As filed with the Securities and Exchange Commission on March 25, 2004
Registration No. 333-112636
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3310019
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
60 Wall Street
New York, New York 10005
(212) 250-2500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
- --------------------------------------------------------------------------------
Anna H. Glick, Esq. Kevin C. Blauch, Esq.
Cadwalader, Wickersham & Taft LLP Latham & Watkins LLP
100 Maiden Lane 885 Third Avenue
New York, New York 10038 New York, New York 10022
(212) 504-6309 (212) 906-1241
- --------------------------------------------------------------------------------
Approximate date of commencement of proposed sale to the public: From time to
time on or after the effective date of this Registration Statement.
If the only certificates being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestments plans, please check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Amount being Maximum Offering Maximum Aggregate Amount of
Title of Securities being Registered(1) Registered Price Per Unit(2) Offering Price(2) Registration Fee(3)(4)
- --------------------------------------- ---------------- ----------------- ------------------ -----------------------
Mortgage Pass-Through Certificates $7,480,485,000 100% $7,480,485,000 $760,200
- ----------
(1) This Registration Statement and the registration fee pertain to the
initial offering of the Mortgage Pass-Through Certificates registered
hereunder by the Registrant.
(2) Estimated solely for purposes of calculating the registration fee.
(3) In accordance with Rule 457(o) of the Securities and Exchange Commission's
Rules and Regulations under the Securities Act of 1933, as amended.
(4) $126.70 of the registration fee was paid in connection with the initial
filing of this Registration Statement. The amount paid in connection with
this filing is $760,073.30.
================================================================================
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
Pursuant to Rule 429 of the Securities and Exchange Commission's Rules and
Regulations under the Securities Act of 1933, as amended, the Prospectus and
Prospectus Supplement contained in this Registration Statement also relate to
the Registrant's Registration Statement on Form S-3 (Registration No. 333-08328)
which initially was filed with the Securities and Exchange Commission on January
23, 1998, as amended by that
certain Pre-Effective Amendment No. 1, which was filed on February 27, 1998, and
further amended by that certain Post-Effective Amendment No. 1, which was filed
on September 29, 1998 (collectively, the "Prior Registration Statement") and to
$1,480,485,000 of unsold Mortgage Pass-Through Certificates registered on such
Prior Registration Statement.
Subject to Completion Dated _____________, 200__
PROSPECTUS SUPPLEMENT
(To Prospectus dated ___, 200_)
$[______] (Approximate)
COMM 200[_]-[_]
Commercial Mortgage Pass-Through Certificates
Deutsche Mortgage & Asset Receiving Corporation
Depositor
[ ]
Mortgage Loan Sellers
----------------------
The COMM 200[_]-[_] Commercial Mortgage Pass-Through Certificates will
represent beneficial ownership interests in a trust fund. The trust's assets
will primarily be [_] fixed-rate mortgage loans secured by first liens on [_]
commercial and multifamily properties. The COMM 200[_]-[_] Commercial Mortgage
Pass-Through Certificates are not obligations of Deutsche Bank AG, Deutsche
Mortgage & Asset Receiving Corporation, the mortgage loan sellers or any of
their respective affiliates, and neither the certificates nor the underlying
mortgage loans are insured or guaranteed by any governmental agency.
----------------------
Characteristics of the offered certificates include:
- ---------------------------------------------------------------------------------------------------------------------
Initial Certificate Initial Pass-Through Assumed Final Anticipated Ratings
Class Balance(1) Rate Distribution Date(2) ([___]/[___])
Class A $[_______] [___]% [___] [___]/[___]
Class B $[_______] [___]% [___] [___]/[___]
-----------
(Footnotes on page S-[__])
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined that this
prospectus supplement or the accompanying prospectus are truthful or complete.
Any representation to the contrary is a criminal offense.
Investing in the offered certificates involves risks. You should review
"Risk Factors" beginning on page S-[ ] of this prospectus and page [_] of the
prospectus.
[UNDERWRITER] will offer the offered certificates to the public in
negotiated transactions at varying prices to be determined at the time of sale.
[UNDERWRITER] is required to purchase the offered certificates (in the
amounts set forth in this prospectus supplement) from Deutsche Mortgage & Asset
Receiving Corporation, subject to certain conditions. Deutsche Mortgage & Asset
Receiving Corporation expects to receive from the sale of the offered
certificates approximately [__]% of the initial aggregate principal balance of
the offered certificates, plus accrued interest, before deducting expenses
payable by it. [UNDERWRITER] expects to deliver the offered certificates to
purchasers on or about [_____], 200[_].
[UNDERWRITER]
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS [_______________], 200[_]
----------------------
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
Information about the offered certificates is contained in two separate
documents that progressively provide more detail: (a) the accompanying
prospectus, which provides general information, some of which may not apply to
the offered certificates; and (b) this prospectus supplement, which describes
the specific terms of the offered certificates. The prospectus contains
important information regarding this offering that is not contained in this
prospectus supplement, and you should read the prospectus and this prospectus
supplement in full. This prospectus supplement may not be used to consummate
sales of the offered certificates unless it is accompanied by the prospectus. If
the terms of the offered certificates vary between this prospectus supplement
and the accompanying prospectus, you should rely on the information in this
prospectus supplement.
You should rely only on the information contained in this prospectus
supplement and the accompanying prospectus. We have not authorized anyone to
provide you with information that is different from that contained in this
prospectus supplement and the prospectus. The information in this prospectus
supplement is accurate only as of the date of this prospectus supplement.
This prospectus supplement and the accompanying 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 sections are located.
Certain capitalized terms are defined and used in this prospectus
supplement and the prospectus to assist you in understanding the terms of the
offered certificates and this offering. The capitalized terms used in this
prospectus supplement are defined on the pages indicated under the caption
"Index of Principal Definitions" beginning on page S-53 in this prospectus
supplement. The capitalized terms used in the prospectus are defined on the
pages indicated under the caption "Index of Defined Terms" beginning on page 110
in the prospectus.
----------------------
In this prospectus supplement, the terms "depositor," "we," "us" and "our"
refer to Deutsche Mortgage & Asset Receiving Corporation.
----------------------
S-2
TABLE OF CONTENTS
EXECUTIVE SUMMARY............................................................S-5
SUMMARY OF PROSPECTUS SUPPLEMENT.............................................S-6
RISK FACTORS................................................................S-15
The Lack of Liquidity May Make it Difficult for You to
Resell Your Offered Certificates......................................S-15
Environmental Issues at the Mortgaged Properties May
Adversely Affect Payments on Your Certificates........................S-15
Geographic Concentration Within a Trust Fund Exposes
Investors to Greater Risk of Default and Loss.........................S-15
Concentration of Mortgage Loans or of Borrowers Increase
the Risk of Loss and Could Reduce the Payments On Your
Certificates..........................................................S-15
Mortgage Loan with Balloon Payments Have a Greater Risk of
Default...............................................................S-16
Extension of the Mortgage Loans Will Result in an Extension
of the Weighted Average Life of Your Offered Certificates.............S-16
A Large Concentration Of A Particular Property Type In the
Mortgage Pool Will Subject Your Investment To The
Special Risks Of Particular Properties................................S-16
A Large Concentration of Retail Properties In the Mortgage
Pool Will Subject Your Investment To The Special Risks
Of Retail Properties..................................................S-16
A Large Concentration Of Multifamily Properties In The
Mortgage Pool Will Subject Your Investment To The
Special Risks Of Multifamily Properties...............................S-17
A Large Concentration Of Office Properties In The Mortgage
Pool Will Subject Your Investment To The Special Risks
Of Office Properties..................................................S-19
A Large Concentration Of Industrial Properties In The
Mortgage Pool Will Subject Your Investment To The
Special Risks Of Industrial Properties................................S-19
A Large Concentration Of Hotel Properties In The Mortgage
Pool Will Subject Your Investments To The Special Risks
of Hotel Properties...................................................S-20
The Affiliate of Some Of the Properties With A Franchise Or
Hotel Management Company May Adversely Affect Payments
On Your Certificates..................................................S-20
A Large Concentration Of Manufactured Housing Community
Properties In The Mortgage Pool Will Subject Your
Investment To The Special Risks Of Manufactured Housing
Community Properties..................................................S-21
[A Large Concentration Of Senior Housing Properties In The
Mortgage Pool Will Subject Your Investment To The
Special Risks Of Senior Housing Properties]...........................S-21
Your Lack Of Control Over The Trust Fund Increases Your
Risks of Loss.........................................................S-21
Can Affect The Yield On Your Certificates................................S-22
The Subordination Of Your Certificates May Increase Your
Risk Of Loss..........................................................S-22
Book-Entry System For Certain Classes Many Decrease
Liquidity And Delay Payment...........................................S-22
DESCRIPTION OF THE MORTGAGE POOL............................................S-22
General..................................................................S-22
Certain Payment Characteristics..........................................S-23
Delinquent And NonPerforming Mortgage Loans..............................S-23
Additional Mortgage Loan Information.....................................S-23
The Mortgage Loan Seller[s]..............................................S-28
Underwriting Standards...................................................S-28
Representations and Warranties; Repurchases..............................S-29
Changes in Mortgage Pool Characteristics.................................S-29
SERVICING OF THE MORTGAGE LOANS.............................................S-30
General..................................................................S-30
The Master Servicer......................................................S-31
The Special Servicer.....................................................S-31
Servicing and Other Compensation and Payment of Expenses.................S-31
Modifications, Waivers and Amendments....................................S-32
Inspections; Collection of Operating Information.........................S-33
DESCRIPTION OF THE CERTIFICATES.............................................S-33
General..................................................................S-33
Delivery, Form and Denomination..........................................S-34
Book-Entry Registration..................................................S-34
S-3
Distributions............................................................S-36
Subordination; Allocation of Collateral Support Deficit..................S-40
Advances.................................................................S-41
Reports to Certificateholders; Certain Available Information.............S-42
Voting Rights............................................................S-43
Termination; Retirement of Certificates..................................S-43
The Trustee..............................................................S-43
YIELD AND MATURITY CONSIDERATIONS...........................................S-44
Yield Considerations.....................................................S-44
Weighted Average Life....................................................S-45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................S-47
METHOD OF DISTRIBUTION......................................................S-48
LEGAL MATTERS...............................................................S-49
RATING......................................................................S-49
LEGAL INVESTMENT CONSIDERATIONS.............................................S-49
CERTAIN ERISA CONSIDERATIONS................................................S-50
INDEX OF PRINCIPAL DEFINITIONS..............................................S-53
ANNEX A - CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
S-4
EXECUTIVE SUMMARY
This Executive Summary does not include all of the information you need to
consider in making your investment decision. You are advised to carefully read,
and should rely solely on, the detailed information appearing elsewhere in this
prospectus supplement and the prospectus relating to the offered certificates
and the underlying mortgage loans.
The Certificates
Approximate Description Assumed Approximate
Anticipated Initial Percent of of Final Initial
Ratings Certificate Total Approximate Pass-Through Distribution Pass-Through
Class [(_/_)] Balance (1) Certificates Credit Support Rate Date(2) Rate
- ------------ ------------ ----------- ------------ -------------- ------------ ------------ ------------
Offered Certificates
Class A [_____] $[_____] [_____]% [_____]% [_____] [_____] [_____]%
Class B [_____] $[_____] [_____]% [_____]% [_____] [_____] [_____]%
Private Certificates(4)
Class C [_____] $[_____] [_____]% [_____]% [_____] [_____] [_____]%
Weighted
Average
Life Principal
Class Cusip No. (Yrs.)(3) Window(3)
- ------------ --------- --------- ----------
Offered Certificates
Class A [_____] [_____] [_____]
Class B [_____] [_____] [_____]
Private Certificates(4)
Class C [_____] [_____] [_____]
- ---------------------
(1) Approximate: subject to a variance of plus or minus [5]%.
(2) The "Assumed Final Distribution Date" with respect to any class of offered
certificates is the distribution date on which the final distribution
would occur for such class of certificates based upon the assumption that
no mortgage loan is prepaid prior to its stated maturity date and
otherwise based on modeling assumptions described in this prospectus
supplement.
(3) The weighted average life and principal window during which distributions
of principal would be received as set forth in the table with respect to
each class of certificates is based on:
o modeling assumptions and prepayment assumptions described in this
prospectus supplement;
o assumptions that there are no prepayments or losses on the mortgage
loans; and
o assumptions that there are not extension of maturity dates.
(4) Not offered hereby.
The Class R Certificates are not represented on this table.
The following table shows information regarding the mortgage loans and
mortgaged properties as of the cut-off date. All weighted averages set forth
below are based on the principal balances of the mortgage loans as of such date.
The Mortgage Pool
Initial Outstanding Pool Balance(1)..................................... $[________]
Number of Mortgage Loans................................................ [________]
Number of Mortgaged Properties.......................................... [________]
Average Mortgage Loan Balance........................................... $[________]
Weighted Average Mortgage Rate.......................................... [___]%
Weighted Average Remaining Term to Maturity (in months)................. [________]
Weighted Average Debt Service Coverage Ratio............................ [___]x
Weighted Average Loan-to-Value Ratio.................................... [___]%
- ---------------------
(1) Subject to a permitted variance of plus or minus [5]%.
S-5
- --------------------------------------------------------------------------------
SUMMARY OF PROSPECTUS SUPPLEMENT
This summary highlights selected information from this prospectus
supplement and does not include all of the relevant information you need to
consider in making your investment decision. You are advised to carefully read,
and should rely solely on, the detailed information appearing elsewhere in this
prospectus supplement and in the accompanying prospectus.
Title of Certificates..................... COMM 200[_]-[_] Commercial Mortgage
Pass-Through Certificates
RELEVANT PARTIES AND DATES
Depositor................................. Deutsche Mortgage & Asset Receiving
Corporation, a Delaware Corporation.
See "The Depositor" in the
prospectus. Our principal offices
are located at 60 Wall Street, New
York, New York 10005. Our telephone
number is (212) 250-2500.
Master Servicer........................... See "Servicing of the Mortgage
Loans--The Master Servicer" in this
prospectus supplement.
Special Servicer.......................... See "Servicing of the Mortgage
Loans--The Special Servicer" in this
prospectus supplement.
Trustee................................... See "Description of the
Certificates--The Trustee" in this
prospectus supplement.
Bond Administrator........................ [_______________]
Mortgage Loan Seller...................... [_______________]
Underwriter............................... [_______________]
Cut-off Date.............................. [_______________], 200[_]
Closing Date.............................. On or about [__________], 200[_]
Distribution Date......................... The [10th] day of each month, or if
such [10th] day is not a business
day, the business day immediately
following such [10th] day,
commencing in [__________], 200[_]
Record Date............................... With respect to any distribution
date, the close of business on the
last business day of the preceding
month.
Determination Date........................ The earlier of:
o the [sixth] day of the
month in which the
related distribution date
occurs, or if such
[sixth] day is not a
business day, then the
immediately preceding
business day; and
o the [fourth] business day
prior to the related
distribution date.
Collection Period......................... With respect to a distribution date,
the period that begins immediately
following the determination date in
the calendar month preceding the
month in which such distribution
date occurs (or, in the case of the
initial distribution date,
immediately following the cut-off
date) and ends on the determination
date in the calendar month in which
such distribution date occurs.
- --------------------------------------------------------------------------------
S-6
- --------------------------------------------------------------------------------
Interest Accrual Period................... With respect to any distribution
date, the calendar month immediately
preceding the month in which such
distribution date occurs.
OFFERED CERTIFICATES
General................................... We are offering the following two
classes of our COMM 200[_]-[_]
Commercial Mortgage Pass-Through
Certificates--
o Class A; and
o Class B.
The entire series will consist of a
total of 4 classes, the Class C and
Class R certificates not being
offered through this prospectus
supplement and the accompanying
prospectus.
The offered certificates, the Class
C and the Class R certificates will
represent beneficial ownership
interest in the trust created by the
depositor. The trust's assets will
primarily consist of [__] mortgage
loans secured by first liens on [__]
commercial [and multifamily]
properties.
Certificate Balances...................... Your certificates have the
approximate aggregate initial
certificate balance set forth below,
subject to a permitted variance of
plus or minus [5]%.
Class A.............. $[_________]
Class B.............. $[_________]
The Class C certificates will have
the initial aggregate certificate
balance as set forth under
"Executive Summary--The
Certificates" in this prospectus
supplement. The Class R certificates
will not have a principal balance.
See "Description of the
Certificates--General" and
"--Distributions" in this prospectus
supplement.
Pass-Through Rates........................ The certificates will accrue
interest at an annual rate called a
pass-through rate which is set forth
below.
o The pass-through rate
applicable to the class A
and class B certificates
are fixed at [___]% and
[___]% respectively per
annum.
o The pass-through rate
applicable to the class C
certificates not offered
herein, is fixed at
[___]%.
The Class R certificates will not
have a pass-through rate.
Distributions............................. On each distribution date, you will
be entitled to receive interest and
principal distributions from
available funds in an amount equal
to your certificate's interest and
principal entitlement, subject to--
o payment of the respective
interest entitlement for
any class of certificates
bearing an earlier
alphabetical designation,
and
o if applicable, payment of
the respective principal
entitlement for such
distribution date to
outstanding classes of
certificates having an
earlier alphanumeric
designation.
A description of the principal and
interest entitlement of the Class A
and Class B certificates for each
distribution date can be found in
"Description of the
Certificates--Distributions--Method
Timing and Amount," "--
- --------------------------------------------------------------------------------
S-7
- --------------------------------------------------------------------------------
Payment Priorities,"
"--Distributable Certificate
Interest" and "--Scheduled Principal
Distribution Amount and Unscheduled
Principal Distribution Amount" in
this prospectus supplement.
[Prepayment Premiums...................... Prepayment premiums will be
allocated as described in
"Description of the
Certificates--Distributions--
Prepayment Premiums" in this
prospectus supplement.]
Prepayment and Yield Considerations....... Your yield, particularly if you
should invest in a subordinate
class, will be sensitive to:
o the timing of
prepayments, repurchases
or purchases of mortgage
loans, and
o the magnitude of losses
on the mortgage loans due
to liquidations.
The yield to maturity on the Class A
and Class B certificates will be
sensitive to the rate and timing of
principal payments (including both
voluntary and involuntary
prepayments, defaults and
liquidations) on the mortgage loans
and payments with respect to
repurchase thereof that are applied
in reduction of the certificate
balance of such class. See "Yield
and Maturity Considerations" in this
prospectus supplement and "Yield and
Maturity Considerations" in the
prospectus.
Subordination; Allocation of Losses
and Certain Expenses................... The chart below describes the manner
in which the rights of various
classes will be senior to the rights
of other classes. This subordination
will be effected in two ways:
entitlement to receive principal and
interest on any distribution date is
in descending order and loan losses
are allocated in ascending order.
---------------------------
Class A
---------------------------
---------------------------
Class B
---------------------------
---------------------------
Class C*
---------------------------
--------------
* The Class C certificates are not
offered hereby.
[No other form of credit enhancement
will be available for the benefit of
the holders of the offered
certificates.]
Shortfalls in mortgage loan interest
that are the result of the timing of
prepayments and that are in excess
of the sum of:
o the servicing fee payable
to the master servicer,
and
o the amount of mortgage
loan interest that
accrues and is collected
with respect to any
principal prepayment that
is made after the date on
which interest is due
will be allocated to, and be deemed
distributed to, each class of
certificates, pro rata, based upon
amounts distributable in respect of
interest to each such class.
- --------------------------------------------------------------------------------
S-8
- --------------------------------------------------------------------------------
Shortfalls in Available Funds............. The following types of shortfalls in
available funds will be allocated in
the same manner as mortgage loan
losses--
o shortfalls resulting from
additional servicing
compensation which the
master servicer or
special servicer are
entitled to receive;
o shortfalls resulting from
interest on advances made
by the master servicer
[or the special servicer]
(to the extent not
covered by default
interest and late payment
charges paid by the
borrower);
o shortfalls resulting from
unanticipated expenses of
the trust (including, but
not limited to, expenses
relating to environmental
assessments, appraisals,
any administrative or
judicial proceeding,
management of REO
properties, maintenance
of insurance policies,
and permissible
indemnification); and
o shortfalls resulting from
a reduction of a mortgage
loan's interest rate by a
bankruptcy court or from
other unanticipated or
default-related expenses
of the trust.
THE MORTGAGE POOL
Characteristics of the Mortgage Pool
A. General............................... For a more complete description of
the mortgage loans, see the
following sections in this
prospectus supplement:
o "Description of the
Mortgage Pool;" and
o Annex A (Certain
Characteristics of the
Mortgage Loans).
All numerical information provided
in this prospectus supplement with
respect to the mortgage loans is
approximate. All weighted average
information regarding the mortgage
loans reflects weighting of the
mortgage loans by their respective
principal balances as of the cut-off
date.
Number of Mortgage Loans..................... [______]
Number of Mortgaged Properties............... [______]
Aggregate Initial Principal Balance
(plus or minus [5]%)...................... $[______]
Range of Mortgage Loan Principal Balances.... $[______] to $[______]
Average Mortgage Loan Principal Balance...... $[______]
Range of Mortgage Rates...................... [_____]% to [_____]%
Weighted Average Mortgage Rate............... [______]%
Range of Remaining Terms to Maturity......... [__] months to [___] months
Weighted Average Remaining Term
to Maturity............................... [___] months
Range of Remaining Amortization Term......... [__] months to [__] months
Weighted Average Remaining
Amortization Term......................... [___] months
Weighted Average Loan-to-Value Ratio......... [____]%
Weighted Average Debt Service
Coverage Ratio............................ [____]x
- --------------------------------------------------------------------------------
S-9
- --------------------------------------------------------------------------------
B. Non-Recourse.......................... Substantially all of the mortgage
loans are non-recourse obligations.
No mortgage loan will be insured or
guaranteed by any governmental
entity or private insurer, or by any
other person.
C. Fee Simple/Leasehold Estate........... Each mortgage loan is secured by a
first mortgage lien on the
borrower's fee simple estate [(or in
[_] cases, which represent [___]% of
the initial outstanding pool
balance, a leasehold estate in all
or a portion of the property and a
fee estate in the remainder of the
property if applicable in an
income-producing real property)].
D. Property Purpose...................... The number of mortgage properties,
and the approximate percentage of
the initial outstanding pool balance
of the mortgage loans secured
thereby, for each indicated purpose
are:
Percentage of
Aggregate Initial
Number of Principal Outstanding
Mortgaged Balance of the Pool
Property Type Properties Mortgage Loans Balance(1)
------------------------ ---------- -------------- -------------
Retail.................. [______] $[______] [______]%
Anchored............. [______] [______] [______]
Unanchored........... [______] [______] [______]
Multifamily............. [______] [______] [______]
Office.................. [______] [______] [______]
Industrial.............. [______] [______] [______]
Hotel................... [______] [______] [______]
Mixed Use(2)............ [______] [______] [______]
Total................... [______] $[______] [______]%
---------------
(1) Because this table presents
information relating to the
mortgaged properties and not
the mortgage loans, the
information for mortgage loans
secured by more than one
mortgaged property is based on
allocated loan amounts.
(2) Includes office and retail
spaces.
E. Property Location..................... The number of mortgaged properties,
and the approximate percentage of
the initial outstanding pool balance
of mortgage loans secured thereby,
that are located in the five states
with the highest concentrations of
mortgaged properties are:
Aggregate Percentage of
Number of Principal Balance Outstanding
Mortgaged of this Mortgage Initial Pool
State Properties Loans Balance(1)
------------------- ------------ ----------------- -------------
[New York]......... [______] $[______] [______]%
[California].......
[Arizona]..........
[Pennsylvania].....
[Georgia]..........
Other(2)...........
Total.............. [______] $[______] [______]%
-------------
(1) Because this table presents
information relating to the
mortgaged properties and not
the mortgage loans, the
information for mortgage loans
secured by more than one
mortgaged property is based on
allocated loan amounts.
(2) This reference consists of [__]
states.
- --------------------------------------------------------------------------------
S-10
F. Other Mortgage Loan Features.......... As of the cut-off date, the mortgage
loans had the following
characteristics:
o [No scheduled payment of
principal and interest on
any mortgage loan was
thirty days or more past
due, and no mortgage loan
has been thirty days or
more delinquent in the
past year.]
o All mortgage loans bear
interest at fixed rates.
o [No mortgage loan permits
negative amortization or
the deferral of accrued
interest.]
G. Balloon Loans......................... The mortgage loans provided for one
of the following:
o [__] mortgage loans,
representing [___]% of
the initial outstanding
pool balance provide for
regularly scheduled
payments of interest and
principal based on an
amortization period
longer than the term of
the mortgage loan and
therefore have an
expected balloon balance
at the maturity date.
o [__] mortgage loans,
representing [___]% of
the initial outstanding
pool balance are fully
amortizing.
o [[__] mortgage loans,
representing [___]% of
the initial outstanding
pool balance provide for
payments of interest only
for the first [__] to
[__] months of their
terms.]
o [[__] mortgage loan[s],
representing [___]% of
the initial outstanding
pool balance provide[s]
for payments of interest
only for the entire [___]
months of its term.]
Advances of Principal and Interest
The master servicer is required to
advance delinquent monthly mortgage
loan payments unless it determines
that the advance will not be
recoverable from collections on or
in respect of the particular
mortgage loan. The master servicer
will not be required to advance
interest in excess of a loan's
regular interest rate (i.e., not
including any default rate). The
master servicer also is not required
to advance prepayment or yield
maintenance premiums, or balloon
payments. If an advance is made, the
master servicer will defer rather
than advance servicing fees, but
will advance the trustee's and the
bond administrator's fees.
If a borrower fails to pay amounts
due on the maturity date of the
related mortgage loan, the master
servicer will be required to advance
only an amount equal to the interest
(at the loan's regular interest
rate, as described above) and
principal portion of the constant
mortgage loan payment due
immediately prior to the maturity
date, subject to a recoverability
determination.
If the master servicer fails to make
a required advance, the trustee will
be required to make the advance. The
obligation of the trustee to make
such an advance will also be subject
to a determination of
recoverability. The trustee will be
entitled to conclusively rely on the
determination of recoverability made
by the master servicer.
- --------------------------------------------------------------------------------
S-11
- --------------------------------------------------------------------------------
These advances are intended to
maintain a regular flow of your
scheduled interest and principal
payments and are not intended to
guarantee or insure against losses.
Advances which cannot be reimbursed
out of collections on, or in respect
of, the related mortgage loans will
be reimbursed directly from any
other collections on the mortgage
loans as provided in this prospectus
supplement and this will cause
losses with respect to your
certificates in the priority
specified in this prospectus
supplement.
The master servicer and the trustee,
as the case may be, will be entitled
to interest on any advances made,
such interest accruing at the rate
and payable under the circumstances
described in this prospectus
supplement. Interest accrued on
outstanding advances may result in
reductions in amounts otherwise
available for payment on your
certificates.
See "Description of the
Certificates--Advances" in this
prospectus supplement.
ADDITIONAL CONSIDERATIONS
Optional Termination...................... At its option, on any distribution
date on which the remaining
aggregate principal balance of the
mortgage pool is less than [__]% of
the initial pool balance, the
[master servicer] or the [special
servicer] may purchase all of the
mortgage loans and REO properties.
This will cause the termination of
the trust fund and the early
retirement of the then outstanding
certificates.
See "Description of the
Certificates--Termination;
Retirement of Certificates" in this
prospectus supplement and in the
prospectus.
Certain Federal Income
Tax Consequences....................... An election will be made to treat
the trust fund as a REMIC for
Federal income tax purposes. Upon
the issuance of offered
certificates, [Cadwalader,
Wickersham & Taft LLP] [Latham &
Watkins LLP], our counsel, will
deliver its opinion generally to the
effect that, assuming the making of
a proper election, compliance with
all provisions of the pooling and
servicing agreement and other
related documents and no amendments
thereof, the accuracy of all
representations made with respect to
the mortgage loans and compliance
with any changes in the law,
including any amendments to the Code
or applicable Treasury regulations
thereunder, for Federal income tax
purposes, the trust fund will
qualify as a REMIC under Sections
860A through 860G of the Internal
Revenue Code of 1986, as amended.
For Federal income tax purposes, the
Class A, Class B and Class C
certificates will be the "regular
interests" in the trust fund, and
the Class R certificates will be the
sole class of "residual interests"
in the trust fund.
For further information regarding
the Federal income tax consequences
of investing in offered
certificates, see "Certain Federal
Income Tax Consequences" in this
prospectus supplement and in the
prospectus.
Ratings................................... It is a condition to their issuance
that the offered certificates
receive from [Standard & Poor's
Ratings Services, a division of The
McGraw-Hill Companies], [Fitch
Ratings, Inc.] and [Moody's
Investors Service, Inc.], the credit
ratings indicated below.
[___] [___]
------- ------
Class A....... [_____] [_____]
- --------------------------------------------------------------------------------
S-12
- --------------------------------------------------------------------------------
Class B....... [_____] [_____]
See "Ratings" in this prospectus
supplement and in the prospectus for
a discussion of the basis upon which
ratings are given, the limitations
of and restrictions on the ratings,
and the conclusions that should not
be drawn from a rating.
Certain ERISA Considerations.............. If you are a fiduciary of employee
benefit plans and certain other
retirement plans and arrangements
(including individual retirement
accounts, annuities, Keogh plans,
and collective investment funds and
separate accounts in which such
plans, accounts, annuities or
arrangements are invested) that are
subject to the Employee Retirement
Income Security Act of 1974, as
amended ("ERISA"), or Section 4975
of the Internal Revenue Code of
1986, as amended, or materially
similar provisions of applicable
federal, state or local law, you
should review with your legal
advisors whether the purchase or
holding of the offered certificates
could give rise to a transaction
that is prohibited or is not
otherwise permissible either under
ERISA or Section 4975 of the
Internal Revenue Code of 1986, as
amended, or other applicable law.
See "Certain ERISA Considerations"
in this prospectus supplement and in
the prospectus.
Legal Investment Considerations........... [The Class A certificates will
constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market
Enhancement Act of 1984, as amended
("SMMEA"), so long as they are rated
in one of the two highest rating
categories by one or more nationally
recognized statistical rating
organization [and the mortgage loans
are secured by liens on real
property]. The class B certificates
will not constitute "mortgage
related securities" within the
meaning of SMMEA. If your investment
activities are subject to legal
investment laws and regulations,
regulatory capital requirements, or
review by regulatory authorities,
then you may be subject to
restrictions on investment in either
class of these certificates. You
should consult your own legal
advisors for assistance in
determining the suitability of and
consequences to you of the purchase,
ownership, and sale of these
certificates.
See "Legal Investment
Considerations" in this prospectus
supplement and in the prospectus.
Registration; Denominations............... The offered certificates will be
issuable in registered from, in
minimum denominations of certificate
balance of (i) $10,000 with respect
to the Class A certificates and (ii)
$25,000 with respect to the Class B
certificates. Investments in excess
of the minimum denominations may be
made in multiples $1.
You may hold your certificates
through
o The Depository Trust
Company (in the United
States), or
o Clearstream Banking,
societe anonyme, or The
Euroclear System (in
Europe).
Transfers within DTC, Clearstream
Banking, societe anonyme, or The
Euroclear System will be in
accordance with the usual rules and
operating procedures of the relevant
system.
S-13
- --------------------------------------------------------------------------------
See "Description of the
Certificates--Book-Entry
Registration" in this prospectus
supplement and "Description of the
Certificates--Book-Entry
Registration and Definitive
Certificates" in the prospectus.
- --------------------------------------------------------------------------------
S-14
RISK FACTORS
You should consider, among other things, the following risk factors (as
well as the risk factors set forth under "Risk Factors" in the prospectus) in
deciding whether to purchase offered certificates.
The Lack of Liquidity May Make it Difficult for You to Resell Your Offered
Certificates
There is currently no secondary market for the offered certificates. The
underwriter has indicated its intention to make a secondary market in the
offered certificates, but it is not obligated to do so. We cannot assure you
that a secondary market for your offered certificates will develop or, if it
does develop, that it will provide you with liquidity of investment or that it
will continue for the life of your offered certificates. The offered
certificates will not be listed on any securities exchange. See "Risk
Factors--The Lack of Liquidity May Make it Difficult for You to Resell Your
Offered Certificates and May Have an Adverse Effect on the Market Value of Your
Offered Certificates" in the prospectus.
Environmental Issues at the Mortgaged Properties May Adversely Affect Payments
on Your Certificates
[An environmental site assessment was performed at [each][all but __] of
the mortgaged properties during the [___] month period prior to the cut-off
date. [Note any special environmental problems.] [Otherwise,] no such
environmental assessment revealed any material adverse environmental condition
or circumstance at any mortgaged property[, except for:
o those cases in which the condition or circumstance was remediated or
an escrow for such remediation has been established; and
o those cases in which an operations and maintenance plan or periodic
monitoring of nearby properties was recommended, which
recommendations are consistent with industrywide practices].
The pooling and servicing agreement requires that the [master servicer]
[special servicer] obtain an environmental site assessment of a mortgaged
property securing a defaulted mortgage loan prior to acquiring title thereto or
assuming its operation. This prohibition will decrease the likelihood that the
trust fund will become liable for a material adverse environmental condition at
the mortgaged property. However, we cannot assure you that the requirements of
the pooling and servicing agreement will effectively insulate the trust fund
from potential liability for a materially adverse environmental condition at any
mortgaged property. See "Description of the Pooling Agreements--Realization Upon
Defaulted Mortgage Loans," "Risk Factors--Commercial and Multifamily Mortgage
Loans Are Subject to Certain Risks Which Could Adversely Affect the Performance
of Your Offered Certificates--Environmental Issues at the Mortgaged Properties
May Adversely Affect Payments on Your Certificates" and "Certain Legal Aspects
of Mortgage Loans--Environmental Considerations" in the prospectus.
Geographic Concentration Within a Trust Fund Exposes Investors to Greater Risk
of Default and Loss
[___] mortgage loans, which represent [___]% of the initial mortgage pool
balance, are secured by liens on mortgaged properties located in [___________].
In general, that concentration increases the exposure of the mortgage pool to
any adverse economic or other developments that may occur in [__________]. In
recent periods, [_____] (along with other regions of the United States) has
experienced a significant downturn in the market value of real estate.
Concentration of Mortgage Loans or of Borrowers Increase the Risk of Loss and
Could Reduce the Payments On Your Certificates
Several of the mortgage loans have principal balances as of the cut-off
date that are substantially higher than the average principal balance as of that
date. In general, concentrations in a mortgage pool of loans with
larger-than-average balances can result in losses that are more severe, relative
to the size of the pool, than would be the case if the aggregate balance of the
pool were more evenly distributed.
S-15
Concentration of borrowers also poses increased risks. For instance, if a
borrower that owns several mortgaged properties experiences financial difficulty
at one mortgaged property, or at another income-producing property that it owns,
it could attempt to avert foreclosure by filing a bankruptcy petition that might
have the effect of interrupting monthly payments for an indefinite period on all
of the related mortgage loans.
Mortgage Loan with Balloon Payments Have a Greater Risk of Default
[None] of the mortgage loans is fully amortizing over its term to
maturity. Each mortgage loan will have a substantial payment due at its stated
maturity unless prepaid prior thereto. Loans with balloon payments involve a
greater likelihood of default than self-amortizing loans because the ability of
a borrower to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related mortgaged property. See
"Risk Factors--Commercial and Multifamily Mortgage Loans Are Subject to Certain
Risks Which Could Adversely Affect the Performance of Your Offered
Certificates--Environmental Issues at the Mortgaged Properties May Adversely
Affect Payments on Your Certificates--Mortgage Loan With Balloon Payments Have a
Greater Risk of Default" in the prospectus.
Extension of the Mortgage Loans Will Result in an Extension of the Weighted
Average Life of Your Offered Certificates
In order to maximize recoveries on defaulted mortgage loans, the pooling
and servicing agreement enables the [master servicer] [special servicer] to
extend and modify mortgage loans that are in material default or as to which a
payment default (including the failure to make a balloon payment) is reasonably
foreseeable. See "Servicing of the Mortgage Loans--Modifications, Waivers and
Amendments" in this prospectus supplement. However, we cannot assume you, that
any 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, will likely extend
the weighted average life of such class of offered certificates. See "Yield and
Maturity Considerations" herein and in the prospectus.
A Large Concentration Of A Particular Property Type In the Mortgage Pool Will
Subject Your Investment To The Special Risks Of Particular Properties
A concentration of mortgage loans secured by the same mortgaged property
types can increase the risk that a decline in a particular industry or business
would have a disproportionately large impact on the pool of mortgage loans. As
to property types:
o [Retail] properties represent [_____]% of the initial outstanding
pool balance;
o [Multifamily] properties represent [_____]% of the initial
outstanding pool balance;
o [Office] properties represent [_____]% of the initial outstanding
pool balance;
o [Industrial] properties represent [_____]% of the initial
outstanding pool balance;
o [Manufactured Housing Community] properties represent [_____]% of
the initial outstanding pool balance;
o [Hotel] properties represent [_____]% of the initial outstanding
pool balance; and
o [Senior Housing] properties represent [_____]% of the initial
outstanding pool balance.
A Large Concentration of Retail Properties In the Mortgage Pool Will Subject
Your Investment To The Special Risks Of Retail Properties
[____] of the mortgaged properties, which represent security for [____]%
of the initial outstanding pool balance, are retail properties. Of these, [____]
mortgaged properties, representing [____]% of the initial outstanding pool
balance, are considered anchored or shadow anchored properties, and [____]
mortgaged property, representing [____]% of the initial outstanding pool
balance, is considered an unanchored property. The quality and success of a
retail property's tenants significantly affect the property's value. For
example, if the sales of retail tenants were to
S-16
decline, rents tied to a percentage of gross sales may decline and those tenants
may be unable to pay their rent or other occupancy costs.
The presence or absence of an "anchor tenant" or a "shadow anchor" in or
near a shopping center also can be important, because anchors play a key role in
generating customer traffic and making a center desirable for other tenants. An
"anchor tenant" is usually proportionately larger in size than most other
tenants in the mortgaged property, is vital in attracting customers to a retail
property and is located on the related mortgaged property. A "shadow anchor" is
usually proportionally larger in size than most tenants in the mortgaged
property, is important in attracting customers to a retail property and is
located sufficiently close and convenient to the mortgaged property, but not on
the mortgaged property, so as to influence an attract potential customers. The
economic performance of an anchored or shadow anchored retail property will
consequently be adversely affected by:
o an anchor tenant's or shadow anchor tenant's failure to renew its
lease;
o termination of an anchor tenant's or shadow anchor tenant's lease,
or if the anchor tenant or shadow anchor owns its own site, a
decision to vacate;
o the bankruptcy or economic decline of an anchor tenant, shadow
anchor or self-owned anchor; or
o the cessation of the business of an anchor tenant, or shadow anchor
tenant or of a self-owned anchor (notwithstanding its continued
payment of rent).
If anchor stores in a mortgaged property were to close, the related
borrower may be unable to replace those anchors in a timely manner or without
suffering adverse economic consequences. Furthermore, certain of the anchor
stores at the retail properties have co-tenancy clauses in their leases or
operating agreements which permit those anchors to cease operating if certain
other stores are not operated at those locations. The breach of various other
covenants in anchor store leases or operating agreements also may permit those
stores to cease operating. Certain non-anchor tenants at retail properties also
may be permitted their leases if certain other stores are not operated or if
those tenants fail to meet certain business objectives.
Retail properties also face competition from sources outside a given real
estate market. For example, all of the following compete with more traditional
retail properties for consumer business:
o factory outlet centers;
o discount shopping centers and clubs;
o catalogue retailers;
o home shopping networks;
o internet web sites; and
o telemarketers.
Continued growth of these alternative retail outlets (which often have
lower operating costs) could adversely affect the rents collectible at the
retail properties included in the mortgage pool, as well as the income from, and
market value of, the mortgaged properties.
Moreover, additional competing retail properties may be built in the areas
where the retail properties are located.]
A Large Concentration Of Multifamily Properties In The Mortgage Pool Will
Subject Your Investment To The Special Risks Of Multifamily Properties
[____] of the mortgaged properties (including [____] manufactured housing
community properties), which represent security for [____]% of the initial
outstanding pool balance, are multifamily properties. Of these, [____]
S-17
mortgaged properties, representing [____]% of the initial outstanding pool
balance, are conventional multifamily properties and [____] mortgaged
properties, representing [____]% of the initial outstanding pool balance, are
manufactured housing community properties.
A large number of factors may adversely affect the value and successful
operation of a multifamily property, including:
o the physical attributes of the apartment building (e.g., its age,
appearance and construction quality);
o the location of the property (e.g., a change in the neighborhood
over time);
o the ability of management to provide adequate maintenance and
insurance;
o the types of services the property provides;
o the property's reputation;
o the level of mortgage interest rates (which may encourage tenants to
purchase rather than rent housing);
o the presence of competing properties in the local market;
o adverse local or national economic conditions, which may limit the
amount of rent that can be charged and may result in reduction in
timely rent payments or a reduction in occupancy;
o state and local regulations;
o government assistance/rent subsidy programs; and
o national, state, or local politics.
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 percentage, 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 permit vacancy
decontrol. Local authority to impose rent control is pre-empted by state law in
certain states, and rent control is not imposed at the state level in those
states. In some states, however, local rent control ordinances are not
pre-empted for tenants having short-term or month-to-month leases, and
properties there may be subject to various forms of rent control with respect to
those tenants. Any limitations on a borrower's ability to raise property rents
may impair such borrower's ability to repay its multifamily loan from its net
operating income or the proceeds of a sale or refinancing of the related
multifamily property.
[Certain of the mortgage loans may be secured now by mortgaged properties
that are eligible (or become eligible in the future) for and have received low
income housing tax credits pursuant to ss. 42 of the Internal Revenue Code of
1986, as amended in respect of various units within the mortgaged property or
have tenants that rely on rent subsidies under various government-funded
programs, including the ss. 8 Tenant-Based Assistance Rental Certificate Program
of the United States Department of Housing and Urban Development. We cannot
assure you that such programs will be continued in their present form or that
the level of assistance provided will be sufficient to generate enough revenues
for the related borrower to meet its obligations under the related mortgage
loans.]
S-18
[Certain of the mortgage loans may be secured now or in the future by
mortgaged properties that are subject to certain affordable housing covenants,
in respect of various units within the mortgaged properties.]]
A Large Concentration Of Office Properties In The Mortgage Pool Will Subject
Your Investment To The Special Risks Of Office Properties
[[____] of the mortgaged properties, which represent security for [____]%
of the initial outstanding pool balance, are office properties.
Various factors may adversely affect the value of office properties,
including:
o the quality of an office building's tenants;
o an economic decline in the business operated by the tenants;
o the diversity of an office building's tenant (or reliance on a
single or dominant tenant);
o the physical attributes of the building in relation to competing
buildings (e.g., age, condition, design, location, access to
transportation and ability to offer certain amenities, including,
without limitation, current business wiring requirements);
o the desirability of the area as a business location;
o the strength and nature of the local economy (including labor costs
and quality, tax environment and quality of life for employees); and
o an adverse change in population, patterns of telecommuting or
sharing of office space, and employment growth (which creates demand
for office space).
Moreover, the cost of refitting office space for a new tenant is often
higher than the cost of refitting other types of property.]
A Large Concentration Of Industrial Properties In The Mortgage Pool Will Subject
Your Investment To The Special Risks Of Industrial Properties
[[____] of the mortgaged properties, which represent security for [____]%
of the initial outstanding pool balance, are industrial properties. Various
factors may adversely affect the economic performance of an industrial property,
including:
o quality of tenants, especially if the property is occupied by a
single tenant;
o reduced demand for industrial space because of a decline in a
particular industry segment;
o whether the building design is conductive to industrial use;
o a property becoming functionally obsolete;
o the unavailability of labor sources;
o changes in access, energy prices, strikes, relocation of highways,
the construction of additional highways or other factors;
o a change in the proximity of supply sources;
o the expense of converting a previously adapted space to general use;
and
o environmental hazards.]
S-19
A Large Concentration Of Hotel Properties In The Mortgage Pool Will Subject Your
Investments To The Special Risks of Hotel Properties
[[____] of the mortgaged properties, which represent security for [____]%
of the initial outstanding pool balance, are hotel properties. Various factors
may adversely affect the economic performance of a hotel, including:
o adverse economic and social conditions, either local, regional or
national (which may limit the amount that can be charged for a room
and reduce occupancy levels);
o the construction of competing hotels or resorts;
o continuing expenditures for modernizing, refurnishing, and
maintaining existing facilities prior to the expiration of their
anticipated useful lives;
o a deterioration in the financial strength or managerial capabilities
of the owner and operator of a hotel; and
o changes in travel patterns (including, for example, the decline in
air travel following the terrorist attacks in New York City,
Washington, D.C., and Pennsylvania and the current military action
in Iraq) caused by changes in access, energy prices, strikes,
relocation of highways, the construction of additional highways or
other factors.
Because hotel rooms generally are rented for short periods of time, the
financial performance of hotels tend to be affected by adverse economic
conditions and competition more quickly than other commercial properties.
Additionally, as a result of high operating costs, relatively small decreases in
revenue can cause significant stress on a property's cashflow.
Moreover, the hotel and lodging industry is generally seasonal in nature
and different seasons affect different hotels depending on type and location.
This seasonality can be expected to cause periodic fluctuations in a hotel
property's room and restaurant revenues, occupancy levels, room rates and
operating expenses.
When applicable, the liquor licenses for most of the mortgaged properties
are commonly held by affiliates of the mortgagors, unaffiliated managers and
operating lessees. The laws and regulations relating to liquor licenses
generally prohibit the transfer of such licenses to any person. In the event of
a foreclosure of a hotel property that holds a liquor license, the trustee or a
purchaser in a foreclosure sale would likely have to apply for a new license,
which might not be granted or might be granted only after a delay, which could
be significant. We cannot assure you that a new license could be obtained
promptly or at all. The lack of a liquor license in a full-service hotel could
have an adverse impact on the revenue from the related mortgaged property or on
the hotel's occupancy rate.]
The Affiliate of Some Of the Properties With A Franchise Or Hotel Management
Company May Adversely Affect Payments On Your Certificates
[Certain of the hotel properties are franchises of national hotel chains
or managed by a hotel management company. The performance of a hotel property
affiliated with a franchise or hotel management company depends in part on:
o the continued existence and financial strength of the franchisor or
hotel management company;
o the public perception of the franchise or hotel chain service mark;
and
o the duration of the franchise licensing or agreements.
Any provision in a franchise agreement or management agreement providing
for termination because of a bankruptcy of a franchisor or manager generally
will not be enforceable.
The transferability of franchise license agreements may be restricted. In
the event of a foreclosure, the trustee may not have the right to use the
franchise license without the franchisor's consent. Conversely, in the case of
S-20
certain mortgage loans, the lender may be unable to remove a franchisor or a
hotel management company that it desires to replace following a foreclosure.]
A Large Concentration Of Manufactured Housing Community Properties In The
Mortgage Pool Will Subject Your Investment To The Special Risks Of Manufactured
Housing Community Properties
[[____] of the mortgaged properties, which represent security for [____]%
of the initial outstanding pool balance, are manufactured housing community
properties. Loans secured by liens on manufactured housing community properties
pose risks not associated with loans secured by liens on other types of income
producing real estate.
The successful operation of a manufactured housing community property may
depend upon the number of other competing residential developments in the local
market, such as:
o other manufactured housing communities;
o apartment buildings; and
o site built single family homes.
Other factors may also include:
o the physical attributes of the community, including its age and
appearance;
o location of the manufactured housing community;
o the ability of management to provide adequate maintenance and
insurance;
o the type of services or amenities it provides;
o the property's reputation; and
o state and local regulations, including rent control and rent
stabilization.
The manufactured housing community properties are "special purpose"
properties that could not be readily converted to general residential, retail or
office use. Thus, if the operation of any of the manufactured housing community
properties 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 that manufactured housing
community property may be substantially less, relative to the amount owing on
the related mortgage loan, than would be the case if the manufactured housing
community property were readily adaptable to other uses.]
[A Large Concentration Of Senior Housing Properties In The Mortgage Pool Will
Subject Your Investment To The Special Risks Of Senior Housing Properties]
[[____] of the mortgaged properties, which represents security for [____]%
of the initial outstanding pool balance, is a senior housing/independent living
facility.
In addition to the special risks pertaining to multifamily properties, a
senior housing/independent living facility may be adversely affected by the
imposition of governmental regulation and supervision and by competing
facilities owned by non-profit organizations or governmental agencies supported
by endowments, charitable contributions, tax revenues and other sources.]
Your Lack Of Control Over The Trust Fund Increases Your Risks of Loss
As a certificateholder, you generally do not have a right to vote, except
with respect to required consents to certain amendments to the pooling and
servicing agreement. Furthermore, you, as a certificateholder, will generally
S-21
not have the right to make decisions with respect to the administration of the
trust fund. These decisions are generally made, subject to the express terms of
the pooling and servicing agreement, by the master servicer, the special
servicer, or the trustee, as applicable. Any decision made by one of those
parties in respect of the trust fund, even if made in your best interests as a
certificateholder (as determined by such party in its good faith and reasonable
judgment), may be contrary to the decision that you would have made as holder of
any particular class of offered certificates and may negatively affect your
interests as such holder.
Can Affect The Yield On Your Certificates
If and as payments in respect of principal (including any principal
prepayments, liquidations and the principal portion of the repurchase prices of
any mortgage loans repurchased due to breaches of representations) are received
with respect to the mortgage loans, the remaining mortgage loans as a group may
exhibit increased concentration with respect to the type of properties, property
characteristics, number of mortgagors and affiliated mortgagors and geographic
location. Because unscheduled collections of principal on the mortgage loans is
payable on the Class A, Class B and Class C certificates in sequential order,
such classes that have a lower sequential priority are relatively more likely to
be exposed to any risks associated with changes in concentrations of loan or
property characteristics.
The Subordination Of Your Certificates May Increase Your Risk Of Loss.
As and to the extent described in this prospectus supplement, your rights
as a holder of any class of certificates to receive distributions of amounts
collected or advanced on or in respect of the mortgage loans will be
subordinated to the holders of the certificates with an earlier alphabetical
designation. See "Description of the Certificates--Distributions--Payment
Priorities" and "--Subordination; Allocation of Collateral Support Deficit"
herein.
Book-Entry System For Certain Classes Many Decrease Liquidity And Delay Payment
The certificates will be initially represented by one or more certificates
registered in the name of Cede & Co., as the nominee for The Depository Trust
Company, and will not be registered in your name (or your nominee's name) as a
holder the certificates. As a result, holders of the certificates will not be
recognized as "Certificateholders." Hence, those beneficial owners will be able
to exercise the rights of holders of "Certificates" only indirectly through The
Depository Trust Company and participants in the Depository Trust Company's
system. See "Description of the Certificates--General" and "--Book-Entry
Registration of the Certificates" in this prospectus supplement and "Description
of the Certificates--Book-Entry Registration and Definitive Certificates" in the
prospectus.
DESCRIPTION OF THE MORTGAGE POOL
General
The assets of the trust fund will consist primarily of a pool of [___]
fixed rate mortgage loans. Each mortgage loan is evidenced by a promissory note
and secured by a mortgage, deed of trust or other similar security instrument
that creates a first mortgage lien on a fee simple estate in a commercial or
multifamily rental 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
"Cut-off Date Balance" of any mortgage loan is the unpaid principal balance
thereof as of [__________], 200[_] (the "Cut-off Date"), after application of
all payments due on or before such date, whether or not received. The "Initial
Pool Balance" is the aggregate principal balance of all mortgage loans as of the
Cut-off Date.
The mortgage loans are not insured or guaranteed by any governmental
entity or private mortgage insurer. The depositor has not undertaken any
evaluation of the significance of the recourse provisions of any of a number of
the mortgage loans that provide for recourse against the related borrower or
another person in the event of a default. Accordingly, investors should consider
all of the mortgage loans to be nonrecourse loans as to which recourse in the
case of default will be limited to the specific property and such other assets,
if any, as were pledged to secure a mortgage loan.
On or prior to [__________], 200[_] (the "Closing Date"), the depositor
will acquire the mortgage loans from [_____] (the "Mortgage Loan Seller")
pursuant to a mortgage loan purchase agreement (the "Purchase Agreement")
S-22
and will thereupon assign its interests in the mortgage loans, without recourse,
to the trustee for the benefit of the certificateholders. See "--The Mortgage
Loan Seller" in this prospectus supplement and "Description of the Pooling
Agreements--Assignment of Mortgage Loans; Repurchases" in the prospectus. For
purposes of the prospectus, the Mortgage Loan Seller constitutes a "Mortgage
Asset Seller."
The mortgage loans were originated between 200[_] and 200[_]. [The
Mortgage Loan Seller originated [all] [___] of the mortgage loans, [which
represent [___]% of the Initial Pool Balance, and acquired the remaining
mortgage loans from the respective originators of the mortgage loans,] generally
in accordance with the underwriting criteria described below under
"--Underwriting Standards."
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
Initial Pool Balance), [_________] ([___]% of the Initial Pool Balance),
[__________] ([___]% of the Initial Pool Balance), and [__________] ([___]% of
the Initial Pool Balance) day of each month.
[Describe any adjustable rate mortgage loans and any index.]
All of the mortgage loans are fixed rate mortgage loans.
[__] of the mortgage loans provide for monthly payments of principal based
on amortization schedules significantly longer than the remaining terms of such
mortgage loans. Thus, each of these [__] mortgage loan[s] will have balloon
payment[s] due at their stated maturity date, unless prepaid prior thereto. The
remaining [__] mortgage loans will be fully amortizing loans.
No mortgage loan currently prohibits principal prepayments; however,
[certain] of the mortgage loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments. Prepayment Premiums are payable
to [the master servicer as additional servicing compensation, to the extent not
otherwise applied to offset Prepayment Interest Shortfalls], and may be waived
by the master servicer in accordance with the servicing standard described under
"Servicing of the Mortgage Loans--General" herein.
Delinquent And NonPerforming Mortgage Loans
[Describe those delinquent and nonperforming mortgage loans, if any,
included in the trust fund.]
Additional Mortgage Loan Information
The following tables set forth the specified characteristics of the
mortgage loans. The sum in any column may not equal the indicated total due to
rounding.
S-23
Range of Cut-off Date Balances
Weighted Averages
------------------------------------------------------------
Number % of
of Outstanding Stated Cut-off
Range of Cut-Off Mortgage Aggregate Cut-Off Initial Mortgage Remaining Date LTV LTV Ratio
Date Balances Loans Date Balance Pool Balance Rate Term (Mos.) DSCR Ratio at Maturity
- ---------------------- -------- ----------------- ------------ -------- ----------- ------ ---------- -----------
$[____] to $[____].... [__] $[____] [__]% [__]% [__] [__]x [__]% [__]%
$[____] to $[____].... [__] $[____] [__]% [__]% [__] [__]x [__]% [__]%
$[____] to $[____].... [__] $[____] [__]% [__]% [__] [__]x [__]% [__]%
$[____] to $[____].... [__] $[____] [__]% [__]% [__] [__]x [__]% [__]%
$[____] to $[____].... [__] $[____] [__]% [__]% [__] [__]x [__]% [__]%
Total/Weighted
Average............. ======== ================= ============
S-24
Type of Mortgaged Properties
Weighted Averages
-----------------------------------------
% of Cut-off Date
Number of Aggregate Outstanding Number of Balance per # Stated
Range of Cut-Off Mortgage Cut-Off Date Initial Pool Units or of Units or Mortgage Remaining
Date Balances Loans Balance Balance NRA NRA Rate Term (Mos.)
- ------------------------- --------- ------------ ------------ --------- ------------- -------- -----------
Retail................... [__] $[____] [__]% [__]% $[____] [__]% [__]
Anchored.............. [__] $[____] [__]% [__]% $[____] [__]% [__]
Unanchored............ [__] $[____] [__]% [__]% $[____] [__]% [__]
CTL................... [__] $[____] [__]% [__]% $[____] [__]% [__]
Multifamily.............. [__] $[____] [__]% [__]% $[____] [__]% [__]
Multifamily........... [__] $[____] [__]% [__]% $[____] [__]% [__]
Manufactured Housing.. [__] $[____] [__]% [__]% $[____] [__]% [__]
Office................... [__] $[____] [__]% [__]% $[____] [__]% [__]
Industrial............... [__] $[____] [__]% [__]% $[____] [__]% [__]
Land..................... [__] $[____] [__]% [__]% $[____] [__]% [__]
Mixed Use................ [__] $[____] [__]% [__]% $[____] [__]% [__]
Hotel.................... [__] $[____] [__]% [__]% $[____] [__]% [__]
Senior Housing........... [__] $[____] [__]% [__]% $[____] [__]% [__]
--------- ------------ ------------
Total/Weighted
Average................ ========= ============ ============
Weighted Averages
-----------------------
Cut-off
Range of Cut-Off Date LTV LTV Ratio
Date Balances Occupancy DSCR Ratio at Maturity
- ------------------------- --------- ---- -------- -----------
Retail................... [__]% [__]x [__]% [__]%
Anchored.............. [__]% [__]x [__]% [__]%
Unanchored............ [__]% [__]x [__]% [__]%
CTL................... [__]% [__]x [__]% [__]%
Multifamily.............. [__]% [__]x [__]% [__]%
Multifamily........... [__]% [__]x [__]% [__]%
Manufactured Housing.. [__]% [__]x [__]% [__]%
Office................... [__]% [__]x [__]% [__]%
Industrial............... [__]% [__]x [__]% [__]%
Land..................... [__]% [__]x [__]% [__]%
Mixed Use................ [__]% [__]x [__]% [__]%
Hotel.................... [__]% [__]x [__]% [__]%
Senior Housing........... [__]% [__]x [__]% [__]%
Total/Weighted
Average................
S-25
Mortgaged Properties by State and/or Location
Weighted Averages
Aggregate % of --------------------------------------------------------
Number of Cut-off Outstanding Stated Cut-off LTV
Mortgaged Date Initial Mortgage Remaining Date LTV Ratio at
State/Location Properties Balance Pool Balance Rate Term (Mos.) DSCR Ratio Maturity
- ------------------------------- ---------- ---------- ------------ -------- ----------- ----- -------- --------
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
Total/Weighted Average.........
========== ========== ============
The following table set forth the range of LTV Ratios of the mortgage
loans at origination and the Cut-off Date. An "LTV Ratio" for any mortgage loan,
as of any date of determination, is a fraction, expressed as a percentage, the
numerator of which is the original principal balance of such mortgage loan or
the Cut-off Date Balance of such mortgage loan, as applicable, 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. Because it is based on the value of a mortgaged property
determined as of loan origination, the information set forth in the table below
is not necessarily a reliable measure of the related borrower's current equity
in each mortgaged property. In a declining real estate market, the fair market
value of a mortgaged property could have decreased from the value determined at
origination, and the current actual loan-to-value ratio of a mortgage loan may
be higher than even its LTV Ratio at origination, notwithstanding taking into
account amortization since origination:
Range of LTV Ratios as of the Cut-off Date
Weighted Averages
Aggregate % of --------------------------------------------------------
Range of LTV Number of Cut-off Outstanding Stated Cut-off LTV
Ratios as of the Mortgaged Date Initial Mortgage Remaining Date LTV Ratio at
Cut-off Date Properties Balance Pool Balance Rate Term (Mos.) DSCR Ratio Maturity
- ------------------------------- ---------- ---------- ------------ -------- ----------- ----- -------- --------
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
Total/Weighted Average.........
========== ========== ============
S-26
Range of LTV Ratios as of Maturity Dates
Weighted Averages
Aggregate % of --------------------------------------------------------
Ratios Range of Number of Cut-off Outstanding Stated Cut-off LTV
LTV as of Mortgaged Date Initial Mortgage Remaining Date LTV Ratio at
Maturity Dates Properties Balance Pool Balance Rate Term (Mos.) DSCR Ratio Maturity
- ------------------------------- ---------- ---------- ------------ -------- ----------- ----- -------- --------
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
Total/Weighted Average.........
========== ========== ============
The following table sets forth a range of Debt Service Coverage Ratios for
the mortgage loans. The "Debt Service Coverage Ratio" set forth in the following
table for any Mortgage Loan is the ratio of:
o Net Operating Income produced by the related mortgaged property for
the period (annualized if the period was less than one year) covered
by the most recent operating statement available to the depositor
to; and
o 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 or
the related property managers. 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 ([___], representing
[___]% of the Initial Pool Balance, 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.
Range of Debt Service Coverage Ratios as of the Cut-off Date
Weighted Averages
Aggregate % of --------------------------------------------------------
Range of Debt Number of Cut-off Outstanding Stated Cut-off LTV
Service Coverage Mortgage Date Initial Mortgage Remaining Date LTV Ratio at
Ratios Loans Balance Pool Balance Rate Term (Mos.) DSCR Ratio Maturity
- ------------------------------- ---------- ---------- ------------ -------- ----------- ----- -------- --------
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
Total/Weighted Average.........
========== ========== ============
S-27
Range of Mortgage Rates as of the Cut-off Date
Weighted Averages
Aggregate % of --------------------------------------------------------
Number of Cut-off Outstanding Stated Cut-off LTV
Mortgage Date Initial Mortgage Remaining Date LTV Ratio at
Range of Mortgage Rates Loans Balance Pool Balance Rate Term (Mos.) DSCR Ratio Maturity
- ------------------------------- ---------- ---------- ------------ -------- ----------- ----- -------- --------
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
Total/Weighted Average.........
========== ========== ============
Range of Remaining Terms to Maturity Date in Months
Weighted Averages
Aggregate % of --------------------------------------------------------
Number of Cut-off Outstanding Stated Cut-off LTV
Mortgage Date Initial Mortgage Remaining Date LTV Ratio at
Range of Remaining Terms (Mos.) Loans Balance Pool Balance Rate Term (Mos.) DSCR Ratio Maturity
- ------------------------------- ---------- ---------- ------------ -------- ----------- ----- -------- --------
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
[_____] ....................... [___] $[_______] [___]% [___]% [___] [___]% [____]% [___]%
Total/Weighted Average.........
========== ========== ============
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" and "--Representations and
Warranties; Repurchases" and in the Prospectus under "Description of the Trust
Funds--Mortgage Loans" and "Certain Legal Aspects of Mortgage Loans."
Delinquencies. As of the Cut-off Date, [no] mortgage loan was more than 30
days delinquent in respect of any monthly payment.
The Mortgage Loan Seller[s]
General. [The Mortgage Loan Seller [, a wholly-owned subsidiary of [___],]
is a [____] organized in [__]] under the laws of [_____]. As of December 31,
200[_], the Mortgage Loan Seller had a net worth of approximately $[______], and
currently holds and services for its own account a total residential and
commercial mortgage loan portfolio of approximately $[____], of which
approximately $[_____] constitutes multifamily mortgage loans.]
The information set forth herein concerning the Mortgage Loan Seller and
its underwriting standards has been provided by the Mortgage Loan Seller, and
neither the depositor nor the underwriter makes any representation or warranty
as to the accuracy or completeness of such information.
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.]]
S-28
Representations and Warranties; Repurchases
In the Purchase Agreement, the Mortgage Loan Seller has represented and
warranted with respect to each mortgage loan, as of [the Cut-off Date], or as of
such other date specifically provided in the representation and warranty, among
other things, that:
[Specify significant representations and warranties.]
If the Mortgage Loan Seller has been notified of a material breach of any
of the foregoing representations and warranties and if the Mortgage Loan Seller
cannot cure such breach within a period of 90 days following its receipt of such
notice, then the Mortgage Loan Seller will be obligated pursuant to the Purchase
Agreement (the relevant rights under which will be assigned, together with its
interests in the mortgage loans, by the depositor to the trustee) to repurchase
the affected mortgage loan within such 90-day period at a price (the "Purchase
Price") equal to the sum of:
o the unpaid principal balance of such mortgage loan;
o unpaid accrued interest on such mortgage loan at the interest 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; and
o certain servicing expenses that are reimbursable to the master
servicer and the special servicer.
The foregoing repurchase obligation will constitute the sole remedy
available to the certificateholders and the trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the mortgage
loans. The Mortgage Loan Seller will be the sole warranting party in respect of
the mortgage loans, and none of the depositor, the master servicer or any of
their affiliates [(other than the Mortgage Loan Seller)] will be obligated to
repurchase any affected mortgage loan in connection with a breach of the
Mortgage Loan Seller's representations and warranties if the Mortgage Loan
Seller defaults on its obligation to do so. However, the depositor will not
include any mortgage loan in the mortgage pool if anything has come to the
depositor's attention prior to the Closing Date that would cause it to believe
that the representations and warranties made by the Mortgage Loan Seller
regarding such mortgage loan will not be correct in all material respects. See
"Description of the Pooling Agreements--Representations and Warranties;
Repurchases" in the prospectus.
Changes in Mortgage Pool Characteristics
The description in this prospectus supplement of the mortgage pool and the
mortgaged properties is based upon the mortgage pool as expected to be
constituted at the time the offered certificates are issued, as adjusted for the
scheduled principal payments due on or before the Cut-off Date. Prior to the
issuance of the offered certificates, a mortgage loan may be removed from the
mortgage pool if the depositor deems such removal necessary or appropriate or if
it is prepaid. A limited number of other mortgage loans may be included in the
mortgage pool prior to the issuance of the offered certificates, unless
including such mortgage loans would materially alter the characteristics of the
mortgage pool as described herein. The depositor believes that the information
set forth herein will be 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 interest 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 Closing Date and
will be filed, together with the Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the offered certificates. 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.
S-29
SERVICING OF THE MORTGAGE LOANS
General
Each of the master servicer and the special servicer will be required to
service and administer the mortgage loans for which it is responsible, 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 or the special servicer, as the case may be, 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:
o any relationship that the master servicer or the special servicer,
as the case may be, or any affiliate thereof, may have with the
related mortgagor;
o the ownership of any certificate by the master servicer or the
special servicer, as the case may be, or any affiliate thereof;
o the master servicer's or the special servicer's, as the case may be,
obligation to make advances, whether in respect of delinquent
payments of principal and/or interest or to cover certain servicing
expenses; and
o the master servicer's or the special servicer's, as the case may be,
right to receive compensation for its services under the Pooling and
Servicing Agreement or with respect to any particular transaction.
Except as otherwise described under "--Inspections; Collection of
Operating Information" below, the master servicer initially will be responsible
for the servicing and administration of the entire mortgage pool. With respect
to any mortgage loan:
o which has a Balloon Payment which is past due or any other payment
which is more than [60] days past due;
o as to which the borrower has entered into or consented to
bankruptcy, appointment of a receiver or conservator or a similar
insolvency proceeding, or the borrower has become the subject of a
decree or order for such a proceeding which shall have remained in
force undischarged or unstayed for a period of [60] days;
o as to which the master servicer shall have received notice of the
foreclosure or proposed foreclosure of any other lien on the
mortgaged property; or
o as to which, in the judgment of the master servicer, a payment
default has occurred or is imminent and is not likely to be cured by
the borrower within [60] days,
and prior to acceleration of amounts due under the related mortgage note or
commencement of any foreclosure or similar proceedings, the master servicer will
transfer its servicing responsibilities to the special servicer, but will
continue to receive payments on such mortgage loan (including amounts collected
by the special servicer), to make certain calculations with respect to such
mortgage loan and to make remittances and prepare certain reports to the
certificateholders with respect to such mortgage loan. If the related mortgaged
property is acquired in respect of any such mortgage loan (upon acquisition, an
"REO Property"), whether through foreclosure, deed-in-lieu of foreclosure or
otherwise, the special servicer will continue to be responsible for the
operation and management thereof. The mortgage loans serviced by the special
servicer are referred to in this prospectus supplement as the "Specially
Serviced Mortgage Loans" and, together with any REO Properties, constitute the
"Specially Serviced Mortgage Assets." The master servicer shall have no
responsibility for the performance by the special servicer of its duties under
the Pooling and Servicing Agreement.
S-30
If any Specially Serviced Mortgage Loan, in accordance with its original
terms or as modified in accordance with the Pooling and Servicing Agreement,
becomes a performing mortgage loan for at least [90] days, the special servicer
will return servicing of such mortgage loan to the master servicer.
Set forth below, following the subsection captioned "--The Special
Servicer," is a description of certain pertinent provisions of the Pooling
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 and Servicing Agreements," for important information in addition to
that set forth herein regarding the terms and conditions of the Pooling and
Servicing Agreement as they relate to the rights and obligations of the master
servicer thereunder.
The Master Servicer
[__________], a [__________], will act as master servicer with respect to
the mortgage pool. Founded in [__________] as a [__________], the master
servicer today furnishes a variety of wholesale banking services. As of December
31, 200[_], 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.
The offices of the master servicer that will be primarily responsible for
servicing and administering the mortgage pool are located at [__________].
The Special Servicer
[__________], a [__________], will be responsible for the servicing and
administration of the Specially Serviced Mortgage Loans. As of December 31,
200[_], the special servicer had a total mortgage loan servicing portfolio of
approximately $[_____], of which approximately $[_____] represented multifamily
mortgage loans.
The special servicer has [____] offices in [__________] states with a
total staff of employees. Its principal executive offices are located at
[_____].
The information set forth herein concerning the special servicer has been
provided by the special servicer, and neither the depositor nor the underwriter
makes any representation or warranty as to the accuracy or completeness of such
information.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the master servicer in respect of
its master servicing activities will be the Master Servicing Fee. The "Master
Servicing Fee" will be payable monthly on a loan-by-loan basis from amounts
received in respect of interest on each mortgage loan, will accrue in accordance
with the terms of the related mortgage note at a rate equal to [___]% per annum
and will be computed on the basis of the same principal amount and for the same
period respecting which any related interest payment on the related mortgage
loan is computed. [As additional servicing compensation, the master servicer
will be entitled to retain all [Prepayment Premiums] assumption and modification
fees, late charges and penalty interest and, as and to the extent described
below, 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 permitted
investments, and the master servicer will be entitled to retain any interest or
other income earned on such funds.]
The principal compensation to be paid to the special servicer in respect
of its special servicing activities will consist of the Special Servicing Fee
(together with the Master Servicing Fee, the "Servicing Fees") and the Workout
Fee. Like the Master Servicing Fee, the "Special 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, 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. The "Workout
Fee" will equal 1% (the "Workout Fee Rate") and will be payable from, all
collections and proceeds received in respect of principal of each mortgage loan
which is or has been a Specially Serviced Mortgage Loan (including those for
which servicing has been returned to the master servicer). As additional
servicing compensation, the special servicer will be entitled to retain all
assumption and modification fees received on Mortgage Loans serviced thereby.
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Although the master servicer and special servicer are each 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 or the special servicer,
as the case may be, 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 (as defined herein) 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 may be less than (such
shortfall, a "Prepayment Interest Shortfall") 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 may 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
collected for all mortgage loans are greater than Prepayment Interest Shortfalls
incurred, such excess will be paid to the master servicer as additional
servicing compensation.]
[As and to the extent described herein under "Description of the
Certificates--Advances," the master servicer will be entitled to receive
interest on Advances, such interest to be paid, contemporaneously with the
reimbursement of the related Advance, 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 of such expenses directly out
of the Certificate Account and at times without regard to the relationship
between the expense and the funds from which it is being paid. In connection
therewith, the master servicer will be responsible for all fees of any
sub-servicers, other than management fees earned in connection with the
operation of an REO Property, which management fees the master servicer will be
authorized to pay out of revenues received from such property (thereby reducing
the portion of such revenues that would otherwise be available for distribution
to certificateholders). See "Description of the
Certificates--Distributions--Method, Timing and Amount" herein and "Description
of the Pooling Agreements--Certificate Account" and "--Servicing Compensation
and Payment of Expenses" in the Prospectus.
Modifications, Waivers and Amendments
The master servicer or the special servicer may, consistent with its
normal servicing practices, agree to modify, waive or amend any term of any
mortgage loan, without the consent of the trustee or any certificateholder,
subject, however, to each of the following limitations, conditions and
restrictions:
(a) with limited exception, the master servicer and the special
servicer may not agree to any modification, waiver or amendment that will
(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; unless, in any such case, in the master
servicer's or the special servicer's judgment, as the case may be, a
material default on the mortgage loan has occurred or a payment default is
reasonably foreseeable, 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; and
(b) [describe additional limitations to permitted modification
standards]
The master servicer and the special servicer will 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 loan documents, 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
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be available for review during normal business hours at the offices of the
trustee. See "Description of the Certificates--Reports to Certificateholders;
Certain Available Information" herein.
Inspections; Collection of Operating Information
The special servicer will perform physical inspections of each mortgaged
property at such times and in such manner as are consistent with the special
servicer's normal servicing procedures, but in any event:
o at least once per calendar year, commencing in the calendar year
200[_]; and
o if any scheduled payment becomes more than 60 days delinquent on the
related mortgage loan, as soon as practicable thereafter.
The special servicer will 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 special 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, we cannot assure you that any operating
statements required to be delivered will in fact be delivered, nor is the
special servicer likely to have any practical means of compelling such delivery
in the case of an otherwise performing mortgage loan.
Copies of the inspection reports and operating statements referred
to above are to be available for review by certificateholders during normal
business hours at the offices of the trustee. See "Description of the
Certificates--Reports to Certificateholders; Certain Available Information"
herein.
DESCRIPTION OF THE CERTIFICATES
General
The certificates will be issued pursuant to the Pooling and Servicing
Agreement and will represent in the aggregate the entire beneficial ownership
interest in a trust fund consisting of:
o the mortgage loans and all payments under and proceeds of the
mortgage loans received after the Cut-off Date (exclusive of
payments of principal and interest due on or before the Cut-off
Date);
o any REO Property;
o such funds or assets as from time to time are deposited in the
Certificate Account;
o the rights of the mortgagee under all insurance policies with
respect to the mortgage loans; and
o certain rights of the depositor under the Purchase Agreement
relating to mortgage loan document delivery requirements and the
representations and warranties of the Mortgage Loan Seller regarding
the mortgage loans.
The trust fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
certificateholders into which all payments and collections received or advanced
with respect to the Mortgage Loans and other assets in the trust fund will be
deposited to the extent described herein and in the prospectus. See "Description
of the Pooling Agreements--Certificate Account" in the Prospectus.
The certificates will consist of the following four classes:
o the Class A Certificates;
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o the Class B Certificates;
o the Class C Certificates; and
o the Class R Certificates.
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, the Certificate Balance of each class of certificates will be reduced by
any distributions of principal actually made on, and any Collateral Support
Deficit actually allocated to, such class of certificates on such distribution
date.
Only the Class A Certificates and the Class B Certificates (collectively,
the "Offered Certificates") are offered hereby. The Class C and Class R
Certificates have not been registered under the Securities Act of 1933 and are
not offered hereby.
Delivery, Form and Denomination
The Offered Certificates will be issuable in registered form, in minimum
denominations of Certificate Balance of:
o $10,000 with respect to the Class A Certificates and multiples of $1
in excess thereof; and
o $25,000 with respect to Class B Certificates and multiples of $1 in
excess thereof.
The Offered Certificates will initially be represented by one or more
global Certificates for each such Class registered in the name of the nominee of
DTC. The depositor has been informed by DTC that DTC's nominee will be Cede &
Co. No holder of an Offered Certificate will be entitled to receive a
certificate issued in fully registered, certificated form (each, a "Definitive
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 Certificates are issued, all references to actions by holders
of the Offered Certificates will refer to actions taken by DTC upon instructions
received from holders of Offered Certificates through its participating
organizations (together with Clearstream Banking, societe anonyme
("Clearstream") and Euroclear participating organizations, the "Participants"),
and all references herein to payments, notices, reports, statements and other
information to holders of Offered Certificates will refer to payments, notices,
reports and statements to DTC or Cede & Co., as the registered holder of the
Offered Certificates, for distribution to holders of Offered Certificates
through its Participants in accordance with DTC procedures; provided, however,
that to the extent that the party responsible for distributing any report,
statement or other information has been provided with the name of the beneficial
owner of a certificate (or the prospective transferee of such beneficial owner),
such report, statement or other information will be provided to such beneficial
owner (or prospective transferee).
Until Definitive Certificates are issued in respect of the Offered
Certificates, interests in the Offered Certificates will be transferred on the
book-entry records of DTC and its Participants. [__________] will initially
serve as bond administrator and as certificate registrar (in such capacity, the
"Certificate Registrar") for purposes of recording and otherwise providing for
the registration of the Offered Certificates.
Book-Entry Registration
Holders of Offered Certificates may hold their certificates through DTC
(in the United States) or Clearstream or Euroclear (in Europe) if they are
Participants of such system, or indirectly through organizations that are
participants in such systems. Clearstream and Euroclear will hold omnibus
positions on behalf of the Clearstream Participants and the Euroclear
Participants, respectively, through customers' securities accounts in
Clearstream's and Euroclear's names on the books of their respective
depositaries (collectively, the "Depositaries") which in turn will hold such
positions in customers' securities accounts in the Depositories' names on the
books of DTC. DTC is a limited purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to ss. 17A of the
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Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its Participants and to facilitate the clearance and settlement of
securities transactions between participants through electronic computerized
book-entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Clearstream Participants and Euroclear Participants
will occur in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly through Clearstream Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
its Depositary; however, such cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures. If the
transaction complies with all relevant requirements, Euroclear or Clearstream,
as the case may be, will then deliver instructions to the Depository to take
action to effect final settlement on its behalf.
Because of time-zone differences, credits of securities in Clearstream or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Clearstream Participant or Euroclear Participant on such business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream Participant or a Euroclear Participant to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant Clearstream or Euroclear cash account only as of the
business day following settlement in DTC.
The holders of Offered Certificates that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interest in, Offered Certificates may do so only through Participants and
Indirect Participants. In addition, holders of Offered Certificates will receive
all distributions of principal and interest from the Bond Administrator through
the Participants who in turn will receive them from DTC. Under a book-entry
format, holders of Offered Certificates may experience some delay in their
receipt of payments, reports and notices, since such payments, reports and
notices will be forwarded by the Bond Administrator to Cede & Co., as nominee
for DTC. DTC will forward such payments, reports and notices to its
Participants, which thereafter will forward them to Indirect Participants,
Clearstream, Euroclear or holders of Offered Certificates.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Offered Certificates among Participants on whose behalf it acts with respect to
the Offered Certificates and to receive and transmit distributions of principal
of, and interest on, the Offered Certificates. Participants and Indirect
Participants with which the holders of Offered Certificates have accounts with
respect to the Offered Certificates similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
holders of Offered Certificates. Accordingly, although the holders of Offered
Certificates will not possess the Offered Certificates, the Rules provide a
mechanism by which Participants will receive payments on Offered Certificates
and will be able to transfer their interest.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a holder of
Offered Certificates to pledge such Certificates to persons or entities that do
not participate in the DTC system, or to otherwise act with respect to such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
DTC has advised the depositor that it will take any action permitted to be
taken by a holder of an Offered Certificate under the Pooling and Servicing
Agreement only at the direction of one or more Participants to whose accounts
with DTC the Offered Certificates are credited. DTC may take conflicting actions
with respect to other undivided interests to the extent that such actions are
taken on behalf of Participants whose holdings include such undivided interests.
S-35
Clearstream is incorporated under the laws of Luxembourg as a professional
depository. Clearstream holds securities for its participating organizations
("Clearstream Participants") and facilities the clearance and settlement of
securities transactions between Clearstream Participants through electronic
book-entry changes in accounts of Clearstream Participants, thereby eliminating
the need for physical movement of certificates.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear system ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear system, withdrawal of
securities and cash from the Euroclear system, and receipts of payments with
respect to securities in the Euroclear system.
Although DTC, Euroclear and Clearstream have implemented the foregoing
procedures in order to facilitate transfers of interests in Global Certificates
among Participants of DTC, Euroclear and Clearstream, they are under no
obligation to perform or to continue to comply with such procedures, and such
procedures may be discontinued at any time. None of the depositor, the trustee,
the Bond Administrator, the Servicer, the special servicer or the underwriters
will have any responsibility for the performance by DTC, Euroclear or
Clearstream or their respective direct or indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
The information herein concerning DTC, Clearstream and Euroclear and their
book-entry systems has been obtained from sources believed to be reliable, but
the depositor takes no responsibility for the accuracy or completeness thereof.
Distributions
Method, Timing and Amount. Distributions on the certificates will be made
by the [trustee], to the extent of available funds, on the [10th] day of each
month or, if any such [10th] day is not a business day, then on the next
succeeding business day, commencing in __________, 200[_] (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 the last business day of the month
preceding the month in which the related Distribution Date occurs (the "Record
Date"). 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 [trustee] with wiring instructions [no less than five
business days prior to the related Record Date (which wiring instructions may be
in the form of a standing order applicable to all subsequent distributions) and
is the registered owner of certificates with an aggregate initial principal
amount of at least $5,000,000], or otherwise by check mailed to such
certificateholder. The final distribution on any certificate will be made in
like manner, but only upon presentation and surrender of such certificate at the
location that will be specified in a notice of the pendency of such final
distribution. All distributions made with respect to a class of certificates
will be allocated pro rata among the outstanding certificates of such class
based on their respective Percentage Interests. The "Percentage Interest"
evidenced by any Offered Certificate is equal to the initial denomination
thereof as of the Closing Date, 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 interest thereon and related Prepayment Premiums, all amounts
received and retained in connection with the liquidation of
defaulted
S-36
mortgage loans or property acquired in respect thereof, by
foreclosure or otherwise (such amounts, "Liquidation Proceeds"), 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)
("Insurance Proceeds" and "Condemnation Proceeds, " respectively)
and other unscheduled recoveries received subsequent to the related
Due Period, and
(iii) 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 [second] day of the month preceding the month in which such Distribution
Date occurs and ends on the [first] day of the month in which such Distribution
Date occurs. For purposes of this discussion in the prospectus, the due date is
also the Prepayment Period.
The "Determination Date" for each Distribution Date is the earlier of
o the [sixth] day of the month in which the related distribution date
occurs, or if such [sixth] day is not a business day, then the
immediately preceding business day, and
o the [fourth] business day prior to the related distribution date.
Payment Priorities. On each Distribution Date, for so long as the
Certificate Balances of the Offered Certificates have not been reduced to zero,
the [trustee] will (except as otherwise described under "--Termination;
Retirement of Certificates" 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 aggregate Certificate Balance of the Class A
Certificates to zero);
3. to distributions to the holders of the Class A Certificates, until all
amounts of Collateral Support Deficit previously allocated to the Class A
Certificates, but not previously reimbursed, have been reimbursed in full;
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 Certificate Balances of the
Class A Certificates have been reduced to zero, then to the extent not
distributed in reduction of such Certificate Balances 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 to the holders of the Class B Certificates, until all
amounts of Collateral Support Deficit previously allocated to the Class B
Certificates, but not previously reimbursed, have been reimbursed in full; to
S-37
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;
7. 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;
8. 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;
9. to distributions to the holders of the Class C Certificates, until all
amounts of Collateral Support Deficit previously allocated to the Class C
Certificates, but not previously reimbursed, have been reimbursed in full; and
10. 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.
Reimbursement of previously allocated Collateral Support Deficit will not
constitute distributions of principal for any purpose and will not result in an
additional reduction in the Certificate Balance of the Class of Certificates in
respect of which any such reimbursement is made.
Pass-Through Rates. The Pass-Through Rate applicable to each Class of
certificates (other than the Class R 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 each
Class of Certificates will equal 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 Pass-Through Rate for any
Class of Certificates and any Distribution Date, the "applicable Effective Net
Mortgage Rate" for each Mortgage Loan is:
o if such mortgage loan accrues interest on the basis of a 360-day
year consisting of twelve 30-day months (a "30/360 basis, which is
the basis of accrual for interest on the certificates), the Net
Mortgage Rate in effect for such Mortgage Loan as of the
commencement of the related Due Period; and
o if such mortgage loan does not accrue interest on a 30/360 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 30/360 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 Certificates for each Distribution Date
represents that portion of the Accrued Certificate Interest in respect of such
class of certificates for such Distribution Date that is net of such Class's
allocable share (calculated as described below) of the aggregate of any
Prepayment Interest Shortfalls resulting from voluntary principal prepayments
made on the mortgage loans during the related Due Period that are not offset by
Prepayment Interest Excesses 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
certificates for each Distribution Date is equal to one month's interest at the
Pass-Through Rate applicable to class of certificates for such Distribution Date
accrued on the related Certificate Balance outstanding immediately prior to such
Distribution Date. Accrued Certificate Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each class of certificates will equal the
product of:
o such Net Aggregate Prepayment Interest Shortfall, multiplied by
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o a fraction, the numerator of which is equal to the Accrued
Certificate Interest in respect of such class of certificates for
such Distribution Date, and the denominator of which is equal to the
Accrued Certificate Interest in respect of all the classes of
certificates for 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[, net of any related Workout Fees
payable therefrom to the special servicer], 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 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 [, net of any related
Workout Fees payable therefrom to the special servicer]; 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 Proceeds, 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[, net of any related Workout Fees payable therefrom to the special
servicer].
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as the
"Distributable Principal."
[The "Ownership Percentage" evidenced by any Class [or Classes] 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(s) of such
class(es) of certificates, 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 subject to the special servicer's right to
receive any Workout Fee with respect to such mortgage loan. 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 that 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. If any mortgage loan is
paid in full or such mortgage loan (or any mortgaged property acquired in
respect thereof) is otherwise liquidated, then, as of the first Distribution
Date that follows the end of the Due Period in which such payment in full or
liquidation occurred, and notwithstanding that a loss may have occurred in
connection with any such liquidation, the Stated Principal Balance of such
mortgage loan shall be zero.
For purposes of calculating distributions on, and allocations of
Collateral Support Deficit to, the certificates, as well as for purposes of
calculating 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
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be made, or reimbursement to the master servicer or the special servicer for
payments previously advanced, in connection with the operating 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,
be deemed to equal one month's interest thereon at the applicable Mortgage Rate.
Subordination; Allocation of Collateral Support Deficit
The rights of holders of the Class B Certificates and the Class C
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 the rights of holders of the
Class C 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 B Certificates. This subordination is
intended to enhance the likelihood of timely receipt by the holders of the Class
A Certificates of the full amount of all Distributable Certificate Interest
payable in respect of such certificates on each Distribution Date, and the
ultimate receipt by such holders of principal in an amount equal to the entire
aggregate Certificate Balance of the Class A Certificates. Similarly, but to a
lesser degree, this subordination is also intended to enhance the likelihood of
timely receipt by the holders of the Class B Certificates of the full amount of
all Distributable Certificate Interest payable in respect of such certificates
on each Distribution Date, and the ultimate receipt by such holders of principal
in an amount equal to the entire Certificate Balance of the Class B
Certificates. This subordination 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--Payment Priorities" above.
No other form of Credit Support will be available for the benefit of the holders
of the Offered Certificates.
Allocation to the Class A Certificates, for so long as they are
outstanding, of the entire Unscheduled Principal Distribution Amount for each
Distribution Date will generally accelerate the amortization of such
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 Class B and Class C Certificates), thereby
increasing, relative to their respective Certificate Balances, the subordination
afforded the Class A Certificates by the Class B and Class C 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 Class C Certificates.
On each Distribution Date, immediately following the distributions to be
made to the certificateholders on such date, the [trustee] is to calculate the
amount, if any, by which:
o the aggregate Stated Principal Balance of the Mortgage Pool expected
to be outstanding immediately following such Distribution Date is
less than
o the then aggregate Certificate Balance of the REMIC Regular
Certificates (any such deficit, "Collateral Support Deficit").
The [trustee] will be required to allocate any such Collateral Support
Deficit among the respective classes of Certificates as follows:
o first, to the Class C Certificates, until the remaining Certificate
Balance of such class of certificates is reduced to zero;
o second, to the Class B Certificates, until the remaining Certificate
Balance of such class of certificates is reduced to zero; and
o last, to the Class A Certificates, until the remaining Certificate
Balance of such class of certificates has been reduced to zero.
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Any allocation of Collateral Support Deficit to a class of certificates
will be made by reducing the Certificate Balance thereof by the amount so
allocated. Any Collateral Support Deficit allocated to a Class of REMIC Regular
Certificates will be allocated among the respective Certificates of such Class
in proportion to the Percentage Interests evidenced thereby. In general,
Collateral Support Deficit will result from the occurrence of:
o losses and other shortfalls on or in respect of the mortgage loans,
including as a result of defaults and delinquencies thereon,
Nonrecoverable Advances made in respect thereof and the payment to
the master servicer of interest on Advances and certain servicing
expenses; and
o certain unanticipated, non-mortgage loan specific expenses of the
trust fund, including certain reimbursements to the trustee as
described under "Description of the Pooling Agreements--Certain
Matters Regarding the trustee" in the prospectus, certain
reimbursements to the master servicer and the depositor as described
under "Description of the Pooling Agreements--Certain Matters
Regarding the Master Servicer and the depositor" in the prospectus
and certain federal, state and local taxes, and certain tax-related
expenses, payable out of the trust fund as described under "Certain
Federal Income Tax Consequences--REMICs--Prohibited Transactions Tax
and Other Taxes" in the prospectus. Accordingly, the allocation of
Collateral Support Deficit as described above will constitute an
allocation of losses and other shortfalls experienced by the trust
fund.
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, an "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:
o 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;
o in the case of each mortgage loan delinquent in respect of its
Balloon Payment as of the related Determination Date, an amount
equal to one month's 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
o in the case of each REO Property, an amount equal to thirty days'
imputed interest with respect thereto at the related Mortgage Rate
in effect as of the commencement of the related Due Period (net of
the related Servicing Fee), but only to the extent that such amount
is not covered by any net income from such REO Property included in
the Available Distribution Amount for such Distribution Date. The
master servicer's obligations to make 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 Advance made out of
its own funds from any amounts collected in respect of the mortgage loan as to
which such Advance was made, whether in the form of late payments, Insurance
Proceeds, Condemnation Proceeds, Liquidation Proceeds or otherwise ("Related
Proceeds"). Notwithstanding the foregoing, the master servicer will not be
obligated to make any Advance that it determines in its reasonable good faith
judgment would, if made, not be recoverable out of Related Proceeds (a
"Nonrecoverable Advance"), and the master servicer will be entitled to recover
any Advance that it so determines to be a Nonrecoverable Advance out of general
funds on deposit in the Certificate Account. Nonrecoverable Advances will
represent a portion of the losses to be borne by the Certificateholders. 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 Advance or reimbursable servicing
expense, each of the master servicer and the special servicer will be entitled
to be paid, out of any amounts then on deposit in the Certificate Account,
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interest at [__]% per annum (the "Reimbursement Rate") accrued on the amount of
such Advance or expense 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
Class C 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 Class C
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
and/or special 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 Reimbursement Rate.]
Each Distribution Date Statement delivered by the trustee to the
certificateholders will contain information relating to the amounts of Advances
made with respect to the related Distribution Date. See "Description of the
Certificates--Reports to Certificateholders; Certain Available Information" in
this prospectus supplement and "Description of Certificates--Reports to
Certificateholders" in the prospectus.
Reports to Certificateholders; Certain Available Information
On each Distribution Date, the [trustee] will be required to prepare and
make available 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 [trustee] to persons who at any time during the prior calendar
year were holders of the Offered Certificates. Certain information regarding the
mortgage loans will be made accessible at the website maintained by [________]
at www.[______] or such other mechanism as the [trustee] my have in place from
time to time, see "Description of the Certificates--Reports to
Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the [trustee] make
available at its offices primarily responsible for [administration of the trust
fund], during normal business hours, for review by any holder of an Offered
Certificate, originals or copies of, among other things, the following items:
o the Pooling and Servicing Agreement and any amendments thereto;
o all Distribution Date Statements delivered to holders of the
relevant class of Offered Certificates since the Closing Date;
o all officer's certificates delivered to the trustee since the
Closing Date as described under "Description of the Pooling
Agreements--Evidence as to Compliance" in the prospectus;
o all accountants' reports delivered to the trustee since the Closing
Date as described under "Description of the Pooling
Agreements--Evidence as to Compliance" in the prospectus;
o the most recent property inspection report prepared by or on behalf
of the special servicer and delivered to the trustee in respect of
each mortgaged property;
o the most recent annual operating statements, if any, collected by or
on behalf of the special servicer and delivered to the trustee in
respect of each mortgaged property; and
o any and all modifications, waivers and amendments of the terms of a
mortgage loan entered into by the master servicer or the special
servicer and delivered to the trustee. Copies of any and all of the
foregoing items will be available from the [trustee] upon request;
however, the [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 Certificates are issued, the foregoing
information will be available to Certificate Owners only to the extent it is
forwarded by or otherwise available through DTC and DTC Participants. Conveyance
of notices and other communications by DTC to DTC Participants, by DTC
Participants to Financial
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Intermediaries and Certificate Owners, and by Financial Intermediaries 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. The
master servicer, the special servicer, the trustee, the depositor and the
Certificate Registrar are required to recognize as Certificateholders only those
persons in whose names the Certificates are registered on the books and records
of the Certificate Registrar. The initial registered holder of the 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 (the "Voting Rights") shall be
allocated among the respective classes of certificateholders in proportion to
the Certificate Balances of their certificates. 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.
Termination; Retirement of Certificates
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of:
o the final payment (or advance in respect thereof) or other
liquidation of the last mortgage loan or REO Property subject
thereto; and
o the purchase of all of the assets of the trust fund by the [master
servicer or the depositor]. Written notice of termination of the
Pooling and Servicing Agreement will be given to each
certificateholder, and the final distribution will be made only upon
surrender and cancellation of the certificates at the office of the
Certificate Registrar or other location specified in such notice of
termination.
Any such purchase by the [master servicer or the depositor] of all the
mortgage loans and other assets in the trust fund is required to be made at a
price equal to [the excess of]:
o the sum of (i) the aggregate Purchase Price of all the mortgage
loans (exclusive of REO Loans) then included in the trust fund and
(ii) the aggregate fair market value of all REO Properties then
included in the trust fund (which fair market value for any REO
Property may be less than the Purchase Price for the corresponding
REO Loan), as determined by an appraiser mutually agreed upon by the
master servicer and the trustee, [over
o the aggregate of amounts payable or reimbursable to the master
servicer under the Pooling and Servicing Agreement].
Such purchase will effect early retirement of the then outstanding Offered
Certificates, but the right of the master servicer or the depositor to effect
such termination is subject to the requirement that the then aggregate Stated
Principal Balance of the Mortgage Pool be less than [5]% of the Initial Pool
Balance.
On the final Distribution Date, the aggregate amount paid by the master
servicer or the depositor, as the case may be, 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 generally
as described above under "--Distributions--Payment Priorities," except that the
distributions of principal described thereunder will, in the case of each class
of certificates, be made, subject to available funds, in an amount equal to the
related Certificate Balance then outstanding.
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--
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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:
o the Pass-Through Rate in effect from time to time for such
certificate;
o 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
o the aggregate amount of distributions on such certificate.
Pass-Through Rate. The Pass-Through Rate applicable to each Class of
Offered Certificates for any Distribution Date will equal [the weighted average
of the applicable Effective Net Mortgage Rates]. Accordingly, the yield on the
Offered Certificates will be sensitive to changes in the relative composition of
the Mortgage Pool as a result of scheduled amortization, voluntary prepayments
and 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 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. Because the rate of
principal payments on the mortgage loans will depend on future events and a
variety of factors (as described 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 extent to which the yield to maturity of any class of Offered
Certificates may vary from the anticipated yield will depend upon the degree to
which such certificates are purchased at a discount or premium and when, and to
what degree, payments of principal on the mortgage loans 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 such certificate could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
any Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments on such certificate could result in an
actual yield to such investor that is lower than the anticipated yield. In
general, the earlier a payment of principal is made 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 on such investor's Offered Certificates occurring at a rate
higher (or lower) than the rate anticipated by the investor during any
particular period would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
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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
Class C 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 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 properties 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" and "Description of the Mortgage Pool" herein and "Risk Factors" and
"Yield and Maturity Considerations--Yield and Prepayment Considerations" in the
prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. The mortgage loans may be prepaid at any time and, in cases (approximately
[___]% of the Initial Pool Balance), may be prepaid in whole or in part without
payment of a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
mortgaged properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by Federal and state tax laws (which are subject to change) to sell mortgaged
properties prior to the exhaustion of tax depreciation benefits.
The depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the mortgage
loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the mortgage loans that will be prepaid or as to which
a default will have occurred as of any date or as to the overall rate of
prepayment or default on the mortgage loans.
Delay in Payment of Distributions. Because monthly distributions will not
be made to certificateholders until a date that is scheduled to be at least days
and as many as days following the due dates for the mortgage loans during the
related Due Period, the effective yield to the holders of the Offered
Certificates will be lower than the yield that would otherwise be produced by
the applicable Pass-Through Rates and purchase prices (assuming such prices did
not account for such delay).
Unpaid Distributable Certificate Interest. As described under "Description
of the Certificates--Distributions--Payment Priorities" herein, if the portion
of the Available Distribution Amount distributable in respect of interest on any
class of Offered Certificates on any Distribution Date is less than the
Distributable Certificate Interest then payable for such class, the shortfall
will be distributable to holders of such class of certificates on subsequent
Distribution Dates, to the extent of available funds. Any such shortfall will
not bear interest, however, and will therefore negatively affect the yield to
maturity of such class of certificates for so long as it is outstanding.
Weighted Average Life
The weighted average life of an Offered Certificate refers to the average
amount of time that will elapse from the date of its issuance until each dollar
allocable to principal of such Certificate is distributed to the investor. The
weighted average life of an Offered Certificate will be influenced by, among
other things, the rate at which principal on the mortgage loans is paid or
otherwise collected, which may be in the form of scheduled amortization,
voluntary prepayments, Insurance Proceeds, Condemnation Proceeds and Liquidation
Proceeds.
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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
levels of CPR. 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 levels of CPR shown or at any other prepayment
rate.]
The following tables indicate the percentage of the initial Certificate
Balance of each of the Class A Certificates and the Class B 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 certificates. The
tables have been prepared on the basis of the following assumptions, among
others:
o scheduled monthly payments of principal and interest on the mortgage
loans, in each case prior to any prepayment of the loan, will be
timely received (with no defaults) and will be distributed on the
[10th] day of each month commencing in [_______, 200[__]];
o the Mortgage Rate in effect for each mortgage loan will remain in
effect to maturity;
o all mortgage loans accrue and pay interest on a 30/360 basis;
o 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 on each due date until maturity;
o any principal prepayments on the mortgage loans will be received on
their respective due dates at the respective levels of CPR set forth
in the tables, and there will be no Net Aggregate Prepayment
Interest Shortfalls in connection therewith; and
o the Mortgage Loan Seller will not be required to repurchase any
mortgage loan, and neither [the master servicer nor the depositor]
will 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, the Class A
Certificates or the Class B Certificates may mature earlier or later than
indicated by the tables. It is highly unlikely that the mortgage loans will
prepay at any constant rate until maturity or that all the mortgage loans will
prepay at the same rate. In addition, variations in the actual prepayment
experience and the balance of the mortgage loans that prepay may increase or
decrease the percentages of initial Certificate Balances (and weighted average
lives) shown in the following tables. Such variations may occur even if the
average prepayment experience of the mortgage loans were to equal any of the
specified CPR percentages. Investors are urged to conduct their own analyses of
the rates at which the mortgage loans may be expected to prepay. Based on the
foregoing assumptions, the following table indicates the resulting weighted
average lives of the Class A Certificates and sets forth the percentage of the
initial Certificate Balance of the Class A Certificates that would be
outstanding after each of the dates shown at the indicated CPRs.
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Percent Of The Initial Certificate Balance Of The
Class A Certificates At The Respective CPRS
Set Forth Below:
Date 0% [___]% [___]% [___]% [___]%
- ----------------------------------- ------ ------ ------ ------ ------
Delivery Date ..................... 100.0 100.0 100.0 100.0 100.0
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
Weighted Average Life (year)(A) ...
- ----------
(A) The weighted average life of a Class A Certificate is determined by:
o 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;
o summing the results; and
o dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class A Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B Certificates and sets forth the
percentage of the initial Certificate Balance of the Class B Certificates that
would be outstanding after each of the dates shown at the indicated CPRs.
Percent Of The Initial Certificate Balance Of The
Class B Certificates At The Respective CPRS
Set Forth Below:
Date 0% [___]% [___]% [___]% [___]%
- ----------------------------------- ------ ------ ------ ------ ------
Delivery Date ..................... 100.0 100.0 100.0 100.0 100.0
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
[_______] 10, 20[_] ............
Weighted Average Life (year)(A) ...
- ----------
(A) The weighted average life of a Class B Certificate is determined by:
o 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;
o summing the results; and
o dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class B Certificate.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, [Cadwalader, Wickersham &
Taft LLP][Latham & Watkins LLP,] counsel to the depositor, will deliver the
following opinion: Assuming the making of a proper election, compliance with the
provisions of the Pooling and Servicing Agreement and other related documents
and no amendments thereof, the accuracy of all representations made with respect
to the mortgage loans and compliance with any changes in the law, including any
amendments to the Code or applicable Treasury regulations thereunder,
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for federal income tax purposes, the trust fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986 (the
"Code"), and the Class A, Class B and Class C Certificates, (collectively,
"REMIC Regular Certificates") will evidence "regular interests" in such REMIC
within the meaning of the REMIC Provisions in effect on the date hereof.
The [____] Certificates [may] [will] [will not] be treated as having been
issued with original issue discount for Federal income tax reporting purposes.
The prepayment assumption that will be used in determining the rate of accrual
of [original issue discount,] market discount and premium, if any, for Federal
income tax purposes will be based on the assumption that subsequent to the date
of any determination the mortgage loans will prepay at a rate equal to [a CPR of
[____]%]. No representation is made that the mortgage loans will prepay at that
rate or at any other rate. See "Certain Federal Income Tax Consequences--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Original Issue Discount" in the prospectus.
The [____] Certificates may be treated for Federal income tax purposes as
having been issued at a premium. Whether any holder of [either] such class of
certificates will be treated as holding a certificate with amortizable bond
premium will depend on such certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such certificateholder. Holders of [each] such class of
certificates should consult their 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.
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)(B) of the Code, and interest (including original issue
discount, if any) on the Offered Certificates will be interest described in
Section 856(c)(3)(B) of the Code. Moreover, the Offered Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3) of the Code. See
"Certain Federal Income Tax Consequences--Federal Income Tax Consequences for
REMIC Certificates--Status of REMIC Certificates" in the Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated [_________], 200[__] (the "Underwriting Agreement"),
[_________] has agreed to purchase and the depositor has agreed to sell to the
underwriter each class of the Offered Certificates. It is expected that delivery
of the Certificates will be made only in book-entry form through the Same Day
Funds Settlement System of DTC on or about [_________], 200[__], against payment
therefor in immediately available funds.
The Underwriting Agreement provides that the obligation of the underwriter
to pay for and accept delivery of its certificates is subject to, among other
things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the depositor's
registration statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Offered Certificates by the underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
depositor from the sale of the Offered Certificates, before deducting expenses
payable by the depositor, will be approximately [___]% of the aggregate
Certificate Balance of the Offered Certificates plus accrued interest thereon
from the Cut-off Date. The underwriter may effect such transactions by selling
its certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the underwriter for whom they act as agent. In connection with the sale of
the Offered Certificates, the underwriter may be deemed to have received
compensation from the depositor in the form of underwriting compensation. The
underwriter and any dealers that participate with such underwriter in the
distribution of the Offered Certificates may
S-48
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 Underwriting Agreement provides that the depositor will indemnify the
underwriter, and that under limited circumstances the underwriter will indemnify
the depositor, against certain civil liabilities under the Securities Act of
1933, as amended, or contribute to payments required to be made in respect
thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of ongoing information available to investors concerning the
Offered Certificates will be the monthly statements discussed in the prospectus
under "Description of the Certificates--Reports to Certificateholders," which
will include information as to the outstanding principal balance of the Offered
Certificates and the status of the applicable form of credit enhancement. Except
as described herein under "Description of the Certificates--Reports to
Certificateholders; Certain Available Information," there can be no assurance
that any additional information regarding the Offered Certificates will be
available through any other source. In addition, the depositor is not aware of
any source through which price information about the Offered Certificates will
be generally available on an ongoing basis. The limited nature of such
information regarding the Offered Certificates may adversely affect the
liquidity of the Offered Certificates, even if a secondary market for the
Offered Certificates becomes available.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the underwriter by [_________]. Certain federal income tax matters and other
matters will be passed upon for the depositor by [Cadwalader, Wickersham & Taft
LLP][Latham & Watkins LLP].
RATING
It is a condition to issuance that the Class A Certificates be rated not
lower than "[_______]," and the Class B Certificates be rated not lower than
"[_______]," by [_______].
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the mortgage
pool, structural and legal aspects associated with the certificates, and the
extent to which the payment stream from the mortgage pool is adequate to make
payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding the likelihood or
frequency of prepayments (whether voluntary or involuntary) on the Mortgage
Loans.
There can be no assurance as to whether any rating agency not requested to
rate the Offered Certificates will nonetheless issue a rating to any class
thereof and, if so, what such rating would be. A rating assigned to any class of
Offered Certificates by a rating agency that has not been requested by the
depositor to do so may be lower than the rating assigned thereto by [_______].
The ratings on the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency.
LEGAL INVESTMENT CONSIDERATIONS
The Class [___] Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"), so long as they are rated in one of the two highest rating
categories by [S&P] [Moody's] [Fitch] [or another] [at least one] nationally
recognized statistical rating organization. The other classes of Certificates
will not constitute "mortgage related securities" for purposes of SMMEA and, as
a result, the appropriate characterization of those classes of Certificates
under various legal investment restrictions, and the ability of investors
subject to these restrictions to purchase those classes are subject to
significant interpretive uncertainties.
S-49
Except as to the status of certain classes of Certificates as "mortgage
related securities," no representations are made as to the proper
characterization of the Certificates for legal investment, financial institution
regulatory, or other purposes, or as to the ability of particular investors to
purchase the certificates under applicable legal investment restrictions.
Investors whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements, or review by regulatory
authorities should consult with their own legal advisors in determining whether
and to what extent the certificates will constitute legal investments for them
or are subject to investment, capital or other restrictions.
See "Legal Investment Considerations" in the Prospectus.
CERTAIN 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 separate accounts in which such plans,
accounts or arrangements are invested, including insurance company general
accounts, that is subject to ERISA, or Section 4975 of the Code (each, an "ERISA
Plan") should 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.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and church plans (as defined in Section 3(33) of ERISA
and provided no election has been made under Section 410(d) of the Code), are
not subject to the restrictions of ERISA or the Code. However, such plans
(collectively with ERISA Plans, "Plans") may be subject to the provisions of
applicable federal, state or local law ("Similar Law") materially similar to the
foregoing provisions of ERISA or the Code.
The U.S. Department of Labor issued to [underwriter] an individual
prohibited transaction exemption, Prohibited Transaction Exemption (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
and Section 501(i) of ERISA, 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 and Class B Certificates (the "ERISA Eligible Certificates"),
underwritten by an underwriter, provided that certain conditions set forth in
the Exemption are satisfied. For purposes of this Section "Certain ERISA
Considerations," the term "underwriter" shall include:
o [underwriter];
o any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control
with [underwriter]; and
o any member of the underwriting syndicate or selling group of which a
person described in the first two bullet points is a manager or
co-manager with respect to the ERISA Eligible Certificate.
The Exemption sets forth five general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the ERISA Eligible
Certificates to be eligible for exemptive relief thereunder.
First, the acquisition of the ERISA Eligible 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 ERISA Eligible Certificates at the time of acquisition by the
Plan must be rated in one of the four highest generic rating categories by
Standard & Poor's Ratings Services ("Standard & Poor's"), Moody's Investors
Service, Inc. ("Moody's") or Fitch Ratings, Inc. ("Fitch").
Third, the trustee cannot be an affiliate of any other member of the
Restricted Group other than an underwriter; the "Restricted Group" consists of
any underwriter, the depositor, the trustee, the master servicer, the special
servicer, any sub-servicer, and any mortgagor with respect to Mortgage Loans
constituting more than 5% of the
S-50
aggregate unamortized principal balance of the Mortgage Loans as of the date of
initial issuance of the ERISA Eligible Certificates.
Fourth, the sum of all payments made to and retained by the underwriter
must represent not more than reasonable compensation for underwriting the ERISA
Eligible Certificates; the sum of all payments made to and retained by the
depositor pursuant to the assignment of the mortgage loans to the trust fund
must represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the master servicer, the special
servicer and any sub-servicer must represent not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in connection
therewith.
Fifth, the investing Plan must be an accredited investor as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933, as amended.
It is a condition of the issuance of the ERISA Eligible Certificates that
they be rated not lower than "[__]" by [___] , thus satisfying the second
general condition set forth above. As of the Delivery Date, the third general
condition set forth above will be satisfied with respect to the ERISA Eligible
Certificates. A fiduciary of a Plan contemplating purchasing an ERISA Eligible
Certificate in the secondary market must make its own determination that, at the
time of such purchase, the ERISA Eligible Certificates continue to satisfy the
second and third general conditions set forth above. A fiduciary of a Plan
contemplating purchasing an ERISA Eligible Certificate, whether in the initial
issuance of such Certificates or in the secondary market, must make its own
determination that the first, fourth and fifth general conditions set forth
above will be satisfied with respect to such ERISA Eligible Certificate.
The Exemption also requires that the Trust Fund meet the following
requirements:
o the trust fund must consist solely of assets of the type that have
been included in other investment pools;
o certificates in such other investment pools must have been rated in
one of the four highest categories of Standard & Poor's, Moody's or
Fitch for at least one year prior to the Plan's acquisition of ERISA
Eligible Certificates; and
o certificates in such other investment pools must have been purchased
by investors other than Plans for at least one year prior to any
Plan's acquisition of ERISA Eligible Certificates.
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:
o the direct or indirect sale, exchange or transfer of ERISA Eligible
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, the special servicer,
a sub-servicer or a mortgagor is a Party in Interest with respect to
the investing Plan;
o the direct or indirect acquisition or disposition in the secondary
market of the ERISA Eligible Certificates by a Plan; and
o the holding of ERISA Eligible Certificates by a Plan.
However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
Class A Certificate on behalf of an "Excluded Plan" by any person who has
discretionary authority or renders investment advice with respect to the assets
of such Excluded Plan. For purposes hereof, an Excluded Plan is a Plan sponsored
by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with:
S-51
o the direct or indirect sale, exchange or transfer of ERISA Eligible
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;
o the direct or indirect acquisition or disposition in the secondary
market of ERISA Eligible Certificates by a Plan; and
o 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.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (a) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party in Interest with respect to an investing Plan by
virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of ERISA Eligible Certificates.
Before purchasing an ERISA Eligible Certificate, a fiduciary of a Plan
should itself confirm that (i) the ERISA Eligible Certificates constitute
"securities" 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 prohibited transaction exemptions. See
"Certain ERISA Considerations" in the prospectus. A purchaser of an ERISA
Eligible 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.
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.
S-52
INDEX OF PRINCIPAL DEFINITIONS
3
30/360 basis ...................................................... S-38
A
Accrued Certificate Interest ...................................... S-39
Available Distribution Amount ..................................... S-36
C
Certificate Account ............................................... S-33
Certificate Registrar ............................................. S-34
Certificateholders ................................................ S-22
Clearstream ....................................................... S-34
Clearstream Participants .......................................... S-36
Closing Date ...................................................... S-23
Code .............................................................. S-48
Collateral Support Deficit ........................................ S-40
Condemnation Proceeds ............................................. S-37
Cut-off Date ...................................................... S-22
Cut-off Date Balance .............................................. S-22
D
Debt Service Coverage Ratio ....................................... S-27
Definitive Certificate ............................................ S-34
Depositaries ...................................................... S-35
Determination Date ................................................ S-37
Distributable Certificate Interest ................................ S-38
Distributable Principal ........................................... S-39
Distribution Date ................................................. S-36
Distribution Date Statement ....................................... S-42
Due Period ........................................................ S-37
E
ERISA ............................................................. S-13
ERISA Eligible Certificates ....................................... S-50
ERISA Plan ........................................................ S-50
Euroclear Participants ............................................ S-36
Exemption ......................................................... S-50
F
Fitch ............................................................. S-50
Form 8-K .......................................................... S-29
I
Indirect Participants ............................................. S-35
Initial Pool Balance .............................................. S-22
Insurance Proceeds ................................................ S-37
L
Liquidation Proceeds .............................................. S-37
LTV Ratio ......................................................... S-26
M
Master Servicing Fee .............................................. S-31
Moody's ........................................................... S-50
Mortgage Loan ..................................................... S-40
Mortgage Loan Seller .............................................. S-23
Mortgage Loans .................................................... S-40
Mortgage Pool ..................................................... S-40
N
Net Aggregate Prepayment Interest Shortfall ....................... S-38
Net Mortgage Rate ................................................. S-38
Net Operating Income .............................................. S-27
Nonrecoverable Advance ............................................ S-42
O
Offered Certificates .............................................. S-34
Ownership Percentage .............................................. S-39
P
P&I Advance ....................................................... S-41
Participants ...................................................... S-34
Plans ............................................................. S-50
Prepayment Interest Excess ........................................ S-32
Prepayment Interest Shortfall ..................................... S-32
Prepayment Premiums ............................................... S-23
Purchase Agreement ................................................ S-23
Purchase Price .................................................... S-29
R
Record Date ....................................................... S-36
Reimbursement Rate ................................................ S-42
Related Proceeds .................................................. S-42
REMIC ............................................................. S-48
REMIC Provisions .................................................. S-48
REMIC Regular Certificates ........................................ S-48
REO Loan .......................................................... S-40
REO Loans ......................................................... S-40
REO Property ...................................................... S-30
Restricted Group .................................................. S-51
Rules ............................................................. S-35
S
Scheduled Principal Distribution Amount ........................... S-39
S-53
Servicing Fees .................................................... S-31
Similar Law ....................................................... S-50
SMMEA ............................................................. S-13, S-49
Special Servicing Fee ............................................. S-31
Specially Serviced Mortgage Assets ................................ S-30
Specially Serviced Mortgage Loans ................................. S-30
Standard & Poor's ................................................. S-50
Stated Principal Balance .......................................... S-39
T
Terms and Conditions .............................................. S-36
U
Underwriting Agreement ............................................ S-48
Unscheduled Principal Distribution Amount ......................... S-39
V
Voting Rights ..................................................... S-43
W
Workout Fee ....................................................... S-31
Workout Fee Rate .................................................. S-31
S-54
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
A-1
================================================================================
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this prospectus supplement and
the prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the depositor or by the
underwriter. This prospectus supplement and the prospectus do not constitute an
offer to sell, or a solicitation of an offer to buy, the securities offered
hereby to anyone in any jurisdiction in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make any such offer or solicitation. Neither the delivery of this prospectus
supplement and the prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that information herein or therein is
correct as of any time since the date of this prospectus supplement or the
prospectus.
----------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Risk Factors ............................................................ S-15
Description of the Mortgage Pool ........................................ S-22
Servicing of the Mortgage Loans ......................................... S-30
Description of the Certificates ......................................... S-33
Yield and Maturity Considerations ....................................... S-44
Certain Federal Income Tax Consequences ................................. S-47
Method of Distribution .................................................. S-48
Legal Matters ........................................................... S-49
Rating .................................................................. S-49
Legal Investment Considerations ......................................... S-49
Certain ERISA Considerations ............................................ S-50
Index of Principal Definitions .......................................... S-53
Annex A - Certain Characteristics of the Mortgage Loans ................. A-1
PROSPECTUS
Important Notice About Information in This Prospectus and the
Accompanying Prospectus Supplement ...................................... ii
Incorporation of Certain Information by Reference and Available
Information ............................................................. ii
Summary of Prospectus ................................................... 6
Risk Factors ............................................................ 13
Description of the Trust Funds .......................................... 23
Yield and Maturity Considerations ....................................... 30
The Depositor ........................................................... 35
Deutsche Bank AG ........................................................ 36
Description of the Certificates ......................................... 36
Description of the Pooling Agreements ................................... 43
Description of Credit Support ........................................... 61
Certain Legal Aspects of Mortgage Loans ................................. 63
Certain Federal Income Tax Consequences ................................. 74
Federal Income Tax Consequences for REMIC Certificates .................. 75
Federal Income Tax Consequences for Certificates as to which No REMIC
Election is Made ........................................................ 95
State Tax and Other Considerations ...................................... 101
Certain ERISA Considerations ............................................ 102
Legal Investment ........................................................ 106
Use of Proceeds ......................................................... 108
Method of Distribution .................................................. 108
Legal Matters ........................................................... 109
Financial Information ................................................... 109
Rating .................................................................. 110
Index of Defined Terms .................................................. 111
Until ninety days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates, whether or not participating
in this distribution, may be required to deliver a prospectus supplement and the
prospectus to which it relates. This delivery requirement is in addition to the
obligation of dealers to deliver a prospectus supplement and prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
================================================================================
$[______] (Approximate)
[LOGO]
COMM 200[_]-[____]
Commercial Mortgage Pass-Through
Certificates
Class A Certificates $[_______]
Class B Certificates $[_______]
----------
Prospectus Supplement
----------
[UNDERWRITER]
DATED [__________], 200[__]
================================================================================
Deutsche Mortgage & Asset Receiving Corporation,
Depositor
Commercial Mortgage Pass-Through Certificates,
(Issuable in Series By Separate Trusts)
------------------------------------------------
Deutsche Mortgage & Asset Receiving Corporation will periodically offer
commercial mortgage pass-through certificates in separate series. We will offer
the certificates through this prospectus and a separate prospectus supplement
for each series. Each series of certificates will represent in the aggregate the
entire beneficial ownership interest in a trust fund that we will form. The
primary assets of each trust fund will consist of:
o various types of multifamily or commercial mortgage loans,
o mortgage participations, pass-through certificates or other
mortgaged-backed securities that evidence interests in one or more of
various types of multifamily or commercial mortgage loans, or
o a combination of the assets described above.
The offered certificates will not represent an interest in or an obligation
of us, any of our affiliates, Deutsche Bank AG or any of its affiliates. Neither
the offered certificates nor the assets of the related trust fund will be
guaranteed or insured by us or any of our affiliates or, unless the related
prospectus supplement specifies otherwise, by any governmental agency of
instrumentality.
Neither the Securities and Exchange Commission nor any state securities
regulators have approved or disapproved of the offered certificates or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
You should review the information appearing on page 13 in this prospectus
under the caption "Risk Factors" and under the caption "risk factors" in the
related prospectus supplement before purchasing any offered certificate.
We may offer the offered certificates of any series through one or more
different methods, including offerings through underwriters, as described under
"Method of Distribution" in this prospectus and in the related prospectus
supplement. There will be no secondary market for the offered certificates of
any series prior to the offering thereof. We cannot assure you that a secondary
market for any offered certificates will develop or, if it does develop, that it
will continue. Unless the related prospectus supplement provides otherwise, the
certificates will not be listed on any securities exchange.
This prospectus may not be used to consummate sales of the offered
certificates of any series unless accompanied by the prospectus supplement for
that series.
------------------------------------------------
The date of this prospectus is ________ __, 2004
Important Notice About Information In This Prospectus And The Accompanying
Prospectus Supplement
Information about the certificates being offered to you is contained in two
separate documents that progressively provide more detail: (a) this prospectus,
which provides general information, some of which may not apply to the series of
certificates offered to you; and (b) the accompanying prospectus supplement,
which describes the specific terms of the series of certificates offered to you.
If the terms of the certificates offered to you vary between this prospectus and
the accompanying prospectus supplement, you should rely on the information in
the prospectus supplement.
Further, you should rely only on the information contained in this prospectus
and the accompanying prospectus supplement. We have not authorized anyone to
provide you with information that is different. In addition, information in this
prospectus or any related prospectus supplement is current only as of the date
on its cover. By delivery of this prospectus and any related prospectus
supplement, we are not offering to sell any securities, and are not soliciting
an offer to buy any securities, in any state where the offer and sale is not
permitted.
Incorporation of Certain Information By Reference and Available Information
With respect to any series of certificates by this prospectus, there are
incorporated herein by reference all documents and reports filed by or on behalf
of Deutsche Mortgage & Asset Corporation with respect to the related trust fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, that relate specifically to such series of certificates.
Deutsche Mortgage & Asset Receiving Corporation will provide without charge to
any beneficial owner to whom this prospectus is delivered in connection with the
offering of one or more classes of offered certificates, upon written or oral
request of such person, a copy of any or all documents or reports incorporated
herein by reference, in each case to the extent such documents or reports relate
to one or more of such classes of such offered certificates, other than the
exhibits to such documents (unless such exhibits are specifically incorporated
by reference in such documents). Requests for this information should be
directed in writing to the Deutsche Mortgage & Asset Receiving Corporation at 60
Wall Street, New York, New York 10005, Attention: Secretary, or by telephone at
(212) 250-2500.
Deutsche Mortgage & Asset Receiving Corporation has filed with the Securities
and Exchange Commission a registration statement (of which this prospectus forms
a part) under the Securities Act of 1933, as amended, with respect to the
offered certificates. This prospectus and the prospectus supplement relating to
each series of offered certificates contain summaries of the material terms of
the documents referred to in this prospectus and such prospectus supplement, but
do not contain all of the information set forth in the registration statement
pursuant to the rules and regulations of the Securities and Exchange Commission.
In addition, Deutsche Mortgage & Asset Receiving Corporation will file or cause
to be filed with the Securities and Exchange Commission such periodic reports
with respect to each trust fund as are required under the Securities Exchange
Act of 1934, as amended, and the rules and regulations of the Securities and
Exchange Commission thereunder.
You can read and copy any document filed by Deutsche Mortgage Asset &
Receiving Corporation at prescribed rates at the Securities and Exchange
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. You can obtain information on the operation of the Public Reference Room
by calling the Securities and Exchange Commission at 1-800-SEC-0330. Copies of
such material can also be obtained electronically through the Securities and
Exchange Commission's Electronic Data Gathering, Analysis and Retrieval system
at the Securities and Exchange Commission's Web site (http://www.sec.gov).
ii
TABLE OF CONTENTS
SUMMARY OF PROSPECTUS........................................................6
RISK FACTORS................................................................13
The Lack of Liquidity May Make it Difficult for You to Resell Your
Offered Certificates and May Have an Adverse Effect on the Market
Value of Your Offered Certificates....................................13
The Trust Fund's Assets May Be Insufficient To Allow For Payment In
Full On Your Certificates.............................................13
Any Credit Support for Your Offered Certificates May Be Insufficient
to Protect You Against All Potential Losses...........................14
Prepayments May Reduce The Average Life of Your Certificates.............14
Prepayments May Reduce the Yield on Your Certificates....................15
Ratings Do Not Guaranty Payment..........................................15
Commercial and Multifamily Mortgage Loans Are Subject to Certain
Risks Which Could Adversely Affect the Performance of Your
Offered Certificates..................................................16
Some Certificates May Not Be Appropriate for ERISA Plans.................21
Residual Interests in a Real Estate Mortgage Investment Conduit Have
Adverse Tax Consequences..............................................21
Certain Federal Tax Considerations Regarding Original Issue Discount.....21
Bankruptcy Proceedings Entail Certain Risks..............................21
Book-Entry System for Certain Classes May Decrease Liquidity and
Delay Payment.........................................................22
Inclusion of Delinquent and Nonperforming Mortgage Loans in a
Mortgage Asset Pool...................................................23
Termination of the Trust Fund Could Affect the Yield on Your Offered
Certificates..........................................................23
DESCRIPTION OF THE TRUST FUNDS..............................................23
General..................................................................23
Mortgage Loans...........................................................23
MBS......................................................................28
Certificate Accounts.....................................................29
Credit Support...........................................................29
Cash Flow Agreements.....................................................30
YIELD AND MATURITY CONSIDERATIONS...........................................30
General..................................................................30
Pass-Through Rate........................................................30
Payment Delays...........................................................31
Certain Shortfalls in Collections of Interest............................31
Yield and Prepayment Considerations......................................31
Weighted Average Life and Maturity.......................................33
Other Factors Affecting Yield, Weighted Average Life and Maturity........33
THE DEPOSITOR...............................................................35
DEUTSCHE BANK AG............................................................36
DESCRIPTION OF THE CERTIFICATES.............................................36
General..................................................................36
Distributions............................................................36
Distributions of Interest on the Certificates............................37
Distributions of Principal of the Certificates...........................38
Distributions on the Certificates in Respect of Prepayment Premiums
or in Respect of Equity Participations................................38
Allocation of Losses and Shortfalls......................................39
Advances in Respect of Delinquencies.....................................39
Reports to Certificateholders............................................40
Voting Rights............................................................41
Termination..............................................................41
Book-Entry Registration and Definitive Certificates......................42
DESCRIPTION OF THE POOLING AGREEMENTS.......................................43
General..................................................................43
Assignment of Mortgage Loans; Repurchases................................44
Representations and Warranties; Repurchases..............................45
iii
Collection and Other Servicing Procedures................................46
Sub-Servicers............................................................48
Certificate Account......................................................48
Modifications, Waivers and Amendments of Mortgage Loans..................51
Realization upon Defaulted Mortgage Loans................................51
Hazard Insurance Policies................................................52
Due-on-Sale and Due-on-Encumbrance Provisions............................53
Servicing Compensation and Payment of Expenses...........................54
Evidence as to Compliance................................................54
Certain Matters Regarding the Master Servicer, the Special Servicer,
the REMIC Administrator and the Depositor.............................55
Events of Default........................................................56
Rights upon Event of Default.............................................57
Amendment................................................................57
List of Certificateholders...............................................58
The Trustee..............................................................59
Duties of the Trustee....................................................59
Certain Matters Regarding the Trustee....................................59
Resignation and Removal of the Trustee...................................59
DESCRIPTION OF CREDIT SUPPORT...............................................60
General..................................................................60
Subordinate Certificates.................................................60
Cross-Support Provisions.................................................61
Insurance or Guarantees with Respect to Mortgage Loans...................61
Letter of Credit.........................................................61
Certificate Insurance and Surety Bonds...................................61
Reserve Funds............................................................61
Credit Support with Respect to MBS.......................................62
Interest Rate Exchange, Cap and Floor Agreements.........................62
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.....................................62
General..................................................................62
Types of Mortgage Instruments............................................63
Leases and Rents.........................................................63
Personalty...............................................................63
Foreclosure..............................................................64
Bankruptcy Laws..........................................................66
Environmental Considerations.............................................69
Due-on-Sale and Due-on-Encumbrance Provisions............................71
Junior Liens; Rights of Holders of Senior Liens..........................71
Subordinate Financing....................................................71
Default Interest and Limitations on Prepayments..........................71
Applicability of Usury Laws..............................................72
Certain Laws and Regulations.............................................72
Americans with Disabilities Act..........................................72
Soldiers' and Sailors' Civil Relief Act of 1940..........................72
Forfeitures in Drug and RICO Proceedings.................................73
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................73
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES......................74
General..................................................................74
Status of REMIC Certificates.............................................74
Qualification as a REMIC.................................................75
Taxation of Regular Certificates.........................................77
General...............................................................77
Original Issue Discount...............................................77
Acquisition Premium...................................................79
Variable Rate Regular Certificates....................................79
iv
Deferred Interest.....................................................79
Market Discount.......................................................79
Premium...............................................................80
Election to Treat All Interest Under the Constant Yield Method........81
Sale or Exchange of Regular Certificates..............................81
Treatment of Losses...................................................82
Taxation of Residual Certificates........................................82
Taxation of REMIC Income..............................................82
Basis and Losses......................................................83
Treatment of Certain Items of REMIC Income and Expense................84
Limitations on Offset or Exemption of REMIC Income....................85
Tax-Related Restrictions on Transfer of Residual Certificates.........86
Sale or Exchange of a Residual Certificate............................89
Mark to Market Regulations............................................90
Taxes that May be Imposed on the REMIC Pool..............................90
Prohibited Transactions...............................................90
Contributions to the REMIC Pool After the Startup Day.................90
Net Income from Foreclosure Property..................................91
Liquidation of the REMIC Pool............................................91
Administrative Matters...................................................91
Limitations on Deduction of Certain Expenses.............................91
Taxation of Certain Foreign Investors....................................92
Regular Certificates..................................................92
Residual Certificates.................................................93
Backup Withholding.......................................................93
Reporting Requirements...................................................93
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC
ELECTION IS MADE.........................................................94
Standard Certificates....................................................94
General...............................................................94
Tax Status............................................................95
Premium and Discount..................................................95
Recharacterization of Servicing Fees..................................96
Sale or Exchange of Standard Certificates.............................96
Stripped Certificates....................................................97
General...............................................................97
Status of Stripped Certificates.......................................98
Taxation of Stripped Certificates.....................................98
Reporting Requirements and Backup Withholding...........................100
Taxation of Certain Foreign Investors...................................100
STATE AND OTHER TAX CONSEQUENCES...........................................100
CERTAIN ERISA CONSIDERATIONS...............................................101
General.................................................................101
Plan Asset Regulations..................................................101
Prohibited Transaction Exemptions.......................................102
Tax Exempt Investors....................................................105
LEGAL INVESTMENT...........................................................105
USE OF PROCEEDS............................................................107
METHOD OF DISTRIBUTION.....................................................107
LEGAL MATTERS..............................................................108
FINANCIAL INFORMATION......................................................108
RATING.....................................................................109
INDEX OF DEFINED TERMS.....................................................110
v
SUMMARY OF PROSPECTUS
This summary highlights selected information from this prospectus. It does
not contain all of the information you need to consider in making your
investment decision. To understand all of the terms of an offering of
certificates, read this entire document and the accompanying prospectus
supplement carefully.
Securities Offered............Mortgage pass-through certificates, issuable in
series. Each series of certificates will represent
beneficial ownership in a trust fund. Each trust
fund will own a segregated pool of certain
mortgage assets, described below under "--The
Mortgage Assets."
Relevant Parties
Who We Are....................Deutsche Mortgage & Asset Receiving Corporation, a
Delaware corporation. See "The Depositor." Our
principal offices are located at 60 Wall Street,
New York, New York 10005. Our telephone number is
(212) 250-2500.
Trustee.......................The trustee for each series of certificates will
be named in the related prospectus supplement. See
"Description of the Pooling Agreements--The
Trustee."
Master Servicer...............If a trust fund includes mortgage loans, then the
master servicer, for the corresponding series of
certificates will be named in the related
prospectus supplement. See "Description of the
Pooling Agreements--Certain Matters Regarding the
Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor."
Special Servicer..............If a trust fund includes mortgage loans, then the
special servicer for the corresponding series of
certificates will be named, or the circumstances
under which a special servicer may be appointed
will be described, in the related prospectus
supplement. See "Description of the Pooling
Agreements--Collection and Other Servicing
Procedures."
MBS Administrator.............If a trust fund includes mortgage-backed
securities, then the entity responsible for
administering such mortgage-backed securities will
be named in the related prospectus supplement.
REMIC Administrator...........The person responsible for the various tax-related
administration duties for a series of certificates
as to which one or more REMIC elections have been
made, will be named in the related prospectus
supplement. See "Description of the Pooling
Agreements--Certain Matters Regarding the Master
Servicer, the Special Servicer, the REMIC
Administrator and the Depositor."
Information About The Mortgage Pool
The Mortgage Assets...........The mortgage assets will be the primary assets of
any trust fund. The mortgage assets with respect
to each series of certificates will, in general,
consist:
o various types of multifamily or commercial
mortgage loans,
o mortgage participations, pass-through
certificates or other mortgaged-backed
securities that evidence interests in one or
more of various types of multifamily or
commercial mortgage loans, or
o a combination of the assets described above.
6
The mortgage loans will not be guaranteed or
insured by us or any of our affiliates or, unless
the related prospectus supplement specifies
otherwise, by any governmental agency or
instrumentality or by any other person. If the
related prospectus supplement so provides, some
mortgage loans may be delinquent or nonperforming
as of the date the related trust fund is formed.
If the related prospectus supplement so provides,
a mortgage loan:
o may provide for no accrual of interest or for
accrual of interest at an interest rate that is
fixed over its term, that adjusts from time to
time, or that may be converted at the
borrower's election from an adjustable to a
fixed interest rate, or from a fixed to an
adjustable rate,
o may provide for level payments to maturity or
for payments that adjust from time to time to
accommodate changes in the interest rate or to
reflect the occurrence of certain events, and
may permit negative amortization,
o may be fully amortizing or may be partially
amortizing or nonamortizing, with a balloon
payment due on its stated maturity date,
o may prohibit over its term or for a certain
period prepayments and/or require payment of a
premium or a yield maintenance payment in
connection with certain prepayments, and
o may provide for payments of principal, interest
or both, on regular due dates or at such other
interval as is specified in the related
prospectus supplement.
Each mortgage loan will have had an original term
to maturity of not more than 40 years. We will not
originate any mortgage loans. See "Description of
the Trust Funds--Mortgage Loans."
If any mortgage loan, or group of related mortgage
loans, constitutes a concentration of credit risk,
financial statements or other financial
information with respect to the related mortgaged
property or mortgaged properties will be included
in the related Prospectus Supplement. See
"Description of the Trust Funds--Mortgage
Loans--Mortgage Loan Information in Prospectus
Supplements."
If the related prospectus supplement so specifies,
the mortgage assets with respect to a series of
certificates may also include, or consist of,
mortgage participations, mortgage pass-through
certificates and/or other mortgage-backed
securities, that evidence an interest in, or are
secured by a pledge of, one or more mortgage loans
that conform to the descriptions of the mortgage
loans contained in this prospectus and which may
or may not be issued, insured or guaranteed by the
United States or an agency or instrumentality
thereof. See "Description of the Trust
Funds--MBS."
Information About The Certificates
The Certificates..............Each series of certificates will be issued in one
or more classes pursuant to a pooling and
servicing agreement or other agreement specified
in the related prospectus supplement and will
represent in the
7
aggregate the entire beneficial ownership interest
in the related trust fund.
The certificates of each series may consist of one
or more classes of certificates that, among other
things:
o are senior or subordinate to one or more other
classes of certificates in entitlement to
certain distributions on the certificates;
o are entitled to distributions of principal with
disproportionate, nominal or no distributions
of interest;
o are entitled to distributions of interest, with
disproportionate nominal or no distributions of
principals;
o 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;
o provide for distributions of principal to be
made, from time to time or for designated
periods, at a rate that is faster (and, in some
cases, substantially faster) or slower (and, in
some cases, substantially slower) than the rate
at which payments or other collections of
principal are received on the mortgage assets
in the related trust fund;
o provide for distributions of principal to be
made, subject to available funds, based on a
specified principal payment schedule or other
methodology; or
o provide for distribution based on collections
on the mortgage assets in the related trust
fund attributable to prepayment premiums, yield
maintenance payments or equity participations.
If so specified in the related prospectus
supplement, a series of certificates may include
one or more "controlled amortization classes,"
which will entitle the holders thereof to receive
principal distributions according to a specified
principal payment schedule. See "Risk
Factors--Prepayments May Reduce the Average Life
of Your Certificates" and "--Prepayments May
Reduce the Yield of Your Certificates."
If the related prospectus supplement so provides,
a class of certificates may have two or more
component parts, each having characteristics that
are otherwise described in this prospectus as
being attributable to separate and distinct
classes.
The certificates will not be guaranteed or insured
by us or any of our affiliates, by any
governmental agency or instrumentality or by any
other person or entity, unless the related
prospectus supplement specifies otherwise. See
"Risk Factors--Limited Assets."
Distributions of Interest
on the Certificates.........Each class of certificates, other than certain
classes of principal-only certificates and certain
classes of residual certificates, will accrue
interest on its certificate balance or, in the
case of certain classes of interest-only
certificates, on a notional amount, based on a
fixed, variable or adjustable interest rate. The
related prospectus supplement
8
will specify the certificate balance, notional
amount and/or pass-through rate (or, in the case
of a variable or adjustable pass-through rate, the
method for determining such rate), as applicable,
for each class of offered certificates.
Distributions of interest 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, and interest accrued with respect to
a class of such certificates prior to the
occurrence of such an event will either be added
to the certificate balance thereof or otherwise
deferred as described in the related prospectus
supplement.
Distributions of interest with respect to one or
more classes of certificates may be reduced to the
extent of certain delinquencies, losses and other
contingencies described in this prospectus and in
the related prospectus supplement. See "Risk
Factors--Prepayments May Reduce the Average Life
of Your Certificates" and "--Prepayments May
Reduce the Yield of Your Certificates," "Yield and
Maturity Considerations--Certain Shortfalls in
Collections of Interest" and "Description of the
Certificates--Distributions of Interest on the
Certificates."
Distributions of Principal
of the Certificates.........Each class of certificates of each series (other
than certain classes of interest-only certificates
and certain classes of residual certificates) will
have a certificate balance. The certificate
balance of a class of certificates outstanding
from time to time will represent the maximum
amount that you are then entitled to receive in
respect of principal from future cash flow on the
assets in the related trust fund. As described in
each prospectus supplement, distributions of
principal with respect to the related series of
certificates will be made on each distribution
date to the holders of the class or classes of
certificates of such series until the certificate
balances of such certificates have been reduced to
zero.
As described in each prospectus supplement,
distributions of principal with respect to one or
more classes of certificates:
o may be made at a rate that is faster (and, in
some cases, substantially faster) or slower
(and, in some cases, substantially slower) than
the rate at which payments or other collections
of principal are received on the mortgage
assets in the related trust fund;
o may not commence until the occurrence of
certain events, such as the retirement of one
or more other classes or certificates of the
same series; or
o may be made, subject to certain limitations,
based on a specified principal payment
schedule.
Unless the related prospectus supplement provides
otherwise, distributions of principal of any class
of offered certificates will be made on a pro rata
basis among all of the certificates of such class.
See "Description of the Certificates-
-Distributions of Principal of the Certificates."
9
Credit Support and Cash
Flow Agreements.............Partial or full protection against certain
defaults and losses on the mortgage assets in the
related trust fund may be provided to one or more
classes of certificates of the related series in
the form of subordination of one or more other
classes of certificates of such series or by one
or more other types of credit support, which may
include:
o a letter of credit,
o a surety bond,
o an insurance policy,
o a guarantee,
o a reserve fund, or
o a combination of the items described above.
In addition, a trust fund may include:
o guaranteed investment contracts pursuant to
which moneys held in the funds and accounts
established for the related series will be
invested at a specified rate; or
o interest rate exchange agreements, interest
rate cap or floor agreements, or other
agreements designed to reduce the effects of
interest rate fluctuations on the mortgage
assets or on one or more classes of
certificates.
The related prospectus supplement for a series of
offered certificates will provide certain relevant
information regarding any applicable credit
support or cash flow agreement. See "Risk
Factors--Any Credit Support For Your Offered
Certificates May Be Insufficient to Protect You
Against All Potential Losses," "Description of the
Trust Funds--Credit Support" and "--Cash Flow
Agreements" and "Description of Credit Support."
Advances......................If the related prospectus supplement so provides,
the master servicer, the special servicer, the
trustee, any provider of credit support and/or any
other specified person may be obligated to make,
or have the option of making, certain advances
with respect to delinquent scheduled payments of
principal and/or interest on mortgage loans
included in the related trust fund. Any such
advances made with respect to a particular
mortgage loan will be reimbursable from subsequent
recoveries in respect of such mortgage loan and
otherwise to the extent described in this
prospectus and in the related prospectus
supplement. See "Description of the
Certificates--Advances in Respect of
Delinquencies." Any entity making advances may be
entitled to receive interest on such advances,
which will be payable from amounts in the related
trust fund. See "Description of the
Certificates--Advances in Respect of
Delinquencies."
If a trust fund includes mortgage participations,
pass-through certificates or mortgage-backed
securities, the related prospectus supplement will
describe any comparable advancing obligation of a
party to the related pooling and servicing
agreement, or of a party to the related indenture
or similar agreement.
10
Optional Termination..........If the related prospectus supplement so provides,
a series of certificates may be subject to
optional early termination through the repurchase
of the mortgage assets in the related trust fund
by the party or parties specified in the related
prospectus supplement, under the circumstances and
in the manner set forth in the related prospectus
supplement. If the related prospectus supplement
so provides, upon the reduction of the certificate
balance of a specified class or classes of
certificates by a specified percentage or amount
or upon a specified date, a party specified in
such prospectus supplement may be authorized or
required to solicit bids for the purchase of all
of the mortgage assets of the related trust fund,
or of a sufficient portion of such mortgage assets
to retire such class or classes, under the
circumstances and in the manner set forth in the
prospectus supplement. See "Description of the
Certificates--Termination."
Registration of
Book-Entry Certificates.....If the related prospectus supplement so provides,
one or more classes of the offered certificates
will be offered in book-entry form through the
facilities of the Depository Trust Company. Each
class of book-entry certificates will be initially
represented by one or more global certificates
registered in the name of a nominee of the
Depository Trust Company. No person acquiring an
interest in a class of book-entry certificates
will be entitled to receive definitive
certificates of that class in fully registered
form, except under the limited circumstances
described in this prospectus. See "Risk
Factors--Book-Entry System for Certain Classes May
Decrease Liquidity and Delay Payment" and
"Description of the Certificates--Book-Entry
Registration and Definitive Certificates."
Certain Federal Income
Tax Consequences............The Certificates of each series will constitute or
evidence ownership of either:
o "regular-interests" and "residual interests" in
a trust fund, or a designated portion thereof,
treated as "real estate mortgage investment
conduit" under Sections 860A through 860G of
the Internal Revenue Code of 1986, or
o interests in a trust fund treated as a grantor
trust under applicable provisions of the
Internal Revenue Code of 1986.
You should consult your tax advisor concerning the
specific tax consequences to you of the purchase,
ownership and disposition of the offered
certificates and you should review "Certain
Federal Income Tax Consequences" in this
prospectus and in the related prospectus
supplement.
ERISA Considerations..........If you are a fiduciary of any employee benefit
plan or certain other retirement plans and
arrangements, including individual retirement
accounts, annuities, Keogh plans, and collective
investment funds and separate accounts in which
such plans, accounts, annuities or arrangements
are invested, that is subject to the Employee
Retirement Income Security Act of 1974, as
amended, or Section 4975 of the Internal Revenue
Code of 1986, you should review with your legal
advisor whether the purchase or holding of offered
certificates could give rise to a transaction that
is prohibited or is not otherwise permissible
under the Employee Retirement Income Security Act
of 1974, as amended, or Section 4975 of the
Internal Revenue Code of
11
1986. See "Certain ERISA Considerations" in this
prospectus and "ERISA Considerations" in the
related prospectus supplement.
Legal Investment..............Your offered certificates will constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984,
as amended, only if the related prospectus
supplement so provides. If your investment
activities are subject to legal investment laws
and regulations, regulatory capital requirements,
or review by regulatory authorities, you may be
subject to restrictions on investment in the
Offered Certificates and should consult your legal
advisor to determine the suitability and
consequences of the purchase, ownership, and sale
of the offered certificates. See "Legal
Investment" in this prospectus and in the related
prospectus supplement.
Rating........................At their respective dates of issuance, each class
of offered certificates will be rated not lower
than investment grade by one or more nationally
recognized statistical rating agencies. See
"Rating" in this prospectus and in the related
prospectus supplement.
12
RISK FACTORS
In considering an investment in the offered certificates of any series, you
should consider, among other things, the following risk factors and any other
risk 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.
The Lack of Liquidity May Make it Difficult for You to Resell Your Offered
Certificates and May Have an Adverse Effect on the Market Value of Your
Offered Certificates
Your offered certificates may have limited or no liquidity. Accordingly, you
may be forced to bear the risk of your investment in your offered certificates
for an indefinite period of time. Lack of liquidity could result in a
substantial decrease in the market value of your offered certificates.
Furthermore, except to the extent described in this prospectus and in the
related prospectus supplement, you will have no redemption rights, and your
offered certificates are subject to early retirement only under certain
specified circumstances described in this prospectus and in the related
prospectus supplement. See "Description of the Certificates--Termination."
The Lack of a Secondary Market May Make it Difficult for You to Resell Your
Offered Certificates. We cannot assure you that a secondary market for your
offered certificates will develop. Even if a secondary market does develop, it
may not provide you with liquidity of investment and it may not continue for as
long as your certificates remain outstanding. The prospectus supplement may
indicate that an underwriter intends to establish a secondary market in your
offered certificates. However, no underwriter will be obligated to do so. Unless
the related prospectus supplement provides otherwise, the certificates will not
be listed on any securities exchange.
The Limited Nature of Ongoing Information May Make it Difficult for You to
Resell Your Offered Certificates. The primary source of ongoing information
regarding your offered certificates, including information regarding the status
of the related assets of the trust fund, will be the periodic reports delivered
to you as described in this prospectus under the heading "Description of the
Certificates--Reports to Certificateholders." We cannot assure you that any
additional ongoing information regarding your offered certificates will be
available through any other source. The limited nature of this information may
adversely affect the liquidity of your offered certificates.
The Market Value of Your Offered Certificates May Be Adversely Affected by
Fluctuations in Prevailing Interest Rates. Even if a secondary market does
develop for your offered certificates, the market value of your certificates
will be affected by several factors, including:
o the perceived liquidity of your offered certificates, anticipated cash
flow of your offered certificates (which may vary widely depending upon
the prepayment and default assumptions applied in respect of the
underlying mortgage loans) and
o prevailing interest rates.
The price payable at any given time in respect of your offered certificates
may be extremely sensitive to small fluctuations in prevailing interest rates.
Accordingly, if you decide to sell your offered certificates in any secondary
market that may develop, you may have to sell them at a discount from the price
you paid. We are not aware of any source through which price information about
your offered certificates will be generally available on an ongoing basis.
The Trust Fund's Assets May Be Insufficient To Allow For Payment In Full On Your
Certificates
Unless the related prospectus supplement specifies otherwise, neither your
offered certificates nor the mortgage assets will be guaranteed or insured by us
or any of our affiliates, by any governmental agency or instrumentality or by
any other person or entity. In addition, your offered certificate will not
represent a claim against or security interest in the trust fund for any other
series. Accordingly, if the related trust fund has insufficient assets to make
13
payments on your offered certificates, no other assets will be available for
payment of the deficiency, and you will be required to bear the consequent loss.
Furthermore, certain amounts on deposit from time to time in certain funds or
accounts constituting part of a trust fund, including the certificate account
and any accounts maintained as credit support, may be withdrawn under certain
conditions for purposes other than the payment of principal of or interest on
your certificates. If the related series of certificates includes one or more
classes of subordinate certificates, on any distribution date in respect of
which losses or shortfalls in collections on the mortgage assets have been
incurred, all or a portion of the amount of such losses or shortfalls will be
borne first by one or more classes of the subordinate certificates, and,
thereafter, by the remaining classes of certificates in the priority and manner
and subject to the limitations specified in such prospectus supplement.
Any Credit Support for Your Offered Certificates May Be Insufficient to Protect
You Against All Potential Losses
Credit Support May Not Cover All Types of Losses. Use of credit support will
be subject to the conditions and limitations described in this prospectus and in
the related prospectus supplement. Moreover, such credit support may not cover
all potential losses or risks. For example, credit support may or may not cover
loss by reason of fraud or negligence by a mortgage loan originator or other
parties. Any losses not covered by credit support may, at least in part, be
allocated to one or more classes of your offered certificates.
Disproportionate Benefits May Be Given to Certain Classes and Series. A
series of certificates may include one or more classes of senior and subordinate
certificates. Although subordination is intended to reduce the likelihood of
temporary shortfalls and ultimate losses to holders of senior certificates, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
offered certificates of a series are made in a specified order of priority, any
related credit support may be exhausted before the principal of the later-paid
classes of offered certificates of such series has been repaid in full. As a
result, the impact of losses and shortfalls experienced with respect to the
mortgage assets may fall primarily upon such later-paid classes of subordinate
certificates. Moreover, if a form of credit support covers the offered
certificates of more than one series and losses on the related mortgage assets
exceed the amount of such credit support, it is possible that the holders of
offered certificates of one (or more) such series will be disproportionately
benefited by such credit support to the detriment of the holders of offered
certificates of one (or more) other such series.
The Amount of Credit Support Will Be Limited. The amount of any applicable
credit support supporting one or more classes of offered certificates, including
the subordination of one or more other classes of certificates, will be
determined on the basis of criteria established by each rating agency rating
such classes of certificates based on an assumed level of defaults,
delinquencies and losses on the underlying mortgage assets and certain other
factors. However, we can not assure you that the loss experienced on the related
mortgage assets will not exceed such assumed levels. See "Description of the
Certificates--Allocation of Losses and Shortfalls" and "Description of Credit
Support." If the losses on the related mortgage assets do exceed such assumed
levels, you may be required to bear such additional losses.
Prepayments May Reduce The Average Life of Your Certificates
As a result of prepayments on the mortgage loans, the amount and timing of
distributions of principal and/or interest on your offered certificates may be
highly unpredictable. Prepayments on the mortgage loans will result in a faster
rate of principal payments on one or more classes of certificates than if
payments on such mortgage loans were made as scheduled. Thus, the prepayment
experience on the mortgage loans may affect the average life of one or more
classes of your offered certificates. The rate of principal payments on pools of
mortgage loans varies among pools and from time to time is influenced by a
variety of economic, demographic, geographic, social, tax and legal factors. For
example, if prevailing interest rates fall significantly below the interest
rates borne by the mortgage loans, then principal prepayments on such mortgage
loans are likely to be higher than if prevailing interest rates remain at or
above the rates borne by those mortgage loans. Conversely, if prevailing
interest rates rise significantly above the mortgage rates borne by the mortgage
loans, then principal prepayments on such mortgage loans are likely to be lower
than if prevailing interest rates remain at or below the mortgage rates borne by
those mortgage loans. We cannot assure you as to the actual rate of prepayment
on the mortgage loans or that such rate of prepayment will conform to any model
described in this prospectus or in any prospectus supplement. As a result,
14
depending on the anticipated rate of prepayment for the mortgage loans, the
retirement of any class of your certificates could occur significantly earlier
or later, and the average life thereof could be significantly shorter or longer,
than expected.
The extent to which prepayments on the mortgage loans ultimately affect the
average life of any class of your offered certificates will depend on the terms
and provisions of your offered certificates. Your offered certificates may
provide that your offered certificates are entitled:
o to a pro rata share of the prepayments on the mortgage loans that are
distributable on such date,
o to a disproportionately large share of such prepayments, or
o to a disproportionately small share of such prepayments.
If your certificates entitle you to a disproportionately large share of the
prepayments on the mortgage loans, then there is an increased likelihood that
your certificates will be retired at an earlier date. If your certificates
entitle you to a disproportionately small share of the prepayments on the
mortgage loans, then there is an increased likelihood that the average life of
your certificates will be extended. As described in the related prospectus
supplement, your entitlement to receive payments (and, in particular,
prepayments) of principal of the mortgage loans may vary based on the occurrence
of certain events (e.g., the retirement of one or more classes of certificates
of such series) or may be subject to certain contingencies (e.g., prepayment and
default rates with respect to such mortgage loans).
A series of certificates may include one or more controlled amortization
classes, which will entitle the holders thereof to receive principal
distributions according to a specified principal payment schedule. Although
prepayment risk cannot be eliminated entirely for any class of certificates, a
controlled amortization class will generally provide a relatively stable cash
flow so long as the actual rate of prepayment on the mortgage loans in the
related trust fund remains relatively constant at the rate, or within the range
of rates, of prepayment used to establish the specific principal payment
schedule for such certificates. Prepayment risk with respect to a given mortgage
asset pool does not disappear, however, and the stability afforded to a
controlled amortization class comes at the expense of one or more companion
classes of the same series, any of which companion classes may also be a class
of offered certificates. In general, and as more specifically described in the
related prospectus supplement, a companion class may entitle the holders thereof
to a disproportionately large share of prepayments on the mortgage loans in the
related trust fund when the rate of prepayment is relatively fast, and/or may
entitle the holders thereof to a disproportionately small share of prepayments
on the mortgage loans in the related trust fund when the rate of prepayment is
relatively slow. As and to the extent described in the related prospectus
supplement, a companion class absorbs some (but not all) of the risk of early
retirement and/or the risk of extension 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.
Prepayments May Reduce the Yield on Your Certificates
Your offered certificates may be offered at a premium or discount. Yields on
such classes of certificates will be sensitive, and in some cases extremely
sensitive, to prepayments on the mortgage loans and, where the amount of
interest payable with respect to a class is disproportionately large, as
compared to the amount of principal, a holder might fail to recover its original
investment. If you purchase your offered 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 that is lower than your
anticipated yield. If you purchase your offered certificates at a premium, you
should consider the risk that a faster than anticipated rate of principal
payments could result in an actual yield that is lower than your anticipated
yield. See "Yield and Maturity Considerations."
Ratings Do Not Guaranty Payment
Any rating assigned by a rating agency to a class of your offered
certificates will reflect only its assessment of the likelihood that you will
receive payments to which you are entitled. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related mortgage
loans will be made, the degree to
15
which the rate of such prepayments might differ from that originally anticipated
or the likelihood of early optional termination of the related trust fund.
The amount, type and nature of credit support, if any, provided with respect
to your certificates will be determined on the basis of criteria established by
each rating agency rating your certificates. Those criteria are sometimes based
upon an actuarial analysis of the behavior of mortgage loans in a larger group.
However, we cannot 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.
In other cases, such criteria may be based upon determinations of the values
of the mortgaged properties that provide security for the mortgage loans.
However, we cannot assure you that those values will not decline in the future.
As a result, the credit support required in respect of your offered certificates
may be insufficient to fully protect you from losses on the related mortgage
asset pool. See "Description of Credit Support" and "Rating."
Commercial and Multifamily Mortgage Loans Are Subject to Certain Risks Which
Could Adversely Affect the Performance of Your Offered Certificates
Repayment of a Commercial or Multifamily Mortgage Loan Depends on the
Performance of the Related Mortgaged Property, of Which We Make No Assurance.
Mortgage loans made on the security of multifamily or commercial property may
have a greater likelihood of delinquency and foreclosure, and a greater
likelihood of loss in the event thereof, than loans made on the security of an
owner-occupied single-family property. See "Description of the Trust
Funds--Mortgage Loans--Default and Loss Considerations with Respect to the
Mortgage Loans." Commercial and multifamily lending typically involved larger
loans to single borrowers or groups of related borrowers than single-family
loans. The ability of a borrower to repay a loan secured by an income-producing
property typically is dependent primarily upon the successful operation of such
property rather than upon the existence of independent income or assets of the
borrower. 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.
Commercial and multifamily real estate can be affected significantly by the
supply and demand in the market for the type of property securing the loan and,
therefore, may be subject to adverse economic conditions. Market values may vary
as a result of economic events or governmental regulations outside the control
of the borrower or lender that impact the cash flow of the property. For
example, some laws, such as the Americans with Disabilities Act, may require
modifications to properties, and rent control laws may limit rent collections in
the case of multifamily properties.
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
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;
16
o natural disasters and civil disturbances such as earthquakes, hurricanes,
floods, eruptions, riots or other acts of God; and
o other circumstances, conditions or events beyond the control of a master
servicer or a special servicer.
Additional considerations may be presented by the type and use of a
particular mortgaged property. For instance,
o Mortgaged properties that operate as hospitals and nursing homes are
subject to significant governmental regulation of the ownership,
operation, maintenance and financing of health care institutions.
o Hotel and motel properties are often operated pursuant to franchise,
management or operating agreements that may be terminable by the
franchisor or operator, and 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.
o The ability of a borrower to repay a mortgage loan secured by shares
allocable to one or more cooperative dwelling units may depend on the
ability of the dwelling units to generate sufficient rental income, which
may be subject to rent control or stabilization laws, to cover both debt
service on the loan as well as maintenance charges to the cooperative.
Further, a mortgage loan secured by cooperative shares is subordinate to
the mortgage, if any, on the cooperative apartment building.
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 regulations of the condominium association.
Mortgaged properties which are multifamily properties of cooperatively owned
multifamily properties may be subject to rent control laws, which could impact
the future cash flows of those properties.
Other multifamily properties, hotels, retail properties, office buildings,
manufactured housing properties, nursing homes and self-storage facilities
located in the areas of 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. Those
lessors or developers could have lower rentals, lower operating costs, more
favorable locations or better facilities. While a borrower under a mortgage loan
may renovate, refurbish or expand the mortgaged property to maintain it and
remain competitive, that 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.
In addition, the concentration of default, foreclosure and loss risks in
individual mortgage loans in a particular trust fund will generally be greater
than for pools of single-family loans because the 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.
The Mortgage Loans May Be Nonrecourse Loans Or Loans With Limited Recourse.
Some or all of the mortgage loans 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 cannot assure you
that enforcement of such recourse provisions will be practicable, or that the
assets of the borrower will be sufficient to permit a recovery in respect of a
defaulted mortgage loan in excess of the liquidation value of the related
mortgaged property. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure--Anti-Deficiency Legislation."
Cross-Collateralization Arrangements May Be Challenged as Unenforceable. The
mortgage asset pool may include groups of mortgage loans which are
cross-collateralized and cross-defaulted. These arrangements are designed
primarily to ensure that all of the collateral pledged to secure the respective
mortgage loans in a cross-
17
collateralized group, and the cash flows generated by such mortgage loans, are
available to support debt service on, and ultimate repayment of, the aggregate
indebtedness evidenced by such mortgage loans. These arrangements thus seek to
reduce the risk that the inability of one or more of the mortgaged properties
securing any such group of mortgage loans to generate net operating income
sufficient to pay debt service will result in defaults and ultimate losses.
There may not be complete identity of ownership of the mortgaged properties
securing a group of cross-collateralized mortgage loans. In such an instance,
creditors of one or more of the related borrowers could challenge the
cross-collateralization arrangement as a fraudulent conveyance. Generally, under
federal and most state fraudulent conveyance statutes, the incurring of an
obligation or the transfer of property by a person will be subject to avoidance
under certain circumstances if the person did not receive fair consideration or
reasonably equivalent value in exchange for such obligation or transfer and
o was insolvent or was rendered insolvent by such obligation or transfer,
o was engaged in business or a transaction, or was about to engage in
business or a transaction, for which any property remaining with the
person was an unreasonably small capital or
o intended to, or believed that it would, incur debts that would be beyond
the person's ability to pay as such debts matured.
Accordingly, a lien granted by a borrower to secure repayment of another
borrower's mortgage loan could be avoided if a court were to determine that
o such borrower was insolvent at the time of granting the lien, was rendered
insolvent by the granting of the lien, or was left with inadequate
capital, or was not able to pay its debts as they matured and
o the borrower did not, when it allowed its mortgaged property to be
encumbered by a lien securing the entire indebtedness represented by the
other mortgage loan, receive fair consideration or reasonably equivalent
value for pledging such mortgaged property for the equal benefit of the
other borrower.
If the lien is avoided, the lender would lose the benefits afforded by such
lien.
The cross-collateralized mortgage loans constituting any group thereof may be
secured by mortgage liens on mortgaged properties located in different states.
Because of various state laws governing foreclosure or the exercise of a power
of sale and because, in general, foreclosure actions are brought in state court,
and the courts of one state cannot exercise jurisdiction over property in
another state, it may be necessary upon a default under any such mortgage loan
to foreclose on the related mortgaged properties in a particular order rather
than simultaneously in order to ensure that the lien of the related mortgages is
not impaired or released.
Mortgage Loan With Balloon Payments Have a Greater Risk of Default. Certain
of the mortgage loans may be non-amortizing or only partially amortizing. The
borrower under a mortgage loan of that type is required to make substantial
payments of principal (that is, balloon payments) at their stated maturity.
Mortgage loans of this type involve a greater likelihood of default than
self-amortizing loans because the ability of a borrower to make a balloon
payment depends upon the borrower's ability to refinance the loan or sell the
mortgaged property. The ability of the borrower to refinance the loan or sell
the property will be affected by a number of factors, including:
o the fair market value and condition of the related mortgaged property;
o the level of interest rates;
o the borrower's equity in the related mortgaged property;
o the borrower's financial condition;
o the operating history of the related mortgaged property;
18
o changes in zoning, tax and (and with respect to residential properties)
rent control laws;
o changes in competition in the relevant area;
o changes in rental rates in the relevant area;
o changes in governmental regulation and fiscal policy;
o prevailing general and regional economic conditions;
o the state of the fixed income and mortgage markets; and
o the availability of credit for multifamily rental or commercial
properties.
Neither we nor any of our affiliates will be obligated to refinance any
mortgage loan underlying your offered certificates.
The related master servicer or special servicer may, within prescribed
limits, extend and modify mortgage loans that are in default or as to which a
payment default is imminent in order to maximize recoveries on such mortgage
loans. See "Description of the Pooling Agreements--Realization Upon Defaulted
Mortgage Loans." The related master servicer or special servicer is only
required to determine that any such extension or modification is reasonably
likely to produce a greater recovery than a liquidation of the real property
securing such mortgage loan. There is a risk that the decision of the master
servicer or special servicer to extend or modify a mortgage loan may not in fact
produce a greater recovery.
The Master Servicer or the Special Servicer May Experience Difficulty in
Collecting Rents Upon the Default and/or Bankruptcy of a Borrower. Some or all
of the mortgage loans may be secured by an assignment of leases and rents
pursuant to which the related 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 such leases as further security for the related mortgage
loan while retaining a license to collect rents for so long as there is no
default. If the borrower defaults, the license terminates and the lender is
entitled to collect rents. Some state laws may require that the lender take
possession of the mortgaged property and obtain a judicial appointment of a
receiver before becoming entitled to collect the rents. In addition, if
bankruptcy or similar proceedings are commenced by or in respect of the
borrower, the lender's ability to collect the rents may be adversely affected.
See "Certain Legal Aspects of Mortgage Loans--Leases and Rents."
Due-on-Sale and Debt-Acceleration Clauses May Be Challenged as Unenforceable.
Some or all of the mortgage loans may contain a due-on-sale clause, which
permits the lender, with some exceptions, to accelerate the maturity of the
related mortgaged loan if the borrower sells, transfers or conveys the related
mortgaged property or its interest in the mortgaged property.
Mortgages also may include a debt-acceleration clause, which permits the
lender to accelerate the debt upon a monetary or non-monetary default by the
related borrower. The courts of all states will enforce acceleration clauses in
the event of a material payment default. The equity courts of any state,
however, may refuse to allow the foreclosure of a mortgage, deed of trust, or
other security instrument or to permit the acceleration of the indebtedness if--
o the exercise of those remedies would be inequitable or unjust; or
o the circumstances would render the acceleration unconscionable.
Environmental Issues at the Mortgaged Properties May Adversely Affect
Payments on Your Certificates. Under federal law and the laws of certain states,
contamination of real property may give rise to a lien on the property to assure
or reimburse the costs of cleanup. In several states, that 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 the property. This
liability may be imposed without regard to whether the owner knew
19
of, or was responsible for, the presence of those hazardous or toxic substances.
The costs of any required remediation and the owner or operator's liability for
them as to any property are generally not limited under these laws, ordinances
and regulations and could exceed the value of the mortgaged property and the
aggregate assets of the owner or operator. In addition, as to the owners or
operators of mortgaged properties that generate hazardous substances that are
disposed of at "offsite" locations, the owners or operators may be held
strictly, jointly and severally liable if there are releases or threatened
releases of hazardous substances at the off-site locations where that person's
hazardous substances were disposed.
The trust may attempt to reduce its potential exposure to cleanup costs by--
o establishing reserves for cleanup costs when they can be anticipated and
estimated; or
o designating the trust as the named insured in specialized environmental
insurance that is designed for secured lenders.
However, we cannot assure you that reserves or environmental insurance will in
fact be applicable or adequate to cover all costs and any other liabilities that
may eventually be incurred.
Under the federal Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, as well as other federal and state laws, a
secured lender (such as the trust ) may be liable as an "owner" or "operator"
for the costs of dealing with hazardous substances affecting a borrower's
property, if agents or employees of the lender have participated in the
management or operations of the borrower's property. This liability could exist
even if a previous owner caused the environmental damage. The trust's potential
exposure to liability for cleanup costs may increase if the trust actually takes
possession of a borrower's property, or control of its day-to-day operations, as
for example through the appointment of a receiver.
See "Certain Legal Aspects of Mortgage Loans--Environmental Considerations."
Lack of Insurance Coverage Exposes You to the Risk of Certain Special Hazard
Losses. Unless the related prospectus supplement otherwise provides, the master
servicer and special servicer for the related trust fund will be required to
cause the borrower on each mortgage loan to maintain such insurance coverage in
respect of the related mortgaged property as is required under the related
mortgage (unless each of the master servicer and the special servicer maintain 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. Most policies typically do not cover any physical damage
resulting from, among other things--
o war;
o revolution;
o governmental actions;
o floods and other water-related causes;
o earth movement, including earthquakes, landslides and mudflows;
o wet or dry rot;
o vermin; and
o domestic animals.
Unless the related mortgage loan documents specifically require the borrower to
insure against physical damage arising from such causes, then, the resulting
losses may be borne by you as a holder of offered certificates. See "Description
of the Pooling Agreements--Hazard Insurance Policies."
20
Geographic Concentration Within a Trust Fund Exposes Investors to Greater
Risk of Default and Loss. Certain geographic regions of the United States from
time to time will experience weaker regional economic conditions and housing
markets, and, consequently, will experience higher rates of loss and delinquency
than will be experienced on mortgage loans generally. For example, a region's
economic condition and housing market may be directly, or indirectly, adversely
affected by natural disasters or civil disturbances such as earthquakes,
hurricanes, floods, eruptions or riots. The economic impact of any of these
types of events may also be felt in areas beyond the region immediately affected
by the disaster or disturbance. The mortgage loans securing certain series of
certificates may be concentrated in these regions, and such concentration may
present risk considerations in addition to those generally present for similar
mortgage-backed securities without such concentration.
Some Certificates May Not Be Appropriate for ERISA Plans
Generally, ERISA applies to investments made by employee benefit plans and
transactions involving the assets of those plans. Due to the complexity of
regulations that govern those plans, if you are subject to ERISA you should
consult your own counsel regarding consequences under ERISA of acquisition,
ownership and disposition of your offered certificates. See "Certain ERISA
Considerations."
Residual Interests in a Real Estate Mortgage Investment Conduit Have Adverse Tax
Consequences
If you hold certain classes of certificates that constitute a residual
interest in a "real estate mortgage investment conduit," for federal income tax
purposes, 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, as
described in "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates." Accordingly, under certain circumstances,
if you hold residual certificates 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 to report your pro rata share
of the taxable income and net loss of the REMIC may continue until the principal
balances of all classes of certificates of the related series have been reduced
to zero, even though you have received full payment of your stated interest and
principal, if any. 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 generally, will not be subject to offset by losses from other activities,
if you are a tax-exempt holder, will be treated as unrelated business taxable
income, and if you are a foreign holder, will not qualify for exemption from
withholding tax.
If you are an individual and you hold a class of residual certificates, you
may be limited in your ability to deduct servicing fees and other expenses of
the REMIC. In addition, classes of residual certificates are subject to certain
restrictions on transfer. Because of the special tax treatment of classes of
residual certificates, the taxable income arising in a given year on a class of
residual certificates 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. As a result, the after-tax yield on the
classes of residual certificates may be significantly less than that of a
corporate bond or stripped instrument having similar cash flow characteristics
or may be negative.
Certain Federal Tax Considerations Regarding Original Issue Discount
Certain classes of certificates of a series may be issued with "original
issue discount" for federal income tax purposes, which generally will result in
recognition of some taxable income in advance of the receipt of cash
attributable to that income. See "Certain Federal Income Tax
Consequences--Taxation of Regular Certificates."
Bankruptcy Proceedings Entail Certain Risks
Under the federal bankruptcy code, the filing of a petition in bankruptcy by
or against a borrower will stay the sale of the related mortgaged property owned
by that borrower, as well as the commencement or continuation of a foreclosure
action.
In addition, even if a court determines that the value of a mortgaged
property is less than the principal balance of the mortgage loan it secures, the
court may prevent a lender from foreclosing on such mortgaged property, subject
to certain protections available to the lender. As part of a restructuring plan,
a court also may reduce the amount of
21
secured indebtedness to the then-current value of such mortgaged property. This
action would make the lender a general unsecured creditor for the difference
between the then-current value of the property and the amount of its outstanding
mortgage indebtedness.
A bankruptcy court may also--
o grant a debtor a reasonable time to cure a payment default on a mortgage
loan;
o reduce monthly payments due under a mortgage loan;
o change the rate of interest due on a mortgage loan; or
o otherwise alter a mortgage loan's repayment schedule.
Moreover, the filing of a petition in bankruptcy by, or on behalf of, a
junior lienholder may stay the senior lienholder from taking action to foreclose
on the junior lien. Additionally, the borrower, as debtor-in-possession, or its
bankruptcy trustee has special powers to avoid, subordinate or disallow debts.
In certain circumstances, the claims of the trustee may be subordinated to
financing obtained by a debtor-in-possession subsequent to its bankruptcy.
Under the federal bankruptcy code, the lender will be stayed from enforcing a
borrower's assignment of rents and leases. The federal bankruptcy code also may
interfere with the trustee's ability to enforce lockbox requirements. The legal
proceedings necessary to resolve these issues can be time consuming and costly
and may significantly delay or diminish the receipt of rents. Rents also may
escape an assignment to the extent they are used by the borrower to maintain the
mortgaged property or for other court authorized expenses.
As a result of the foregoing, the trustee's recovery with respect to
borrowers in bankruptcy proceedings may be significantly delayed, and the
aggregate amount ultimately collected may be substantially less than the amount
owed.
Book-Entry System for Certain Classes May Decrease Liquidity and Delay Payment
If the related prospectus supplement so provides, one or more classes of your
offered certificates will be issued as book-entry certificates. Each class of
book-entry certificates will be initially represented by one or more
certificates registered in the name of a nominee for The Depository Trust
Company, or DTC. Transactions in book-entry certificates of any series generally
can be effected only through The Depository Trust Company and its participating
organizations. You are therefore subject to the following risks:
o The liquidity of book-entry certificates in any secondary trading market
that may develop may be limited because investors may be unwilling to
purchase certificates for which they cannot obtain physical certificates.
o Your ability to pledge certificates to persons or entities that do not
participate in the DTC system, or otherwise to take action in respect of
the certificates, may be limited due to lack of a physical security
representing the certificates.
o Your access to information regarding the certificates may be limited since
conveyance of notices and other communications by The Depository Trust
Company to its participating organizations, and directly and indirectly
through those participating organizations to you, will be governed by
arrangements among them, subject to any statutory or regulatory
requirements as may be in effect at that time.
o You may experience some delay in receiving distributions of interest and
principal on your certificates because distributions will be made by the
trustee to DTC and DTC will then be required to credit those distributions
to the accounts of its participating organizations and only then will they
be credited to your account either directly or indirectly through DTC's
participating organizations.
See "Description of the Certificates--Book-Entry Registration and Definitive
Certificates."
22
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset
Pool
The trust fund may include mortgage loans that are past due or are
nonperforming. However, mortgage loans which are seriously delinquent loans
(that is, loans more than 60 days delinquent or as to which foreclosure has been
commenced) will not constitute a material concentration of the mortgage loans,
based on principal balance at the time the trust fund is formed. The related
prospectus supplement may provide that the servicing of such mortgage loans will
be performed by the special servicer. However, the same entity may act as both
master servicer and special servicer. Credit support provided with respect to
your certificates may not cover all losses related to such delinquent or
nonperforming mortgage loans, and you should consider the risk that their
inclusion in a mortgage pool may result in a greater rate of defaults and
prepayments and, consequently, reduce yield on your certificates. See
"Description of the Trust Funds--Mortgage Loans--General."
Termination of the Trust Fund Could Affect the Yield on Your Offered
Certificates
The related prospectus supplement may provide that, upon the reduction of the
certificate balance of a specified class or classes of certificates by a
specified percentage or amount or upon a specified date, a party designated
therein may be authorized or required to solicit bids for the purchase of all
the mortgage assets of the related trust fund, or of a sufficient portion of
such mortgage assets to retire such class or classes. The solicitation of bids
will be conducted in a commercially reasonable manner and, generally, assets
will be sold at their fair market value. In addition, the related prospectus
supplement may provide that, upon the reduction of the aggregate principal
balance of some or all of the mortgage assets by a specified percentage, a party
or parties designated in the prospectus supplement may be authorized to purchase
such mortgage assets, generally at a price equal to, in the case of any mortgage
asset, the unpaid principal balance of such mortgage asset plus accrued interest
(or, in some cases, at fair market value). However, circumstances may arise in
which such fair market value may be less than the unpaid balance of the related
mortgage assets sold together with interest thereon, and you may therefore
receive an amount less than the certificate balance of, and accrued unpaid
interest on, your offered certificates. See "Description of the
Certificates--Termination."
DESCRIPTION OF THE TRUST FUNDS
General
The primary assets of each trust fund will consist of:
o various types of multifamily or commercial mortgage loans,
o mortgage participations, pass-through certificates or other
mortgage-backed securities ("MBS") that evidence interests in one or more
of various types of multifamily or commercial mortgage loans or
o a combination of mortgage loans and MBS.
Each trust fund will be established by the depositor. Each mortgage asset
will be selected by the depositor for inclusion in a trust fund from among those
purchased, either directly or indirectly, from a mortgage asset seller, which
mortgage asset seller may or may not be the originator of such mortgage loan or
the issuer of such MBS. The mortgage assets will not be guaranteed or insured by
the depositor or any of its affiliates or, unless otherwise provided in the
related prospectus supplement, by any governmental agency or instrumentality or
by any other person. The discussion below under the heading "--Mortgage Loans,"
unless otherwise noted, applies equally to mortgage loans underlying any MBS
included in a particular trust fund.
Mortgage Loans
General. The mortgage loans will be evidenced by promissory notes secured by
mortgages, deeds of trust or similar security instruments that create first or
junior liens on fee or leasehold estates in properties consisting of one or more
of the following types of real property:
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o residential properties consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden
apartment buildings or other residential structures, and mobile home
parks; and
o commercial properties consisting of office buildings, retail shopping
facilities, such as shopping centers, malls and individual stores, hotels
or motels, health care-related facilities (such as hospitals, skilled
nursing facilities, nursing homes, congregate care facilities and senior
housing), recreational vehicle parks, warehouse facilities, mini-warehouse
facilities, self-storage facilities, industrial facilities, parking lots,
restaurants, mixed use properties (that is, any combination of the
foregoing), and unimproved land.
The multifamily properties may include mixed commercial and residential
structures and apartment buildings owned by private cooperative housing
corporations. Unless otherwise specified in the related prospectus supplement,
each mortgage will create a first priority mortgage lien on a fee estate in a
mortgaged property. If a mortgage creates a lien on a borrower's leasehold
estate in a property, then, unless otherwise specified in the related prospectus
supplement, the term of any such leasehold will exceed the term of the mortgage
note by at least ten years. Each mortgage loan will have been originated by a
person other than the depositor. In some cases, that originator or assignee will
be an affiliate of the depositor.
If so provided in the related prospectus supplement, mortgage assets for a
series of certificates may include mortgage loans secured by junior liens, and
the loans secured by the related senior liens may not be included in the
mortgage pool. The primary risk to holders of mortgage loans secured by junior
liens is the possibility that adequate funds will not be received in connection
with a foreclosure of the related senior liens to satisfy fully both the senior
liens and the mortgage loan. In the event that a holder of a senior lien
forecloses on a mortgaged property, the proceeds of the foreclosure or similar
sale will be applied first to the payment of court costs and fees in connection
with the foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the senior liens. The claims of the holders
of the senior liens will be satisfied in full out of proceeds of the liquidation
of the related mortgage property, if such proceeds are sufficient, before the
trust fund as holder of the junior lien receives any payments in respect of the
mortgage loan. If the master servicer were to foreclose on any mortgage loan, it
would do so subject to any related senior liens. In order for the debt related
to such mortgage loan to be paid in full at such sale, a bidder at the
foreclosure sale of such mortgage loan would have to bid an amount sufficient to
pay off all sums due under the mortgage loan and any senior liens or purchase
the mortgaged property subject to such senior liens. In the event that such
proceeds from a foreclosure or similar sale of the related mortgaged property
are insufficient to satisfy all senior liens and the mortgage loan in the
aggregate, the trust fund, as the holder of the junior lien, (and, accordingly,
holders of one or more classes of the certificates of the related series) bear
o the risk of delay in distributions while a deficiency judgment against the
borrower is obtained, and
o the risk of loss if the deficiency judgment is not obtained and satisfied.
Moreover, deficiency judgments may not be available in certain
jurisdictions, or the particular mortgage loan may be a nonrecourse loan,
which means that, absent special facts, recourse in the case of default
will be limited to the mortgaged property and such other assets, if any,
that were pledged to secure repayment of the mortgage loan.
If so specified in the related prospectus supplement, the mortgage assets for
a particular series of certificates may include mortgage loans that are
delinquent or nonperforming as of the date such certificates are issued. In that
case, the related prospectus supplement will set forth, as to each such mortgage
loan, available information as to the period of such delinquency or
nonperformance, 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. However, mortgage loans which are seriously
delinquent loans (that is, loans more than 60 days delinquent or as to which
foreclosure has been commenced) will not constitute a material concentration of
the mortgage loans in any trust fund, based on principal balance at the time
such trust fund is formed.
Default and Loss Considerations with Respect to the Mortgage Loans. Mortgage
loans secured by liens on income-producing properties are substantially
different from loans made on the security of owner-occupied single-family homes.
The repayment of a loan secured by a lien on an income-producing property is
typically dependent upon the successful operation of such property (that is, its
ability to generate income). Moreover, as noted above, some or all of the
mortgage loans included in a particular trust fund may be nonrecourse loans.
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Lenders typically look to the Debt Service Coverage Ratio of a loan secured
by income-producing property as an important factor in evaluating the likelihood
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
o the Net Operating Income derived from the related mortgaged property for a
twelve-month period to
o the annualized scheduled payments of principal and/or interest on the
mortgage loan and any other loans senior thereto that are secured by the
related mortgaged property.
Unless otherwise defined in the related prospectus supplement, "Net Operating
Income" means, for any given period, the total operating revenues derived from a
mortgaged property during such period, minus the total operating expenses
incurred in respect of such mortgaged property during such period other than
o non-cash items such as depreciation and amortization,
o capital expenditures, and
o 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 generally 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 area economy. In
addition, properties typically leased, occupied or used on a short-term basis,
such as certain health care-related facilities, hotels and motels, and
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 facilities. 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 a
greater likelihood of default and loss 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 likelihood of default on a mortgage loan.
As may be further described in the related prospectus supplement, in some cases
leases of mortgaged properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will result
in stable Net Operating Income to the borrower/landlord only to the extent that
the lessee is able to absorb operating expense increases while continuing to
make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a factor
in evaluating the likelihood 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
o the then outstanding principal balance of the mortgage loan and any other
loans senior thereto that are secured by the related mortgaged property to
o the Value of the related mortgaged property.
Unless otherwise specified in the related prospectus supplement, the "Value"
of a mortgaged property will be its fair market value as determined by an
appraisal of such property conducted by or on behalf of the originator in
connection with 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
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o the greater the incentive of the borrower to perform under the terms of
the related mortgage loan (in order to protect such equity) and
o 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 likelihood 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
certain factors including changes in economic conditions and the real estate
market. Moreover, even when current, an appraisal is not necessarily a reliable
estimate of value. Appraised values of income-producing properties are generally
based on
o the market comparison method (recent resale value of comparable properties
at the date of the appraisal),
o the cost replacement method (the cost of replacing the property at such
date),
o the income capitalization method (a projection of value based upon the
property's projected net cash flow), or
o upon a selection from or interpolation of the values derived from such
methods.
Each of these appraisal methods can present analytical difficulties. It is
often difficult to find truly comparable properties that have recently been
sold; the replacement cost of a property may have little to do with its current
market value; and income capitalization is inherently based on inexact
projections of income and expense and the selection of an appropriate
capitalization rate and discount rate. Where more than one of these appraisal
methods are used and provide significantly different results, an accurate
determination of value and, correspondingly, a reliable analysis of the
likelihood of default and loss, is even more difficult.
Although there may be multiple methods for determining the value of a
mortgaged property, value will in all cases be affected by property performance.
As a result, if a mortgage loan defaults because the income generated by the
related mortgaged property is insufficient to cover operating costs and expenses
and pay debt service, then the value of the mortgaged property will reflect such
and a liquidation loss may occur.
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, we cannot assure you that all of such factors
will in fact have been prudently considered by the originators of the mortgage
loans, or that, for a particular mortgage loan, they are complete or relevant.
See "Risk Factors--Commercial and Multifamily Mortgage Loans Are Subject to
Certain Risks Which Could Adversely Affect the Performance of Your Offered
Certificates--Repayment of a Commercial or Multifamily Mortgage Loan Depends on
the Performance of the Related Mortgaged Property, of Which We Make No
Assurance" and "--Commercial and Multifamily Mortgage Loans Are Subject to
Certain Risks Which Could Adversely Affect the Performance of Your Offered
Certificates--Mortgage Loans With Balloon Payments Have a Greater Risk of
Default."
Payment Provisions of the Mortgage Loans. All of the mortgage loans will
o have had original terms to maturity of not more than 40 years and
o provide for scheduled payments of principal, interest or both, to be made
on due dates that occur monthly, quarterly, semiannually or annually.
A mortgage loan
o may provide for no accrual of interest or for accrual of interest thereon
at an interest rate, that is fixed over its term or that adjusts from time
to time, or that may be converted at the borrower's election from an
adjustable to a fixed interest rate or from a fixed to an adjustable
interest rate,
26
o may provide for level payments to maturity or for payments that adjust
from time to time to accommodate changes in the interest rate or to
reflect the occurrence of certain events, and may permit negative
amortization,
o may be fully amortizing or may be partially amortizing or non-amortizing,
with a balloon payment due on its stated maturity date, and
o may 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 payment (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.
Mortgage Loan Information in Prospectus Supplements. Each prospectus
supplement will contain certain information pertaining to the mortgage loans,
which, to the extent then applicable, will generally include the following:
o the aggregate outstanding principal balance and the largest, smallest and
average outstanding principal balance of the mortgage loans,
o the type or types of property that provide security for repayment of the
mortgage loans,
o the earliest and latest origination date and maturity date of the mortgage
loans,
o 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,
o the Loan-to-Value 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 Loan-to-Value Ratios,
o the interest rates borne by the mortgage loans, or the range thereof, and
the weighted average interest rate borne by the mortgage loans,
o with respect to mortgage loans with adjustable interest 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 interest rate adjustments at the time of
any adjustment and over the life of the ARM Loan,
o information regarding the payment characteristics of the mortgage loans,
including, without limitation, balloon payment and other amortization
provisions, Lock-out Periods and Prepayment Premiums,
o 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
o the geographic distribution of the mortgaged properties on a
state-by-state basis.
In appropriate cases, the related prospectus supplement will also contain
certain information available to the depositor that pertains to the provisions
of leases and the nature of tenants of the mortgaged properties. If the
depositor is unable to provide the specific information described above at the
time offered certificates of a series are initially offered, more general
information of the nature described above will be provided in the related
prospectus supplement, and specific information will be set forth in a report
which will be available to purchasers of those certificates at or before the
initial issuance thereof and will be filed as part of a Current Report on Form
8-K with the Securities and Exchange Commission within fifteen days following
such issuance.
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If any mortgage loan, or group of related mortgage loans, constitutes a
concentration of credit risk, financial statements or other financial
information with respect to the related mortgaged property or mortgaged
properties will be included in the related prospectus supplement.
If and to the extent available and relevant to an investment decision in the
offered certificates of the related series, information regarding the prepayment
experience of a master servicer's multifamily and/or commercial mortgage loan
servicing portfolio will be included in the related prospectus supplement.
However, many servicers do not maintain records regarding such matters or, at
least, not in a format that can be readily aggregated. In addition, the relevant
characteristics of a master servicer's servicing portfolio may be so materially
different from those of the related mortgage asset pool that such prepayment
experience would not be meaningful to an investor. For example, differences in
geographic dispersion, property type and/or loan terms (e.g., mortgage rates,
terms to maturity and/or prepayment restrictions) between the two pools of loans
could render the master servicer's prepayment experience irrelevant. Because of
the nature of the assets to be serviced and administered by a special servicer,
no comparable prepayment information will be presented with respect to the
special servicer's multifamily and/or commercial mortgage loan servicing
portfolio.
MBS
MBS may include
o private-label (that is, not issued, insured or guaranteed by the United
States or any agency or instrumentality thereof) mortgage participations,
mortgage pass-through certificates or other mortgage-backed securities or
o certificates issued and/or insured or guaranteed by the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association
("FNMA"), the Governmental National Mortgage Association ("GNMA") or the
Federal Agricultural Mortgage Corporation ("FAMC"),
provided that, unless otherwise specified in the related prospectus supplement,
each MBS will evidence an interest in, or will be secured by a pledge of,
mortgage loans that conform to the descriptions of the mortgage loans contained
herein.
Except in the case of a pro rata mortgage participation in a single mortgage
loan or a pool of mortgage loans, each MBS included in a mortgage asset pool:
o either will (i) have been previously registered under the Securities Act
of 1933, as amended, (ii) be exempt from such registration requirements or
(iii) have been held for at least the holding period specified in Rule
144(k) under the Securities Act of 1933, as amended; and
o either (i) will have been acquired (other than from the depositor or one
of its affiliates) in bona fide secondary market transactions or (ii) if
so specified in the related prospectus supplement, may be derived from the
depositor (or its affiliate's) unsold allotments from the depositor (or
its affiliate's) previous offerings.
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 be parties
to the MBS Agreement, generally together with a trustee (the "MBS Trustee") or,
in the alternative, with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of certificates described herein. Distributions in
respect of the MBS will be made by the MBS Issuer, the MBS Servicer or the MBS
Trustee on the dates specified in the related prospectus supplement. The MBS
Issuer or the MBS Servicer 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.
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Reserve funds, subordination or other credit support similar to that
described for the certificates under "Description of Credit Support" may have
been provided with respect to the MBS. The type, characteristics and amount of
such credit support, if any, will be a function of the characteristics of the
underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The prospectus supplement for a series of certificates that evidence
interests in MBS will specify:
o the aggregate approximate initial and outstanding principal amount(s) and
type of the MBS to be included in the trust fund,
o the original and remaining term(s) to stated maturity of the MBS, if
applicable,
o the pass-through or bond rate(s) of the MBS or the formula for determining
such rate(s),
o the payment characteristics of the MBS,
o the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, of each of
the MBS,
o a description of the related credit support, if any,
o the circumstances under which the related underlying mortgage loans, or
the MBS themselves, may be purchased prior to their maturity,
o the terms on which mortgage loans may be substituted for those originally
underlying the MBS,
o the type of mortgage loans underlying the MBS and, to the extent
appropriate under the circumstances, such other information in respect of
the underlying mortgage loans described under "--Mortgage Loans--Mortgage
Loan Information in Prospectus Supplements," and
o the characteristics of any cash flow agreements that relate to the MBS.
If specified in the prospectus supplement for a series of certificates, a
trust fund may contain one or more MBS issued by the depositor that each
represent an interest in one or more mortgage loans. The prospectus supplement
for a series will contain the disclosure concerning the MBS described in the
preceding paragraph and, in particular, will disclose such mortgage loans
appropriately in light of the percentage of the aggregate principal balance of
all assets represented by the principal balance of the MBS.
The depositor will provide the same information regarding the MBS in any
trust fund in its reports filed under the Securities Exchange Act of 1934 with
respect to such trust fund as was provided by the related MBS Issuer in its own
such reports if such MBS was publicly offered or the reports the related MBS
Issuer provides the related MBS Trustee if such MBS was privately issued.
Certificate Accounts
Each trust fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
certificateholders into which all payments and collections received or advanced
with respect to the mortgage assets and other assets in the trust fund will be
deposited to the extent described herein and in the related prospectus
supplement. See "Description of the Pooling Agreements--Certificate Account."
Credit Support
If so provided in the prospectus supplement for a series of certificates,
partial or full protection against certain defaults and losses on the mortgage
assets in the related trust fund may be provided to one or more classes of
certificates of such series in the form of subordination of one or more other
classes of certificates of such series or by one or more other types of credit
support, which may include
29
o a letter of credit,
o a surety bond,
o an insurance policy,
o a guarantee,
o a reserve fund,
o or any combination thereof (any such coverage with respect to the
certificate of any series, "Credit Support").
The amount and types of such credit support, the identity of the entity
providing it (if applicable) and related information with respect to each type
of Credit Support, if any, will be set forth in the prospectus supplement for a
series of certificates. See "Risk Factors--Any Credit Support For Your Offered
Certificates May Be Insufficient" 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
o guaranteed investment contracts pursuant to which moneys held in the funds
and accounts established for such series will be invested at a specified
rate,
o interest rate exchange agreements,
o interest rate cap or floor agreements, or
o other agreements designed to reduce the effects of interest rate
fluctuations on the mortgage assets on one or more classes of certificates
(any such agreement, a "Cash Flow Agreement").
The principal terms of any such Cash Flow Agreement, including, without
limitation, provisions relating to the timing, manner and amount of payments
thereunder and provisions relating to the termination thereof, will be described
in the related prospectus supplement. The related prospectus supplement will
also identify the obligor under the Cash Flow Agreement.
YIELD AND MATURITY CONSIDERATIONS
General
The yield on any offered certificate will depend on the price paid by the
certificateholder, the pass-through rate of the certificate and the amount and
timing of distributions on the certificate. See "Risk Factors--Prepayments May
Reduce the Average Life of Your Certificates." 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, if any, that the payment characteristics of
the MBS 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
30
o the pass-through rate for each class of offered certificates of such
series or, in the case of a class of offered certificates with a variable
or adjustable pass-through rate, the method of determining the
pass-through rate,
o the effect, if any, of the prepayment of any mortgage loan on the
pass-through rate of one or more classes of offered certificates,
o and whether the distributions of interest on the offered certificates of
any class will be dependent, in whole or in part, on the performance of
any obligor under a Cash Flow Agreement.
Payment Delays
With respect to any series of certificates, a period of time will elapse
between the date upon which payments on the mortgage loans in the related Trust
Fund are due and the distribution date on which such payments are passed through
to certificateholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such mortgage loans were distributed to
certificateholders on the date they were due.
Certain Shortfalls in Collections of Interest
When a principal prepayment in full or in part is made on a mortgage loan,
the borrower is generally charged interest on the amount of such prepayment only
through the date of such prepayment, instead of through the due date for the
next succeeding scheduled payment. However, interest accrued on any series of
certificates and distributable thereon on any distribution date will generally
correspond to interest accrued on the mortgage loans to their respective due
dates during the related Due Period. A "Due Period" will be a specified time
period (generally corresponding in length to the 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, special servicer or other specified person, be distributed to
the holders of the certificates of such series on the next succeeding
distribution date. Consequently, if a prepayment on any mortgage loan is
distributable to certificateholders on a particular distribution date, but such
prepayment is not accompanied by interest thereon to the due date for such
mortgage loan in the related Due Period, then the interest charged to the
borrower (net of servicing and administrative fees) may be less (such shortfall,
a "Prepayment Interest Shortfall") than the corresponding amount of interest
accrued and otherwise payable on the certificates of the related series. If and
to the extent that any such shortfall is allocated to a class of offered
certificates, the yield thereon will be adversely affected. The prospectus
supplement for each series of certificates will describe the manner in which any
such shortfalls will be allocated among the classes of such certificates. The
related prospectus supplement will also describe any amounts available to offset
such shortfalls.
Yield and Prepayment Considerations
A certificate's yield to maturity will be affected by the rate of principal
payments on the mortgage loans in the related trust fund and the allocation
thereof to reduce the principal balance (or notional amount, if applicable) of
such certificate. The rate of principal payments on the mortgage loans in any
trust fund will in turn be affected by the amortization schedules thereof
(which, in the case of ARM Loans, may change periodically to accommodate
adjustments to the interest rates with respect to such mortgage loans), the
dates on which any balloon payments are due, and the rate of principal
prepayments thereon (including for this purpose, voluntary prepayments by
borrowers and also prepayments resulting from liquidations of mortgage loans due
to defaults, casualties or condemnations affecting the related 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 below),
we cannot assure you 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
interest-only certificates, result in the reduction of the Notional Amount
thereof). If you purchase any offered certificates at a discount, you should
consider 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 yield you anticipated. If you purchase any offered
certificates at a premium, you should
31
consider 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 yield you anticipated. In addition, if you 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, any consequent adverse effects on your yield would not be fully offset
by a subsequent like increase (or decrease) in the rate of principal payments.
In general, the Notional Amount of a class of interest-only certificates will
either (i) be based on the principal balances of some or all of the mortgage
assets or (ii) equal the Certificate Balances of one or more of the other
classes of certificates of the same series. Accordingly, the yield on such
interest-only certificates will be inversely related to the rate at which
payments and other collections of principal are received on such mortgage assets
or distributions are made in reduction of the Certificate Balances of such
classes of certificates, as the case may be.
Consistent with the foregoing, if a class of certificates of any series
consists of interest-only certificates or principal-only certificates, a lower
than anticipated rate of principal prepayments on the mortgage loans in the
related trust fund will negatively affect the yield to investors in
principal-only certificates, and a higher than anticipated rate of principal
prepayments on such mortgage loans will negatively affect the yield to investors
in interest-only certificates. If the offered certificates of a series include
any such certificates, the related prospectus supplement will include a table
showing the effect of various constant assumed levels of prepayment on yields on
such certificates. Such tables will be intended to illustrate the sensitivity of
yields to various constant assumed prepayment rates and will not be intended to
predict, or to provide information that will enable investors to predict, yields
or prepayment rates.
The extent of prepayments of principal of the mortgage loans in any trust
fund may be affected by a number of factors, including, without limitation,
o the availability of mortgage credit,
o the relative economic vitality of the area in which the mortgaged
properties are located,
o the quality of management of the mortgaged properties,
o the servicing of the mortgage loans,
o possible changes in tax laws and other opportunities for investment.
In general, those factors which increase the attractiveness of selling a
mortgaged property or refinancing a mortgage loan or which enhance a borrower's
ability to do so, as well as those factors which increase the likelihood of
default under a mortgage loan, would be expected to cause the rate of prepayment
in respect of any mortgage asset pool to accelerate. In contrast, those factors
having an opposite effect would be expected to cause the rate of prepayment of
any mortgage asset pool to slow.
The rate of principal payments on the mortgage loans in any trust fund may
also 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. To the extent enforceable,
such provisions could constitute either an absolute prohibition (in the case of
a Lock-out Period) or a disincentive (in the case of a Prepayment Premium) to a
borrower's voluntarily prepaying its Mortgage Loan, thereby slowing the rate of
prepayments.
The rate of prepayment on a pool of mortgage loans 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. Even in the case of ARM Loans, as prevailing market interest
rates decline, and without regard to whether the interest 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
o converting to a fixed rate loan and thereby "locking in" such rate or
32
o taking advantage of a different index, margin or rate cap or floor on
another adjustable rate mortgage loan.
Therefore, as prevailing market interest rates decline, prepayment speeds
would be expected to accelerate.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
mortgaged properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by federal and state tax laws (which are subject to change) to sell mortgaged
properties prior to the exhaustion of tax depreciation benefits. The depositor
makes no representation as to the particular factors that will affect the
prepayment of the mortgage loans in any trust fund, as to the relative
importance of such factors, as to the percentage of the principal balance of
such mortgage loans that will be paid as of any date or as to the overall rate
of prepayment on such mortgage loans.
Weighted Average Life and Maturity
The rate at which principal payments are received on the mortgage loans in
any trust fund will affect the ultimate maturity and the weighted average life
of one or more classes of the certificates of such series. Unless otherwise
specified in the related prospectus supplement, 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 by borrowers and also prepayments resulting from liquidations of
mortgage loans due to default, casualties or condemnations affecting the related
mortgaged properties and purchases of mortgage loans out of the related trust
fund), is paid to such class. Prepayment rates on loans are commonly measured
relative to a prepayment standard or model, such as the Constant Prepayment Rate
("CPR") prepayment model or the Standard Prepayment Assumption ("SPA")
prepayment model. CPR represents an assumed constant rate of prepayment each
month (expressed as an annual percentage) relative to the then outstanding
principal balance of a pool of mortgage 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 mortgage 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 mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical prepayment
experience for single-family mortgage 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 with a Certificate Balance,
and the percentage of the initial Certificate Balance of each such class that
would be outstanding on specified Distribution Dates, based on the assumptions
stated in such prospectus supplement, including assumptions that prepayments on
the related mortgage loans are made at rates corresponding to various
percentages of CPR or SPA, or at such other rates specified in such prospectus
supplement. Such tables and assumptions will illustrate the sensitivity of the
weighted average lives of the certificates to various assumed prepayment rates
and will not be intended to predict, or to provide information that will enable
investors to predict, the actual weighted average lives of the certificates.
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,
33
there is a possibility 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 the special
servicer, to the extent and under the circumstances set forth herein and in the
related prospectus supplement, may be authorized to modify mortgage loans that
are in default or as to which a payment default is imminent. Any defaulted
balloon payment or modification that extends the maturity of a mortgage loan may
delay distributions of principal on a class of offered certificates and thereby
extend the weighted average life of such certificates and, if such certificates
were purchased at a discount, reduce the yield thereon.
Negative Amortization. The weighted average life of a class of certificates
can be affected by mortgage loans that permit negative amortization to occur
(that is, mortgage loans that provide for the current payment of interest
calculated at a rate lower than the rate at which interest accrues thereon, with
the unpaid portion of such interest being added to the related principal
balance). Negative amortization on one or more mortgage loans in any trust fund
may result in negative amortization on the offered certificates of the related
series. The related prospectus supplement will describe, if applicable, the
manner in which negative amortization in respect of the mortgage loans in any
trust fund is allocated among the respective classes of certificates of the
related series. The portion of any mortgage loan negative amortization allocated
to a class of certificates may result in a deferral of some or all of the
interest payable thereon, which deferred interest may be added to the
Certificate Balance thereof. In addition, an ARM Loan that permits negative
amortization would be expected during a period of increasing interest rates to
amortize at a slower rate (and perhaps not at all) than if interest rates were
declining or were remaining constant. Such slower rate of mortgage loan
amortization would correspondingly be reflected in a slower rate of amortization
for one or more classes of certificates of the related series. Accordingly, the
weighted average lives of mortgage loans that permit negative amortization (and
that of the classes of certificates to which any such negative amortization
would be allocated or that would bear the effects of a slower rate of
amortization on such mortgage loans) may increase as a result of such feature.
Negative amortization may occur in respect of an ARM Loan that
o limits the amount by which its scheduled payment may adjust in response to
a change in its interest rate,
o provides that its scheduled payment will adjust less frequently than its
interest rate or
o provides for constant scheduled payments notwithstanding adjustments to
its interest rate.
Accordingly, during a period of declining interest rates, the scheduled
payment on such a mortgage loan may exceed the amount necessary to amortize the
loan fully over its remaining amortization schedule and pay interest at the then
applicable interest rate, thereby resulting in the accelerated amortization of
such mortgage loan. Any such acceleration in amortization of its principal
balance will shorten the weighted average life of such mortgage loan and,
correspondingly, the weighted average lives of those classes of certificates
entitled to a portion of the principal payments on such mortgage loan.
The extent to which the yield on any offered certificate will be affected by
the inclusion in the related trust fund of mortgage loans that permit negative
amortization, will depend upon
o whether such offered certificate was purchased at a premium or a discount
and
o the extent to which the payment characteristics of such mortgage loans
delay or accelerate the distributions of principal on such certificate
(or, in the case of a interest-only certificate, delay or accelerate the
reduction of the notional amount thereof). See "--Yield and Prepayment
Considerations" above.
Foreclosures and Payment Plans. The number of foreclosures and the principal
amount of the mortgage loans that are foreclosed in relation to the number and
principal amount of mortgage loans that are repaid in accordance with their
terms will affect the weighted average lives of those mortgage loans and,
accordingly, the weighted average 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
34
mortgage loans in bankruptcy proceedings or otherwise, may also have an effect
upon the payment patterns of particular mortgage loans and thus the weighted
average lives of and yields on the certificates of the related series.
Losses and Shortfalls on the Mortgage Assets. The yield to holders of the
offered certificates of any series will directly depend on the extent to which
such holders are required to bear the effects of any losses or shortfalls in
collections arising out of defaults on the mortgage loans in the related trust
fund and the timing of such losses and shortfalls. In general, the earlier that
any such loss or shortfall occurs, the greater will be the negative effect on
yield for any class of certificates that is required to bear the effects
thereof.
The amount of any losses or shortfalls in collections on the mortgage assets
in any trust fund (to the extent not covered or offset by draws on any reserve
fund or under any instrument of Credit Support) will be allocated among the
respective classes of certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related prospectus
supplement. As described in the related prospectus supplement, such allocations
may be effected by
o a reduction in the entitlements to interest and/or the Certificate
Balances of one or more such classes of certificates and/or
o establishing a priority of payments among such classes of certificates.
The yield to maturity on a class of subordinate certificates may be extremely
sensitive to losses and shortfalls in collections on the mortgage loans in the
related trust fund.
Additional Certificate Amortization. One or more classes of certificates of
any series may provide for distributions of principal thereof from
o amounts attributable to interest accrued but not currently distributable
on one or more classes of Accrual Certificates,
o Excess Funds, or
o 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
o interest received or advanced on the mortgage assets in the related trust
fund that is in excess of the interest currently accrued on the
certificates of such series, or
o prepayment premiums, payments from Equity Participations or any other
amounts received on the mortgage assets in the related trust fund that do
not constitute interest thereon or principal thereof.
The amortization of any class of certificates out of the sources described in
the preceding paragraph would shorten the weighted average life of such
certificates and, if such certificates were purchased at a premium, reduce the
yield thereon. The related prospectus supplement will discuss the relevant
factors to be considered in determining whether distributions of principal of
any class of certificates out of such sources is likely to have any material
effect on the rate at which such certificates are amortized and the consequent
yield with respect thereto.
THE DEPOSITOR
The depositor is a special purpose corporation incorporated in the State of
Delaware on March 22, 1996, for the purpose of engaging in the business, among
other things, of acquiring and depositing mortgage assets in trust in exchange
for certificates evidencing interest in such trusts and selling or otherwise
distributing such certificates. The principal executive offices of the depositor
are located at 60 Wall Street, New York, New York 10005. The telephone number is
(212) 250-2500. The depositor's capitalization is nominal. All of the shares of
capital stock of the depositor are held by DB U.S. Financial Markets Holding
Corporation, an affiliate of Deutsche Bank AG.
35
None of the depositor, Deutsche Bank AG or any of their respective affiliates
will insure or guarantee distributions on the certificates of any series.
DEUTSCHE BANK AG
It is anticipated that all or a portion of the assets conveyed to the trust
fund by the depositor will have been acquired by the depositor from Deutsche
Bank AG or an affiliate thereof. Deutsche Bank AG is the largest banking
institution in the Federal Republic of Germany and one of the largest in the
world. It is the parent company of a group (the "Deutsche Bank Group")
consisting of banks, capital market companies, fund management companies, a
property finance company, installment financing companies, research consultancy
companies and other domestic and foreign companies. The Deutsche Bank Group has
approximately 69,000 employees worldwide and operates out of approximately 1,700
facilities around the world.
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.
If the related prospectus supplement so provides, a class of certificates may
have two or more component parts, each having characteristics that are otherwise
described herein as being attributable to separate and distinct classes. For
example, a class of certificates may have a Certificate Balance on which it
accrues interest at a fixed, variable or adjustable rate. Such class of
Certificates may also have certain characteristics attributable to interest-only
certificates insofar as it may also entitle the holders thereof to distributions
of interest accrued on a Notional Amount at a different fixed, variable or
adjustable rate. In addition, a class of certificates may accrue interest on one
portion of its Certificate Balance at one fixed, variable or adjustable rate and
on another portion of its Certificate Balance at a different fixed, variable or
adjustable rate.
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 interest-only certificates or Residual Certificates, notional amounts
or percentage interests, specified in the related prospectus supplement. If the
related prospectus supplement so provides, one or more classes of offered
certificates may be issued in fully registered, definitive form (such
Certificates, "Definitive Certificates") or may be offered in book-entry format
(such Certificates, "Book-Entry Certificates") through the facilities of DTC.
The offered certificates of each series (if issued as Definitive Certificates)
may be transferred or exchanged, subject to any restrictions on transfer
described in the related prospectus supplement, at the location specified in the
related prospectus supplement, without the payment of any service charges, other
than any tax or other governmental charge payable in connection therewith.
Interests in a class of Book-Entry Certificates will be transferred on the
book-entry records of DTC and its participating organizations. If so specified
in the related prospectus supplement, arrangements may be made for clearance and
settlement through Clearstream Banking, societe anonyme or the Euroclear System,
if they are participants in DTC.
Distributions
Distributions on the certificates of each series will be made on each
distribution date 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 and distribution date will be more specifically described in the related
prospectus supplement.
Except as otherwise specified in the related prospectus supplement,
distributions on the certificates of each series (other than the final
distribution in retirement of any such certificate) will be made to the persons
in whose names such certificates are registered at the close of business on the
last business day of the month preceding the
36
month in which the applicable distribution date occurs (the "Record Date"), and
the amount of each distribution will be determined as of the close of business
on the date (the "Determination Date") specified in the related prospectus
supplement. All distributions with respect to each class of certificates on each
distribution date will be allocated pro rata among the outstanding certificates
in such class in proportion to the respective Percentage Interests evidenced
thereby unless otherwise specified in the related prospectus supplement.
Payments will be made either by wire transfer in immediately available funds to
the account of a certificateholder at a bank or other entity having appropriate
facilities therefor, if such certificateholder has provided the person required
to make such payments with wiring instructions no later than the related Record
Date or such other date specified in the related prospectus supplement (and, if
so provided in the related prospectus supplement, such certificateholder holds
certificates in the requisite amount or denomination specified therein), or by
check mailed to the address of such certificateholder as it appears on the
Certificate Register; provided, however, that the final distribution in
retirement of any class of certificates (whether Definitive Certificates or
Book-Entry Certificates) will be made only upon presentation and surrender of
such certificates at the location specified in the notice to Certificateholders
of such final distribution. The undivided percentage interest (the "Percentage
Interest") represented by an offered certificate of a particular class will be
equal to the percentage obtained by dividing the initial principal balance or
notional amount of such certificate by the initial Certificate Balance or
Notional Amount of such class.
Distributions of Interest on the Certificates
Each class of certificates of each series (other than certain classes of
principal-only 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 of offered certificates. 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 with respect to one or more classes of certificates
(collectively, "Accrual Certificates") may not commence until the occurrence of
certain events, such as the retirement of one or more other classes of
certificates, and interest accrued with respect to a class of Accrual
Certificates prior to the occurrence of such an event will either be added to
the Certificate Balance thereof or otherwise deferred as described in the
related prospectus supplement.
Distributions of interest in respect of any class of certificates (other than
a class of Accrual Certificates, and other than any class of principal-only
certificates or Residual Certificates that is not entitled to any distributions
of interest) will be made on each distribution date based on the Accrued
Certificate Interest for such class and such distribution date, subject to the
sufficiency of that portion, if any, of the Available Distribution Amount
allocable to such class on such distribution date. Prior to the time interest is
distributable on any class of Accrual Certificates, the amount of Accrued
Certificate Interest otherwise distributable on such class will be added to the
Certificate Balance thereof on each distribution date or otherwise deferred as
described in the related prospectus supplement.
With respect to each class of certificates (other than certain classes of
interest-only certificates and certain classes of Residual Certificates), the
"Accrued Certificate Interest" for each distribution date will be equal to
interest at the applicable pass-through rate accrued for a specified period
(generally the most recently ended calendar month) 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 interest-only
certificates will be similarly calculated except that it will accrue on a
Notional Amount that is either
o based on the principal balances of some or all of the mortgage assets in
the related trust fund or
o 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 interest-only 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)
37
one or more classes of the certificates of a series may 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 that are applied to offset the amount of such shortfalls. The
particular manner in which such shortfalls will be allocated among some or all
of the classes of certificates of that series will be specified in the related
prospectus supplement.
The related prospectus supplement will also describe the extent to which the
amount of Accrued Certificate Interest that is otherwise distributable on (or,
in the case of Accrual Certificates, that may otherwise be added to the
Certificate Balance of) a class of offered certificates may be reduced as a
result of any other contingencies, including delinquencies, losses and deferred
interest on or in respect of the mortgage assets in the related trust fund.
Unless otherwise provided in the related prospectus supplement, any reduction in
the amount of Accrued Certificate Interest otherwise distributable on a class of
certificates by reason of the allocation to such class of a portion of any
deferred interest on or in respect of the mortgage assets in the related trust
fund will result in a corresponding increase in the Certificate Balance of such
class. See "Risk Factors--Prepayments May Reduce the Average Life of Your
Certificates" and "--Prepayments May Reduce the Yield of Your Certificates" and
"Yield and Maturity Considerations--Certain Shortfalls in Collections of
Interest."
Distributions of Principal of the Certificates
Each class of certificates of each series (other than certain classes of
interest-only certificates and certain classes of Residual Certificates) will
have an initial stated principal amount (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 as principal out of the future cash flow
on the mortgage assets and other assets included in the related trust fund. The
outstanding Certificate Balance of a class of certificates will be reduced by
distributions of principal made thereon from time to time and, if and to the
extent so provided in the related prospectus supplement, further by any losses
incurred in respect of the related mortgage assets allocated thereto from time
to time. In turn, the outstanding Certificate Balance of a class of certificates
may be increased as a result of any deferred interest on or in respect of the
related mortgage assets being allocated thereto from time to time, and will be
increased, in the case of a class of Accrual Certificates prior to the
distribution date on which distributions of interest thereon are required to
commence, by the amount of any Accrued Certificate Interest in respect thereof
(reduced as described above). 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 a specified
date (the "Cut-off Date"), after application of scheduled payments due on or
before such date, whether or not received. The initial Certificate Balance of
each class of a series of certificates will be specified in the related
prospectus supplement. As and to the extent described in the related prospectus
supplement, distributions of principal with respect to a series of certificates
will be made on each distribution date to the holders of the class or classes of
certificates of such series entitled thereto until the Certificate Balances of
such certificates have been reduced to zero. Distributions of principal with
respect to one or more classes of certificates may be made at a rate that is
faster (and, in some cases, substantially faster) than the rate at which
payments or other collections of principal are received on the mortgage assets
in the related trust fund. Distributions of principal with respect to one or
more classes of certificates may not commence until the occurrence of certain
events, such as the retirement of one or more other classes of certificates of
the same series, or may be made at a rate that is slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on the mortgage assets in the related trust fund.
Distributions of principal with respect to one or more classes of
certificates (each such class, a "Controlled Amortization Class") may be made,
subject to available funds, based on a specified principal payment schedule.
Distributions of principal with respect to one or more other classes of
certificates (each such class, a "Companion Class") may be contingent on the
specified principal payment schedule for a Controlled Amortization Class of the
same series and the rate at which payments and other collections of principal on
the mortgage assets in the related trust fund are received. Unless otherwise
specified in the related prospectus supplement, distributions of principal of
any class of offered certificates will be made on a pro rata basis among all of
the certificates of such class.
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
38
distribution date to the holders of the class of certificates of the related
series entitled thereto in accordance with the provisions described in such
prospectus supplement. Alternatively, such items may be retained by the
depositor or any of its affiliates or by any other specified person and/or may
be excluded as trust assets.
Allocation of Losses and Shortfalls
The amount of any losses or shortfalls in collections on the mortgage assets
in any trust fund (to the extent not covered or offset by draws on any reserve
fund or under any instrument of Credit Support) will be allocated among the
respective classes of certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related prospectus
supplement. As described in the related prospectus supplement, such allocations
may be effected by
o a reduction in the entitlements to interest and/or the Certificate
Balances of one or more such classes of certificates and/or
o establishing a priority of payments among such classes of certificates.
See "Description of Credit Support."
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, the special servicer,
the trustee, any provider of Credit Support and/or any other specified person
may be obligated to advance, or have the option of advancing, on or before each
distribution date, from its or their own funds or from excess funds held in the
related Certificate Account that are not part of the Available Distribution
Amount for the related series of certificates for such distribution date, an
amount up to the aggregate of any payments of principal (other than the
principal portion of any balloon payments) and interest that were due on or in
respect of such mortgage loans during the related Due Period and were delinquent
on the related determination date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of certificates entitled
thereto, rather than to guarantee or insure against losses. Accordingly, all
advances made out of a specific entity's own funds will be reimbursable out of
related recoveries on the mortgage loans (including amounts drawn under any fund
or instrument constituting Credit Support) respecting which such advances were
made (as to any mortgage loan, "Related Proceeds") and such other specific
sources as may be identified in the related prospectus supplement, including, in
the case of a series that includes one or more classes of subordinate
certificates, if so identified, collections on other mortgage assets in the
related trust fund that would otherwise be distributable to the holders of one
or more classes of such subordinate certificates. No advance will be required to
be made by a master servicer, special servicer or trustee if, in the judgment of
the master servicer, special servicer or trustee, as the case may be, such
advance would not be recoverable from Related Proceeds or another specifically
identified source (any such advance, a "Nonrecoverable Advance"); and, if
previously made by a master servicer, special servicer or trustee, a
Nonrecoverable Advance will be reimbursable thereto from any amounts in the
related Certificate Account prior to any distributions being made to the related
series of certificateholders.
If advances have been made by a master servicer, special servicer, trustee or
other entity from excess funds in a Certificate Account, such master servicer,
special servicer, trustee or other entity, as the case may be, will be required
to replace such funds in such Certificate Account on or prior to any future
distribution date to the extent that funds in such Certificate Account on such
distribution date are less than payments required to be made to the related
series of certificateholders on such date. If so specified in the related
prospectus supplement, the obligation of a master servicer, special servicer,
trustee or other entity to make advances may be secured by a cash advance
reserve fund or a surety bond. If applicable, information regarding the
characteristics of, and the identity of any obligor on, any such surety bond,
will be set forth in the related prospectus supplement.
If and to the extent so provided in the related prospectus supplement, any
entity making advances will be entitled to receive interest on certain or all of
such advances for a specified period during which such advances are outstanding
at the rate specified in such prospectus supplement, and such entity will be
entitled to payment of such interest periodically from general collections on
the mortgage loans in the related trust fund prior to any payment to the related
series of certificateholders or as otherwise provided in the related Pooling
Agreement and described in such prospectus supplement. The prospectus supplement
for any series of certificates evidencing an interest in a
39
trust fund that includes MBS will describe any comparable advancing obligation
of a party to the related Pooling Agreement or of a party to the related MBS
Agreement.
Reports to Certificateholders
On each distribution date, together with the distribution to the holders of
each class of the offered certificates of a series, a master servicer, Manager
or Trustee, as provided in the related prospectus supplement, will forward to
each such holder, a statement (a "Distribution Date Statement") that, unless
otherwise provided in the related prospectus supplement, will set forth, among
other things, in each case to the extent applicable:
(i) the amount of such distribution to holders of such class of offered
certificates that was applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of such class of offered
certificates that was applied to pay Accrued Certificate Interest;
(iii) the amount, if any, of such distribution to holders of such class of
offered certificates that was allocable to (A) Prepayment Premiums and (B)
payments on account of Equity Participations;
(iv) the amount, if any, by which such distribution is less than the
amounts to which holders of such class of offered certificates are entitled;
(v) if the related trust fund includes mortgage loans, the aggregate
amount of advances included in such distribution;
(vi) if the related trust fund includes mortgage loans, the amount of
servicing compensation received by the related master servicer (and, if
payable directly out of the related trust fund, by any special servicer and
any sub-servicer) and, if the related trust fund includes MBS, the amount of
administrative compensation received by the MBS Administrator;
(vii) information regarding the aggregate principal balance of the related
mortgage assets on or about such distribution date;
(viii) if the related trust fund includes mortgage loans, information
regarding the number and aggregate principal balance of such mortgage loans
that are delinquent;
(ix) if the related trust fund includes mortgage loans, information
regarding the aggregate amount of losses incurred and principal prepayments
made with respect to such mortgage loans during the related Due Period;
(x) the Certificate Balance or Notional Amount, as the case may be, of
such class of certificates at the close of business on such distribution
date, separately identifying any reduction in such Certificate Balance or
Notional Amount due to the allocation of any losses in respect of the related
mortgage assets, any increase in such Certificate Balance or Notional Amount
due to the allocation of any negative amortization in respect of the related
mortgage assets and any increase in the Certificate Balance of a class of
Accrual Certificates, if any, in the event that Accrued Certificate Interest
has been added to such balance;
(xi) if such class of offered certificates has a variable pass-through
rate or an adjustable pass- through rate, the pass-through rate applicable
thereto for such distribution date and, if determinable, for the next
succeeding distribution date;
(xii) the amount deposited in or withdrawn from any reserve fund on such
distribution date, and the amount remaining on deposit in such reserve fund
as of the close of business on such distribution date;
(xiii) if the related trust fund includes one or more instruments of
Credit Support, the amount of coverage under each such instrument as of the
close of business on such distribution date; and
(xiv) the amount of Credit Support being afforded by any classes of
subordinate certificates.
40
In the case of information furnished pursuant to subclauses (i)-(iii) above,
the amounts will be expressed as a dollar amount per specified denomination of
the relevant class of offered certificates or as a percentage. The prospectus
supplement for each series of certificates may describe additional information
to be included in reports to the holders of the offered certificates of such
series.
Within a reasonable period of time after the end of each calendar year, the
master servicer, MBS Administrator or trustee for a series of certificates, as
the case may be, will be required to furnish to each person who at any time
during the calendar year was a holder of an offered certificate of such series a
statement containing the information set forth in subclauses (i)-(iii) above,
aggregated for such calendar year or the applicable portion thereof during which
such person was a certificateholder. Such obligation will be deemed to have been
satisfied to the extent that substantially comparable information is provided
pursuant to any requirements of the Code as are from time to time in force. See,
however, "--Book-Entry Registration and Definitive Certificates" below.
If the trust fund for a series of certificates includes MBS, the ability of
the related master servicer, MBS Administrator or trustee, as the case may be,
to include in any Distribution Date Statement information regarding the mortgage
loans underlying such MBS will depend on the reports received with respect to
such MBS. In such cases, the related prospectus supplement will describe the
loan-specific information to be included in the Distribution Date Statements
that will be forwarded to the holders of the offered certificates of that series
in connection with distributions made to them. The depositor will provide the
same information with respect to any MBSs in its own reports that were publicly
offered and the reports the related MBS Issuer provides to the Trustee if
privately issued.
Voting Rights
The voting rights evidenced by each series of certificates (as to such
series, the "Voting Rights") will be allocated among the respective classes of
such series in the manner described in the related prospectus supplement.
Certificateholders will generally not have a right to vote, except with
respect to required consents to certain amendments to the related Pooling
Agreement and as otherwise specified in the related prospectus supplement. See
"Description of the Pooling Agreements--Amendment." The holders of specified
amounts of certificates of a particular series will have the right to act as a
group to remove the related trustee and also upon the occurrence of certain
events which if continuing would constitute an Event of Default on the part of
the related master servicer, special servicer or REMIC Administrator. See
"Description of the Pooling Agreements--Events of Default," "--Rights Upon Event
of Default" and "--Resignation and Removal of the Trustee."
Termination
The obligations created by the Pooling Agreement for each series of
certificates will terminate following
o the final payment or other liquidation of the last mortgage asset subject
thereto or the disposition of all property acquired upon foreclosure of
any mortgage loan subject thereto and
o the payment (or provision for payment) to the certificateholders of that
series of all amounts required to be paid to them pursuant to such Pooling
Agreement.
Written notice of termination of a Pooling Agreement will be given to each
certificateholder of the related series, and the final distribution will be made
only upon presentation and surrender of the certificates of such series at the
location to be specified in the notice of termination.
If so specified in the related prospectus supplement, a series of
certificates may be subject to optional early termination through the repurchase
of the mortgage assets in the related trust fund by the party or parties
specified therein, under the circumstances and in the manner set forth therein.
In addition, 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 or upon a specified date, a
party designated therein may be authorized or required to solicit bids for the
purchase of all the mortgage assets of the related trust fund, or of a
sufficient portion of such mortgage assets to retire such class or classes,
under the circumstances and in the manner set forth therein. The solicitation of
bids will be conducted in a commercially
41
reasonable manner and, generally, assets will be sold at their fair market
value. Circumstances may arise in which such fair market value may be less than
the unpaid balance of the mortgage loans sold and therefore, as a result of such
a sale, the Certificateholders of one or more classes of certificates may
receive an amount less than the Certificate Balance of, and accrued unpaid
interest on, their certificates.
Book-Entry Registration and Definitive Certificates
If so provided in the prospectus supplement for a series of certificates, one
or more classes of the offered certificates of such series will be offered in
book-entry format through the facilities of DTC, and each such class will be
represented by one or more global certificates registered in the name of The
Depository Trust Company ("DTC") or its nominee. If so provided in the
prospectus supplement, arrangements may be made for clearance and settlement
through the Euroclear System or Clearstream Banking, societe anonyme, if they
are participants in DTC.
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 ("DTC
Participants") and facilitate the clearance and settlement of securities
transactions between DTC Participants through electronic computerized book-entry
changes in their accounts, thereby eliminating the need for physical movement of
securities certificates. DTC Participants that maintain accounts with DTC
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include other organizations. DTC is owned by a number of
DTC 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 is also available to others such as banks, brokers, dealers
and trust companies that directly or indirectly clear through or maintain a
custodial relationship with a DTC Participant that maintains as account with
DTC. The rules applicable to DTC and DTC Participants are on file with the
Commission.
Purchases of Book-Entry Certificates under the DTC system must be made by or
through, and will be recorded on the records of, the brokerage firm, bank,
thrift institution or other financial intermediary (each, a "Financial
Intermediary") that maintains the beneficial owner's account for such purpose.
In turn, the Financial Intermediary's ownership of such certificates will be
recorded on the records of DTC (or of a participating firm that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the beneficial owner's Financial Intermediary is not a DTC
Participant). Therefore, the beneficial owner must rely on the foregoing
procedures to evidence its beneficial ownership of such certificates. The
beneficial ownership interest of the owner of a Book-Entry Certificate (a
"Certificate Owner") may only be transferred by compliance with the rules,
regulations and procedures of such Financial Intermediaries and DTC
Participants.
DTC has no knowledge of the actual Certificate Owners; DTC's records reflect
only the identity of the DTC Participants to whose accounts such certificates
are credited, which may or may not be the Certificate Owners. The DTC
Participants will remain responsible for keeping account of their holdings on
behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants and
by DTC Participants to Financial Intermediaries and 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 DTC Participants' accounts on the related distribution
date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on such date.
Disbursement of such distributions by DTC Participants to Financial
Intermediaries and Certificate Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of each such DTC Participant (and not of DTC, the depositor or
any trustee, master servicer, special servicer or MBS Administrator), subject to
any statutory or regulatory requirements as may be in effect from time to time.
Accordingly, under a book-entry system, Certificate Owners may receive payments
after the related Distribution Date.
Unless otherwise provided in the related prospectus supplement, the only
"certificateholder" (as such term is used in the related Pooling Agreement) of
Book-Entry Certificates will be the nominee of DTC, and the Certificate
42
Owners will not be recognized as certificateholders under the Pooling Agreement.
Certificate Owners will be permitted to exercise the rights of
certificateholders under the related Pooling Agreement only indirectly through
the DTC Participants who in turn will exercise their rights through DTC. The
depositor has been 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
DTC Participants to whose account with DTC interests in the Book-Entry
Certificates are credited. DTC may take conflicting actions with respect to the
Book-Entry Certificates to the extent that such actions are taken on behalf of
Financial Intermediaries whose holdings include such certificates.
Because DTC can act only on behalf of DTC Participants, who in turn act on
behalf of Financial Intermediaries and certain Certificate Owners, the ability
of a Certificate Owner to pledge its interest in Book-Entry Certificates to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of its interest in Book-Entry Certificates, may be limited
due to the lack of a physical certificate evidencing such interest.
Unless otherwise specified in the related prospectus supplement, certificates
initially issued in book-entry form will be issued as Definitive Certificates to
Certificate Owners or their nominees, rather than to DTC or its nominee, only if
o the depositor advises the Trustee in writing that DTC is no longer willing
or able to discharge properly its responsibilities as depository with
respect to such certificates and the depositor is unable to locate a
qualified successor or
o the depositor, at its option, elects to terminate the book-entry system
through DTC with respect to such certificates. Upon the occurrence of
either of the events described in the preceding sentence, DTC will be
required to notify all DTC Participants of the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the certificate or
certificates representing a class of Book-Entry Certificates, together
with instructions for registration, the trustee for the related series or
other designated party will be required to issue to the Certificate Owners
identified in such instructions the Definitive Certificates to which they
are entitled, and thereafter the holders of such Definitive Certificates
will be recognized as "Certificateholders" under and within the meaning of
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 any case, a "Pooling Agreement"). In general, the parties to a
Pooling Agreement will include the depositor, the trustee, the master servicer,
the special servicer and, if one or more REMIC elections have been made with
respect to the trust fund, a REMIC administrator. However, a Pooling Agreement
that relates to a trust fund that includes MBS may include an MBS Administrator
as a party, but may not include a master servicer, special 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, the mortgage
asset seller or an affiliate thereof may perform the functions of master
servicer, special servicer, MBS Administrator or REMIC administrator. If so
specified in the related prospectus supplement, the master servicer may also
perform the duties of special servicer, and the master servicer, the special
servicer or the trustee may also perform the duties of REMIC administrator. Any
party to a Pooling Agreement or any affiliate thereof may own certificates
issued thereunder; however, except in limited circumstances (including with
respect to required consents to certain amendments to a Pooling Agreement),
certificates issued thereunder that are held by the master servicer or special
servicer for the related series will not be allocated Voting Rights.
A form of a pooling and servicing agreement has been filed as an exhibit to
the registration statement of which this prospectus is a part. However, the
provisions of each Pooling Agreement will vary depending upon the nature of the
certificates to be issued thereunder and the nature of the related trust fund.
The following summaries describe certain provisions that may appear in a Pooling
Agreement under which certificates that evidence interests in mortgage loans
will be issued. The prospectus supplement for a series of certificates will
describe any provision of the related Pooling Agreement that materially differs
from the description thereof contained in this prospectus and, if the related
trust fund includes MBS, will summarize all of the material provisions of the
related Pooling Agreement.
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The summaries herein do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Pooling Agreement for each series of certificates and the description of such
provisions in the related prospectus supplement. The depositor will provide a
copy of the Pooling Agreement (without exhibits) that relates to any series of
certificates without charge upon written request of a holder of a certificate of
such series addressed to it at its principal executive offices specified herein
under "The Depositor."
Assignment of Mortgage Loans; Repurchases
At the time of issuance of any series of certificates, the Depositor will
assign (or cause to be assigned) to the designated trustee the mortgage loans to
be included in the related trust fund, together with, unless otherwise specified
in the related prospectus supplement, all principal and interest to be received
on or with respect to such mortgage loans after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date. The trustee will,
concurrently with such assignment, deliver the certificates to or at the
direction of the depositor in exchange for the mortgage loans and the other
assets to be included in the trust fund for such series. Each mortgage loan will
be identified in a schedule appearing as an exhibit to the related Pooling
Agreement. Such schedule generally will include detailed information that
pertains to each mortgage loan included in the related trust fund, which
information will typically include
o the address of the related mortgaged property and type of such property;
o the mortgage rate and, if applicable, the applicable index, gross margin,
adjustment date and any rate cap information;
o the original and remaining term to maturity;
o the amortization term; and
o the original and outstanding principal balance.
In addition, unless otherwise specified in the related prospectus supplement,
the depositor will, as to each mortgage loan to be included in a trust fund,
deliver, or cause to be delivered, to the related trustee (or to a custodian
appointed by the trustee as described below)
o the mortgage note endorsed, without recourse, either in blank or to the
order of such trustee (or its nominee),
o the mortgage with evidence of recording indicated thereon (except for any
mortgage not returned from the public recording office),
o an assignment of the mortgage in blank or to the trustee (or its nominee)
in recordable form, together with any intervening assignments of the
mortgage with evidence of recording thereon (except for any such
assignment not returned from the public recording office), and,
o if applicable, any riders or modifications to such mortgage note and
mortgage, together with certain other documents at such times as set forth
in the related Pooling Agreement.
Such assignments may be blanket assignments covering mortgages on mortgaged
properties located in the same county, if permitted by law. Notwithstanding the
foregoing, a trust fund may include mortgage loans where the original mortgage
note is not delivered to the trustee if the depositor delivers, or causes to be
delivered, to the related trustee (or such custodian) a copy or a duplicate
original of the mortgage note, together with an affidavit certifying that the
original thereof has been lost or destroyed. In addition, if the depositor
cannot deliver, with respect to any mortgage loan, the mortgage or any
intervening assignment with evidence of recording thereon concurrently with the
execution and delivery of the related Pooling Agreement because of a delay
caused by the public recording office, the depositor will deliver, or cause to
be delivered, to the related trustee (or such custodian) a true and correct
photocopy of such mortgage or assignment as submitted for recording. The
depositor will deliver, or cause to be delivered, to the related trustee (or
such custodian) such mortgage or assignment with evidence of recording indicated
thereon after receipt thereof from the public recording office. If the depositor
cannot deliver, with respect
44
to any mortgage loan, the mortgage or any intervening assignment with evidence
of recording thereon concurrently with the execution and delivery of the related
Pooling Agreement because such mortgage or assignment has been lost, the
depositor will deliver, or cause to be delivered, to the related trustee (or
such custodian) a true and correct photocopy of such mortgage or assignment with
evidence of recording thereon. Unless otherwise specified in the related
prospectus supplement, assignments of mortgage to the trustee (or its nominee)
will be recorded in the appropriate public recording office, except in states
where, in the opinion of counsel acceptable to the trustee, such recording is
not required to protect the trustee's interests in the mortgage loan against the
claim of any subsequent transferee or any successor to or creditor of the
depositor or the originator of such mortgage loan.
The trustee (or a custodian appointed by the trustee) for a series of
certificates will be required to review the mortgage loan documents delivered to
it within a specified period of days after receipt thereof, and the trustee (or
such custodian) will hold such documents in trust for the benefit of the
certificateholders of such series. Unless otherwise specified in the related
prospectus supplement, if any such document is found to be missing or defective,
and such omission or defect, as the case may be, materially and adversely
affects the interests of the certificateholders of the related series, the
trustee (or such custodian) will be required to notify the master servicer, the
special servicer and the depositor, and one of such persons will be required to
notify the relevant mortgage asset seller. In that case, and if the mortgage
asset seller cannot deliver the document or cure the defect within a specified
number of days after receipt of such notice, then, except as otherwise specified
below or in the related prospectus supplement, the mortgage asset seller will be
obligated to repurchase the related mortgage loan from the trustee at a price
generally equal to the unpaid principal balance thereof, together with accrued
but unpaid interest through a date on or about the date of purchase, or at such
other price as will be specified in the related prospectus supplement (in any
event, the "Purchase Price"). If so provided in the prospectus supplement for a
series of certificates, a mortgage asset seller, in lieu of repurchasing a
mortgage loan as to which there is missing or defective loan documentation, will
have the option, exercisable upon certain conditions and/or within a specified
period after initial issuance of such series of certificates, to replace such
mortgage loan with one or more other mortgage loans, in accordance with
standards that will be described in the prospectus supplement. Unless otherwise
specified in the related prospectus supplement, this repurchase or substitution
obligation will constitute the sole remedy to holders of the certificates of any
series or to the related trustee on their behalf for missing or defective
mortgage loan documentation, and neither the depositor nor, unless it is the
mortgage asset seller, the master servicer or the special servicer will be
obligated to purchase or replace a mortgage loan if a mortgage asset seller
defaults on its obligation to do so.
The trustee will be authorized at any time to appoint one or more custodians
pursuant to a custodial agreement to hold title to the mortgage loans in any
trust fund and to maintain possession of and, if applicable, to review the
documents relating to such mortgage loans, in any case as the agent of the
trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the certificates will be set forth in the related prospectus
supplement.
Representations and Warranties; Repurchases
Unless otherwise provided in the prospectus supplement for a series of
certificates, the depositor will, with respect to each mortgage loan in the
related trust fund, make or assign, or cause to be made or assigned, certain
representations and warranties (the person making such representations and
warranties, the "Warranting Party") covering, by way of example:
o 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;
o the enforceability of the related mortgage note and mortgage and the
existence of title insurance insuring the lien priority of the related
mortgage;
o the Warranting Party's title to the mortgage loan and the authority of the
Warranting Party to sell the mortgage loan; and
o the payment status of the mortgage loan.
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It is expected that in most cases the Warranting Party will be the mortgage
asset seller. However, the Warranting Party may also be an affiliate of the
mortgage asset seller, the depositor or an affiliate of the depositor, the
master servicer, the special servicer or another person acceptable to the
depositor. The Warranting Party, if other than the mortgage asset seller, will
be identified in the related prospectus supplement.
Unless otherwise provided in the related prospectus supplement, each Pooling
Agreement will provide that the master servicer and/or trustee will be required
to notify promptly any Warranting Party of any breach of any representation or
warranty made by it in respect of a mortgage loan that materially and adversely
affects the interests of the certificateholders of the related series. If such
Warranting Party cannot cure such breach within a specified period following the
date on which it was notified of such breach, then, unless otherwise provided in
the related prospectus supplement, it will be obligated to repurchase such
mortgage loan from the trustee at the applicable Purchase Price. If so provided
in the prospectus supplement for a series of certificates, a Warranting Party,
in lieu of repurchasing a mortgage loan as to which a breach has occurred, will
have the option, exercisable upon certain conditions and/or within a specified
period after initial issuance of such series of certificates, to replace such
mortgage loan with one or more other mortgage loans, in accordance with
standards that will be described in the prospectus supplement. Unless otherwise
specified in the related prospectus supplement, this repurchase or substitution
obligation will constitute the sole remedy available to holders of the
certificates of any series or to the related trustee on their behalf for a
breach of representation and warranty by a Warranting Party, and neither the
Depositor nor the master servicer, in either case unless it is the Warranting
Party, will be obligated to purchase or replace a mortgage loan if a Warranting
Party defaults on its obligation to do so.
In some cases, representations and warranties will have been made in respect
of a mortgage loan as of a date prior to the date upon which the related series
of certificates is issued, and thus may not address events that may occur
following the date as of which they were made. However, the depositor will not
include any mortgage loan in the trust fund for any series of certificates if
anything has come to the depositor's attention that would cause it to believe
that the representations and warranties made in respect of such mortgage loan
will not be accurate in all material respects as of the date of issuance. The
date as of which the representations and warranties regarding the mortgage loans
in any trust fund were made will be specified in the related prospectus
supplement.
Collection and Other Servicing Procedures
Unless otherwise specified in the related prospectus supplement, the master
servicer and the special servicer for any mortgage pool, directly or through
sub-servicers, will each be obligated under the related pooling agreement to
service and administer the mortgage loans in such mortgage pool for the benefit
of the related certificateholders, in accordance with applicable law and further
in accordance with the terms of such pooling agreement, such mortgage loans and
any instrument of Credit Support included in the related trust fund. Subject to
the foregoing, the master servicer and the special servicer will each have full
power and authority to do any and all things in connection with such servicing
and administration that it may deem necessary and desirable.
As part of its servicing duties, each of the master servicer and the special
servicer will be required to make reasonable efforts to collect all payments
called for under the terms and provisions of the mortgage loans that it services
and will be obligated to follow such collection procedures as it would follow
with respect to mortgage loans that are comparable to such mortgage loans and
held for its own account, provided (i) such procedures are consistent with the
terms of the related pooling agreement and (ii) do not impair recovery under any
instrument of Credit Support included in the related trust fund. Consistent with
the foregoing, the master servicer and the special servicer will each be
permitted, in its discretion, unless otherwise specified in the related
prospectus supplement, to waive any prepayment premium, late payment charge or
other charge in connection with any mortgage loan.
The master servicer and the special servicer for any trust fund, either
separately or jointly, directly or through sub-servicers, will also be required
to perform as to the mortgage loans in such trust fund various other customary
functions of a servicer of comparable loans, including maintaining escrow or
impound accounts, if required under the related Pooling Agreement, for payment
of taxes, insurance premiums, ground rents and similar items, or otherwise
monitoring the timely payment of those items; attempting to collect delinquent
payments; supervising foreclosures; negotiating modifications; conducting
property inspections on a periodic or other basis; managing (or overseeing the
management of) mortgaged properties acquired on behalf of such trust fund
through foreclosure, deed-in-lieu of foreclosure or otherwise (each, an "REO
Property"); and maintaining servicing records relating to
46
such mortgage loans. The related prospectus supplement will specify when and the
extent to which servicing of a mortgage loan is to be transferred from the
master servicer to the special servicer. In general, and subject to the
discussion in the related prospectus supplement, a special servicer will be
responsible for the servicing and administration of:
o mortgage loans that are delinquent in respect of a specified number of
scheduled payments;
o mortgage loans as to which the related borrower has entered into or
consented to bankruptcy, appointment of a receiver or conservator or
similar insolvency proceeding, or the related borrower has become the
subject of a decree or order for such a proceeding which shall have
remained in force undischarged or unstayed for a specified number of days;
and
o REO Properties.
If so specified in the related prospectus supplement, a pooling agreement
also may provide that if a default on a mortgage loan has occurred or, in the
judgment of the related master servicer, a payment default is reasonably
foreseeable, the related master servicer may elect to transfer the servicing
thereof, in whole or in part, to the related special servicer. Unless otherwise
provided in the related prospectus supplement, when the circumstances no longer
warrant a special servicer's continuing to service a particular mortgage loan
(e.g., the related borrower is paying in accordance with the forbearance
arrangement entered into between the special servicer and such borrower), the
master servicer will resume the servicing duties with respect thereto. If and to
the extent provided in the related Pooling Agreement and described in the
related prospectus supplement, a special servicer may perform certain limited
duties in respect of mortgage loans for which the master servicer is primarily
responsible (including, if so specified, performing property inspections and
evaluating financial statements); and a master servicer may perform certain
limited duties in respect of any mortgage loan for which the special servicer is
primarily responsible (including, if so specified, continuing to receive
payments on such mortgage loan (including amounts collected by the special
servicer), making certain calculations with respect to such mortgage loan and
making remittances and preparing certain reports to the trustee and/or
certificateholders with respect to such mortgage loan. Unless otherwise
specified in the related prospectus supplement, the master servicer will be
responsible for filing and settling claims in respect of particular mortgage
loans under any applicable instrument of Credit Support. See "Description of
Credit Support."
A mortgagor'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 mortgagor that is unable to make mortgage loan payments may also be
unable to make timely payment of taxes and otherwise to maintain and insure the
related mortgaged property. In general, the related special servicer will be
required to
o monitor any mortgage loan that is in default,
o 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,
o initiate corrective action in cooperation with the Mortgagor if cure is
likely,
o inspect the related mortgaged property and
o take such other actions as it deems necessary and appropriate.
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
behalf of the certificateholders of the related series may vary considerably
depending on the particular mortgage loan, the mortgaged property, the
mortgagor, 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
mortgagor files a bankruptcy petition, the special servicer may not be permitted
to accelerate the maturity of the mortgage loan or to
47
foreclose on the related mortgaged property for a considerable period of time.
See "Certain Legal Aspects of Mortgage Loans-- Bankruptcy Laws."
Mortgagors may, from time to time, request partial releases of the mortgaged
properties, easements, consents to alteration or demolition and other similar
matters. In general, the master servicer may approve such a request if it has
determined, exercising its business judgment in accordance with the applicable
servicing standard, that such approval will not adversely affect the security
for, or the timely and full collectability of, the related mortgage loan. Any
fee collected by the master servicer for processing such request will be
retained by the master servicer as additional servicing compensation.
Sub-Servicers
A master servicer or special servicer may delegate its servicing obligations
in respect of the mortgage loans serviced thereby to one or more third-party
servicers; provided that, unless otherwise specified in the related prospectus
supplement, such master servicer or special servicer will remain obligated under
the related Pooling Agreement. Unless otherwise provided in the related
prospectus supplement, each sub-servicing agreement between a master servicer
and a sub-servicer must provide for servicing of the applicable mortgage loans
consistent with the related Pooling Agreement. The master servicer and special
servicer in respect of any mortgage asset pool will each be required to monitor
the performance of sub-servicers retained by it and will have the right to
remove a sub-servicer retained by it at any time it considers such removal to be
in the best interests of certificateholders. Unless otherwise provided in the
related prospectus supplement, a master servicer or special servicer will be
solely liable for all fees owed by it to any sub-servicer, irrespective of
whether the master servicer's or special servicer's compensation pursuant to the
related Pooling Agreement is sufficient to pay such fees. Each sub-servicer will
be reimbursed by the master servicer or special servicer, as the case may be,
that retained it for certain expenditures which it makes, generally to the same
extent such master servicer or special servicer would be reimbursed under a
Pooling Agreement. See "--Certificate Account" and "--Servicing Compensation and
Payment of Expenses."
Certificate Account
General. The master servicer, the trustee and/or the special servicer will,
as to each trust fund that includes mortgage loans, establish and maintain or
cause to be established and maintained the corresponding Certificate Account,
which will be established so as to comply with the standards of each rating
agency that has rated any one or more classes of certificates of the related
series. A Certificate Account may be maintained as an interest-bearing or a
non-interest-bearing account and the funds held therein may be invested pending
each succeeding distribution date in United States government securities and
other investment grade obligations that are acceptable to each rating agency
that has rated any one or more classes of certificates of the related series
("Permitted Investments"). Such Permitted Investments include
o federal funds,
o uncertificated certificates of deposit,
o time deposits,
o bankers' acceptances and repurchase agreements,
o certain United States dollar-denominated commercial paper,
o units of money market funds that maintain a constant net asset value and
any other obligations or security acceptable to each rating agency.
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 as additional compensation.
A Certificate Account may be maintained with the related master servicer,
special servicer, trustee or mortgage asset seller or with a depository
institution that is an affiliate of any of the foregoing or of the depositor,
provided that it complies with applicable rating agency standards. If permitted
by the applicable rating agency or agencies, a Certificate Account may contain
funds relating to more than one series of mortgage pass-through
48
certificates and may contain other funds representing payments on mortgage loans
owned by the related master servicer or special servicer 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 following payments and
collections received or made by the master servicer, the trustee or the special
servicer subsequent to the Cut-off Date (other than payments due on or before
the Cut-off Date) are 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:
(1) all payments on account of principal, including principal prepayments, on
the mortgage loans;
(2) all payments on account of interest on the mortgage loans, including any
default interest collected, in each case net of any portion thereof retained by
the master servicer or the special servicer as its servicing compensation or as
compensation to the trustee;
(3) all proceeds received under any hazard, title or other insurance policy
that provides coverage with respect to a mortgaged property or the related
mortgage loan or in connection with the full or partial condemnation of a
mortgaged property (other than proceeds applied to the restoration of the
property or released to the related borrower) ("Insurance Proceeds" and
"Condemnation Proceeds," respectively) 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 (such amounts,
together with those amounts listed in clause (7) below, "Liquidation Proceeds"),
together with the net operating income (less reasonable reserves for future
expenses) derived from the operation of any mortgaged properties acquired by the
trust fund through foreclosure or otherwise;
(4) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of certificates;
(5) any advances made with respect to delinquent scheduled payments of
principal and interest on the mortgage loans;
(6) any amounts paid under any Cash Flow Agreement;
(7) all proceeds of the purchase of any mortgage loan, or property acquired
in respect thereof, by the Depositor, any mortgage asset seller or any other
specified person as described under "--Assignment of mortgage 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; Retirement of
Certificates";
(8) to the extent that any such item does not constitute additional servicing
compensation to the master servicer or the special servicer and is not otherwise
retained by the depositor or another specified person, any payments on account
of modification or assumption fees, late payment charges, prepayment premiums or
Equity Participations with respect to the mortgage loans;
(9) all payments required to be deposited in the Certificate Account with
respect to any deductible clause in any blanket insurance policy as described
under "--Hazard Insurance Policies";
(10) any amount required to be deposited by the master servicer, the special
servicer or the trustee in connection with losses realized on investments for
the benefit of the master servicer, the special servicer or the trustee, as the
case may be, of funds held in the Certificate Account; and
(11) any other amounts received on or in respect of the mortgage loans
required to be deposited in the Certificate Account as provided in the related
Pooling Agreement and described in the related prospectus supplement.
49
Withdrawals. Unless otherwise provided in the related Pooling Agreement and
described in the related prospectus supplement, a master servicer, trustee or
special servicer may make withdrawals from the Certificate Account for each
trust fund that includes mortgage loans for any of the following purposes:
(1) to make distributions to the certificateholders on each distribution
date;
(2) to pay the master servicer or the special servicer any servicing fees not
previously retained thereby, such payment to be made out of payments and other
collections of interest on the particular mortgage loans as to which such fees
were earned;
(3) to reimburse the master servicer, the special servicer or any other
specified person for unreimbursed advances of delinquent scheduled payments of
principal and interest made 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 late payments collected on the particular mortgage loans, Liquidation
Proceeds, Insurance Proceeds and Condemnation Proceeds collected on the
particular mortgage loans and properties, and net income collected on the
particular properties, with respect to which such advances were made or such
expenses were incurred or out of amounts drawn under any form of Credit Support
with respect to such mortgage loans and properties, or if in the judgment of the
master servicer, the special servicer or such other person, as applicable, such
advances and/or expenses will not be recoverable from such amounts, 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;
(4) if and to the extent described in the related prospectus supplement, to
pay the master servicer, the special servicer or any other specified person
interest accrued on the advances and servicing expenses described in clause (3)
above incurred by it while such remain outstanding and unreimbursed;
(5) 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";
(6) to reimburse the master servicer, the special servicer, the REMIC
administrator, the depositor, the trustee, 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, the Special Servicer, the
REMIC Administrator and the Depositor" and "--Certain Matters Regarding the
Trustee";
(7) if and to the extent described in the related prospectus supplement, to
pay the fees of the trustee, the REMIC administrator and any provider of Credit
Support;
(8) if and to the extent described in the related prospectus supplement, to
reimburse prior draws on any form of Credit Support;
(9) to pay the master servicer, the special servicer or the trustee, as
appropriate, interest and investment income earned in respect of amounts held in
the Certificate Account as additional compensation;
(10) to pay any servicing expenses not otherwise required to be advanced by
the master servicer, the special servicer or any other specified person;
(11) 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--REMICs--Prohibited
Transactions Tax and Other Taxes";
50
(12) to pay for the cost of various opinions of counsel obtained pursuant to
the related Pooling Agreement for the benefit of certificateholders;
(13) to make any other withdrawals permitted by the related Pooling Agreement
and described in the related prospectus supplement; and
(14) to clear and terminate the Certificate Account upon the termination of
the trust fund.
Modifications, Waivers and Amendments of Mortgage Loans
The master servicer and the special servicer may each agree to modify, waive
or amend any term of any mortgage loan serviced by it in a manner consistent
with the applicable servicing standard; provided that, unless otherwise set
forth in the related prospectus supplement, the modification, waiver or
amendment
o will not affect the amount or timing of any scheduled payments of
principal or interest on the mortgage loan,
o will not, in the judgment of the master servicer or the special servicer,
as the case may be, materially impair the security for the mortgage loan
or reduce the likelihood of timely payment of amounts due thereon, and
o will not adversely affect the coverage under any applicable instrument of
Credit Support.
Unless otherwise provided in the related prospectus supplement, the special
servicer also may agree to any other modification, waiver or amendment if, in
its judgment,
o a material default on the mortgage loan has occurred or a payment default
is imminent,
o 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
o such modification, waiver or amendment will not adversely affect the
coverage under any applicable instrument of Credit Support.
Realization upon Defaulted Mortgage Loans
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 institute foreclosure proceedings, exercise any power
of sale contained in the related mortgage, obtain a deed in lieu of foreclosure,
or otherwise acquire title to the related mortgaged property, by operation of
law or otherwise. 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, unless the special servicer has previously received a report prepared by a
person who regularly conducts environmental audits (which report will be an
expense of the trust fund) and either:
(i) such report indicates that (a) the mortgaged property is in
compliance with applicable environmental laws and regulations and (b)
there are no circumstances or conditions present at the mortgaged property
that have resulted in any contamination for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under
any applicable environmental laws and regulations; or
(ii) the special servicer, based solely (as to environmental matters
and related costs) on the information set forth in such report, determines
that taking such actions as are necessary to bring the mortgaged property
into compliance with applicable environmental laws and regulations and/or
taking the actions contemplated by clause (i)(b) above, is reasonably
likely to produce a greater recovery, taking into
51
account the time value of money, than not taking such actions. See
"Certain Legal Aspects of Mortgage Loans--Environmental Considerations."
A Pooling Agreement may grant to the master servicer, the special servicer, a
provider of Credit Support and/or the holder or holders of certain classes of
the related series of certificates an option to purchase from the trust fund, at
fair market value (which, if less than the Purchase Price, will be specified in
the related prospectus supplement), any mortgage loan as to which a specified
number of scheduled payments are delinquent.
Unless otherwise provided in the related prospectus supplement, if title to
any mortgaged property is acquired by a trust fund as to which a REMIC election
has been made, the special servicer, on behalf of the trust fund, will be
required to sell the mortgaged property prior to the close of the third calendar
year beginning after the year of acquisition, unless (i) the Internal Revenue
Service (the "IRS") 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 beyond such period 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 and any other
tax-related limitations, the special servicer will generally be required to
attempt to sell any mortgaged property so acquired on the same terms and
conditions it would if it were the owner. Unless otherwise provided in the
related prospectus supplement, if title to any mortgaged property is acquired by
a trust fund as to which a REMIC election has been made, the special servicer
will also be required to ensure that the mortgaged property is administered so
that it constitutes "foreclosure property" within the meaning of Code Section
860G(a)(8) at all times, that the sale of such property does not result in the
receipt by the trust fund of any income from nonpermitted assets as described in
Code Section 860F(a)(2)(B), and that the trust fund does not derive any "net
income from foreclosure property" within the meaning of Code Section 860G(c)(2),
with respect to 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 such property. The retention of an
independent contractor, however, will not relieve the special servicer of its
obligation to manage such mortgaged property as required under 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 thereon plus the aggregate amount of reimbursable expenses
incurred by the special servicer and/or the master servicer in connection with
such mortgage loan, then, to the extent that such shortfall is not covered by
any instrument or fund constituting Credit Support, the trust fund will realize
a loss in the amount of such shortfall. The special servicer and/or the master
servicer will be entitled to reimbursement out of the Liquidation Proceeds
recovered on any defaulted mortgage loan, prior to the distribution of such
Liquidation Proceeds to certificateholders, any and all amounts that represent
unpaid servicing compensation in respect of the mortgage loan, unreimbursed
servicing expenses incurred with respect to the mortgage loan and any
unreimbursed advances of delinquent payments made with respect to the mortgage
loan. In addition, if and to the extent set forth in the related prospectus
supplement, amounts otherwise distributable on the certificates may be further
reduced by interest payable to the master servicer and/or special servicer on
such servicing expenses and advances.
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, neither the special servicer nor the master servicer will 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
o that such restoration will increase the proceeds to certificateholders on
liquidation of the mortgage loan after reimbursement of the special
servicer or the master servicer, as the case may be, for its expenses and
o that such expenses will be recoverable by it from related Insurance
Proceeds, Condemnation Proceeds, Liquidation Proceeds and/or amounts drawn
on any instrument or fund constituting Credit Support.
Hazard Insurance Policies
Unless otherwise specified in the related prospectus supplement, each Pooling
Agreement will require the master servicer (or the special servicer with respect
to mortgage loans serviced thereby) to use reasonable efforts to cause each
mortgage loan borrower to maintain a hazard insurance policy that provides for
such coverage as is
52
required under the related mortgage or, if the mortgage permits the holder
thereof to dictate to the borrower the insurance coverage to be maintained on
the related mortgaged property, such coverage as is consistent with the master
servicer's (or special servicer's) normal servicing procedures. Unless otherwise
specified in the related prospectus supplement, such coverage generally will be
in an amount equal to the lesser of the principal balance owing on such mortgage
loan and the replacement cost of the related mortgaged property. The ability of
a master servicer (or special servicer) to assure that hazard insurance proceeds
are appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance policy
referred to below, or upon the extent to which information concerning covered
losses is furnished by borrowers. All amounts collected by a master servicer (or
special servicer) under any such policy (except for amounts to be applied to the
restoration or repair of the mortgaged property or released to the borrower in
accordance with the master servicer's (or special servicer's) normal servicing
procedures and/or to the terms and conditions of the related mortgage and
mortgage note) will be deposited in the related Certificate Account. The Pooling
Agreement may provide that the master servicer (or special servicer) may satisfy
its obligation to cause each borrower to maintain such a hazard insurance policy
by maintaining a blanket policy insuring against hazard losses on the mortgage
loans in a trust fund. If such blanket policy contains a deductible clause, the
master servicer (or special servicer) will be required, in the event of a
casualty covered by such blanket policy, to deposit in the related Certificate
Account all additional sums that would have been deposited therein under an
individual policy but were not because of such deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the mortgaged properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin and domestic animals. 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
o the replacement cost of the improvements less physical depreciation and
o 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 (or
special servicer) will determine whether to exercise any right the trustee may
have under any such provision in a manner consistent with the master servicer's
(or special servicer's) normal servicing procedures. Unless otherwise specified
in the related prospectus supplement, the master servicer or special servicer,
as applicable, will be entitled to retain as additional servicing compensation
any fee collected in connection with the permitted transfer of a mortgaged
property. See "Certain Legal Aspects of mortgage loans--Due-on-Sale and
Due-on-Encumbrance."
53
Servicing Compensation and Payment of Expenses
Unless otherwise specified in the related prospectus supplement, a 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, including
mortgage loans serviced by the related special servicer. If and to the extent
described in the related prospectus supplement, a special servicer's primary
compensation with respect to a series of certificates may consist of any or all
of the following components:
o a specified portion of the interest payments on each mortgage loan in the
related trust fund, whether or not serviced by it;
o an additional specified portion of the interest payments on each mortgage
loan then currently serviced by it; and
o subject to any specified limitations, a fixed percentage of some or all of
the collections and proceeds received with respect to each mortgage loan
which was at any time serviced by it, including mortgage loans for which
servicing was returned to the master servicer.
Insofar as any portion of the master servicer's or special servicer's
compensation consists of a specified portion of the interest payments on a
mortgage loan, such compensation will generally be based on a percentage of the
principal balance of such mortgage loan outstanding from time to time and,
accordingly, will decrease with the amortization of the mortgage loan. As
additional compensation, a master servicer or special servicer may be entitled
to 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 related Certificate
Account. A more detailed description of each master servicer's and special
servicer's compensation will be provided in the related prospectus supplement.
Any sub-servicer will receive as its sub-servicing compensation a portion of the
servicing compensation to be paid to the master servicer or special servicer
that retained such sub-servicer. In addition to amounts payable to any
sub-servicer, a master servicer or special servicer may be required, to the
extent provided in the related prospectus supplement, to pay from amounts that
represent its servicing compensation certain expenses incurred in connection
with the administration of the related trust fund, including, without
limitation, payment of the fees and disbursements of independent accountants,
payment of fees and disbursements of the trustee and any custodians appointed
thereby and payment of expenses incurred in connection with distributions and
reports to certificateholders. Certain other expenses, including certain
expenses related to mortgage loan defaults and liquidations and, to the extent
so provided in the related prospectus supplement, interest on such expenses at
the rate specified therein, may be required to be borne by the trust fund.
Evidence as to Compliance
Unless otherwise specified in the related prospectus supplement, each Pooling
Agreement will provide that on or before a specified date in each year,
beginning the first such date that is at least a specified number of months
after the Cut-off Date, there will be furnished to the related trustee a report
of a firm of independent certified public accountants stating that
o it has obtained a letter of representation regarding certain matters from
the management of the master servicer which includes an assertion that the
master servicer has complied with certain minimum mortgage loan servicing
standards (to the extent applicable to commercial and multifamily mortgage
loans), identified in the Uniform Single Attestation Program for Mortgage
Bankers established by the Mortgage Bankers Association of America, with
respect to the master servicer's servicing of commercial and multifamily
mortgage loans during the most recently completed calendar year and
o on the basis of an examination conducted by such firm in accordance with
standards established by the American Institute of Certified Public
Accountants, such representation is fairly stated in all material
respects, subject to such exceptions and other qualifications that, in the
opinion of such firm, such standards require it to report. In rendering
its report such firm may rely, as to the matters relating to the direct
servicing of commercial and multifamily mortgage loans by sub-servicers,
upon comparable reports of firms of independent public accountants
rendered on the basis of examinations conducted in accordance the same
standards (rendered within one year of such report) with respect to those
sub-servicers. The
54
prospectus supplement may provide that additional reports of independent
certified public accountants relating to the servicing of mortgage loans
may be required to be delivered to the trustee.
Each Pooling Agreement will also provide that, on or before a specified date
in each year, beginning the first such date that is at least a specified number
of months after the Cut-off Date, the master servicer and special servicer shall
each deliver to the related trustee an annual statement signed by one or more
officers of the master servicer or the special servicer, as the case may be, to
the effect that, to the best knowledge of each such officer, the master servicer
or the special servicer, as the case may be, has fulfilled in all material
respects its obligations under the Pooling Agreement throughout the preceding
year or, if there has been a material default in the fulfillment of any such
obligation, such statement shall specify each such known default and the nature
and status thereof. Such statement may be provided as a single form making the
required statements as to more than one Pooling Agreement.
Unless otherwise specified in the related prospectus supplement, copies of
the annual accountants' statement and the annual statement of officers of a
master servicer or special servicer may be obtained by certificateholders upon
written request to the trustee.
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor
Unless otherwise specified in the prospectus supplement for a series of
certificates, the related Pooling Agreement will permit the master servicer, the
special servicer and any REMIC administrator to resign from its obligations
thereunder only upon
o the appointment of, and the acceptance of such appointment by, a successor
thereto and receipt by the trustee of written confirmation from each
applicable rating agency that such resignation and appointment will not
have an adverse effect on the rating assigned by such rating agency to any
class of certificates of such series or
o a determination that such obligations are no longer permissible under
applicable law or are in material conflict by reason of applicable law
with any other activities carried on by it. No such resignation will
become effective until the trustee or other successor has assumed the
obligations and duties of the resigning master servicer, special servicer
or REMIC administrator, as the case may be, under the Pooling Agreement.
The master servicer and special servicer for each trust fund will be required
to maintain a fidelity bond and errors and omissions policy or their equivalent
that provides coverage against losses that may be sustained as a result of an
officer's or employee's misappropriation of funds or errors and omissions,
subject to certain limitations as to amount of coverage, deductible amounts,
conditions, exclusions and exceptions permitted by the related Pooling
Agreement.
Unless otherwise specified in the related prospectus supplement, each Pooling
Agreement will further provide that none of the master servicer, the special
servicer, the REMIC administrator, 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, that
none of the master servicer, the special servicer, the REMIC administrator, the
depositor or any such person will be protected against any liability that would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of obligations or duties thereunder or by reason
of reckless disregard of such obligations and duties. Unless otherwise specified
in the related prospectus supplement, each Pooling Agreement will further
provide that the master servicer, the special servicer, the REMIC administrator,
the depositor and any director, officer, employee or agent of any of them will
be entitled to indemnification by the related trust fund against any loss,
liability or expense incurred in connection with any legal action that relates
to such Pooling Agreement or the related series of certificates.
However, such indemnification will not extend to any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence
in the performance of obligations or duties under such Pooling Agreement, or by
reason of reckless disregard of such obligations or duties. In addition, each
Pooling Agreement will provide that none of the master servicer, the special
servicer, the REMIC administrator or the depositor will be
55
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, the special servicer, the REMIC administrator and
the depositor will be permitted, in the exercise of its discretion, to undertake
any such action that it may deem necessary or desirable with respect to the
enforcement and/or protection of the rights and duties of the parties to the
Pooling Agreement and the interests of the related series of certificateholders
thereunder. In such event, the legal expenses and costs of such action, and any
liability resulting therefrom, will be expenses, costs and liabilities of the
related series of certificateholders, and the master servicer, the special
servicer, the REMIC administrator or the depositor, as the case may be, will be
entitled to charge the related Certificate Account therefor.
Any person into which the master servicer, the special servicer, the REMIC
administrator or the depositor may be merged or consolidated, or any person
resulting from any merger or consolidation to which the master servicer, the
special servicer, the REMIC administrator or the depositor is a party, or any
person succeeding to the business of the master servicer, the special servicer,
the REMIC administrator or the depositor, will be the successor of the master
servicer, the special servicer, the REMIC administrator or the depositor, as the
case may be, under the related Pooling Agreement.
Unless otherwise specified in the related prospectus supplement, a REMIC
administrator will be entitled to perform any of its duties under the related
Pooling Agreement either directly or by or through agents or attorneys, and the
REMIC administrator will not be responsible for any willful misconduct or gross
negligence on the part of any such agent or attorney appointed by it with due
care.
Events of Default
Unless otherwise provided in the prospectus supplement for a series of
certificates, "Events of Default" under the related Pooling Agreement will
include, without limitation,
o any failure by the master servicer to distribute or cause to be
distributed to the certificateholders of such series, or to remit to the
trustee for distribution to such certificateholders, any amount required
to be so distributed or remitted, which failure continues unremedied for
five days after written notice thereof has been given to the master
servicer by any other party to the related Pooling Agreement, or to the
master servicer, with a copy to each other party to the related Pooling
Agreement, by certificateholders entitled to not less than 25% (or such
other percentage specified in the related prospectus supplement) of the
Voting Rights for such series;
o any failure by the special servicer to remit to the master servicer or the
trustee, as applicable, any amount required to be so remitted, which
failure continues unremedied for five days after written notice thereof
has been given to the special servicer by any other party to the related
Pooling Agreement, or to the special servicer, with a copy to each other
party to the related Pooling Agreement, by the certificateholders entitled
to not less than 25% (or such other percentage specified in the related
prospectus supplement) of the Voting Rights of such series;
o any failure by the master servicer or the special servicer duly to observe
or perform in any material respect any of its other covenants or
obligations under the related Pooling Agreement, which failure continues
unremedied for sixty days after written notice thereof has been given to
the master servicer or the special servicer, as the case may be, by any
other party to the related Pooling Agreement, or to the master servicer or
the special servicer, as the case may be, with a copy to each other party
to the related Pooling Agreement, by certificateholders entitled to not
less than 25% (or such other percentage specified in the related
prospectus supplement) of the Voting Rights for such series;
o any failure by a REMIC administrator (if other than the trustee) duly to
observe or perform in any material respect any of its covenants or
obligations under the related Pooling Agreement, which failure continues
unremedied for sixty days after written notice thereof has been given to
the REMIC administrator by any other party to the related Pooling
Agreement, or to the REMIC administrator, with a copy to each other party
to the related Pooling Agreement, by certificateholders entitled to not
less than 25% (or such other percentage specified in the related
prospectus supplement) of the Voting Rights for such series; and
56
o certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities, or similar proceedings in respect of or relating to the
master servicer, the special servicer or the REMIC administrator (if other
than the trustee), and certain actions by or on behalf of the master
servicer, the special servicer or the REMIC administrator (if other than
the trustee) 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.
Unless otherwise specified in the related prospectus supplement, when a
single entity acts as master servicer, special servicer and REMIC
administrator, or in any two of the foregoing capacities, for any trust
fund, an Event of Default in one capacity will constitute an Event of
Default in each capacity.
Rights upon Event of Default
If an Event of Default occurs with respect to the master servicer, the
special servicer or a REMIC administrator 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 defaulting party as master servicer, special
servicer or REMIC administrator, as applicable, under the Pooling Agreement,
whereupon the trustee will succeed to all of the responsibilities, duties and
liabilities of the defaulting party as master servicer, special servicer or
REMIC administrator, as applicable, under the Pooling Agreement (except that if
the defaulting party is required to make advances thereunder regarding
delinquent mortgage loans, but the trustee is prohibited by law from obligating
itself to make such advances, or if the related prospectus supplement so
specifies, the trustee will not be obligated to make such advances) and will be
entitled to similar compensation arrangements. Unless otherwise specified in the
related prospectus supplement, if the trustee is unwilling or unable so to act,
it may (or, at the written request of certificateholders of the related series
entitled to not less than 51% (or such other percentage specified in the related
prospectus supplement) of the Voting Rights for such series, it will be required
to) appoint, or petition a court of competent jurisdiction to appoint, a loan
servicing institution or other entity that (unless otherwise provided in the
related prospectus supplement) is acceptable to each applicable Rating Agency to
act as successor to the master servicer, special servicer or REMIC
administrator, as the case may be, under the Pooling Agreement. Pending such
appointment, the trustee will be obligated to act in such capacity.
If the same entity is acting as both trustee and REMIC administrator, it may
be removed in both such capacities as described under "--Resignation and Removal
of the Trustee" below.
No certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the trustee written notice of default and the
continuance thereof and unless the holders of certificates of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class have made written request upon the trustee to institute such
proceeding in its own name as trustee thereunder and have offered to the trustee
reasonable indemnity and the trustee for sixty days after receipt of such
request and indemnity has neglected or refused to institute any such proceeding.
However, the trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the Pooling Agreement 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 covered by such Pooling
Agreement, unless such certificateholders have offered to the trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
Except as otherwise specified in the related prospectus supplement, each
pooling agreement may be amended by the parties thereto, without the consent of
any of the holders of certificates covered by such pooling agreement,
o to cure any ambiguity,
o to correct or supplement any provision therein which may be inconsistent
with any other provision therein or to correct any error,
57
o to change the timing and/or nature of deposits in the Certificate Account,
provided that (A) such change would not adversely affect in any material
respect the interests of any certificateholder, as evidenced by an opinion
of counsel, and (B) such change would not adversely affect the
then-current rating of any rated classes of certificates, as evidenced by
a letter from each applicable rating agency,
o if a REMIC election has been made with respect to the related trust fund,
to modify, eliminate or add to any of its provisions (A) to such extent as
shall be necessary to maintain the qualification of the trust fund (or any
designated portion thereof) as a REMIC or to avoid or minimize the risk of
imposition of any tax on the related trust fund, provided that the trustee
has received an opinion of counsel to the effect that (1) such action is
necessary or desirable to maintain such qualification or to avoid or
minimize such risk, and (2) such action will not adversely affect in any
material respect the interests of any holder of certificates covered by
the pooling agreement, or (B) to restrict the transfer of the Residual
certificates, provided that the depositor has determined that the
then-current ratings of the classes of the certificates that have been
rated will not be adversely affected, as evidenced by a letter from each
applicable rating agency, and that any such amendment will not give rise
to any tax with respect to the transfer of the Residual certificates to a
non-permitted transferee (See "Certain Federal Income Tax
Consequences--REMICs--Tax and Restrictions on Transfers of Residual
certificates to Certain Organizations" herein),
o to make any other provisions with respect to matters or questions arising
under such pooling agreement or any other change, provided that such
action will not adversely affect in any material respect the interests of
any certificateholder, or
o to amend specified provisions that are not material to holders of any
class of certificates offered hereunder.
The pooling agreement may also be amended by the parties thereto with the
consent of the holders of certificates of each class affected thereby
evidencing, in each case, not less than 66-2/3% (or such other percentage
specified in the related prospectus supplement) of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such pooling
agreement or of modifying in any manner the rights of the holders of
certificates covered by such pooling agreement, except that no such amendment
may
o reduce in any manner the amount of, or delay the timing of, payments
received on mortgage loans which are required to be distributed on a
certificate of any class without the consent of the holder of such
certificate or
o reduce the aforesaid percentage of certificates of any class the holders
of which are required to consent to any such amendment without the consent
of the holders of all certificates of such class covered by such pooling
agreement then outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with respect
to the related trust fund, the trustee will not be required to consent to any
amendment to a pooling agreement without having first received an opinion of
counsel to the effect that such amendment or the exercise of any power granted
to the Master Servicer, the special servicer, the Depositor, the trustee or any
other specified person in accordance with such amendment will not result in the
imposition of a tax on the related trust fund or cause such trust fund (or any
designated portion thereof) to fail to qualify as a REMIC.
List of Certificateholders
Unless otherwise specified in the related prospectus supplement, upon written
request of three or more certificateholders of record made for purposes of
communicating with other holders of certificates of the same series with respect
to their rights under the related Pooling Agreement, the trustee or other
specified person will afford such certificateholders access during normal
business hours to the most recent list of certificateholders of that series held
by such person. If such list is as of a date more than 90 days prior to the date
of receipt of such certificateholders' request, then such person, if not the
registrar for such series of certificates, will be required to request from such
registrar a current list and to afford such requesting certificateholders access
thereto promptly upon receipt.
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The Trustee
The trustee under each Pooling Agreement will be named in the related
prospectus supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as trustee may have typical
banking relationships with the depositor and its affiliates and with any master
servicer, special servicer or REMIC administrator and its affiliates.
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, such certificates
or any underlying mortgage asset or related document and will not be accountable
for the use or application by or on behalf of any master servicer or special
servicer of any funds paid to the master servicer or special servicer in respect
of the certificates or the underlying mortgage assets. If no Event of Default
has occurred and is continuing, the trustee for each series of certificates will
be required to perform only those duties specifically required under the related
Pooling Agreement. However, upon receipt of any of the various certificates,
reports or other instruments required to be furnished to it pursuant to the
related Pooling Agreement, a trustee will be required to examine such documents
and to determine whether they conform to the requirements of such agreement.
Certain Matters Regarding the Trustee
As and to the extent described in the related prospectus supplement, the fees
and normal disbursements of any trustee may be the expense of the related master
servicer or other specified person or may be required to be borne by the related
trust fund.
Unless otherwise specified in the related prospectus supplement, the trustee
for each series of certificates will be entitled to indemnification, from
amounts held in the Certificate Account for such series, for any loss, liability
or expense incurred by the trustee in connection with the trustee's acceptance
or administration of its trusts under the related Pooling Agreement; provided,
however, that such indemnification will not extend to any loss liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence
on the part of the trustee in the performance of its obligations and duties
thereunder, or by reason of its reckless disregard of such obligations or
duties.
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 this duties
thereunder either directly or by or through agents or attorneys, and the trustee
will not be responsible for any willful misconduct or gross negligence on the
part of any such agent or attorney appointed by it with due care.
Resignation and Removal of the Trustee
The trustee may resign at any time, in which event the depositor will be
obligated to appoint a successor trustee. The depositor may also remove the
trustee if the trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the trustee becomes insolvent. Upon becoming aware of
such circumstances, the depositor will be obligated to appoint a successor
trustee. The trustee may also be removed at any time by the holders of
certificates of the applicable series evidencing not less than 51% (or such
other percentage specified in the related prospectus supplement) of the Voting
Rights for such series. Any resignation or removal of the trustee and
appointment of a successor trustee will not become effective until acceptance of
the appointment by the successor trustee. Notwithstanding anything herein to the
contrary, if any entity is acting as both trustee and REMIC administrator, then
any resignation or removal of such entity as the trustee will also constitute
the resignation or removal of such entity as REMIC administrator, and the
successor trustee will serve as successor to the REMIC administrator as well.
59
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
o a letter of credit,
o the subordination of one or more classes of certificates,
o the use of a surety bond,
o an insurance policy or a guarantee,
o the establishment of one or more reserve funds, or
o any combination of the foregoing.
If and to the extent so provided in the related prospectus supplement, any of
the foregoing forms of Credit Support may provide credit enhancement for more
than one series of certificates.
The Credit Support may not provide protection against all risks of loss and
will not guarantee payment to certificateholders of all amounts to which they
are entitled under the related Pooling Agreement. If losses or shortfalls occur
that exceed the amount covered by the related Credit Support or that are of a
type not covered by such Credit Support, certificateholders will bear their
allocable share of deficiencies. Moreover, if a form of Credit Support covers
the offered certificates of more than one series and losses on the related
mortgage assets exceed the amount of such Credit Support, it is possible that
the holders of offered certificates of one (or more) such series will be
disproportionately benefited by such Credit Support to the detriment of the
holders of offered certificates of one (or more) other such series.
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
o the nature and amount of coverage under such Credit Support,
o any conditions to payment thereunder not otherwise described herein,
o 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
o the material provisions relating to such Credit Support. Additionally, the
related prospectus supplement will set forth certain information with
respect to the obligor, if any, under any instrument of Credit Support.
See "Risk Factors--Credit Support Limitations."
Subordinate Certificates
If so specified in the related prospectus supplement, one or more classes of
certificates of a series may be subordinate certificates. To the extent
specified in the related prospectus supplement, the rights of the holders of
subordinate certificates to receive distributions from the Certificate Account
on any distribution date will be subordinated to the corresponding rights of the
holders of senior certificates. If so provided in the related prospectus
supplement, the subordination of a class may apply only in the event of 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. The related prospectus
supplement will describe the nature of such default risks and the extent of such
coverage.
Letter of Credit
If so provided in the prospectus supplement for a series of certificates,
deficiencies in amounts otherwise payable on such certificates or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or other financial institution specified in such prospectus supplement (the
"Letter of Credit Bank"). Under a letter of credit, the Letter of Credit Bank
will be obligated to honor draws thereunder in an aggregate fixed dollar amount,
net of unreimbursed payments thereunder, generally equal to a percentage
specified in the related prospectus supplement of the aggregate principal
balance of some or all of the related 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 Letter of Credit 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.
Certificate Insurance and Surety Bonds
If so provided in the prospectus supplement for a series of certificates,
deficiencies in amounts otherwise payable on such certificates or certain
classes thereof will be covered by insurance policies or surety bonds provided
by one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of certificates of the related series, timely
distributions of interest or distributions of principal on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. The related prospectus
supplement will describe any limitations on the draws that may be made under any
such instrument.
Reserve Funds
If so provided in the prospectus supplement for a series of certificates,
deficiencies in amounts otherwise payable on such certificates or certain
classes thereof will be covered (to the extent of available funds) by one or
more reserve funds in which cash, a letter of credit, Permitted Investments, a
demand note or a combination thereof will be deposited, in the amounts specified
in such prospectus supplement. If so specified in the related prospectus
supplement, the reserve fund for a series may also be funded over time by a
specified amount of certain collections received on the related mortgage assets.
Amounts on deposit in any reserve fund for a series 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
61
or other gain from such investments will be credited to the related reserve fund
for such series, and any loss resulting from such investments will be charged to
such reserve fund. However, such income may be payable to any related master
servicer or another service provider as additional compensation for its
services. The reserve fund, if any, for a series will not be a part of the trust
fund unless otherwise specified in the related prospectus supplement.
Credit Support with Respect to MBS
If so provided in the prospectus supplement for a series of certificates, any
MBS included in the related trust fund and/or the related underlying mortgage
loans may be covered by one or more of the types of Credit Support described
herein. The related prospectus supplement will specify, as to each such form of
Credit Support, the information indicated above with respect thereto, to the
extent such information is material and available.
Interest Rate Exchange, Cap and Floor Agreements
If so specified in the prospectus supplement for a series of certificates,
the related trust fund may include interest rate exchange agreements or interest
rate cap or floor agreements. These types of agreements may be used to limit the
exposure of the trust fund or investors in the certificates to fluctuations in
interest rates and to situations where interest rates become higher or lower
than specified thresholds. Generally, an interest rate exchange agreement is a
contract between two parties to pay and receive, with a set frequency, interest
payments determined by applying the differential between two interest rates to
an agreed-upon notional principal. Generally, an interest rate cap agreement is
a contract pursuant to which one party agrees to reimburse another party for a
floating rate interest payment obligation, to the extent that the rate payable
at any time exceeds a specified cap. Generally, an interest rate floor agreement
is a contract pursuant to which one party agrees to reimburse another party in
the event that amounts owing to the latter party under a floating rate interest
payment obligation are payable at a rate which is less than a specified floor.
The specific provisions of these types of agreements will be described in the
related prospectus supplement.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal aspects
of mortgage loans secured by commercial and multifamily residential properties.
Because such legal aspects are governed by applicable local law (which laws may
differ substantially), the summaries do not purport to be complete, to reflect
the laws of any particular jurisdiction, or to encompass the laws of all
jurisdictions 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 jurisdictions. See
"Description of the Trust Funds--Mortgage Loans." If a significant percentage of
mortgage loans (or mortgage loans underlying MBS), by balance, are secured by
properties in a particular jurisdiction, relevant local laws, to the extent they
vary materially from this discussion, will be discussed in the prospectus
supplement.
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.
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Types of Mortgage Instruments
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In 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, pursuant to which the borrower, or grantor, conveys title to the
real property to the grantee, or lender, generally with a power of sale, until
such time as the debt is repaid. In a case where the borrower is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the borrower.
At origination of a mortgage loan involving a land trust, the borrower may
execute a separate undertaking to make payments on the mortgage note. In no
event is the land trustee personally liable for the mortgage note obligation.
The mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed by
the express provisions of the related instrument, the law of the state in which
the real property is located, certain federal laws and, in some deed of trust
transactions, the directions of the beneficiary.
Leases and Rents
Mortgages that encumber income-producing property often contain an assignment
of rents and leases and/or may be accompanied by a separate assignment of rents
and leases, pursuant to which the borrower assigns to the lender the borrower's
right, title and interest as landlord under each lease and the income derived
therefrom, while (unless rents are to be paid directly to the lender) retaining
a revocable license to collect the rents for so long as there is no default. If
the borrower defaults, the license terminates and the lender is entitled to
collect the rents. Local law may require that the lender take possession of the
property and/or obtain a court-appointed receiver before becoming entitled to
collect the rents.
In most states, hotel and motel room rates are considered accounts receivable
under the Uniform Commercial Code ("UCC"); in cases where hotels or motels
constitute loan security, the rates are generally pledged by the borrower as
additional security for the loan. In general, the lender must file financing
statements in order to perfect its security interest in the room rates and must
file continuation statements, generally every five years, to maintain perfection
of such security interest. In certain cases, mortgage loans secured by hotels or
motels may be included in a trust fund even if the security interest in the room
rates was not perfected or the requisite UCC filings were allowed to lapse. Even
if the lender's security interest in room rates is perfected under applicable
nonbankruptcy law, it will generally be required to commence a foreclosure
action or otherwise take possession of the property in order to enforce its
rights to collect the room rates following a default. In the bankruptcy setting,
however, the lender will be stayed from enforcing its rights to collect room
rates, but those room rates constitute "cash collateral" and therefore cannot be
used by the bankruptcy debtor without a hearing or lender's consent or unless
the lender's interest in the room rates is given adequate protection (e.g., cash
payment for otherwise encumbered funds or a replacement lien on unencumbered
property, in either case equal in value to the amount of room rates that the
debtor proposes to use, or other similar relief). See "--Bankruptcy Laws."
Personalty
In the case of certain types of mortgaged properties, such as hotels, motels
and nursing homes, personal property (to the extent owned by the borrower and
not previously pledged) may constitute a significant portion of the property's
value as security. The creation and enforcement of liens on personal property
are governed by the UCC. Accordingly, if a borrower pledges personal property as
security for a mortgage loan, the lender generally must file UCC financing
statements in order to perfect its security interest therein, and must file
continuation statements, generally every five years, to maintain that
perfection. In certain cases, mortgage loans secured in part by personal
property may be included in a trust fund even if the security interest in such
personal property was not perfected or the requisite UCC filings were allowed to
lapse.
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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 nonjudicial 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.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action is
initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the lender's
right to foreclose is contested, the legal proceedings can be time-consuming.
Upon successful completion of a judicial foreclosure proceeding, the court
generally issues a judgment of foreclosure and appoints a referee or other
officer to conduct a public sale of the mortgaged property, the proceeds of
which are used to satisfy the judgment. Such sales are made in accordance with
procedures that vary from state to state.
Equitable and Other Limitations on Enforceability of Certain Provisions.
United States courts have traditionally imposed general equitable principles to
limit the remedies available to lenders in foreclosure actions. These principles
are generally designed to relieve borrowers from the effects of mortgage
defaults perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative actions to determine the cause of the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose in the case of a nonmonetary 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.
In addition, some states may have statutory protection such as the right of
the borrower to reinstate mortgage loans after commencement of foreclosure
proceedings but prior to a foreclosure sale.
Nonjudicial Foreclosure/Power of Sale. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial 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 nonjudicial 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
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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 exact status of
title to the property (due to, among other things, redemption rights that may
exist) and because of the possibility that physical deterioration of the
property may have occurred during the foreclosure proceedings. Therefore, it is
common for the lender to purchase the mortgaged property for an amount equal to
the secured indebtedness and accrued and unpaid interest plus the expenses of
foreclosure, in which event the borrower's debt will be extinguished, or for a
lesser amount in order to preserve its right to seek a deficiency judgment if
such is available under state law and under the terms of the mortgage loan
documents. (The mortgage loans, however, may be nonrecourse. See "Risk
Factors--Commercial and Multifamily Mortgage Loans Are Subject to Certain Risks
Which Could Adversely Affect the Performance of Your Offered Certificates--The
Mortgage Loans May Be Nonrecourse Loans or Loans With Limited Recourse.")
Thereafter, subject to the borrower's right in some states to remain in
possession during a redemption period, the lender will become the owner of the
property and have both the benefits and burdens of ownership, including the
obligation to pay debt service on any senior mortgages, to pay taxes, to obtain
casualty insurance and to make such repairs as are necessary to render the
property suitable for sale. The costs of operating and maintaining a commercial
or multifamily residential property may be significant and may be greater than
the income derived from that property. The lender also will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale or lease of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Moreover, because of the expenses associated with
acquiring, owning and selling a mortgaged property, a lender could realize an
overall loss on a mortgage loan even if the mortgaged property is sold at
foreclosure, or resold after it is acquired through foreclosure, for an amount
equal to the full outstanding principal amount of the loan plus accrued
interest.
The holder of a junior mortgage that forecloses on a mortgaged property does
so subject to senior mortgages and any other prior liens, and may be obliged to
keep senior mortgage loans current in order to avoid foreclosure of its interest
in the property. In addition, if the foreclosure of a junior mortgage triggers
the enforcement of a "due-on-sale" clause contained in a senior mortgage, the
junior mortgagee could be required to pay the full amount of the senior mortgage
indebtedness or face foreclosure.
Rights of Redemption. The purposes of a foreclosure action are to enable the
lender to realize upon its security and to bar the borrower, and all persons who
have interests in the property that are subordinate to that of the foreclosing
lender, from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property encumbered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having interests that are subordinate to that of the foreclosing lender
have an equity of redemption and may redeem the property by paying the entire
debt with interest. Those having an equity of redemption must generally be made
parties and joined in the foreclosure proceeding in order for their equity of
redemption to be terminated.
The equity of redemption is a common-law (nonstatutory) 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
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a lender cannot obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment is a personal
judgment against the former borrower equal to the difference between the net
amount realized upon the public sale of the real property and the amount due to
the lender. Other statutes may require the lender to exhaust the security
afforded under a mortgage before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of those states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the security. Consequently, lenders in those
states where such an election of remedy provision exists will usually proceed
first against the security. Finally, other statutory provisions, designed to
protect borrowers from exposure to large deficiency judgments that might result
from bidding at below-market values at the foreclosure sale, limit any
deficiency judgment to the excess of the outstanding debt over the fair market
value of the property at the time of the sale.
Leasehold Considerations. Mortgage Loans may be secured by a mortgage on the
borrower's leasehold interest in a ground lease. Leasehold mortgage loans are
subject to certain risks not associated with mortgage loans secured by a lien on
the fee estate of the borrower. The most significant of these risks is that if
the borrower's leasehold were to be terminated upon a lease default, the
leasehold mortgagee would lose its security. This risk may be lessened if the
ground lease requires the lessor to give the leasehold mortgagee notices of
lessee defaults and an opportunity to cure them, permits the leasehold estate to
be assigned to and by the leasehold mortgagee or the purchaser at a foreclosure
sale, and contains certain other protective provisions typically included in a
"mortgageable" ground lease. Certain mortgage loans, however, may be secured by
ground leases which do not contain these provisions.
In addition, where a lender has as its security both the fee and leasehold
interest in the same property, the grant of a mortgage lien on its fee interest
by the land owner/ground lessor to secure the debt of a borrower/ground lessee
may be subject to challenge as a fraudulent conveyance. Among other things, a
legal challenge to the granting of the liens may focus on the benefits realized
by the land owner/ground lessor from the loan. If a court concluded that the
granting of the mortgage lien was an avoidable fraudulent conveyance, it might
take actions detrimental to the holders of the offered certificates, including,
under certain circumstances, invalidating the mortgage lien on the fee interest
of the land owner/ground lessor.
Cooperative Shares. Mortgage loans may be secured by a security interest on
the borrower's ownership interest in shares, and the proprietary leases
appurtenant thereto, allocable to cooperative dwelling units that may be vacant
or occupied by nonowner tenants. Such loans are subject to certain risks not
associated with mortgage loans secured by a lien on the fee estate of a borrower
in real property. Such a loan typically is subordinate to the mortgage, if any,
on the cooperative's building which, if foreclosed, could extinguish the equity
in the building and the proprietary leases of the dwelling units derived from
ownership of the shares of the cooperative. Further, transfer of shares in a
cooperative are subject to various regulations as well as to restrictions under
the governing documents of the cooperative, and the shares may be cancelled in
the event that associated maintenance charges due under the related proprietary
leases are not paid. Typically, a recognition agreement between the lender and
the cooperative provides, among other things, the lender with an opportunity to
cure a default under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on cooperative shares
is accomplished by a sale in accordance with the provisions of Article 9 of the
UCC and the security agreement relating to the shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable" manner, which
may be dependent upon, among other things, the notice given the debtor and the
method, manner, time, place and terms of the sale. Article 9 of the UCC provides
that the proceeds of the sale will be applied first to pay the costs and
expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. A recognition agreement, however, generally provides
that the lender's right to reimbursement is subject to the right of the
cooperative to receive sums due under the proprietary leases.
Bankruptcy Laws
Operation of the federal bankruptcy code, as amended from time to time (11
U.S.C.) (the "Bankruptcy Code") and related state laws may interfere with or
affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions
66
and deficiency judgment proceedings) are automatically stayed upon the filing of
the bankruptcy petition and, usually, no interest or principal payments are made
during the course of the bankruptcy case. The delay and the consequences thereof
caused by such automatic stay can be significant. Also, under the Bankruptcy
Code, the filing of a petition in bankruptcy by or on behalf of a junior lienor
may stay the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. In many jurisdictions, the outstanding amount of the loan may be
reduced to the then-current value of the property (with a corresponding partial
reduction of the amount of lender's security interest) pursuant to a confirmed
plan 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. Some courts with federal bankruptcy jurisdiction have approved
plans, based on the particular facts of the reorganization case, that effected
the cure of a mortgage loan default by paying arrearages over a number of years.
Also, under the Bankruptcy Code, a bankruptcy court may permit a debtor, through
its rehabilitative plan, to de-accelerate a secured loan and to reinstate the
loan even if the lender accelerated the mortgage loan and final judgment of
foreclosure has been entered in state court (provided no sale of the property
had yet occurred) prior to the filing of the debtor's petition. This may be done
even if the full amount due under the original loan is never repaid.
The Bankruptcy Code has been amended to provide that a lender's perfected
pre-petition security interest in leases, rents and hotel revenues continues in
the post-petition leases, rents and hotel revenues, unless a bankruptcy court
orders to the contrary "based on the equities of the case." Thus, unless a court
orders otherwise, revenues from a mortgaged property generated after the date
the bankruptcy petition is filed will constitute "cash collateral" under the
Bankruptcy Code. Debtors may only use cash collateral upon obtaining the
lender's consent or a prior court order finding that the lender's interest in
the mortgaged property and the cash collateral is "adequately protected" as the
term is defined and interpreted under the Bankruptcy Code. It should be noted,
however, that the court may find that the lender has no security interest in
either pre-petition or post-petition revenues if the court finds that the loan
documents do not contain language covering accounts, room rents, or other forms
of personality necessary for a security interest to attach to hotel revenues.
The Bankruptcy Code provides generally that rights and obligation under an
unexpired lease of the debtor/lessee may not be terminated or modified at any
time after the commencement of a case under the Bankruptcy Code solely because
of a provision in the lease to that effect or because of certain other similar
events. This prohibition on so-called "ipso facto clauses" could limit the
ability of the trustee to exercise certain contractual remedies with respect to
the leases on any mortgaged property. In addition, Section 362 of the Bankruptcy
Code operates as an automatic stay of, among other things, any act to obtain
possession of property from a debtor's estate, which may delay a trustee's
exercise of those remedies in the event that a lessee becomes the subject of a
proceeding under the Bankruptcy Code.
For example, a mortgagee would be stayed from enforcing an assignment of the
lease by a borrower related to a mortgaged property if the related borrower was
in a bankruptcy proceeding. The legal proceedings necessary to resolve the
issues could be time-consuming and might result in significant delays in the
receipt of the assigned rents. Similarly, the filing of a petition in bankruptcy
by or on behalf of a lessee of a mortgaged property would result in a stay
against the commencement or continuation of any state court proceeding for past
due rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the related lease that occurred prior to the filing
of the lessee's petition. Rents and other proceeds of a mortgage loan may also
escape an assignment if the assignment is not fully perfected under state law
prior to commencement of the bankruptcy proceeding.
In addition, the Bankruptcy Code generally provides that a trustee or
debtor-in-possession may, subject to approval of the court, (a) assume the lease
and retain it or assign it to a third party or (b) reject the lease. If the
lease is assumed, the trustee in bankruptcy on behalf of the lessee, or the
lessee as debtor-in-possession, or the assignee, if applicable, must cure any
defaults under the lease, compensate the lessor for its losses and provide the
lessor with "adequate assurance" of future performance. These remedies may be
insufficient, however, as the lessor may be forced to continue under the lease
with a lessee that is a poor credit risk or an unfamiliar tenant if the lease
was
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assigned, and any assurances provided to the lessor may, in fact, be inadequate.
If the lease is rejected, the rejection generally constitutes a breach of the
executory contract or unexpired lease immediately before the date of filing the
petition. As a consequence, the other party or parties to the lease, such as the
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. In addition, pursuant to Section
502(b)(6) of the Bankruptcy Code, a lessor's damages for lease rejection in
respect of future rent installments are limited to the rent reserved by the
lease, without acceleration, for the greater of one year or 15 percent, not to
exceed three years, of the remaining term of the lease.
If a trustee in bankruptcy on behalf of a lessor, or a lessor as
debtor-in-possession, rejects an unexpired lease of real property, the lessee
may treat the lease as terminated by the rejection or, in the alternative, the
lessee may remain in possession of the leasehold for the balance of the term and
for any renewal or extension of the 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 the balance of the term after
the date of rejection of the lease, and the related renewal or extension of the
lease, any damages occurring after that date caused by the nonperformance of any
obligation of the lessor under the lease after that date.
On the bankruptcy of a lessor or a lessee under a ground lease, the debtor
entity has the right to assume (continue) or reject (terminate) the ground
lease. Pursuant to Section 365(h) of the Bankruptcy Code, as it is presently in
effect, a ground lessee whose ground lease is rejected by a debtor 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. In the event a ground lessee/borrower
in bankruptcy rejects any/or all of its ground leases, the leasehold mortgagee
would have the right to succeed to the ground lessee/borrower's position under
the lease only if the ground lessor had specifically granted the mortgagee such
right. In the event of concurrent bankruptcy proceedings involving the ground
lessor and the ground lessee/borrower, the trustee may be unable to enforce the
ground lessee/borrower's obligation to refuse to treat a ground lease rejected
by a bankrupt ground lessor as terminated. In such circumstances, a ground lease
could be terminated notwithstanding lender protection provisions contained
herein or in the mortgage. A lender could lose its security unless the borrower
holds a fee mortgage or the bankruptcy court, as a court of equity, allows the
lender to assume the ground lessee's obligations under the ground lease and
succeed to the position of a leasehold mortgagor. Although consistent with the
Bankruptcy Code, such position may not be adopted by a bankruptcy court.
In a bankruptcy or similar proceeding of a borrower, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the borrower, or made directly by the related lessee, under the
related mortgage loan to the trust fund. Payments on long-term debt may be
protected from recovery as preferences if they are payments in the ordinary
course of business made on debts incurred in the ordinary course of business.
Whether any particular payment would be protected depends upon the facts
specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of payment to
the lender. In certain circumstances, a debtor in bankruptcy may have the power
to grant liens senior to the lien of a mortgage, and analogous state statutes
and general principles of equity may also provide a borrower with means to halt
a foreclosure proceeding or sale and to force a restructuring of a mortgage loan
on terms a lender would not otherwise accept. Moreover, the laws of certain
states also give priority to certain tax liens over the lien of a mortgage or
deed of trust. Under the Bankruptcy Code, if the court finds that actions of the
mortgagee have been unreasonable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
Certain of the borrowers may be partnerships. The laws governing limited
partnerships in certain states provide that the commencement of a case under the
Bankruptcy Code with respect to a general partner will cause a person to cease
to be a general partner of the limited partnership, unless otherwise provided in
writing in the limited partnership agreement. This provision may be construed as
an "ipso facto" clause and, in the event of the general partner's bankruptcy,
may not be enforceable. Certain limited partnership agreements of the borrowers
may provide that the commencement of a case under the Bankruptcy Code with
respect to the related general partner constitutes an event of withdrawal
(assuming the enforceability of the clause is not challenged in bankruptcy
proceedings or, if
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challenged, is upheld) that might trigger the dissolution of the limited
partnership, the winding up of its affairs and the distribution of its assets,
unless (i) at the time there was at least one other general partner and the
written provisions of the limited partnership permit the business of the limited
partnership to be carried on by the remaining general partner and that general
partner does so or (ii) the written provisions of the limited partnership
agreement permit the limited partners to agree within a specified time frame
(often 60 days) after the withdrawal to continue the business of the limited
partnership and to the appointment of one or more general partners and the
limited partners do so. In addition, the laws governing general partnerships in
certain states provide that the commencement of a case under the Bankruptcy Code
or state bankruptcy laws with respect to a general partner of the partnerships
triggers the dissolution of the partnership, the winding up of its affairs and
the distribution of its assets. Those state laws, however, may not be
enforceable or effective in a bankruptcy case. The dissolution of a borrower,
the winding up of its affairs and the distribution of its assets could result in
an acceleration of its payment obligation under the borrower's mortgage loan,
which may reduce the yield on the notes in the same manner as a principal
prepayment.
In addition, the bankruptcy of the general or limited partner of a borrower
that is a partnership, or the bankruptcy of a member of a borrower that is a
limited liability company or the bankruptcy of a shareholder of a borrower that
is a corporation may provide the opportunity in the bankruptcy case of the
partner, member or shareholder to obtain an order from a court consolidating the
assets and liabilities of the partner, member or shareholder with those of the
mortgagor pursuant to the doctrines of substantive consolidation or piercing the
corporate veil. In such a case, the respective mortgaged property, for example,
would become property of the estate of the bankrupt partner, member or
shareholder. Not only would the mortgaged property be available to satisfy the
claims of creditors of the partner, member or shareholder, but an automatic stay
would apply to any attempt by the trustee to exercise remedies with respect to
the mortgaged property. However, such an occurrence should not affect the
trustee's status as a secured creditor with respect to the mortgagor or its
security interest in the mortgaged property.
Environmental Considerations
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties that
are or have been used for industrial, manufacturing, military or disposal
activity. Such environmental risks include the possible diminution of the value
of a contaminated property or, as discussed below, potential liability for
clean-up costs or other remedial actions that could exceed the value of the
property or the amount of the lender's loan. In certain circumstances, a lender
may decide to abandon a contaminated mortgaged property as collateral for its
loan rather than foreclose and risk liability for clean-up costs.
Superlien Laws. Under the laws of many states, contamination on a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to such
a "superlien."
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
participated in the management or operation of such mortgaged property. Such
liability may exist even if the lender did not cause or contribute to the
contamination and regardless of whether the lender has actually taken possession
of a mortgaged property through foreclosure, deed in lieu of foreclosure or
otherwise. Moreover, such liability is not limited to the original or
unamortized principal balance of a loan or to the value of the property securing
a loan. Excluded from CERCLA's definition of "owner" or "operator, " however, is
a person "who, without participating in the management of the facility, holds
indicia of ownership primarily to protect his security interest." This is the so
called "secured creditor exemption."
The Asset Conservation, Lender Liability and Deposit Insurance Protection Act
of 1996 (the "Act") amended, among other things, the provisions of CERCLA with
respect to lender liability and the secured creditor exemption. The Act offers
protection to lenders by defining the activities in which a lender can engage
and still have the benefit of the secured creditor exemption. 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 lose the protection of the secured
creditor exemption if it
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exercises decision-making control over the borrower's environmental compliance
and hazardous substance handling or disposal practices, or assumes day-to-day
management of environmental or substantially all other 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.
Certain Other Federal and State Laws. Many states have statutes similar to
CERCLA, and not all those statutes provide for a secured creditor exemption. In
addition, under federal law, there is potential liability relating to hazardous
wastes and underground storage tanks under the federal Resource Conservation and
Recovery Act.
Some federal, state and local laws, regulations and ordinances govern the
management, removal, encapsulation or disturbance of asbestos-containing
materials. These laws, as well as common law standards, may impose liability for
releases of or exposure to asbestos-containing materials, and provide for third
parties to seek recovery from owners or operators of real properties for
personal injuries associated with those releases.
Federal legislation requires owners of residential housing constructed prior
to 1978 to disclose to potential residents or purchasers any known lead-based
paint hazards and will impose treble damages for any failure to disclose. In
addition, the ingestion of lead-based paint chips or dust particles by children
can result in lead poisoning. If lead-based paint hazards exist at a property,
then the owner of that property may be held liable for injuries and for the
costs of removal or encapsulation of the lead-based paint.
In a few states, transfers of some types of properties are conditioned upon
cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting in
death, personal injury or damage to property) related to hazardous environmental
conditions on a property. While it may be more difficult to hold a lender liable
under common law causes of action, unanticipated or uninsured liabilities of the
borrower may jeopardize the borrower's ability to meet its loan obligations or
may decrease the re-sale value of the collateral.
Federal, state and local environmental laws and regulatory requirements
change often. It is possible that compliance with a new requirement could impose
significant compliance costs on a borrower. Such costs may jeopardize the
borrower's ability to meet its loan obligations or decrease the re-sale value of
the collateral.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard, but that individual or entity may be without
substantial assets. Accordingly, it is possible that such costs could become a
liability of the trust fund and occasion a loss to the certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in the
related prospectus supplement, the Pooling Agreement will provide that neither
the master servicer nor the special servicer, acting on behalf of the trustee,
may acquire title to a mortgaged property or take over its operation unless the
special servicer, based solely (as to environmental matters) on a report
prepared by a person who regularly conducts environmental audits, has made the
determination that it is appropriate to do so, as described under "Description
of the Pooling Agreements--Realization Upon Defaulted Mortgage Loans."
If a lender forecloses on a mortgage secured by a property, the operations on
which are subject to environmental laws and regulations, the lender will be
required to operate the property in accordance with those laws and regulations.
Such compliance may entail substantial expense, especially in the case of
industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental conditions
on a property to government entities and/or to prospective buyers (including
prospective buyers at a foreclosure sale or following foreclosure). Such
70
disclosure may decrease the amount that prospective buyers are willing to pay
for the affected property, sometimes substantially, and thereby decrease the
ability of the lender to recoup its investment in a loan upon foreclosure.
Environmental Site Assessments. In most cases, an environmental site
assessment of each mortgaged property will have been performed in connection
with the origination of the related mortgage loan or at some time prior to the
issuance of the related certificates. Environmental site assessments, however,
vary considerably in their content, quality and cost. Even when adhering to good
professional practices, environmental consultants will sometimes not detect
significant environmental problems because to do an exhaustive environmental
assessment would be far too costly and time-consuming to be practical.
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. However, the Garn-St Germain Depository Institutions Act of 1982
(the "Garn Act") generally preempts state laws that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limitations as set forth in the Garn Act
and the regulations promulgated thereunder. Accordingly, a master servicer may
nevertheless have the right to accelerate the maturity of a mortgage loan that
contains a "due-on-sale" provision upon transfer of an interest in the property,
without regard to the master servicer's ability to demonstrate that a sale
threatens its legitimate security interest.
Junior Liens; Rights of Holders of Senior Liens
If so provided in the related prospectus supplement, mortgage assets for a
series of certificates may include mortgage loans secured by junior liens, and
the loans secured by the related senior liens may not be included in the
mortgage pool. See "Description of the Trust Funds--Mortgage Loans--General."
Subordinate Financing
The terms of 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, or such restrictions may be unenforceable. Where a borrower
encumbers a mortgaged property with one or more junior liens, the senior lender
is subjected to additional risk. First, the borrower may have difficulty
servicing and repaying multiple loans. Moreover, if the subordinate financing
permits recourse to the borrower (as is frequently the case) and the senior loan
does not, a borrower may have more incentive to repay sums due on the
subordinate loan. Second, acts of the senior lender that prejudice the junior
lender or impair the junior lender's security may create a superior equity in
favor of the junior lender. For example, if the borrower and the senior lender
agree to an increase in the principal amount of or the interest rate payable on
the senior loan, the senior lender may lose its priority to the extent any
existing junior lender is harmed or the borrower is additionally burdened.
Third, if the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that obligate the borrower to pay
a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
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Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal law.
In addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
No mortgage loan originated in any state in which application of Title V has
been expressly rejected or a provision limiting discount points or other charges
has been adopted, will (if originated after that rejection or adoption) be
eligible for inclusion in a trust fund unless (i) such mortgage loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such mortgage loan provides that the terms thereof are to be
construed in accordance with the laws of another state under which such interest
rate, discount points and charges would not be usurious and the borrower's
counsel has rendered an opinion that such choice of law provision would be given
effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the borrower may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the borrower to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
Certain Laws and Regulations
The mortgaged properties will be subject to compliance with various federal,
state and local statutes and regulations. Failure to comply (together with an
inability to remedy any such failure) could result in material diminution in the
value of a mortgaged property which could, together with the possibility of
limited alternative uses for a particular mortgaged property (i.e., a nursing or
convalescent home or hospital), result in a failure to realize the full
principal amount of the related mortgage loan.
The lender may be subject to additional risk depending upon the type and use
of the mortgaged property in question. See "Risk Factors--Commercial and
Multifamily Mortgage Loans are Subject to Certain Risks Which Could Adversely
Affect the Performance of Your Offered Certificates."
Americans with Disabilities Act
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers 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, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. 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.
Servicemembers Civil Relief Act
Under the terms of the Servicemembers Civil Relief Act (formerly, 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
72
who was in reserve status and is called to active duty after origination of the
mortgage loan), upon notification by such borrower, will not be charged
interest, including fees and charges, in excess of 6% per annum, during the
period of such borrower's active duty status. In addition to adjusting the
interest, the lender must forgive any such interest in excess of 6%, unless a
court or administrative agency 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 or the National Oceanic and Atmospheric Administration
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 a master servicer or
special servicer to collect full amounts of interest on certain of the mortgage
loans. Any shortfalls in interest collections resulting from the application of
the Relief Act would result in a reduction of the amounts distributable to the
holders of the related series of certificates, and would not be covered by
advances or, unless otherwise specified in the related prospectus supplement,
any form of Credit Support provided in connection with such certificates. In
addition, the Relief Act imposes limitations that would impair the ability of
the master servicer or special 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.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property purchased or improved with assets derived
from criminal activity or otherwise tainted, or used in the commission of
certain offenses, can be seized and ordered forfeited to the United States of
America. The offenses which can trigger such a seizure and forfeiture include,
among others, violations of the Racketeer Influenced and Corrupt Organizations
Act, the Bank Secrecy Act, the anti-money laundering laws and regulations,
including the USA Patriot Act of 2001 and the regulations issued pursuant to
that Act, as well as the narcotic drug laws. In many instances, the United
States may seize the property even before a conviction occurs.
In the event of a forfeiture proceeding, a lender may be able to establish
its interest in the property by proving that (1) its mortgage was executed and
recorded before the commission of the illegal conduct from which the assets used
to purchase or improve the property were derived or before the commission of any
other crime upon which the forfeiture is based, or (2) the lender, at the time
of the execution of the mortgage, "did not know or was reasonably without cause
to believe that the property was subject to forfeiture." However, there is no
assurance that such a defense will be successful.
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:
o references to the mortgage loans include references to the mortgage loans
underlying any MBS included in the mortgage assets; and
o 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 portion, if any, of the payments on the mortgage loan that is
retained by the related mortgage asset seller. References to a "holder" or
"certificateholder" in this discussion generally mean the beneficial owner
of a certificate.
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FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
General
With respect to a particular series of certificates, one or more elections
may be made to treat the trust fund or one or more segregated pools of assets
therein as one or more real estate mortgage investment conduits (each, a
"REMIC") 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, Cadwalader, Wickersham & Taft
LLP or Latham & Watkins LLP, counsel to the depositor, has advised the depositor
that in the firm's opinion, assuming:
o the making of proper elections;
o compliance with the Pooling Agreement and other related documents and no
amendments thereof;
o the accuracy of all representations made with respect to the mortgage
loans; and
o 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 with respect to the related trust fund will be made,
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 a grantor trust for federal income tax purposes. See
"--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 be
treated as an asset described in 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)(5)(B), and interest on the Regular Certificates and income with respect
to Residual Certificates will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) in the same proportion that, for both purposes, the
assets of the REMIC Pool would be so treated. If at all times 95% or more of the
assets of the REMIC Pool qualify for each of the foregoing respective
treatments, the REMIC Certificates will qualify for the corresponding status in
their entirety. For purposes of Code Section 856(c)(5)(B), 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%. Mortgage loans that have been defeased with U.S. Treasury obligations or
other government securities will not qualify for the foregoing treatments.
Except as provided in the related prospectus supplement, Regular Certificates
will be "qualified mortgages" for another REMIC for purposes of Code Section
860G(a)(3) and "permitted assets" for a financial asset securitization
investment trust for purposes of Section 860L(c). REMIC Certificates held by a
regulated investment company will not constitute "Government Securities" within
the meaning of Code Section 851(b)(3)(A)(i). REMIC Certificates held by certain
financial institutions will constitute "evidences of indebtedness" within the
meaning of Code Section 582(c)(1).
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Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Certificates) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement is met if at all times the aggregate adjusted
basis of the nonqualified assets is less than 1% of the aggregate adjusted basis
of all the REMIC Pool's assets. An entity that fails to meet the safe harbor may
nevertheless demonstrate that it holds no more than a de minimis amount of
nonqualified assets. A REMIC also must provide "reasonable arrangements" to
prevent its residual interest from being held by "disqualified organizations"
and must furnish applicable tax information to transferors or agents that
violate this requirement. The Pooling Agreement for each Series will contain a
provision designed to meet this requirement. See "Taxation of Residual
Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates--Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the mortgage loans,
certificates of beneficial interest in a grantor trust that holds mortgage
loans, including certain of the MBS, regular interests in another REMIC, such as
MBS in a trust as to which a REMIC election has been made, loans secured by
timeshare interests and loans secured by shares held by a tenant stockholder in
a cooperative housing corporation, provided, in general:
o the fair market value of the real property security (including buildings
and structural components thereof) is at least 80% of the principal
balance of the related mortgage loan or mortgage loan underlying the MBS
either at origination or as of the Startup Day (an original loan-to-value
ratio of not more than 125% with respect to the real property security);
or
o substantially all the proceeds of the mortgage loan or the underlying
mortgage loan were used to acquire, improve or protect an interest in real
property that, at the origination date, was the only security for the
mortgage loan or underlying mortgage loan.
If the mortgage loan has been substantially modified other than in connection
with a default or reasonably foreseeable default, it must meet the loan-to-value
test in the first bullet point of the preceding sentence as of the date of the
last 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:
o in exchange for any qualified mortgage within a three-month period
thereafter; or
o in exchange for a "defective obligation" within a two-year period
thereafter.
A "defective obligation" includes:
o a mortgage in default or as to which default is reasonably foreseeable;
o a mortgage as to which a customary representation or warranty made at the
time of transfer to the REMIC Pool has been breached;
o a mortgage that was fraudulently procured by the mortgagor; and
o a mortgage that was not in fact principally secured by real property (but
only if such mortgage is disposed of within 90 days of discovery).
75
A mortgage loan that is "defective" as described in the fourth bullet point
above that is not sold or, if within two years of the Startup Day, exchanged,
within 90 days of discovery, ceases to be a qualified mortgage after such 90-day
period.
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 the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in such fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the mortgage loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally not held beyond the close of the third calendar year following the
acquisition of the property by the REMIC Pool, with an extension that may be
granted by the Internal Revenue Service (the "Service").
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:
o one or more classes of regular interests; or
o a single class of residual interests on which distributions, if any, are
made pro rata.
A regular interest is an interest in a REMIC Pool that is issued on the
Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Such a specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a fixed or qualified variable or inverse variable rate on some or
all of the qualified mortgages minus a different fixed or qualified variable
rate. The specified principal amount of a regular interest that provides for
interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an interest
in a REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool may
be treated as a regular interest even if payments of principal with respect to
such interest are subordinated to payments on other regular interests or the
residual interest in the REMIC Pool, and are dependent on the absence of
defaults or delinquencies on qualified mortgages or permitted investments, lower
than reasonably expected returns on permitted investments, unanticipated
expenses incurred by the REMIC Pool or prepayment interest shortfalls.
Accordingly, the Regular Certificates of a series will constitute one or more
classes of regular interests, and the Residual Certificates with respect to that
series will constitute a single class of residual interests on which
distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of the
ongoing requirements of the Code for REMIC status during any taxable year, the
Code provides that the entity will not be treated as a REMIC for such year and
thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury regulations, and the Regular Certificates may be treated as
equity interests therein. The Code, however, authorizes the Treasury Department
to issue regulations that address situations where failure to meet one or more
of the requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
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Taxation of Regular Certificates
General
In general, interest, original issue discount and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder") as they accrue, and
principal payments on a Regular Certificate will be treated as a return of
capital to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto. Regular Certificateholders must use the accrual
method of accounting with regard to Regular Certificates, regardless of the
method of accounting otherwise used by such Regular Certificateholders.
Original Issue Discount
Accrual Certificates and principal-only certificates will be, and other
Classes of Regular Certificates may be, issued with "original issue discount"
within the meaning of Code Section 1273(a). Holders of any class of Regular
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 Treasury regulations (the
"OID Regulations") under Code Sections 1271 through 1273 and 1275 and in part on
the provisions of the 1986 Act. Regular Certificateholders should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the Regular Certificates. To the
extent such issues are not addressed in such regulations, the depositor intends
to apply the methodology described in the Conference Committee Report to the
1986 Act. No assurance can be provided that the Service will not take a
different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Service to apply or depart from the OID Regulations where necessary or
appropriate to ensure a reasonable tax result in light of the applicable
statutory provisions. A tax result will not be considered unreasonable under the
anti-abuse rule in the absence of a substantial effect on the present value of a
taxpayer's tax liability. Investors are advised to consult their own tax
advisors as to the discussion herein and the appropriate method for reporting
interest and original issue discount with respect to the Regular Certificates.
Each Regular Certificate will be treated as a single installment obligation
for purposes of determining the original issue discount includible in a Regular
Certificateholder's income. The total amount of original issue discount on a
Regular Certificate is the excess of the "stated redemption price at maturity"
of the Regular Certificate over its "issue price." The issue price of a class of
Regular Certificates offered pursuant to this Prospectus generally is the first
price at which a substantial amount of Regular Certificates of that class is
sold to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, the depositor intends to treat the issue
price of a class as to which there is no substantial sale as of the issue date
or that is retained by the depositor as the fair market value of that class as
of the issue date. The issue price of a Regular Certificate also includes the
amount paid by an initial Regular Certificateholder for accrued interest that
relates to a period prior to the issue date of the Regular Certificate, unless
the Regular Certificateholder elects on its federal income tax return to exclude
such amount from the issue price and to recover it on the first distribution
date. The stated redemption price at maturity of a Regular Certificate always
includes the original principal amount of the Regular Certificate, but generally
will not include distributions of stated interest if such interest distributions
constitute "qualified stated interest." Under the OID Regulations, qualified
stated interest generally means interest payable at a single fixed rate or a
qualified variable rate (as described below), provided that such interest
payments are unconditionally payable at intervals of one year or less during the
entire term of the Regular Certificate. Because there is no penalty or default
remedy in the case of nonpayment of interest with respect to a Regular
Certificate, it is possible that no interest on any class of Regular
Certificates will be treated as qualified stated interest. However, except as
provided in the following three sentences or in the applicable prospectus
supplement, because the underlying mortgage loans provide for remedies in the
event of default, the depositor intends to treat interest with respect to the
Regular Certificates as qualified stated interest. Distributions of interest on
an Accrual Certificate, or on other Regular Certificates with respect to which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of such Regular Certificates
includes all distributions of interest as well as principal thereon. Likewise,
the depositor intends to treat an "interest only" class, or a class on which
interest is substantially disproportionate to its principal amount (a so-called
"super-premium" class) as having no qualified
77
stated interest. Where the interval between the issue date and the first
distribution date on a Regular Certificate is shorter than the interval between
subsequent distribution dates, the interest attributable to the additional days
will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted average maturity of the Regular Certificate is computed as the sum
of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution is
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. Although currently unclear, it appears that
the schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the mortgage loans (the "Prepayment Assumption")
relating to the Regular Certificates. The Prepayment Assumption with respect to
a series of Regular Certificates will be set forth in the related prospectus
supplement. Holders generally must report de minimis original issue discount pro
rata as principal payments are received, and such income will be capital gain if
the Regular Certificate is held as a capital asset. However, under the OID
Regulations, Regular Certificateholders may elect to accrue all de minimis
original issue discount as well as market discount and market premium under the
constant yield method. See "Election to Treat All Interest Under the Constant
Yield Method."
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which it holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. The depositor will treat the
monthly period ending on the day before each distribution date as the accrual
period. With respect to each Regular Certificate, a calculation will be made of
the original issue discount that accrues during each successive full accrual
period (or shorter period from the date of original issue) that ends on the day
before the related distribution date on the Regular Certificate. The Conference
Committee Report to the 1986 Act states that the rate of accrual of original
issue discount is intended to be based on the Prepayment Assumption. The
original issue discount accruing in a full accrual period would be the excess,
if any, of:
o the sum of (a) the present value of all of the remaining distributions to
be made on the Regular Certificate as of the end of that accrual period
that are included in the Regular Certificate's stated redemption price at
maturity and (b) the distributions made on the Regular Certificate during
the accrual period that are included in the Regular Certificate's stated
redemption price at maturity; over
o the adjusted issue price of the Regular Certificate at the beginning of
the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
o the yield to maturity of the Regular Certificate at the issue date;
o events (including actual prepayments) that have occurred prior to the end
of the accrual period; and
o the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Certificate at the
beginning of any accrual period equals the issue price of the Regular
Certificate, increased by the aggregate amount of original issue discount with
respect to the Regular Certificate that accrued in all prior accrual periods and
reduced by the amount of distributions included in the Regular Certificate's
stated redemption price at maturity that were made on the Regular Certificate in
such prior periods. The original issue discount accruing during any accrual
period (as determined in this paragraph) will then be divided by the number of
days in the period to determine the daily portion of original issue discount for
each day in the period. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of original issue discount must be
determined according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the mortgage loans that exceed the
Prepayment Assumption, and generally
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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.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, such
a subsequent purchaser may elect to treat all such acquisition premium under the
constant yield method, as described below under the heading "Election to Treat
All Interest Under the Constant Yield Method."
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate
permitted under the REMIC Regulations.
Unless otherwise indicated in the applicable prospectus supplement, the
depositor intends to treat Regular Certificates that provide for variable rates
in the same manner as obligations bearing a variable rate for original issue
discount reporting purposes. The amount of original issue discount with respect
to a Regular Certificate bearing a variable rate of interest will accrue in the
manner described above under "Original Issue Discount" with the yield to
maturity and future payments on such Regular Certificate generally to be
determined by assuming that interest will be payable for the life of the Regular
Certificate based on the initial rate (or, if different, the value of the
applicable variable rate as of the pricing date) for the relevant class. Unless
otherwise specified in the applicable prospectus supplement, the depositor
intends to treat such variable interest as qualified stated interest, other than
variable interest on an interest-only or super-premium class, which will be
treated as non-qualified stated interest includible in the stated redemption
price at maturity. Ordinary income reportable for any period will be adjusted
based on subsequent changes in the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on mortgage loans or MBS having fixed or adjustable rates, as
having qualified stated interest, except to the extent that initial "teaser"
rates cause sufficiently "back-loaded" interest to create more than de minimis
original issue discount. The yield on such Regular Certificates for purposes of
accruing original issue discount will be a hypothetical fixed rate based on the
fixed rates, in the case of fixed rate mortgage loans, and initial "teaser
rates" followed by fully indexed rates, in the case of adjustable rate mortgage
loans. In the case of adjustable rate mortgage loans, the applicable index used
to compute interest on the mortgage loans in effect on the pricing date (or
possibly the issue date) will be deemed to be in effect beginning with the
period in which the first weighted average adjustment date occurring after the
issue date occurs. Adjustments will be made in each accrual period either
increasing or decreasing the amount of ordinary income reportable to reflect the
actual Pass-Through Rate on the Regular Certificates.
Deferred Interest
Under the OID Regulations, all interest on a Regular Certificate as to which
there may be Deferred Interest is includible in the stated redemption price at
maturity thereof. Accordingly, any Deferred Interest that accrues with respect
to a class of Regular Certificates may constitute income to the holders of such
Regular Certificates prior to the time distributions of cash with respect to
such Deferred Interest are made.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Section 1276 through 1278. Under these Code sections and
the principles applied by the OID Regulations in the context of
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original issue discount, "market discount" is the amount by which the
purchaser's original basis in the Regular Certificate:
o is exceeded by the then-current principal amount of the Regular
Certificate; or
o in the case of a Regular Certificate having original issue discount, is
exceeded by the adjusted issue price of such Regular Certificate at the
time of purchase.
Such purchaser generally will be required to recognize ordinary income to the
extent of accrued market discount on such Regular Certificate as distributions
includible in the stated redemption price at maturity thereof are received, in
an amount not exceeding any such distribution. Such market discount would accrue
in a manner to be provided in Treasury regulations and should take into account
the Prepayment Assumption. The Conference Committee Report to the 1986 Act
provides that until such regulations are issued, such market discount would
accrue either:
o on the basis of a constant interest rate; or
o in the ratio of stated interest allocable to the relevant period to the
sum of the interest for such period plus the remaining interest as of the
end of such period, or in the case of a Regular Certificate issued with
original issue discount, in the ratio of original issue discount accrued
for the relevant period to the sum of the original issue discount accrued
for such period plus the remaining original issue discount as of the end
of such period.
Such purchaser also generally will be required to treat a portion of any gain
on a sale or exchange of the Regular Certificate as ordinary income to the
extent of the market discount accrued to the date of disposition under one of
the foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense in
any taxable year generally will not exceed the accrued market discount on the
Regular Certificate for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Certificate is disposed of.
As an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues on all market discount instruments acquired by
such Regular Certificateholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. See "Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
such election may be deemed to be made.
Market discount with respect to a Regular Certificate will be considered to
be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Certificate multiplied by the
weighted average maturity of the Regular Certificate (determined as described
above in the third paragraph under "Original Issue Discount") remaining after
the date of purchase. It appears that de minimis market discount would be
reported in a manner similar to de minimis original issue discount. See
"Original Issue Discount" above. Treasury regulations implementing the market
discount rules have not yet been issued, and therefore investors should consult
their own tax advisors regarding the application of these rules. Investors
should also consult Revenue Procedure 92-67 concerning the elections to include
market discount in income currently and to accrue market discount on the basis
of the constant yield method.
Premium
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. Treasury Regulations issued under Code Section
171 do not, by their terms, apply to Regular Certificates, which are prepayable
based on prepayments on the underlying mortgage loans. However, 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
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the Regular Certificates, although it is unclear whether the alternatives to the
constant yield method described above under "Market Discount" are available.
Amortizable bond premium will be treated as an offset to interest income on a
Regular Certificate rather than as a separate deduction item. See "Election to
Treat All Interest Under the Constant Yield Method" below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election:
o "interest" includes stated interest, original issue discount, de minimis
original issue discount, market discount and de minimis market discount,
as adjusted by any amortizable bond premium or acquisition premium; and
o the debt instrument is treated as if the instrument were issued on the
holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition.
It is unclear whether, for this purpose, the initial Prepayment Assumption
would continue to apply or if a new prepayment assumption as of the date of the
holder's acquisition would apply. A holder generally may make such an election
on an instrument by instrument basis or for a class or group of debt
instruments. However, if the holder makes such an election with respect to a
debt instrument with amortizable bond premium or with market discount, the
holder is deemed to have made elections to amortize bond premium or to report
market discount income currently as it accrues under the constant yield method,
respectively, for all debt instruments acquired by the holder in the same
taxable year or thereafter. The election is made on the holder's federal income
tax return for the year in which the debt instrument is acquired and is
irrevocable except with the approval of the Service. Investors should consult
their own tax advisors regarding the advisability of making such an election.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate, the
Regular Certificateholder will recognize gain or loss equal to the difference,
if any, between the amount received and its adjusted basis in the Regular
Certificate. The adjusted basis of a Regular Certificate generally will equal
the cost of the Regular Certificate to the seller, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Regular Certificate and reduced by amounts included
in the stated redemption price at maturity of the Regular Certificate that were
previously received by the seller, by any amortized premium and by previously
recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the long-term
capital gain holding period (currently more than one year). Such gain will be
treated as ordinary income:
o 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;
o 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
o to the extent that such gain does not exceed the excess, if any, of (a)
the amount that would have been includible in the gross income of the
holder if its yield on such Regular Certificate were 110% of the
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applicable Federal rate as of the date of purchase, over (b) the amount of
income actually includible in the gross income of such holder with respect
to the Regular Certificate.
In addition, gain or loss recognized from the sale of a Regular Certificate
by certain banks or thrift institutions will be treated as ordinary income or
loss pursuant to Code Section 582(c). Capital gains of certain non-corporate
taxpayers generally are subject to a lower maximum tax rate than ordinary income
of such taxpayers for property held for more than one year. The maximum tax rate
for corporations is the same with respect to both ordinary income and capital
gains.
Holders that recognize a loss on a sale or exchange of a Regular Certificate
for federal income tax purposes in excess of certain threshold amounts should
consult their tax advisors as to the need to file IRS Form 8886 (disclosing
certain potential tax shelters) on their federal income tax returns.
Treatment of Losses
Holders of Regular Certificates will be required to report income with
respect to Regular Certificates on the accrual method of accounting, without
giving effect to delays or reductions in distributions attributable to defaults
or delinquencies on the mortgage loans allocable to a particular class of
Regular Certificates, except to the extent it can be established that such
losses are uncollectible. Accordingly, the holder of a Regular Certificate may
have income, or may incur a diminution in cash flow as a result of a default or
delinquency, but may not be able to take a deduction (subject to the discussion
below) for the corresponding loss until a subsequent taxable year. In this
regard, investors are cautioned that while they may generally cease to accrue
interest income if it reasonably appears that the interest will be
uncollectible, the Internal Revenue Service may take the position that original
issue discount must continue to be accrued in spite of its uncollectibility
until the debt instrument is disposed of in a taxable transaction or becomes
worthless in accordance with the rules of Code Section 166. To the extent the
rules of Code Section 166 regarding bad debts are applicable, it appears that
holders of Regular Certificates that are corporations or that otherwise hold the
Regular Certificates in connection with a trade or business should in general be
allowed to deduct as an ordinary loss any such loss sustained during the taxable
year on account of any such Regular Certificates becoming wholly or partially
worthless, and that, in general, holders of Regular Certificates that are not
corporations and do not hold the Regular Certificates in connection with a trade
or business will be allowed to deduct as a short-term capital loss any loss with
respect to principal sustained during the taxable year on account of a portion
of any class or subclass of such Regular Certificates becoming wholly worthless.
Holders of Regular Certificates are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained
with respect to such Regular Certificates. While losses attributable to interest
previously reported as income should be deductible as ordinary losses by both
corporate and non-corporate holders, the Internal Revenue Service may take the
position that losses attributable to accrued original issue discount may only be
deducted as short-term capital losses by non-corporate holders not engaged in a
trade or business. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Regular Certificates.
Taxation of Residual Certificates
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Certificates ("Residual Certificateholders"), and will
not be taxed separately to the REMIC Pool. The daily portions of REMIC taxable
income or net loss of a Residual Certificateholder are determined by allocating
the REMIC Pool's taxable income or net loss for each calendar quarter ratably to
each day in such quarter and by allocating such daily portion among the Residual
Certificateholders in proportion to their respective holdings of Residual
Certificates in the REMIC Pool on such day. REMIC taxable income is generally
determined in the same manner as the taxable income of an individual using the
accrual method of accounting, except that:
o the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply;
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o all bad loans will be deductible as business bad debts; and
o the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount
income and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from amortization
of issue premium, if any, on the Regular Certificates, plus income on
reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the Regular
Certificates. The REMIC Pool's deductions include interest and original issue
discount expense on the Regular Certificates, servicing fees on the mortgage
loans, other administrative expenses of the REMIC Pool and realized losses on
the mortgage loans. The requirement that Residual Certificateholders report
their pro rata share of taxable income or net loss of the REMIC Pool will
continue until there are no certificates of any class of the related series
outstanding.
The taxable income recognized by a Residual Certificateholder in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest and original issue discount or market discount
income or amortization of premium with respect to the mortgage loans, on the one
hand, and the timing of deductions for interest (including original issue
discount) on the Regular Certificates or income from amortization of issue
premium on the Regular Certificates, on the other hand. In the event that an
interest in the mortgage loans is acquired by the REMIC Pool at a discount, and
one or more of such mortgage loans is prepaid, the Residual Certificateholder
may recognize taxable income without being entitled to receive a corresponding
amount of cash because:
o the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Certificates; and
o the discount on the mortgage loans which is includible in income may
exceed the deduction allowed upon such distributions on those Regular
Certificates on account of any unaccrued original issue discount relating
to those Regular Certificates.
When there is more than one class of Regular Certificates that distribute
principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being made
in respect of earlier classes of Regular Certificates to the extent that such
classes are not issued with substantial discount. If taxable income attributable
to such a mismatching is realized, in general, losses would be allowed in later
years as 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.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Certificateholder is limited to the adjusted basis of the
Residual Certificate as of the close of the quarter (or time of disposition of
the Residual Certificate if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for such Residual Certificate. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Certificateholder and will be decreased (but not
below zero), first, by a cash distribution from the REMIC Pool and, second, by
the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. Any loss that is
83
disallowed on account of this limitation may be carried over indefinitely with
respect to the Residual Certificateholder as to whom such loss was disallowed
and may be used by such Residual Certificateholder only to offset any income
generated by the same REMIC Pool.
A Residual Certificateholder will not be permitted to amortize directly the
cost of its Residual Certificate as an offset to its share of the taxable income
of the related REMIC Pool. However, that taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's basis
in its assets.
A Residual Certificate may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. Regulations have been proposed addressing
the federal income tax treatment of "inducement fees" received by transferees of
non-economic residual interests. The proposed regulations would require
inducement fees to be included in income over a period reasonably related to the
period in which the related residual interest is expected to generate taxable
income or net loss to its holder. Under two proposed safe harbor methods,
inducement fees would be permitted to be included in income:
o in the same amounts and over the same period that the taxpayer uses for
financial reporting purposes, provided that such period is not shorter
than the period the REMIC is expected to generate taxable income; or
o ratably over the remaining anticipated weighted average life of all the
regular and residual interests issued by the REMIC, determined based on
actual distributions projected as remaining to be made on such interests
under the Prepayment Assumption.
If the holder of a non-economic residual interest sells or otherwise disposes
of the non-economic residual interest, any unrecognized portion of the
inducement fee would be required to be taken into account at the time of the
sale or disposition. If these rules are adopted without change, they will apply
to taxable years ending on or after the date that they are published as final
regulations, and consequently these rules may govern the treatment of any
inducement fee received in connection with the purchase of the Residual
Certificates. Prospective purchasers of the Residual Certificates should consult
with their tax advisors regarding the effect of these proposed regulations.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate is
greater that the corresponding portion of the REMIC Pool's basis in the mortgage
loans, the Residual Certificateholder will not recover a portion of such basis
until termination of the REMIC Pool unless future Treasury regulations provide
for periodic adjustments to the REMIC income otherwise reportable by such
holder. The REMIC Regulations currently in effect do not so provide. See
"Treatment of Certain Items of REMIC Income and Expense--Market Discount" below
regarding the basis of mortgage loans to the REMIC Pool and "Sale or Exchange of
a Residual Certificate" below regarding possible treatment of a loss upon
termination of the REMIC Pool as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Although the depositor intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities regarding
the determination of specific items of income and expense are subject to
differing interpretations. The depositor makes no representation as to the
specific method that it will use for reporting income with respect to the
mortgage loans and expenses with respect to the Regular Certificates, and
different methods could result in different timing of reporting of taxable
income or net loss to Residual Certificateholders or differences in capital gain
versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of issue premium will
be determined in the same manner as original issue discount income on Regular
Certificates as described above under "Taxation of Regular
Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates," without regard to the de minimis rule described therein, and
"--Premium."
84
Deferred Interest. Any Deferred Interest that accrues with respect to any
adjustable rate mortgage loans held by the REMIC Pool will constitute income to
the REMIC Pool and will be treated in a manner similar to the Deferred Interest
that accrues with respect to Regular Certificates as described above under
"Taxation of Regular Certificates--Deferred Interest."
Market Discount. The REMIC Pool will have market discount income in respect
of mortgage loans if, in general, the basis of the REMIC Pool allocable to such
mortgage loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such mortgage loans is generally the fair market value of the mortgage
loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool (or the fair
market value thereof at the Closing Date, in the case of a retained class).
Market discount income generally should accrue in the manner described above
under "Taxation of Regular Certificates--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the mortgage loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such mortgage loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in mortgage loans is the fair
market value of the mortgage loans, based on the aggregate of the issue prices
(or the fair market value of retained classes) of the regular and residual
interests in the REMIC Pool immediately after the transfer thereof to the REMIC
Pool. In a manner analogous to the discussion above under "Taxation of Regular
Certificates--Premium," a REMIC Pool that holds a mortgage loan as a capital
asset under Code Section 1221 may elect under Code Section 171 to amortize
premium on whole mortgage loans or mortgage loans underlying MBS that were
originated after September 27, 1985 or MBS that are REMIC regular interests
under the constant yield method. Amortizable bond premium will be treated as an
offset to interest income on the mortgage loans, rather than as a separate
deduction item. To the extent that the mortgagors with respect to the mortgage
loans are individuals, Code Section 171 will not be available for premium on
mortgage loans (including underlying mortgage loans) originated on or prior to
September 27, 1985. Premium with respect to such mortgage loans may be
deductible in accordance with a reasonable method regularly employed by the
holder thereof. The allocation of such premium pro rata among principal payments
should be considered a reasonable method; however, the Service may argue that
such premium should be allocated in a different manner, such as allocating such
premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion or all of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Certificateholder will be subject to
special treatment. That portion, referred to as the "excess inclusion," is equal
to the excess of REMIC taxable income for the calendar quarter allocable to a
Residual Certificate over the daily accruals for such quarterly period of:
o 120% of the long-term applicable Federal rate that would have applied to
the Residual Certificate (if it were a debt instrument) on the Startup Day
under Code Section 1274(d), multiplied by;
o the adjusted issue price of such Residual Certificate at the beginning of
such quarterly period.
For this purpose, the adjusted issue price of a Residual Certificate at the
beginning of a quarter is the issue price of the Residual Certificate, plus the
amount of such daily accruals of REMIC income described in this paragraph for
all prior quarters, decreased by any distributions made with respect to such
Residual Certificate prior to the beginning of such quarterly period.
Accordingly, the portion of the REMIC Pool's taxable income that will be treated
as excess inclusions will be a larger portion of such income as the adjusted
issue price of the Residual Certificates diminishes.
The portion of a Residual Certificateholder's REMIC taxable income consisting
of the excess inclusions generally may not be offset by other deductions,
including net operating loss carryforwards, on such Residual Certificateholder's
return. However, net operating loss carryovers are determined without regard to
excess inclusion income. Further, if the Residual Certificateholder is an
organization subject to the tax on unrelated business income imposed by Code
Section 511, the Residual Certificateholder's excess inclusions will be treated
as unrelated business taxable income of such Residual Certificateholder for
purposes of Code Section 511. In addition, REMIC taxable income is subject to
30% withholding tax with respect to certain persons who are not U.S. Persons (as
defined below under "Tax-Related Restrictions on Transfer of Residual
Certificates--Foreign Investors"), and the
85
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 Code 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.
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, a tax would be
imposed in an amount equal to the product of:
o the present value of the total anticipated excess inclusions with respect
to such Residual Certificate for periods after the transfer; and
o the highest marginal federal income tax rate applicable to corporations.
The REMIC Regulations provide that the anticipated excess inclusions are
based on actual prepayment experience to the date of the transfer and projected
payments based on the Prepayment Assumption. The present value rate equals the
applicable Federal rate under 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.
In addition, if a Pass-Through Entity has excess inclusion income with
respect to a Residual Certificate during a taxable year and a Disqualified
Organization is the record holder of an equity interest in such entity, then a
tax is imposed on such entity equal to the product of:
o the amount of excess inclusions on the Residual Certificate that are
allocable to the interest in the Pass-Through Entity during the period
such interest is held by such Disqualified Organization; and
o 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.
If an "electing large partnership" holds a Residual Certificate, all
interests in the electing large partnership are treated as held by Disqualified
Organizations for purposes of the tax imposed upon a Pass-Through Entity by
section 860E(c) of the Code. An exception to this tax, otherwise available to a
Pass-Through Entity that is furnished certain affidavits by record holders of
interests in the entity and that does not know such affidavits are false, is not
available to an electing large partnership.
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For these purposes:
o "Disqualified Organization" means the United States, any state or
political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing
(provided, that such term does not include an instrumentality if all of
its activities are subject to tax and a majority of its board of directors
is not selected by any such governmental entity), any cooperative
organization furnishing electric energy or providing telephone service to
persons in rural areas as described in Code Section 1381(a)(2)(C), and any
organization (other than a farmers' cooperative described in Code Section
521) that is exempt from taxation under the Code unless such organization
is subject to the tax on unrelated business income imposed by Code Section
511;
o "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); and
o an "electing large partnership" means any partnership having more than 100
members during the preceding tax year (other than certain service
partnerships and commodity pools), which elect to apply simplified
reporting provisions under the Code.
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:
o 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
o the transferor provides a statement in writing to the depositor and the
trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Pooling Agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee. Each Residual Certificate with
respect to a series will bear a legend referring to such restrictions on
transfer, and each Residual Certificateholder will be deemed to have agreed, as
a condition of ownership thereof, to any amendments to the related Pooling
Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Service and to the requesting
party within 60 days of the request, and the depositor or the trustee may charge
a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard certain
transfers of Residual Certificates, in which case the transferor would continue
to be treated as the owner of the Residual Certificates and thus would continue
to be subject to tax on its allocable portion of the net income of the REMIC
Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Certificateholder (other than a
Residual Certificateholder who is not a U.S. Person, as defined below under
"--Foreign Investors") is disregarded for all federal income tax purposes if a
significant purpose of the transferor is to impede the assessment or collection
of tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) is a "noneconomic residual interest" unless, at the
time of the transfer:
o 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
o 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.
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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:
o the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and found that
the transferee historically had paid its debts as they came due and found
no significant evidence to indicate that the transferee would not continue
to pay its debts as they came due in the future;
o the transferee represents to the transferor that it understands that, as
the holder of the noneconomic residual interest, the transferee may incur
tax liabilities in excess of cash flows generated by the interest and that
the transferee intends to pay taxes associated with holding the residual
interest as they become due; and
o transferee represents that it will not cause income from the Residual
Certificate to be attributable to a foreign permanent establishment or
fixed base, within the meaning of an applicable income tax treaty, of the
transferee or any other U.S. Person.
The transferor must have no actual knowledge or reason to know that those
statements are false. 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 bullet points set forth above as part of the affidavit
described above under the heading "Disqualified Organizations." The transferor
must have no actual knowledge or reason to know that such statements are false.
In addition to the three conditions set forth above for the transferor of a
noneconomic residual interest to be presumed not to have knowledge that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC, recently issued Treasury regulations require a
fourth condition for the transferor to be presumed to lack such knowledge. The
condition must be satisfied in one of the two alternative ways for the
transferor to have a "safe harbor" against ignoring the transfer: Either
(a) the present value of the anticipated tax liabilities associated with
holding the noneconomic residual interest must not exceed the sum of:
(i) the present value of any consideration given to the transferee
to acquire the interest;
(ii) the present value of the expected future distributions on the
interest;
(iii) the present value of the anticipated tax savings associated with
holding the interest as the REMIC generates losses.
For purposes of the computations under this "minimum transfer price"
alternative, the transferee is assumed to pay tax at the highest rate of tax
specified in Section 11(b)(1) of the Code (currently 35%) or, in certain
circumstances the alternative minimum tax rate. Further, present values
generally are computed using a discount rate equal to the short-term Federal
rate set forth in Section 1274(d) of the Code for the month of such transfer and
the compounding period used by the transferee; or
(b) (i) the transferee must be a domestic "C" corporation (other than a
corporation exempt from taxation of a regulated investment company or real
estate investment trust) that meets certain gross and net assets tests
(generally, $100 million of gross assets and $10 million of net assets for
the current year and the two preceding fiscal years);
(ii) the transferee must agree in writing that it will transfer the
Residual Certificate only to a subsequent transferee that is an eligible
corporation and meets the requirements for a safe harbor transfer; and
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(iii) the facts and circumstances known to the transferor on or before
the date of the transfer must not reasonably indicate that the taxes
associated with ownership of the Residual Certificate will not be paid by
the transferee.
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. 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 (except to
the extent provided in applicable Treasury regulations) or other entity created
or organized in or under the laws of the United States, any state thereof or the
District of Columbia, an estate that is subject to United States federal income
tax regardless of the source of its income or a trust if 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, 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 if such election has
been made).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under "Taxation
of Residual Certificates--Basis and Losses") of such Residual Certificateholder
in such Residual Certificate at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Certificateholder
will have taxable income to the extent that any cash distribution to it from the
REMIC Pool exceeds such adjusted basis on that Distribution Date. Such income
will be treated as gain from the sale or exchange of the Residual Certificate.
It is possible that the termination of the REMIC Pool may be treated as a sale
or exchange of a Residual Certificateholder's Residual Certificate, in which
case, if the Residual Certificateholder has an adjusted basis in such Residual
Certificateholder's Residual Certificate remaining when its interest in the
REMIC Pool terminates, and if such Residual Certificateholder holds such
Residual Certificate as a capital asset under Code Section 1221, then such
Residual Certificateholder will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
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
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Residual Certificate and ending six months after such sale or disposition,
acquires (or enters into any other transaction that results in the application
of Section 1091) any residual interest in any REMIC or any interest in a
"taxable mortgage pool" (such as a non-REMIC owner trust) that is economically
comparable to a Residual Certificate.
Mark to Market Regulations
The Service has issued regulations under Code Section 475 relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. These 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.
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:
o the disposition of a qualified mortgage other than for (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) a qualified (complete)
liquidation;
o the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold;
o the receipt of compensation for services; or
o the receipt of gain from disposition of cash flow investments other than
pursuant to a qualified liquidation.
Notwithstanding the first or fourth bullet points set forth above, it is not
a prohibited transaction to sell REMIC Pool property to prevent a default on
Regular Certificates as a result of a default on qualified mortgages or to
facilitate a clean-up call (generally, an optional termination to save
administrative costs when no more than a small percentage of the certificates is
outstanding). The REMIC Regulations indicate that the modification of a mortgage
loan generally will not be treated as a disposition if it is occasioned by a
default or reasonably foreseeable default, an assumption of the mortgage loan,
the waiver of a due-on-sale or due-on-encumbrance clause or the conversion of an
interest rate by a mortgagor pursuant to the terms of a convertible adjustable
rate mortgage loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool:
o during the three months following the Startup Day;
o made to a qualified reserve fund by a Residual Certificateholder;
o in the nature of a guarantee;
o made to facilitate a qualified liquidation or clean-up call; and
o as otherwise permitted in Treasury regulations yet to be issued.
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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 ending with the third calendar year following the year of acquisition of
such property, with a possible extension. 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.
Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC Pool's final tax return a date on which such adoption is deemed to occur,
and sells all of its assets (other than cash) within a 90-day period beginning
on the date of the adoption of the plan of liquidation, the REMIC Pool will not
be subject to the prohibited transaction rules on the sale of its assets,
provided that the REMIC Pool credits or distributes in liquidation all of the
sale proceeds plus its cash (other than amounts retained to meet claims) to
holders of Regular Certificates and Residual Certificateholders within the
90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) 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:
o to the appointment of the tax matters person as provided in the preceding
sentence; and
o 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:
o 3% of the excess, if any, of adjusted gross income over a threshold
amount; or
o 80% of the amount of itemized deductions otherwise allowable for such
year.
These limitations will be phased out over the period 2006-2010. 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
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holds in another REMIC. Such investors who hold REMIC Certificates either
directly or indirectly through certain pass-through entities may have their pro
rata share of such expenses allocated to them as additional gross income, but
may be subject to such limitation on deductions. In addition, such expenses are
not deductible at all for purposes of computing the alternative minimum tax, and
may cause such investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Certificates in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. However,
such additional gross income and limitation on deductions will apply to the
allocable portion of such expenses to holders of Regular Certificates, as well
as holders of Residual Certificates, where such Regular Certificates are issued
in a manner that is similar to pass-through certificates in a fixed investment
trust. In general, such allocable portion will be determined based on the ratio
that a REMIC Certificateholder's income, determined on a daily basis, bears to
the income of all holders of Regular Certificates and Residual Certificates with
respect to a REMIC Pool. As a result, individuals, estates or trusts holding
REMIC Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Certificates that are issued in a single class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the related
period on Residual Certificates. Unless otherwise indicated in the applicable
prospectus supplement, all such expenses will be allocable to the Residual
Certificates.
Taxation of Certain Foreign Investors
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are nonresident 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:
o 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
o 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.
The IRS issued final regulations which would provide alternative methods of
satisfying the beneficial ownership certification requirement described above.
For example, these regulations will require, in the case of Regular Certificates
held by a foreign partnership, that:
o the certification described above be provided by the partners rather than
by the foreign partnership; and
o the partnership provide certain information, including a United States
taxpayer identification number. A look-through rule would apply in the
case of tiered partnerships. Non-U.S. Persons should consult their own tax
advisors concerning the application of the certification requirements in
these regulations.
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Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Certificateholders who are Non-U.S. Persons are treated as interest
for purposes of the 30% (or lower treaty rate) United States withholding tax.
Treasury regulations provide that amounts distributed to Residual
Certificateholders may qualify as "portfolio interest," subject to the
conditions described in "Regular Certificates" above, but only to the extent
that:
o the mortgage loans (including mortgage loans underlying MBS) were issued
after July 18, 1984; and
o the trust fund or segregated pool of assets therein (as to which a
separate REMIC election will be made), to which the Residual Certificate
relates, consists of obligations issued in "registered form" within the
meaning of 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." 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 28% (which rate is scheduled
to increase to 31% after 2010) 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. Investors are urged to contact
their own tax advisors regarding the application to them of backup withholding
and information reporting.
Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of any market discount on the Regular
Certificates will be made annually to the Service and to individuals, estates,
non-exempt and non-charitable trusts, and partnerships who are either holders of
record of Regular Certificates or beneficial owners who own Regular Certificates
through a broker or middleman as nominee. All brokers, nominees and all other
non-exempt holders of record of Regular Certificates (including corporations,
non-calendar year taxpayers, securities or commodities dealers, real estate
investment trusts, investment companies, common trust funds, thrift institutions
and charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Service
Publication 938 with respect to a particular series of Regular Certificates.
Holders through nominees must request such information from the nominee.
The Service's Form 1066 has an accompanying Schedule Q, Quarterly Notice to
Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the
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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"), in the opinion of Cadwalader, Wickersham & Taft LLP or Latham &
Watkins LLP, counsel to the depositor, the trust fund will be classified as a
grantor trust under subpart E, Part 1 of subchapter J of the Code and not as an
association taxable as a corporation or a "taxable mortgage pool" within the
meaning of Code Section 7701(i). Where there is no fixed retained yield with
respect to the mortgage loans underlying the Standard Certificates, the holder
of each such Standard Certificate (a "Standard Certificateholder") in such
series will be treated as the owner of a pro rata undivided interest in the
ordinary income and corpus portions of the trust fund represented by its
Standard Certificate and will be considered the beneficial owner of a pro rata
undivided interest in each of the mortgage loans, subject to the discussion
below under "Recharacterization of Servicing Fees." Accordingly, the holder of a
Standard Certificate of a particular series will be required to report on its
federal income tax return its pro rata share of the entire income from the
mortgage loans represented by its Standard Certificate, including interest at
the coupon rate on such mortgage loans, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by the
master servicer, in accordance with such Standard Certificateholder's method of
accounting. A Standard Certificateholder generally will be able to deduct its
share of the servicing fee and all administrative and other expenses of the
trust fund in accordance with its method of accounting, provided that such
amounts are reasonable compensation for services rendered to that trust fund.
However, investors who are individuals, estates or trusts who own Standard
Certificates, either directly or indirectly through certain pass-through
entities, will be subject to limitation with respect to certain itemized
deductions described in Code Section 67, including deductions under Code Section
212 for the servicing fee and all such administrative and other expenses of the
trust fund, to the extent that such deductions, in the aggregate, do not exceed
two percent of an investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over a threshold amount or (ii) 80% of the amount
of itemized deductions otherwise allowable for such year. These limitations will
be phased out over the period 2006-2010. As a result, such investors holding
Standard Certificates, directly or indirectly through a pass-through entity, may
have aggregate taxable income in excess of the aggregate amount of cash received
on such Standard Certificates with respect to interest at the pass-through rate
on such Standard Certificates. In addition, such expenses are not deductible at
all for purposes of computing the alternative minimum tax, and may cause such
investors to be subject to significant additional tax liability. Moreover, where
there is fixed retained yield with respect to the mortgage loans underlying a
series of Standard Certificates or where the servicing fee is in excess of
reasonable servicing compensation, the transaction will be subject to the
application of the "stripped bond" and "stripped coupon" rules of the Code, as
described below under "Stripped Certificates" and "Recharacterization of
Servicing Fees," respectively.
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Tax Status
Standard Certificates will have the following status for federal income tax
purposes:
1. A Standard Certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to represent
"loans . . . secured by an interest in real property which is . . . residential
real property" within the meaning of Code Section 7701(a)(19)(C)(v), provided
that the real property securing the mortgage loans represented by that Standard
Certificate is of the type described in such section of the Code.
2. A Standard Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code Section
856(c)(5)(B) 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 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.
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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.
See "Stripped Certificates" below for a further description of the federal
income tax treatment of stripped bonds and stripped coupons.
Sale or Exchange of Standard Certificates
Upon sale or exchange of a Standard Certificate, a Standard Certificateholder
will recognize gain or loss equal to the difference between the amount realized
on the sale and its aggregate adjusted basis in the mortgage loans and the other
assets represented by the Standard Certificate. In general, the aggregate
adjusted basis will equal the Standard Certificateholder's cost for the Standard
Certificate, increased by the amount of any income previously reported with
respect to the Standard Certificate and decreased by the amount of any losses
previously reported with respect to the Standard Certificate and the amount of
any distributions received thereon. Except as provided above with respect to
market discount on any mortgage loans, and except for certain financial
institutions subject to the provisions of Code Section 582(c), any such gain or
loss would be capital gain or loss if the Standard Certificate was held as a
capital asset. However, gain on the sale of a Standard Certificate will be
treated as ordinary income:
o 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
o 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 generally are subject to a
lower maximum tax rate than ordinary income of such taxpayers for property held
for more than one year. The maximum tax rate for corporations is the same with
respect to both ordinary income and capital gains.
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Holders that recognize a loss on a sale or exchange of a Standard Certificate
for federal income tax purposes in excess of certain threshold amounts should
consult their tax advisors as to the need to file IRS Form 8886 (disclosing
certain potential tax shelters) on their federal income tax returns.
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 interest-only certificates entitled
to distributions of interest, with disproportionately small, nominal or no
distributions of principal and principal-only certificates entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest as to which no REMIC election is made.
The certificates will be subject to those rules if:
o the depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of fixed retained yield or otherwise, an
ownership interest in a portion of the payments on the mortgage loans;
o the master servicer is treated as having an ownership interest in the
mortgage loans to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for
servicing the mortgage loans (see "Standard
Certificates--Recharacterization of Servicing Fees" above); and
o certificates are issued in two or more classes or subclasses representing
the right to non-pro-rata percentages of the interest and principal
payments on the mortgage loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each mortgage loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
mortgage loan, including the Stripped Certificate's allocable share of the
servicing fees paid to the master servicer, to the extent that 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:
o 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
o unless otherwise specified in the related prospectus supplement, 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
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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 provide for the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount. In
addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a de
minimis original issue discount, or, presumably, at a premium. This treatment
suggests that the interest component of such a Stripped Certificate would be
treated as qualified stated interest under the OID Regulations. Further, these
final regulations provide that the purchaser of such a Stripped Certificate will
be required to account for any discount as market discount rather than original
issue discount if either:
o the initial discount with respect to the Stripped Certificate was treated
as zero under the de minimis rule; or
o 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, Stripped
Certificates owned by applicable holders should be considered to represent "real
estate assets" within the meaning of Code Section 856(c)(5)(B), "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 may be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount with respect
to a Stripped Certificate must be included in ordinary income as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, the amount of original issue discount required to be included in the income
of a holder of a Stripped Certificate (referred to in this discussion as a
"Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under "Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates." However, with the apparent exception of
a Stripped Certificate qualifying as a market discount obligation, as described
above under "General," the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments, other than qualified
stated interest to be made on the Stripped Certificate to such Stripped
Certificateholder, presumably under the Prepayment Assumption.
If the mortgage loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the amount
of such original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each mortgage loan
represented by such Stripped Certificateholder's Stripped Certificate. It is
unclear under what circumstances, if any, the prepayment of mortgage loans or
MBS will give rise to a loss to the holder of a Stripped Certificate. If the
certificate is treated as a single instrument rather than an interest in
discrete mortgage loans and the effect of prepayments is taken into account in
computing yield with respect to the grantor trust certificate, it appears that
no loss will be available as a result of any particular prepayment unless
98
prepayments occur at a rate sufficiently faster than the assumed prepayment rate
so that the certificateholder will not recover its investment. However, if the
certificate is treated as an interest in discrete mortgage loans or MBS, or if
no prepayment assumption is used, then when a mortgage loan or MBS is prepaid,
the holder of the certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the certificate that is allocable to the
mortgage loan or MBS. Holders of Stripped Certificates are urged to consult with
their own tax advisors regarding the proper treatment of these certificates for
federal income tax purposes.
As an alternative to the method described above, the fact that some or all of
the interest payments with respect to the Stripped Certificates will not be made
if the mortgage loans are prepaid could lead to the interpretation that such
interest payments are "contingent" within the meaning of the OID Regulations.
The OID Regulations, as they relate to the treatment of contingent interest, are
by their terms not applicable to prepayable securities such as the Stripped
Certificates. However, if final regulations dealing with contingent interest
with respect to the Stripped Certificates apply the same principles as the OID
Regulations, such regulations may lead to different timing of income inclusion
that would be the case under the OID Regulations. Furthermore, application of
such principles could lead to the characterization of gain on the sale of
contingent interest Stripped Certificates as ordinary income. Investors should
consult their tax advisors regarding the appropriate tax treatment of Stripped
Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Sale or Exchange of Regular
Certificates." 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.
Holders that recognize a loss on a sale or exchange of a Stripped Certificate
for federal income tax purposes in excess of certain threshold amounts should
consult their tax advisors as to the need to file IRS Form 8886 (disclosing
certain potential tax shelters) on their federal income tax returns.
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:
o 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;
o as many stripped bonds or stripped coupons as there are scheduled payments
of principal and/or interest on each mortgage loan; or
o a separate installment obligation for each mortgage loan, representing the
Stripped Certificate's pro rata share of payments of principal and/or
interest to be made with respect thereto. Alternatively, the holder of one
or more classes of Stripped Certificates may be treated as the owner of a
pro rata fractional undivided interest in each mortgage loan to the extent
that such Stripped Certificate, or classes of Stripped Certificates in the
aggregate, represent the same pro rata portion of principal and interest
on each such mortgage loan, and a stripped bond or stripped coupon (as the
case may be), treated as an installment obligation or contingent payment
obligation, as to the remainder. Final regulations issued on December 28,
1992 regarding original issue discount on stripped obligations make the
foregoing interpretations less likely to be applicable. The preamble to
those regulations states that they are premised on the assumption that an
aggregation approach is appropriate for determining whether original issue
discount on a stripped bond or stripped coupon is de minimis, and solicits
comments on appropriate rules for aggregating stripped bonds and stripped
coupons under Code Section 1286.
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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.
Reporting Requirements and Backup Withholding
The trustee will furnish, within a reasonable time after the end of each
calendar year, to each Standard Certificateholder or Stripped Certificateholder
at any time during such year, such information (prepared on the basis described
above) as the trustee deems to be necessary or desirable to enable such
certificateholders to prepare their federal income tax returns. Such information
will include the amount of original issue discount accrued on certificates held
by persons other than certificateholders exempted from the reporting
requirements. The amounts required to be reported by the trustee may not be
equal to the proper amount of original issue discount required to be reported as
taxable income by a certificateholder, other than an original certificateholder
that purchased at the issue price. In particular, in the case of Stripped
Certificates, unless provided otherwise in the applicable prospectus supplement,
such reporting will be based upon a representative initial offering price of
each class of Stripped Certificates. The trustee will also file such original
issue discount information with the Service. If a certificateholder fails to
supply an accurate taxpayer identification number or if the Secretary of the
Treasury determines that a certificateholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 28%
(which rate is scheduled to increase to 31% after 2010) 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."
On June 20, 2002, the Service published proposed regulations which will, when
effective, establish a reporting framework for interests in "widely held fixed
investment trusts" that will place the responsibility of reporting on the person
in the ownership chain who holds an interest for a beneficial owner. A
widely-held investment trust is defined as an entity classified as a "trust"
under Treasury regulation Section 301.7701-4(c), in which any interest is held
by a middleman, which includes, but is not limited to:
o a custodian of a person's account;
o a nominee; and
o a broker holding an interest for a customer in "street name."
These regulations were proposed to be effective beginning January 1, 2004,
but such date has passed and the regulations have not been finalized. It is
unclear when, or if, these regulations will become final.
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 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 CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
offered certificates. State tax law may differ substantially from the
corresponding federal law, and
100
the discussion above does not purport to describe any aspect of the tax laws of
any state or other jurisdiction. Therefore, prospective investors should consult
their tax advisors with respect to the various tax consequences of investments
in the offered certificates.
CERTAIN ERISA CONSIDERATIONS
General
Sections 404 and 406 of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), impose certain fiduciary requirements and prohibited
transaction restrictions on employee pension and welfare benefit plans subject
to ERISA ("ERISA Plans") and on certain other arrangements, including bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on Individual
Retirement Accounts described in Section 408 of the Code (collectively, "Tax
Favored Plans").
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) (collectively with
ERISA Plans and Tax-Favored plans, "Plans") are not subject to ERISA
requirements. Accordingly, assets of such plans may be invested in offered
certificates without regard to the ERISA considerations described below, subject
to the provisions of other applicable federal and state law ("Similar Law"). Any
such plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code is subject to the prohibited transaction rules set forth in
Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of a Plan and
persons ("parties in interest" within the meaning of ERISA and "disqualified
persons" within the meaning of the Code; collectively, "Parties in Interest")
who have certain specified relationships to the Plan, unless a statutory,
regulatory or administrative exemption is available with respect to any such
transaction. Pursuant to Section 4975 of the Code, certain Parties in Interest
to a prohibited transaction may be subject to a nondeductible 15% per annum
excise tax on the amount involved in such transaction, which excise tax
increases to 100% if the Party in Interest involved in the transaction does not
correct such transaction during the taxable period. In addition, such Party in
Interest may be subject to a penalty imposed pursuant to Section 502(i) of
ERISA. The United States Department of Labor ("DOL") and participants,
beneficiaries and fiduciaries of ERISA Plans may generally enforce violations of
ERISA, including the prohibited transaction provisions. If the prohibited
transaction amounts to a breach of fiduciary responsibility under ERISA, a 20%
civil penalty may be imposed on the fiduciary or other person participating in
the breach.
Plan Asset Regulations
Certain transactions involving the trust fund, including a Plan's investment
in offered certificates, might be deemed to constitute prohibited transactions
under ERISA, the Code or Similar Law if the underlying Mortgage Assets and other
assets included in a related trust fund are deemed to be assets of such Plan.
Section 2510.3-101 of the DOL regulations (the "Plan Asset Regulations") defines
the term "Plan Assets" for purposes of applying the general fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code. Under the Plan Asset Regulations, generally, 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 here apply, or unless the
equity participation in the entity by "benefit plan investors" (i.e., ERISA
Plans and certain employee benefit plans not subject to ERISA) is not
"significant," both as defined therein. For this purpose, in general, equity
participation by benefit plan investors will be "significant" on any date if 25%
or more of the value of any class of equity interests in the entity is held by
benefit plan investors. Equity participation in a trust fund will be significant
on any date if immediately after the most recent acquisition of any certificate,
25% or more of any class of certificates is held by benefit plan investors.
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The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a trust fund and cause the depositor, the master
servicer, any special servicer, any sub-servicer, any manager, the trustee, the
obligor under any credit enhancement mechanism or certain affiliates thereof to
be considered or become Parties in Interest with respect to an investing Plan
(or of a Plan holding an interest in an investing entity). If so, the
acquisition or holding of certificates by or on behalf of the investing Plan
could also give rise to a prohibited transaction under ERISA, the Code or
Similar Law, unless some statutory, regulatory or administrative exemption is
available. Certificates acquired by a Plan may be assets of that Plan. Under the
Plan Asset Regulations, the trust fund, including the mortgage assets and the
other assets held in the trust fund, may also be deemed to be Plan Assets of
each Plan that acquires certificates. Special caution should be exercised before
Plan Assets are used to acquire a certificate in such circumstances, especially
if, with respect to such assets, the depositor, the master servicer, any special
servicer, any sub-servicer, any manager, the trustee, the obligor under any
credit enhancement mechanism or an affiliate thereof either:
o has investment discretion with respect to the investment of Plan Assets;
or
o has authority or responsibility to give (or regularly gives) investment
advice with respect to Plan Assets for a fee pursuant to an agreement or
understanding that such advice will serve as a primary basis for
investment decisions with respect to such Plan Assets.
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 mortgage assets and other assets included in a trust fund
constitute Plan Assets, then any party exercising management or discretionary
control regarding those assets, such as the master servicer, any special
servicer, any sub-servicer, the trustee, the obligor under any credit
enhancement mechanism, or certain affiliates thereof may be deemed to be a Plan
"fiduciary" and thus subject to the fiduciary responsibility provisions and
prohibited transaction provisions of ERISA and the Code with respect to the
investing Plan. In addition, if the mortgage assets and other assets included in
a trust fund constitute Plan Assets, the purchase of certificates by a Plan, as
well as the operation of the trust fund, may constitute or involve a prohibited
transaction under ERISA or the Code.
The Plan Asset Regulations provide that where a Plan acquires a "guaranteed
governmental mortgage pool certificate," the Plan's assets include such
certificate but do not solely by reason of the Plan's holdings of such
certificate include any of the mortgages underlying such certificate. The Plan
Asset Regulations include in the definition of a "guaranteed governmental
mortgage pool certificate" FHLMC Certificates, GNMA Certificates, FNMA
Certificates and FAMC Certificates. Accordingly, even if such MBS included in a
trust fund were deemed to be assets of Plan investors, the mortgages underlying
such MBS would not be treated as assets of such Plans. Private label mortgage
participations, mortgage pass-through certificates or other mortgage-backed
securities are not "guaranteed governmental mortgage pool certificates" within
the meaning of the Plan Asset Regulations. Potential Plan investors should
consult their counsel and review the ERISA discussion in the related prospectus
supplement before purchasing any such certificates.
Prohibited Transaction Exemptions
The DOL granted an individual exemption, DOL Final Authorization Number
97-03E, as amended by Prohibited Transaction Exemption 97-34, Prohibited
Transaction Exemption 2000-58 and Prohibited Transaction Exemption 2002-41 (the
"Exemption"), to Deutsche Bank AG, New York Branch ("DBNY") and to a predecessor
to Deutsche Bank Securities, Inc. ("DBSI") 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 Section
4975(a) and (b) of the Code, certain transactions, among others, relating to the
servicing and operation of mortgage pools and the initial purchase, holding and
subsequent resale of mortgage pass-through certificates underwritten by an
Underwriter (as hereinafter defined), provided that certain conditions set forth
in the Exemption are satisfied. For purposes of this Section "Certain ERISA
Considerations," the term "Underwriter" shall include (a) DBNY and DBSI, (b) any
person directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with DBNY and DBSI 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 a class of certificates.
102
The Exemption sets forth five general conditions which must be satisfied for
the Exemption to apply. The conditions are as follows:
first, the acquisition of certificates by a Plan or with Plan Assets 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 certificates at the time of acquisition by a Plan or with Plan
Assets must be rated in one of the four highest generic rating categories by
Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies,
Inc., Moody's Investors Service, Inc. or Fitch, Inc. (collectively, the
"Exemption Rating Agencies");
third, the trustee cannot be an affiliate of any member of the Restricted
Group, other than an Underwriter; the "Restricted Group" consists of any
Underwriter, the depositor, the trustee, the master servicer, any sub-servicer,
any party that is considered a "sponsor" within the meaning of the Exemption and
any obligor with respect to assets included in the trust fund constituting more
than 5% of the aggregate unamortized principal balance of the assets in the
trust fund as of the date of initial issuance of the certificates;
fourth, the sum of all payments made to and retained by the Underwriter(s)
must represent not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the depositor
pursuant to the assignment of the assets to the related trust fund must
represent not more than the fair market value of such obligations; and the sum
of all payments made to and retained by the master servicer and any sub-servicer
must represent not more than reasonable compensation for such person's services
under the related Pooling Agreement and reimbursement of such person's
reasonable expenses in connection therewith; and
fifth, the Exemption states that the investing Plan or Plan Asset investor
must be an accredited investor as defined in Rule 501(a)(1) of Regulation D of
the Commission under the Securities Act of 1933, as amended.
The Exemption also requires that the trust fund meet the following
requirements:
o the trust fund must consist solely of assets of the type that have been
included in other investment pools;
o certificates evidencing interests in such other investment pools must have
been rated in one of the four highest categories of one of the Exemption
Rating Agencies for at least one year prior to the acquisition of
certificates by or on behalf of a Plan or with Plan Assets; and
o certificates evidencing interests in such other investment pools must have
been purchased by investors other than Plans for at least one year prior
to any acquisition of certificates by or on behalf of a Plan or with Plan
Assets.
A fiduciary of a Plan or any person investing Plan Assets intending to
purchase a certificate must make its own determination that the conditions set
forth above will be satisfied with respect to such certificate.
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, and 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
the direct or indirect sale, exchange, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of certificates by a
Plan or with Plan Assets. However, no exemption is provided from the
restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the
acquisition or holding of a certificate on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with respect
to the assets of such Excluded Plan. For purposes of the certificates, an
Excluded Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, and the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code, in
connection with:
o the direct or indirect sale, exchange or transfer of 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
103
investment advice with respect to the investment of Plan Assets in the
certificates is (a) a mortgagor with respect to 5% or less of the fair
market value of the trust fund or (b) an affiliate of such a person;
o the direct or indirect acquisition or disposition in the secondary market
of certificates by a Plan; and
o the holding of certificates by a Plan or with Plan Assets.
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 of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
trust fund. The depositor expects that the specific conditions of the Exemption
required for this purpose will be satisfied with respect to the Certificates so
that the Exemption would provide an exemption from the restrictions imposed by
Sections 406(a) and (b) of ERISA (as well as the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code)
for transactions in connection with the servicing, management and operation of
the trust fund, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party in Interest with respect to an investing Plan by
virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of certificates.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain certificates, such as Residual Certificates or any
certificates ("ERISA Restricted Certificates") which are not rated in one of the
four highest generic rating categories by at least one of the Exemption Rating
Agencies, transfers of such certificates to a Plan, to a trustee or other person
acting on behalf of any Plan, or to any other person investing Plan Assets to
effect such acquisition will not be registered by the trustee unless the
transferee provides the depositor, the trustee and the master servicer with an
opinion of counsel satisfactory to the depositor, the trustee and the master
servicer, which opinion will not be at the expense of the depositor, the trustee
or the master servicer, that the purchase of such certificates by or on behalf
of such Plan is permissible under applicable law, will not constitute or result
in any nonexempt prohibited transaction under ERISA or Section 4975 of the Code
or Similar Law and will not subject the depositor, the trustee or the master
servicer to any obligation in addition to those undertaken in the Agreement.
In lieu of such opinion of counsel with respect to ERISA Restricted
Certificates, the transferee may provide a certification substantially to the
effect that the purchase of ERISA Restricted Certificates by or on behalf of
such Plan is permissible under applicable law, will not constitute or result in
any nonexempt prohibited transaction under ERISA or Section 4975 of the Code,
will not subject the depositor, the trustee or the master servicer to any
obligation in addition to those undertaken in the Pooling Agreement and the
following conditions are satisfied:
o the transferee is an insurance company and the source of funds used to
purchase such ERISA Restricted Certificates is an "insurance company
general account" (as such term is defined in PTCE 95-60); and
o the conditions set forth in Sections I and III of PTCE 95-60 have been
satisfied; and
o there is no Plan with respect to which the amount of such general
account's reserves and for contracts held by or on behalf of such Plan and
all other Plans maintained by the same employer (or any "affiliate"
thereof, as defined in PTCE 95-60) or by the same employee organization
exceed 10% of the total of all reserves and liabilities of such general
account (as determined under PTCE 95-60) as of the date of the acquisition
of such ERISA Restricted Certificates.
The purchaser or any transferee of any interest in an ERISA Restricted
Certificate or Residual Certificate that is not a definitive certificate, by the
act of purchasing such certificate, shall be deemed to represent that it is not
a Plan or directly or indirectly purchasing such certificate or interest therein
on behalf of, as named fiduciary of, as trustee of, or with assets of a Plan.
The ERISA Restricted Certificates and Residual Certificates will contain a
legend
104
describing such restrictions on transfer and the Pooling Agreement will provide
that any attempted or purported transfer in violation of these transfer
restrictions will be null and void.
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the certificates or, even if all the
conditions specified therein were satisfied, that any such exemption would apply
to all transactions involving the trust fund. Prospective Plan investors should
consult with their legal counsel concerning the impact of ERISA, the Code and
Similar Law and the potential consequences to their specific circumstances prior
to making an investment in the certificates. Neither the depositor, the trustee,
the master servicer nor any of their respective affiliates will make any
representation to the effect that the certificates satisfy all legal
requirements with respect to the investment therein by Plans generally or any
particular Plan or to the effect that the certificates are an appropriate
investment for Plans generally or any particular Plan.
Before purchasing a certificate (other than an ERISA Restricted Certificate,
Residual Certificate or any certificate which is not rated in one of the four
highest generic rating categories by at least one of the Exemption Rating
Agencies), a fiduciary of a Plan should itself confirm that (a) all the specific
and general conditions set forth in the Exemption would be satisfied and (b) the
certificate constitutes a "certificate" for purposes of the Exemption. In
addition, a Plan fiduciary should consider its general fiduciary obligations
under ERISA in determining whether to purchase a certificate on behalf of a
Plan. Finally, a Plan fiduciary should consider the fact that the DOL, in
granting the Exemption, may not have had under its consideration interests in
pools of the exact nature of some of the certificates described herein.
Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section 501 of
the Code (a "Tax Exempt Investor") nonetheless will be subject to federal income
taxation to the extent that its income is "unrelated business taxable income"
("UBTI") within the meaning of Section 512 of the Code. All "excess inclusions"
of a REMIC allocated to a Residual Certificate held by a Tax-Exempt Investor
will be considered UBTI and thus will be subject to federal income tax. See
"Certain Federal Income Tax Consequences--Federal Income Tax Consequences for
REMIC Certificates--Taxation of Residual Certificates--Limitations on Offset or
Exemption of REMIC Income."
LEGAL INVESTMENT
If so specified in the related prospectus supplement, certain classes of
certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended ("SMMEA").
Generally, the only classes of certificates that qualify as "mortgage related
securities" will be those that:
o are rated in one of two highest rating categories by at least one
nationally recognized statistical rating organization; and
o are part of a series evidencing interests in a trust fund consisting of
loans originated by certain types of originators specified in SMMEA and
secured by first liens on real estate.
The appropriate characterization of those certificates not qualifying as
"mortgage related securities" for purposes of SMMEA ("Non-SMMEA Certificates")
under various legal investment restrictions, and thus the ability of investors
subject to these restrictions to purchase such certificates, may be subject to
significant interpretive uncertainties. Accordingly, all investors whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements, or review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the Non-SMMEA Certificates constitute legal investments for them.
Those classes of certificates qualifying as "mortgage related securities,"
will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities, including
depository institutions, insurance companies 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, under
applicable law, obligations issued by or guaranteed as to
105
principal and interest by the United States or any of its agencies or
instrumentalities constitute legal investments for those entities.
Under SMMEA, a number of states enacted legislation, on or prior to the
October 3, 1991 cutoff for those enactments, limiting to varying extents the
ability of certain entities (in particular, insurance companies) to invest in
"mortgage related securities" secured by liens on residential, or mixed
residential and commercial properties, in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA. Pursuant to
Section 347 of the Riegle Community Development and Regulatory Improvement Act
of 1994, which amended the definition of "mortgage related security" to include,
in relevant part, certificates satisfying the rating and qualified originator
requirements for "mortgage related securities, " but evidencing interests in a
trust fund consisting, in whole or in part, of first liens on one or more
parcels of real estate upon which are located one or more commercial structures,
states were authorized to enact legislation, on or before September 23, 2001,
specifically referring to Section 347 and prohibiting or restricting the
purchase, holding or investment by state-regulated entities in such types of
certificates. Accordingly, the investors affected by any state legislation
overriding the preemptive effect of SMMEA will be authorized to invest in
certificates qualifying as "mortgage related securities" only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell, or otherwise deal in "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in those securities, and
national banks may purchase those securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. ss. 24 (Seventh), subject in each case to those regulations
as the applicable federal regulatory authority may prescribe. In this
connection, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C.F.R. Part 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(m) to
include certain "residential mortgage-related securities" and "commercial
mortgage-related securities." As so defined, "residential mortgage-related
security" and "commercial mortgage-related security" mean, in relevant part,
"mortgage related security" within the meaning of SMMEA, provided that, in the
case of a "commercial mortgage-related security," it "represents ownership of a
promissory note or certificate of interest or participation that is directly
secured by a first lien on one or more parcels of real estate upon which one or
more commercial structures are located and that is fully secured by interests in
a pool of loans to numerous obligors." In the absence of any rule or
administrative interpretation by the OCC defining the term "numerous obligors,"
no representation is made as to whether any class of offered certificates will
qualify as "commercial mortgage-related securities, " and thus as "Type IV
securities," for investment by national banks. The National Credit Union
Administration (the "NCUA") has adopted rules, codified at 12 C.F.R. Part 703,
which permit federal credit unions to invest in "mortgage related securities,"
other than stripped mortgage related securities, residual interests in mortgage
related securities, and commercial mortgage related securities, subject to
compliance with general rules governing investment policies and practices;
however, credit unions approved for the NCUA's "investment pilot program" under
12 C.F.R. ss. 703.19 may be able to invest in those prohibited forms of
securities, while "RegFlex credit unions" may invest in commercial mortgage
related securities under certain conditions pursuant to 12 C.F.R. ss.
742.4(b)(2). The Office of Thrift Supervision (the "OTS") has issued Thrift
Bulletin 13a (December 1, 1998), "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities," and Thrift Bulletin 73a (December 18,
2001), "Investing in Complex Securities," which thrift institutions subject to
the jurisdiction of the OTS should consider before investing in any of the
certificates.
All depository institutions considering an investment in the certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" (the "1998 Policy Statement") of the Federal
Financial Institutions Examination Council, which has been adopted by the Board
of Governors of the Federal Reserve System, the OCC, the Federal Deposit
Insurance Corporation and the OTS, effective May 26, 1998, and by the NCUA,
effective October 1, 1998. The 1998 Policy Statement sets forth general
guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
106
Investors whose investment activities are subject to regulation by federal or
state authorities should review rules, policies and guidelines adopted from time
to time by those authorities before purchasing any certificates, as certain
series or classes may be deemed unsuitable investments, or may otherwise be
restricted, under such rules, policies or guidelines (in certain instances
irrespective of SMMEA).
The foregoing does not take into consideration the applicability of statutes,
rules, regulations, orders, guidelines or agreements generally governing
investments made by a particular investor, including, but not limited to,
"prudent investor" provisions, percentage-of-assets limits, provisions which may
restrict or prohibit investment in securities which are not "interest-bearing"
or "income-paying," and, with regard to any certificates issued in book-entry
form, provisions which may restrict or prohibit investments in securities which
are issued in book-entry form.
Except as to the status of certain classes of offered certificates as
"mortgage related securities," no representations are made as to the proper
characterization of the certificates for legal investment purposes, financial
institution regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the certificates) may adversely affect the liquidity of the
certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the certificates constitute legal
investments or are subject to investment, capital or other restrictions and, if
applicable, whether SMMEA has been overridden in any jurisdiction relevant to
that investor.
USE OF PROCEEDS
The net proceeds to be received from the sale of the certificates of any
series will be applied by the depositor to the purchase of the assets of the
trust fund or will be used by the depositor to cover expenses related thereto.
The depositor expects to sell the certificates from time to time, but the timing
and amount of offerings of certificates will depend on a number of factors,
including the volume of mortgage assets acquired by the depositor, prevailing
interest rates, availability of funds and general market conditions.
METHOD OF DISTRIBUTION
The certificates offered hereby and by the 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 the
depositor from such sale.
The depositor intends that offered certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the offered
certificates of a particular series may be made through a combination of two or
more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
offering by one or more underwriters specified in the related prospectus
supplement;
2. By placements by the depositor with institutional investors through
dealers; and
3. By direct placements by the depositor with institutional investors.
In addition, if specified in the related prospectus supplement, the offered
certificates of a series may be offered in whole or in part to the seller of the
related mortgage assets that would comprise the trust fund for such
certificates.
If underwriters are used in a sale of any offered certificates (other than in
connection with an underwriting on a best efforts basis), such certificates will
be acquired by the underwriters for their own account and may be resold
107
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
managing underwriter or underwriters with respect to the offer and sale of
offered certificates of a particular series will be set forth on the cover of
the prospectus supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such prospectus supplement.
In connection with the sale of offered certificates, underwriters may receive
compensation from the depositor or from purchasers of the offered certificates
in the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the offered certificates may be deemed to
be underwriters in connection with such certificates, and any discounts or
commissions received by them from the depositor and any profit on the resale of
offered certificates by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale of
the offered certificates of any series will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the depositor will indemnify the
several underwriters and the underwriters will indemnify the depositor against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
The prospectus supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the depositor and purchasers of
offered certificates of such series.
The depositor anticipates that the offered certificates will be sold
primarily to institutional investors. Purchasers of offered certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, as amended, in connection with reoffers and sales by them of
offered certificates. Holders of offered certificates should consult with their
legal advisors in this regard prior to any such reoffer or sale.
All or part of any class of offered certificates may be acquired by the
depositor or by an affiliate of the depositor in a secondary market transaction
or from an affiliate. Such offered certificates may then be included in a trust
fund, the beneficial ownership of which will be evidenced by one or more classes
of mortgage-backed certificates, including subsequent series of certificates
offered pursuant to this prospectus and a prospectus supplement.
As to any series of certificates, only those classes rated in an investment
grade rating category by any nationally recognized rating agency will be offered
hereby. Any unrated class may be initially retained by the depositor, and may be
sold by the depositor at any time to one or institutional investors.
If and to the extent required by applicable law or regulation, this
prospectus will be used by the Underwriter in connection with offers and sales
related to market-making transactions in the offered certificates with respect
to 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 sales.
LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement, certain
legal matters in connection with the certificates of each series, including
certain federal income tax consequences, will be passed upon for the depositor
by Cadwalader, Wickersham & Taft LLP or Latham & Watkins LLP.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of certificates,
and no trust fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of certificates.
Accordingly, no financial statements with respect to any trust fund will be
included in this Prospectus or in the
108
related prospectus supplement. The depositor has determined that its financial
statements will not be material to the offering of any offered certificates.
RATING
It is a condition to the issuance of any class of offered certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one nationally recognized rating
agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the structural,
legal and issuer-related aspects associated with such certificates, the nature
of the underlying mortgage assets and the credit quality of the guarantor, if
any. Ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which such prepayments might differ from those originally anticipated.
As a result, certificateholders might suffer a lower than anticipated yield,
and, in addition, holders of interest-only might, in extreme cases fail to
recoup their initial investments. Furthermore, ratings on mortgage pass-through
certificates do not address the price of such certificates or the suitability of
such certificates to the investor.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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INDEX OF DEFINED TERMS
1986 Act..........................76
1998 Policy Statement............106
Accrual Certificates..............37
Accrued Certificate Interest......37
Act...............................69
ADA...............................72
affiliate........................104
ARM Loans.........................27
Available Distribution Amount.....36
Bankruptcy Code...................66
Book-Entry Certificates...........36
Cash Flow Agreement...............30
Certificate Account...............29
Certificate Balance...............38
Certificate Owner.................42
Code..............................73
Companion Class...................38
Condemnation Proceeds.............49
Controlled Amortization Class.....38
CPR...............................33
Credit Support....................30
Cut-off Date......................38
DBNY.............................102
DBSI.............................102
Debt Service Coverage Ratio.......25
Definitive Certificates...........36
Determination Date............31, 37
Deutsche Bank Group...............36
Disqualified Organization.........87
Distribution Date Statement.......40
DOL..............................101
DTC...............................42
DTC Participants..................42
Due Period........................31
due-on-sale.......................65
electing large partnership........87
Equity Participation..............27
ERISA............................101
ERISA Plans......................101
ERISA Restricted Certificates....104
Events of Default.................56
Excess Funds......................35
excess servicing..................96
Exemption........................102
Exemption Rating Agencies........103
FAMC..............................28
FHLMC.............................28
Financial Intermediary............42
FNMA..............................28
Garn Act..........................71
GNMA..............................28
Insurance Proceeds................49
IRS...............................52
Letter of Credit Bank.............61
Liquidation Proceeds..............49
Loan-to-Value Ratio...............25
Lock-out Date.....................27
Lock-out Period...................27
MBS...............................23
MBS Agreement.....................28
MBS Issuer........................28
MBS Servicer......................28
MBS Trustee.......................28
NCUA.............................106
Net Leases........................25
Net Operating Income..............25
Nonrecoverable Advance............39
Non-SMMEA Certificates...........105
Non-U.S. Person...................92
OCC..............................106
OID Regulations...................77
OTS..............................106
Parties in Interest..............101
Pass-Through Entity...............87
Percentage Interest...............37
Permitted Investments.............48
Plan Asset Regulations...........101
Plan Assets......................101
Plans............................101
Pooling Agreement.................43
Prepayment Assumption.............78
Prepayment Interest Shortfall.....31
Prepayment Premium................27
Purchase Price....................45
Record Date.......................37
Regular Certificateholder.........77
Regular Certificates..............74
Related Proceeds..................39
Relief Act........................72
REMIC.............................74
REMIC Certificates................74
REMIC Pool........................74
REMIC Regulations.................73
REO Property......................46
Residual Certificateholders.......82
Residual Certificates.............74
Service...........................76
Similar Law......................101
SMMEA............................105
SPA...............................33
Standard Certificateholder........94
Standard Certificates.............94
Stripped Certificateholder........98
Stripped Certificates.............97
Tax Exempt Investor..............105
Tax Favored Plans................101
Title V...........................72
Treasury..........................73
U.S. Person.......................89
UBTI.............................105
110
UCC...............................63
Underwriter......................102
Value.............................25
Voting Rights.....................41
Warranting Party..................45
111
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The expenses expected to be incurred in connection with the issuance and
distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below.
Filing Fee for Registration Statement ........................... $ 760,200**
Legal Fees and Expenses ......................................... 200,000
Accounting Fees and Expenses .................................... 40,000
Trustee's Fees and Expenses (including counsel fees) ............ 25,000
Blue Sky Fees and Expenses ...................................... 3,000
Printing and Engraving Fees ..................................... 50,000
Rating Agency Fees .............................................. 60,000
Miscellaneous ................................................... 35,000
Total ........................................................... $1,173,200*
- ----------
* All amounts except the Filing Fee are estimates of expenses incurred or to
be incurred in connection with the issuance and distribution of a single
series of Certificates in an aggregate principal amount assumed for these
purposes to be equal to $100,000,000 of Certificates registered hereby.
** Includes $126.70 previously paid in connection with this Registration
Statement.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Each Pooling Agreement will provide that no director, officer, employee or
agent of the Registrant shall be liable to the related trust fund or the related
certificateholders for any action taken, or for refraining from the taking of
any action, in good faith pursuant to such Pooling Agreement, or for errors in
judgment, except for any liability which would otherwise be imposed by reason of
such person's own willful misfeasance, bad faith, fraud or negligence in the
performance of duties or negligent disregard of obligations and duties. Each
Pooling Agreement will further provide that, with the exceptions stated above, a
director, officer, employee or agent of the Registrant is entitled to be
indemnified and held harmless by the related trust fund against any loss,
liability or expense incurred in connection with legal action relating to such
Pooling Agreements and related Certificates other than such expenses related to
particular mortgage assets.
Any underwriters who execute an Underwriting Agreement in the form filed
as Exhibit 1.1 to this Registration Statement will agree to indemnify the
Registrant's directors and its officers who signed this Registration Statement
against certain liabilities which might arise under the Securities Act of 1933
(the "Securities Act") from certain information furnished to the Registrant by
or on behalf of such indemnifying party.
Any purchase agreement pursuant to which the Registrant acquires mortgage
assets for inclusion in a trust fund may provide under certain circumstances
that each officer and director and certain controlling persons of the
Registrant, are entitled to be indemnified by the seller of such mortgage assets
or an affiliate against certain liabilities, including liabilities under the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), relating to such mortgage assets.
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no cause to believe the person's conduct
was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification may be made in respect to any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
or suit was brought shall determine that despite the adjudication of liability
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that (i) to the extent a present or former
director or officer of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith; (ii) that indemnification or advancement of
expenses provided for by Section 145 shall not be deemed exclusive of any other
rights to which the indemnified party may be entitled; and (iii) empowers the
corporation to purchase and maintain insurance on behalf of a person servicing
in the capacities set forth above against any liability asserted against such
person or incurred by such person in any such capacity or arising out of such
person's status as such whether or not the corporation would have the power to
indemnify such person against such liabilities under Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145 of
the General Corporation Law of the State of
II-2
Delaware, the Registrant (i) shall indemnify and hold harmless each person who
was or is a party or is threatened to be made a party to any action, suit or
proceeding described in subsections (a) and (b) by reason of the fact that he is
or was a director or officer, or his testator or intestate is or was a director
or officer of the Registrant, against expenses, judgments, fines and amounts
paid in settlement, and (ii) shall indemnify and hold harmless each person who
was or is a party or is threatened to be made a party to any such action, suit
or proceeding if such person is or was serving at the request of the Registrant
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise.
ITEM 16. EXHIBITS.
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation of the Company.**
3.2 Amended and Restated By-Laws of the Company.
4.1 Form of Pooling and Servicing Agreement.*
5.1 Opinion of Cadwalader, Wickersham & Taft LLP with respect to the
legality of the Certificates.
5.2 Opinion of Latham & Watkins LLP with respect to the legality of the
Certificates.
8.1 Opinion of Cadwalader, Wickersham & Taft LLP with respect to certain
tax matters (included in Exhibit 5.1).
8.2 Opinion of Latham & Watkins LLP with respect to certain tax matters
23.1 Consent of Cadwalader, Wickersham & Taft LLP (included in Exhibit
5.1).
23.2 Consent of Latham & Watkins LLP (included in Exhibit 5.2 and Exhibit
8.2).
24.1 Power of Attorney.**
- ----------
* Previously filed with Registration Statement No. 333-04272 incorporated by
reference herein.
** Previously filed.
ITEM 17. UNDERTAKINGS.
A. Undertakings Pursuant to Rule 415.
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;
(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,
- ----------
* Previously filed with Registration Statement No. 333-04272 and incorporated by
reference herein.
II-3
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) above do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Exchange Act that are incorporated by reference in
this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
B. Undertaking In Respect of Incorporation by Reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
C. Undertaking In Respect of Equity Offerings of Nonreporting Registrants.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
D. Undertaking in Respect of Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling
II-4
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
E. Undertaking Pursuant to Rule 430A
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus 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.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it (i) has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3, (ii) reasonably believes that the security
rating requirement contained in Transaction Requirement B.5. of Form S-3 will be
met by the time of the sale of the securities registered hereunder and (iii) has
duly caused this Pre-Effective Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, the State of New York on the 25 day of March 2004.
DEUTSCHE MORTGAGE & ASSET
RECEIVING CORPORATION
By: /s/ Helaine Kaplan
------------------------------------------
Helaine Kaplan
President
By: /s/ John Griffin
------------------------------------------
John Griffin
Vice President, Treasurer and Chief Financial
Officer
II-6
Pursuant to the requirements of the Securities Act, this Pre-Effective
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
Signature Title Date
/s/ Helaine Kaplan President March 25, 2004
- ---------------------------
Helaine Kaplan
/s/ John Griffin Vice President, Treasurer and March 25, 2004
- --------------------------- Chief Financial Officer
John Griffin
* Director March 25, 2004
- ---------------------------
Lawrence Brown
* Director March 25, 2004
- ---------------------------
Tobin Cobb
* Director March 25, 2004
- ---------------------------
Joseph J. Rice
* Director March 25, 2004
- ---------------------------
Eric Schwartz
/s/ Helaine Kaplan
- -------------------------------------
* Helaine Kaplan, as Attorney-in-Fact
II-7
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation of the
Company.**
3.2 Amended and Restated By-Laws of the Company.
4.1 Form of Pooling and Servicing Agreement.*
5.1 Opinion of Cadwalader, Wickersham & Taft LLP with respect to
the legality of the Certificates.
5.2 Opinion of Latham & Watkins LLP with respect to the legality
of the Certificates.
8.1 Opinion of Cadwalader, Wickersham & Taft LLP as to certain tax
matters (included in Exhibit 5.1).
8.2 Opinion of Latham & Watkins LLP with respect to certain tax
matters.
23.1 Consent of Cadwalader, Wickersham & Taft LLP (included in
Exhibit 5.1).
23.2 Consent of Latham & Watkins LLP (included in Exhibits 5.2 and
8.2 hereto).
24.1 Power of Attorney.**
- ----------
* Previously filed with Registration Statement No. 333-04272 incorporated by
reference herein.
** Previously filed.