<PAGE>
As filed with the Securities and Exchange Commission on September 17, 1999
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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
INCORPORATION OR ORGANIZATION NUMBER)
245 PARK AVENUE
NEW YORK, NEW YORK 10167
(212) 272-2000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
-------------------
WILLIAM J. MONTGORIS
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.
O'MELVENY & MYERS LLP
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE
PUBLIC: From time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being
offered to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please check the following box. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
TITLE OF SECURITIES AMOUNT BEING PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1),(2) PRICE PER UNIT(3) OFFERING PRICE(3) REGISTRATION FEE(1),(4)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through
Certificates............. $1,585,704,194 100% $1,585,704,194 $467,782.74
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(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) Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
Prospectus and forms of Prospectus Supplements filed with this Registration
Statement also relate to $1,584,704,194 aggregate principal amount of the
registrant's mortgage pass-through certificates that were previously
registered pursuant to Registration Statements on Form S-3 (Registration
Nos. 33-65816 and 333-61783). As permitted by Rule 429 under the Securities
Act of 1933, as amended, the Prospectus and the forms of Prospectus
Supplements filed as part of this Registration Statement on Form S-3 will
be used in connection with the offering of such previously registered and
unsold mortgage pass-through certificates and the Mortgage Pass-Through
Certificates initially registered pursuant hereto. Accordingly, the filing
fee paid herewith is $295 ($1,000,000 multiplied by .000295). In the event
any of such previously registered securities are offered prior to the
effective date of this Registration Statement, they will not be included in
the Prospectus constituting a part hereof.
(3) Estimated solely for purpose of calculating the registration fee on the
basis of the proposed maximum aggregate offering price.
(4) Of which $467,487.74 was previously paid with respect to $1,584,704,194
aggregate principal amount of mortgage pass-through certificates registered
under Registration Statements on Form S-3 (Registration Nos. 33-65816 and
333-61783)
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.
2
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM AND CAPTION IN FORM S-3 LOCATION IN PROSPECTUS LOCATION IN PROSPECTUS SUPPLEMENT
- ---------------------------- ---------------------- ---------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Forepart of Registration Statement Outside Front Cover Page
Front Cover Page of Prospectus................ and Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Inside From Cover Page, Outside Inside Front Cover Page, Outside Back
Prospectus.................................... Back Cover Page Cover Page
3. Summary Information, Risk Factors and Ratio of Summary of Prospectus, Risk Summary of Prospectus Supplement,
Earnings to Fixed Charges..................... Factors Risk 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
Aspects of the Mortgage Loans; Income 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 ................................. * *
</TABLE>
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.
3
<PAGE>
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.
PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED SEPTEMBER 17, 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 12 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 the Depositor or any of its affiliates.
Neither these securities nor the underlying Mortgage Loans are insured or
guaranteed by any governmental agency or any other person.
This prospectus supplement and the accompanying prospectus relate only to the
offered certificates. The privately placed certificates are not offered by this
document.
- --------------------------------------------------------------------------------
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, health-care 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 prospectus supplement and
the accompanying prospectus.
o Two additional classes of "private certificates" are also being issued
by the Depositor. The private certificates are not offered by this
prospectus supplement.
o The private certificates are subordinate to the offered certificates,
and each class of offered certificates is subordinate to each other
class of offered certificates that has an earlier alphabetical
designation.
<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> <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 PROSPECTUS 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.
_____________ __, ____
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
In this Prospectus Supplement, the terms "Depositor", "we", "us" and
"our" refer to Bear Stearns Commercial Mortgage Securities Inc.
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 prospectus supplement, which describes the specific terms
of your series of certificates.
IF WE DESCRIBE TERMS OF THE OFFERED CERTIFICATES DIFFERENTLY IN THIS
PROSPECTUS SUPPLEMENT THAN WE DO IN THE PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT RATHER THAN ON THE MORE GENERAL
INFORMATION IN THE PROSPECTUS. HOWEVER, YOU SHOULD CAREFULLY REVIEW THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TOGETHER, BECAUSE NEITHER ONE BY ITSELF
PROVIDES COMPLETE INFORMATION ABOUT THE OFFERED CERTIFICATES.
This prospectus 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 prospectus supplement and the prospectus identify
the pages where these cross-referenced sections are located.
[THE PHOTOGRAPHS OF THE MORTGAGED PROPERTIES INCLUDED IN THIS
PROSPECTUS SUPPLEMENT ARE NOT REPRESENTATIVE OF ALL OF THE MORTGAGED PROPERTIES
OR OF ANY PARTICULAR TYPE OF MORTGAGED PROPERTY.]
Whenever we use words like "intends," "anticipates" or "expects" or
similar words in this prospectus 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 prospectus supplement speak only as of the date of this prospectus
supplement. We do not assume any responsibility to update or review any
forward-looking statement contained in this prospectus 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.
In this prospectus supplement and the prospectus we use capitalized
terms to refer to many concepts which are referenced under the caption "Index of
Significant Definitions" beginning on page S-69 in this prospectus supplement
and under the caption "Index of Significant Definitions" beginning on page 154
in the prospectus.
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
SUMMARY OF PROSPECTUS SUPPLEMENT............................................................................ S-6
RISK FACTORS................................................................................................ S-20
The Certificates.................................................................................... S-20
Limited Liquidity........................................................................... S-20
Limited Assets.............................................................................. S-20
Risks Related to the Rate of Prepayment..................................................... S-20
Risks Related to Enforcement of Prepayment Restrictions..................................... S-21
Yield Risk Associated With Changes in Concentrations........................................ S-22
Potential Environmental Liability to the Trust.............................................. S-22
Certain Tax Considerations Related to Foreclosure........................................... S-23
Risks Relating to Lack of Certificateholders Control OverTrust.............................. S-23
Sequential Pay and Subordination of Subordinate Offered Certificates........................ S-24
Risk Associated With Year 2000.............................................................. S-24
The Mortgage Loans.................................................................................. S-25
Borrower Default; Nonrecourse Mortgage Loans................................................ S-25
Dependence on Operation of Mortgaged Property............................................... S-25
Risks Associated With Balloon Loans......................................................... S-26
Management.................................................................................. S-27
Adjustable Rate Mortgage Loans.............................................................. S-27
Risks Associated With Tenants............................................................... S-27
Geographic Concentration Entails Risk....................................................... S-29
Loan Concentration Entails Risk............................................................. S-29
Risks Associated With Related Borrowers and Managers........................................ S-30
Limitations on Enforceability of Cross-Collateralization Agreements......................... S-30
Other Financing and Additional Debt......................................................... S-31
Recently Constructed Properties............................................................. S-31
Zoning Compliance........................................................................... S-32
Americans With Disabilities Act............................................................. S-32
Litigation.................................................................................. S-32
Inclusion of Delinquent Mortgage Loans...................................................... S-32
DESCRIPTION OF THE MORTGAGE POOL............................................................................ S-33
General............................................................................................. S-33
Certain Payment Characteristics..................................................................... S-34
Delinquent Mortgage Loans........................................................................... S-34
Additional Mortgage Loan Information................................................................ S-34
The Mortgage Loan Seller............................................................................ S-38
Underwriting Standards.............................................................................. S-39
Assignment of the Mortgage Loans; Repurchase........................................................ S-39
Representations and Warranties; Repurchases......................................................... S-41
Changes in Mortgage Pool Characteristics............................................................ S-41
SERVICING OF THE MORTGAGE LOANS............................................................................. S-42
General............................................................................................. S-42
The Master Servicer................................................................................. S-43
Servicing and Other Compensation and Payment of Expenses............................................ S-43
Modifications, Waivers and Amendments............................................................... S-44
</TABLE>
S-3
<PAGE>
TABLE OF CONTENTS (continued)
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Inspections; Collection of Operating Information.................................................... S-44
Additional Obligations of the Master Servicer with Respect to
ARM Loans........................................................................................ S-45
DESCRIPTION OF THE CERTIFICATES............................................................................. S-45
General............................................................................................. S-45
Distributions....................................................................................... S-47
Method, Timing and Amount................................................................... S-47
Priority.................................................................................... S-48
Pass-Through Rates.......................................................................... S-49
Distributable Certificate Interest.......................................................... S-49
Scheduled Principal Distribution Amount and Unscheduled
Principal Distribution Amount............................................................ S-50
Certain Calculations with Respect to Individual
Mortgage Loans........................................................................... S-51
Subordination....................................................................................... S-51
P&I Advances........................................................................................ S-52
Reports to Certificateholders; Certain Available Information........................................ S-53
Voting Rights....................................................................................... S-54
Termination......................................................................................... S-54
YIELD AND MATURITY CONSIDERATIONS........................................................................... S-55
Yield Considerations................................................................................ S-55
General..................................................................................... S-55
Pass-Through Rate........................................................................... S-56
Rate and Timing of Principal Payments....................................................... S-56
Losses and Shortfalls....................................................................... S-57
Certain Relevant Factors.................................................................... S-57
Delay in Payment of Distributions........................................................... S-58
Unpaid Distributable Certificate Interest................................................... S-58
Weighted Average Life............................................................................... S-58
Yield Sensitivity of the Class S Certificates....................................................... S-60
USE OF PROCEEDS............................................................................................. S-62
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................................................... S-63
ERISA CONSIDERATIONS........................................................................................ S-63
LEGAL INVESTMENT............................................................................................ S-66
METHOD OF DISTRIBUTION...................................................................................... S-67
LEGAL MATTERS............................................................................................... S-67
RATING...................................................................................................... S-67
</TABLE>
S-4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
INDEX OF SIGNIFICANT DEFINITIONS............................................................................ S-69
</TABLE>
S-5
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS 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. The Class
A, Class B and Class C certificates are
collectively referred to from time to time
as the "Regular Certificates". Only the
Class A and Class B certificates are offered
hereby. The Class C and Class R certificates
are collectively referred to from time to
time as the "Private Certificates".
Depositor.......................... Bear Stearns Commercial Mortgage Securities
Inc., a Delaware corporation. Neither the
Depositor nor any of its affiliates has
insured or guaranteed the offered
certificates.
Master Servicer.................... _____________________________, a
___________. See "Servicing of the Mortgage
Loans-The Master Servicer" in this
prospectus supplement.
Trustee............................ _____________________________, a
_______________. See "Description of the
Certificates-The Trustee" in this prospectus
supplement.
Mortgage Loan Seller............... _____________________________, a
___________. See "Description of the
Mortgage Pool-The Mortgage Loan Seller" in
this prospectus supplement.
Underwriter........................ _____________________________, a
___________..
Cut-off Date....................... _______________, 20__.
Delivery Date...................... On or about _______________, 20__.
Distribution Date.................. The ____ day of each month or, if any
such ___ 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
represented by one or more
S-6
<PAGE>
Class A Certificates............... 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 thereof. The Class B certificates
will be issuable in fully registered,
certificated form in denominations of
$____________ and in integral multiples of
$1,000 in excess thereof, with one Class B
certificate evidencing an additional amount
equal to the remainder of the initial
certificate balance of such class.
THE MORTGAGE POOL
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 is secured by a first
mortgage lien on a fee simple estate in a
multifamily or commercial property (each, a
"Mortgaged Property"). ________ of the
Mortgage Loans, which represent _____% of
the initial pool balance, are secured by
liens on Mortgaged Properties located in
_____________. The remaining Mortgaged
Properties are located throughout
___________ other states.
___________ 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 (the date
in any month on which a monthly payment on a
Mortgage Loan is first due, the "Due Date").
ARM Loans represent _____% of the initial
pool balance and is subject to adjustment on
specified Due Dates (each such date of
adjustment, an "Interest Rate Adjustment
Date") by adding a fixed number of basis
points (a "Gross Margin") to the value of a
base index. 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
S-7
<PAGE>
Mortgage Loans 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. 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
had the following additional
characteristics:
(i) Mortgage Rates ranging from ____%
per annum to ____% per annum, and a
weighted average Mortgage Rate of
_____% per annum;
(ii) in the case of the ARM Loans, Gross
Margins ranging from _____ basis
points to _____ basis points, and a
weighted average Gross Margin of
_____ basis points;
(iii) for those ___ ARM Loans as to which
such characteristic applies, minimum
lifetime Mortgage Rates ranging from
___% per annum to ___% per annum,
and a weighted average minimum
lifetime Mortgage Rate of ____% per
annum;
(iv) for those ___ ARM Loans as to which
such characteristic applies, maximum
lifetime Mortgage Rates ranging from
___% per annum to ___% per annum,
and a weighted average maximum
lifetime Mortgage Rate of ___% per
annum;
(v) Cut-off Date balances ranging from
$___________ to $___________, and an
average Cut-off Date balance of
$___________;
(vi) original terms to scheduled maturity
ranging from ___ months to ____
months, and a weighted average
original term to scheduled maturity
of ___ months;
(vii) remaining terms to scheduled maturity
ranging from ___ months to ____
months, and a weighted average
remaining term to scheduled maturity
of ____ months;
(viii) Cut-off Date LTV Ratios (i.e., in
each case, a loan-to-value ratio
based upon (a) the Cut-off Date
balance of the Mortgage Loan, and
(b) the appraised value of the
related Mortgaged Property
determined at the time of
origination of such loan) ranging
from
S-8
<PAGE>
_____% to ____%, and a weighted
average Cut-off Date LTV Ratio
of _____%; and
(ix) for those ___ Mortgage Loans as to
which such characteristic was
determinable, Debt Service Coverage
Ratios ranging from _______x to
______x, and a weighted average Debt
Service Coverage Ratio of _______x.
The Mortgage Loans were originated between
19__ and 20__.
THE CERTIFICATES
Description of the Certificates.... The certificates will be issued pursuant to
a pooling and servicing agreement, to be
dated as of the Cut-off Date, among
Depositor, 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 certain
related assets.
A. Certificate Balance............. The aggregate certificate balance of the
certificates as of the Delivery Date will
equal the initial pool balance. The Class A
certificates will have an initial
certificate balance of $_____________, which
represents _____% of the initial pool
balance; the Class B certificates will have
an initial certificate balance of
$___________, which represents ___% of the
initial pool balance; 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.
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
S-9
<PAGE>
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.
The "Weighted Average Effective Net Mortgage
Rate" for each Distribution Date is the
weighted average of the applicable
"Effective Net Mortgage Rates" for the
Mortgage Loans, weighted on the basis of
their respective Stated Principal Balances
immediately prior to that Distribution Date.
For purposes of calculating the Weighted
Average Effective Net Mortgage Rate for any
Distribution Date, the applicable "Effective
Net Mortgage Rate" for each Mortgage Loan is
an annualized rate equal to the Mortgage
Rate in effect for that Mortgage Loan as of
the commencement of the related Due Period,
(a) reduced by ___ basis points (the
Mortgage Rate, as so reduced, the "Net
Mortgage Rate"), and (b) if the accrual of
interest on such Mortgage Loan is computed
other than on the basis of a 360-day year
consisting of twelve 30-day months (which is
the basis of accrual for interest on the
Regular Certificates), then adjusted to
reflect that difference in computation.
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. The
total of all payments or other collections
(or advances in lieu thereof) on or in
respect of the Mortgage Loans that are
available for distribution to you on any
Distribution Date is referred to as the
"Available Distribution Amount" for that
date.
In general, on each Distribution Date, for
so long as the Class A and/or Class B
certificates remain outstanding, the
S-10
<PAGE>
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
Interest in respect of the Class A
certificates for that 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 that
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 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 such
Distribution Date), multiplied
by (ii) the Scheduled Principal
Distribution Amount for such
Distribution Date, plus
(b) if the Class A certificates have
been retired, then
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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.
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<PAGE>
See "Description of the Certificates--
Distributions--Priority" in this
prospectus 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 such certificates and
(iii) the extent to which the items
described in subclauses (i) and (ii)
are applied on any Distribution Date
in reduction of the certificate
balance of the class to which such
certificate belongs, which will be
dependent, in part, on the nature of
such amounts. See "Description of the
Certificates--Distributions--Priority"
and "Distributions--Calculation
of Principal Distributions" in this
prospectus 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.
D. Yield Considerations............ Yield. If you purchase an offered
certificate at an amount equal to its unpaid
principal balance (i.e., at "par"), 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 (i.e. buys the certificate
at a "discount" or "premium", respectively),
then, based on the assumptions set forth in
the preceding sentence, the effective yield
to 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
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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 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 such weighted average life. In
general, if the weighted average life of a
certificate purchased at par is extended
beyond that initially anticipated, such
certificate's market value may be adversely
affected, even though the yield to maturity
on the certificate is unaffected. The
weighted average lives of the offered
certificates, under various prepayment
scenarios, are displayed in the table
appearing under the heading "Yield and
Maturity Considerations--Weighted Average
Life" in this prospectus supplement. [The
following disclosure is applicable to
Stripped Interest certificates. The Class S
certificates are interest-only
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<PAGE>
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
prospectus 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:
(i) all delinquent payments of principal
and interest (net of related servicing
fees) on the Mortgage Loans, other
than delinquent Balloon Payments,
scheduled to be due during the related
Due Period;
(ii) in the case of each Mortgage Loan
delinquent in respect of its Balloon
Payment, an amount equal to 30 days'
interest thereon (net of related
servicing fees), but only to the
extent that the related borrower has
not made a payment sufficient to
cover such amount under any
forbearance arrangement or otherwise,
which payment has been included in the
Available Distribution Amount for that
Distribution Date; and
(iii) in the case of each REO Property, an
amount equal to 30 days' imputed
interest with respect thereto (net of
related servicing fees), but only to
the extent that such amount is not
covered by any net income from such
REO Property included in the Available
Distribution Amount for that
Distribution Date.
The Master Servicer will be entitled to
interest on any advances made, and certain
servicing expenses incurred a 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 prospectus 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 (collectively, the "Subordinate
Certificates") to receive distributions of
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<PAGE>
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.
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 such holders of
principal equal to the entire certificate
balance of the Class A certificates.
Similarly, but to a lesser degree, this
subordination is also intended to enhance
the likelihood of timely receipt by the
holders of the Class B certificates of the
full amount of Distributable Certificate
Interest payable in respect of the Class B
certificates on each Distribution Date, and
the ultimate receipt by such 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.
Optional 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
prospectus supplement.
Certain Federal Income Tax You will be required to report income
Consequences..................... 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 premium and that the
Class _____ certificates will be issued with
de minimis original issue discount for
federal income tax purposes. Although
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<PAGE>
not free from doubt, it is anticipated that
the Class _____ certificates will be treated
as issued with original issue discount in an
amount equal to the excess of all
distributions of principal and interest
thereon over their issue price (including
accrued interest), and we intend to report
income in respect of such Class of
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
Code (a "Plan"), 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
Code or whether there exists any statutory
or administrative prohibited transaction
exemption applicable to an investment
therein.
[The U.S. Department of Labor has issued to
Bear, Stearns & Co. Inc. an individual
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 of 1986, as
amended (the "Code"), transactions relating
to the purchase, sale and holding of
pass-through certificates underwritten by
the underwriter, Bear, Stearns & Co. Inc.,
and the servicing and operation of related
asset pools, provided that certain
conditions are satisfied.]
[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 therein may be made to a Plan
or to any person who is directly or
indirectly purchasing such [Class B]
certificate or interest therein on behalf
of, as named fiduciary of, as trustee of, or
with assets of a Plan, unless the
prospective transferee (at its own expense)
provides the Certificate Registrar (as
identified in this prospectus supplement)
with a certification and an opinion of
counsel which establish to the Certificate
Registrar's satisfaction that such transfer
will not result in a violation of Section
406 of ERISA or Section 4975 of the Code or
cause the Master Servicer or the Trustee to
be deemed a fiduciary of such Plan or result
in the imposition of an excise tax under
Section 4975 of the Code. See "ERISA
Considerations" in this prospectus
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<PAGE>
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 prepayments (whether voluntary
or involuntary) of Mortgage Loans, or the
possibility that, as a result of
prepayments, investors in the Class S
certificates may realize a lower than
anticipated yield or may fail to recover
fully their initial investment.] See
"Rating" 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 ("SMMEA"), for so
long as they are rated in one of the two
highest ratings categories by one or more
nationally recognized statistical rating
organizations. 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 residential and
commercial structure or a residential
manufactured home. Such investments,
however, will be subject to general
regulatory considerations governing
investment practices under state and federal
law. In addition, institutions whose
investment activities are subject to review
by federal or state regulatory authorities
may be or may become subject to
restrictions, which may be retroactively
imposed by such regulatory authorities, on
the investment by such institutions in
certain forms of mortgage related
securities.]
S-18
<PAGE>
[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 prospectus 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.
THE CERTIFICATES.
LIMITED LIQUIDITY.
Lack of a secondary market for the certificate may make it difficult
for you to resell your certificates at all or at an attractive price. There is
currently no secondary market for the offered certificates. We have been advised
by the Underwriter that it currently intends to make a secondary market in the
offered certificates; however, the Underwriter has no obligation to do so and
any market making may be discontinued at any time. There can be no assurance
that a secondary market for the offered certificates will develop or, if it does
develop, that it will provide holders of offered certificates with liquidity of
investment or that it will continue for the life of the offered certificates.
The offered certificates will not be listed on any securities exchange. See
"Risk Factors - Secondary Market" in the prospectus.
LIMITED ASSETS.
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
prospectus supplement, no other assets will be available to you for payment of
the deficiency.
RISKS RELATED TO THE RATE OF PREPAYMENT.
The rate of prepayment of the Mortgage Loans may adversely affect the
yield on your investment. The yield on your certificates will be affected by a
variety of factors, including the following:
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 and delinquent payments)
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.
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 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 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 such amounts in an alternative
investment with a yield comparable to the yield on your offered certificates.
S-20
<PAGE>
We cannot predict the actual rate of prepayment of principal of the
Mortgage Loans. See "-Risks Relating to the Mortgage Loans Enforcement of
Prepayment Restrictions" below for a more complete discussion of prepayment
issues.
The investment performance of your certificates may vary materially and
adversely from your investment expectations due to prepayments on the Mortgage
Loans (whether voluntary or otherwise) 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 certificate.
In deciding whether to purchase any certificates, you should make an
independent decision as to the appropriate prepayment assumptions to be used.
The structure of the certificates causes the yield of certain classes
to be sensitive to changes in the rates of prepayment of the Mortgage Loans and
other factors. If you are purchasing any Class of subordinate certificates you
will not receive any principal distributions until the certificate balance of
each class that is senior to your class is reduced to zero.
[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 prospectus supplement
titled "Description of the Mortgage Pool," "Description of the Certificates -
Distributions" and "Subordination" and "Yield and Maturity Considerations."]
RISKS RELATED TO ENFORCEMENT OF PREPAYMENT RESTRICTIONS.
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 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 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 certain 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) under certain
circumstances, particularly if they are required to be paid
following a default,
o certain state or federal laws (including federal bankruptcy
law) may limit the amount that may be collected from a
borrower.
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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 such payment. For a description of
Prepayment Premiums, see "Yield and Maturity Considerations" in this prospectus
supplement.
YIELD RISK ASSOCIATED WITH CHANGES IN CONCENTRATIONS.
Changes in concentrations in the types of properties securing the
Mortgage Loans 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 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.
POTENTIAL ENVIRONMENTAL LIABILITY TO THE TRUST.
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 Mortgage Loan. Furthermore, the Mortgage
Loan Seller has agreed that, in the event of a material breach of such
representation and warranty, it will either cure the breach or repurchase the
affected Mortgage Loan. The Mortgage Loan Seller's representations and
warranties regarding the Mortgage Loans set forth in the Mortgage Loan Purchase
Agreement will be assigned, together with the related cure and repurchase
obligations, by 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 for
any material breach of such 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 prospectus 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 certain 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 such Mortgaged Properties the
environmental consultant concluded as a result of such testing 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 such exposure under federal and state laws that impose affirmative
discovery and
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<PAGE>
remediation obligations on owners of multifamily housing containing lead-based
paint. The environmental assessments revealed the existence of lead-based paint
at certain 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 thereto 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 required remedial action is
not taken). This 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
prospectus 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.
CERTAIN TAX CONSIDERATIONS RELATED TO FORECLOSURE.
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
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
certain circumstances may subject the trust to a "prohibited transaction" tax on
such income 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.
RISKS RELATING TO LACK OF CERTIFICATEHOLDER CONTROL OVER TRUST.
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, in certain cases, 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 made in your best interest (as determined by that party in its good faith and
reasonable judgment), may be contrary to the decision that would have been made
by you and may negatively affect your interests.
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<PAGE>
Certain Conflicts 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 such
event, 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 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
prospectus supplement titled "Servicing of the Mortgage Loans".
The underwriters may be affiliated with the mortgage loan sellers and
may be subject to certain conflicts of interest arising from the related
mortgage loan seller's desire to consummate a sale of its Mortgage Loans to the
trust.
SEQUENTIAL PAY AND SUBORDINATION OF SUBORDINATE OFFERED CERTIFICATES.
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 prospectus supplement for more information.
RISKS ASSOCIATED WITH YEAR 2000.
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 and
the certificates;
o collecting payments on the Mortgaged Loans;
o remitting payments to certificateholders; and
o servicing the Mortgage Loans.
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 certain representations in the Pooling and Servicing Agreement
with respect to the steps that they are taking to address the Year 2000 problem.
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THE MORTGAGE LOANS
BORROWER DEFAULT; NONRECOURSE MORTGAGE LOANS. Some or all of the
Mortgage Loans will be non-recourse loans for which recourse will be restricted
or unenforceable. The Mortgage Loans will not be an obligation of, or be insured
or guaranteed by, any governmental entity, or private mortgage insurer.
Each Mortgage Loan 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 Mortgage 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. The Depositor
has not evaluated the significance of the recourse provisions of any of a number
of Mortgage Loans 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 to be non-recourse loans.
DEPENDENCE ON OPERATION OF MORTGAGED PROPERTY. Repayment of the
Mortgage Loans 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 such 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 such other properties.
RISKS ASSOCIATED WITH BALLOON LOANS. 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,
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
o to sell the related Mortgaged Property.
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The ability of a borrower to accomplish either of these goals will be
affected by all of the factors described herein 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,
tot he limitations described under "Servicing of the Mortgage
Loans--Modifications, Waivers and Amendments" in this prospectus 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 prospectus supplement and in the prospectus.
MANAGEMENT. Each Mortgaged Property is managed by a property manager
(which in many cases is an affiliate of the borrower) or by the borrower itself.
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.
ADJUSTABLE RATE MORTGAGE LOANS. Default rates may be higher for
borrowers of adjustable rate mortgage loans. _____ of the Mortgage Loans, which
represent ____% of the initial pool balance, are ARM Loans. Increases in the
required Monthly Payments on ARM Loan sin excess of those assumed in the
original underwriting of those loans may result in a default rate higher than
that on mortgage loans with fixed mortgage rates.
RISKS ASSOCIATED WITH TENANTS. 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. 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.
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__ 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 such 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 such 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 (absent collateral securing the 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 greater of one year's rent or 15% of the remaining
reserved rent (but not more than three years' rent).
Such a 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 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.
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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 therein or in the mortgage.
GEOGRAPHIC CONCENTRATION ENTAILS RISK. Geographic concentration or
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. Such 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
such factors than other states or regions, and to the extent that there is a
concentration of Mortgaged 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 _________.
LOAN CONCENTRATION ENTAILS RISK. In general, concentrations in a
mortgage pool of loans with larger-than-average balances can result in losses
that are more severe, relative to the size of the pool, than 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 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.
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RISKS ASSOCIATED WITH RELATED BORROWERS AND MANAGERS. 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 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.
LIMITATIONS ON ENFORCEABILITY OF CROSS-COLLATERALIZATION ARRANGEMENTS.
Mortgage Loans with Cross-Collateralization Arrangements may be susceptible to
"fraudulent conveyance" risk. _____ separate groups of Mortgage Loans with an
aggregate Cut-off Date balance of approximately $____________, representing
approximately _____% of the initial pool balance, provide for some form of
cross-collateralization between the Mortgage Loans in each such group and each
such group, a "Cross-Collateralized Group").
The purpose of cross-collateralization arrangements is to reduce the
risk of default or ultimate loss as a result of the inability of a Mortgaged
Property to generate sufficient net cash flow to pay debt service on the related
Mortgage Loan. However, cross-collateralization arrangements involving more than
one borrower could be challenged as a "fraudulent conveyance" by creditors of an
insolvent borrower (or by that borrower's bankruptcy trustee). Such a challenge
could eliminate or reduce the benefits of cross-collateralization with respect
to one or more Cross-Collateralized Groups.
In general, a pledge or transfer may be set aside as a "fraudulent
conveyance" if a court finds that the following circumstances exist:
o Insufficient Consideration. The pledgor or transferor did not
receive fair consideration or reasonably equivalent value in
exchange for its agreement to pledge its property for the
equal benefit of the other borrower; and
o Insolvency. The pledgor or transferor either (a) was insolvent
at the time of granting the lien on its property or (b) was
rendered insolvent as a result of granting the lien on its
property or (c) intended to, or believed that it would, incur
debts that would be beyond the person's ability to pay as such
debts matured.
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OTHER FINANCING AND ADDITIONAL DEBT. A borrower may be maintaining
other financing that could reduce cash flow from the related property and
increase the risk or borrower default and bankruptcy. _____ Mortgage Loans, with
an aggregate Cut-off Date Balance of approximately [$__________], 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. Each lender of existing subordinate secured debt has
entered into 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 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. Recently constructed properties do not
have operating histories. [____] of the Mortgaged Properties securing Mortgage
Loans 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 such Mortgaged Properties will
be successful. There can be no assurances that current occupancy levels of such
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 such Mortgaged Property
ZONING COMPLIANCE. 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 ("Zoning Laws") affecting certain of the Mortgaged
Properties which have come into effect after the construction of improvements on
such Mortgaged Properties and for other reasons, certain 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. Such changes may limit the ability of the borrower to rebuild the premises
"as is" in the event of a substantial casualty loss with respect thereto and, to
the extent law and
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ordinance insurance coverage is not in place, may adversely affect the ability
of the borrower to meet its Mortgage Loan obligations from cash flow.
AMERICANS WITH DISABILITIES ACT. Compliance with the ADA 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
(the "ADA"), public accommodations are required to meet certain federal
requirements related to access and use by disabled persons. If a Mortgaged
Property does not currently comply with the ADA, 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. 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.
[INCLUSION OF DELINQUENT MORTGAGE LOAN. 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 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 such Mortgage Loan sin 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.]
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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 promissory note or other evidence of indebtedness (a "Mortgage
Note") and secured by a first priority lien, created by a mortgage, deed of
trust or similar instrument (a "Mortgage"), on a fee simple estate in a
multifamily rental or commercial property (a "Mortgaged Property"). All
percentages of the Mortgage Loans, or of any specified group of Mortgage Loans,
referred to herein without further description are approximate percentages by
aggregate Cut-off Date balance.
The Mortgage Loans will be acquired by us on or before the Delivery
Date from __________________ (the "Mortgage Loan Seller"), which either
originated the Mortgage Loans or acquired them from their respective
originators. See "--The Mortgage Loan Seller" in this prospectus supplement.
The Mortgage Loans 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.
____________ of the Mortgage Loans (the "ARM Loans"), which represent
____% of the initial pool balance, bear interest at Mortgage Rates that are
subject to adjustment on periodically occurring Interest Rate Adjustment Dates
by adding the related Gross Margin to the value of a base index (an "Index"),
subject in ______ cases to rounding conventions and lifetime minimum and/or
maximum Mortgage Rates and, in the case of ________ Mortgage Loans, which
represent ____% of the initial pool balance, to periodic minimum and/or maximum
Mortgage Rates. The remaining Mortgage Loans (the "Fixed Rate Loans") bear
interest at fixed Mortgage Rates. [None of the ARM Loans is convertible into a
Fixed Rate Loan.]
[Identify Mortgage Loan Index] The adjustments to the Mortgage Rates on
the ARM Loans may in each case be based on the value of the related Index as
available a specified number of days prior to an Interest Rate Adjustment Date,
or may be based on the value of the related Index as most recently published as
of an Interest Rate Adjustment Date or as of a designated date preceding an
Interest Rate Adjustment Date. ____ of the ARM Loans, which represent ___% of
the initial pool balance, provide for Interest Rate Adjustment Dates that occur
monthly; ____ of the ARM Loans, which represent ___% of the initial pool
balance, provide for Interest Rate Adjustment Dates that occur semi-annually;
and the remaining ARM Loans provide for Interest Rate Adjustment Dates that
occur annually.
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The monthly payments on each ARM Loan are subject to adjustment on each
Payment Adjustment Date to an amount that would amortize fully the principal
balance of the Mortgage Loan over its then remaining amortization schedule and
pay interest at the Mortgage Rate in effect during the one month period
preceding such Payment Adjustment Date. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date following each related Interest Rate
Adjustment Date.
All of the Mortgage Loans provide for monthly payments of principal
based on amortization schedules that are significantly longer than the remaining
terms of such Mortgage Loans, thereby leaving substantial principal amounts due
and payable (each such payment, a "Balloon Payment") on their respective
maturity dates, unless prepaid prior thereto.
No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments. Prepayment Premiums are payable
to the Master Servicer as additional servicing compensation, to the extent not
otherwise applied to offset Prepayment Interest Shortfalls, and may be waived by
the Master Servicer in accordance with the servicing standard described under
"Servicing of the Mortgage Loans--General" 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:
MORTGAGE RATES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Range of Mortgage Number of Mortgage Aggregate Cut-off Percent By Aggregate
Rates Loans Date Balance Percent by Number Cut-off Date Balance
<S> <C> <C> <C> <C>
Total
</TABLE>
Weighted Average Mortgage Rate (All Loans): ______% per annum
Weighted Average Mortgage Rate (ARM Loans): ____% per annum
Weighted Average Mortgage Rate (Fixed Rate Loans): _____% per annum
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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> <C> <C> <C>
Total.
</TABLE>
Weighted Average
Gross Margin: ______%
The following table sets forth the frequency of adjustments to the
Mortgage Rates and monthly payments of the ARM Loans:
FREQUENCY OF ADJUSTMENTS TO MORTGAGE RATES AND MONTHLY PAYMENTS FOR THE
ARM LOANS.
<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> <C> <C> <C> <C>
Total
</TABLE>
The following table sets forth the range of maximum lifetime Mortgage
Rates for the ARM Loans to which such characteristic applies:
MAXIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
NUMBER OF ARM AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF DATE
RANGE OF MAXIMUM RATES (%) LOANS DATE BALANCE BALANCE
<S> <C> <C> <C>
Total.
</TABLE>
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): ______% per annum (A)
(A) This calculation does not include the __________ ARM Loans without
maximum lifetime Mortgage Rates.
The following table sets forth the range of minimum lifetime Mortgage
Rates for the ARM Loans to which such characteristic applies:
MINIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
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.
S-35
<PAGE>
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> <C> <C> <C>
Total
</TABLE>
Average Cut-off Date Balance (All Loans): $___________
Average Cut-off Date Balance (ARM Loans): $___________
Average Cut-off Date Balance (Fixed Rate Loans): $___________
The following tables set forth the original and remaining terms to
stated maturity (in months) of the Mortgage Loans:
ORIGINAL TERM TO STATED MATURITY (IN MONTHS)
<TABLE>
<CAPTION>
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> <C> <C> <C>
Total
</TABLE>
Weighted Average Original Term to Stated Maturity (All Loans): _____ months
Weighted Average Original Term to Stated Maturity (ARM Loans): _____ months
Weighted Average Original Term to Stated Maturity (Fixed Rate Loans):
_____ months
REMAINING TERM TO STATED MATURITY (IN MONTHS)
<TABLE>
<CAPTION>
AS OF THE CUT-OFF DATE
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> <C> <C> <C>
Total
</TABLE>
Term to Stated Maturity (All Loans): _____ months
Weighted Average Remaining Term to Stated Maturity (ARM Loans): _____ months
Weighted Average Remaining Term to Stated Maturity (Fixed Rate Loans):
_____ months
The following table sets forth the respective years in which the
Mortgage Loans were originated:
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
NUMBER OF MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
YEAR LOANS DATE BALANCE PERCENT BY NUMBER CUT-OFF DATE BALANCE
<S> <C> <C> <C> <C>
Total
</TABLE>
S-36
<PAGE>
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 prospectus
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> <C> <C> <C>
Total
</TABLE>
The following table sets forth the range of Cut-off Date LTV Ratios of
the Mortgage Loans. A "Cut-off Date LTV Ratio" is a fraction, expressed as a
percentage, the numerator of which is the Cut-off Date Balance of a Mortgage
Loan, and the denominator of which is the appraised value of the related
Mortgaged Property as determined by an appraisal thereof obtained in connection
with the origination of such Mortgage Loan. A Cut-off Date LTV Ratio, because it
is based on the value of a Mortgaged Property determined as of loan origination,
is not necessarily a reliable measure of the borrower's current equity in that
Mortgaged Property. In a declining real estate market, the fair market value of
the Mortgaged Property could have decreased from the value determined at
origination, and the actual loan-to-value ratio of a Mortgage Loan may be higher
than its Cut-off Date LTV Ratio.
CUT-OFF DATE LTV RATIOS
<TABLE>
<CAPTION>
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> <C> <C> <C>
Total
</TABLE>
Weighted Average Cut-off Date LTV Ratio (All Loans): _____%
Weighted Average Cut-off Date LTV Ratio (ARM Loans): _____%
Weighted Average Cut-off Date LTV Ratio (Fixed Rate Loans): _____%
The following table sets forth the range of Debt Service Coverage
Ratios for the Mortgage Loans as of the Cut-off Date. The "Debt Service Coverage
Ratio" for any Mortgage Loan is the ratio of Net Operating Income produced by
the related Mortgaged Property for the period (annualized if the period was less
than one year) covered by an operating statement to the amount of the monthly
payment in effect as of the Cut-off Date multiplied by 12. "Net Operating
Income" is the revenue derived from the use and operation of a Mortgaged
Property (consisting primarily of rental income and deposit forfeitures), less
operating expenses (such as utilities, general administrative expenses,
management fees, advertising, repairs and maintenance), and further less fixed
expenses (such as insurance and real estate taxes). Net Operating Income
generally does not reflect capital expenditures. The following table was
prepared using operating statements obtained from the respective mortgagors. In
each case, the information contained in such operating statements was unaudited,
and the Depositor has made no attempt to verify its accuracy. In the case of
_____ Mortgage Loans (____ ARM Loans and ____ Fixed Rate Loans), operating
statements could not be obtained, and accordingly, Debt Service Coverage Ratios
for those Mortgage Loans were not calculated. The last day of the period (which
may not correspond to the end of the calendar year most recent to the Cut-off
Date) covered by each operating statement from which a Debt Service Coverage
Ratio was calculated is set forth in Annex A with respect to the related
Mortgage Loan.
S-37
<PAGE>
DEBT SERVICE COVERAGE RATIOS
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
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> <C> <C> <C>
Total
</TABLE>
Weighted Average Debt Service Coverage Ratio (All Loans): _______x(B)
Weighted Average Debt Service Coverage Ratio (ARM Loans): _______x(C)
Weighted Average Debt Service Coverage Ratio (Fixed Rate Loans): _______x(D)
(A) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements.
(B) This calculation does not include the ________ Mortgage Loans as to
which Debt Service Coverage Ratios were not calculated.
(C) This calculation does not include the ________ ARM Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the ________ Fixed Rate Loans as to
which Debt Service Coverage Ratios were not calculated.
The Mortgage Loans are secured by Mortgaged Properties located in _____
different states. The following table sets forth the states in which the
Mortgaged Properties are located:
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
NUMBER OF MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
STATE LOANS DATE BALANCE PERCENT BY NUMBER CUT-OFF DATE BALANCE
<S> <C> <C> <C> <C>
Total
</TABLE>
Specified in Annex A to this prospectus supplement are the foregoing
and certain additional characteristics of the Mortgage Loans set forth on a
loan-by-loan basis. Certain additional information regarding the Mortgage Loans
is contained herein under "--Underwriting Standards", "--Assignment of the
Mortgage Loans; Repurchases" and "--Representations and Warranties; Repurchases"
and in the prospectus under "Description of the trust funds" and "Certain Legal
Aspects of Mortgage Loans".
THE MORTGAGE LOAN SELLER
On or prior to the Delivery Date, 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 Purchase Agreement"). [The Mortgage Loan Seller
originated ___ of the Mortgage Loans, which represent ___% of the initial pool
balance, and acquired the remaining Mortgage Loans from the respective
originators thereof, generally in accordance with the underwriting criteria
described below under "--Underwriting Standards".]
[The Mortgage Loans Seller [, a wholly-owned subsidiary of __________,]
is a _________________ organized in ____ under the laws of __________________
and currently holds and services for its own account a total residential and
commercial mortgage loan portfolio of approximately $__________________, of
which approximately $__________________ constitutes multifamily
S-38
<PAGE>
mortgage loans [and approximately $___________ constitutes other types of
commercial mortgage loans].]
UNDERWRITING STANDARDS
[All of the Mortgage Loans were originated or acquired by the Mortgage
Loan Seller, generally in accordance with the underwriting criteria described
herein.]
[Description of underwriting standards.]
[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 Delivery Date, 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 "Custodian"),
among other things, the following documents with respect to each Mortgage Loan
(collectively, as to such Mortgage Loan, the "Mortgage File"):
[(i) the original Mortgage Note, endorsed (without recourse) to the
order of Trustee;
(ii) the original Mortgage or a certified copy thereof, together
with originals or certified copies of any intervening
assignments of such document, in each case with evidence of
recording thereon;
(iii) the original or a certified copy of any related assignment of
leases, rents and profits (if such item is a document separate
from the Mortgage), together with originals or certified
copies of any intervening assignments of such document, in
each case with evidence of recording thereon;
(iv) the original or a certified copy of any related security
agreement (if such item is a document separate from the
Mortgage), together with originals or certified copies of any
intervening assignments of such document;
(v) an assignment of the Mortgage in favor of the Trustee, in
recordable form;
(vi) an assignment of any related assignment of leases, rents and
profits (if such item is a document separate from the
Mortgage) in favor of the Trustee, in recordable form;
(vii) an assignment of any related security agreement (if such item
is a document separate from the Mortgage) in favor of the
Trustee;
(viii) originals or certified copies of all assumption, modification
and substitution agreements in those instances where the terms
or provisions of the Mortgage or Mortgage Note have been
modified or the Mortgage or Mortgage Note has been assumed;
S-39
<PAGE>
(ix) the original lender's title insurance policy issued on the
date of the origination of such Mortgage Loan or, with respect
to each Mortgage Loan as to which a lender's title insurance
policy has not yet been issued, a preliminary title report or
a title insurance commitment or binder or, with respect to
each Mortgage Loan not covered by a lender's title insurance
policy, an attorney's opinion of title given by an attorney
licensed to practice law in the jurisdiction where the
Mortgaged Property is located; and
(x) the original of any guaranty of the borrower's obligations
under the related Mortgage Note.]
The Trustee or a Custodian on its behalf will be required to review
each Mortgage File within a period of ___ days of the receipt thereof, and the
Trustee or a Custodian on its behalf will hold such documents in trust for 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, the Depositor and the Mortgage Loan Seller. In any such case,
and if the Mortgage Loan Seller cannot deliver the document or cure the defect
within a period of ___ days following its receipt of such notice, then, except
as otherwise provided below, the Mortgage Loan Seller will be obligated pursuant
to the Mortgage Loan Purchase Agreement (the relevant rights under which will be
assigned by us to the Trustee, together with its interests in the Mortgage
Loans) to repurchase the affected Mortgage Loan within such ___day period at a
price (the "Purchase Price") equal to the sum of:
(i) the unpaid principal balance of such Mortgage Loan,
(ii) unpaid accrued interest on such Mortgage Loan at the Mortgage
Rate from the date to which interest was last paid to the Due
Date in the Due Period in which the purchase is to occur,
(iii) certain servicing expenses that are reimbursable to the Master
Servicer, and
(iv) any unpaid accrued interest at the Master Servicer
Reimbursement Rate that may be payable to the Master Servicer
in respect of related unreimbursed P&I Advances and servicing
expenses as described under "Description of the
Certificates--P&I Advances" in this prospectus supplement.
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.
The Pooling and Servicing Agreement will require the Master Servicer
promptly (and in any event within ___ days of the Delivery Date) to cause each
assignment of a Mortgage described in clause (v) of the second preceding
paragraph and each assignment of an assignment of leases, rents and profits
described in clause (vi) of the second preceding paragraph to be submitted for
recording in the real property records of the jurisdiction in which the related
Mortgaged Property is located except in states
S-40
<PAGE>
where, in the written opinion of local counsel acceptable to the Depositor and
the Trustee, such recordation is not required to protect the Trustee's interests
in the related Mortgage Loans against sale, further assignment, satisfaction or
discharge by the Mortgage Loan Seller, the Master Servicer, any sub-servicers or
the Depositor. See "Description of the Pooling Agreements--Assignment of
Mortgage Loans; Repurchases" in the prospectus.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
In the Mortgage Loan Purchase Agreement, the Mortgage Loan Seller has
represented and warranted with respect to each Mortgage Loan, as of [the
Delivery Date], or as of such other date specifically provided in the
representation and warranty, among other things, substantially to the effect
that:
[Summarize significant representations and warranties.]
If the Master Servicer, the Trustee or the Depositor discovers a breach
of any of the foregoing representations and warranties, and such breach
materially and adversely affects the value of any Mortgage Loan or 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 prospectus 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 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 prospectus supplement of the mortgage pool and
the Mortgaged Properties is based upon the mortgage pool as expected to be
constituted at the time the offered certificates are issued, as adjusted for the
scheduled principal payments due on or before the Cut-off
S-41
<PAGE>
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 prospectus supplement. We believe that the
information set forth in this prospectus supplement will be representative of
the characteristics of the mortgage pool as it will be constituted at the time
the offered certificates are issued, although the range of Mortgage Rates and
maturities and certain other characteristics of the Mortgage Loans in the
mortgage pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the offered certificates on or shortly after the Delivery Date and
will be filed, together with the Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the offered certificates. In the event Mortgage Loans are removed
from or added to the mortgage pool as set forth in the preceding paragraph, such
removal or addition will be noted in the Form 8-K.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Master Servicer will be required to service and administer the
Mortgage Loans, either directly or through sub-servicers, on behalf of the
Trustee and in the best interests of and for the benefit of the
certificateholders (as determined by the Master Servicer in its good faith and
reasonable judgment), in accordance with applicable law, the terms of the
Pooling and Servicing Agreement, the terms of the respective Mortgage Loans and,
to the extent consistent with the foregoing, in the same manner as would prudent
institutional mortgage lenders and loan servicers servicing mortgage loans
comparable to the Mortgage Loans in the jurisdictions where the Mortgaged
Properties are located, and with a view to the maximization of timely and
complete recovery of principal and interest, but without regard to the
following:
(i) any relationship that the Master Servicer or any affiliate of
the Master Servicer may have with the related mortgagor;
(ii) the ownership of any certificate by the Master Servicer or any
affiliate of the Master Servicer;
(iii) the Master Servicer's obligation to make P&I Advances and
advances to cover certain servicing expenses; and
(iv) the Master Servicer's right to receive compensation for its
services under the Pooling and Servicing Agreement or with
respect to any particular transaction.
Set forth below, following the subsection captioned "--The Master
Servicer", is a description of certain pertinent provisions of the Pooling and
Servicing Agreement relating to the servicing of the Mortgage Loans. Reference
is also made to the prospectus, in particular to the section captioned
"Description of the Pooling Agreements", for important information in addition
to that set forth herein regarding the terms and conditions of the Pooling and
Servicing Agreement as they relate to the rights and obligations of the Master
Servicer thereunder.
S-42
<PAGE>
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 prospectus 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 a rate equal to ________% per annum (the
"Servicing Fee Rate") and will be computed on the basis of the same principal
amount and for the same period respecting which any related interest payment on
the related Mortgage Loan is computed. As additional servicing compensation, the
Master Servicer will be entitled to retain all assumption and modification fees,
late charges and penalty interest and, as and to the extent described below,
Prepayment Premiums and Prepayment Interest Excesses collected from mortgagors.
In addition, the Master Servicer is authorized but not required to invest or
direct the investment of funds held in the Certificate Account in certain
short-term United States government securities and other obligations acceptable
to the rating agencies ("Permitted Investments"), and the Master Servicer will
be entitled to retain any interest or other income earned on such funds.
Although the Master Servicer is required to service and administer the mortgage
pool in accordance with the general servicing standard described under
"--General" above and, accordingly, without regard to its right to receive
compensation under the Pooling and Servicing Agreement, additional servicing
compensation in the nature of assumption and modification fees, Prepayment
Premiums and Prepayment Interest Excesses may under certain circumstances
provide the Master Servicer with an economic disincentive to comply with such
standard.
[If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Due Period on a date that is prior to its Due Date in such Due
Period, the amount of interest (net of related Servicing Fees) that accrues on
the amount of such principal prepayment will be less (such shortfall, a
"Prepayment Interest Shortfall") than the corresponding amount of interest
accruing on the certificates. If such a principal prepayment occurs during any
Due Period after the Due Date for such Mortgage Loan in such Due Period, the
amount of interest (net of related Servicing Fees) that accrues on the amount of
such principal prepayment will exceed (such excess, a "Prepayment Interest
Excess") the corresponding amount of interest accruing on the certificates. As
to any Due Period, to the extent Prepayment Interest Excesses and Prepayment
Premiums collected for all Mortgage Loans are greater than Prepayment
S-43
<PAGE>
Interest Shortfalls incurred, such excess will be paid to the Master Servicer as
additional servicing compensation.]
[As and to the extent described in this prospectus 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 prospectus 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
herein, provided that such modification, waiver or amendment will not (i) affect
the amount or timing of any scheduled payments of principal or interest on the
Mortgage Loan or (ii) in its judgment, materially impair the security for the
Mortgage Loan or reduce the likelihood of timely payment of amounts due thereon.
The Master Servicer also may agree to any other modification, waiver or
amendment of the terms of a Mortgage Loan, but only if, in its judgment, a
material default on the Mortgage Loan has occurred or a payment default is
imminent, and such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Mortgage Loan, taking into
account the time value of money, than would liquidation.
To the extent consistent with the foregoing, the Master Servicer will
be permitted: [describe permitted modification standards]
The Master Servicer is required to notify the Trustee of any
modification, waiver or amendment of any term of any Mortgage Loan, and must
deliver to the Trustee or the related Custodian, for deposit in the related
Mortgage File, an original counterpart of the agreement related to such
modification, waiver or amendment, promptly (and in any event within [10]
business days) following the execution thereof. Copies of each agreement whereby
any such modification, waiver or amendment of any term of any Mortgage Loan is
effected are to be available for review during normal business hours at the
offices of the Master Servicer. See "Description of the Certificates--Reports to
Certificateholders; Available Information" in this prospectus 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 herein, but in any event (i) at least once per
calendar year, commencing in the calendar year _______, and (ii), if any
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<PAGE>
scheduled payment becomes more than 60 days delinquent on the related Mortgage
Loan, as soon as practicable thereafter. The Master Servicer will be required to
prepare a written report of each such inspection describing the condition of the
Mortgaged Property and specifying the existence of any material vacancies in the
Mortgaged Property, of any sale, transfer or abandonment of the Mortgaged
Property, of any material change in the condition or value of the Mortgaged
Property, or of any waste committed thereon.
With respect to each Mortgage Loan that requires the borrower to
deliver such statements, the Master Servicer is also required to collect and
review the annual operating statements of the related Mortgaged Property. [Most]
of the Mortgages obligate the related borrower to deliver annual property
operating statements. However, there can be no assurance that any operating
statements required to be delivered will in fact be delivered, nor is the Master
Servicer likely to have any practical means of compelling such delivery in the
case of an otherwise performing Mortgage Loan.
Copies of the inspection reports and operating statements referred to
above are to be available for review by you during normal business hours at the
offices of the [Trustee]. See "Description of the Certificates--Reports to
Certificateholders; Available Information" in this prospectus 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 direct control, that
is readily verifiable and that is acceptable under the terms of the related
Mortgage Note. If the Mortgage Rate or the monthly payment with respect to any
ARM Loan is not properly adjusted by the Master Servicer pursuant to the terms
of such Mortgage Loan and applicable law, the Master Servicer is required to
deposit in the Certificate Account on or prior to the Due Date of the affected
monthly payment, an amount equal to the excess, if any, of (i) the amount that
would have been received from the borrower if the Mortgage Rate or monthly
payment had been properly adjusted, over (ii) the amount of such improperly
adjusted monthly payment, subject to reimbursement only out of such amounts as
are recovered from the borrower in respect of such excess.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off Date, among the Depositor, the Master
Servicer and the Trustee (the "Pooling and Servicing Agreement"), and will
represent in the aggregate the entire beneficial ownership interest in a trust
fund consisting of:
(i) the Mortgage Loans and all payments under and proceeds of the
Mortgage Loans received after the Cut-off Date (exclusive of
payments of principal and interest due on or before the
Cut-off Date);
(ii) any Mortgaged Property acquired on behalf of the trust fund
through foreclosure, deed in lieu of foreclosure or otherwise
(upon acquisition, an "REO Property");
(iii) such funds or assets as from time to time are deposited in the
Certificate Account;
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(iv) the rights of the mortgagee under all insurance policies with
respect to the Mortgage Loans; and
(v) certain rights of the Depositor under the Mortgage Loan
Purchase Agreement relating to Mortgage Loan document delivery
requirements and the representations and warranties of the
Mortgage Loan Seller regarding the Mortgage Loans.
The certificates will consist of four classes to be designated as the
Class A certificates, the Class B certificates, the Class C certificates and the
Class R certificates. The Class A certificates will have an initial certificate
balance of $____________, which represents ____% of the initial pool balance;
the Class B certificates will have an initial certificate balance of
$____________, which represents ____% of the initial pool balance; the Class C
certificates will have an initial certificate balance of $____________, which
represents ___% of the initial pool balance; and the Class R certificates will
have a certificate balance of zero. The certificate balance of any class of
certificates outstanding at any time represents the maximum amount which the
holders thereof are entitled to receive as distributions allocable to principal
from the cash flow on the Mortgage Loans and the other assets in the trust fund.
On each Distribution Date, to the extent of the Available Distribution Amount
and subject to the priority of payments described in
"Distributions--Priorities", the respective certificate balances of the Class A,
Class B and Class C certificates (the "Regular Certificates") will in each case
be reduced by any amounts actually distributed on such class of certificates on
such Distribution Date that are allocable to principal.
Only the Class A and Class B certificates are being offered pursuant to
this prospectus supplement. The Class C and Class R certificates (the "Private
Certificates") have not been registered under the Securities Act of 1933 and are
not being offered pursuant to this prospectus 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 herein to
payments, notices, reports and statements to holders of the Class A certificates
will refer to payments notices, reports and statements to DTC or Cede & Co., as
the registered holder of the Class A certificates, for distribution to Class A
certificate owners through its participants in accordance with DTC procedures.
See "Description of the Certificates--Book-Entry Registration and Definitive
Certificates" in the prospectus.
Until definitive Class A certificates are issued, interests in such
class will be transferred on the book-entry records of DTC and its participants.
The Class B certificates may be transferred or exchanged, subject to certain
restrictions on the transfer of such certificates to Plans (see "ERISA
Considerations" in this prospectus supplement), at the offices of
___________________________ located at ______________________________________,
without the payment of any service
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charges, other than any tax or other governmental charge payable in connection
therewith. ________________________ will initially serve as registrar (in such
capacity, the "Certificate Registrar") for purposes of recording and otherwise
providing for the registration of the offered certificates and of transfers and
exchanges of the Class B and, if issued, the definitive Class A certificates.
DISTRIBUTIONS
METHOD, TIMING AND AMOUNT. Distributions on the certificates will be
made by the Master Servicer, to the extent of available funds, on the ___ day of
each month or, if any such ___ day is not a business day, then on the next
succeeding business day, commencing in _________ 199__ (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
certificate) will be made to the persons in whose names the certificates are
registered at the close of business on each Record Date, which will be the last
business day of the month preceding the month in which the related Distribution
Date occurs. Each such distribution will be made by wire transfer in immediately
available funds to the account specified by the certificateholder at a bank or
other entity having appropriate facilities therefor, if such certificateholder
will have provided the Master Servicer with wiring instructions [no less than
five business days prior to the related Record Date (which wiring instructions
may be in the form of a standing order applicable to all subsequent
distributions) and is the registered owner of certificates with an aggregate
initial principal amount of at least $5,000,000], or otherwise by check mailed
to such certificateholder. The final distribution on any certificate will be
made in like manner, but only upon presentation and surrender of such
certificate at the location that will be specified in a notice of the pendency
of such final distribution. All distributions made with respect to a class of
certificates will be allocated pro rata among the outstanding certificates of
such class based on their respective Percentage Interests. The "Percentage
Interest" evidenced by any offered certificate is equal to the initial
denomination thereof as of the Delivery Date, divided by the initial certificate
balance of the class to which it belongs.
The aggregate amount available for distribution to certificateholders
on each Distribution Date (the "Available Distribution Amount") will, in
general, equal the sum of the following amounts:
(a) the total amount of all cash received on the Mortgage Loans
and any REO Properties that is on deposit in the Certificate
Account as of the related Determination Date, exclusive of:
(i) all monthly payments collected but due on a Due Date
subsequent to the related Due Period,
(ii) all principal prepayments (together with related
payments of the interest thereon and related
Prepayment Premiums), Liquidation Proceeds, Insurance
and Condemnation Proceeds and other unscheduled
recoveries received subsequent to the related Due
Period, and
(iii) all amounts in the Certificate Account that are due
or reimbursable to any person other than the
certificateholders; and
(b) all P&I Advances made by the Master Servicer with respect to
such Distribution Date. See "Description of the Pooling
Agreements--Certificate Account" in the prospectus.
The "Due Period" for each Distribution Date will be the period that
begins on the ______ day of the month preceding the month in which such
Distribution Date occurs and ends on the _____ day of the
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month in which such Distribution Date occurs. For purposes of the discussion in
the prospectus, the Due Period is also the Prepayment Period. The "Determination
Date" for each Distribution Date is the _______ day of the month in which such
Distribution Date occurs or, if any such ________ day is not a business day,
then the next preceding business day.
PRIORITY. On each Distribution Date, for so long as the Class A and/or
Class B certificates are outstanding, the Master Servicer will (except as
otherwise described under "--Termination" below) apply amounts on deposit in the
Certificate Account, to the extent of the Available Distribution Amount, in the
following order of priority:
(1) to distributions of interest to the holders of the Class A
certificates in an amount equal to all Distributable
Certificate Interest in respect of the Class A certificates
for such Distribution Date and, to the extent not previously
paid, for all prior Distribution Dates;
(2) to distributions of principal to the holders of the Class A
certificates in an amount equal to the sum of (a) the product
of (i) the Class A certificates' Ownership Percentage (as
calculated immediately prior to such Distribution Date),
multiplied by (ii) the Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) the entire Unscheduled
Principal Distribution Amount for such Distribution Date (but
not more than would be necessary to reduce the certificate
balance of the Class A certificates to zero);
(3) to distributions of principal to the holders of the Class A
certificates in an amount equal to any Uncovered Portion of
the certificate balance of the Class A certificates
immediately prior to such Distribution Date;
(4) to distributions of interest to the holders of the Class B
certificates in an amount equal to all Distributable
Certificate Interest in respect of the Class B certificates
for such Distribution Date and, to the extent not previously
paid, for all prior Distribution Dates;
(5) to distributions of principal to the holders of the Class B
certificates in an amount equal to the sum of (a) the product
of (i) the Class B certificates' Ownership Percentage (as
calculated immediately prior to such Distribution Date),
multiplied by (ii) the Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) if the Class A
certificates have been retired, then to the extent not
distributed in retirement thereof on such Distribution Date,
the entire Unscheduled Principal Distribution Amount for such
Distribution Date (but not more than would be necessary to
reduce the certificate balance of the Class B certificates to
zero);
(6) to distributions of principal to the holders of the Class A
certificates in an amount equal to any Uncovered Portion of
the certificate balance of the Class B certificates
immediately prior to such Distribution Date (but not more than
would be necessary to reduce the certificate balance of the
Class A certificates to zero);
(7) to distributions of principal to the holders of the Class B
certificates in an amount equal to any Uncovered Portion of
the certificate balance of the Class B certificates
immediately prior to such Distribution Date, net of any
distributions of principal made on such Distribution Date in
respect of the Class A certificates as described in the
immediately preceding clause (6);
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(8) to distributions of interest to the holders of the Class C
certificates in an amount equal to all Distributable
Certificate Interest in respect of the Class C certificates
for such Distribution Date and, to the extent not previously
distributed, for all prior Distribution Dates;
(9) to distributions of principal to the holders of the Class C
certificates in an amount equal to the product of (a) the
Class C certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by
(b) the Scheduled Principal Distribution Amount for such
Distribution Date;
(10) to distributions of principal to the holders of the respective
classes of Regular Certificates, in alphabetical order of
their class designations (i.e., A, B, C), in an aggregate
amount equal to any Uncovered Portion of the certificate
balance of the Class C certificates immediately prior to such
Distribution Date (but, in each case, not more than would be
necessary to reduce the related certificate balance to zero);
and
(11) to distributions to the holders of the Class R certificates in
an amount equal to the remaining balance, if any, of the
Available Distribution Amount.
PASS-THROUGH RATES. The pass-through rate applicable to the Class A and
Class B certificates for the initial Distribution Date will equal _______% per
annum. With respect to any Distribution Date subsequent to the initial
Distribution Date, the pass-through rate for the Class A certificates and the
Class B certificates will equal the Weighted Average Effective Net Mortgage Rate
for such Distribution Date.
[The pass-through rate applicable to the Class C certificates for any
Distribution Date will equal the Weighted Average Effective Net Mortgage Rate
for such Distribution Date. The Class R certificates will have no specified
pass-through rate.]
The "Weighted Average Effective Net Mortgage Rate" for each
Distribution Date is the weighted average of the applicable Effective Net
Mortgage Rates for the Mortgage Loans, weighted on the basis of their respective
Stated Principal Balances immediately prior to such Distribution Date. For
purposes of calculating the Weighted Average Effective Net Mortgage Rate for any
Distribution Date, the applicable "Effective Net Mortgage Rate" for each
Mortgage Loan is:
(a) if such Mortgage Loan accrues interest on the basis of a
360-day year consisting of twelve 30-day months (a "360/360
basis", which is the basis of accrual for interest on the
Regular Certificates), the Net Mortgage Rate in effect for
such Mortgage Loan as of the commencement of the related Due
Period; and
(b) if such Mortgage Loan does not accrue interest on a 360/360
basis, the annualized rate at which interest would have to
accrue during the one month period preceding the Due Date for
such Mortgage Loan during the related Due Period on a 360/360
basis in order to produce the aggregate amount of interest
(adjusted to the actual Net Mortgage Rate) accrued during such
period.
The "Net Mortgage Rate" for each Mortgage Loan is equal to the related
Mortgage Rate in effect from time to time less the Servicing Fee Rate.
DISTRIBUTABLE CERTIFICATE INTEREST. The "Distributable Certificate
Interest" in respect of each class of Regular Certificates for each Distribution
Date represents that portion of the Accrued Certificate Interest in respect of
such class of certificates for such Distribution Date that is net of such
class's
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allocable share (calculated as described below) of the aggregate of any
Prepayment Interest Shortfalls resulting from voluntary principal prepayments
made on the Mortgage Loans during the related Due Period that are not offset by
Prepayment Interest Excesses and Prepayment Premiums collected during the
related Due Period (the aggregate of such Prepayment Interest Shortfalls that
are not so offset or covered, as to such Distribution Date, the "Net Aggregate
Prepayment Interest Shortfall").
The "Accrued Certificate Interest" in respect of each Class of Regular
Certificates for each Distribution Date is equal to 30 days' interest at the
pass-through rate applicable to such class of certificates for such Distribution
Date accrued on the related certificate balance outstanding immediately prior to
such Distribution Date.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each class of Regular certificates will
equal the product of (a) such Net Aggregate Prepayment Interest Shortfall,
multiplied by (b) a fraction, the numerator of which is equal to 30 days'
interest at the pass-through rate applicable to such class of Regular
certificates for such Distribution Date accrued on the related certificate
balance (net of any Uncovered Portion thereof) outstanding immediately prior to
such Distribution Date, and the denominator of which is equal to 30 days'
interest at the Weighted Average Effective Net Mortgage Rate for such
Distribution Date accrued on the aggregate Stated Principal Balance of the
mortgage pool outstanding immediately prior to such Distribution Date.
SCHEDULED PRINCIPAL DISTRIBUTION AMOUNT AND UNSCHEDULED PRINCIPAL
DISTRIBUTION AMOUNT. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
monthly payments, including Balloon Payments, due during or, if and to the
extent not previously received or advanced and distributed to certificateholders
on a preceding Distribution Date, prior to the related Due Period, in each case
to the extent paid by the related borrower or advanced by the Master Servicer
and included in the Available Distribution Amount for such Distribution Date.
The Scheduled Principal Distribution Amount from time to time will include all
late payments of principal made by a borrower, including late payments in
respect of a delinquent Balloon Payment, regardless of the timing of such late
payments, except to the extent such late payments are otherwise reimbursable to
the Master Servicer for prior P&I Advances.
The "Unscheduled Principal Distribution Amount" for each Distribution
Date will equal the aggregate of:
(a) all voluntary prepayments of principal received on the
Mortgage Loans during the related Due Period; and
(b) any other collections (exclusive of payments by borrowers)
received on the Mortgage Loans and any REO Properties during
the related Due Period, whether in the form of Liquidation
Proceeds, Insurance and Condemnation Proceeds, net income from
REO Property or otherwise, that were identified and applied by
the Master Servicer as recoveries of previously unadvanced
principal of the related Mortgage Loan.
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are collectively referred to from time to time as the
"Distributable Principal".
The "Ownership Percentage" evidenced by any class of certificates as of
any date of determination will equal a fraction, expressed as a percentage, the
numerator of which is the then certificate balance of such class of
certificates, net (in the case of a class of Regular certificates) of any
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Uncovered Portion of such certificate balance, and the denominator of which is
the then aggregate Stated Principal Balance of the mortgage pool.
CERTAIN CALCULATIONS WITH RESPECT TO INDIVIDUAL MORTGAGE LOANS. The
"Stated Principal Balance" of each Mortgage Loan outstanding at any time
represents the principal balance of such Mortgage Loan ultimately due and
payable to the Certificateholders. The Stated Principal Balance of each Mortgage
Loan will initially equal the Cut-off Date Balance thereof and, on each
Distribution Date, will be reduced by the portion of the Distributable Principal
for such date, which in either case is attributable to such Mortgage Loan. The
Stated Principal Balance of a Mortgage Loan may also be reduced in connection
with any forced reduction of the actual unpaid principal balance thereof imposed
by a court presiding over a bankruptcy proceeding wherein the related borrower
is the debtor. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure--Bankruptcy Laws" in the prospectus.
For purposes of calculating distributions on the certificates, as well
as the amount of Servicing Fees payable each month, each REO Property will be
treated as if there exists with respect thereto an outstanding mortgage loan (an
"REO Loan"), and all references to "Mortgage Loan", "Mortgage Loans" and
"mortgage pool" herein and in the prospectus, when used in such context, will be
deemed to also be references to or to also include, as the case may be, any "REO
Loans". Each REO Loan will generally be deemed to have the same characteristics
as its actual predecessor Mortgage Loan, including the same adjustable or fixed
Mortgage Rate (and, accordingly, the same Net Mortgage Rate and Effective Net
Mortgage Rate) and the same unpaid principal balance and Stated Principal
Balance. Amounts due on such predecessor Mortgage Loan, including any portion
thereof payable or reimbursable to the Master Servicer, will continue to be
"due" in respect of the REO Loan; and amounts received in respect of the related
REO Property, net of payments to be made, or reimbursement to the Master
Servicer for payments previously advanced, in connection with the operation and
management of such property, generally will be applied by the Master Servicer as
if received on the predecessor Mortgage Loan. However, notwithstanding the terms
of the predecessor Mortgage Loan, the monthly payment "due" on an REO Loan will
in all cases, for so long as the related Mortgaged Property is part of the trust
fund, equal one month's interest thereon at the applicable Mortgage Rate.
SUBORDINATION
The rights of holders of the Class B certificates and each class of the
Private Certificates (collectively, the "Subordinate Certificates") to receive
distributions of amounts collected or advanced on the Mortgage Loans will be
subordinated, to the extent described herein, to the rights of holders of the
Class A certificates and each other class of Subordinate Certificates with an
earlier alphabetical class designation. This subordination is intended to
enhance the likelihood of timely receipt by the holders of the Class A
certificates of the full amount of all Distributable Certificate Interest
payable in respect of 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, 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.
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Allocation to the Class A certificates, for so long as they are
outstanding, of the entire Unscheduled Principal Distribution Amount for each
Distribution Date will generally accelerate the amortization of the Class A
certificates relative to the actual amortization of the Mortgage Loans. To the
extent that the Class A certificates are amortized faster than the Mortgage
Loans, the percentage interest evidenced by the Class A certificates in the
trust fund will be decreased (with a corresponding increase in the interest in
the trust fund evidenced by the Subordinate Certificates), thereby increasing,
relative to their respective certificate balances, the subordination afforded
the Class A certificates by the Subordinate Certificates. Following retirement
of the Class A certificates, allocation to the Class B certificates, for so long
as they are outstanding, of the entire Unscheduled Principal Distribution Amount
for each Distribution Date will provide a similar benefit to such class of
certificates as regards the relative amount of subordination afforded thereto by
the Private Certificates.
Losses and other shortfalls experienced with respect to the Mortgage
Loans will not, with the exception of any Net Aggregate Prepayment Interest
Shortfalls, be applied to reduce either the certificate balance or the absolute
entitlement to interest of any class of Regular Certificates, even though such
losses and shortfalls may cause one or more of such classes to receive less than
the full amount of principal and interest to which it is entitled. As a result,
the aggregate Stated Principal Balance of the mortgage pool at any time may be
less than the aggregate certificate balance of the Regular Certificates. Such
deficit will be allocated to the respective classes of Regular Certificates (in
each case to the extent of its certificate balance) in reverse alphabetical
order of their Class designations (i.e., C, B, A). Such allocation will not
reduce the certificate balance of any such class and is intended solely to
identify the portion (the "Uncovered Portion") of the certificate balance of
each such class for which there is at such time no corresponding principal
amount of Mortgage Loans.
P&I ADVANCES
[On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated, subject to the recoverability determination
described in the next paragraph, to make advances (each, a "P&I Advance") out of
its own funds or, subject to the replacement thereof as provided in the Pooling
and Servicing Agreement, funds held in the Certificate Account that are not
required to be part of the Available Distribution Amount for such Distribution
Date, in an amount equal to the aggregate of:
(i) all monthly payments (net of the related Servicing Fee), other
than Balloon Payments, which were due on the Mortgage Loans
during the related Due Period and delinquent as of the related
Determination Date;
(ii) in the case of each Mortgage Loan delinquent in respect of its
Balloon Payment as of the related Determination Date, an
amount equal to 30 days' interest thereon at the related
Mortgage Rate in effect as of the commencement of the related
Due Period (net of the related Servicing Fee), but only to the
extent that the related mortgagor has not made a payment
sufficient to cover such amount under any forbearance
arrangement or otherwise that has been included in the
Available Distribution Amount for such Distribution Date; and
(iii) in the case of each REO Property, an amount equal to thirty
days' imputed interest with respect thereto at the related
Mortgage Rate in effect as of the commencement of the related
Due Period (net of the related Servicing Fee), but only to the
extent that such amount is not covered by any net income from
such REO Property included in the Available Distribution
Amount for such Distribution Date.
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The Master Servicer's obligations to make P&I Advances in respect of
any Mortgage Loan or REO Property will continue through liquidation of such
Mortgage Loan or disposition of such REO Property, as the case may be.
The Master Servicer will be entitled to recover any P&I Advance made
out of its own funds from any amounts collected in respect of the Mortgage Loan
as to which such P&I Advance was made, whether in the form of late payments,
Insurance and Condemnation Proceeds, Liquidation Proceeds or otherwise ("Related
Proceeds"). Notwithstanding the foregoing, the Master Servicer will not be
obligated to make any P&I Advance that it determines in its reasonable good
faith judgment would, if made, not be recoverable out of Related Proceeds (a
"Nonrecoverable P&I Advance"), and the Master Servicer will be entitled to
recover any P&I Advance that it so determines to be a Nonrecoverable P&I Advance
out of general funds on deposit in the Certificate Account. See "Description of
the Certificates--Advances in Respect of Delinquencies" and "Description of the
Pooling Agreements--Certificate Account" in the prospectus.
In connection with its recovery of any P&I Advance or reimbursable
servicing expense (each, an "Advance"), the Master Servicer will be entitled to
retain, out of any amounts then on deposit in the Certificate Account, interest
at a per annum rate equal to ________________ (the "Master Servicer
Reimbursement Rate"), accrued on the amount of such Advance from the date made
to but not including the date of reimbursement.
To the extent not offset or covered by amounts otherwise payable on the
Private Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Class B certificates; and to the extent not
offset or covered by amounts otherwise payable on the Class B and the Private
Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Class A certificates. To the extent that any
holder of an offered certificate must bear the cost of the Master Servicer's
Advances, the benefits of such Advances to such holder will be contingent on the
ability of such holder to reinvest the amounts received as a result of such
Advances at a rate of return equal to or greater than the Master Servicer
Reimbursement Rate.]
REPORTS TO CERTIFICATEHOLDERS; CERTAIN AVAILABLE INFORMATION
On each Distribution Date, the [Master Servicer] [Trustee] will be
required to forward by mail to each holder of an offered certificate a statement
(a "Distribution Date Statement") providing various items of information
relating to distributions made on such date with respect to the relevant class
and the recent status of the mortgage pool. For a more detailed discussion of
the particular items of information to be provided in each Distribution Date
Statement, as well as a discussion of certain annual information reports to be
furnished by the [Master Servicer] [Trustee] to persons who at any time during
the prior calendar year were holders of the offered certificates, see
"Description of the Certificates--Reports to Certificateholders" in the
prospectus.
The Pooling and Servicing Agreement requires that the [Master Servicer]
[Trustee] make available at its offices primarily responsible for servicing the
Mortgage Loans, during normal business hours, for review by any holder of an
offered certificate, originals or copies of, among other things, the following
items:
(a) the Pooling and Servicing Agreement and any amendments
thereto,
(b) all Distribution Date Statements delivered to holders of the
relevant Class of offered certificates since the Delivery
Date,
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(c) all officer's certificates delivered to the Trustee since the
Delivery Date as described under "Description of the Pooling
Agreements--Evidence as to Compliance" in the prospectus,
(d) all accountants' reports delivered to the Trustee since the
Delivery Date as described under "Description of the Pooling
Agreements--Evidence as to Compliance" in the prospectus,
(e) the most recent property inspection report prepared by or on
behalf of the Master Servicer in respect of each Mortgaged
Property,
(f) the most recent Mortgaged Property annual operating
statements, if any, collected by or on behalf of the Master
Servicer, and
(g) any and all modifications, waivers and amendments of the terms
of a Mortgage Loan entered into by the Master Servicer.
Copies of any and all of the foregoing items will be available from the
[Master Servicer] [Trustee] upon request; however, the [Master Servicer]
[Trustee] will be permitted to require payment of a sum sufficient to cover the
reasonable costs and expenses of providing such copies.
Until such time as definitive Class A certificates are issued, the
foregoing information will be available to Class A certificate owners only to
the extent it is forwarded by or otherwise available through DTC and its
participants. Conveyance of notices and other communications by DTC to
participants, and by participants to Class A certificate owners, will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time. The Master Servicer, the
Trustee, the Depositor and the Certificate Registrar are required to recognize
as certificateholders only those persons in whose names the certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A certificates will be Cede & Co. as nominee for
DTC.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement,
the voting rights for the series offered hereby shall be allocated among the
respective Classes of Certificateholders in proportion to the certificate
balances of their Certificates (net, in the case of a Class of Regular
Certificates, of any Uncovered Portion of the related certificate balance).
Voting rights allocated to a class of certificateholders shall be allocated
among such Certificateholders in proportion to the Percentage Interests
evidenced by their respective certificates. See "Description of the
Certificates--Voting Rights" in the prospectus.
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.
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<PAGE>
Any such purchase by the Master Servicer of all the Mortgage Loans and
other assets in the trust fund is required to be made at a price equal to the
excess of (a) the sum of (i) the aggregate Purchase Price of all the Mortgage
Loans then included in the trust fund and (ii) the fair market value of all REO
Properties then included in the trust fund, as determined by an appraiser
mutually agreed upon by the Master Servicer and the Trustee, over (b) the
aggregate of amounts payable or reimbursable to the Master Servicer under the
Pooling and Servicing Agreement. Such purchase will effect early retirement of
the then outstanding offered certificates, but the right of the Master Servicer
to effect such termination is subject to the requirement that the then aggregate
Stated Principal Balance of the mortgage pool be less than __% of the initial
pool balance.
On the final Distribution Date, the aggregate amount paid by the Master
Servicer for the Mortgage Loans and other assets in the trust fund (if the trust
fund is to be terminated as a result of the purchase described in the preceding
paragraph), together with all other amounts on deposit in the Certificate
Account and not otherwise payable to a person other than the certificateholders
(see "Description of the Pooling Agreements--Certificate Account" in the
prospectus), will be applied:
first, to distributions of interest to the holders of the Class A
certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class A certificates for such Distribution
Date and, to the extent not previously paid, for all prior Distribution
Dates;
second, to distributions of principal to the holders of the Class A
certificates in an amount equal to the sum of the certificate balance
of the Class A certificates outstanding immediately prior to such
Distribution Date;
third, to distributions of interest to the holders of the Class B
certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class B certificates for such Distribution
Date and, to the extent not previously paid, for all prior Distribution
Dates;
fourth, to distributions of principal to the holders of the Class B
certificates in an amount equal to the sum of the certificate balance
of the Class B certificates outstanding immediately prior to such
Distribution Date; and thereafter, to distributions to holders of the
Private Certificates.
THE TRUSTEE
____________, a _____________________, will act as Trustee on behalf of
the certificateholders. [The Master Servicer will be responsible for the fees
and normal disbursements of the Trustee.] The offices of the Trustee primarily
responsible for the administration of the trust fund are located at
______________________________. See "Description of the Pooling Agreements--the
Trustee", "--Duties of the Trustee", "--Certain Matters Regarding the Trustee"
and "--Resignation and Removal of the Trustee" in the prospectus.
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
GENERAL. The yield on any offered certificate will depend on: (i) the
pass-through rate in effect from time to time for such certificate; (ii) the
price paid for such certificate and, if the price was other than par, the rate
and timing of payments of principal on such certificate; and (iii) the aggregate
amount of distributions on such certificate.
S-55
<PAGE>
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" herein and "--Yield
Considerations--Rate and Timing of Principal Payments" below.
RATE AND TIMING OF PRINCIPAL PAYMENTS. The yield to holders of offered
certificates that are purchased at a discount or premium will be affected by the
rate and timing of principal payments on such certificates. As and to the extent
described herein, the holders of each class of offered certificates will be
entitled to receive on each Distribution Date their allocable share (calculated
on the basis of the Ownership Percentage evidenced by such class of certificates
immediately prior to such date) of the Scheduled Principal Distribution Amount
for such Distribution Date; however, the Unscheduled Principal Distribution
Amount for each Distribution Date will be distributable entirely in respect of
the Class A certificates, until the certificate balance thereof is reduced to
zero, and will thereafter be distributable entirely in respect of the Class B
certificates. See "Description of the Certificates--Distributions--Priority" and
"--Distributions--Scheduled Principal Distribution Amount and Unscheduled
Principal Distribution Amount" herein. Consequently, the rate and timing of
principal payments on the offered certificates will be directly related to the
rate and timing of principal payments on or in respect of the Mortgage Loans
(including principal prepayments on the Mortgage Loans resulting from both
voluntary prepayments by the mortgagors and involuntary liquidations). The rate
and timing of principal payments on the Mortgage Loans will in turn be affected
by the amortization schedules thereof, the dates on which Balloon Payments are
due and the rate and timing of principal prepayments and other unscheduled
collections thereon (including for this purpose, collections made in connection
with liquidations of Mortgage Loans due to defaults, casualties or condemnations
affecting the Mortgaged Properties, or purchases of Mortgage Loans out of the
trust fund). Prepayments and, assuming the respective stated maturity dates
therefor have not occurred, liquidations and purchases of the Mortgage Loans,
will result in distributions on the offered certificates of amounts that would
otherwise be distributed over the remaining terms of the Mortgage Loans.
Defaults on the Mortgage Loans, particularly at or near their stated maturity
dates, may result in significant delays in payments of principal on the Mortgage
Loans (and, accordingly, on the offered certificates) while work-outs are
negotiated or foreclosures are completed. See "Servicing of the Mortgage
Loans--Modifications, Waivers and Amendments" herein and "Description of the
Pooling Agreements--Realization Upon Defaulted Mortgage Loans" and "Certain
Legal Aspects of Mortgage Loans--Foreclosure" in the prospectus.
The extent to which the yield to maturity of any class of offered
certificates may vary from the anticipated yield will depend upon the degree to
which they are purchased at a discount or premium and when, and to what degree,
payments of principal on the Mortgage Loans are in turn distributed on such
certificates. An investor should consider, in the case of any offered
certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on the Mortgage Loans could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
any offered certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments could result in an actual yield to such
investor that is lower than the anticipated yield. In general, the earlier a
payment of principal on the Mortgage Loans is distributed on an offered
certificate purchased at a discount or premium, the greater will be the effect
on an investor's yield to maturity. As a result, the effect on an investor's
yield of principal payments (to the extent distributable on such investor's
offered certificates) occurring at a rate higher (or lower) than the rate
anticipated by the investor during any
S-56
<PAGE>
particular period would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments. Because the rate of principal
payments on the Mortgage Loans will depend on future events and a variety of
factors (as described more fully below), no assurance can be given as to such
rate or the rate of principal prepayments in particular. The Depositor is not
aware of any relevant publicly available or authoritative statistics with
respect to the historical prepayment experience of a large group of mortgage
loans comparable to the Mortgage Loans.
The yield to maturity of offered certificates that are purchased at a
discount or premium will be similarly affected by payments of principal thereon
made with funds in excess of the Distributable Principal to which the holders of
such Certificates may be then entitled. As described herein under "Description
of the Certificates--Distributions--Priority", if there exists an Uncovered
Portion of the certificate balance of any class of Regular Certificates
outstanding immediately prior to a Distribution Date, distributions will be
made, to the extent of the lesser of available funds and such Uncovered Portion,
in reduction of the certificate balance(s) of such class of Regular Certificates
and each other class of Regular Certificates, if any, with an earlier
alphabetical class designation, in alphabetical order of such class
designations. Accordingly, losses incurred in respect of the mortgage pool, to
the extent creating an Uncovered Portion of the certificate balance of the Class
C certificates, could speed amortization of the offered certificates, to the
extent described above, beyond any positive effect on such amortization that
would generally result from liquidations of Mortgage Loans prior to their
maturity.
LOSSES AND SHORTFALLS. The yield to holders of the offered certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net Aggregate
Prepayment Interest Shortfalls, generally be borne:
first, by the holders of the Private Certificates, to the extent of
amounts otherwise distributable in respect of their Certificates;
second, by the holders of the Class B certificates, to the extent of
amounts otherwise distributable in respect of their Certificates; and
last, by the holders of the Class A certificates.
As more fully described herein under "Description of the
Certificates--Distributions--Distributable Certificate Interest", Net Aggregate
Prepayment Interest Shortfalls will generally be borne by the respective classes
of certificateholders on a pro rata basis.
CERTAIN RELEVANT FACTORS. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by a
number of factors, including, without limitation, prevailing interest rates, the
terms of the Mortgage Loans (for example, Prepayment Premiums, adjustable
Mortgage Rates and amortization terms that require balloon payments), the
demographics and relative economic vitality of the areas in which the Mortgaged
Properties are located and the general supply and demand for rental units in
such areas, the quality of management of the Mortgaged Properties, the servicing
of the Mortgage Loans, possible changes in tax laws and other opportunities for
investment. See "Risk Factors--The Mortgage Loans" and "Description of the
mortgage pool" herein and "Yield and Maturity Considerations--Principal
Prepayments" in the prospectus.
The rate of prepayment on the mortgage pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. Although most of the Mortgage Loans are ARM Loans, adjustments to the
Mortgage
S-57
<PAGE>
Rates thereon will generally be limited by lifetime and/or periodic caps and
floors and, in each case, will be based on the related Index (which may not rise
and fall consistently with mortgage interest rates then available) plus the
related Gross Margin (which may be different from margins then offered on
adjustable rate mortgage loans). See "Description of the mortgage pool--Certain
Payment Characteristics" and "--The Index" herein. As a result, the Mortgage
Rates on the ARM Loans at any time may not be comparable to prevailing market
interest rates. In addition, as prevailing market interest rates decline, and
without regard to whether the Mortgage Rates on the ARM Loans decline in a
manner consistent therewith, related borrowers may have an increased incentive
to refinance for purposes of either (i) converting to a fixed rate loan and
thereby "locking in" such rate, or (ii) taking advantage of a different index,
margin or rate cap or floor on another adjustable rate mortgage loan. The
Mortgage Loans may be prepaid at any time and, in ____ cases (approximately
_____% of the initial pool balance), may be prepaid in whole or in part without
payment of a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by Federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits.
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" herein, if the
portion of the Available Distribution Amount distributable in respect of
interest on either class of offered certificates on any Distribution Date is
less than the Distributable Certificate Interest then payable for such Class,
the shortfall will be distributable to holders of such class of certificates on
subsequent Distribution Dates, to the extent of available funds. Any such
shortfall will not bear interest, however, and will therefore negatively affect
the yield to maturity of such class of certificates for so long as it is
outstanding.
WEIGHTED AVERAGE LIFE
The weighted average life of an offered certificate refers to the
average amount of time that will elapse from the date of its issuance until each
dollar allocable to principal of such Certificate is distributed to 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 herein, the holders of each class of offered
certificates will be entitled to receive on each Distribution Date their
allocable share (calculated on the basis of the Ownership Percentage evidenced
by such class of certificates immediately prior to such date) of the Scheduled
Principal Distribution Amount for such Distribution Date; however, the
Unscheduled Principal Distribution Amount for each Distribution Date will be
distributable entirely in respect of the
S-58
<PAGE>
Class A certificates, until the certificate balance thereof is reduced to zero,
and will thereafter be distributable entirely in respect of the Class B
certificates. In addition, as and to the extent described herein, distributions
in respect of an Uncovered Portion of the certificate balance of any class of
Regular Certificates will be applied, to the extent of such Uncovered Portion,
in reduction of the certificate balance(s) of such class of Regular Certificates
and each other class of Regular Certificates, if any, with an earlier
alphabetical class designation, in alphabetical order of such class
designations. See "Description of the Certificates--Distributions--Priority" and
"--Distributions--Scheduled Principal Distribution Amount and Unscheduled
Principal Distribution Amount" herein. As a consequence of the foregoing, the
weighted average life of the Class A certificates will be shorter, and the
weighted average life of the Class B certificates may be longer, than would
otherwise be the case if Distributable Principal and any other amounts being
applied in reduction of the certificate balances of the Regular Certificates
were being distributed on a pro rata basis among the respective Classes thereof.
Prepayments on mortgage loans may be measured by a prepayment standard
or model. The model used in this prospectus supplement is the ["Constant
Prepayment Rate" or "CPR" model. The CPR model represents an assumed constant
annual rate of prepayment each month, expressed as a per annum percentage of the
then scheduled principal balance of the pool of mortgage loans. As used in each
of the following tables, the column headed "0%" assumes that none of the
Mortgage Loans is prepaid before maturity. The columns headed "___%", "___%",
"___%" and "___%" assume that prepayments on the Mortgage Loans are made at
those CPRs. There is no assurance, however, that prepayments of the Mortgage
Loans will conform to any level of CPR, and no representation is made that the
Mortgage Loans will prepay at the CPRs shown or at any other prepayment rate.]
The following tables indicate the percentage of the initial certificate balance
of each Class of offered certificates that would be outstanding after each of
the dates shown at various CPRs and the corresponding weighted average life of
each such Class of offered certificates. The tables have been prepared on the
basis of the following assumptions, among others: (i) scheduled monthly payments
of principal and interest on the Mortgage Loans will be timely received (with no
defaults) and will be distributed on the ___ day of each month commencing in
________ 199___; (ii) the Mortgage Rate in effect for each Mortgage Loan as of
the Cut-off Date will remain in effect (a) in the case of each Fixed Rate Loan,
to maturity and, (b) in the case of each ARM Loan, until its next Interest Rate
Adjustment Date, when a new Mortgage Rate that is to remain in effect to
maturity will be calculated reflecting the value of the related Index as of
________, 199__, subject to such Mortgage Loan's lifetime and/or periodic rate
caps and floors, if any; (iii) all Mortgage Loans accrue and pay interest on a
360/360 basis; (iv) the monthly principal and interest payment due for each
Mortgage Loan on the first Due Date following the Cut-off Date will continue to
be due (a) in the case of each Fixed Rate Loan, on each Due Date until maturity
and (b) in the case of each ARM Loan, until its next Payment Adjustment Date,
when a new payment that is to be due on each Due Date until maturity will be
calculated reflecting the appropriate Mortgage Rate and remaining amortization
term; (v) principal prepayments on the Mortgage Loans will be received on their
respective Due Dates at the respective CPRs set forth in the tables, and there
will be no Net Aggregate Prepayment Interest Shortfalls in connection therewith;
and (vi) the Mortgage Loan Seller will not be required to repurchase any
Mortgage Loan, and the Master Servicer will not exercise its option to purchase
all the Mortgage Loans and thereby cause an early termination of the trust fund.
To the extent that the Mortgage Loans have characteristics that differ from
those assumed in preparing the tables set forth below, each Class of the offered
certificates may mature earlier or later than indicated by the tables. It is
highly unlikely that the Mortgage Loans will prepay at any constant rate until
maturity or that all the Mortgage Loans will prepay at the same rate. In
addition, variations in the actual prepayment experience and the balance of the
Mortgage Loans that prepay may increase or decrease the percentages of initial
certificate balances (and weighted average lives) shown in the following tables.
Such variations may occur even if the average prepayment experience of the
Mortgage Loans were to equal any of the specified CPR percentages.
S-59
<PAGE>
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
</TABLE>
Weighted Average Life (years)(A):
(A) The weighted average life of a Class A certificate is determined by
(i) multiplying the amount of each principal distribution thereon by the number
of years from the date of issuance of the Class A certificates to the related
Distribution Date, (ii) summing the results and (iii) dividing the sum by the
aggregate amount of the reductions in the principal balance of such Class A
certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B certificates and sets forth the
percentage of the initial certificate balance of the Class B certificates that
would be outstanding after each of the dates shown at the indicated CPRs.
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS B CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
<TABLE>
<CAPTION>
Date 0% % % % %
- ---- -- - - - -
<S> <C> <C> <C> <C> <C>
Delivery Date....................... 100.0 100.0 100.0 100.0 100.0
</TABLE>
Weighted Average Life (years)(A):
(A) The weighted average life of a Class B certificate is determined by
(i) multiplying the amount of each principal distribution thereon by the number
of years from the date of issuance of the Class B certificates to the related
Distribution Date, (ii) summing the results and (iii) dividing the sum by the
aggregate amount of the reductions in the principal balance of such Class B
certificate.
[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.
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<PAGE>
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]
----------------------------------------------------------------
Distribution Dates ending % % % % %
- ------------------------- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Total Payments
</TABLE>
PRE-TAX YIELD
The pre-tax yields set forth in the preceding table were calculated by
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the Class S Certificates, would cause the discounted
present value of such assumed stream of cash flows to equal the assumed
aggregate purchase price of such Certificates and by converting such monthly
rates to corporate bond equivalent rates. Such calculation does not take into
account shortfalls in collection of interest due to prepayments (or other
liquidations) on the Mortgage Loans or the interest rates at which investors may
be able to reinvest funds received by them as distributions on the Class S
Certificates and consequently does not purport to reflect the return on any
investment in the Class S Certificates when such reinvestment rates are
considered. Such calculation does not presume receipt of any distributions in
respect of Prepayment Premiums.
The characteristics of the Mortgage Loans may differ from those assumed
in preparing the table above. There can be no assurance that the Mortgage Loans
will prepay at any of the rates shown in the table or at any other particular
rate, that the cash flows on the Class S Certificates will correspond to the
cash flow shown herein or that the aggregate purchase price of the Class S
Certificates will be as assumed. [Describe prepayment speed model] In addition,
it is unlikely that any Mortgage Loan will prepay at the specified percentages
of [Prepayment speed model] until maturity or that all of the Mortgage Loans
will prepay at the same rate. The timing of 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.]
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<PAGE>
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the offered
certificates will be used by the Depositor to purchase the Mortgage Loans and to
pay certain expenses in connection with the issuance of the Certificates.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the offered certificates, O'Melveny & Myers LLP,
New York, New York, 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 Code.
For federal income tax purposes, the Class R certificates will be the
sole class of ["residual interests" in the REMIC] [ownership interests in the
FASIT] and the Class A, Class B and Class C certificates will be the "regular
interests" in the [REMIC] [FASIT] and will be treated as debt instruments of the
[REMIC] [FASIT].
[See "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates" in the prospectus.] [See "Certain Federal
Income Tax Consequences--Federal Income Tax Consequences for FASIT Certificates"
in the prospectus.]
The Class _____ certificates [may] [will not] be treated as having been
issued with original issue discount for federal income tax purposes. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, market discount and premium, if any, for federal income
tax purposes will be based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to ___% [CPR]
[SPA]. No representation is made that the Mortgage Loans will prepay at that
rate or at any other rate. [See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Original Issue Discount" in the prospectus.]
The Class _____ certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of such a class
of certificates will be treated as holding a certificate with amortizable bond
premium will depend on such certificateholder's purchase price and the
distributions remaining to be made on such certificate at the time of its
acquisition by such certificateholder. Holders of such class of certificates
should consult their own tax advisors regarding the possibility of making an
election to amortize such premium. [See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Premium" in the prospectus.] [See "Certain Federal
Income Tax Consequences--Federal Income Tax Consequences for FASIT Certificates"
in the prospectus.]
[The offered certificates will be treated as [assets described in
Section 7701(a)(19)(C) of the Code] and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code generally in the same proportion that the
assets of the REMIC underlying such certificates would be so treated. [In
addition, the offered certificates will be "obligation(s) ... which ... [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3) (C) of the Code generally to the extent that such offered
certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. Moreover, the offered certificates will be "obligation[s] ... which
... [are] principally secured by an interest in real property" within the
meaning of Section 860G(a)(3)(C) of the Code.] [The offered certificates will
not be considered to represent an interest in "loans ... secured by an interest
in real property" within the meaning of Section 7701(a)(19)(C)(v) of the Code.]
See "Certain Federal Income
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<PAGE>
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.]
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh plans
and collective investment funds and insurance company general and separate
accounts in which such plans, annuities, accounts or arrangements are invested,
that is subject to Title I of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the Code (each, a "Plan") should
carefully review with its legal advisors whether the purchase or holding of
offered certificates could give rise to a transaction that is prohibited or is
not otherwise permitted either under ERISA or Section 4975 of the Code or
whether there exists any statutory or administrative exemption applicable
thereto. Moreover, each Plan fiduciary should determine whether an investment in
the offered certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
[The U.S. Department of Labor ("DOL") issued to Bear, Stearns & Co.
Inc. an individual prohibited transaction exemption, Prohibited Transaction
Exemption 90-33, as amended by Prohibited Transaction Exemption 97-34 (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
mortgage pools, such as the mortgage pool, and the purchase, sale and holding of
mortgage pass-through certificates, such as the Class A certificates,
underwritten by an Underwriter (as hereinafter defined), provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations", the term "Underwriter" shall include (a) Bear,
Stearns & Co. Inc., (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with Bear,
Stearns & Co. Inc., and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager with
respect to the Class A certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Class A
certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Class A certificates by a Plan must be on terms that are at
least as favorable to the Plan as they would be in an arm's-length transaction
with an unrelated party. Second, the rights and interests evidenced by the Class
A certificates must not be subordinated to the rights and interests evidenced by
other certificates of the same trust. Third, the Class A certificates at the
time of acquisition by the Plan must be rated in one of the three highest
generic rating categories by Standard & Poor's Structured Rating Group
("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff &
Phelps Credit Rating Co. ("Duff & Phelps") or Fitch IBCA, Inc. ("Fitch").
Fourth, the Trustee cannot be an affiliate of any other member of the
"Restricted Group", which consists of any Underwriter, the Depositor, the Master
Servicer, the Trustee, any sub-servicer, and any mortgagor with respect to
Mortgage Loans constituting more than 5% of the aggregate unamortized principal
balance of the Mortgage Loans as of the date of initial issuance of the Class A
certificates. Fifth, the sum of all payments made to and retained by the
Underwriter must represent not more than reasonable compensation for
underwriting the Class A certificates; the sum of all payments made to and
retained by
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the Depositor pursuant to the assignment of the Mortgage Loans to the trust fund
must represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer and any
sub-servicer must represent not more than reasonable compensation for such
person's services under the Pooling and Servicing Agreement and reimbursement of
such person's reasonable expenses in connection therewith. Sixth, the investing
Plan must be an accredited investor as defined in Rule 501(a)(1) of Regulation D
of the SEC under the Securities Act of 1933, as amended. [As amended by
Prohibited Transaction Exemption 97-34, the Exemption contains a seventh
restriction applicable to a trust with a pre-funding account; that restriction
is not applicable to the trust fund.]
Because the Class A certificates are not subordinated to any other
class of certificates, the second general condition set forth above is satisfied
with respect to such certificates. It is a condition of the issuance of the
Class A certificates that they be rated not lower than "__" by
__________________________ _____________. As of the Delivery Date, the fourth
general condition set forth above will be satisfied with respect to the Class A
certificates. A fiduciary of a Plan contemplating purchasing a Class A
certificate in the secondary market must make its own determination that, at the
time of such purchase, the Class A certificates continue to satisfy the third
and fourth general conditions set forth above. A fiduciary of a Plan
contemplating purchasing a Class A certificate, whether in the initial issuance
of such certificates or in the secondary market, must make its own determination
that the first, fifth and sixth general conditions set forth above will be
satisfied with respect to such Class A certificate.
The Exemption also requires that the trust fund meet the following
requirements:
(i) the trust fund must consist solely of assets of the type that
have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest categories of Standard &
Poor's, Moody's, Duff & Phelps or Fitch for at least one year
prior to the Plan's acquisition of Class A certificates; and
(iii) certificates in such other investment pools must have been
purchased by investors other than 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 Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b)
of the Code by reason of Sections 4975(c)(1) (A) through (D) of the Code) in
connection with (i) the direct or indirect sale, exchange or transfer of Class A
certificates in the initial issuance of Certificates between the Depositor or an
Underwriter and a Plan when the Depositor, the Underwriter, the Trustee, the
Master Servicer, a sub-servicer or a mortgagor is a Party in Interest with
respect to the investing Plan, (ii) the direct or indirect acquisition or
disposition in the secondary market of the Class A certificates by a Plan and
(iii) the holding of Class A certificates by a Plan. However, no exemption is
provided from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of
ERISA for the acquisition or holding of a Class A certificate on behalf of an
"Excluded Plan" by any person who has discretionary authority or renders
investment advice with respect to the assets of such Excluded Plan. For purposes
hereof, an Excluded Plan is a Plan sponsored by any member of the Restricted
Group.
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If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Class A certificates in the initial issuance of certificates between
the Depositor or an Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of Plan
assets in such certificates is (a) a mortgagor with respect to 5% or less of the
fair market value of the Mortgage Loans or (b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the secondary market of
Class A certificates by a Plan and (3) the holding of Class A certificates by a
Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the mortgage pool.
Before purchasing a Class A certificate, a fiduciary of a Plan should
itself confirm that (i) the Class A certificates constitute "certificates" for
purposes of the Exemption and (ii) the specific and general conditions and the
other requirements set forth in the Exemption would be satisfied. In addition to
making its own determination as to the availability of the exemptive relief
provided in the Exemption, the Plan fiduciary should consider the availability
of any other individual or class prohibited transaction exemptions. See "ERISA
Considerations" in the prospectus. A purchaser of a Class A certificate should
be aware, however, that even if the conditions specified in one or more
exemptions are satisfied, the scope of relief provided by an exemption may not
cover all acts which might be construed as prohibited transactions.]
[Because the characteristics of the Class B certificates do not meet
the requirements of the Exemption, the purchase or holding of such Certificates
by a Plan may result in prohibited transactions and the imposition of excise
taxes or civil penalties. As a result,] no transfer of a [Class B] Certificate
or any interest therein may be made to a Plan or to any person who is directly
or indirectly purchasing such [Class B] Certificate or interest therein on
behalf of, as named fiduciary of, as trustee of, or with assets of a Plan,
unless the prospective transferee (at its own expense) provides the Certificate
Registrar with a certification of facts and an opinion of counsel which
establish to the satisfaction of the Certificate Registrar that such transfer
will not result in a violation of Section 406 of ERISA or Section 4975 of the
Code or cause the Master Servicer or the Trustee to be deemed a fiduciary of
such Plan or result in the imposition of an excise tax under Section 4975 of the
Code. See "ERISA Considerations" in the prospectus.
[The Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, to define whether assets held by an insurance company general
account constitute plan assets by reason of the insurance company issuing one or
more policies to employee benefit plans. Pursuant to Section 401(c), the DOL has
proposed regulations ("401(c) Regulations") to provide guidance for the purpose
of determining, in cases where insurance policies supported by an insurer's
general account are issued to or for the benefit of a Plan on or before December
31, 1998, which general account assets continue Plan assets. Section 401(c) of
ERISA generally provides that, until the date which is 18 months after the
401(c) Regulations become final, no person shall be subject to liability under
Part 4 of Title I of ERISA (including the prohibited transaction requirements of
Sections 406 and 407 of ERISA) or Section 4975 of the Code on the basis of a
claim that the assets of an insurance company general account constitute Plan
assets, except (i) as otherwise provided by the Secretary of Labor in
regulations intended to prevent avoidance of the 401(c) Regulations, or (ii) in
an action brought by the Secretary of Labor for certain breaches of fiduciary
duty which would also constitute a violation of federal or state criminal law.
Absent further changes to the law, any assets of an insurance company general
account which support
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insurance policies issued to a Plan after December 31, 1998, or issued to Plans
on or before December 31, 1998 for which the insurance company does not comply
with the 401(c) Regulations 18 months after those regulations become final may
be treated as Plan assets. In addition, because Section 401(c) does not relate
to insurance company separate accounts, separate account assets are treated as
Plan assets of any Plan invested in such separate account. Insurance companies
contemplating the investment of general account assets in the offered
certificates should consult with their legal counsel with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the offered certificates after the date which is 18
months after the 401(c) Regulations become final.]
Any Plan fiduciary considering whether to purchase an offered
certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
Governmental plans as defined in Section 3(32) of ERISA and, if no
election has been made under Section 410(d) of the Code, church plans as defined
in Section 3(33) of ERISA are not subject to Title I of ERISA or Section 4975 of
the Code. However, such a governmental plans or church plans may be subject to a
federal, state or local law which is, to a material extent, similar to the
foregoing provisions of ERISA or the Code ("Similar Law"), and to the prohibited
transaction rules set forth in Section 503 of the Code. A fiduciary of a
governmental plan should make its own determination as to its compliance with
those requirements and the need for and the availability of any exemptive relief
under Similar Law.
The sale of certificates to a Plan is in no respect a representation by
the Depositor or Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT
[As long as the Class A certificates are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization and each Mortgage Loan is secured by a first priority lien
on a single parcel of real property upon which is located a dwelling or mixed
residential and commercial structure or a residential manufactured home, the
Class A certificates will constitute "mortgage related securities" within the
meaning of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").]
[The Class B certificates will not be "mortgage related securities" for
purposes of SMMEA. As a result, the appropriate characterization of the Class B
certificates under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase the Class B certificates,
is subject to significant interpretive uncertainties.]
[Except as to the status of the Class A certificates as "mortgage
related securities," no] [No] representation is made as to the proper
characterization of the offered certificates for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase the offered certificates under
applicable legal investment or other restrictions. All institutions whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the offered certificates constitute legal investments for them or are subject to
investment, capital or other restrictions.
See "Legal Investment" in the prospectus.
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METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter, the offered certificates
will be purchased from the Depositor by the Underwriter, an affiliate of the
Depositor, upon issuance. Proceeds to the Depositor from the sale of the offered
certificates, before deducting expenses payable by the Depositor estimated to be
approximately $_______, will be _______% of the initial aggregate certificate
balance thereof, plus accrued interest.
Distribution of the offered certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. The Underwriter may effect such
transactions by selling the offered certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter. In connection with the purchase
and sale of the offered certificates, the Underwriter may be deemed to have
received compensation from the Depositor in the form of underwriting discounts.
The Underwriter and any dealers that participate with the Underwriter in the
distribution of the offered certificates may be deemed to be underwriters and
any profit on the resale of the offered certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended (the "Securities Act").
Purchasers of the offered certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of offered certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
The Depositor also has been advised by the Underwriter that it, through
one or more of its affiliates, currently intends to make a market in the offered
certificates; however, it has no obligation to do so, any market making may be
discontinued at any time and there can be no assurance that an active public
market for the offered certificates will develop. See "Risk Factors--Limited
Liquidity" herein and "Risk Factors--Secondary Market" in the prospectus.
[If and to the extent required by applicable law or regulation, this
prospectus supplement and the prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
offered certificates in which the Underwriter acts as principal. The Underwriter
may also act as agent in such transactions. Sales may be made at negotiated
prices determined at the time of sale.]
The Depositor has agreed to indemnify the Underwriter and each person,
if any, who controls the Underwriter within the meaning of Section 15 of the
Securities Act against, or make contributions to the Underwriter and each such
controlling person with respect to, certain liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and the
Underwriter by O'Melveny & Myers LLP, New York, New York.
RATING
It is a condition to issuance that the Class A certificates be rated
not lower than "__", and the Class B certificates be rated not lower than "__",
by ________________________________.
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A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the mortgage
pool, structural and legal aspects associated with the certificates, and the
extent to which the payment stream from the mortgage pool is adequate to make
payments required under the certificates. The ratings on the offered
certificates do not, however, constitute a statement regarding the likelihood or
frequency of prepayments (whether voluntary or involuntary) on the Mortgage
Loans, [The following disclosure is applicable to Stripped Interest
Certificates... or the possibility that as a result of prepayments investors in
the Class S Certificates may realize a lower than anticipated yield or may fail
to recover fully their initial investment.]
There can be no assurance as to whether any rating agency not requested
to rate the offered certificates will nonetheless issue a rating to either or
both Classes thereof and, if so, what such rating or ratings would be. A rating
assigned to either Class of offered certificates by a rating agency that has not
been requested by the Depositor to do so may be lower than the rating assigned
thereto by ___________________________.
The ratings on the offered certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
See "Risk Factors--Limited Nature of Ratings" in the prospectus.
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INDEX OF SIGNIFICANT DEFINITIONS
360/360 basis..........................................................S-49
401(c) Regulations.....................................................S-65
Accrued Certificate Interest...........................................S-50
Advance................................................................S-53
ARM Loans..............................................................S-33
Available Distribution Amount..........................................S-10
Balloon Payment........................................................S-37
Certificate Registrar..................................................S-17
Class S Certificates...................................................S-14
Code...................................................................S-20
Constant Prepayment Rate...............................................S-59
CPR....................................................................S-59
Custodian..............................................................S-39
Cut-off Date............................................................S-6
Cut-off Date LTV Ratio..................................................S-8
Debt Service Coverage Ratio............................................S-37
Delivery Date...........................................................S-6
Depositor...............................................................S-6
Determination Date.....................................................S-47
Distributable Certificate Interest.....................................S-49
Distributable Principal................................................S-50
Distribution Date......................................................S-47
Distribution Date Statement............................................S-53
DOL....................................................................S-63
DTC.....................................................................S-7
Due Date................................................................S-7
Due Period..............................................................S-6
Duff & Phelps..........................................................S-63
Effective Net Mortgage Rate............................................S-10
ERISA..................................................................S-17
Excluded Plan..........................................................S-64
Exemption..............................................................S-64
Fitch..................................................................S-63
Fixed Rate Loans.......................................................S-33
Form 8-K...............................................................S-42
Gross Margin............................................................S-7
Index..................................................................S-33
Interest Rate Adjustment Date...........................................S-7
Master Servicer Reimbursement Rate.....................................S-53
Moody's................................................................S-63
Mortgage...............................................................S-33
Mortgage File..........................................................S-39
Mortgage Loan..........................................................S-51
Mortgage Loan Purchase Agreement.......................................S-38
Mortgage Loan Seller....................................................S-6
Mortgage Note..........................................................S-33
Mortgage Rate..........................................................S-10
Mortgage Related Securities............................................S-18
Mortgaged Property......................................................S-7
S-69
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Net Aggregate Prepayment Interest Shortfall............................S-50
Net Mortgage Rate......................................................S-49
Net Operating Income...................................................S-37
Nonrecoverable P&I Advance.............................................S-53
Ownership Percentage...................................................S-50
P&I Advance............................................................S-52
Payment Adjustment Date................................................S-34
Percentage Interest....................................................S-47
Permitted Investments..................................................S-43
Plan...................................................................S-17
Pooling and Servicing Agreement........................................S-45
Prepayment Interest Excess.............................................S-43
Prepayment Interest Shortfall..........................................S-43
Prepayment Premiums....................................................S-34
Private Certificates....................................................S-6
Purchase Price.........................................................S-40
Real Estate Assets.....................................................S-62
Real Estate Mortgage Investment Conduit................................S-62
Record Date............................................................S-47
Regular Certificates....................................................S-6
Regular Interests......................................................S-62
Related Proceeds.......................................................S-53
REMIC..................................................................S-62
REO Loan...............................................................S-51
REO Property...........................................................S-45
Residual Interests.....................................................S-62
Restricted Group.......................................................S-63
Scheduled Principal Distribution Amount................................S-50
Securities Act.........................................................S-67
Servicing Fee..........................................................S-43
Servicing Fee Rate.....................................................S-43
Similar Law............................................................S-66
SMMEA..................................................................S-18
Standard & Poor's......................................................S-63
Stated Principal Balance................................................S-9
Subordinate Certificates...............................................S-51
Uncovered Portion......................................................S-52
Underwriter.............................................................S-6
Unscheduled Principal Distribution Amount..............................S-50
Weighted Average Effective Net Mortgage Rate...........................S-49
Weighted Average Life..................................................S-14
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<PAGE>
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 Delivery Date.
S-71
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BEAR STEARNS COMMERCIAL MORTGAGE
SECURITIES INC.
$______________
CLASS A AND CLASS B
COMMERCIAL MORTGAGE PASS-THROUGH
CERTIFICATES
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 Code ("Section 42
Properties"). However, rent limitations associated therewith may adversely
affect the ability of the applicable borrowers to increase rents to maintain
such Mortgaged Properties in proper condition during periods of rapid inflation
or declining market value of such Mortgaged Properties. In addition, the income
restrictions on tenants imposed by Section 42 of the Code may reduce the number
of eligible tenants in such Mortgaged Properties and result in a reduction in
occupancy rates applicable thereto. Furthermore, some eligible tenants may not
find any differences in rents between the Section 42 Properties and other
multifamily rental properties in the same area to be a sufficient economic
incentive to reside at a Section 42 Property, which may have fewer amenities or
otherwise be less attractive as a residence. All of these conditions and events
may increase the possibility that a borrower may be unable to meet its
obligations under its Mortgage Loan.
RISKS PARTICULAR TO COOPERATIVELY-OWNED APARTMENT BUILDINGS.
Generally, a tenant-shareholder of a cooperative corporation must make
a monthly maintenance payment to the cooperative corporation that owns the
subject apartment building representing such tenant-shareholder's pro rata share
of the corporation's payments in respect of the Mortgage Loan secured by, and
all real property taxes, maintenance expenses and other capital and ordinary
expenses with respect to, such property, less any other income that the
cooperative corporation may realize. Adverse economic conditions, either local
regional or national, may adversely affect tenant-shareholders' ability to make
required maintenance payments, either because such adverse economic conditions
have impaired the individual financial conditions of such tenant-shareholders or
their ability to sub-let the subject apartments. To the extent that a large
number of tenant-shareholders in a cooperatively-owned apartment building rely
on sub-letting their apartments to make maintenance payments, the lender on any
mortgage loan secured by such building will be subject to all the risks that it
would have in connection with lending on the security of a multifamily rental
property. See "--Risks Particular to Multifamily Rental Properties" above. In
addition, if in connection with any cooperative conversion of an apartment
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building, the sponsor holds the shares allocated to a large number of the
apartment units, any lender secured by a mortgage on such building will be
subject to a risk associated with such sponsor's creditworthiness.
S-75
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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 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
S-76
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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. Neither the Depositor nor any other person will have any
obligation to provide refinancing for any of the Mortgage Loans.
In a typical cooperative conversion plan, the owner of a rental
apartment building contracts to sell the building to a newly formed cooperative
corporation. Shares are allocated to each apartment unit by the owner or
sponsor, and the current tenants have a certain period to subscribe at prices
discounted from the prices to be offered to the public after such period. As
part of the consideration for the sale, the owner or sponsor receives all the
unsold shares of the cooperative corporation. The sponsor usually also controls
the corporation's board of directors and management for a limited period of
time.
Each purchaser of shares in the cooperative corporation generally
enters into a long-term proprietary lease which provides the shareholder with
the right to occupy a particular apartment unit. However, many cooperative
conversion plans are "non-eviction" plans. Under a non-eviction plan, a tenant
at the time of conversion who chooses not to purchase shares is entitled to
reside in the unit as a subtenant from the owner of the shares allocated to such
apartment unit. Any applicable rent control or rent stabilization laws would
continue to be applicable to such subtenancy, and the subtenant may be entitled
to renew its lease for an indefinite number of times, with continued protection
from rent increases above those permitted by any applicable rent control and
rent stabilization laws. The shareholder is responsible for the maintenance
payments to the cooperative without regard to its receipt or non-receipt of rent
from the subtenant, which may be lower than maintenance payments on the unit.
Newly-formed cooperative corporations typically have the greatest concentration
of non-tenant shareholders.
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Version 1: Multifamily Properties
[The following is to be inserted in the prospectus supplement immediately
following "Risk Factors--Borrower Default; Nonrecourse Mortgage Loans":]
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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<PAGE>
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--Borrower Default; Nonrecourse Mortgage Loans":]
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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<PAGE>
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--Borrower Default; Nonrecourse Mortgage Loans":]
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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<PAGE>
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: (i) hotels and motels may be operated
pursuant to franchise, management and operating agreements that may be
terminable by the franchiser, the manager or the operator; (ii) the
transferability of any operating, liquor and other licenses to the entity
acquiring such hotel or motel (either through purchase or foreclosure) is
subject to local law requirements; (iii) it may be difficult to terminate an
ineffective operator of a hotel or motel property subsequent to a foreclosure of
such property; and (iv) future occupancy rates may be adversely affected by,
among other factors, any negative perception of a hotel or motel based upon its
historical reputation.
Hotel and motel properties may be operated pursuant to franchise
agreements. The continuation of franchises is typically subject to specified
operating standards and other terms and conditions. The franchiser periodically
inspects its licensed properties to confirm adherence to its operating
standards. The failure of the hotel or motel property to maintain such standards
or adhere to such other terms and conditions could result in the loss or
cancellation of the franchise license. It is possible that the franchiser could
condition the continuation of a franchise license on the completion of capital
improvements or the making of certain capital expenditures that the related
borrower determines are too expensive or are otherwise unwarranted in light of
general economic conditions or the operating results or prospects of the
affected hotels. In that event, the related borrower may elect to allow the
franchise license to lapse. In any case, if the franchise is terminated, the
related borrower may seek to obtain a suitable replacement franchise or to
operate such hotel or motel property independently of a franchise license. The
loss of a franchise license could have a material adverse effect upon the
operations or the underlying value of the hotel or motel covered by the
franchise because of the loss of associated name recognition, marketing support
and centralized reservation systems provided by the franchiser.
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<PAGE>
Version 4: Hotel and Motel Properties
[The following is to be inserted in the prospectus immediately following
"Description of the Trust Funds--Mortgage Loans--General":]
MORTGAGE LOANS SECURED BY HOTEL AND MOTEL PROPERTIES.
Hotel and motel properties may include full service hotels, resort
hotels with many amenities, limited service hotels, hotels and motels associated
with national franchise chains, hotels and motels associated with regional
franchise chains and hotels that are not affiliated with any franchise chain but
may have their own brand identity. Various factors, including location, quality
and franchise affiliation affect the economic performance of a hotel or motel.
Adverse economic conditions, either local, regional or national, may limit the
amount that can be charged for a room and may result in a reduction in occupancy
levels. The construction of competing hotels and motels can have similar
effects. To meet competition in the industry and to maintain economic values,
continuing expenditures must be made for modernizing, refurbishing, and
maintaining existing facilities prior to the expiration of their anticipated
useful lives. Because hotel and motel rooms generally are rented for short
periods of time, hotels and motels tend to respond more quickly to adverse
economic conditions and competition than do other commercial properties.
Furthermore, the financial strength and capabilities of the owner and operator
of a hotel or motel may have an impact on quality of service and economic
performance. Additionally, the lodging industry, in certain locations, is
seasonal in nature and this seasonality can be expected to cause periodic
fluctuations in room and other revenues, occupancy levels, room rates and
operating expenses. The demand for particular accommodations may also be
affected by changes in travel patterns caused by changes in energy prices,
strikes, relocation of highways, the construction of additional highways and
other factors.
The viability of any hotel or motel property that is part of a national
or regional hotel or motel chain depends in part on the continued existence and
financial strength of the franchiser, the public perception of the franchise
service mark and the duration of the franchise licensing agreement. The
transferability of franchise license agreements may be restricted and, in the
event of a foreclosure on any such hotel or motel property, the consent of the
franchiser for the continued use the franchise license by the hotel or motel
property would be required. Conversely, a lender may be unable to remove a
franchiser that it desires to replace following a foreclosure. Further, in the
event of a foreclosure on a hotel or motel property, it is unlikely that the
purchaser of such hotel or motel property would be entitled to the rights under
any associated liquor license, and such purchaser would be required to apply in
its own right for such license. There can be no assurance that a new license
could be obtained or that it could be obtained promptly.
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<PAGE>
Version 4: Hotel and Motel Properties
[The following is to be inserted in the prospectus supplement immediately
following "Risk Factors--Borrower Default; Nonrecourse Mortgage Loans":]
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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<PAGE>
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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<PAGE>
Version 5: Health Care-Related Facilities
[The following is to be inserted in the prospectus immediately following
"Description of the Trust Funds--Mortgage Loans--General":]
MORTGAGE LOANS SECURED BY HEALTH CARE-RELATED PROPERTIES.
The Mortgaged Properties may include Senior Housing, Assisted Living
Facilities, Skilled Nursing Facilities and Acute Care Facilities (any of the
foregoing, "Health Care-Related Properties"). "Senior Housing" generally
consists of apartment-style facilities, the residents of which are ambulatory
and handle their own affairs. "Assisted Living Facilities" are typically single
or double room occupancy, dormitory-style housing facilities which provide food
service, cleaning and some personal care and assistance with certain daily
routines. "Skilled Nursing Facilities" provide services to post trauma and frail
residents with limited mobility who require sub-acute medical treatment. "Acute
Care Facilities" generally consist of hospital and other facilities providing
short-term, acute medical care services.
Certain types of Health Care-Related Properties, particularly Acute
Care Facilities and Skilled Nursing Facilities, typically receive a substantial
portion of their revenues from government reimbursement programs, primarily
Medicaid and Medicare. Medicaid and Medicare reimbursements are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings, policy interpretations, delays by fiscal intermediaries and government
funding restrictions. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers, and
there exist various proposals for national health care reform that could further
limit those payments. Accordingly, there can be no assurance that payments under
government reimbursement programs will, in the future, be sufficient to fully
reimburse the cost of caring for program beneficiaries. If such payments are
insufficient, net operating income of those Health Care-Related Properties that
receive revenues from those sources, and consequently the ability of the related
borrowers to meet their obligations under any Mortgage Loans secured thereby,
could be adversely affected.
Moreover, Health Care-Related Properties that provide medical care are
generally subject to federal and state laws that relate to the adequacy of
medical care, distribution of pharmaceuticals, rates and charges, equipment,
personnel, operating policies and additions to facilities and services. In
addition, those facilities are subject to periodic inspection by governmental
authorities to determine compliance with various standards necessary to
continued licensing under state law and continued participation in the Medicaid
and Medicare reimbursement programs. Providers of assisted living services are
also subject to state licensing requirements in certain states. The failure of
an operator to maintain or renew any required license or regulatory approval
could prevent it from continuing operations at a Health Care-Related Property
or, if applicable, prohibit it from participating in government reimbursement
programs. Furthermore, under applicable federal and state laws, Medicare and
Medicaid reimbursements are generally not permitted to be made to any person
other than the provider who actually furnished the related medical goods and
services. Accordingly, in the event of foreclosure, neither the Trustee nor a
subsequent lessee or operator of any Health Care-Related Property securing a
defaulted Mortgage Loan would generally be entitled to obtain from federal or
state governments any outstanding reimbursement payments relating to services
furnished prior to such foreclosure. Any of the aforementioned circumstances may
adversely affect the ability of the related borrowers to meet their Mortgage
Loan obligations.
Government regulation applying specifically to Acute Care Facilities,
Skilled Nursing Facilities and Assisted Living Facilities includes health
planning legislation, enacted by most states, intended, at least in part, to
regulate the supply of nursing beds. The most common method of control is the
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requirement that a state authority first make a determination of need, evidenced
by its issuance of a Certificate of Need ("CON"), before a long-term care
provider can establish a new facility, add beds to an existing facility or, in
some states, take certain other actions (for example, acquire major medical
equipment, make major capital expenditures, add services, refinance long-term
debt, or transfer ownership of a facility). States also regulate nursing bed
supply in other ways. For example, some states have imposed moratoria on the
licensing of new beds, or on the certification of new Medicaid beds, or have
discouraged the construction of new nursing facilities by limiting Medicaid
reimbursements allocable to the cost of new construction and equipment. In
general, a CON is site specific and operator specific; it cannot be transferred
from one site to another, or to another operator, without the approval of the
appropriate state agency. Accordingly, if a Mortgage Loan secured by a lien on
such a Health Care-Related Property were foreclosed upon, the purchaser at
foreclosure might be required to obtain a new CON or an appropriate exemption.
In addition, compliance by a purchaser with applicable regulations may in any
case require the engagement of a new operator and the issuance of a new
operating license. Upon a foreclosure, a state regulatory agency may be willing
to expedite any necessary 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--Borrower Default; Nonrecourse Mortgage Loans":]
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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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.
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Version 6: Industrial Properties
[The following is to be inserted in the prospectus supplement immediately
following "Risk Factors--Borrower Default; Nonrecourse Mortgage Loans":]
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.
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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.
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<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-95
<PAGE>
Version 7: Warehouse, Mini-Warehouse and Self-Storage Facilities
[The following is to be inserted in the prospectus supplement immediately
following "Risk Factors--Borrower Default; Nonrecourse Mortgage Loans":]
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-96
<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.
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<PAGE>
Version 8: Mobile Home Parks and Recreational Vehicle Parks
[The following is to be inserted in the prospectus immediately following
"Description of the Trust Funds--General":]
MORTGAGE LOANS SECURED BY MOBILE HOME PARKS AND RECREATIONAL VEHICLE PARKS.
Mobile home parks consist of land that is divided into "spaces" or
"homesites" that are primarily leased to mobile home owners. Accordingly, the
related Mortgage Loans will be secured by mortgage liens on the real estate (or
a leasehold interest therein) upon which the mobile homes are situated, but not
the mobile homes themselves. The mobile home owner often invests in
site-specific improvements such as carports, steps, fencing, skirts around the
base of the mobile home, and landscaping. The park owner typically provides
private roads within the park, common facilities and, in many cases, utilities.
Park amenities may include driveways, visitor parking, recreational vehicle and
pleasure boat storage, laundry facilities, community rooms, swimming pools,
tennis courts, security systems and healthclubs. Due to relocation costs and, in
some cases, demand for mobile home spaces, the value of a mobile home in place
in a park is generally higher, and can be significantly higher, than the value
of the same unit not placed in a park. As a result, a well-operated mobile home
park that has achieved stabilized occupancy is typically able to maintain
occupancy at or near that level. For the same reason, a lender that provided
financing for the mobile home of a tenant who defaulted in his or her space rent
generally has an incentive to keep rental payments current until the mobile home
can be resold in place, rather than to allow the unit to be removed from the
park.
Recreational vehicle parks lease spaces primarily or exclusively for
motor homes, travel trailers and portable truck campers primarily designed for
recreational, camping or travel use. In general, parks that lease recreational
vehicle spaces can be viewed as having a less stable tenant population than
parks occupied predominantly by mobile homes. However, it is not unusual for the
owner of a recreational vehicle to leave the vehicle at the park on a year-round
basis or to use the vehicle as low cost housing and reside in the park
indefinitely.
Mortgage Loans secured by liens on mobile home parks and recreational
vehicle parks are affected by factors not associated with loans secured by liens
on other types of income-producing real estate. The successful operation of such
types of properties will generally depend upon the number of competing parks, as
well as upon other factors such as its age, appearance, reputation, the ability
of management to provide adequate maintenance and insurance, and the types of
facilities and services it provides. Mobile home parks also compete against
alternative forms of residential housing, including multifamily rental
properties, cooperatively-owned apartment buildings, condominium complexes and
single-family residential developments. Recreational vehicle parks also compete
against alternative forms of recreation and short-term lodging (for example,
staying at a hotel at the beach). Mobile home parks and recreational vehicle
parks are "special purpose" properties that cannot be readily converted to
general residential, retail or office use. Thus, if the operation of a mobile
home park or recreational vehicle park becomes unprofitable due to competition,
age of the improvements or other factors such that the borrower becomes unable
to meet its obligations on the related Mortgage Loan, the liquidation value of
the park may be substantially less, relative to the amount owing on the Mortgage
Loan, than would be the case if the park were readily adaptable to other uses.
Certain states regulate the relationship of a mobile home park owner
and its tenants. Commonly, these laws require a written lease, good cause for
eviction, disclosure of fees, and notification to residents of changed land use,
while prohibiting unreasonable rules, retaliatory evictions, and restrictions on
a resident's choice of unit vendors. Mobile home park owners have been the
subject of suits under
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<PAGE>
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.
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<PAGE>
Version 8: Mobile Home Parks and Recreational Vehicle Parks
[The following is to be inserted in the prospectus supplement immediately
following "Risk Factors--Borrower Default; Nonrecourse Mortgage Loans":]
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.
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<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.
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<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.
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<PAGE>
Version 9: Casino Properties
[The following is to be inserted in the prospectus supplement immediately
following "Risk Factors--Borrower Default; Nonrecourse Mortgage Loans":]
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.
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<PAGE>
PROSPECTUS
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC.
(DEPOSITOR)
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.
- --------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 12 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 DATE OF THIS PROSPECTUS IS SEPTEMBER 17, 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 find the definitions of capitalized terms that are used in this
prospectus under the caption "Index of Significant Definitions" beginning on
page 154 in this prospectus.
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.
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<PAGE>
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 CERTAIN 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. 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 such 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 such offer would be unlawful. The delivery of this prospectus to you at
any time does not
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<PAGE>
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 Depository Trust Company ("DTC"), then unless otherwise
provided in the related prospectus supplement, such reports will be sent on
behalf of the related trust fund to a nominee of DTC as the registered holder of
such offered certificates. Conveyance of notices and other communications by DTC
to its participating organizations, and directly or indirectly through such
participating organizations to the beneficial owners of the applicable offered
certificates, will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time. We
will file or cause to be filed with the SEC such periodic reports with respect
to each trust fund as are required under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations of the SEC
thereunder.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTS AND PROSPECTUS SUPPLEMENT 2
WHERE YOU CAN FIND MORE INFORMATION 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE 3
REPORTS 3
SUMMARY OF PROSPECTUS 10
RISK FACTORS 12
Secondary Market 12
Limited Assets 13
Prepayments; Average Life of Certificates; Yields 14
Limited Nature of Ratings 16
Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans--General 16
Risks Particular to Multifamily Rental Properties 18
Risks Particular to Cooperatively-Owned Apartment Buildings. 20
Risks Particular to Retail Properties 20
Balloon Payments; Borrower Default 21
Credit Support Limitations 22
Leases and Rents 22
Environmental Risks 23
Special Hazard Losses 24
ERISA Considerations 24
Certain Federal Tax Considerations Regarding Residual Certificates 25
Certain Federal Tax Considerations Regarding Original Issue Discount 25
Book-Entry Registration 26
Delinquent Mortgage Loans 27
DESCRIPTION OF THE TRUST FUNDS 27
General 27
Mortgage Loans 28
General 28
Mortgage Loans Secured by Multifamily Rental Properties 29
Mortgage Loans Secured by Cooperatively-Owned Apartment Buildings 30
Mortgage Loans Secured by Retail Properties 31
Default and Loss Considerations with Respect to the Mortgage Loans 32
Payment Provisions of the Mortgage Loans 34
Mortgage Loan Information in Prospectus Supplements 35
MBS 36
Certificate Accounts 38
Credit Support 38
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Cash Flow Agreements 38
YIELD AND MATURITY CONSIDERATIONS 39
General 39
Pass-Through Rate 39
Payment Delays 39
Certain Shortfalls in Collections of Interest 40
Yield and Prepayment Considerations 40
Weighted Average Life and Maturity 42
Controlled Amortization Classes and Companion Classes 43
Other Factors Affecting Yield, Weighted Average Life and Maturity 45
Balloon Payments; Extensions of Maturity 45
Negative Amortization 45
Foreclosures and Payment Plans 46
Losses and Shortfalls on the Mortgage Assets 46
Additional Certificate Amortization 47
Optional Early Termination 47
THE DEPOSITOR 48
USE OF PROCEEDS 48
DESCRIPTION OF THE CERTIFICATES 48
General 48
Distributions 49
Distributions of Interest on the Certificates 50
Distributions of Principal on the Certificates 51
Distributions on the Certificates in Respect of Prepayment Premiums or in Respect of 52
Equity Participations
Allocation of Losses and Shortfalls 52
Advances in Respect of Delinquencies 53
Reports to Certificateholders 55
Voting Rights 57
Termination 57
Book-Entry Registration and Definitive Certificates 58
DESCRIPTION OF THE POOLING AGREEMENTS 60
General 60
Assignment of Mortgage Loans; Repurchases 61
Representations and Warranties; Repurchases 62
Collection and Other Servicing Procedures 63
Sub-Servicers 64
Special Servicers 64
Certificate Account 65
General 65
Deposits 65
Withdrawals 67
Modifications, Waivers and Amendments of Mortgage Loans 69
Realization Upon Defaulted Mortgage Loans 70
Hazard Insurance Policies 73
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Due-on-Sale and Due-on-Encumbrance Provisions 74
Servicing Compensation and Payment of Expenses 74
Evidence as to Compliance 75
Certain Matters Regarding the Master Servicer and the Depositor 76
Events of Default 77
Rights Upon Event of Default 78
Amendment 79
List of Certificateholders 80
The Trustee 81
Duties of the Trustee 82
Certain Matters Regarding the Trustee 82
Resignation and Removal of the Trustee 83
DESCRIPTION OF CREDIT SUPPORT 83
General 83
Subordinate Certificates 84
Cross-Support Provisions 85
Insurance or Guarantees with Respect to Mortgage Loans 85
Letter of Credit 85
Certificate Insurance and Surety Bonds 85
Reserve Funds 86
Credit Support with Respect to MBS 86
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS 87
General 87
Types of Mortgage Instruments 87
Leases and Rents 88
Personal Property 88
Foreclosure 89
General 89
Foreclosure procedures vary from state to state 89
Judicial Foreclosure 89
Equitable Limitations on Enforceability of Certain Provisions 89
Non-Judicial Foreclosure/Power of Sale 90
Public Sale 90
Rights of Redemption 92
Anti-Deficiency Legislation 92
Leasehold Risks 93
Cooperative Shares 94
Bankruptcy Laws 94
Environmental Risks 99
Due-on-Sale and Due-on-Encumbrance Provisions 101
Subordinate Financing 101
Default Interest and Limitations on Prepayments 102
Adjustable Rate Loans 102
Applicability of Usury Laws 102
Soldiers' and Sailors' Civil Relief Act of 1940 103
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Type of Mortgaged Property 103
Americans with Disabilities Act 104
Forfeitures in Drug and RICO Proceedings 104
CERTAIN FEDERAL INCOME TAX CONSEQUENCES 105
Federal Income Tax Consequences for REMIC Certificates 105
General 105
Status of REMIC Certificates 106
Qualification as a REMIC 107
Taxation of Regular Certificates 110
General 110
Original Issue Discount 110
Acquisition Premium 114
Variable Rate Regular Certificates 114
Deferred Interest 116
Market Discount 116
Premium 118
Election to Treat All Interest Under the Constant Yield Method 118
Sale or Exchange of Regular Certificates 119
Treatment of Losses 119
Taxation of Residual Certificates 121
Taxation of REMIC Income 121
Basis and Losses 122
Treatment of Certain Items of REMIC Income and Expense 123
Original Issue Discount and Premium 124
Deferred Interest 124
Market Discount 124
Premium 124
Limitations on Offset or Exemption of REMIC Income 125
Tax-Related Restrictions on Transfer of Residual Certificates 126
Disqualified Organizations 126
Noneconomic Residual Interests 128
Foreign Investors 129
Sale or Exchange of a Residual Certificate 129
Mark to Market Regulations 131
Taxes That May Be Imposed on the REMIC Pool 131
Prohibited Transactions 131
Contributions to the REMIC Pool After the Startup Day 132
Net Income from Foreclosure Property 132
Liquidation of the REMIC Pool 132
Administrative Matters 133
Limitations on Deduction of Certain Expenses 133
Taxation of Certain Foreign Investors 134
Regular Certificates 134
Residual Certificates 134
Backup Withholding 135
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Reporting Requirements 135
Federal Income Tax Consequences For Certificates as to Which No REMIC Election 136
Is Made
Standard Certificates 136
General 136
Tax Status 137
Premium and Discount 138
Premium 138
Original Issue Discount 138
Market Discount 139
Recharacterization of Servicing Fees. 139
Sale or Exchange of Standard Certificates 140
Stripped Certificates 140
General 140
Status of Stripped Certificates 142
Taxation of Stripped Certificates 142
Original Issue Discount 143
Sale or Exchange of Stripped Certificates 143
Purchase of More Than One Class of Stripped Certificates 143
Possible Alternative Characterizations 144
Federal Income Tax Consequences for FASIT Certificates 144
Reporting Requirements and Backup Withholding 144
Taxation of Certain Foreign Investors 145
STATE AND OTHER TAX CONSIDERATIONS 145
ERISA CONSIDERATIONS 145
General 145
Plan Asset Regulations 146
Administrative Exemptions 148
Unrelated Business Taxable Income; Residual Certificates 148
LEGAL INVESTMENT 148
METHOD OF DISTRIBUTION 151
LEGAL MATTERS 153
FINANCIAL INFORMATION 153
RATINGS 153
INDEX OF SIGNIFICANT DEFINITIONS 154
</TABLE>
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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;
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(3) the identity and attributes of
each class within a series of
certificates, including whether
(and to 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.
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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 such 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.
SECONDARY MARKET.
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 thereof, 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
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response to an upward or downward movement in prevailing interest rates may not
necessarily equal the relative change in price for such offered certificate in
response to an equal but opposite movement in such rates. Accordingly, you may
only be able to sell your certificates at a discount from the price 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 certain 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. Such 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 such information may adversely affect the
liquidity of your certificates, even if a secondary market does develop for
them.
LIMITED ASSETS.
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
such 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.
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PREPAYMENTS; AVERAGE LIFE OF CERTIFICATES; YIELDS.
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:
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 principal payments of the underlying mortgage loans, and on
whether we or the servicer purchases the underlying mortgage loans.
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, if and 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
certain classes of Stripped Interest Certificates, you might fail to recover its
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
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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, 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 such date, to
a disproportionately large share (which, in some cases, may be all) of such
prepayments, or to a disproportionately small share (which, in some cases, may
be none) of such prepayments. A class of certificates that entitles 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 certain events (e.g., the retirement of
one or more classes of certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such Mortgage
Loans).
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 such 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
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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.
LIMITED NATURE OF RATINGS.
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;
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 such
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 such actuarial analysis will accurately
reflect future experience, or that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of Mortgage Loans. 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."
FACTORS AFFECTING DELINQUENCY, FORECLOSURE AND LOSS OF THE MORTGAGE LOANS
-GENERAL.
MORTGAGE LOANS ARE SUSCEPTIBLE TO NUMEROUS RISKS RESULTING 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
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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 such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants. Furthermore, the value of any
Mortgaged Property may be adversely affected by risks generally incident to
interests in real property, including 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;
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
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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.
Such lessors or developers could have lower rentals, lower operating costs, more
favorable locations or better facilities. While a borrower under a Mortgaged
Property may renovate, refurbish or expand the Mortgaged Property to maintain it
and remain competitive, such renovation, refurbishment or expansion may itself
entail significant risk. Increased competition could adversely affect income
from and market value of the Mortgaged Properties. In addition, the business
conducted at each Mortgaged Property may face competition from other industries
and industry segments.
(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 such Mortgage Loan, recourse in the event of borrower
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the borrower and its
assets generally, we can give you no assurance that enforcement of such recourse
provisions will be practicable, or that the assets of the borrower will be
sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property.
(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.
RISKS PARTICULAR TO MULTIFAMILY RENTAL PROPERTIES.
CERTAIN 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;
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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.
Certain multifamily rental properties are eligible to receive low-income
housing tax credits pursuant to Section 42 of the Code ("Section 42
Properties"). However, Section 42 properties are subject to certain restrictions
that may affect a borrower's ability to meet its obligations under a Mortgage
Loan. This includes the following:
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 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.
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RISKS PARTICULAR COOPERATIVELY-OWNED APARTMENT BUILDINGS
MORTGAGE LNDERS 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.
RISKS PARTICULAR TO RETAIL PROPERTIES.
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:
o adverse changes in consumer spending patterns;
o local competitive conditions (such as the supply of retail space or the
existence or construction of new competitive shopping centers or shopping
malls);
o 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);
o the quality and management philosophy of management;
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o the attractiveness of the properties and the surrounding neighborhood to
tenants and their customers;
o the public perception of the safety of customers (at shopping malls and
shopping centers, for example);
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 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.
BALLOON PAYMENTS; BORROWER DEFAULT.
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 Loan 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 certain residential
properties);
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.
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Neither we nor any of our affiliates will be required to refinance any
Mortgage Loan.
CREDIT SUPPORT LIMITATIONS.
CREDIT SUPPORT FOR A SERIES OF CERTIFICATES MAY COVER SOME 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 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 such 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 certain 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".
LEASES AND RENTS.
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
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lender is entitled to collect rents. Some state laws may require that the lender
take possession of the Mortgaged Property and obtain a judicial appointment of a
receiver before becoming entitled to collect the rents. In addition, if
bankruptcy or similar proceedings are commenced by or in respect of the
borrower, the lender's ability to collect the rents may be adversely affected.
For more detailed information regarding leases and rents, you should review
the section in this prospectus titled "Certain Legal Aspects of Mortgage
Loans--Leases and Rents".
ENVIRONMENTAL RISKS.
OWNERS AND OPERATORS OF A MORTGAGED PROPERTY AND MORTGAGE LENDERS MAY
BECOME LIABLE FOR THE COSTS OF ENVIRONMENTAL CLEANUP. Under the laws of certain
states, contamination of real property may give rise to a lien on the property
to assure the costs of cleanup. In several states, such a lien has priority over
an existing mortgage lien on 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 ("CERCLA"). 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.
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For more detailed information regarding environmental risks, you should
review the section in this prospectus titled "Certain Legal Aspects of Mortgage
Loans--Environmental Risks".
SPECIAL HAZARD LOSSES.
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 certain 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".
ERISA CONSIDERATIONS.
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, certain other retirement plans and arrangements,
including individual retirement accounts and Keogh plans, are subject to Section
4975 of the Code. Due to the complexity of regulations that govern such plans,
if you are subject to ERISA or Section 4975 of the Code you are urged to consult
your own counsel regarding the consequences under ERISA or the 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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CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING RESIDUAL CERTIFICATES.
YOU MAY BE SUBJECT TO ADDITIONAL TAX LIABILITIES IF YOU ACQUIRE RESIDUAL
CERTIFICATES. 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 certain circumstances, all) of your share of the REMIC taxable income
may be treated as "excess inclusion" income to you which
(i) generally, will not be subject to offset by losses from other
activities,
(ii) for a tax-exempt holder, will be treated as unrelated business
taxable income and
(iii) for a foreign holder, will not qualify for exemption from
withholding tax.
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 certain restrictions on transfer. Because of the
special tax treatment of Residual Certificates, the taxable income arising in a
given year on a Residual Certificate will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pre-tax yield. Therefore, the after-tax
yield on the Residual Certificate that you receive may be significantly less
than that of a corporate bond or stripped instrument having similar cash flow
characteristics.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING ORIGINAL ISSUE DISCOUNT.
YOU MAY BE ALLOCATED TAXABLE INCOME IN EXCESS OF DISTRIBUTIONS RECEIVED IF
YOU ACQUIRE CERTIFICATES WITH "ORIGINAL ISSUE DISCOUNT." Accrual Certificates
will be, and certain of the other classes of certificates of a series may be,
issued with "original issue discount" for federal income tax purposes. This will
generally result in recognition of some taxable income to you in advance of the
receipt of cash attributable to such income.
For more detailed information regarding "original issue discount" you
should review the section in this prospectus titled "Certain Federal Income Tax
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Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates".
BOOK-ENTRY REGISTRATION.
IF CERTIFICATES ARE ISSUED IN BOOK-ENTRY FORM, CERTIFICATEHOLDERS OF
BOOK-ENTRY CERTIFICATES WILL ONLY BE ABLE TO EXERCISE THEIR RIGHTS INDIRECTLY
THROUGH DTC AND 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 ("Participants"). In
addition, your access to information regarding the book-entry certificates may
be limited. Conveyance of notices and other communications by DTC to its
Participants, and directly and indirectly through the Participants 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".
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DELINQUENT MORTGAGE LOANS.
THE YIELD ON YOUR CERTIFICATES MAY BE ADVERSELY AFFECTED BECAUSE THE
RELATED TRUST FUND MAY INCLUDE DELINQUENT MORTGAGE LOANS AND 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 such 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 such 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.
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".
DESCRIPTION OF THE TRUST FUNDS
GENERAL
The primary assets of each trust fund will consist of the following:
(i) various types of multifamily or commercial mortgage loans or
participations in those mortgage loans (the "Mortgage Loans");
(ii) pass-through certificates or other mortgage-backed securities ("MBS")
that evidence interests in, or that are secured by pledges of, one or more of
various types of multifamily or commercial mortgage loans or
(iii) a combination of the foregoing (collectively, "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
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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 (the "Mortgage Notes") secured by liens on fee or
leasehold estates in properties (the "Mortgaged Properties") consisting of the
following:
(i) residential properties consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or other residential structures ("Multifamily Properties") and mobile
home parks,
(ii) commercial properties consisting of office buildings, retail
facilities related to the sale of goods and products and facilities related to
providing entertainment, recreation or personal services, hotels and motels,
casinos, health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, auto parks, golf courses, arenas and restaurants (or
cooperatively owned units therein) and
(iii) mixed use properties (that is, any combination of the foregoing) and
unimproved land (the "Commercial Properties").
The Multifamily Properties may include mixed commercial and residential
structures, apartment buildings owned by private cooperative housing
corporations ("Cooperatives"), and shares of the Cooperative allocable to one or
more dwelling units occupied by non-owner tenants or to vacant units. Such liens
may be created by mortgages, deeds of trust and similar security instruments
(the "Mortgages"). Each Mortgage will create a first priority or junior priority
mortgage lien on a borrower's fee estate in a Mortgaged Property. If a Mortgage
creates a lien on a borrower's leasehold estate in a property, then, unless
otherwise specified in the related prospectus supplement, the term of any
leasehold will exceed the term of the Mortgage Note by at least two years.
Unless otherwise specified in the related prospectus supplement, each Mortgage
Loan will have been originated by a person (the "Originator") other than the 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
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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 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
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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 such 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.
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 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 the
cooperative corporation depends primarily on its ability to refinance the
mortgage loan.
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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 certain 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 such properties,
o the ability of tenants to meet their lease obligations,
o the possibility of a significant tenant becoming bankrupt or insolvent,
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
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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.
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 such other assets, if any, that were pledged to
secure repayment of the Mortgage Loan.
Lenders typically look to the Debt Service Coverage Ratio of a loan secured
by income-producing property as an important factor in evaluating the risk of
default on such a loan. Unless otherwise defined in the related prospectus
supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan at any given
time is the ratio of (i) the Net Operating Income derived from the related
Mortgaged Property for a twelve-month period to (ii) the annualized scheduled
payments on the Mortgage Loan and any other loans senior thereto that are
secured by the related Mortgaged Property. Unless otherwise defined in the
related prospectus supplement, "Net Operating Income" means, for any
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given period, the total operating revenues derived from a Mortgaged Property
during such period, minus the total operating expenses incurred in respect of
such Mortgaged Property during such period other than (i) non-cash items such as
depreciation and amortization, (ii) capital expenditures and (iii) debt service
on the related Mortgage Loan or on any other loans that are secured by such
Mortgaged Property. The Net Operating Income of a Mortgaged Property will
fluctuate over time and may or may not be sufficient to cover debt service on
the related Mortgage Loan at any given time. As the primary source of the
operating revenues of a non-owner occupied, income-producing property, rental
income (and, with respect to a Mortgage Loan secured by a Cooperative apartment
building, maintenance payments from tenant-stockholders of a Cooperative) may be
affected by the condition of the applicable real estate market and/or the
economy of the area in which the Mortgaged Property is located or the industry
that it services. In addition, properties typically leased, occupied or used on
a short-term basis, such as certain healthcare-related facilities, hotels and
motels, and mini-warehouse and self-storage facilities, tend to be affected more
rapidly by changes in market or business conditions than do properties typically
leased for longer periods, such as warehouses, retail stores, office buildings
and industrial plants. Commercial Properties may be owner-occupied or leased to
a small number of tenants. Thus, the Net Operating Income of such a Mortgaged
Property may depend substantially on the financial condition of the borrower or
a tenant, and Mortgage Loans secured by liens on such properties may pose
greater risks than loans secured by liens on Multifamily Properties or on
multi-tenant Commercial Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Mortgage Loan. As may
be further described in the related prospectus supplement, in some cases leases
of Mortgaged Properties may provide that the lessee, rather than the borrower/
landlord, is responsible for payment of operating expenses ("Net Leases").
However, the existence of "net of expense" provisions will result in stable Net
Operating Income to the borrower/landlord only to the extent that the lessee is
able to absorb operating expense increases while continuing to make rent
payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a factor
in evaluating risk of loss if a property must be liquidated following a default.
Unless otherwise defined in the related prospectus supplement, the
"Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of (i) the then outstanding principal balance of the
Mortgage Loan and any other loans senior thereto that are secured by the related
Mortgaged Property to (ii) the Value of the related Mortgaged Property. The
"Value" of a Mortgaged Property is generally its fair market value determined in
an appraisal obtained by the Originator at the origination of such loan. The
lower the Loan-to-Value Ratio, the greater the percentage of the borrower's
equity in a Mortgaged Property, and thus (a) the greater the incentive of the
borrower to perform under the terms of the related Mortgage Loan (in order to
protect such equity)
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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 (recent resale value of
comparable properties at the date of the appraisal), the cost replacement method
(the cost of replacing the property at such date), the income capitalization
method (a projection of value based upon the property's projected net cash
flow), or upon a selection from or interpolation of the values derived from 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 Certain Mortgage Loans and Mortgaged
Properties" and "--Balloon Payments; Borrower Default".
PAYMENT PROVISIONS OF THE MORTGAGE LOANS. Unless otherwise specified in the
related prospectus supplement, all of the Mortgage Loans will have the following
characteristics:
(i) have had individual principal balances at origination of not less
than $25,000;
(ii) have had original terms to maturity of not more than 40 years; and
(iii) provide for scheduled payments of principal, interest or both, to be
made on specified dates ("Due Dates") that occur monthly, quarterly,
semi-annually or annually.
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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 certain 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 such prohibition, a "Lock-out Period" and its date of expiration, a
"Lock-out Date") and/or require payment of a premium or a yield
maintenance penalty (a "Prepayment Premium") in connection with certain
prepayments, in each case as described in the related prospectus
supplement.
A Mortgage Loan may also contain a provision that entitles the lender to a
share of appreciation of the related Mortgaged Property, or profits realized
from the operation or disposition of such Mortgaged Property or the benefit, if
any, resulting from the refinancing of the Mortgage Loan (any such provision, an
"Equity Participation"), as described in the related prospectus supplement. If
holders of any class or classes of offered certificates of a series will be
entitled to all or a portion of an Equity Participation in addition to payments
of interest on and/or principal of such offered certificates, the related
prospectus supplement will describe the Equity Participation and the method or
methods by which distributions in respect thereof will be made to such holders.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS. Each prospectus
supplement will contain certain information pertaining to the Mortgage Loans in
the related trust fund, which will generally be current as of a date specified
in the related prospectus supplement. To the extent then applicable and
specifically known to us, the prospectus supplement will include the following:
(i) the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Mortgage Loans,
(ii) the type or types of property that provide security for repayment of
the Mortgage Loans,
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(iii) the earliest and latest origination date and maturity date of the
Mortgage Loans,
(iv) the original and remaining terms to maturity of the Mortgage Loans, or
the respective ranges thereof, and the weighted average original and remaining
terms to maturity of the Mortgage Loans,
(v) the original Loan-to-Value Ratios of the Mortgage Loans, or the range
thereof, and the weighted average original Loan-to-Value Ratio of the Mortgage
Loans,
(vi) the Mortgage Rates borne by the Mortgage Loans, or range thereof, and
the weighted average Mortgage Rate borne by the Mortgage Loans,
(vii) with respect to Mortgage Loans with adjustable Mortgage Rates ("ARM
Loans"), the index or indices upon which such adjustments are based, the
adjustment dates, the range of gross margins and the weighted average gross
margin, and any limits on Mortgage Rate adjustments at the time of any
adjustment and over the life of the ARM Loan,
(viii) information regarding the payment characteristics of the Mortgage
Loans, including, without limitation, balloon payment and other amortization
provisions, Lock-out Periods and Prepayment Premiums,
(ix) the Debt Service Coverage Ratios of the Mortgage Loans (either at
origination or as of a more recent date), or the range thereof, and the weighted
average of such Debt Service Coverage Ratios, and
(x) the geographic distribution of the Mortgaged Properties on a
state-by-state basis.
In appropriate cases, the related prospectus supplement will also contain
certain information available to 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 (i) private (that is, not guaranteed or insured by the
United States or any agency or instrumentality thereof) mortgage pass-through
certificates or other mortgage-backed securities or (ii) certificates insured or
guaranteed by FHLMC,
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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
(an "MBS Agreement"). The issuer of the MBS (the "MBS Issuer") and/or the
servicer of the underlying mortgage loans (the "MBS Servicer") will have entered
into the MBS Agreement, generally with a trustee (the "MBS Trustee") or, in the
alternative, with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of certificates described 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 assets underlying the MBS after a certain date or under other
circumstances specified in the related prospectus supplement.
Reserve funds, subordination or other credit support similar to that
described for the certificates under "Description of Credit Support" 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:
(i) the aggregate approximate initial and outstanding principal amount
and type of the MBS to be included in the trust fund, (ii) the original and
remaining term to stated maturity of the MBS, if applicable,
(iii) the pass-through or bond rate of the MBS or the formula for
determining those rates,
(iv) the payment characteristics of the MBS,
(v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
(vi) a description of the credit support, if any,
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(vii) the circumstances under which the related underlying mortgage loans,
or the MBS themselves, may be purchased prior to their maturity,
(viii) the terms on which mortgage loans may be substituted for those
originally underlying the MBS,
(ix) the type of mortgage loans underlying the MBS and, to the extent
available to 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
(x) the characteristics of any cash flow agreements that relate to the
MBS.
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 such prospectus supplement, deposit all payments and
collections received or advanced with respect to the Mortgage Assets and other
assets in the trust fund. A certificate account may be maintained as an interest
bearing or a non-interest bearing account, and funds held a certificate account
may be held as cash or invested in certain obligations acceptable to each rating
agency rating one or more classes of the related series of offered certificates.
CREDIT SUPPORT
If so provided in the prospectus supplement for a series of certificates,
partial or full protection against certain defaults and losses on the Mortgage
Assets in the related trust fund may be provided to one or more classes of
certificates of that series in the form of subordination of one or more other
classes of certificates of such series or by one or more other types of credit
support arrangements. 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
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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 such agreement, will be
described in the prospectus supplement for a series of certificates.
YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on any offered certificate will depend on the price paid by the
certificateholder, the pass-through rate of the certificate and the amount and
timing of distributions on the certificate. The following discussion
contemplates a trust fund that consists solely of Mortgage Loans. While the
characteristics and behavior of mortgage loans underlying an MBS can generally
be expected to have the same effect on the yield to maturity and/or weighted
average life of a class of certificates as will the characteristics and behavior
of comparable Mortgage Loans, the effect may differ due to the payment
characteristics of the MBS. If a trust fund includes MBS, the related prospectus
supplement will discuss the effect that the MBS payment characteristics may have
on the yield to maturity and weighted average lives of the offered certificates
of the related series.
PASS-THROUGH RATE
The certificates of any class within a series may have a fixed, variable or
adjustable pass-through rate, which may or may not be based upon the interest
rates borne by the Mortgage Loans in the related trust fund. The prospectus
supplement with respect to any series of certificates will specify the
pass-through rate for each class of offered certificates of such series or, in
the case of a class of offered certificates with a variable or adjustable
pass-through rate the 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 such 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.
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CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full or in part is made on a Mortgage Loan,
the borrower is generally charged interest 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 during the related Due Period. Unless otherwise specified in the
prospectus supplement for a series of certificates, a "Due Period" is a
specified time period generally corresponding in length to the time period
between Distribution Dates, and all scheduled payments on the Mortgage Loans in
the related trust fund that are due during a given Due Period will, to the
extent received by a specified date (the "Determination Date") or otherwise
advanced by the related master servicer or other specified person, be
distributed to the holders of the certificates of such series on the next
succeeding Distribution Date. Consequently, if a prepayment on any Mortgage Loan
is distributable to certificateholders on a particular Distribution Date, but
such prepayment is not accompanied by interest to the Due Date for such Mortgage
Loan in the related Due Period, then the interest charged to the borrower (net
of servicing and administrative fees) may be less (such shortfall, a "Prepayment
Interest Shortfall") than the corresponding amount of interest accrued and
otherwise payable on the certificates of the related series. If and to the
extent that any 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,
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casualties or condemnations affecting the Mortgaged Properties, or purchases of
Mortgage Loans out of the related trust fund). Because the rate of principal
prepayments on the Mortgage Loans in any trust fund will depend on future events
and a variety of factors (as described more fully below), no assurance can be
given as to such rate.
The extent to which the yield to maturity of a class of offered
certificates of any series may vary from the anticipated yield will depend upon
the degree to which they are purchased at a discount or premium and when, and to
what degree, payments of principal on the Mortgage Loans in the related trust
fund are in turn distributed on such certificates (or, in the case of a class of
Stripped Interest Certificates, result in the reduction of the Notional Amount
thereof). 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 such Mortgage Loans could result in an
actual yield to you that is lower than the anticipated yield. In addition, if
purchase an offered certificate at a discount (or premium), 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 such date, to a disproportionately
large share (which, in some cases, may be all) of such prepayments, or to a
disproportionately small share (which, in some cases, may be none) of such
prepayments. As and to the extent described in the related prospectus
supplement, the respective entitlements of the various classes of certificates
of any series to receive distributions in respect of payments (and, in
particular, prepayments) of principal of the Mortgage Loans in the related trust
fund may vary based on the occurrence of certain events (e.g., the retirement of
one or more classes of certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such Mortgage
Loans).
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or all
of the Mortgage Assets in the related trust fund or (ii) equal the certificate
balances of one or more of the other classes of certificates of the same series.
Accordingly, the yield on 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 such classes of certificates, as the case may be.
Consistent with the foregoing, if a class of certificates of any series
consists of Stripped Interest Certificates or Stripped Principal Certificates, a
lower than anticipated
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rate of principal prepayments on the Mortgage Loans in the related trust fund
will negatively affect the yield to investors in Stripped Principal
Certificates, and a higher than anticipated rate of principal prepayments on
such Mortgage Loans will negatively affect the yield to investors in Stripped
Interest Certificates. 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 quality of management of the Mortgaged Properties, the servicing of
the Mortgage Loans, possible changes in tax laws and other opportunities for
investment. In addition, the rate of principal payments on the Mortgage Loans in
any trust fund may be affected by the existence of Lock-out Periods and
requirements that principal prepayments be accompanied by Prepayment Premiums,
and by the extent to which such provisions may be practicably enforced.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. Even in the case of ARM Loans, as prevailing market interest rates
decline, and without regard to whether the Mortgage Rates on such ARM Loans
decline in a manner consistent therewith, the related borrowers may have an
increased incentive to refinance for purposes of either (i) converting to a
fixed rate loan and thereby "locking in" such rate or (ii) taking advantage of a
different index, margin or rate cap or floor on another adjustable rate mortgage
loan.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits. 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 such
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
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The rate at which principal payments are received on the Mortgage Loans in
any trust fund will affect the ultimate maturity and the weighted average life
of one or more classes of the certificates of such series. Weighted average life
refers to the average amount of time that will elapse from the date of issuance
of an instrument until each dollar allocable as principal of such instrument is
repaid to the investor.
The weighted average life and maturity of a class of certificates of any
series will be influenced by the rate at which principal on the related Mortgage
Loans, whether in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes voluntary prepayments, liquidations due
to default and purchases of Mortgage Loans out of the related trust fund) is
paid to that class. Prepayment rates on loans are commonly measured relative to
a prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model.
CPR represents an assumed constant rate of prepayment each month (expressed as
an annual percentage) relative to the then outstanding principal balance of a
pool of loans for the life of such loans. SPA represents an assumed variable
rate of prepayment each month (expressed as an annual percentage) relative to
the then outstanding principal balance of a pool of loans, with different
prepayment assumptions often expressed as percentages of SPA. For example, a
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month, and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of loans. Moreover, the
CPR and SPA models were developed based upon historical prepayment experience
for single-family loans. Thus, it is unlikely that the prepayment experience of
the Mortgage Loans included in any trust fund will conform to any particular
level of CPR or SPA.
The prospectus supplement with respect to each series of certificates will
contain tables, if applicable, setting forth the projected weighted average life
of each class of offered certificates of such series. 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 such other rates specified in the
prospectus supplement. The tables and assumptions will illustrate the
sensitivity of the weighted average lives of the certificates to various assumed
prepayment rates and will not be intended to predict, or to provide information
that will enable investors to predict, the actual weighted average lives of the
certificates.
CONTROLLED AMORTIZATION CLASSES AND COMPANION CLASSES
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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 (a "PAC") or a Targeted
Amortization Class (a "TAC"). In general, a PAC has a "prepayment collar" (that
is, a range of prepayment rates that can be sustained without disruption) that
determines the principal cash flow of such certificates. A prepayment collar is
not static, and may expand or contract after the issuance of the PAC depending
on the actual prepayment experience for the underlying Mortgage Loans.
Distributions of principal on a PAC would be made in accordance with the
specified schedule so long as prepayments on the underlying Mortgage Loans
remain at a relatively constant rate within the prepayment collar and, as
described below, Companion Classes exist to absorb "excesses" or "shortfalls" in
principal payments on the underlying Mortgage Loans. If the rate of prepayment
on the underlying Mortgage Loans from time to time falls outside the prepayment
collar, or fluctuates significantly within the prepayment collar, especially for
any extended period of time, such an event may have material consequences in
respect of the anticipated weighted average life and maturity for a PAC. A TAC
is structured so that principal distributions generally will be payable 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 TAC 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 such
class ("call risk") if the rate of prepayment is relatively fast; while a class
of certificates that entitles the holders thereof to a disproportionately
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small share of the prepayments on the Mortgage Loans in the related trust fund
enhances the risk of an extended average life of such class ("extension risk")
if the rate of prepayment is relatively slow. Thus, as and to the extent
described in the related prospectus supplement, a Companion Class absorbs some
(but not all) of the "call risk" and/or "extension risk" that would otherwise
belong to the related Controlled Amortization Class if all payments of principal
of the Mortgage Loans in the related trust fund were allocated on a pro rata
basis.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
BALLOON PAYMENTS; EXTENSIONS OF MATURITY. Some or all of the Mortgage Loans
included in a particular trust fund may require that balloon payments be made at
maturity. Because the ability of a borrower to make a balloon payment typically
will depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that Mortgage Loans that require balloon
payments may default at maturity, or that the maturity of such a Mortgage Loan
may be extended in connection with a workout. In the case of defaults, recovery
of proceeds may be delayed by, among other things, bankruptcy of the borrower or
adverse conditions in the market where the property is located. In order to
minimize losses on defaulted Mortgage Loans, the master servicer or a special
servicer, to the extent and under the circumstances set forth 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 such negative
amortization would be allocated or that would
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bear the effects of a slower rate of amortization on such Mortgage Loans) may
increase as a result of such feature.
Negative amortization also may occur in respect of an ARM Loan that limits
the amount by which its scheduled payment may adjust in response to a change in
its Mortgage Rate, provides that its scheduled payment will adjust less
frequently than its Mortgage Rate or provides for constant scheduled payments
notwithstanding adjustments to its Mortgage Rate. Conversely, during a period of
declining interest rates, the scheduled payment on 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 such 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 (i) whether the offered certificate was
purchased at a premium or a discount and (ii) the extent to which the payment
characteristics of those Mortgage Loans delay or accelerate the distributions of
principal on such Certificate (or, in the case of a Stripped Interest
Certificate, delay or accelerate the amortization of the notional amount
thereof). 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 such 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 the effects thereof.
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The amount of any losses or shortfalls in collections on the Mortgage
Assets in any trust fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of credit support) will be allocated among
the respective classes of certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related prospectus
supplement. As described in the related prospectus supplement, such allocations
may be effected by a reduction in the entitlements to interest and/or
certificate balances of one or more such classes of certificates, or by
establishing a priority of payments among 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 such series, may provide for
distributions of principal. Distributions may be provided from (i) amounts
attributable to interest accrued but not currently distributable on one or more
classes of Accrual Certificates, (ii) Excess Funds or (iii) any other amounts
described in the related prospectus supplement. Unless otherwise specified in
the related prospectus supplement, "Excess Funds" will, in general, represent
that portion of the amounts distributable in respect of the certificates of any
series on any Distribution Date that represent (i) interest received or advanced
on the Mortgage Assets in the related trust fund that is in excess of the
interest currently accrued on the certificates, or (ii) Prepayment Premiums,
payments from Equity Participations or any other amounts received on the
Mortgage Assets in the related trust fund that do not constitute interest or
principal.
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
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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
Bear Stearns Commercial Mortgage Securities Inc., is a Delaware corporation
organized on April 20, 1987 is the Depositor. The Depositor's primary business
is to acquire Mortgage 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. The Depositor does not have, nor does the Depositor
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.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each series of certificates will represent the entire beneficial ownership
interest in the trust fund created pursuant to the related pooling agreement. As
described in the related prospectus supplement, the certificates of each series,
including the offered certificates of such series, may consist of one or more
classes of certificates that, among other things:
(i) provide for the accrual of interest thereon at a fixed, variable or
adjustable rate;
(ii) are senior or subordinate to one or more other classes of
certificates in entitlement to certain distributions on the certificates;
(iii) are Stripped Principal Certificates;
(iv) are Stripped Interest Certificates;
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(v) provide for distributions of interest or principal that commence
only after the occurrence of certain events, such as the retirement of one or
more other classes of certificates of such series;
(vi) provide for distributions of principal to be made, from time to time
or for designated periods, at a rate that is faster (and, in some cases,
substantially faster) or slower (and, in some cases, substantially slower) than
the rate at which payments or other collections of principal are received on the
Mortgage Assets in the related trust fund;
(vii) provide for distributions of principal to be made, subject to
available funds, based on a specified principal payment schedule or other
methodology; or
(viii) provide for distributions based on collections on the Mortgage
Assets in the related trust fund attributable to Prepayment Premiums and Equity
Participations.
Each class of offered certificates of a series will be issued in minimum
denominations corresponding to the principal balances or, in case of certain
classes of Stripped Interest Certificates or Residual Certificates, notional
amounts or percentage interests, specified in the related prospectus supplement.
As provided in the related prospectus supplement, one or more classes of offered
certificates of any series may be issued in fully registered, definitive form or
may be offered in book-entry format through the facilities of The Depository
Trust Company ("DTC"). The offered certificates of each series (if issued as
definitive certificates) may be transferred or exchanged, subject to any
restrictions on transfer described in the related prospectus supplement, at the
location specified in the related prospectus supplement, without the payment of
any service charges, other than any tax or other governmental charge payable in
connection with such transfer. Interests in a class of book-entry certificates
will be transferred on the book-entry records of DTC and its participating
organizations.
DISTRIBUTIONS
Distributions on the certificates of each series will be made by or on
behalf of the related trustee or master servicer on each Distribution Date as
specified in the related prospectus supplement from the Available Distribution
Amount for such series and such Distribution Date. Unless otherwise provided in
the related prospectus supplement, the "Available Distribution Amount" for any
series of certificates and any Distribution Date will refer to the total of all
payments or other collections (or advances in lieu thereof) on, under or in
respect of the Mortgage Assets and any other assets included in the related
trust fund that are available for distribution to the holders of certificates of
such series on such date. The particular components of the Available
Distribution Amount for any series on each Distribution Date will be more
specifically described in the related prospectus supplement.
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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 such certificates are registered at the close of business on the
last business day of the month preceding the month in which the applicable
Distribution Date occurs (the "Record Date"). The amount of each distribution
will be determined as of the close of business on the date (the "Determination
Date") specified in the related prospectus supplement. All distributions with
respect to each class of certificates on each Distribution Date will be
allocated pro rata among the outstanding certificates in such class. Payments
will be made either by wire transfer in immediately available funds to the
account of a certificateholder at a bank or other entity having appropriate
facilities therefor. 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 certain classes of
Stripped Principal Certificates and certain classes of Residual Certificates
that have no pass-through rate) may have a different pass-through rate, which in
each case may be fixed, variable or adjustable. The related prospectus
supplement will specify the pass-through rate or, in the case of a variable or
adjustable pass-through rate, the method for determining the pass-through rate,
for each class. Unless otherwise specified in the related prospectus supplement,
interest on the certificates of each series will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
Distributions of interest in respect of any class of certificates (other
than certain classes of 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 such Distribution Date,
subject to the sufficiency of the portion of the Available Distribution Amount
allocable to that class on such Distribution Date. Prior to the time interest is
distributable on any class of Accrual Certificates, the amount of Accrued
Certificate Interest otherwise distributable on that class will be added to the
certificate balance of that class on each Distribution Date. With respect to
each class of certificates (other than certain classes of Stripped Interest
Certificates and certain classes of Residual Certificates), the "Accrued
Certificate Interest" for each Distribution Date will be equal to
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interest at the applicable pass-through rate accrued for a specified period
(generally equal to the time period between Distribution Dates) on the
outstanding certificate balance of such class of certificates immediately prior
to such Distribution Date. Unless otherwise provided in the related prospectus
supplement, the Accrued Certificate Interest for each Distribution Date on a
class of Stripped Interest Certificates will be similarly calculated except that
it will accrue on a notional amount that is either (i) based on the principal
balances of some or all of the Mortgage Assets in the related trust fund or (ii)
equal to the certificate balances of one or more other classes of certificates
of the same series. Reference to a notional amount with respect to a class of
Stripped Interest Certificates is solely for convenience in making certain
calculations and does not represent the right to receive any distributions of
principal. If so specified in the related prospectus supplement, the amount of
Accrued Certificate Interest that is otherwise distributable on (or, in the case
of Accrual Certificates, that may otherwise be added to the certificate balance
of 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--Certain Shortfalls in Collections of
Interest", exceed the amount of any sums (including, if and to the extent
specified in the related prospectus supplement, all or a portion of the master
servicer's servicing compensation) that are applied to offset the amount of such
shortfalls. The particular manner in which shortfalls will be allocated among
some or all of the classes of certificates of that series will be specified in
the related prospectus supplement. The related prospectus supplement will also
describe the extent to which the amount of Accrued Certificate Interest that is
otherwise distributable on (or, in the case of Accrual Certificates, that may
otherwise be added to the certificate balance of) a class of offered
certificates may be reduced as a result of any other contingencies, including
delinquencies, losses and deferred interest on or in respect of the Mortgage
Assets in the related trust fund. Unless otherwise provided in the related
prospectus supplement, any reduction in the amount of Accrued Certificate
Interest otherwise distributable on a class of certificates by reason of the
allocation to such class of a portion of any deferred interest on or in respect
of the Mortgage Assets in the related trust fund will result in a corresponding
increase in the certificate balance of that class.
DISTRIBUTIONS OF PRINCIPAL ON THE CERTIFICATES
Each class of certificates of each series (other than certain classes of
Stripped Interest Certificates and certain classes of Residual Certificates)
will have a "certificate balance" which, at any time, will equal the then
maximum amount that the holders of certificates of such class will be entitled
to receive in respect of principal out of the future cash flow on the Mortgage
Assets and other assets included in the related trust fund. The outstanding
certificate balance of a class of certificates will be reduced by distributions
of principal made from time
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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 such date, whether or not received. The initial certificate balance of
each class of a series of certificates will be specified in the related
prospectus supplement. As and to the extent described in the related prospectus
supplement, distributions of principal with respect to a series of certificates
will be made on each Distribution Date to the holders of the class or classes of
certificates of such series 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 certain events, such as the retirement of one or more other
classes of certificates of the same series, or may be made at a rate that is
slower (and, in some cases, substantially slower) than the rate at which
payments or other collections of principal are received on the Mortgage Assets
in the related trust fund. Distributions of principal with respect to one or
more classes of certificates (each such class, a "Controlled Amortization
Class") may be made, subject to available funds, based on a specified principal
payment schedule. Distributions of principal with respect to one or more classes
of certificates (each such class, a "Companion Class") may be contingent on the
specified principal payment schedule for a Controlled Amortization Class of the
same series and the rate at which payments and other collections of principal on
the Mortgage Assets in the related trust fund are received. Unless otherwise
specified in the related prospectus supplement, distributions of principal of
any class of offered certificates will be made on a pro rata basis among all of
the certificates of 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
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certificates of the related series in the priority and manner, and subject to
the limitations, specified in the related prospectus supplement. As described in
the related prospectus supplement, such allocations may be effected by a
reduction in the entitlements to interest and/or certificate balances of one or
more 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 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
such 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 such 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 such certificate account on such
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 such surety bond,
will be set forth in the related prospectus supplement.
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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 statement (a "Distribution Date Statement") that, unless otherwise
provided in the related prospectus supplement, will set forth, among other
things, in each case to the extent applicable:
(i) the amount of distribution to holders of the class of offered
certificates that was applied to reduce the certificate balance of those
certificates;
(ii) the amount of distribution to holders of the class of offered
certificates that is allocable to Accrued Certificate Interest;
(iii) the amount, if any, of distribution to holders of that class of
offered certificates that is allocable to (A) Prepayment Premiums and (B)
payments on account of Equity Participations;
(iv) the amount, if any, by which the distribution is less than the
amounts to which holders of a class of offered certificates are entitled;
(v) if the related trust fund includes Mortgage Loans, the aggregate
amount of advances included in the distribution;
(vi) if the related trust fund includes Mortgage Loans, the amount of
servicing compensation received by the related master servicer (and, if payable
directly out of the related trust fund, by any special servicer and any
sub-servicer) and other customary information as the reporting party deems
necessary or desirable, or that a certificateholder reasonably requests, to
enable certificateholders to prepare their tax returns;
(vii) information regarding the aggregate principal balance of the related
Mortgage Assets on or about such Distribution Date;
(viii) if the related trust fund includes Mortgage Loans, information
regarding the number and aggregate principal balance of 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);
(ix) 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 related trust fund must be received in order to be
distributed on a particular Distribution Date.);
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(x) the certificate balance or Notional Amount, as the case may be, of
each class of certificates (including any class of certificates not offered
hereby) at the close of business on 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 such certificate balance or Notional Amount due to the allocation of any
negative amortization in respect of the related Mortgage Assets and any increase
in the certificate balance of a class of Accrual Certificates, if any, in the
event that Accrued Certificate Interest has been added to such balance;
(xi) 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;
(xii) 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;
(xiii) if the related trust fund includes one or more instruments of credit
support, such as a letter of credit, an insurance policy and/or a surety bond,
the amount of coverage under each instrument as of the close of business on the
Distribution Date; and
(xiv) to the extent not otherwise reflected through the information
furnished pursuant to subclauses (x) and (xiii) above, the amount of credit
support being afforded by any classes of subordinate certificates.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per minimum denomination
of the relevant class of offered certificates or per a specified portion of such
minimum denomination. The prospectus supplement for each series of certificates
may describe additional information to be included in reports to the holders of
the offered certificates of 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 (i)-(iii) above. The information will be
aggregated for that calendar year or the applicable portion of that calendar
year during which such 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 Code as are from time to time in force.
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".
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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 certain 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 certain
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 (i) 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 (ii) 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.
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
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related trust fund, or of a sufficient portion of the Mortgage Assets to retire
such 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 Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic computerized book-entry
changes in their accounts, thereby eliminating the need for physical movement of
securities certificates. "Direct Participants", which maintain accounts with
DTC, include securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. DTC is owned by a
number of its Direct Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the DTC system also is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and its Participants are
on file with 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 such
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.
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
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of the book-entry certificates; DTC's records reflect only the identity of the
Direct Participants to whose accounts such certificates are credited, which may
or may not be the certificate owners. The Participants will remain responsible
for keeping account of their holdings on behalf of their customers.
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 such 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, the
Depositor or any trustee or master servicer), subject to any statutory or
regulatory requirements as may be in effect from time to time. Under a
book-entry system, you may receive payments after the related Distribution Date.
Unless otherwise provided in the related prospectus supplement, the only
"certificateholder" (as such term is used in the related pooling agreement) will
be the nominee of DTC, and 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 such 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
(i) 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 (ii) 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
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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
depositor, the trustee, the master servicer and, in some cases, a special
servicer appointed as of the date of the pooling agreement. However, a pooling
agreement may include a mortgage asset seller as a party, and a pooling
agreement that relates to a trust fund that consists solely of MBS may not
include the master servicer or other servicer as a party. All parties to each
pooling agreement under which certificates of a series are issued will be
identified in the related prospectus supplement. If so specified in the related
prospectus supplement, 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 certain
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 certain provisions that may appear in a pooling
agreement under which certificates that evidence interests in Mortgage Loans
will be issued. The prospectus supplement for a series of certificates will
describe any provision of the related pooling agreement that materially differs
from the description 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 such 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.
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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 such property; the Mortgage Rate and, if applicable, the applicable
index, gross margin, adjustment date and any rate cap information; the original
and remaining term to maturity; the original amortization term; and the original
and outstanding principal balance.
With respect to each Mortgage Loan to be included in a trust fund, the
Depositor will deliver (or cause to be delivered) to the related trustee (or to
a custodian appointed by the trustee) certain loan documents. 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 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
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missing or defective loan documentation, will have the option, exercisable upon
certain conditions and/or within a specified period after initial issuance of
such series of certificates, to replace 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 such certified copy.
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, certain representations
and warranties covering, by way of example:
(i) the accuracy of the information set forth for such Mortgage Loan on
the schedule of Mortgage Loans appearing as an exhibit to the related pooling
agreement;
(ii) the enforceability of the related Mortgage Note and Mortgage and the
existence of title insurance insuring the lien priority of the related Mortgage;
(iii) the Warranting Party's title to the Mortgage Loan and the authority
of the Warranting Party to sell the Mortgage Loan; and
(iv) the payment status of the Mortgage Loan.
It is expected that in most cases the Warranting Party will be the mortgage
asset seller. However, the Warranting Party may also be an affiliate of the
mortgage asset seller, the 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.
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
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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 certain 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 such procedures are consistent with (i) the terms of
the related pooling agreement and any related instrument of credit support
included in the trust fund, (ii) applicable law and (iii) the servicing standard
specified in the related pooling agreement and prospectus supplement.
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;
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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 such 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 such 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
certain expenditures which it makes, generally to the same extent the master
servicer would be reimbursed under a pooling agreement.
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
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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 such 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 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):
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(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, including
any default interest collected, in each case net of any portion retained by the
master servicer or any special servicer as its servicing compensation or as
compensation to the trustee;
(iii) all proceeds received under any hazard, title or other insurance
policy that provides coverage with respect to a Mortgaged Property or the
related Mortgage Loan or in connection with the full or partial condemnation of
a Mortgaged Property (other than proceeds applied to the restoration of the
property or released to the related borrower in accordance with the customary
servicing practices of the master servicer (or, if applicable, a special
servicer) and/or the terms and conditions of the related Mortgage)
(collectively, "Insurance and Condemnation Proceeds") and all other amounts
received and retained in connection with the liquidation of defaulted Mortgage
Loans or property acquired in respect thereof, by foreclosure or otherwise
("Liquidation Proceeds"), together with the net operating income (less
reasonable reserves for future expenses) derived from the operation of any
Mortgaged Properties acquired by the trust fund through foreclosure or
otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes credit support for the related series of certificates as described
under "Description of Credit Support";
(v) any advances made as described under "Description of the
Certificates--Advances in Respect of Delinquencies";
(vi) any amounts paid under any cash flow agreement, as described under
"Description of the trust funds--Cash Flow Agreements";
(vii) all proceeds of the purchase of any Mortgage Loan, or property
acquired in respect thereof, by 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");
(viii) any amounts paid by the master servicer to cover Prepayment Interest
Shortfalls arising out of the prepayment of Mortgage Loans as described under
"--Servicing Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to the master servicer or a special servicer, any
payments on account of
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modification or assumption fees, late payment charges, Prepayment Premiums or
Equity Participations with respect to the Mortgage Loans;
(x) all payments required to be deposited in the certificate account
with respect to any deductible clause in any blanket insurance policy described
under "--Hazard Insurance Policies";
(xi) any amount required to be deposited by the master servicer or the
trustee in connection with losses realized on investments for the benefit of the
master servicer or the trustee, as the case may be, of funds held in the
certificate account; and
(xii) any other amounts required to be deposited in the certificate
account as provided in the related pooling agreement and described in the
related prospectus supplement.
WITHDRAWALS. Unless otherwise provided in the related pooling agreement and
described in the related prospectus supplement, the master servicer, trustee or
special servicer may make withdrawals from the certificate account for each
trust fund that includes Mortgage Loans for any of the following purposes:
(i) to make distributions to you on each Distribution Date;
(ii) to pay the master servicer, the trustee or a special servicer any
servicing fees not previously retained thereby, such payment to be made out of
payments on the particular Mortgage Loans as to which such fees were earned;
(iii) to reimburse the master servicer, a special servicer, the trustee or
any other specified person for any unreimbursed amounts advanced by it as
described under "Description of the Certificates--Advances in Respect of
Delinquencies", such reimbursement to be made out of amounts received that were
identified and applied by the master servicer or a special servicer, as
applicable, as late collections of interest on and principal of the particular
Mortgage Loans with respect to which the advances were made or out of amounts
drawn under any instrument of credit support with respect to those Mortgage
Loans;
(iv) to reimburse the master servicer, the trustee or a special servicer
for unpaid servicing fees earned by it and certain unreimbursed servicing
expenses incurred by it with respect to Mortgage Loans in the trust fund and
properties acquired in respect thereof, such reimbursement to be made out of
amounts that represent Liquidation Proceeds and Insurance and Condemnation
Proceeds collected on the particular Mortgage Loans and properties, and net
income collected on the particular properties, with respect to which their fees
were earned or their expenses were incurred or out of amounts drawn under any
instrument of credit support with respect to such Mortgage Loans and properties;
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(v) to reimburse the master servicer, a special servicer, the trustee or
other specified person for any advances described in clause (iii) above made by
it and/or any servicing expenses referred to in clause (iv) above incurred by it
that, in the good faith judgment of the master servicer, special servicer,
trustee or other specified person, as applicable, will not be recoverable from
the amounts described in clauses (iii) and (iv), respectively, such
reimbursement to be made from amounts collected on other Mortgage Loans in the
same trust fund or, if and to the extent so provided by the related pooling
agreement and described in the related prospectus supplement, only from that
portion of amounts collected on such other Mortgage Loans that is otherwise
distributable on one or more classes of subordinate certificates of the related
series;
(vi) if and to the extent described in the related prospectus supplement,
to pay the master servicer, a special servicer, the trustee or any other
specified person interest accrued on the advances described in clause (iii)
above made by it and the servicing expenses described in clause (iv) above
incurred by it while such remain outstanding and unreimbursed;
(vii) to pay for costs and expenses incurred by the trust fund for
environmental site assessments performed with respect to Mortgaged Properties
that constitute security for defaulted Mortgage Loans, and for any containment,
clean-up or remediation of hazardous wastes and materials present on such
Mortgaged Properties, as described under "--Realization Upon Defaulted Mortgage
Loans";
(viii) to reimburse the master servicer, the special servicer, the
Depositor, or any of their respective directors, officers, employees and agents,
as the case may be, for certain expenses, costs and liabilities incurred
thereby, as and to the extent described under "--Certain Matters Regarding the
master servicer and the Depositor";
(ix) if and to the extent described in the related prospectus supplement,
to pay the fees of trustee;
(x) to reimburse the trustee or any of its directors, officers, employees
and agents, as the case may be, for certain expenses, costs and liabilities
incurred thereby, as and to the extent described under "--Certain Matters
Regarding the trustee";
(xi) if and to the extent described in the related prospectus supplement,
to pay the fees of any provider of credit support;
(xii) if and to the extent described in the related prospectus supplement,
to reimburse prior draws on any instrument of credit support;
(xiii) to pay the master servicer, a special servicer or the trustee, as
appropriate, interest and investment income earned in respect of amounts held in
the certificate account as additional compensation;
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(xiv) to pay (generally from related income) for costs incurred in
connection with the operation, management and maintenance of any Mortgaged
Property acquired by the trust fund by foreclosure or otherwise;
(xv) if one or more elections have been made to treat the trust fund or
designated portions thereof as a REMIC, to pay any federal, state or local taxes
imposed on the trust fund or its assets or transactions, as and to the extent
described under "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates--Taxes That May Be Imposed on the REMIC
Pool";
(xvi) to pay for the cost of an independent appraiser or other expert in
real estate matters retained to determine a fair sale price for a defaulted
Mortgage Loan or a property acquired in respect thereof in connection with the
liquidation of such Mortgage Loan or property;
(xvii) to pay for the cost of various opinions of counsel obtained pursuant
to the related pooling agreement for the benefit of certificateholders;
(xviii) to make any other withdrawals permitted by the related pooling
agreement and described in the related prospectus supplement; and
(xix) to clear and terminate the certificate account upon the termination
of the trust fund.
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:
(i) affect the amount or timing of any scheduled payments of principal or
interest on the Mortgage Loan;
(ii) in the judgment of the master servicer, materially impair the security
for the Mortgage Loan or reduce the likelihood of timely payment of amounts due
on that Mortgage Loan; and
(iii) 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,
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(i) a material default on the Mortgage Loan has occurred or a payment
default is imminent;
(ii) such modification, waiver or amendment is reasonably likely to produce
a greater recovery with respect to the Mortgage Loan, taking into account the
time value of money, than would liquidation; and
(iii) such modification, waiver or amendment will not adversely affect the
coverage under any applicable instrument of credit support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
A borrower's failure to make required Mortgage Loan payments may mean that
operating income is insufficient to service the mortgage debt, or may reflect
the diversion of that income from the servicing of the mortgage debt. In
addition, a borrower that is unable to make Mortgage Loan payments may also be
unable to make timely payment of taxes and insurance premiums and to otherwise
maintain the related Mortgaged Property. In general, the 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 such 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 such
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 accelerate the maturity of the related Mortgage
Loan or to foreclose on the related Mortgaged Property for a considerable period
of time, and such Mortgage Loan may be restructured in the resulting bankruptcy
proceedings. For additional information regarding the restructuring of a
Mortgage Loan, you should review the Section in this prospectus titled "Certain
Legal Aspects of Mortgage Loans".
A pooling agreement may grant to the master servicer, a special servicer, a
provider of credit support and/or the holder or holders of certain classes of
the related series of certificates a right of first refusal to purchase from the
trust fund, at a predetermined purchase price any Mortgage Loan as to which a
specified number of
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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 such 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:
(i) institute foreclosure proceedings;
(ii) exercise any power of sale contained in the related Mortgage;
(iii) obtain a deed in lieu of foreclosure; or
(iv) 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 such Mortgaged Property within the
meaning of certain 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 either:
(i) the Mortgaged Property is in compliance with applicable environmental
laws and regulations or, if not, that taking such actions as are necessary to
bring the Mortgaged Property into compliance therewith is reasonably likely to
produce a greater recovery, taking into account the time value of money, than
not taking such actions; and
(ii) there are no circumstances or conditions present at the Mortgaged
Property that have resulted in any contamination for which investigation,
testing, monitoring, containment, clean-up or remediation could be required
under any applicable
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environmental laws and regulations or, if such circumstances or conditions are
present for which any such action could be required, taking such actions with
respect to the Mortgaged Property is reasonably likely to produce a greater
recovery, taking into account the time value of money, than not taking such
actions.
For additional information regarding environmental risks associated with
Mortgage Loans, you should review the section in this prospectus titled "Certain
Legal Aspects of Mortgage Loans--Environmental Risks".
Unless otherwise provided in the related prospectus supplement, if title to
any Mortgaged Property is acquired by a trust fund as to which one or more REMIC
elections have been made, the 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:
(i) the Internal Revenue Service grants an extension of time to sell
such property or
(ii) the trustee receives an opinion of independent counsel to the
effect that the holding of the property by the trust fund for more than two
years after its acquisition will not result in the imposition of a tax on
the trust fund or cause the trust fund (or any designated portion thereof)
to fail to qualify as a REMIC under the Code at any time that any
certificate is outstanding.
Subject to the foregoing, the special servicer will generally be required
to solicit bids for any Mortgaged Property so acquired in such a manner as will
be reasonably likely to realize a fair price for such property. If the trust
fund acquires title to any Mortgaged Property, the 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 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.
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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 such restoration unless (and to the extent not otherwise
provided in the related prospectus supplement) it determines (i) that such
restoration will increase the proceeds to certificateholders on liquidation of
the Mortgage Loan after reimbursement of the special servicer for its expenses
and (ii) that such 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 such 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 such
deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
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 such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
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water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds of
risks. Accordingly, a Mortgaged Property may not be insured for losses arising
from any such cause unless the related Mortgage specifically requires, or
permits the holder thereof to require, such coverage.
The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the improvements on the property in order to recover
the full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clauses generally provide that the insurer's
liability in the event of partial loss does not exceed the lesser of (i) the
replacement cost of the improvements less physical depreciation and (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale or
other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage Loan
upon the creation of any other lien or encumbrance upon the Mortgaged Property.
Unless otherwise provided in the related prospectus supplement, the master
servicer will determine whether to exercise any right the trustee may have under
any such provision in a manner consistent with the servicing standard 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 "Certain Legal Aspects of Mortgage Loans--Due-on-Sale and
Due-on-Encumbrance".
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
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amortization of the Mortgage Loans. The prospectus supplement with respect to a
series of certificates may provide that, as additional compensation, the master
servicer may retain all or a portion of late payment charges, Prepayment
Premiums, modification fees and other fees collected from borrowers and any
interest or other income that may be earned on funds held in the certificate
account. Any sub-servicer will receive a portion of the master servicer's
compensation as its sub-servicing compensation.
In addition to amounts payable to any sub-servicer, the master servicer may
be required, to the extent provided in the related prospectus supplement, to pay
from amounts that represent its servicing compensation certain expenses incurred
in connection with the administration of the related trust fund. 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. Certain other expenses,
including certain expenses related to Mortgage Loan defaults and liquidations
and, to the extent so provided in the related prospectus supplement, interest on
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--Certain Shortfalls in Collections of Interest".
EVIDENCE AS TO COMPLIANCE
Unless otherwise provided in the related prospectus supplement, each
pooling agreement will require, on or before a specified date in each year, the
master servicer to cause a firm of independent public accountants to furnish to
the trustee a statement. The statement should provide that, on the basis of the
examination by such firm conducted substantially in compliance with either the
Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC, the servicing by or on behalf of the master
servicer of mortgage loans under pooling and servicing agreements substantially
similar to each other (which may include 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 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
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material obligations under the applicable pooling agreement throughout the
preceding calendar year or other specified twelve month period.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The entity serving as master servicer under a pooling agreement may be 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:
(a) the appointment of, and the acceptance of such appointment by, a
successor thereto and receipt by the trustee of written confirmation from
each applicable rating agency that such resignation and appointment will
not have an adverse effect on the rating assigned by the rating agency to
any class of certificates of the series or
(b) 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 certain limitations as to amount of coverage, deductible
amounts, conditions, exclusions and exceptions permitted by the related pooling
agreement.
Unless otherwise specified in the related prospectus supplement, each
pooling agreement will further provide that none of the master servicer, 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,
o any expense or liability that that person is specifically required to
bear pursuant to the terms of such 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 such
obligations and duties.
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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 under the following circumstances:
(i) that such person is specifically required to bear pursuant to
the terms of such agreement, or is incidental to the performance of
obligations and duties thereunder and is not otherwise reimbursable
pursuant to such pooling agreement;
(ii) those that are incurred in connection with any breach of a
representation, warranty or covenant made in such pooling agreement;
(iii) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties under the pooling
agreement, or by reason of reckless disregard of such obligations or
duties; or
(iv) incurred in connection with any violation of any state or
federal securities law.
In addition, each pooling agreement will provide that neither the master
servicer nor the Depositor will be under any obligation to appear in, prosecute
or defend any legal action that is not incidental to its respective
responsibilities under the pooling agreement and that in its opinion may involve
it in any expense or liability. However, each of the master servicer and the
Depositor will be permitted, in the exercise of its discretion, to undertake any
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 such action, and any liability resulting
therefrom, will be expenses, costs and liabilities of the related series of
certificateholders, and the master servicer or the Depositor, as the case may
be, will be entitled to charge the related certificate account 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.
EVENTS OF DEFAULT
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Unless otherwise provided in the prospectus supplement for a series of
certificates, "Events of Default" under the related pooling agreement will
include the following:
(i) 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 such other
percentage specified in the related prospectus supplement) of the voting
rights for that series;
(ii) any failure by the master servicer duly to observe or perform
in any material respect any of its other covenants or obligations under the
related pooling agreement, which failure continues unremedied for sixty
days after written notice thereof has been given to the master servicer by
the trustee or the Depositor, or to the master servicer, the Depositor and
the trustee by certificateholders entitled to not less than 25% (or such
other percentage specified in the related prospectus supplement) of the
voting rights for that series; and
(iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings in respect of
or relating to the master servicer and certain actions by or on behalf of
the master servicer indicating its insolvency or inability to pay its
obligations.
Material variations to the foregoing Events of Default (other than to add
thereto or shorten cure periods or eliminate notice requirements) will be
specified in the related prospectus supplement.
RIGHTS UPON EVENT OF DEFAULT
If an Event of Default occurs with respect to the master servicer under a
pooling agreement, then, in each and every such case, so long as the Event of
Default remains unremedied, the Depositor or the trustee will be authorized, and
at the direction of certificateholders of the related series entitled to not
less than 51% (or such other percentage specified in the related prospectus
supplement) of the voting rights for such series, the trustee will be required,
to terminate all of the rights and obligations of the master servicer 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 such 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 such
other percentage specified in the related prospectus supplement) of the voting
rights for such series, it will be required to) appoint, or petition a court of
competent jurisdiction to appoint, a loan servicing institution that (unless
otherwise provided in the related prospectus supplement) is acceptable to each
applicable rating agency to act as successor to the master servicer under the
pooling agreement. Pending such appointment, the trustee will be obligated to
act in such capacity.
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:
(i) 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 such other percentage specified in the related prospectus
supplement) of the voting rights for such series shall have made written
request upon the trustee to institute such proceeding in its own name as
trustee;
(ii) you shall have offered to the trustee reasonable indemnity; and
(iii) the trustee for sixty days (or such other period specified in
the related prospectus supplement) shall have neglected or refused to
institute any such proceeding.
The trustee, however, will be under no obligation to exercise any of the
trusts or powers vested in it by the related pooling agreement or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of certificates of the related series, unless
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 thereto,
without you consent to do the following:
(i) to cure any ambiguity,
(ii) 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,
(iii) to add any other provisions with respect to matters or
questions arising under the pooling agreement that are not inconsistent
with the provisions thereof,
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(iv) to comply with any requirements imposed by the Code, or
(v) for any other purpose; provided that such amendment (other than
an amendment for the specific purpose referred to in clause (iv) above) may
not (as evidenced by an opinion of counsel to such effect satisfactory to
the trustee) adversely affect in any material respect your interests; and
provided further that such amendment (other than an amendment for one of
the specific purposes referred to in clauses (i) through (iv) above) must
be acceptable to each applicable rating agency.
Unless otherwise specified in the related prospectus supplement, each
pooling agreement may also be amended by the respective parties to the pooling
agreement, with the consent of the holders of the related series of certificates
entitled to not less than 51% (or such other percentage specified in the related
prospectus supplement) of the voting rights for such series allocated to the
affected classes, for any purpose. However, unless otherwise specified in the
related prospectus supplement, no such amendment may:
(i) reduce in any manner the amount of, or delay the timing of,
payments received or advanced on Mortgage Loans that are required to be
distributed in respect of any Certificate without the consent of the holder
of such certificate,
(ii) adversely affect in any material respect the interests of the
holders of any class of certificates, in a manner other than as described
in clause (i), without the consent of the holders of all certificates of
such class or
(iii) modify the provisions of the pooling agreement described in
this paragraph without the consent of the holders of all certificates of
the related series.
However, unless otherwise specified in the related prospectus supplement,
the trustee will be prohibited from consenting to any amendment of a pooling
agreement pursuant to which one or more REMIC elections are to be or have been
made unless the trustee shall first have received an opinion of counsel to the
effect that such amendment will not result in the imposition of a tax on the
related trust fund or cause the related trust fund (or designated portion
thereof) to fail to qualify as a REMIC at any time that the related certificates
are outstanding.
LIST OF CERTIFICATEHOLDERS
Unless otherwise specified in the related prospectus supplement, upon
written request of three or more certificateholders of record made for purposes
of communicating with other holders of certificates of the same series with
respect to their rights under the related pooling agreement, the trustee or
other specified person will afford such certificateholders access during normal
business hours to the most recent list of certificateholders of that series held
by such person. If the list is of a date more than 90
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days prior to the date of receipt of such certificateholders' request, then such
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 thereto promptly upon receipt.
THE TRUSTEE
The trustee under each pooling agreement will be named in the related
prospectus supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as trustee may have typical
banking relationships with 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, certain functions of the trustee may be performed by
a fiscal agent under certain circumstances.
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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.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related prospectus supplement, the
fees and normal disbursements of any trustee may be the expense of the related
master servicer or other specified person or may be required to be borne by the
related trust fund.
Unless otherwise specified in the related prospectus supplement, the
trustee for each series of certificates will be entitled to indemnification,
from amounts held in the certificate account for 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 constitutes:
(i) a specific liability imposed on the trustee pursuant to the related
pooling agreement,
(ii) to any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence on the part of the trustee in the
performance of its obligations and duties, by reason of its reckless disregard
of such obligations or duties, or
(iii) as 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.
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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 such under
the related pooling agreement, or if at any time the trustee becomes incapable
of acting, or if certain events of (or proceedings in respect of) bankruptcy or
insolvency occur with respect to the trustee, 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 such other percentage
specified in the related prospectus supplement) of the voting rights for such
series may at any time (with or without cause) remove the trustee under the
related pooling agreement and appoint a successor trustee.
Any resignation or removal of a trustee and appointment of a successor
trustee will not become effective until acceptance of appointment by the
successor trustee.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit support may be provided with respect to one or more classes of the
certificates of any series, or with respect to the related Mortgage Assets.
Credit support may be in the form of letters of credit, overcollateralization,
the subordination of one or more classes of certificates, insurance policies,
surety bonds, guarantees or reserve funds, or any combination of the foregoing.
If so provided in the related prospectus supplement, any instrument of credit
support may provide credit enhancement for more than one series of certificates
to the extent described 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 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 such 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.
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If credit support is provided with respect to one or more classes of
certificates of a series, or with respect to the related Mortgage Assets, the
related prospectus supplement will include a description of the following:
(i) the nature and amount of coverage under such credit support,
(ii) any conditions to payment thereunder not otherwise described in
this prospectus,
(iii) the conditions (if any) under which the amount of coverage
under such credit support may be reduced and under which such credit
support may be terminated or replaced and
(iv) the material provisions relating to such credit support.
Additionally, the related prospectus supplement will set forth certain
information with respect to the obligor under any instrument of credit support,
including the following:
(i) a brief description of its principal business activities,
(ii) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
(iii) if applicable, the identity of regulatory agencies that
exercise primary jurisdiction over the conduct of its business and
(iv) its total assets, and its stockholders' equity or
policyholders' surplus, if applicable, as of a date that will be specified
in the prospectus supplement.
SUBORDINATE CERTIFICATES
If so specified in the related prospectus supplement, one or more classes
of certificates of a series may be subordinate certificates. To the extent
specified in the related prospectus supplement, the rights of the holders of
subordinate certificates to receive distributions from the certificate account
on any Distribution Date will be subordinated to the corresponding rights of the
holders of senior certificates. If so provided in the related prospectus
supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related prospectus
supplement will set forth information concerning the method and amount of
subordination provided by a class or classes of subordinate certificates in a
series and the circumstances under which such subordination will be available.
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CROSS-SUPPORT PROVISIONS
If the Mortgage Assets in any trust fund are divided into separate groups,
each supporting a separate class or classes of certificates of the related
series, credit support may be provided by cross-support provisions requiring
that distributions be made on senior certificates evidencing interests in one
group of Mortgage Assets prior to distributions on subordinate certificates
evidencing interests in a different group of Mortgage Assets within the trust
fund. The prospectus supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
If so provided in the prospectus supplement for a series of certificates,
Mortgage Loans included in the related trust fund will be covered for certain
default risks by insurance policies or guarantees. To the extent deemed by 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 certain
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 certain types of losses and
shortfalls. The amount available under the letter of credit will, in all cases,
be reduced to the extent of the unreimbursed payments thereunder and may
otherwise be reduced as described in the related prospectus supplement. The
obligations of the 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 such
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 certain
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
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more classes of certificates of the related series, timely distributions of
interest and/or full distributions of principal on the basis of a schedule of
principal distributions set forth in or determined in the manner specified in
the related prospectus supplement. The related prospectus supplement will
describe any limitations on the draws that may be made under any insurance
policies and/or surety bonds. A copy of any such 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 certain 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 certain types of losses and shortfalls.
Following each Distribution Date, amounts in a reserve fund in excess of any
amount required to be maintained therein may be released from the reserve fund
under the conditions and to the extent specified in the related prospectus
supplement.
If so specified in the related prospectus supplement, amounts deposited in
any reserve fund will be invested in Permitted Investments. Unless otherwise
specified in the related prospectus supplement, any reinvestment income or other
gain from such investments will be credited to the related reserve fund for such
series, and any loss resulting from 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 such information is material and available.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of loans secured by commercial and multifamily residential properties.
Because such legal aspects are governed by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete, to reflect
the laws of any particular state, or to encompass the laws of all states in
which the security for the Mortgage Loans (or mortgage loans underlying any MBS)
is situated. Accordingly, the summaries are qualified in their entirety by
reference to the applicable laws of those states.
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
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legal title to the property is held by a land trustee under a land trust
agreement for the benefit of the borrower. At origination of a mortgage loan
involving a land trust, the borrower executes a separate undertaking to make
payments on the related note. The mortgagee's authority under a mortgage, the
trustee's authority under a deed of trust and the grantee's authority under a
deed to secure debt are governed by the express provisions of the related
instrument, the law of the state in which the real property is located, certain
federal laws (including, without limitation, the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended) and, in some deed of trust transactions, the
directions of the beneficiary.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
In most states, hotel and motel room revenues are considered accounts
receivable under the 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 certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the borrower
and not previously pledged) may constitute a significant portion of the
property's value as security. The creation and enforcement of liens on personal
property are governed by the UCC. Accordingly, if a borrower pledges personal
property as security for a mortgage loan, the lender generally must file UCC
financing statements in order to perfect its security interest therein, and must
file continuation statements, generally every five years, to maintain that
perfection.
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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 such sale occurred while
the borrower was insolvent and within a specified period prior to the borrower's
filing for bankruptcy protection.
JUDICIAL FORECLOSURE. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action is
initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the lender's
right to foreclose is contested, the legal proceedings can be time-consuming.
Upon successful completion of a judicial foreclosure proceeding, the court
generally issues a judgment of foreclosure and appoints a referee or other
officer to conduct a public sale of the mortgaged property, the proceeds of
which are used to satisfy the judgment. Public sales of mortgaged property are
made in accordance with procedures that vary from state to state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS. United
States courts have traditionally imposed general equitable principles to limit
the remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
perceived as harsh or unfair. Relying on such principles, a court may alter the
specific terms of a loan to the extent it considers necessary to prevent or
remedy an injustice, undue oppression or overreaching, or may require the lender
to undertake affirmative actions to determine the cause of the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for that of the lenders
and have
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required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose in the
case of a non-monetary default, such as a failure to adequately maintain the
mortgaged property or an impermissible further encumbrance of the mortgaged
property. Finally, some courts have addressed the issue of whether federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that a borrower receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to trigger constitutional protections.
NON-JUDICIAL FORECLOSURE/POWER OF SALE. Foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale pursuant to a power of
sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument if applicable law so permits.
A power of sale under a deed of trust allows a non-judicial public sale to be
conducted generally following a request from the beneficiary/lender to the
trustee to sell the property upon default by the borrower and after notice of
sale is given in accordance with the terms of the mortgage and applicable state
law. In some states, prior to such sale, the trustee under the deed of trust
must record a notice of default and notice of sale and send a copy to the
borrower and to any other party who has recorded a request for a copy of a
notice of default and notice of sale. In addition, in some states the trustee
must provide notice to any other party having an interest of record in the real
property, including junior lienholders. A notice of sale must be posted in a
public place and, in most states, published for a specified period of time in
one or more newspapers. The borrower or junior lienholder may then have the
right, during a reinstatement period required in some states, to cure the
default by paying the entire actual amount in arrears (without regard to the
acceleration of the indebtedness), plus the lender's expenses incurred in
enforcing the obligation. In other states, the borrower or the junior lienholder
is not provided a period to reinstate the loan, but has only the right to pay
off the entire debt to prevent the foreclosure sale. Generally, state law
governs the procedure for public sale, the parties entitled to notice, the
method of giving notice and the applicable time periods.
PUBLIC SALE. A third party may be unwilling to purchase a Mortgaged
Property at a public sale because of the difficulty in determining the value of
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 (i) the foreclosure sale was held while the
debtor was insolvent and not more
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than one year prior to the filing of the bankruptcy petition and (ii) the price
paid for the foreclosed property did not represent "fair consideration"
("reasonably equivalent value" under the Bankruptcy Code). Although the
reasoning and result of Durrett in respect of the Bankruptcy Code was rejected
by the United States Supreme Court in May 1994, the case could nonetheless be
persuasive to a court applying a state fraudulent conveyance law which has
provisions similar to those construed in Durrett. For these reasons, it is
common for the lender to purchase the mortgaged property for an amount equal to
the lesser of fair market value and the underlying debt and accrued and unpaid
interest plus the expenses of foreclosure.
Generally, state law controls the amount of foreclosure costs and expenses
which may be recovered by a lender. Thereafter, subject to the mortgagor's right
in some states to remain in possession during a redemption period, if
applicable, the lender will become the owner of the property and have both the
benefits and burdens of ownership of the mortgaged property. For example, the
lender will have the obligation to pay debt service on any senior mortgages, to
pay taxes, obtain casualty insurance and to make such repairs at its own expense
as are necessary to render the property suitable for sale. Frequently, the
lender employs a third party management company to manage and operate the
property. The costs of operating and maintaining a commercial or multifamily
residential property may be significant and may be greater than the income
derived from that property. The costs of management and operation of those
mortgaged properties which are hotels, motels or nursing or convalescent homes
or hospitals may be particularly significant because of the expertise, knowledge
and, with respect to nursing or convalescent homes or hospitals, regulatory
compliance, required to run such operations and the effect which foreclosure and
a change in ownership may have on the public's and the industry's (including
franchisors') perception of the quality of such operations. The lender will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
amount of the mortgage against the property. Moreover, a lender commonly incurs
substantial legal fees and court costs in acquiring a mortgaged property through
contested foreclosure and/or bankruptcy proceedings. Furthermore, a few states
require that any environmental contamination at certain types of properties be
cleaned up before a property may be resold. In addition, a lender may be
responsible under federal or state law for the cost of cleaning up a mortgaged
property that is environmentally contaminated. 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
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addition, if the foreclosure of a junior mortgage triggers the enforcement of a
"due-on-sale" clause contained in a senior mortgage, the junior mortgagee could
be required to pay the full amount of the senior mortgage indebtedness or face
foreclosure.
The proceeds received by the referee or trustee from a foreclosure sale are
generally applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage under which the sale
was conducted. Any proceeds remaining after satisfaction of senior mortgage debt
are generally payable to the holders of junior mortgages and other liens and
claims in order of their priority, whether or not the borrower is in default.
Any additional proceeds are generally payable to the borrower. The payment of
the proceeds to the holders of junior mortgages may occur in the foreclosure
action of the senior mortgage or a subsequent ancillary proceeding or may
require the institution of separate legal proceedings by such holders.
RIGHTS OF REDEMPTION. The purposes of a foreclosure action are to enable
the lender to realize upon its security and to bar the borrower, and all persons
who have interests in the property that are subordinate to that of the
foreclosing lender, from exercise of their "equity of redemption". The doctrine
of equity of redemption provides that, until the property encumbered by a
mortgage has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having interests that are subordinate to that of the
foreclosing lender have an equity of redemption and may redeem the property by
paying the entire debt with interest. Those having an equity of redemption must
generally be made parties and joined in the foreclosure proceeding in order for
their equity of redemption to be terminated.
The equity of redemption is a common-law (non-statutory) right which should
be distinguished from post-sale statutory rights of redemption. In some states,
after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the property. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted if the former borrower pays only a portion of the sums due. The effect
of a statutory right of redemption is to diminish the ability of the lender to
sell the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
ANTI-DEFICIENCY LEGISLATION. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be limited
to the Mortgaged Property and such other assets, if any, that were pledged to
secure the Mortgage Loan. However, even if a mortgage loan by its terms provides
for recourse to the borrower's other assets, a lender's ability to realize upon
those assets may be limited by state law. For example, in some states a lender
cannot obtain a deficiency judgment
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against the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment is a personal judgment against the former borrower equal to
the difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Other statutes may require the lender
to exhaust the security afforded under a mortgage before bringing a personal
action against the borrower. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt without first
exhausting that security. However, in some of those states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in those states where such an election of remedy provision
exists will usually proceed first against the security. Finally, other statutory
provisions, designed to protect borrowers from exposure to large deficiency
judgments that might result from bidding at below-market values at the
foreclosure sale, limit any deficiency judgment to the excess of the outstanding
debt over the fair market value of the property at the time of the sale.
LEASEHOLD RISKS
Mortgage Loans may be secured by a mortgage on the borrower's leasehold
interest in a ground lease. Leasehold mortgage loans are subject to certain
risks not associated with mortgage loans secured by a lien on the fee estate of
the borrower. The most significant of these risks is that if the borrower's
leasehold were to be terminated upon a lease default, the leasehold mortgagee
would lose its security. This risk may be lessened under certain circumstances
such as the following:
(i) if the ground lease requires the lessor to give the leasehold
mortgagee notices of lessee defaults and an opportunity to cure them,
(ii) permits the leasehold estate to be assigned to and by the
leasehold mortgagee or the purchaser at a foreclosure sale, and
(iii) contains certain other protective provisions typically
included in a "mortgageable" ground lease.
The ground leases that secure the Mortgage Loans at issue may not contain
some of these protective provisions, and the related mortgages may not contain
the other protections discussed in the next paragraph. Protective ground lease
provisions include the following:
(i) the right of the leasehold mortgagee to receive notices from the
ground lessor of any defaults by the borrower under the ground lease;
(ii) the right to cure such defaults, with adequate cure periods;
(iii) if a default is not susceptible of cure by the leasehold
mortgagee, the right to acquire the leasehold estate through foreclosure or
otherwise;
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(iv) 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
(v) the right of the leasehold mortgagee to enter into a new ground
lease with the ground lessor on the same terms and conditions as the old
ground lease in the event of a termination of the ground lease.
In addition to the foregoing protections, a leasehold mortgagee may
prohibit the ground lessee from treating the ground lease as terminated in the
event of the ground lessor's bankruptcy and rejection of the ground lease in the
lessor's bankruptcy case. As further protection, a leasehold mortgage may
provide for the assignment of the debtor-ground lessee's right to reject the
lease in a ground lessee bankruptcy case, although the enforceability of such a
provision has not been established. Without the protections described in this
and the foregoing paragraph, a leasehold mortgagee may be more likely to lose
the collateral securing its leasehold mortgage. In addition, the terms and
conditions of a leasehold mortgage are subject to the terms and conditions of
the ground lease. Although certain rights given to a ground lessee can be
limited by the terms of a leasehold mortgage, the rights of a ground lessee or a
leasehold mortgagee with respect to, among other things, insurance, casualty and
condemnation proceeds will ordinarily be governed by the provisions of the
ground lease, unless otherwise agreed to by the ground lessee and leasehold
mortgagee.
COOPERATIVE SHARES
Mortgage Loans may be secured by a security interest on the borrower's
ownership interest in shares, and the proprietary leases appurtenant to those
shares, allocable to cooperative dwelling units that may be vacant or occupied
by non-owner tenants. Such loans are subject to certain risks not associated
with mortgage loans secured by a lien on the fee estate of a borrower in real
property. Such a loan typically is subordinate to the mortgage, if any, on the
cooperative's building which, if foreclosed, could extinguish the equity in the
building and the proprietary leases of the dwelling units derived from ownership
of the shares of the cooperative. Further, transfer of shares in a cooperative
are subject to various regulations as well as to restrictions under the
governing documents of the cooperative, and the shares may be cancelled in the
event that associated maintenance charges due under the related proprietary
leases are not paid. Typically, a recognition agreement between the lender and
the cooperative provides, among other things, the lender with an opportunity to
cure a default under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner,
which may be dependent upon, among other things, the notice given the debtor and
the method, manner, time, place and terms of
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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 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 certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified. For example,
the lender's lien may be transferred to other collateral and/or the outstanding
amount of the secured loan may be reduced to the then-current value of the
property (with a corresponding partial reduction of the amount of the lender's
security interest) pursuant to a confirmed plan or lien avoidance proceeding,
thus leaving the lender a general unsecured creditor for the difference between
such value and the outstanding balance of the loan. Other modifications may
include the reduction in the amount of each scheduled payment, by means of a
reduction in the rate of interest and/or an alteration of the repayment schedule
(with or without affecting the unpaid principal balance of the loan), and/or by
an extension (or shortening) of the term to maturity. The priority of a mortgage
loan may also be subordinated to bankruptcy court-approved financing. Some
bankruptcy courts have approved plans, based on the particular facts of the
reorganization case, that effected the cure of a mortgage loan default by paying
arrearages over a number of years. Also, a bankruptcy court may permit a debtor,
through its rehabilitative plan, to reinstate a loan mortgage payment schedule
even if the lender has obtained a final judgment of foreclosure prior to the
filing of the debtor's petition.
The bankruptcy court can also reinstate accelerated indebtedness and also,
in effect, invalidate due-on-sale clauses through confirmed Chapter 11 plans of
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reorganization. Under Section 363(b) and (f) of the Bankruptcy Code, a trustee
for a lessor, or a lessor as debtor-in-possession, may, despite the provisions
of the related Mortgage Loan to the contrary, sell the Mortgaged Property free
and clear of all liens, which liens would then attach to the proceeds of such
sale.
The Bankruptcy Code provides that a lender's perfected pre-petition
security interest in leases, rents and hotel revenues continues in the
post-petition leases, rents and hotel revenues, unless a bankruptcy court orders
to the contrary "based on the equities of the case." Thus, unless a court orders
otherwise, revenues from a Mortgaged Property generated after the date the
bankruptcy petition is filed will constitute "cash collateral" under the
Bankruptcy Code. Debtors may only use cash collateral upon obtaining the
lender's consent or a prior court order finding that the lender's interest in
the Mortgaged Properties and the cash collateral is "adequately protected." Such
term is defined and interpreted under the Bankruptcy Code. It should be noted,
however, that the court may find that the lender has no security interest in
either pre-petition or post-petition revenues if the court finds that the loan
documents do not contain language covering accounts, room rents, or other forms
of 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 certain other similar events. In addition, Section 362 of the Bankruptcy
Code operates as an automatic stay of, among other things, any act to obtain
possession of property of or from a debtor's estate, which may delay the
borrower's exercise of such remedies in the event that a lessee becomes the
subject of a proceeding under the Bankruptcy Code.
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 (i) the rent reserved by such lease, without acceleration,
for the greater of one year or 15 percent, not to exceed three years, of the
remaining term of the lease, following the earlier of the date of the filing of
the petition and the date on which such lender repossessed, or
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the lessee surrendered, the leased property, and (ii) 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 such assignment, provided that the trustee or debtor-in-possession
provides "adequate assurance of future performance" by the assignee. The
Bankruptcy Code specifically provides, however, that adequate assurance of
future performance for purposes of a lease of real property in a shopping center
includes the following:
(i) adequate assurance of the source of rent and other consideration
due under such lease, and in the case of an assignment, that the financial
condition and operating performance of the proposed assignee and its
guarantors, if any, shall be similar to the financial condition and
operating performance of the debtor and its guarantors, if any, as of the
time the debtor became the lessee under the lease,
(ii) that any percentage rent due under such lease will not decline
substantially,
(iii) 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
(iv) that the assumption or assignment of such 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
(i) the balance of the term after the date of rejection of the
lease, and any renewal or extension and
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(ii) 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 insolvent
and within one year (or within any longer state statutes of limitations periods
if the trustee in bankruptcy elects to proceed under state fraudulent conveyance
law) of the filing of the bankruptcy.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, a debtor in bankruptcy may have
the power to grant liens senior to the lien of a mortgage, and analogous state
statutes and general principles of equity may also provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring of a
mortgage loan on terms a lender would not otherwise accept. Moreover, the laws
of certain states also give priority to 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
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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.
ENVIRONMENTAL RISKS
A lender may be subject to unforeseen environmental risks with respect to
loans secured by real or personal property, such as the Mortgage Loans. Such
environmental risks may give rise to (i) a diminution in value of property
securing a Mortgage Loan or the inability to foreclose against such property or
(ii) in certain circumstances as more fully described below, liability for
clean-up costs or other remedial actions, which liability could exceed the value
of such property or the principal balance of the related Mortgage Loan. Under
the laws of many states, contamination on a property may give rise to a lien on
the property for cleanup costs. In several states, such a lien has priority over
all existing liens, 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
("CERCLA"), a lender may be liable either to the government or to private
parties for cleanup costs on a property securing a loan, even if the lender does
not cause or contribute to the contamination. CERCLA imposes strict, as well as
joint and several, liability on several classes of potentially responsible
parties ("PRPs"), including current owners and operators of the property who did
not cause or contribute to the contamination. Many states have laws similar to
CERCLA.
Lenders may be held liable under CERCLA as owners or operators unless they
qualify for the secured creditor exemption to CERCLA. A 1990 decision of the
United States Court of Appeals for the Eleventh Circuit, United States v. Fleet
Factors Corp., 901 F.2d 1550 (11th Cir. 1990), narrowly construed the security
interest exemption under CERCLA to hold lenders liable if they had the capacity
to influence their borrower's management of hazardous waste. In response to the
Fleet Factors case, the Environmental Protection Agency ("EPA") promulgated a
rule in 1992 intended to reduce interpretive uncertainties that surrounded the
scope of the secured lender exemption to liability under CERCLA. The rule, which
the EPA stated would be entitled to deference in CERCLA cost recovery actions
brought against lenders by private parties, clarified the scope of the secured
creditor exemption and identified specific types of actions that, if taken by a
lender, would preclude application of the exemption. In the decision of Kelley
v. EPA, 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
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of 1996" (the "Asset Conservation Act"), which substantially protects lenders
and fiduciaries from liability for the environmental obligations of borrowers
and beneficiaries. The Asset Conservation Act includes amendments to CERCLA and
to the underground storage tank provisions of the Resource Conservation and
Recovery Act and applies to any claim that was not finally adjudicated as of
September 30, 1996. The Act offers substantial protection to lenders by defining
the activities in which a lender can engage and still have the benefit of a
secured creditor exemption. However, the secured creditor exemption is not
available to a lender that participates in management of mortgaged property
prior to a foreclosure. In order for a lender to be deemed to have participated
in the management of a mortgaged property, the lender must actually participate
in the operational affairs of the property of the borrower. The Act provides
that "merely having the capacity to influence, or unexercised right to control"
operations does not constitute participation in management. A lender will be
deemed to have participated in management and will lose the protection of the
secured creditor exemption only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the mortgaged property. The Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Environment clean-up costs may be substantial. It is possible that
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 such costs could become a liability of a trust
fund and occasion a loss to certificateholders of the related series.
To reduce the likelihood of such a loss, and unless otherwise provided in
the related prospectus supplement, the related pooling agreement will provide
that the master servicer, acting on behalf of the related trust fund, may not
acquire title to a Mortgaged Property or take over its operation unless the
master servicer, based on a report prepared by a person who regularly conducts
environmental site assessments, has made the determination that it is
appropriate to do so, as described under "Description of the
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pooling agreements--Realization Upon Defaulted Mortgage Loans". There can be no
assurance that any environmental site assessment obtained by the master servicer
will detect all possible environmental contamination or conditions or that the
other requirements of the related pooling agreement, even if fully observed by
the master servicer, will in fact insulate the related trust fund from liability
with respect to environmental matters.
Even when a lender is not directly liable for cleanup costs on property
securing loans, if a property securing a loan is contaminated, the value of the
security is likely to be affected. In addition, a lender bears the risk that
unanticipated cleanup costs may jeopardize the borrower's repayment. Neither of
these two issues is likely to pose risks exceeding the amount of unpaid
principal and interest of a particular loan secured by a contaminated property,
particularly if the lender declines to foreclose on a mortgage secured by the
property.
If a lender forecloses on a mortgage secured by a property the operations
of which are subject to environmental laws and regulations, the lender will be
required to operate the property in accordance with those laws and regulations.
Compliance may entail some expense.
In addition, a lender may be obligated to disclose environmental conditions
on a property to government entities and/or to prospective buyers (including
prospective buyers at a foreclosure sale or following foreclosure). Such
disclosure may decrease the amount that prospective buyers are willing to pay
for the affected property and thereby lessen the ability of the lender to
recover its investment in a loan upon foreclosure.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate the
maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such clauses
in many states. By virtue, however, of the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn Act"), effective October 15, 1982 (which
purports to preempt state laws that prohibit the enforcement of due-on-sale
clauses by providing among other matters, that "due-on-sale" clauses in certain
loans made after the effective date of the Garn Act are enforceable, within
certain limitations, as set forth in the Garn Act and the regulations
promulgated thereunder), the master servicer may nevertheless have the right to
accelerate the maturity of a Mortgage Loan that contains a "due-on-sale"
provision upon transfer of an interest in the property, regardless of the master
servicer's ability to demonstrate that a sale threatens its legitimate security
interest.
SUBORDINATE FINANCING
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Certain of the Mortgage Loans may not restrict the ability of the borrower
to use the Mortgaged Property as security for one or more additional loans.
Where a borrower encumbers a Mortgaged Property with one or more junior liens,
the senior lender is subjected to additional risk. First, the borrower may have
difficulty servicing and repaying multiple loans. Moreover, if the subordinate
financing permits recourse to the borrower (as is frequently the case) and the
senior loan does not, a borrower may have more incentive to repay sums due on
the subordinate loan. Second, acts of the senior lender that prejudice the
junior lender or impair the junior lender's security may create a superior
equity in favor of the junior lender. For example, if the borrower and the
senior lender agree to an increase in the principal amount of or the interest
rate payable on the senior loan, the senior lender may lose its priority to the
extent any existing junior lender is harmed or the borrower is additionally
burdened. Third, if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by junior lenders
can impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
ADJUSTABLE RATE LOANS
The laws of certain states may provide that mortgage notes relating to
adjustable rate loans are not negotiable instruments under the UCC. In 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 ("Title V") provides that state usury limitations shall
not apply to certain types of residential (including multifamily) first mortgage
loans originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a law
or constitutional provision that
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expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits and/or to
limit discount points or other charges.
No Mortgage Loan originated in any state in which application of Title V
has been expressly rejected or a provision limiting discount points or other
charges has been adopted, will (if originated after that rejection or adoption)
be eligible for inclusion in a trust fund unless (i) the Mortgage Loan provides
for an interest rate, discount points and charges as are permitted under the
laws of such state or (ii) 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 and charges would not be usurious
and the borrower's counsel has rendered an opinion that such choice of law
provision would be given effect.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of such borrower's Mortgage Loan (including a borrower who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
individuals who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of any servicer to
collect full amounts of interest on certain of the Mortgage Loans. Any
shortfalls in interest collections resulting from the application of the Relief
Act would result in a reduction of the amounts distributable to the holders of
the related series of certificates. 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 such certificates.
In addition, the Relief Act imposes limitations that would impair the ability of
the servicer to foreclose on an affected Mortgage Loan during the borrower's
period of active duty status, and, under certain circumstances, during an
additional three-month period thereafter. Thus, in the event 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
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The lender may be subject to additional risk depending upon the type and
use of the Mortgaged Property in question. For instance, Mortgaged Properties
which are hospitals, nursing homes or convalescent homes may present special
risks to lenders in large part due to significant governmental regulation of the
operation, maintenance, control and financing of health care institutions.
Mortgages on Mortgaged Properties which are owned by the borrower under a
condominium form of ownership are subject to the declaration, by-laws and other
rules and regulation of the condominium association. Mortgaged Properties which
are hotels or motels may present additional risk to the lender in that: (i)
hotels and motels are typically operated pursuant to franchise, management and
operating agreements which may be terminable by the operator; and (ii) the
transferability of the hotel's operating, liquor and other licenses to the
entity acquiring the hotel either through purchase or foreclosure is subject to
the vagaries of local law requirements. In addition, Mortgaged Properties which
are multifamily properties or cooperatively owned multifamily properties may be
subject to rent control laws, which could impact the future cash flows of such
properties.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels, shopping
centers, hospitals, schools and social service center establishments) must
remove architectural and communication barriers which are structural in nature
from existing places of public accommodation to the extent "readily achievable."
In addition, under the ADA, alterations to a place of public accommodation or a
commercial facility are to be made so that, to the maximum extent feasible, each
altered portions are readily accessible to and usable by disabled individuals.
The "readily achievable" standard takes into account, among other factors, the
financial resources of the affected site, owner, landlord or other applicable
person. In addition to imposing a possible financial burden on the borrower in
its capacity as owner or landlord, the ADA may also impose such requirements on
a foreclosing lender who succeeds to the interest of the borrower as owner or
landlord. Furthermore, since the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender who is financially more capable than the borrower of complying with the
requirements of the ADA may be subject to more stringent requirements than those
to which the borrower is subject.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of
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the forfeiture proceeding and may give notice to all parties "known to have an
alleged interest in the property", including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
established that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
In addition, there may be other state or municipal laws providing for
forfeiture of mortgaged properties.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
certificates. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as regulations
(the "REMIC Regulations") promulgated by the U.S. Department of Treasury (the
"Treasury"). Investors should consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of certificates.
For purposes of this discussion, (i) references to the Mortgage Loans
include references to the mortgage loans underlying MBS included in the Mortgage
Assets and (ii) where the applicable prospectus supplement provides for a fixed
retained yield with respect to the Mortgage Loans underlying a series of
certificates, references to the Mortgage Loans will be deemed to refer to that
portion of the Mortgage Loans held by the trust fund which does not include the
Retained Interest. References to a "holder" or "certificateholder" in this
discussion generally mean the beneficial owner of a Certificate.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL. With respect to a particular series of certificates, an election
may be made to treat the trust fund or one or more segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. A trust
fund or a portion thereof as to which a REMIC election will be made will be
referred to as a "REMIC Pool". For purposes of this discussion, certificates of
a series as to which one or more REMIC elections are made are referred to as
"REMIC Certificates" and will consist of one or more classes of "Regular
Certificates" and one class of "Residual Certificates" in the case of each REMIC
Pool. Qualification as a REMIC requires ongoing compliance with certain
conditions. With respect to each series of REMIC Certificates, O'Melveny &
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Myers LLP, our counsel, has advised us that in the firm's opinion, assuming (i)
the making of such an election, (ii) compliance with the pooling agreement and
(iii) compliance with any changes in the law, including any amendments to the
Code or applicable Treasury regulations thereunder, each REMIC Pool will qualify
as a REMIC. In such case, the Regular Certificates will be considered to be
"regular interests" in the REMIC Pool and generally will be treated for federal
income tax purposes as if they were newly originated debt instruments, and the
Residual Certificates will be considered to be "residual interests" in the REMIC
Pool. The prospectus supplement for each series of certificates will indicate
whether one or more REMIC elections will be made with respect to the related
trust fund, in which event references to "REMIC" or "REMIC Pool" herein shall be
deemed to refer to each such REMIC Pool. If so specified in the applicable
prospectus supplement, the portion of a trust fund as to which a REMIC election
is not made may be treated as either a financial asset securitization investment
trust (a "FASIT") a grantor trust for federal income tax purposes.
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 Code Section 7701(a)(19)(C)(xi), but only in the
same proportion that the assets of the REMIC Pool would be treated as "loans . .
. secured by an interest in real property which is . . . residential real
property" (such as single family or multifamily properties, but not commercial
properties) within the meaning of Code Section 7701(a)(19)(C)(v) or as other
assets described in Code Section 7701(a)(19)(C), and otherwise will not qualify
for such treatment. REMIC Certificates held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code Section
856(c)(4)(A). Interest on the Regular Certificates and income with respect to
Residual Certificates will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) in the same proportion that, for both purposes, the
assets of the REMIC Pool would be so treated. If at all times 95% or more of the
assets of the REMIC Pool qualify for each of the foregoing respective
treatments, the REMIC Certificates will qualify for the corresponding status in
their entirety. For purposes of Code Section 856(c)(4)(A), payments of principal
and interest on the Mortgage Loans that are reinvested pending distribution to
holders of REMIC Certificates qualify for such treatment. Where two REMIC Pools
are a part of a tiered structure they will be treated as one REMIC for purposes
of the tests described above respecting asset ownership of more or less than
95%. In addition, if the assets of the REMIC include Buy-Down Mortgage Loans, it
is possible that the percentage of the assets constituting "loans . . . secured
by an interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related Buy-Down Funds. REMIC Certificates held by a regulated
investment company will not constitute
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"Government Securities" within the meaning of Code Section 851(b)(3)(A)(i).
REMIC Certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of Code Section 582(c)(1). The
Small Business Job Protection Act of 1996 (the "SBJPA of 1996") repealed the
reserve method for bad debts of domestic building and loan associations and
mutual savings banks, and thus has eliminated the asset category of "qualifying
real property loans" in former Code Section 593(d) for taxable years beginning
after December 31, 1995. The requirement in the SBJPA of 1996 that such
institutions must "recapture" a portion of their existing bad debt reserves is
suspended if a certain portion of their assets are maintained in "residential
loans" under Code Section 7701(a)(19)(C)(v), but only if 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 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:
(i) whole mortgage loans, such as the Mortgage Loans,
(ii)certificates of beneficial interest in a grantor trust that
holds mortgage loans, including certain of the MBS,
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(iii) regular interests in another REMIC, such as MBS in a trust as
to which a REMIC election has been made,
(iv) loans secured by timeshare interests and
(v) loans secured by shares held by a tenant stockholder in a
cooperative housing corporation.
However, in general, (i) the fair market value of the real property
securing the mortgage (including buildings and structural components thereof)
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 (ii)
substantially all the proceeds of the Mortgage Loan or the underlying mortgage
loan were used to acquire, improve or protect an interest in real property that,
at the origination date, was the only security for the Mortgage Loan or
underlying mortgage loan. If the Mortgage Loan has been substantially modified
other than in connection with a default or reasonably foreseeable default, it
must meet the loan-to-value test in (i) of the preceding sentence as of the date
of the last such modification or at closing. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on the
Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes the following:
(i) a mortgage in default or as to which default is reasonably
foreseeable,
(ii) a mortgage as to which a customary representation or warranty
made at the time of transfer to the REMIC Pool has been breached,
(iii) a mortgage that was fraudulently procured by the mortgagor,
and
(iv) a mortgage that was not in fact principally secured by real
property (but only if the mortgage is disposed of within 90 days of
discovery).
A Mortgage Loan that is "defective" as described in clause (iv) 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.
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Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until distributed to holders of interests in the REMIC Pool. A qualified reserve
asset is any intangible property (other than a REMIC residual interest) held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for payments of expenses of the REMIC Pool or amounts due
on the regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from the
assets in 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 (the
"Service") of up to an additional four years.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Such a specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a fixed or qualified variable or inverse variable rate on some or
all of the qualified mortgages minus a different fixed or qualified variable
rate. The specified principal amount of a regular interest that provides for
interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an interest
in a REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool may
be treated as a regular interest even if payments of principal with respect to
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
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regular interests, and the Residual Certificates with respect to that series
will constitute a single class of residual interests on which distributions are
made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
the Code provides that the entity will not be treated as a REMIC for 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 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 (the "1986 Act") indicates that the relief may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
REMIC Pool's income for the period of time in which the requirements for REMIC
status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
GENERAL
In general, interest, original issue discount and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder") as they accrue, and
principal payments on a Regular Certificate will be treated as a return of
capital to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto. Regular Certificateholders must use the accrual
method of accounting with regard to Regular Certificates, regardless of the
method of accounting otherwise used by 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 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 such
income. The following discussion is based in part on temporary and final
Treasury regulations issued on February 2, 1994, as amended on June 14, 1996,
(the "OID Regulations") under Code Sections 1271 through 1273 and 1275 and in
part on the provisions of the 1986 Act. Regular Certificateholders should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to repayable securities, such as the Regular Certificates. To
the extent such issues are not addressed in the regulations, we intend to apply
the methodology described in the Conference
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Committee Report to the 1986 Act. No assurance can be provided that the Service
will not take a different position as to those matters not currently addressed
by the OID Regulations. Moreover, the OID Regulations include an anti-abuse rule
allowing the Service to apply or depart from the OID Regulations where necessary
or appropriate to ensure a reasonable tax result in light of the applicable
statutory provisions. A tax result will not be considered unreasonable under the
anti-abuse rule in the absence of a substantial effect on the present value of a
taxpayer's tax liability. 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
("Random Lot Certificates")) will be treated as a single installment obligation
for purposes of determining the original issue discount includible in a Regular
Certificateholder's income. The total amount of original issue discount on a
Regular Certificate is the excess of the "stated redemption price at maturity"
of the Regular Certificate over its "issue price". The issue price of a Class of
Regular Certificates offered pursuant to this prospectus generally is the first
price at which a substantial amount of Regular Certificates of that class is
sold to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, 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 such interest distributions constitute
"qualified stated interest". Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a qualified
variable rate (as described below) provided that 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 (a so-called "super-premium" class)
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as having no qualified stated interest. Where the interval between the issue
date and the first Distribution Date on a Regular Certificate is shorter than
the interval between subsequent Distribution Dates, the interest attributable to
the additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if 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 such
distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Certificates. The
Prepayment Assumption with respect to a series of Regular Certificates will be
set forth in the related prospectus supplement. Holders generally must report de
minimis original issue discount pro rata as principal payments are received, and
such income will be capital gain if the Regular Certificate is held as a capital
asset. However, under the OID Regulations, Regular Certificateholders may elect
to accrue all de minimis original issue discount as well as market discount and
market premium under the constant yield method.
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:
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(i) the sum of (a) the present value of all of the remaining
distributions to be made on the Regular Certificate as of the end of that
accrual period that are included in the Regular Certificate's stated
redemption price at maturity and (b) the distributions made on the Regular
Certificate during the accrual period that are included in the Regular
Certificate's stated redemption price at maturity, over
(ii) the adjusted issue price of the Regular Certificate at the
beginning of the accrual period.
The present value of the remaining distributions referred to in the
preceding sentence is calculated based on (i) the yield to maturity of the
Regular Certificate at the issue date, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period and (iii)
the Prepayment Assumption. For these purposes, the adjusted issue price of a
Regular Certificate at the beginning of any accrual period equals the issue
price of the Regular Certificate, increased by the aggregate amount of original
issue discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in 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 certain classes of Regular Certificates and
either an increase or decrease in the daily portions of original issue discount
with respect to such Regular Certificates.
In the case of a Random Lot Certificate, 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
such unpaid principal balance), (i) the remaining unaccrued original issue
discount allocable to such Certificate (or to such portion) will accrue at the
time of such
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distribution, and (ii) 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 after a distribution of principal
has been received) will be adjusted by reducing the present value of the
remaining payments on such class and the adjusted issue price of that class to
the extent attributable to the portion of the unpaid principal balance thereof
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 such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, 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,
(i) the issue price does not exceed the original principal balance
by more than a specified de minimis amount and
(ii) the interest compounds or is payable at least annually at
current values of (a) one or more "qualified floating rates", (b) a single
fixed rate and one or more qualified floating rates, (c) a single
"objective rate", or (d) a single fixed rate and a single objective rate
that is a "qualified inverse floating rate".
A floating rate is a qualified floating rate if variations in the rate can
reasonably be expected to measure contemporaneous variations in the cost of
newly borrowed funds, or where such rate is subject to a fixed multiple that is
greater than 0.65, but not more than 1.35. Such rate may also be increased or
decreased by a fixed spread or subject to a fixed cap or floor, or a cap or
floor that is not reasonably expected as of the issue date to affect the yield
of the instrument significantly. Two or more qualified floating rates will be
treated as a single qualified floating rate if all 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 such qualified floating rates are within 0.25% of
each other on the issue date. An
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objective rate (other than a qualified floating rate) is a rate that is
determined using a single fixed formula and that is based on objective financial
or economic information, provided that such information is not (i) within the
control of the issuer or a related party or (ii) unique to the circumstances of
the issuer or a related party. A qualified inverse floating rate is an objective
rate that is equal to a fixed rate minus a qualified floating rate that
inversely reflects contemporaneous variations in the cost of newly borrowed
funds. An inverse floating rate that is not a qualified floating rate may
nevertheless be an objective rate. A class of Regular Certificates may be issued
under this Prospectus that does not have a variable rate under the OID
Regulations. For example, a class 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 such a class may be considered to bear
"contingent interest" within the meaning of the OID Regulations. The OID
Regulations, as they relate to the treatment of contingent interest, are by
their terms not applicable to Regular Certificates. However, if final
regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, 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
(i) 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 such a 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 such a rate that is subject to one or more caps or
floors, or
(ii) 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.
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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 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 such Regular Certificates for purposes of
accruing original issue discount will be a hypothetical fixed rate based on the
fixed rates, in the case of fixed rate Mortgage Loans, and initial "teaser
rates" followed by fully indexed rates, in the case of adjustable rate Mortgage
Loans. In the case of adjustable rate Mortgage Loans, the applicable index used
to compute interest on the Mortgage Loans in effect on the pricing date (or
possibly the issue date) will be deemed to be in effect beginning with the
period in which the first weighted average adjustment date occurring after the
issue date occurs. Adjustments will be made in each accrual period either
increasing or decreasing the amount of ordinary income reportable to reflect the
actual pass-through rate on the Regular Certificates.
DEFERRED INTEREST
Under the OID Regulations, all interest on a Regular Certificate as to
which there may be Deferred Interest is includible in the stated redemption
price at maturity. 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
such Deferred Interest are made.
MARKET DISCOUNT
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Section 1276 through 1278. Under these Code sections and
the principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate or (ii) in the case of a Regular Certificate
having original issue discount, is exceeded by the adjusted issue price of such
Regular Certificate at the time of purchase. The purchaser
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generally will be required to recognize ordinary income to the extent of accrued
market discount on the Regular Certificate as distributions includible in the
stated redemption price at maturity thereof are received, in an amount not
exceeding any such distribution. Such market discount would accrue in a manner
to be provided in Treasury regulations and should take into account the
Prepayment Assumption. The Conference Committee Report to the 1986 Act provides
that until the Treasury regulations are issued, market discount would accrue
either
(i) on the basis of a constant interest rate or
(ii) in the ratio of stated interest allocable to the relevant
period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular
Certificate issued with original issue discount, in the ratio of original
issue discount accrued for the relevant period to the sum of the original
issue discount accrued for 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 such election may be
deemed to be made.
Market discount with respect to a Regular Certificate will be considered to
be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of 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
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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
discount in income currently and to accrue market discount on the basis of the
constant yield method.
PREMIUM
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize 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 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 Code Section 171
election may be deemed to be made.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD METHOD
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make 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 with the
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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). Such gain will be
treated as ordinary income in the following instances
(i) if a Regular Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Certificateholder's net
investment in the conversion transaction at 120% of the appropriate
applicable Federal rate under Code Section 1274(d) in effect at the time
the taxpayer entered into the transaction minus any amount previously
treated as ordinary income with respect to any prior distribution of
property that was held as a part of such transaction,
(ii) in the case of a non-corporate taxpayer, to the extent such
taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary rates, or (iii) to the
extent that such gain does not exceed the excess, if any, of (a) the amount
that would have been includible in the gross income of the holder if its
yield on 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 certain banks or thrift institutions will be treated as ordinary income or
loss pursuant to Code Section 582(c). Capital gains of certain non-corporate
taxpayers are subject to a lower maximum tax rate (28%) than ordinary income of
those taxpayers (39.6%), and still a lower maximum rate (20%) for property held
for more than 18 months. The maximum
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tax rate for corporations is the same with respect to both ordinary income and
capital gains.
TREATMENT OF LOSSES
Holders of Regular Certificates will be required to report income with
respect to Regular Certificates on the accrual method of accounting, without
giving effect to delays or reductions in distributions attributable to defaults
or delinquencies on the Mortgage Loans allocable to a particular class of
Regular Certificates, except to the extent it can be established that such
losses are uncollectible. Accordingly, the holder of a Regular Certificate may
have income, or may incur a diminution in cash flow as a result of a default or
delinquency, but may not be able to take a deduction (subject to the discussion
below) for the corresponding loss until a subsequent taxable year. In this
regard, 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
Code Section 166. To the extent the rules of Code Section 166 regarding bad
debts are applicable, it appears that holders of Regular Certificates that are
corporations or that otherwise hold the Regular Certificates in connection with
a trade or business should in general be allowed to deduct as an ordinary loss
any 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 such
Regular Certificates becoming wholly worthless. Although the matter is not free
from doubt, non-corporate holders of Regular Certificates should be allowed a
bad debt deduction at such time as the principal balance of any class or
subclass of such Regular Certificates is reduced to reflect losses resulting
from any liquidated Mortgage Loans. The Service, however, could take the
position that non-corporate holders will be allowed a bad debt deduction to
reflect those losses only after all Mortgage Loans remaining in the trust fund
have been liquidated or such class of Regular Certificates has been otherwise
retired. The Service could also assert that losses on the Regular Certificates
are deductible based on some other method that may defer such deductions for all
holders, such as reducing future cash flow for purposes of computing original
issue discount. This may have the effect of creating "negative" original issue
discount which would be deductible only against future positive original issue
discount or otherwise upon termination of the class. Holders of Regular
Certificates are urged to consult their own tax advisors regarding the
appropriate timing, amount and character of any loss sustained with respect to
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
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rules regarding reserves for bad debts. You are advised to consult your tax
advisors regarding the treatment of losses on Regular Certificates.
TAXATION OF RESIDUAL CERTIFICATES
TAXATION OF REMIC INCOME
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Certificates ("Residual Certificateholders"), and will
not be taxed separately to the REMIC Pool. The daily portions of REMIC taxable
income or net loss of a Residual Certificateholder are determined by allocating
the REMIC Pool's taxable income or net loss for each calendar quarter ratably to
each day in such quarter and by allocating such daily portion among the Residual
Certificateholders in proportion to their respective holdings of Residual
Certificates in the REMIC Pool on such day. REMIC taxable income is generally
determined in the same manner as the taxable income of an individual using the
accrual method of accounting, except for the following:
(i) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply,
(ii) all bad loans will be deductible as business bad debts and
(iii) the limitation on the deductibility of interest and expenses
related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount
income and market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income from amortization
of issue premium, if any, on the Regular Certificates, plus income on
reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the Regular
Certificates. The REMIC Pool's deductions include interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Loans, other administrative expenses of the REMIC Pool and realized losses on
the Mortgage Loans. The requirement that Residual Certificateholders report
their pro rata share of taxable income or net loss of the REMIC Pool will
continue until there are no certificates of any class of the related series
outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates or income from amortization of issue
premium on the Regular Certificates, on the other hand. In the event that an
interest in the Mortgage Loans is acquired by the REMIC Pool at a discount, and
one or more of the Mortgage Loans is prepaid, the
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Residual Certificateholder may recognize taxable income without being entitled
to receive a corresponding amount of cash because (i) the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Certificates and (ii) the discount on the Mortgage Loans which is
includible in income may exceed the deduction allowed upon the 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 such a 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
such a series of Regular Certificates, may increase over time as distributions
in reduction of principal are made on the lower yielding classes of Regular
Certificates, whereas to the extent that the REMIC Pool includes fixed rate
Mortgage Loans, interest income with respect to any given Mortgage Loan will
remain constant over time as a percentage of the outstanding principal amount of
that loan. Consequently, Residual Certificateholders must have sufficient other
sources of cash to pay any federal, state or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such income,
subject to the discussion of "excess inclusions" below under "Limitations on
Offset or Exemption of REMIC Income". The timing of such mismatching of income
and deductions described in this paragraph, if present with respect to a series
of certificates, may have a significant adverse effect upon the Residual
Certificateholder's after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during certain periods may exceed the income
reflected by the Residual Certificateholder for such 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. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Certificateholder and will be decreased (but not
below zero), first, by a cash distribution from the REMIC Pool and, second, by
the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. Any loss that is disallowed on account of this limitation may
be carried over indefinitely with respect to the Residual Certificateholder as
to whom such loss was disallowed and may
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be used by such Residual Certificateholder only to offset any income generated
by the same REMIC Pool.
A Residual Certificateholder will not be permitted to amortize directly the
cost of its Residual Certificate as an offset to its share of the taxable income
of the related REMIC Pool. However, that taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's basis
in its assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual
Certificateholders described above under "Taxation of REMIC Income", the period
of time over which such issue price is effectively amortized may be longer than
the economic life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Service may provide future guidance on the proper tax treatment
of payments made by a transferor of such a residual interest to induce the
transferee to acquire the interest, and Residual Certificateholders should
consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate is
greater that the corresponding portion of the REMIC Pool's basis in the Mortgage
Loans, the Residual Certificateholder will not recover a portion of such basis
until termination of the REMIC Pool unless future Treasury regulations provide
for periodic adjustments to the REMIC income otherwise reportable by such
holder. The REMIC Regulations currently in effect do not so provide.
You should review the sections titled "Treatment of Certain Items of REMIC
Income and Expense--Market Discount" below regarding the basis of Mortgage Loans
to the REMIC Pool and "Sale or Exchange of a Residual Certificate" below
regarding possible treatment of a loss upon termination of the REMIC Pool as a
capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Although we intend to compute REMIC income and expense in accordance with
the Code and applicable regulations, the authorities regarding the determination
of specific items of income and expense are subject to differing
interpretations. 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.
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ORIGINAL ISSUE DISCOUNT AND PREMIUM. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of issue premium will
be determined in the same manner as original issue discount income on Regular
Certificates as described above under "Taxation of Regular
Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates", without regard to the de minimis rule described therein, and
"--Premium".
DEFERRED INTEREST. Any Deferred Interest that accrues with respect to any
adjustable rate Mortgage Loans held by the REMIC Pool will constitute income to
the REMIC Pool and will be treated in a manner similar to the Deferred Interest
that accrues with respect to Regular Certificates as described above under
"Taxation of Regular Certificates--Deferred Interest".
MARKET DISCOUNT. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool allocable to the
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool (or the fair
market value thereof at the Closing Date, in the case of a retained class). In
respect of Mortgage Loans that have market discount to which Code Section 1276
applies, the accrued portion of such market discount would be recognized
currently as an item of ordinary income in a manner similar to original issue
discount. Market discount income generally should accrue in the manner described
above under "Taxation of Regular Certificates--Market Discount".
PREMIUM. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
(or the fair market value of retained Classes) of the regular and residual
interests in the REMIC Pool immediately after the transfer thereof to the REMIC
Pool. In a manner analogous to the discussion above under "Taxation of Regular
Certificates--Premium", a REMIC Pool that holds a Mortgage Loan as a capital
asset under Code Section 1221 may elect under Code Section 171 to amortize
premium on whole mortgage loans or mortgage loans underlying MBS that were
originated after September 27, 1985 or MBS that are REMIC regular interests
under the constant yield method. Amortizable bond premium will be treated as an
offset to interest income on the Mortgage Loans, rather than as a separate
deduction item. To the extent that the mortgagors with respect to the Mortgage
Loans are individuals, Code Section 171 will not be available for premium on
Mortgage Loans (including underlying mortgage loans) originated on or prior to
September 27, 1985. Premium with respect to such Mortgage Loans may be
deductible in accordance with a reasonable method regularly employed by the
holder thereof. The allocation of such premium pro rata among principal payments
should be considered a reasonable method; however, the
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Service may argue that the premium should be allocated in a different manner,
such as allocating such premium entirely to the final payment of principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
A portion or all of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Certificateholder will be subject to
special treatment. That portion, referred to as the "excess inclusion", is equal
to the excess of REMIC taxable income for the calendar quarter allocable to a
Residual Certificate over the daily accruals for such quarterly period of (i)
120% of the long-term applicable Federal rate that would have applied to the
Residual Certificate (if it were a debt instrument) on the Startup Day under
Code Section 1274(d), multiplied by (ii) the adjusted issue price of such
Residual Certificate at the beginning of such quarterly period. For this
purpose, the adjusted issue price of a Residual Certificate at the beginning of
a quarter is the issue price of the Residual Certificate, plus the amount of
such daily accruals of REMIC income described in this paragraph for all prior
quarters, decreased by any distributions made with respect to that Residual
Certificate prior to the beginning of such quarterly period. Accordingly, the
portion of the REMIC Pool's taxable income that will be treated as excess
inclusions will be a larger portion of such income as the adjusted issue price
of the Residual Certificates diminishes.
The portion of a Residual Certificateholder's REMIC taxable income
consisting of the excess inclusions generally may not be offset by other
deductions, including net operating loss carry forwards, on such Residual
Certificateholder's return. However, net operating loss carryovers are
determined without regard to excess inclusion income. Further, if the Residual
Certificateholder is an organization subject to the tax on unrelated business
income imposed by Code Section 511, the Residual Certificateholder's excess
inclusions will be treated as unrelated business taxable income of that Residual
Certificateholder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under "Tax-Related Restrictions on Transfer
of Residual Certificates--Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "Taxation of Certain Foreign
Investors--Residual Certificates" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Certificate, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or a regulated investment company could not be
offset by net operating losses of its shareholders, would constitute unrelated
business taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
of 1996 has eliminated the special rule permitting Section 593 institutions
("thrift institutions") to use net operating losses and other allowable
deductions to offset their excess inclusion income from Residual Certificates
that have "significant value" within the meaning of the REMIC Regulations,
effective for taxable years beginning after December 31, 1995,
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except with respect to Residual Certificates continuously held by thrift
institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Certificateholder. First, alternative minimum taxable income for a
Residual Certificateholder is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions.
Second, a Residual Certificateholder's alternative minimum taxable income for a
taxable year cannot be less than the excess inclusions for the year. Third, the
amount of any alternative minimum tax net operating loss deduction must be
computed without regard to any excess inclusions. These rules are effective for
taxable years beginning after December 31, 1996, unless a Residual
Certificateholder elects to have such rules apply only to taxable years
beginning after August 20, 1996.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
DISQUALIFIED ORGANIZATIONS. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below) other than in connection with the formation of a REMIC Pool, if the
Disqualified Organization is required, pursuant to a binding contract, to sell
that Residual Certificate, which sale occurs within seven days after the Startup
Days, a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value rate equals the applicable
Federal rate under Code Section 1274(d) as of the date of the transfer for a
term ending with the last calendar quarter in which excess inclusions are
expected to accrue. Such a tax generally would be imposed on the transferor of
the Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified Organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. The tax also may be waived by the Treasury Department if the
Disqualified Organization promptly disposes of the residual interest and the
transferor pays income tax at the highest corporate rate on the excess
inclusions for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual
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Certificate that are allocable to the interest in the Pass-Through Entity during
the period such interest is held by such Disqualified Organization, and (ii) the
highest marginal federal corporate income tax rate. Such tax would be deductible
from the ordinary gross income of the Pass-Through Entity for the taxable year.
The Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that it is not a Disqualified Organization or
stating such holder's taxpayer identification number and, during the period such
person is the record holder of the Residual Certificate, the Pass-Through Entity
does not have actual knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the following:
o the United States, any state or political subdivision thereof,
o any foreign government,
o any international organization,
o any agency or instrumentality of any of the foregoing (provided, that
such term does not include an instrumentality if all of its activities are
subject to tax and, except in the case of the Federal Home Loan Mortgage
Corporation, a majority of its board of directors is not selected by any
such governmental entity),
o any cooperative organization furnishing electric energy or providing
telephone service to persons in rural areas as described in Code Section
1381(a)(2)(C), and
o any organization (other than a farmers' cooperative described in Code
Section 521) that is exempt from taxation under the Code unless such
organization is subject to the tax on unrelated business income imposed by
Code Section 511.
"Pass-Through Entity" means any regulated investment company, real estate
investment trust, common trust fund, partnership, trust or estate and certain
corporations operating on a cooperative basis. Except as may be provided in
Treasury regulations, any person holding an interest in a Pass-Through Entity as
a nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity.
The pooling agreement with respect to a series of certificates will provide
that no legal or beneficial interest in a Residual Certificate may be
transferred unless the following occurs:
(i) the proposed transferee provides to the transferor and the
trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual
Certificate, is not a Disqualified Organization and is not purchasing such
Residual Certificates on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof), and
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(ii) the transferor provides a statement in writing to us and the
trustee that it has no actual knowledge that such affidavit is false.
Moreover, the pooling agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null and
void and will vest no rights in any purported transferee. Each Residual
Certificate with respect to a series will bear a legend referring to such
restrictions on transfer, and each Residual Certificateholder will be deemed to
have agreed, as a condition of ownership thereof, to any amendments to the
related pooling agreement required under the Code or applicable Treasury
regulations to effectuate the foregoing restrictions. Information necessary to
compute an applicable excise tax must be furnished to the Service and to the
requesting party within 60 days of the request, and we or the trustee may charge
a fee for computing and providing such information.
NONECONOMIC RESIDUAL INTERESTS. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Certificateholder (other than a
Residual Certificateholder who is not a U.S. Person, as defined below under
"Foreign Investors") is disregarded for all federal income tax purposes if a
significant purpose of the transferor is to impede the assessment or collection
of tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) is a "noneconomic residual interest" unless, at the
time of the transfer, (i) the present value of the expected future distributions
on the residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the REMIC
at or after the time at which taxes accrue on the anticipated excess inclusions
in an amount sufficient to satisfy the accrued taxes. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "Disqualified Organizations". The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of the noneconomic residual
interest, the transferee may incur tax liabilities in excess of cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The pooling
agreement with respect to each series of certificates will require the
transferee of a Residual Certificate to certify to the matters in the preceding
sentence as part of the affidavit
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described above under the heading "Disqualified Organizations". The transferor
must have no actual knowledge or reason to know that such statements are false.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States or not otherwise subject to a withholding tax.
A Residual Certificate is deemed to have tax avoidance potential unless, at the
time of the transfer, (i) the future value of expected distributions equals at
least 30% of the anticipated excess inclusions after the transfer, and (ii) the
transferor reasonably expects that the transferee will receive sufficient
distributions from the REMIC Pool at or after the time at which the excess
inclusions accrue and prior to the end of the next succeeding taxable year for
the accumulated withholding tax liability to be paid. If the non-U.S. Person
transfers the Residual Certificate back to a U.S. Person, the transfer will be
disregarded and the foreign transferor will continue to be treated as the owner
unless arrangements are made so that the transfer does not have the effect of
allowing the transferor to avoid tax on accrued excess inclusions.
The prospectus supplement relating to a series of certificates may provide
that a Residual Certificate may not be purchased by or transferred to any person
that is not a U.S. Person or may describe the circumstances and restrictions
pursuant to which such a transfer may be made. The term "U.S. Person" means a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
State, an estate that is subject to United States federal income tax regardless
of the source of its income or a trust if (A) for taxable years beginning after
December 31, 1996 (or for taxable years ending after August 20, 1996, if the
trustee has made an applicable election), a court within the United States is
able to exercise primary supervision over the administration of such trust, and
one or more United States persons have the authority to control all substantial
decisions of such trust, or (B) for all other taxable years, such trust is
subject to United States federal income tax regardless of the source of its
income (or, to the extent provided in applicable Treasury Regulations, certain
trusts in existence on August 20, 1996 which are eligible to elect to be treated
as U.S. Persons).
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under "Taxation
of Residual Certificates--Basis and Losses") of such Residual Certificateholder
in such Residual Certificate at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Certificateholder
will have taxable income to the extent that any cash distribution to it from the
REMIC Pool exceeds such adjusted basis on that
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Distribution Date. Such income will be treated as gain from the sale or exchange
of the Residual Certificate. It is possible that the termination of the REMIC
Pool may be treated as a sale or exchange of a Residual Certificateholder's
Residual Certificate, in which case, if the Residual Certificateholder has an
adjusted basis in such Residual Certificateholder's Residual Certificate
remaining when its interest in the REMIC Pool terminates, and if such Residual
Certificateholder holds such Residual Certificate as a capital asset under Code
Section 1221, then such Residual Certificateholder will recognize a capital loss
at that time in the amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Certificate by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Certificate.
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MARK-TO-MARKET REGULATIONS
The Service has issued regulations (the "Mark-to-Market Regulations") under
Code Section 475 relating to the requirement that a securities dealer
mark-to-market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that the
dealer has specifically identified a security as held for investment. The
Mark-to-Market Regulations provide that, for purposes of this mark-to-market
requirement, a Residual Certificate is not treated as a security and thus may
not be marked-to-market. The Mark-to-Market Regulations apply to all Residual
Certificates acquired on or after January 4, 1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Certificateholders, but rather
will be taxed directly to the REMIC Pool at a 100% rate. Prohibited transactions
generally include
(i) the disposition of a qualified mortgage other than pursuant to a
(a) substitution within two years of the Startup Day for a defective
(including a defaulted) obligation (or repurchase in lieu of substitution
of a defective (including a defaulted) obligation at any time) or for any
qualified mortgage within three months of the Startup Day, (b) foreclosure,
default or imminent default of a qualified mortgage, (c) bankruptcy or
insolvency of the REMIC Pool or (d) qualified (complete) liquidation,
(ii) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold,
(iii) the receipt of compensation for services or
(iv) the receipt of gain from disposition of cash flow investments
other than pursuant to a qualified liquidation.
Notwithstanding (i) and (iv), it is not a prohibited transaction to sell
REMIC Pool property to prevent a default on Regular Certificates as a result of
a default on qualified mortgages or to facilitate a clean-up call (generally, an
optional termination to save administrative costs when no more than a small
percentage of the certificates is outstanding). The REMIC Regulations indicate
that the modification of a Mortgage Loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the Mortgage Loan, the waiver of a due-on-sale or
due-on-encumbrance clause or the conversion of an interest rate by a mortgagor
pursuant to the terms of a convertible adjustable rate Mortgage Loan.
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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:
(i) during the three months following the Startup Day,
(ii) if made to a qualified reserve fund by a Residual
Certificateholder,
(iii) if in the nature of a guarantee,
(iv) if made to facilitate a qualified liquidation or clean-up call
and
(v) 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 Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on the date of the adoption of the plan of liquidation, the REMIC Pool
will not be subject to the prohibited transaction rules on the sale of its
assets, provided that the REMIC Pool credits or distributes in liquidation all
of the sale proceeds plus its cash (other than amounts retained to meet claims)
to holders of Regular Certificates and Residual Certificateholders within the
90-day period.
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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 such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Certificateholder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Service of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction or credit in a unified administrative
proceeding. The Residual Certificateholder owning the largest percentage
interest in the Residual Certificates will be obligated to act as "tax matters
person", as defined in applicable Treasury regulations, with respect to the
REMIC Pool. Each Residual Certificateholder will be deemed, by acceptance of
such Residual Certificates, to have agreed (i) to the appointment of the tax
matters person as provided in the preceding sentence and (ii) to the irrevocable
designation of the master servicer as agent for performing the functions of the
tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of the following:
(i) 3% of the excess, if any, of adjusted gross income over $124,500 for
the taxable year beginning in 1998 ($62,250 in the case of a married individual
filing a separate return) (subject to adjustments for inflation in subsequent
years) or
(ii) 80% of the amount of itemized deductions otherwise allowable for such
year.
In the case of a REMIC Pool, such deductions may include deductions under
Code Section 212 for the servicing fee and all administrative and other expenses
relating to the 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 certain pass-through
entities may have their pro rata share of such expenses allocated to them as
additional gross income, but may be subject to such limitation on deductions. In
addition, 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 liability. Temporary Treasury regulations provide that the
additional gross income and corresponding amount of expenses generally are to
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be allocated entirely to the holders of Residual Certificates in the case of a
REMIC Pool that would not qualify as a fixed investment trust in the absence of
a REMIC election. However, such additional gross income and limitation on
deductions will apply to the allocable portion of such expenses to holders of
Regular Certificates, as well as holders of Residual Certificates, where Regular
Certificates are issued in a manner that is similar to pass-through certificates
in a fixed investment trust. In general, such allocable portion will be
determined based on the ratio that a REMIC Certificateholder's income,
determined on a daily basis, bears to the income of all holders of Regular
Certificates and Residual Certificates with respect to a REMIC Pool. As a
result, individuals, estates or trusts holding REMIC Certificates (either
directly or indirectly through a grantor trust, partnership, S corporation,
REMIC, or certain other pass-through entities described in the foregoing
temporary Treasury regulations) may have taxable income in excess of the
interest income at the pass-through rate on Regular Certificates that are issued
in a single Class or otherwise consistently with fixed investment trust status
or in excess of cash distributions for the related period on Residual
Certificates. Unless otherwise indicated in the applicable prospectus
supplement, all such expenses will be allocable to the Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR CERTIFICATES
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
trustee, or the person who would otherwise be required to withhold tax from such
distributions under Code Section 1441 or 1442, with an appropriate statement,
signed under penalties of perjury, identifying the beneficial owner and stating,
among other things, that the beneficial owner of the Regular Certificate is a
Non-U.S. Person. If such statement, or any other required statement, is not
provided, 30% withholding will apply unless reduced or eliminated pursuant to an
applicable tax treaty or unless the interest on the Regular Certificate is
effectively connected with the conduct of a trade or business within the United
States by such Non-U.S. Person. In the latter case, such Non-U.S. Person will be
subject to United States federal income tax at regular rates. Prepayment
Premiums distributable to Regular Certificateholders who are Non-U.S. Persons
may be subject to 30% United States withholding tax. Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a Regular Certificate. The term "Non-U.S. Person"
means any person who is not a U.S. Person.
RESIDUAL CERTIFICATES
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The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Certificateholders who are Non-U.S. Persons are treated as interest
for purposes of the 30% (or lower treaty rate) United States withholding tax.
Treasury regulations provide that amounts distributed to Residual
Certificateholders may qualify as "portfolio interest", subject to the
conditions described in "Regular Certificates" above, but only to the extent
that (i) the Mortgage Loans (including mortgage loans underlying MBS) were
issued after July 18, 1984 and (ii) the trust fund or segregated pool of assets
therein (as to which a separate REMIC election will be made), to which the
Residual Certificate relates, consists of obligations issued in "registered
form" within the meaning of Code Section 163(f)(1). Generally, whole mortgage
loans will not be, but MBS and regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, a Residual
Certificateholder will not be entitled to any exemption from the 30% withholding
tax (or lower treaty rate) to the extent of that portion of REMIC taxable income
that constitutes an "excess inclusion". See "Taxation of Residual
Certificates--Limitations on Offset or Exemption of 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 such Non-U.S. Persons, 30% (or lower treaty rate)
withholding will not apply. Instead, the amounts paid to such Non-U.S. Persons
will be subject to United States federal income tax at regular rates. If 30% (or
lower treaty rate) withholding is applicable, such amounts generally will be
taken into account for purposes of withholding only when paid or otherwise
distributed (or when the Residual Certificate is disposed of) under rules
similar to withholding upon disposition of debt instruments that have original
issue discount. See "Tax-Related Restrictions on Transfer of Residual
Certificates--Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential". Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences to
them of owning Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Certificateholder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the trustee, its agent or the
broker who effected the sale of the Regular Certificate, or such
certificateholder is otherwise an exempt recipient under applicable provisions
of the Code. Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the Service or allowed as a credit against the
Regular Certificateholder's federal income tax liability.
REPORTING REQUIREMENTS
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Reports of accrued interest, original issue discount and information
necessary to compute the accrual of any market discount on the Regular
Certificates will be made annually to the Service and to individuals, estates,
non-exempt and non-charitable trusts, and partnerships who are either holders of
record of Regular Certificates or beneficial owners who own Regular Certificates
through a broker or middleman as nominee. All brokers, nominees and all other
non-exempt holders of record of Regular Certificates (including corporations,
non-calendar year taxpayers, securities or commodities dealers, real estate
investment trusts, investment companies, common trust funds, thrift institutions
and charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Service
Publication 938 with respect to a particular series of Regular Certificates.
Holders through nominees must request information from the nominee.
The Service's Form 1066 has an accompanying Schedule Q, Quarterly Notice
to Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Certificateholder by the end of the month following the close of
each calendar quarter (41 days after the end of a quarter under proposed
Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Service concerning Code Section 67
expenses (see "Limitations on Deduction of Certain Expenses" above) allocable to
such holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Certificateholders, furnished annually to holders of
Regular Certificates, and filed annually with the Service concerning the
percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Status of REMIC Certificates".
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC ELECTION
IS MADE
STANDARD CERTIFICATES
GENERAL
In the event that no election is made to treat a trust fund (or a
segregated pool of assets therein) with respect to a series of certificates that
are not designated as "Stripped Certificates", as described below, as a REMIC
(certificates of such a series hereinafter referred to as "Standard
Certificates"), the trust fund will be classified as a grantor trust under
subpart E, Part 1 of subchapter J of the Code and not as an association taxable
as a corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Where there is no fixed retained yield with respect to the Mortgage
Loans underlying the Standard Certificates, the holder of each such Standard
Certificate (a "Standard
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Certificateholder") in such series will be treated as the owner of a pro rata
undivided interest in the ordinary income and corpus portions of the trust fund
represented by its Standard Certificate and will be considered the beneficial
owner of a pro rata undivided interest in each of the Mortgage Loans, subject to
the discussion below under "Recharacterization of Servicing Fees". Accordingly,
the holder of a Standard Certificate of a particular series will be required to
report on its federal income tax return its pro rata share of the entire income
from the Mortgage Loans represented by its Standard Certificate, including
interest at the coupon rate on such Mortgage Loans, original issue discount (if
any), prepayment fees, assumption fees, and late payment charges received by the
master servicer, in accordance with such Standard Certificateholder's method of
accounting. A Standard Certificateholder generally will be able to deduct its
share of the servicing fee and all administrative and other expenses of the
trust fund in accordance with its method of accounting, provided that such
amounts are reasonable compensation for services rendered to that trust fund.
However, investors who are individuals, estates or trusts who own Standard
Certificates, either directly or indirectly through certain pass-through
entities, will be subject to limitation with respect to certain itemized
deductions described in Code Section 67, including deductions under Code Section
212 for the servicing fee and all such administrative and other expenses of the
trust fund, to the extent that such deductions, in the aggregate, do not exceed
two percent of an investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $124,500 for the taxable year beginning in
1998 ($62,250 in the case of a married individual filing a separate return)
(subject to adjustments for inflation in subsequent years), or (ii) 80% of the
amount of itemized deductions otherwise allowable for such year. As a result,
investors holding Standard Certificates, directly or indirectly through a
pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Standard Certificates with respect to
interest at the pass-through rate on such Standard Certificates. In addition,
such expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is fixed retained
yield with respect to the Mortgage Loans underlying a series of Standard
Certificates or where the servicing fee is in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Certificates" and "Recharacterization of Servicing Fees",
respectively.
TAX STATUS
Standard Certificates will have the following status for federal income tax
purposes:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be considered
to represent "loans . . . secured by an interest in real property which is . . .
residential real property" within the meaning of Code Section
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7701(a)(19)(C)(v), provided that the real property securing the Mortgage Loans
represented by that Standard Certificate is of the type described in such
section of the Code.
2. A Standard Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code Section
856(c)(4)(A) to the extent that the assets of the related trust fund consist of
qualified assets, and interest income on such assets will be considered
"interest on obligations secured by mortgages on real property" to such extent
within the meaning of Code Section 856(c)(3)(B).
3. A Standard Certificate owned by a REMIC will be considered to represent
an "obligation . . . which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent that
the assets of the related trust fund consist of "qualified mortgages" within the
meaning of Code Section 860G(a)(3).
PREMIUM AND DISCOUNT
Standard Certificateholders are advised to consult with their tax advisors
as to the federal income tax treatment of premium and discount arising either
upon initial acquisition of Standard Certificates or thereafter.
PREMIUM. The treatment of premium incurred upon the purchase of a Standard
Certificate will be determined generally as described above under "Certain
Federal Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Treatment of Certain Items of REMIC Income and Expense--Premium".
ORIGINAL ISSUE DISCOUNT. The original issue discount rules will be
applicable to a Standard Certificateholder's interest in those Mortgage Loans as
to which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount income are applicable to
mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, such original issue discount could arise by the charging of points
by the originator of the mortgages in an amount greater than a statutory de
minimis exception, including a payment of points currently deductible by the
borrower under applicable Code provisions or, under certain circumstances, by
the presence of "teaser rates" on the Mortgage Loans.
Original issue discount must generally be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable prospectus supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if such Mortgage Loans acquired by a
Standard Certificateholder are purchased at a price equal to the then unpaid
principal amount of such Mortgage Loans, no original issue discount
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attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by
such holder.
MARKET DISCOUNT. Standard Certificateholders also will be subject to the
market discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "Certain Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Market Discount", except that the ratable accrual
methods described therein will not apply and it is unclear whether a Prepayment
Assumption would apply. Rather, the holder will accrue market discount pro rata
over the life of the Mortgage Loans, unless the constant yield method is
elected. Unless indicated otherwise in the applicable prospectus supplement, no
prepayment assumption will be assumed for purposes of such accrual.
RECHARACTERIZATION OF SERVICING FEES. If the servicing fee paid to the
master servicer were deemed to exceed reasonable servicing compensation, the
amount of such excess would represent neither income nor a deduction to
certificateholders. In this regard, there are no authoritative guidelines for
federal income tax purposes as to either the maximum amount of servicing
compensation that may be considered reasonable in the context of this or similar
transactions or whether, in the case of the Standard Certificate, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that such amount would exceed reasonable servicing compensation as to
some of the Mortgage Loans would be increased. Service guidance indicates that a
servicing fee in excess of reasonable compensation ("excess servicing") will
cause the Mortgage Loans to be treated under the "stripped bond" rules. Such
guidance provides safe harbors for servicing deemed to be reasonable and
requires taxpayers to demonstrate that the value of servicing fees in excess of
such amounts is not greater than the value of the services provided.
Accordingly, if the Service's approach is upheld, a servicer who receives a
servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as "stripped coupons" and "stripped bonds".
Subject to the de minimis rule discussed below under "--Stripped Certificates",
each stripped bond or stripped coupon could be considered for this purpose as a
non-interest bearing obligation issued on the date of issue of the Standard
Certificates, and the original issue discount rules of the Code would apply to
the holder thereof. While Standard Certificateholders would still be treated as
owners of beneficial interests in a grantor trust for federal income tax
purposes, the corpus of such trust could be viewed as excluding the portion of
the Mortgage Loans the ownership of which is attributed to the master servicer,
or as including such portion as a second class of equitable interest. Applicable
Treasury regulations treat such an arrangement as a fixed investment trust,
since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership interests is incidental to that purpose. In
general, such a recharacterization should not have any significant effect upon
the timing or amount of income reported by a Standard Certificateholder, except
that the income reported by a cash method holder may be slightly accelerated.
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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 certain financial institutions subject to the
provisions of Code Section 582(c), any such gain or loss would be capital gain
or loss if the Standard Certificate was held as a capital asset. However, gain
on the sale of a Standard Certificate will be treated as ordinary income (i) if
a Standard Certificate is held as part of a "conversion transaction" as defined
in Code Section 1258(c), up to the amount of interest that would have accrued on
the Standard Certificateholder's net investment in the conversion transaction at
120% of the appropriate applicable Federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as a part of such transaction or (ii) in the case of a non-corporate taxpayer,
to the extent such taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income rates.
Capital gains of certain non-corporate taxpayers are subject to a lower maximum
tax rate (28%) than ordinary income of such taxpayers (39.6%) for property held
for more than one year but not more than 18 months, and a still lower maximum
rate (20%) for property held for more than 18 months. The maximum tax rate for
corporations is the same with respect to both ordinary income and capital gains.
STRIPPED CERTIFICATES
GENERAL
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
certificates that are subject to those rules will be referred to as "Stripped
Certificates". Stripped Certificates include "Stripped Interest Certificates"
and "Stripped Principal Certificates" (as defined in this Prospectus) as to
which no REMIC election is made.
The certificates will be subject to those rules if the following occur:
(i) 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,
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(ii) the master servicer is treated as having an ownership interest
in the Mortgage Loans to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for
servicing the Mortgage Loans (see "Standard
Certificates--Recharacterization of Servicing Fees" above) and
(iii) certificates are issued in two or more classes or subclasses
representing the right to non-pro-rata percentages of the interest and
principal payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid to the master servicer, to the extent that such fees
represent reasonable compensation for services rendered. See discussion above
under "Standard Certificates--Recharacterization of Servicing Fees". Although
not free from doubt, for purposes of reporting to Stripped Certificateholders,
the servicing fees will be allocated to the Stripped Certificates in proportion
to the respective entitlements to distributions of each class (or subclass) of
Stripped Certificates for the related period or periods. The holder of a
Stripped Certificate generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "Standard
Certificates--General", subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon as an
obligation issued at an original issue discount on the date that such stripped
interest is purchased. Although the treatment of Stripped Certificates for
federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, we have has been advised
by counsel that (i) the trust fund will be treated as a grantor trust under
subpart E, Part 1 of subchapter J of the Code and not as an association taxable
as a corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i), and (ii) each Stripped Certificate should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship of
Code Section 1286, Code Sections 1272 through 1275, and the OID Regulations.
While under Code Section 1286 computations with respect to Stripped Certificates
arguably should be made in one of the ways described below under "Taxation of
Stripped Certificates--Possible Alternative Characterizations," the OID
Regulations state, in general, that two or more debt instruments issued by a
single issuer to a single investor in a single transaction should be treated as
a single debt instrument for original issue discount purposes. The pooling
agreement requires that the trustee make and report all computations described
below using this aggregate approach, unless substantial legal authority requires
otherwise.
Furthermore, Treasury regulations issued December 28, 1992, assume that a
Stripped Certificate will be treated as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount and
that the interest component of such a Stripped Certificate would be treated as
qualified stated interest under the OID Regulations. Further pursuant to these
final regulations the purchaser of such a Stripped Certificate will be required
to account for any discount as market discount rather than original issue
discount unless either (i) the initial discount with respect to the Stripped
Certificate was treated as zero under the de minimis rule of Code Section
1273(a)(3), or (ii)
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no more than 100 basis points in excess of reasonable servicing is stripped off
the related Mortgage Loans. Any such market discount would be reportable as
described under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Market Discount," without regard
to the de minimis rule therein, assuming that a prepayment assumption is
employed in such computation.
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 Code Section
856(c)(4)(A), "obligation[s] principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A), and "loans . . .
secured by an interest in real property which is . . . residential real
property" within the meaning of Code Section 7701(a)(19)(C)(v), and interest
(including original issue discount) income attributable to Stripped Certificates
should be considered to represent "interest on obligations secured by mortgages
on real property" within the meaning of Code Section 856(c)(3)(B), provided that
in each case the Mortgage Loans and interest on such Mortgage Loans qualify for
such treatment.
TAXATION OF STRIPPED CERTIFICATES
ORIGINAL ISSUE DISCOUNT. Except as described above under "General", each
Stripped Certificate will be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount with respect
to a Stripped Certificate must be included in ordinary income as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, the amount of original issue discount required to be included in the income
of a holder of a Stripped Certificate (referred to in this discussion as a
"Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under "Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates". However, with the apparent exception of
a Stripped Certificate qualifying as a market discount obligation, as described
above under "General", the issue price of a Stripped Certificate will be the
purchase price paid by each holder 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
such Stripped Certificateholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the amount
of such original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Certificateholder's Stripped Certificate. While the
matter is not free from doubt, the holder of a Stripped Certificate should be
entitled in the year that it becomes certain
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(assuming no further prepayments) that the holder will not recover a portion of
its adjusted basis in such Stripped Certificate to recognize an ordinary loss
equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Certificates. However, if final regulations dealing with contingent
interest with respect to the Stripped Certificates apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Stripped Certificates as ordinary income. 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 such Stripped Certificate, as described
above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Sale or Exchange of Regular
Certificates". To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Certificates, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Stripped Certificateholder other than an original
Stripped Certificateholder should be the Prepayment Assumption or a new rate
based on the circumstances at the date of subsequent purchase.
PURCHASE OF MORE THAN ONE CLASS OF STRIPPED CERTIFICATES. Where an investor
purchases more than one class of Stripped Certificates, it is currently unclear
whether for federal income tax purposes such classes of Stripped Certificates
should be treated separately or aggregated for purposes of the rules described
above.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. The characterizations of the
Stripped Certificates discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Stripped Certificateholder
may be treated as the owner of any of the following:
(i) one installment obligation consisting of such Stripped
Certificate's pro rata share of the payments attributable to principal on
each Mortgage Loan and a second installment obligation consisting of such
Stripped Certificate's pro rata share of the payments attributable to
interest on each Mortgage Loan,
(ii) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each Mortgage Loan or
(iii) a separate installment obligation for each Mortgage Loan,
representing the Stripped Certificate's pro rata share of payments of
principal and/or interest to be made with respect thereto.
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Alternatively, the holder of one or more classes of Stripped Certificates
may be treated as the owner of a pro rata fractional undivided interest in each
Mortgage Loan to the extent that such Stripped Certificate, or classes of
Stripped Certificates in the aggregate, represent the same pro rata portion of
principal and interest on each such Mortgage Loan, and a stripped bond or
stripped coupon (as the case may be), treated as an installment obligation or
contingent payment obligation, as to the remainder. Final regulations issued on
December 28, 1992 regarding original issue discount on stripped obligations make
the foregoing interpretations less likely to be applicable. The preamble to
those regulations states that they are premised on the assumption that an
aggregation approach is appropriate for determining whether original issue
discount on a stripped bond or stripped coupon is de minimis, and solicits
comments on appropriate rules for aggregating stripped bonds and stripped
coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
FEDERAL INCOME TAX CONSEQUENCES FOR FASIT CERTIFICATES
If and to the extent set forth in the prospectus supplement relating to a
particular series of certificates, an election may be made to treat the related
trust fund or one or more segregated pools of assets therein as one or more
financial asset securitization investment trusts ("FASITs") within the meaning
of Code Section 860L(a). Qualification as a FASIT requires ongoing compliance
with certain conditions. With respect to each series of FASIT Certificates,
O'Melveny & Myers LLP, our counsel, will advise us that in the firm's opinion,
assuming (i) the making of such an election, (ii) compliance with the pooling
agreement and (iii) compliance with any changes in the law, including any
amendments to the Code or applicable Treasury Regulations thereunder, each FASIT
Pool will qualify as a FASIT. In such case, the Regular Certificates will be
considered to be "regular interests" in the FASIT and will be treated for
federal income tax purposes as if they were newly originated debt instruments,
and the Residual Certificate will be considered the "ownership interest" in the
FASIT Pool. The prospectus supplement for each series of certificates will
indicate whether one or more FASIT elections will be made with respect to the
related trust fund.
FASIT treatment has become available pursuant to recently enacted
legislation, and no Treasury regulations have as yet been issued detailing the
circumstances under which a FASIT election may be made or the consequences of
such an election. If a FASIT election is made with respect to any trust fund or
as to any segregated pool of assets therein, the related prospectus supplement
will describe the Federal income tax consequences of such election.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The trustee will furnish, within a reasonable time after the end of each
calendar year, to each Standard Certificateholder or Stripped Certificateholder
at any time during such year, such information (prepared on the basis described
above) as the trustee deems to be necessary or desirable to enable such
certificateholders to prepare their federal income tax returns. Such information
will include the amount
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of original issue discount accrued on certificates held by persons other than
certificateholders exempted from the reporting requirements. The amounts
required to be reported by the trustee may not be equal to the proper amount of
original issue discount required to be reported as taxable income by a
certificateholder, other than an original certificateholder that purchased at
the issue price. In particular, in the case of Stripped Certificates, unless
provided otherwise in the applicable prospectus supplement, such reporting will
be based upon a representative initial offering price of each class of Stripped
Certificates. The trustee will also file such original issue discount
information with the Service. If a certificateholder fails to supply an accurate
taxpayer identification number or if the Secretary of the Treasury determines
that a certificateholder has not reported all interest and dividend income
required to be shown on his federal income tax return, 31% backup withholding
may be required in respect of any reportable payments, as described above under
"Certain Federal Income Tax Consequences for REMIC Certificates--Backup
Withholding".
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Standard Certificateholder or Stripped
Certificateholder on original issue discount recognized by the Standard
Certificateholder or Stripped Certificateholders on the sale or exchange of such
a Certificate also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under "Certain
Federal Income Tax Consequences for REMIC Certificates--Taxation of Certain
Foreign Investors--Regular Certificates".
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," 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 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 ("ERISA"),
and Section 4975 of the Code impose certain requirements on employee benefit
plans, and on certain other
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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 such plans,
accounts or arrangements are invested (all of which are hereinafter referred to
as "Plans"), and on persons who are fiduciaries with respect to Plans in
connection with the investment of Plan assets.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties in Interest") who
have certain specified relationships to the Plan, unless a statutory or
administrative exemption is available. Parties in Interest that participate in a
prohibited transaction may be subject to an excise tax imposed pursuant to
Section 4975 of the Code, unless a statutory or administrative exemption is
available. These prohibited transactions generally are set forth in Section 406
of ERISA and Section 4975 of the Code. Special caution should be exercised
before the assets of a Plan are used to purchase a Certificate if, with respect
to such assets, 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 such assets of such Plan; or (b)
has authority or responsibility to give, or regularly gives, investment advice
with respect to such assets of such Plan for a fee and pursuant to an agreement
or understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets and that such advice will be based on the
particular investment needs of the Plan.
Before purchasing any offered certificates, a Plan fiduciary should consult
with its counsel and determine whether there exists any prohibition to such
purchase under the requirements of ERISA, whether any prohibited transaction
class exemption or any individual prohibited transaction exemption (as described
below) applies, including whether the appropriate conditions set forth therein
would be met, or whether any statutory prohibited transaction exemption is
applicable, and further should consult the applicable prospectus supplement
relating to such series of certificates.
Certain employee benefit plans, such as governmental plans (as defined in
ERISA Section 3(32)), and, if no election has been made under Section 410(d) of
the Code, church plans (as defined in Section 3(33) of ERISA) are not subject to
ERISA requirements. Accordingly, assets of such governmental and church plans
may be invested in offered certificates without regard to the ERISA
considerations described below, subject to the provisions of other applicable
federal and state law. Any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Code, however, is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
PLAN ASSET REGULATIONS
A Plan's investment in offered certificates may cause the Trust Assets to
be deemed Plan assets. Section 2510.3-101 of the regulations ("Plan Asset
Regulations") of the United States Department of Labor ("DOL") provides that
when a Plan acquires an equity interest in an entity, the Plan's assets include
both such equity interest and an undivided interest in each of the underlying
assets of the entity, unless certain exceptions not applicable to this
discussion apply, or unless the equity participation in the entity by "benefit
plan investors" (that is, Plans, certain employee benefit plans not subject to
ERISA,
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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 such assets for a fee, is a fiduciary of the investing
Plan. If the Trust Assets constitute Plan assets, then any party exercising
management or discretionary control regarding those assets, such as a master
servicer, a special servicer or any sub-servicer, may be deemed to be a Plan
"fiduciary" with respect to the investing Plan, and thus subject to the
fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code. In addition, if the Trust Assets constitute Plan assets, the
purchase of certificates by a Plan, as well as the operation of the trust fund,
may constitute or involve one or more prohibited transactions under ERISA and
the Code.
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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 such possibility, as well as provide a
summary of the conditions to the exemption's applicability.
UNRELATED BUSINESS TAXABLE INCOME; RESIDUAL CERTIFICATES
The purchase of a Residual Certificate by any employee benefit plan
qualified under Code Section 401(a) and exempt from taxation under Code Section
501(a), including most varieties of ERISA plans, may give rise to "unrelated
business taxable income" as described in Code Sections 511-515 and 860E.
Further, prior to the purchase of Residual Certificates, a prospective
transferee may be required to provide an affidavit to a transferor that it is
not, nor is it purchasing a Residual Certificate on behalf of, a "Disqualified
Organization," which term as defined above includes certain tax-exempt entities
not subject to Code Section 511 including certain governmental plans, as
discussed above under the caption "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates--Disqualified Organizations."
Due to the complexity of these rules and the penalties that may be imposed
upon persons involved in prohibited transactions, it is particularly important
that potential investors who are Plan fiduciaries consult with their counsel
regarding the consequences under ERISA of their acquisition and ownership of
certificates.
The sale of certificates to an employee benefit plan is in no respect a
representation by 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
("SMMEA"), only if so specified in the related prospectus supplement. The
appropriate characterization of those certificates not qualifying as "mortgage
related securities" ("Non-SMMEA Certificates") under various legal investment
restriction, and thus the ability of investors subject to these restrictions to
purchase such certificates, may be subject to significant interpretive
uncertainties. Accordingly, investors whose investment authority is subject to
legal restrictions should consult their own legal advisors to determine whether
and to what extent the Non-SMMEA Certificates constitute legal investments for
them.
Generally, only classes of offered certificates that meet the following
criteria will be mortgage related securities for purposes of SMMEA:
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(i) are rated in one of the two highest rating categories by one or
more rating agencies,
(ii) are part of a series evidencing interests in a trust fund
consisting of loans originated by certain types of Originators as specified
in SMMEA and
(iii) are part of a series evidencing interests in a trust fund
consisting of mortgage loans each of which is secured by a first lien on
(a) a single parcel of real estate on which is located a residential and/or
mixed residential and commercial structure or (b) one or more parcels of
real estate upon which are located one or more commercial structures.
As "mortgage related securities," such classes will constitute legal
investments, for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions,
insurance companies, trustees and pension funds) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation, to the same extent that obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities under applicable law.
Under SMMEA, a number of states enacted legislation on or prior to the October
3, 1991 cut-off for such enactments limiting to various extends the ability of
certain entities (in particular, insurance companies) to invest in "mortgage
related securities," secured by liens on residential, or mixed residential and
commercial properties, in most cases by requiring the affected investors to rely
solely upon existing state law, and not SMMEA. Pursuant to Section 347 of the
Riegle Community Development and Regulatory Improvement Act of 1994, states are
authorized to enact legislation, on or before September 23, 2001, prohibiting or
restricting the purchase, holding or investment by state regulated entities in
certificates satisfying the rating and qualified originator requirements for
"mortgage related securities," but evidencing interests in a trust fund
consisting, in whole or in part, of first liens on one or more parcels of real
estate upon which are located one or more commercial structures. Accordingly,
the investors affected by such legislation will be authorized to invest in
offered certificates qualifying as "mortgage related securities" only to the
extent provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows:
(i) 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,
(ii) federal credit unions may invest in such securities, and
(iii) national banks may purchase such securities for their own
account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. Section 24 (Seventh), subject
in each case to such regulations as the applicable federal regulatory
authority may prescribe.
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In this connection, effective December 31, 1996, the Office of the
Comptroller of the Currency (the "OCC") has amended 12 C.F.R. Part 1 to
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus (but subject to
compliance with certain general standards in 12 C.F.R. ss.1.5 concerning "safety
and soundness" and retention of credit information), certain "Type IV
securities," defined in 12 C.F.R. ss.1.2(1) to include certain "commercial
mortgage-related securities" and "residential mortgage-related securities." As
so defined, "commercial mortgage-related security" and "residential
mortgage-related security" mean, in relevant part, "mortgage related security"
within the meaning of SMMEA, provided that, in the case of a "commercial
mortgage-related security," it "represents ownership of a promissory note or
certificate of interest or participation that is directly secured by a first
lien on one or more parcels of real estate upon which one or more commercial
structures are located and that is fully secured by interests in a pool of loans
to numerous obligors." In the absence of any rule or administrative
interpretation by the OCC defining the term "numerous obligors," no
representation is made as to whether any class of certificates will qualify as
"commercial mortgage-related securities," and thus as "Type IV securities," for
investment by national banks, federal credit unions should review NCUA Letter to
Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities. The NCUA has adopted rules, codified
as 12 C.F.R. ss.ss.703.5(f)-(k), which prohibit federal credit unions from
investing in certain mortgage related securities (including securities such as
certain classes of the offered certificates), except under limited
circumstances. Effective January 1, 1998, the NCUA has amended its rules
governing investments by federal credit unions at 12 C.F.R. Part 703; the
revised rules will permit investments in "mortgage related securities" under
certain limited circumstances, but will prohibit investments in stripped
mortgage related securities, residual interests in mortgage related securities,
and commercial mortgage related securities, unless the credit union has obtained
written approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. 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 (the "Policy
Statement") of the Federal Financial Institutions Examination Council (the
"FFIEC"). The Policy Statement, which has been adopted by the Board of Governors
of the Federal Reserve System, the OCC, the Federal Depository Insurance Company
and the Office of Thrift Supervision, and by the NCUA (with certain
modifications), prohibits depository institutions from investing in certain
"high-risk mortgage securities" (including securities such as certain classes of
the offered certificates), except under limited circumstances, and sets forth
certain investment practices deemed to be unsuitable for regulated institutions.
On September 29, 1997, the FFEIC released for public comment a proposed
"Supervisory Policy Statement on Investment Securities and End-User Derivatives
Activities" (the "1997 Statement"), which would replace the Policy Statement. As
proposed, the 1997 Statement would delete the specific "high-risk mortgage
securities" tests, and substitute general guidelines which depository
institutions should follow in managing risks (including market, credit,
liquidity, operational (transactional), and legal risks) applicable to all
securities (including mortgage pass-through securities and mortgage-derivative
products) used for investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any class of the
offered certificates, as certain classes may be deemed unsuitable
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investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," and, with regard to any class of the offered
certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
Except as to the status of certain classes of offered certificates as
"mortgage related securities," no representations are made as to the proper
characterization of any class of offered certificates for legal investment
purposes, financial institution regulatory purposes, or other purposes, or as to
the ability of particular investors to purchase any class of offered
certificates under applicable legal investment restrictions. These uncertainties
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the offered certificates)
may adversely affect the liquidity of any class of offered certificates.
Accordingly, 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.
Such methods are as follows:
(i) by negotiated firm commitment underwriting and public offering
by one or more underwriters specified in the related prospectus supplement;
(ii) by placements through one or more placement agents specified in
the related prospectus supplement primarily with institutional investors
and dealers; and
(iii) through direct offerings by us.
If specified in the prospectus supplement relating to a series of offered
certificates, we or any of our affiliates thereof or any other person or persons
specified in the prospectus supplement (including
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<PAGE>
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
such other person or persons specified in such 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 such other manner as may be specified in the related
prospectus supplement. Such offering may be restricted in the manner specified
in the related prospectus supplement. Such transactions may be effected at
market prices prevailing at the time of sale, at negotiated prices or at fixed
prices.
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 (the "Securities Act").
It is anticipated that the underwriting agreement pertaining to the sale of
any series of certificates will provide that the obligations of the underwriters
will be subject to certain conditions precedent, including the following:
(i) 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
(ii) that we will indemnify the several underwriters, and each person, if
any, who controls any such underwriters within the meaning of Section 15 of the
Securities Act, against certain civil liabilities, including liabilities under
the Securities Act, or will contribute to payments required to be made in
respect thereof.
The prospectus supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of 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
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<PAGE>
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 such reoffer or sale.
As to each series of certificates, only those classes rated in an
investment grade rating category by any rating agency will be offered hereby.
Any unrated class may be initially retained by 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.
LEGAL MATTERS
The validity of the certificates of each series will be passed upon for us
by O'Melveny & Myers LLP, New York, New York.
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.
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>
INDEX OF SIGNIFICANT DEFINITIONS
PAGE
----
1986 ACT ................................................................. 110
1997 STATEMENT ........................................................... 150
A
ACCRUAL CERTIFICATES ..................................................... 26
ACCRUED CERTIFICATE INTEREST ............................................. 50
ADA ...................................................................... 104
ARM LOANS ................................................................ 36
ASSET CONSERVATION ACT ................................................... 100
C
CALL RISK ................................................................ 44
CERCLA ................................................................... 23,99
CODE ..................................................................... 105
COMMERCIAL PROPERTIES .................................................... 28
COMPANION CLASS .......................................................... 52
CONTROLLED AMORTIZATION CLASS ............................................ 52
COOPERATIVE .............................................................. 28
CPR ...................................................................... 43
CRIME CONTROL ACT ........................................................ 104
CUT-OFF DATE ............................................................. 52
D
DEBT SERVICE COVERAGE RATIO .............................................. 32
DEPOSITOR ................................................................ 1
DETERMINATION DATE ....................................................... 40,50
DIRECT PARTICIPANTS ...................................................... 58
DISQUALIFIED ORGANIZATION ................................................ 127
DISTRIBUTION DATE ........................................................ 15
DISTRIBUTION DATE STATEMENT .............................................. 55
DOL ...................................................................... 146
DTC ...................................................................... 4,49
DUE DATES ................................................................ 34
DUE PERIOD ............................................................... 40
E
EPA ...................................................................... 99
EQUITY PARTICIPATION ..................................................... 35
ERISA .................................................................... 145
154
<PAGE>
EVENTS OF DEFAULT ........................................................ 78
EXCHANGE ACT ............................................................. 4
EXTENSION RISK ........................................................... 45
F
FAMC ..................................................................... 37
FASIT .................................................................... 106
FFIEC .................................................................... 150
FHLMC .................................................................... 36
FNMA ..................................................................... 37
FOREIGN INVESTORS ........................................................ 128
G
GARN ACT ................................................................. 101
GNMA ..................................................................... 37
I
INDIRECT PARTICIPANTS .................................................... 58
INSURANCE AND CONDEMNATION PROCEEDS ...................................... 66
L
LIQUIDATION PROCEEDS ..................................................... 66
LOAN-TO-VALUE RATIO ...................................................... 33
LOCK-OUT DATE ............................................................ 35
LOCK-OUT PERIOD .......................................................... 35
M
MARK-TO-MARKET REGULATIONS ............................................... 131
MBS ...................................................................... 27
MBS AGREEMENT ............................................................ 37
MBS ISSUER ............................................................... 37
MBS SERVICER ............................................................. 37
MBS TRUSTEE .............................................................. 37
MORTGAGE ASSETS .......................................................... 27
MORTGAGE LOANS ........................................................... 27
MORTGAGE NOTES ........................................................... 27
MORTGAGE RATE ............................................................ 35
MORTGAGED PROPERTIES ..................................................... 28
MORTGAGES ................................................................ 28
MULTIFAMILY PROPERTIES ................................................... 28
N
NET LEASES ............................................................... 33
NET OPERATING INCOME ..................................................... 32
155
<PAGE>
NONECONOMIC RESIDUAL INTEREST ......................................... 128
NONRECOVERABLE ADVANCE ................................................ 53
NON-SMMEA CERTIFICATES ................................................ 148
NON-U.S. PERSON ....................................................... 134
NOTIONAL AMOUNT ....................................................... 41
O
OCC ................................................................... 150
OID REGULATIONS ....................................................... 110
ORIGINAL ISSUE DISCOUNT ............................................... 116
ORIGINATOR ............................................................ 28
P
PAC ................................................................... 44
PARTICIPANTS .......................................................... 26
PARTIES IN INTEREST ................................................... 146
PASS-THROUGH ENTITY ................................................... 127
permitted investments ................................................. 107
PLAN ASSET REGULATIONS ................................................ 146
PLANS ................................................................. 146
POLICY STATEMENT ...................................................... 150
PREPAYMENT ASSUMPTION ................................................. 112
PREPAYMENT INTEREST SHORTFALL ......................................... 40
PREPAYMENT PREMIUM .................................................... 35
PRPS .................................................................. 99
R
RANDOM LOT CERTIFICATES ............................................... 111
RECORD DATE ........................................................... 50
REGULAR CERTIFICATEHOLDER ............................................. 110
REGULAR CERTIFICATES .................................................. 105
RELATED PROCEEDS ...................................................... 53
RELIEF ACT ............................................................ 103
REMIC ................................................................. 106
REMIC CERTIFICATES .................................................... 105
REMIC POOL............................................................. 105, 106
REMIC REGULATIONS ..................................................... 105
REO PROPERTY .......................................................... 64
RESIDUAL CERTIFICATEHOLDERS ........................................... 121
RESIDUAL CERTIFICATES ................................................. 105
RICO .................................................................. 104
S
SBJPA OF 1996 ......................................................... 107
SECTION 42 PROPERTIES ................................................. 19
156
<PAGE>
SECURITIES ACT ........................................................... 152
SERVICE .................................................................. 109
SMMEA .................................................................... 148
SPA ...................................................................... 43
STANDARD CERTIFICATEHOLDER ............................................... 136
STANDARD CERTIFICATES .................................................... 136
STRIPPED CERTIFICATEHOLDER ............................................... 142
STRIPPED CERTIFICATES .................................................... 140
STRIPPED INTEREST CERTIFICATES ........................................... 140
STRIPPED PRINCIPAL CERTIFICATES .......................................... 140
super-premium ............................................................ 111
T
TAC ...................................................................... 44
TITLE V .................................................................. 102
TREASURY ................................................................. 105
TRUST ASSETS ............................................................. 146
U
U.S. PERSON .............................................................. 129
V
VALUE .................................................................... 33
W
WARRANTING PARTY ......................................................... 62
157
<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 O'Melveny & Myers LLP as to legality of the Certificates*
8.1 Opinion of O'Melveny & Myers LLP as to certain tax matters (included
in Exhibit 5.1)*
23.1 Consent of O'Melveny & Myers LLP (included in Exhibits 5.1 and 8.1
hereto)*
24.1 Power of Attorney**
* Previously filed as exhibits to Registration Statements on Form S-3
(Registration Nos. 33-65816 and 333-61783)
** Included on Page II-5.
II-2
<PAGE>
ITEM 17 UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change of such information in the Registration
Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the information
required to be included in the post-effective amendment is contained in periodic
reports filed by the Issuer pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration, by means of a post-effective amendment,
any of the securities being registered which remain unsold at the termination of
the offering.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 15 above,
or otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted against the Registrant by such
II-3
<PAGE>
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this 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 17th day of
September, 1999.
BEAR STEARNS COMMERCIAL
MORTGAGE SECURITIES INC.
By: /s/ James G. Reichek
-------------------------
Name: James G. Reichek
Title: Executive Vice President
KNOW ALL MEN THESE PRESENTS, that each person whose signature appears below
constitutes and appoints James G. Reichek, acting individually as his true and
lawful attorney-in-fact and agent, with full powers of substitution and
resubstitution, for and in his name, place and stead, in any and all capacities
to sign any or all amendments (including post-effective amendments) to this
Registration Statement and any or all other documents in connection therewith,
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as might or could be done in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below on September 17, 1999 by the following persons
in their capacities as directors and officers of Bear Stearns Commercial
Mortgage Securities Inc. (the capacities for each such person being indicated
below).
Signature Title
--------- -----
/s/ Jeffrey Mayer President (Principal Executive
- --------------------------- Officer) and Director
Jeffrey Mayer
/s/ Thomas M. Flexner Director
- ---------------------------
Thomas M. Flexner
/s/ Paul M. Friedman Director
- ----------------------------
Paul M. Friedman
/s/ Samuel L. Molinario, Jr. Treasurer (Principal Accounting
- ----------------------------- Officer and Principal Financial
Samuel L. Molinaro, Jr. Officer)
II-6
