the prospectus immediately
following "Risk Factors--Factors Affecting Delinquency, Foreclosure and Loss of
the Mortgage Loans--General":]
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.
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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.
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Version 2: Office Properties
[The following is to be inserted in the prospectus supplement
immediately following "Risk Factors-- The Mortgage Loans--Some or all of the
mortgage loans will be non-recourse loans for which recourse will be restricted
or unenforceable":]
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--Factors
Affecting Delinquency, Foreclosure and Loss of the Mortgage--Risks Particular to
Office Properties" in the prospectus.
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Version 3: Retail Properties
[The following is to be inserted in the prospectus at the end of the
section titled "Risk Factors--Factors Affecting Delinquency, Foreclosure and
Loss of the Mortgage Loans--Risks Particular to Retail Properties":]
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.
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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.
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Version 3: Retail Properties
[The following is to be inserted in the prospectus supplement
immediately following "Risk Factors The Mortgage Loans--Some or all of the
mortgage loans will be non-recourse loans for which recourse will be restricted
or unenforceable":]
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--Factors
Affecting Delinquency, Foreclosure and Loss of the Mortgage--Risks Particular to
Retail Properties" in the prospectus.
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Version 4: Hotel and Motel Properties
[The following is to be inserted in the prospectus immediately
following "Risk Factors--Factors Affecting Delinquency, Foreclosure and Loss of
the Mortgage Loans--Risks Particular to Retail 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:
o 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;
o 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;
o it may be difficult to terminate an ineffective operator of a hotel or
motel property subsequent to a foreclosure of such property; and
o 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
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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.
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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.
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Version 4: Hotel and Motel Properties
[The following is to be inserted in the prospectus supplement
immediately following "Risk Factors The Mortgage Loans--Some or all of the
mortgage loans will be non-recourse loans for which recourse will be restricted
or unenforceable":]
Risks Particular To Hotel And Motel Properties.
_____ of the mortgage loans, which represent _____ % of the initial
pool 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--Factors
Affecting Delinquency, Foreclosure and Loss of the Mortgage--Risks Particular to
Hotel and Motel Properties" in the prospectus.
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Version 5: Health Care-Related Facilities
[The following is to be inserted in the prospectus immediately
following "Risk Factors--Factors Affecting Delinquency, Foreclosure and Loss of
the Mortgage Loans--Risks Particular to Retail 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.
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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
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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, 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 Certificate of Need is
site specific and operator specific; it cannot be transferred from one site to
another, or to another operator, without the approval of the appropriate state
agency. Accordingly, 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 Certificate of Need or an appropriate exemption. In
addition, compliance by a purchaser with applicable regulations may in any case
require the engagement of a new operator and the issuance of a new operating
license. Upon a foreclosure, a state regulatory agency may be willing to
expedite any necessary review and approval process to avoid interruption of care
to a facility's residents, but 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.
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Version 5: Health Care-Related Facilities
[The following is to be inserted in the prospectus supplement
immediately following "Risk Factors-- The Mortgage Loans--Some or all of the
mortgage loans will be non-recourse loans for which recourse will be restricted
or unenforceable":]
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--Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage --
Risks Particular to Health Care-Related Properties" in the prospectus.
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<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-100
<PAGE>
Version 6: Industrial Properties
[The following is to be inserted in the prospectus supplement
immediately following "Risk Factors-- The Mortgage Loans--Some or all of the
mortgage loans will be non-recourse loans for which recourse will be restricted
or unenforceable":]
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--Factors
Affecting Delinquency, Foreclosure and Loss of the Mortgage--Risks Particular to
Industrial Properties" in the prospectus.
S-101
<PAGE>
Version 7: Warehouse, Mini-Warehouse and Self-Storage Facilities
[The following is to be inserted in the prospectus immediately
following "Risk Factors--Factors Affecting Delinquency, Foreclosure and Loss of
the Mortgage Loans--Risks Particular to Retail 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-102
<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-103
<PAGE>
Version 7: Warehouse, Mini-Warehouse and Self-Storage Facilities
[The following is to be inserted in the prospectus supplement
immediately following "Risk Factors-- The Mortgage Loans--Some or all of the
mortgage loans will be non-recourse loans for which recourse will be restricted
or unenforceable":]
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--Factors Affecting Delinquency, Foreclosure and Loss of
the Mortgage--Risks Particular to Warehouse, Mini-Warehouse and Self-Storage
Facilities" in the prospectus.
S-104
<PAGE>
Version 8: Mobile Home Parks and Recreational Vehicle Parks
[The following is to be inserted in the prospectus immediately
following "Risk Factors--Factors Affecting Delinquency, Foreclosure and Loss of
the Mortgage Loans--Risks Particular to Retail 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-105
<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.
S-106
<PAGE>
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 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-107
<PAGE>
Version 8: Mobile Home Parks and Recreational Vehicle Parks
[The following is to be inserted in the prospectus supplement
immediately following "Risk Factors-- The Mortgage Loans--Some or all of the
mortgage loans will be non-recourse loans for which recourse will be restricted
or unenforceable":]
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--Factors Affecting Delinquency, Foreclosure and Loss of
the Mortgage--Risks Particular to Mobile Home Parks and Recreational Vehicle
Parks" in the prospectus.
S-108
<PAGE>
Version 9: Casino Properties
[The following is to be inserted in the prospectus immediately
following "Risk Factors--Factors Affecting Delinquency, Foreclosure and Loss of
the Mortgage Loans--Risks Particular to Retail 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-109
<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-110
<PAGE>
Version 9: Casino Properties
[The following is to be inserted in the prospectus supplement
immediately following "Risk Factors-- The Mortgage Loans--Some or all of the
mortgage loans will be non-recourse loans for which recourse will be restricted
or unenforceable":]
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-111
<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..................................$58,472.84
Engraving Fees........................................150,000.00
Legal Fees and Expenses...............................375,000.00
Accounting Fees and Expenses...........................51,000.00
Trustee Fees and Expenses..............................75,000.00
Blue Sky Qualification Fees and Expenses...............45,000.00
Rating Agency Fees.....................................75,000.00
Miscellaneous......................................... 10,000.00
Total................................................$839,472.84
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 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
- ---------------------
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 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 Shearman & Sterling as to legality of the
Certificates
8.1 Opinion of Shearman & Sterling as to certain tax matters
(included in Exhibit 5.1)
23.1 Consent of Shearman & Sterling (included in Exhibits 5.1
and 8.1 hereto)
24.1 Power of Attorney*
* Previously filed.
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
II-2
<PAGE>
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 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-3
<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
Pre-Effective Amendment No. 1 to 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 21st day of October, 1999.
BEAR STEARNS COMMERCIAL
MORTGAGE SECURITIES INC.
By: /s/ James G. Reichek
----------------------------------------
Name: James G. Reichek
Title: Executive Vice President
II-4
<PAGE>
EXHIBIT
NUMBER DESCRIPTION PAGE
5.1 Opinion of Shearman & Sterling as to
legality of the Certificates
8.1 Opinion of Shearman & Sterling as to
certain tax matters (included in Exhibit 5.1)
23.1 Consent of Shearman & Sterling
(included in Exhibits 5.1 and 8.1 hereto)
II-5
LETTER OF OPINION
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
October 22, 1999
Bear Stearns Commercial Mortgage Securities Inc.
245 Park Avenue
New York 10167
Commercial Mortgage Pass-Through Certificates
---------------------------------------------
Ladies and Gentlemen :
We have acted as your special counsel in connection with the
Registration Statement on Form S-3, as amended by Post-Effective Amendment No. 1
(the "Registration Statement"), which Registration Statement is being filed with
the Securities and Exchange Commission (the "Commission") pursuant to the
Securities Act of 1933, as amended (the "Act"). The Prospectus describes
commercial mortgage pass-through Certificates (the "Certificates") to be sold by
Bear Stearns Commercial Mortgage Securities Inc. (The "Depositor") in one or
more series of Certificates (each such series, a "Series"). Each Series of
Certificates will be issued under a separate pooling and servicing agreement (a
"Pooling and Servicing Agreement") among the Depositor, a master servicer (a
"Servicer"), a special servicer (a "Special Servicer"), a trustee (a "Trustee")
and such other parties as are to be identified in the prospectus supplement for
such Series. The form of Pooling and Servicing Agreement has been filed as an
exhibit to the Registration Statement. Capitalized terms used and not otherwise
defined herein have the respective meanings given to such terms in the
Registration Statement.
In rendering the opinions set forth below, we have examined
and relied upon the following: (1) the Registration Statement, including the
Prospectus and the form of Prospectus Supplement constituting part thereof, each
substantially in the form filed with the Commission, (2) the Pooling and
Servicing Agreement in the form filed with the Commission and (3) such other
documents, materials and authorities as we have deemed necessary in order to
enable us to render our opinions set forth below. We express no opinion with
respect to any Series of Certificates for which we do not act as counsel to the
Depositor.
<PAGE>
We express no opinion concerning the laws of any jurisdiction
other than the laws of the State of New York and, where expressly referred to
below, the federal income tax laws of the United States of America.
Based on and subject to the foregoing, we are of the opinion
that:
1. When a Pooling and Servicing Agreement for a
Series of Certificates has been duly and validly authorized, executed
and delivered by the Depositor, the Servicer, the Trustee and any other
parties thereto, such Pooling and Servicing Agreement will constitute a
valid and legally binding agreement of the Depositor, enforceable
against the Depositor in accordance with its terms, subject to
applicable bankruptcy, reorganization, insolvency, moratorium and other
laws affecting the enforcement of rights of creditors generally and to
general principles of equity and the discretion of the court
(regardless of whether enforceability is considered in a proceeding in
equity or at law).
2. When a Pooling and Servicing Agreement for a
Series of Certificates has been duly and validly authorized, executed
and delivered by the Depositor, a Servicer, a Trustee and any other
party thereto, and the Certificates of such Series have been duly
executed, authenticated, delivered and sold as contemplated in the
Registration Statement, such Certificates will be legally and validly
issued, fully paid and nonassessable, and the holders of such
Certificates will be entitled to the benefits of the Pooling and
Servicing Agreement.
3. The description of federal income tax consequences
appearing under the heading "Some Federal Income Tax Consequences" in
the Prospectus accurately describes the material federal income tax
consequences, under existing law, and subject to the qualifications and
assumptions set forth in that section of the Prospectus, to holders of
the Certificates to be offered pursuant to the Prospectus.
We hereby consent to the filing of a copy of this letter as an
exhibit to the Registration Statement and to the reference to this firm under
the headings "Legal Matters" and "Some Federal Income Tax Consequences" in the
Prospectus, which is a part of the Registration Statement. This consent is not
to be construed as an admission that we are a person whose consent is required
to be filed with the Registration Statement under the provisions of the Act.
Very truly yours,
/s/ Shearman & Sterling
