As filed with the Securities and Exchange Commission on February 24, 2006
Registration No. 333-130524
================================================================================
UNITED STATES
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
----------
BANC OF AMERICA COMMERCIAL MORTGAGE INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
56-1950039
(I.R.S. employer identification number)
214 North Tryon Street
Charlotte, North Carolina 28255
(704) 386-8509
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Stephen L. Hogue
Banc of America Commercial Mortgage Inc.
214 North Tryon Street
Charlotte, North Carolina 28255
(704) 387-2040
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------
Copies to:
Paul E. Kurzeja, Esq.
Assistant General Counsel
Bank of America, National Association
Bank of America Corporate Center, NC1-007-20-01
Charlotte, North Carolina 28255
Henry A. LaBrun, Esq.
Cadwalader, Wickersham & Taft LLP
227 West Trade Street
Charlotte, North Carolina 28202
(704) 348-5100 (704) 386-8509
================================================================================
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 securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest 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
Maximum Proposed Maximum
Amount to be Offering Aggregate Offering Amount of
Title of Securities Being Registered(1) Registered Price Per Unit Price(2) Registration Fee
- --------------------------------------- ------------ -------------- ------------------ ----------------
Mortgage Pass-Through
Certificates......................... $18,250,000,000 100% $18,250,000,000 $1,952,750(3)
- ----------
(1) This Registration Statement and the registration fee pertain to the initial
offering of the Mortgage Pass-Through Certificates registered hereunder by
the registrant. The amount of Mortgage Pass-Through Certificates that may
be initially offered hereunder and the registration fee shall not be
affected by any offers and sales relating to any such market-making
transactions.
(2) Estimated solely for the purposes of calculating the registration fee.
(3) Paid in full with the initial filing to which this Pre-Effective Amendment
No. 1 relates.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until a final prospectus supplement
has been delivered to you. This prospectus supplement and the accompanying
prospectus are not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
- --------------------------------------------------------------------------------
The information in this prospectus supplement will be amended or completed;
dated [_________ ___], 20[__].
Prospectus Supplement
$[____________________________]
Banc of America Commercial Mortgage Inc.
Depositor
Bank of America, National Association
Sponsor and Master Servicer
Banc of America Commercial Mortgage Trust 200[_-__]
Issuing Entity
--------------------------------------------------------
Commercial Mortgage Pass-Through Certificates, Series 200[_-_]
Consider carefully the risk factors beginning on The Series 200[__-__] Commercial Mortgage Pass-Through
page S-11 in this prospectus supplement and page 9 Certificates will consist of the following classes:
in the accompanying prospectus.
the Class A Certificates;
Neither the certificates nor the underlying
mortgage loans are insured or guaranteed by any the Class B Certificates;
governmental agency.
[the Class X Certificates;]
The certificates will represent interests only in
the issuing entity and will not represent the Class C Certificates; and
interests in or obligations of Banc of America
Commercial Mortgage Inc., Bank of America, the Class R Certificates.
National Association or any of their affiliates,
including Bank of America Corporation. Only the senior certificates and the Class B Certificates are
offered by this prospectus supplement. Distributions on the
offered certificates will occur monthly, commencing
[___________], as and to the extend of available funds as
described in this prospectus supplement. The mortgage loans
constitute the sole source of repayment on the mortgage loans.
Credit enhancement for the offered certificates will be
provided by subordination, in that each class of certificates
will be subordinate to the class(es) of certificates that are
higher in order of payment priority. [Identification of any
other form and provider of credit support to the extent
required by Item 1102(h) of Regulation AB, including any
enhancement or provider referenced in Items 1114(b) or 1115 of
Regulation AB.]
Certain characteristics of the offered certificates include:
Assumed Rated
Final Final
Initial Certificate Balance Distribution Distribution
Class or Notional Amount Pass-Through Rate Rating Date Date
- ------------------- --------------------------- --------------------- ---------- ------------ ------------
A $_____________________ ____%
B $_____________________ ____%
[X $_____________________ Variable
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these offered certificates or
determined if this prospectus or the accompanying prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
Banc of America Securities LLC
______________, 200_
The underwriter, [____________________], will purchase the offered
certificates from Banc of America Commercial Mortgage Inc. and will offer them
to the public at negotiated prices determined at the time of sale. The
underwriter expects to deliver the offered certificates to purchasers on or
about [___________]. Banc of America Commercial Mortgage Inc. expects to receive
from this offering approximately [___]% of the initial principal amount of the
offered certificates, [plus accrued interest from [_________],] before deducting
expenses payable by Banc of America Commercial Mortgage Inc.
- --------------------------------------------------------------------------------
For more information
Banc of America Commercial Mortgage Inc. has filed with the SEC additional
registration materials relating to the certificates. You may read and copy any
of these materials at the SEC's Public Reference Room at the following location:
o SEC Public Reference Section 100 F Street, N.E. Washington, D.C.
20549
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information that
has been filed electronically with the SEC. The Internet address is
http://www.sec.gov.
You may also contact Banc of America Commercial Mortgage Inc. in writing at 214
North Tryon Street, Charlotte, North Carolina 28255, or by telephone at (704)
386-8509.
See also the sections captioned "Available Information" and "Incorporation of
Certain Information by Reference" appearing at the end of the accompanying
prospectus.
- --------------------------------------------------------------------------------
Table of Contents
Important Notice About Information Presented in this Prospectus Supplement and
the Accompanying Prospectus
EXECUTIVE SUMMARY..............................................................v
SUMMARY OF PROSPECTUS SUPPLEMENT...............................................1
THE CERTIFICATES...............................................................4
GENERAL...................................................................4
DISTRIBUTIONS.............................................................5
RISK FACTORS..................................................................11
DESCRIPTION OF THE MORTGAGE POOL..............................................19
GENERAL..................................................................19
CERTAIN TERMS AND CONDITIONS OF THE MORTGAGE LOANS.......................20
CERTAIN UNDERWRITING MATTERS.............................................24
[THE INDEX]..............................................................28
[DELINQUENT MORTGAGE LOANS]..............................................28
SPLIT LOAN STRUCTURES....................................................28
ADDITIONAL MORTGAGE LOAN INFORMATION.....................................28
CHANGES IN MORTGAGE POOL CHARACTERISTICS.................................28
STATIC POOL INFORMATION..................................................29
REPRESENTATIONS AND WARRANTIES; REPURCHASES AND SUBSTITUTIONS............29
THE SPONSOR...................................................................31
THE DEPOSITOR.................................................................31
THE ISSUING ENTITY............................................................32
THE TRUSTEE...................................................................32
SIGNIFICANT ORIGINATORS AND OBLIGORS..........................................33
[SIGNIFICANT ORIGINATORS]................................................33
[SIGNIFICANT OBLIGORS]...................................................33
THE SERVICERS.................................................................33
THE MASTER SERVICER......................................................33
THE SPECIAL SERVICER.....................................................33
OTHER SERVICERS..........................................................33
COMPENSATION AND EXPENSES.....................................................34
SERVICING OF THE MORTGAGE LOANS...............................................36
GENERAL..................................................................36
MODIFICATIONS, WAIVERS AND AMENDMENTS....................................37
ASSET STATUS REPORTS.....................................................38
INSPECTIONS; COLLECTION OF OPERATING INFORMATION.........................38
ADDITIONAL OBLIGATIONS OF THE MASTER SERVICER WITH RESPECT TO ARM LOANS..38
DESCRIPTION OF THE CERTIFICATES...............................................39
GENERAL..................................................................39
BOOK-ENTRY REGISTRATION OF THE OFFERED CERTIFICATES......................40
DISTRIBUTIONS............................................................41
CREDIT SUPPORT...........................................................45
CASH FLOW AGREEMENTS.....................................................46
ADVANCES.................................................................46
APPRAISAL REDUCTIONS.....................................................47
REPORTS TO CERTIFICATEHOLDERS; CERTAIN AVAILABLE INFORMATION.............47
VOTING RIGHTS............................................................49
TERMINATION; RETIREMENT OF CERTIFICATES..................................49
YIELD AND MATURITY CONSIDERATIONS.............................................50
YIELD CONSIDERATIONS.....................................................50
WEIGHTED AVERAGE LIFE....................................................52
ii
YIELD SENSITIVITY OF THE CLASS X CERTIFICATES............................55
[CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS].................................55
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................................56
METHOD OF DISTRIBUTION........................................................57
LEGAL MATTERS.................................................................57
RATING........................................................................58
LEGAL INVESTMENT..............................................................58
CERTAIN ERISA CONSIDERATIONS..................................................58
iii
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 incorporates
and includes the appendices, and describes the specific terms of the offered
certificates. 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.
This prospectus supplement begins with several introductory sections
describing the Series [_____-_____] Certificates and the trust in abbreviated
form:
Summary of Prospectus Supplement, which begins on page S-[__] of this
prospectus supplement and gives a brief introduction of the key features of
Series 20[___-___] and the mortgage loans; and
Risk Factors, which begins on page S-[__] of this prospectus supplement and
describes risks that apply to the offered certificates which are in addition to
those described in the accompanying prospectus with respect to the securities
issued by the trust generally.
This prospectus supplement and the accompanying prospectus include cross
references to sections in these materials where you can find further related
discussions. The Tables of Contents in this prospectus supplement and the
accompanying prospectus identify the pages where these sections are located.
Certain capitalized terms are defined and used in this prospectus
supplement and the accompanying 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 "Glossary" beginning on page S-[___] in this prospectus supplement. The
capitalized terms used in the accompanying prospectus are defined under the
caption "Glossary" beginning on page [___] in the prospectus.
In this prospectus supplement, "we" refers to the depositor, and "you"
refers to a prospective investor in the offered certificates.
----------------------
This prospectus supplement and the accompanying prospectus contain forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended. Specifically, forward looking statements, together with
related qualifying language and assumptions, are found in the material
(including tables) under the headings "Risk Factors" and "Prepayment and Yield
Considerations" and in the appendices. Forward looking statements are also found
in other places throughout this prospectus supplement and the prospectus, and
may be identified by, among other things, accompanying language such as
"expects," "intends," "anticipates," "estimates" or analogous expressions, or by
qualifying language or assumptions. These statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results or performance to differ materially from the forward looking statements.
These risks, uncertainties and other factors include, among others, general
economic and business conditions, competition, changes in political, social and
economic conditions, regulatory initiatives and compliance with governmental
regulations, customer preference and various other matters, many of which are
beyond the depositor's control. These forward looking statements speak only as
of the date of this prospectus supplement. The depositor expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any forward
looking statements to reflect changes in the depositor's expectations with
regard to those statements or any change in events, conditions or circumstances
on which any forward looking statement is based.
iv
EXECUTIVE SUMMARY
Certificate Characteristics
The following executive summary does not include all relevant
information relating to the offered certificates and the mortgage loans. In
particular, the executive summary does not address the risks and special
considerations involved with an investment in the offered certificates, and
prospective investors should carefully review the detailed information appearing
elsewhere in this prospectus supplement and in the accompanying prospectus
before making any investment decision. The executive summary also describes the
certificates that are not offered by this prospectus supplement which have not
been registered under the Securities Act of 1933, as amended, and which will be
sold to investors only in private transactions. Any information we provide
herein regarding the terms of the private certificates is provided only to
enhance your understanding of the offered certificates. Certain capitalized
terms used in this executive summary may be defined elsewhere in this prospectus
supplement, including in Annex A to this prospectus supplement, or in the
prospectus. A "Glossary of Principal Definitions" is included at the end of this
prospectus supplement. A "Glossary" is included at the end of the prospectus.
Terms that are used but not defined in this prospectus supplement will have the
meanings specified in the prospectus.
Approximate
Initial
Certificate Approximate Pass-Through Weighted
Balance or Percentage Approximate Rate as of Average
Notional of Pool Credit Delivery Life Principal
Class Ratings(1) Amount(2) Balance Support Rate Type Date (years)(3) Window(3)
Offered Certificates
A [__]/[__] $[__] [__]% [__]% [_____] [__]% [__] [__]-[__]
B [__]/[__] $[__] [__]% [__]% [_____] [__]% [__] [__]-[__]
[X] [__]/[__] $[__] N/A N/A Variable Rate(4) [__]%(4) (4) N/A
Private Certificates -- Not Offered Hereby (5)
C [__]/[__] $[__] [__]% [__]% [_____] [__]% [__] [__]-[__]
R [__]/[__] $[__] [__]% [__]% [_____] [__]% [__] [__]-[__]
- ------------------
(1) Ratings shown are those of [__________].
(2) As of the delivery date; subject to a variance of plus or minus 5%.
(3) Based on the maturity assumptions (as defined under "Yield and Maturity
Considerations" in this prospectus supplement). As of the delivery date,
calculations for the certificates assume no prepayments will be made on the
mortgage loans prior to their related maturity dates (or, in the case of
the mortgage loans with anticipated repayment dates, the related
anticipated repayment date).
(4) [For stripped interest certificates, when offered: the Class X
Certificates will not have a certificate balance and their holders will not
receive distributions of principal, but such holders are entitled to
receive payments of the aggregate interest accrued on the notional amount
of the Class X Certificates, as described in this prospectus supplement.
The interest rate applicable to the Class X Certificates for each
distribution date will be as described in this prospectus supplement. See
"Description of the Certificates" in this prospectus supplement.]
(5) Not offered by this prospectus supplement. Any information we provide
herein regarding the terms of the private certificates is provided only to
enhance your understanding of the offered certificates.
v
Below is a summary of information regarding the characteristics of mortgage
loans and the mortgaged properties in the mortgage pool as of the cut-off date.
The balances and other numerical information used to calculate various ratios
are explained in this prospectus supplement in the related definition under
"Glossary of Principal Definitions." Further information regarding the mortgage
loans is contained in this prospectus supplement under "Summary of Prospectus
Supplement--Mortgage Pool", "Description of the Mortgage Pool" and in the tables
in Annex A and Annex B to this prospectus supplement.
Summary of Prospectus Supplement--Mortgage Pool
Characteristics
- ---------------
Initial principal balance........................................[ ]
Number of mortgage loans.........................................[ ]
Number of mortgaged properties...................................[ ]
Number of balloon mortgage loans.................................[ ]
Number of ARD loans..............................................[ ]
Number of full-period interest only mortgage loans...............[ ]
Average cut-off date balance.....................................[ ]
Range of cut-off date balance....................................[ ]
Weighted average mortgage rate...................................[ ]
Weighted average remaining lock-out period.......................[ ]
Range of remaining terms to maturity.............................[ ]
Weighted average underwritten debt service coverage ratio........[ ]
Weighted average cut-off date loan-to-value ratio................[ ]
- ------------------
[Footnotes as warranted to indicate any material calculation methods.]
vi
- --------------------------------------------------------------------------------
SUMMARY OF PROSPECTUS SUPPLEMENT
This summary highlights selected information from this prospectus
supplement. It does not contain all of the information you need to consider in
making your investment decision. To understand all of the terms of the offering
of the offered certificates, read this entire document and the accompanying
prospectus carefully.
Title of Certificates
Banc of America Commercial Mortgage Inc., Commercial Mortgage Pass-Through
Certificates, Series 200[__-__].
Relevant Parties and Dates
--------------------------
Sponsor
The Sponsor, Bank of America, National Association, is an indirect
wholly-owned subsidiary of Bank of America Corporation.
See "Bank of America, National Association, as Sponsor", "The Mortgage Loan
Program," and "The Pooling and Servicing Agreements" in the accompanying
prospectus for more information about the Sponsor, its securitization programs,
its solicitation and underwriting criteria used to originate the mortgage loans
and its material roles and duties in this securitization.
Depositor
Banc of America Commercial Mortgage Inc. The Depositor was incorporated in
the State of Delaware on December 13, 1995 under the name "NationsLink Funding
Corporation" and filed a Certificate of Amendment of Certificate of
Incorporation changing its name to "Banc of America Commercial Mortgage Inc." on
August 24, 2000. The Depositor is a wholly-owned subsidiary of the Sponsor. It
is not expected that the Depositor will have any business operations other than
offering mortgage pass-through certificates and related activities.
The Depositor maintains its principal executive office at 201 North Tryon
Street, Charlotte, North Carolina 28255. Its telephone number is 704-387-8239.
See "The Depositor" in the accompanying prospectus. Neither the depositor nor
any of its affiliates has insured or guaranteed the offered certificates.
Issuing Entity
The Issuing Entity will be a New York common law trust, formed on the
Closing Date pursuant to the Pooling Agreement. See "The Issuing Entity" in this
prospectus supplement.
Trustee
[_____________________]. See "The Trustee" in this prospectus supplement.
REMIC Administrator
[_____________________] See "Certain Federal Income Tax Consequences" and
"The Pooling and Servicing Agreements--Events of Default" and "--Rights Upon
Event of Default" in the accompanying prospectus.
Master Servicer
[_____________________]. See "The Servicers--The Master Servicer" in this
prospectus supplement.
S-1
Special Servicer
[_____________________]. See "The Servicers--The Special Servicer" in this
prospectus supplement.
Other Servicers
[_____________________]. See "The Servicers--Other Servicers" in this
prospectus supplement.
[Other Parties]
[Name and brief identification of any swap or derivative counterparty,
liquidity provider or credit enhancement provider.]
Certain Relationships and Affiliations
Bank of America, National Association and its affiliates have several roles
in this transaction. Bank of America, National Association is the Sponsor and
the Master Servicer, and the parent of the Depositor. Bank of America, National
Association originated or acquired the Mortgage Loans and will be selling them
to the Depositor. Bank of America, National Association is also an affiliate of
Banc of America Securities LLC, a managing underwriter for the offering of the
certificates. The Sponsor may also provide financing to the other originators of
the Mortgage Loans. [In this regard, the Mortgage Loans originated by [___] were
financed by the Sponsor.] In addition, the Sponsor and its affiliates may also
have other investment banking or commercial banking relationships with
borrowers, originators, servicers, trustees and other transaction parties.
[Disclosure regarding any other affiliations.] These roles and the other
potential relationships may give rise to conflicts of interest as further
described in this prospectus supplement under "RISK FACTORS--Risks Related to
the Certificates--Transaction Party Roles and Relationships Create Potential
Conflicts of Interest". There are no additional relationships, agreements or
arrangements outside of this transaction among the affiliated parties that are
material to an understanding of the offered certificates.
It is also anticipated that [an affiliate of] the [Sponsor] [Depositor]
[Issuing Entity] [specify entity described in Item 1119(a) of Regulation AB]
will retain or otherwise be the initial holder of one or more certificates[,
including the [identification of certificates having any special voting or
control rights]; however such entity will have the right to dispose of such
certificates at any time.
Cut-off Date
[___________________], 200[__].
Delivery Date
On or about [___________________], 200[__].
Distribution Dates
The 10th day of each calendar month, or if such day is not a business day,
the next succeeding business day. The first Distribution Date with respect to
the offered certificate will occur in [_______].
Transaction Overview
On the closing date the sponsor will sell the mortgage loans to the
depositor, which will in turn deposit them into a common law trust. The trust,
which is the issuing entity, will be formed by a pooling and servicing
agreement, to be dated as of the cut-off date, among the depositor, the servicer
and the trustee. The master servicer will service the mortgage loans (other than
the specially-serviced mortgage loans) in accordance with the pooling and
servicing agreement and provide the information to the trustee necessary for the
trustee to calculate distributions and other information regarding the
certificates.
S-2
The transfers of the mortgage loans from the sponsor to the depositor to
the issuing entity in exchange for the certificates is illustrated below:
---------
Sponsor Offered
--------- Certificates
| ^
Mortgage Loans | | Cash
v |
--------- -----------
Depositor ----------------------------------> Underwriter
--------- <---------------------------------- -----------
| ^ Cash | ^
Mortgage Loans | | All Certificates Offered Certificate | | Cash
v | | |
--------- v |
Issuing Investors
Entity
---------
The Mortgage Pool
The mortgage pool will consist primarily of [_____] multifamily and
commercial mortgage loans with an initial pool balance of $[_________________].
On or prior to [_________ ___], 200[__], we will acquire the mortgage loans from
the mortgage loan seller pursuant to a mortgage loan purchase and sale
agreement. A summary chart of certain aggregate characteristics of the Mortgage
Loans is set forth in the table on page S-[__]. Further information regarding
the Mortgage Loans is contained in this prospectus supplement under "Description
of the Mortgage Pool". In addition, Annex A contains information on each
Mortgage Loan in the mortgage pool on an individual basis, and Annex B
summarizes aggregate information regarding the Mortgage Loan in the mortgage
pool according to specific characteristics.
Each Mortgage Loan is secured by a first mortgage lien on a fee simple
and/or leasehold interest in a commercial or multifamily rental property. Set
forth below are the number of mortgage loans, and the approximate percentage of
the aggregate principal balance of the Mortgage Loans represented by such
Mortgage Loans, that are secured by Mortgaged Properties operated for each
indicated purpose:
Percentage of initial
Property Type Number of mortgage loans pool balance
- ------------------------------------------------------------ -------------------------- ---------------------
[Multifamily...............................................]
[Specify various types of commercial properties............]
See "Risk Factors-Risks Associated With Multifamily Properties" and "-Risks
Associated with [___________] Properties" and "Description of the Mortgage
Pool-Additional Mortgage Loan Information" in this prospectus supplement.
S-3
The mortgaged properties are located throughout [____] states. Set forth
below are the number of mortgage loans, and the approximate percentage of the
initial pool balance represented by such mortgage loans, that are secured by
mortgaged properties located in the [_____] states with the highest
concentrations:
Percentage of initial
State Number of mortgage loans pool balance
- ------------------------------------------------------------ -------------------------- ---------------------
[Specify all states with a concentration
of 10% or greater.....................................]
[___________] of the mortgage loans, which [___________] of the mortgage
loans, which represent [______]% of the initial pool balance, provide for
monthly payments of principal and/or interest to be due on the first day of each
month; the remainder of the mortgage loans provide for monthly payments to be
due on the [____, _____], [_____] or [_____] day of each month.
The annualized rate at which interest accrues on [____] of the mortgage
loans, which represent [_____]% of the initial pool balance, is subject to
adjustment on specified due dates by adding a fixed number of basis points to
the value of a base index, subject, in [______] cases, to lifetime maximum
and/or minimum mortgage rates, and in [_____] cases, to periodic maximum and/or
minimum mortgage rates, in each case as described in this prospectus supplement.
The remaining mortgage loans bear interest at fixed mortgage rates. [____] of
the adjustable rate mortgage loans mentioned above, which represent [___]% of
the initial pool balance, provide for mortgage rate adjustments to occur
monthly, while the remainder of such mortgage loans provide for mortgage rate
adjustments to occur semi-annually or annually. [Identification of applicable
Mortgage Loan Index.] See "Description of the Mortgage Pool--Certain Terms and
Conditions of the Mortgage Loans" in this prospectus supplement.
The amount of the monthly payment on all of the adjustable rate mortgage
loans is subject to adjustment on specified due dates to an amount that would
amortize the outstanding principal balance of the mortgage loan over its then
remaining amortization schedule and pay interest at the then applicable mortgage
rate. Payment adjustments for adjustable rate mortgage loans will occur on the
due date following each related interest rate adjustment.
[_________] of the mortgage loans provide for monthly payments of principal
based on amortization schedules significantly longer than the remaining terms of
such mortgage loans, thereby leaving substantial principal amounts due and
payable with corresponding interest payments, on their respective maturity
dates, unless prepaid prior thereto.
THE CERTIFICATES
General
The certificates will be issued pursuant to a pooling and servicing
agreement, and will represent in the aggregate the entire beneficial ownership
interest in the trust fund, which will consist of the mortgage pool and certain
related assets. A summary chart of the initial class balances, pass-through
rates, and ratings of the certificates is set forth in the table on page S-[__].
Denominations. The certificates will be issued, maintained and transferred
on the book-entry records of The Depository Trust Company in minimum
denominations of $[______], in the case of the Class A Certificates and
$[_____], in the case of the Class B Certificates. Investments in excess of the
minimum denomination may be made in multiples of $1. One certificate of each
class may be issued in a different amount in order to evidence the remainder of
the initial certificate balance of such class.
Certificate Registration. The certificates will be represented by one or
more global certificates registered in the name of Cede & Co., as nominee of The
Depository Trust Company. You may hold your offered certificates through: DTC in
the United States; or Clearstream Banking, or the Euroclear System in Europe.
Transfers within DTC, Clearstream Banking or Euroclear will be made in
accordance with the usual rules and operating procedures of those systems. We
may elect to terminate the book-entry system through DTC with respect to all or
any portion of any class of the offered certificates. No person acquiring an
interest in the certificates will be entitled to receive a
S-4
certificate in fully registered, certificated form, except under the limited
circumstances described in this prospectus supplement and in the accompanying
prospectus. See "Description of the Certificates--Book-Entry Registration of the
Offered Certificates" in this prospectus supplement and "Description of the
Certificates--Book-Entry Registration and Definitive Certificates" in the
accompanying prospectus.
For purposes of calculating the pass-through rate for any class of
certificates and any date of distribution, the applicable effective net mortgage
rate for each mortgage loan is an annualized rate equal to--
o the mortgage rate in effect for such mortgage loan as of the [___] day
of the most recently ended calendar month;
o reduced by [___] basis points; and
o if the accrual of interest on such mortgage loan is computed other
than on the basis of a 360-day year consisting of twelve 30-day months
(which is the basis of accrual for interest on the certificates), then
adjusted to reflect that difference in computation.
See "Description of the Certificates--Distributions--Pass-Through Rates"
and "--Certain Calculations with Respect to Individual Mortgage Loans" in this
prospectus supplement.
Distributions
A. General
Distribution on the certificates will occur monthly on each Distribution
Date.
B. Priority of Distributions
The servicing and trustee fees for the mortgage loans are payable out of
collections on the mortgage loans, prior to any distributions to
certificateholders. A table setting forth the rates at which the various
servicing and trustee fees accrue, as well as other information concerning the
administrative expenses of the trust, are set forth in this prospectus
supplement under "Compensation and Expenses". The remaining total of all
payments or other collections (or advances in lieu thereof) on or in respect of
the mortgage loans (but excluding prepayment premiums, yield maintenance charges
and excess interest, each as described in this prospectus supplement) that are
available for distributions of interest on and principal of the certificates on
any distribution date is referred to in this prospectus supplement as the
available distribution amount for such date. See "Description of the
Certificates--Distributions--Available Distribution Amount" in this prospectus
supplement. On each distribution date, the trustee will apply the available
distribution amount of such date for the following purposes and in the following
order of priority:
[Summarize applicable priority of payments, for example:
First, [pro rata,] to the Class A Certificates [and the Class X
Certificates], to pay interest then due on the Class A Certificates [and the
Class X Certificates], as well as to reimburse any previously unreimbursed
interest shortfalls on such certificates from prior distribution dates;
Second, to the Class A Certificates, to the extent of amounts required to
be distributed as principal, as a distribution of principal to the Class A
Certificates, until the certificate balance of the Class A Certificates is
reduced to zero;
Third, to the Class A Certificates, to reimburse the Class A Certificates
for any previously unreimbursed losses on the mortgage loans allocable to
principal that were previously borne by such class;
Fourth, to the Class B Certificates, to pay interest then due on the Class
B Certificates, as well as to reimburse any previously unreimbursed interest
shortfalls on such certificates from prior distribution dates;
S-5
Fifth, to the Class B Certificates, to the extent of amounts required to be
distributed as principal, as a distribution of principal to the Class B
Certificates, until the certificate balance of the Class B Certificates is
reduced to zero;
Sixth, to the Class B Certificates, to reimburse the Class B Certificates
for any previously unreimbursed losses on the mortgage loans allocable to
principal that were previously borne by such class; and
Finally, to the Private Certificates, in the amounts and order of priority
provided for in the pooling and servicing agreement.]
[Summary of cases in which classes of certificates may be entitled to
distributions from a credit support provider or from a particular group of
mortgage loans or otherwise from less than all of the mortgage loans (if
applicable and to the extent not already provided for in the priority of
payments itself).]
C. Interest and Principal Entitlements
A description of each class's interest entitlement can be found under
"Description of the Certificates--Distributions--Distributable Certificate
Interest" in this prospectus supplement. As a result of the priority of payments
summarized above and as further described under such heading, there are
circumstances in which your interest entitlement for a distribution date could
be less than one full month's interest at the pass-through rate on your
certificate's principal [or notional] amount.
The amount of principal required to be distributed to the classes entitled
to principal on a particular distribution date also can be found under
"Description of the Certificates--Distributions--Principal Distribution Amount"
in this prospectus supplement.
D. Prepayment Premiums
The manner in which prepayment premiums and yield maintenance charges
received during a particular collection period will be allocated to on or more
of the classes of offered certificates is described under "Description of the
Certificates--Distributions--Distribution of Prepayment Premiums" in this
prospectus supplement.
Certain Yield and Prepayment Considerations
The yield on the offered certificates of any class will depend on, among
other things, the pass-through rate for those certificates. The yield on any
offered certificate that is purchased at a discount or premium will also be
affected by the rate and timing of distributions in respect of principal on such
certificate, which in turn will be affected by --
o the rate and timing of principal payments (including principal
prepayments) on the mortgage loans; and
o the extent to which such principal payments are applied on any date of
distribution in reduction of the certificate balance of the class to
which that certificate belongs.
See "Description of the Certificates--Distributions--Priority" and
"--Distributions--Scheduled Principal Distribution Amount and Unscheduled
Principal Distribution Amount" in this prospectus supplement.
An investor that purchases an offered certificate at a discount should
consider the risk that a slower than anticipated rate of principal payments on
that certificate will result in an actual yield that is lower than such
investor's expected yield. An investor that purchases any offered certificate at
a premium should consider the risk that a faster than anticipated rate of
principal payments on such certificate will result in an actual yield that is
lower than such investor's expected yield. Insofar as an investor's initial
investment in any offered certificate is repaid, there can be no assurance that
such amounts can be reinvested in a comparable alternative investment with a
comparable yield.
The actual rate of prepayment of principal on the mortgage loans cannot be
predicted. The mortgage loans may be prepaid at any time, subject, in the case
of [____] mortgage loans, to payment of a prepayment premium. The
S-6
investment performance of the offered certificates may vary materially and
adversely from the investment expectations of investors due to prepayments on
the mortgage loans being higher or lower than anticipated by investors. The
actual yield to the holder of an offered certificate may not be equal to the
yield anticipated at the time of purchase of the certificate or, notwithstanding
that the actual yield is equal to the yield anticipated at that time, the total
return on investment expected by the investor or the expected weighted average
life of the certificate may not be realized. For a discussion of certain factors
affecting prepayment of the mortgage loans, including the effect of prepayment
premiums, see "Yield and Maturity Considerations" in this prospectus supplement.
[The structure of the offered certificates causes the yield of certain
classes to be particularly sensitive to changes in the rates of prepayment of
the mortgage loans and other factors, as follows:]
[Allocation to the senior certificates, for so long as they are
outstanding, of the entire unscheduled principal distribution amount for each
date of distribution will generally accelerate the amortization of those
certificates relative to the actual amortization of the mortgage loans.
Following retirement of the Class A Certificates, the unscheduled principal
distribution amount for each date of distribution will be allocated to the Class
B Certificates.]
[The following disclosure is applicable to stripped interest certificates,
when offered... The Stripped Interest Certificates. The Class X Certificates are
interest-only certificates and are not entitled to any distributions in respect
of principal. The yield to maturity of the Class X Certificates will be
especially sensitive to the prepayment, repurchase, substitution and default
experience on the mortgage loans, which may fluctuate significantly from time to
time. A rate of principal payments that is more rapid than expected by investors
will have a material negative effect on the yield to maturity of the Class X
Certificates. See "Yield and Maturity Considerations--Yield Sensitivity of the
Class X Certificates" in this prospectus supplement.]
Advances
A. P&I Advances
The master servicer (or the trustee, if applicable) is required to advance
delinquent monthly mortgage loan payments if it determines that the advance will
be recoverable. The master servicer will not advance balloon payments due at
maturity, late payment charges or default interest. The master servicer also is
not required to advance prepayment or yield maintenance premiums. If an advance
is made, the master servicer will not advance its servicing fee, but will
advance the trustee's fee.
B. Property Protection Advances
The master servicer (or the trustee, if applicable) may also be required to
make advances to pay delinquent real estate taxes, assessments and hazard
insurance premiums and similar expenses necessary to protect and maintain the
mortgaged property, to maintain the lien on the mortgaged property or enforce
the related mortgage loan documents if it determines that such advances will be
recoverable.
C. Interest on Advances
The master servicer and the trustee, as applicable, will be entitled to
interest as described in this prospectus supplement on any of the advances
referenced in the two immediately preceding paragraphs. Interest accrued on any
of these outstanding advances may result in reductions in amounts otherwise
payable on the certificates.
See "Description of the Certificates--Advances in Respect of Delinquencies"
and "The Pooling and Servicing Agreements--Certificate Account" in the
accompanying prospectus.
Credit Support
Credit support for the offered certificates is provided by subordination.
The rights of the holders of the Class B and Class C Certificates to receive
distributions with respect to the mortgage loans will be subordinate to the
rights of the holders of the senior certificates, and the rights of the holders
of the Class C certificates to receive distributions with respect to the
mortgage loans will be subordinate to the rights of the holders of the Class B
Certificates, in each case to the extent described in this prospectus supplement
and in the accompanying prospectus.
S-7
This subordination is intended to enhance the likelihood of timely receipt by
the holders of the senior certificates of the full amount of all interest
payable in respect of such certificates on each date of distribution, and the
ultimate receipt by those holders of principal in an amount equal to the entire
aggregate certificate balance of the senior 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 interest payable in respect of those
certificates on each date of distribution, 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 date of distribution to
distributions on the respective classes of certificates in the order described
in this prospectus supplement under "Description of the
Certificates--Distributions-Priority". No other form of credit support will be
available for the benefit of the holders of the offered certificates.
The chart below describes the manner in which the right of various classes
will be senior to the rights of other classes. Entitlement to receive principal
and interest on any date of distribution is depicted in descending order.
Subordination(1)
- --------------------------------------------------------------------------------
Priority of Payment /|\
| Class A |
| (Credit Support [____]% |
| |
| |
| Class B |
| (Credit Support [____]% |
| |
| |
| Class C Order of
\|/ (Credit Support [____]% Loss Allocation
- --------------------------------------------------------------------------------
- ------------------
(1) The credit support percentage set forth in this chart shows the aggregate
initial class balance of the classes of certificates subordinate to a class
or classes as a percentage of the initial aggregate principal balance of
the mortgage loans.
Allocation to the senior 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 senior
certificates are amortized faster than the mortgage loans, the percentage
interest evidenced by the senior 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). This will increase, relative
to their respective certificate balances, the subordination afforded the senior
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.
As a result of losses and other shortfalls experienced with respect to the
mortgage loans or otherwise with respect to the trust fund (which may include
shortfalls arising both from interest accrued on advances and from paying for
nonrecoverable advances), the aggregate stated principal balance of the mortgage
pool expected to be outstanding immediately following any date of distribution
may be less than the aggregate certificate balance of the certificates
immediately following the distributions on such date of distribution. Such
deficit will be allocated first to the Class C Certificates, then to the Class B
Certificates and last to the Class A Certificates (in reduction of their
certificate balances), in each case until the related certificate balance has
been reduced to zero. See "Description of the Certificates--Credit Support" in
this prospectus supplement.
Optional Termination
At its option, on any date of distribution on which the remaining aggregate
stated principal balance of the mortgage pool is less than [__]% of the initial
pool balance, the master servicer or the depositor may purchase all of
S-8
the mortgage loans and REO properties, and thereby effect termination of the
trust fund and early retirement of the then outstanding certificates. See
"Description of the Certificates--Termination; Retirement of Certificates" in
this prospectus supplement and in the accompanying prospectus.
Certain Federal Income Tax Consequences
One or more elections will be made to treat segregated portions of the
trust fund as a "real estate mortgage investment conduit," also referred to in
this prospectus supplement as a "REMIC" for federal income tax purposes. Upon
the issuance of the offered certificates, Cadwalader, Wickersham & Taft LLP,
counsel to the depositor, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the pooling and servicing agreement,
for federal income tax purposes, the trust fund will qualify as a REMIC under
Sections 860A through 860G of the Internal Revenue Code. For federal income tax
purposes, the Class A, Class B and Class C Certificates will be the "regular
interests" in the REMIC.
Under the REMIC regulations, the Class R Certificates may constitute
"noneconomic" residual interests for purposes of the REMIC Regulations.
Transfers of the Class R Certificates will be restricted under the pooling and
servicing agreement in the case of persons other than U.S. Persons (as defined
in this prospectus supplement) in a manner designed to prevent a transfer of a
noneconomic residual interest from being disregarded under the REMIC
regulations. See "Certain Federal Income Tax Consequences--Special Tax
Considerations Applicable to REMIC Residual Certificates" in this prospectus
supplement and "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" and "--Noneconomic
REMIC Residual Certificates" in the accompanying prospectus.
See "Yield and Maturity Considerations" and "Certain Federal Income Tax
Consequences--Special Tax Considerations Applicable to REMIC Residual
Certificates" in this prospectus supplement.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Certain Federal Income Tax
Consequences" in this prospectus supplement and in the accompanying prospectus.
ERISA Considerations
Subject to important considerations described under "Certain ERISA
Considerations" in this prospectus supplement and in the accompanying
prospectus, the depositor expects that the offered certificates are eligible for
purchase by persons investing assets of employee benefit plans or individual
retirement accounts. A benefit plan fiduciary considering the purchase of any
offered certificates should consult with its counsel to determine whether all
required conditions have been satisfied.
See "Certain ERISA Considerations" in this prospectus supplement and in the
accompanying prospectus.
Legal Investment
[The [______] certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended, so long as they are rated in one of the two highest categories by
[__________,] [_________,] or another nationally recognized statistical rating
organization.] [The [________] Certificates will not constitute "mortgage
related securities" within the meaning of the Secondary Mortgage Market
Enhancement Act of 1984, as amended.] 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 the offered 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 the offered certificates.
See "Legal Investment" in this prospectus supplement and in the
accompanying prospectus.
Certificate Ratings
It is a requirement for issuance of the offered certificates that they
receive credit ratings no lower than the following credit ratings from
[identification of applicable rating agencies]:
S-9
[Rating Agency] [Rating Agency] [Rating Agency]
- ----------------- --------------- --------------- ---------------
Class A [_____] [_____] [_____]
Class B [_____] [_____] [_____]
Class [X] [_____] [_____] [_____]
[The following disclosure is applicable to Stripped Interest Certificates,
when offered... A security rating does not address the frequency or likelihood
of prepayments (whether voluntary or involuntary) of mortgage loans, or the
possibility that, as a result of prepayments, investors in the Class X
Certificates may realize a lower than anticipated yield or may fail to recover
fully their initial investment.] See "Rating" in this prospectus supplement.
The ratings of the offered certificates address the likelihood of the
timely payment of interest and the ultimate repayment of principal by the rated
final distribution date. A security rating does not address the frequency of
prepayments (either voluntary or involuntary) or the possibility that
certificateholders might suffer a lower than anticipated yield, nor does a
security rating address the likelihood of receipt of prepayment premiums or the
collection of excess interest.
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. Any such revision, if negative, or withdrawal of a rating could
have a material adverse effect on the affected class of offered certificates.
See "Ratings" in this prospectus supplement and "Rating" in the accompanying
prospectus for a discussion of the basis upon which ratings are assigned, the
limitations and restrictions on ratings, and conclusions that should not be
drawn from a rating.
S-10
RISK FACTORS
o The risk factors discussed below and under the heading "Risk Factors"
in the accompanying prospectus describe the material risks of an
investment in the offered certificates and should be carefully
considered by all potential investors.
o The offered certificates are not suitable investments for all
investors and may especially not be suitable for individual investors.
o The offered certificates are complex financial instruments, so you
should not purchase any offered certificates unless you or your
financial advisor possess the necessary expertise to analyze the
potential risks associated with an investment in mortgage backed
securities.
o You should not purchase any offered certificates unless you
understand, and are able to bear, the prepayment, credit, liquidity
and market risks associated with such offered certificates.
Risks Related to the Certificates
Your Lack of Control Over the Trust Fund Can
Create Risk .................................. You and other certificateholders generally do not have the right to
make decisions with respect to the administration of the trust. See
"Servicing of the Mortgage Loans-General" in this prospectus
supplement. Such decisions are generally made, subject to the
express terms of the pooling and servicing agreement, by the master
servicer, the trustee or the special servicer, as applicable. You
will not be a party to any of these agreements and will be relying
on the persons who are to perform their duties under such agreements
and to enforce the obligations of the other parties to do the same.
Any decision made by one of those parties in respect of the trust,
even if such decision is determined to be in your best interests by
such party, may be contrary to the decision that you or other
certificateholders would have made and may negatively affect your
interests.
Transaction Party Roles and Relationships
Create Potential Conflicts of Interest ....... The special servicer will have latitude in determining whether to
liquidate or modify defaulted mortgage loans. See "Servicing of the
Mortgage Loans-Modifications, Waivers and Amendments" in this
prospectus supplement. [_________________], which we anticipate
will be the initial directing certificateholder, is an affiliate of
the special servicer.
The master servicer, the special servicer or an affiliate
of either (including the sponsor) may purchase certain of the
certificates or hold certain companion mortgage loans which are part
of a split loan structure but which are not held in the trust fund
or hold certain subordinate or mezzanine debt or interests therein
related to the mortgage loans. In addition, the holder of certain
of the non-offered certificates has the right to remove a special
servicer and appoint a successor, which may be an affiliate of such
holder. It is possible that the master servicer, the special
servicer or affiliates thereof may be holders of such non-offered
certificates. This could cause a conflict between the master
servicer's or the special servicer's duties to the trust under the
pooling and servicing agreement and its interest as a holder of a
certificate or a companion or subordinate mortgage loan or
S-11
interests therein. In addition, the master servicer is the sponsor, the
originator of the mortgage loans and the mortgage loan seller. This
could cause a conflict between the master servicer's duty to the
trust under the pooling and servicing agreement and its interests in
such other capacities. However, the pooling and servicing agreement
provides that the mortgage loans shall be administered in accordance
with the servicing standards without regard to ownership of any
certificate by the master servicer, the special servicer or any
affiliate of the master servicer or the special servicer. See
"Servicing of the Mortgage Loans -General" in this prospectus
supplement.
Additionally, any of those parties may, especially if it
holds the non-offered certificates, or has financial interests in or
other financial dealings with a borrower or sponsor under any of the
mortgage loans, have interests when dealing with the mortgage loans
that are in conflict with the interests of holders of the offered
certificates. For instance, if the special servicer or an affiliate
holds non-offered certificates, the special servicer could seek to
reduce the potential for losses allocable to those certificates from
a troubled mortgage loan by deferring acceleration in hope of
maximizing future proceeds. The special servicer might also seek to
reduce the potential for such losses by accelerating earlier than
necessary to avoid advance interest or additional trust fund
expenses. Either action could result in less proceeds to the trust
than would be realized if alternate action had been taken. In
general, a servicer is not required to act in a manner more
favorable to the offered certificates or any particular class of
offered certificates than to the non-offered certificates.
Additionally, each of the master servicer, the special
servicer and subservicers under their employ currently services or
will, in the future, service, in the ordinary course of its
business, existing and new loans for third parties, including
portfolios of loans similar to the mortgage loans that will be
included in the trust. The real properties securing these other
loans may be in the same markets as, and compete with, certain of
the real properties securing the mortgage loans that will be
included in the trust. Consequently, personnel of the master
servicer, the special servicer and such subservicers may perform
services, on behalf of the trust, with respect to the mortgage loans
at the same time as they are performing services, on behalf of other
persons, with respect to other mortgage loans secured by properties
that compete with the mortgaged properties securing the Mortgage
Loans. This may pose inherent conflicts for the master servicer,
the sub-servicers and the special servicer.
In addition, certain of the Mortgage Loans included in the
trust fund may have been refinancings of debt previously held by the
sponsor or an affiliate of the sponsor.
The sponsor, the underwriters or their respective
affiliates may have other business relationships with the borrowers
under the mortgage loans. The sponsor, the underwriters or their
respective affiliates may also have or have had equity investments
in the borrowers (or in the owners of the borrowers) or properties
under certain of the mortgage loans included in the trust. The
sponsor, the underwriters and their respective affiliates have made
or may make or have preferential rights to make loans to, or equity
investments in, affiliates of the borrowers
S-12
under the mortgage loans. The sponsor or its affiliates may also hold
mezzanine debt related to a borrower, but which is not held in the
trust fund.
In addition, the sponsor, the underwriters and their
respective affiliates may provide financing to the purchasers of
certificates, companion mortgage loans or mezzanine loans.
The related property managers and borrowers may experience
conflicts of interest in the management and/or ownership of the real
properties securing the mortgage loans because:
o a substantial number of the mortgaged real properties are
managed by property managers affiliated with the respective
borrowers;
o certain of the mortgaged real properties are self-managed by
the borrowers themselves;
o these property managers also may manage and/or franchise
additional properties, including properties that may compete with
the mortgaged properties; and
o affiliates of the property managers and/or the borrowers, or the
property managers and/or the borrowers themselves also may own other
properties, including competing properties.
[To be included for transactions where static pool data is deemed
not material or misleading:
The Prospective Performance of the Commercial
and Multifamily Mortgage Loans Included in a
Particular Trust Fund Should Be Evaluated
Separately from the Performance of the
Mortgage Loans in any of our Other Trusts..... While there may be certain common factors affecting the performance
and value of income-producing real properties in general, those
factors do not apply equally to all income-producing real properties
and, in many cases, there are unique factors that will affect the
performance and/or value of a particular income-producing real
property. Moreover, the effect of a given factor on a particular
real property will depend on a number of variables, including but
not limited to property type, geographic location, competition,
sponsorship and other characteristics of the property and the
related mortgage loan. Each income-producing real property
represents a separate and distinct business venture; and, as a
result, each of the multifamily and commercial mortgage loans
included in one of the depositor's trusts requires a unique
underwriting analysis. Furthermore, economic and other conditions
affecting real properties, whether worldwide, national, regional or
local, vary over time. The performance of a pool of mortgage loans
originated and outstanding under a given set of economic conditions
may vary significantly from the performance of an otherwise
comparable mortgage pool originated and outstanding under a
different set of economic conditions. Accordingly, investors should
evaluate the mortgage loans underlying the offered certificates
S-13
independently from the performance of mortgage loans underlying any
other series of offered certificates. As a result of the distinct
nature of each pool of commercial mortgage loans, and the separate
mortgage loans within the pool, this prospectus supplement does not
include disclosure concerning the delinquency and loss experience of
static pools of periodic originations by the sponsor of assets of
the type to be securitized (known as "static pool data"). Because
of the highly heterogeneous nature of the assets in commercial
mortgage backed securities transactions, static pool data for prior
securitized pools, even those involving the same asset types (e.g.,
hotels or office buildings), may be misleading, since the economics
of the properties and terms of the loans may be materially
different. In particular, static pool data showing a low level of
delinquencies and defaults would not be indicative of the
performance of this pool or any other pools of mortgage loans
originated by the same sponsor or sponsors. Therefore, investors
should evaluate this offering on the basis of the information set
forth in this prospectus supplement with respect to the mortgage
loans, and not on the basis of any successful performance of other
pools of securitized commercial mortgage loans.]
Subordination of Certain Classes of
Certificates May Result in a Loss to Holders
of These Certificates......................... As and to the extent described in this prospectus supplement, the
rights of the holders of the Class B and Class C Certificates to
receive distributions of amounts collected or advanced on or in
respect of the mortgage loans will be subordinated to those of the
holders of the senior certificates and also, in the case of the
holders of the Class C Certificates, also to those of the holders of
the Class B Certificates. See "Description of the
Certificates-Distributions-Priority" and "-Credit Support" in this
prospectus supplement.
Subordination of Subordinate Certificates
Increases Risk of Loss ....................... Subordinate certificateholders are more likely to suffer losses as a
result of losses or delinquencies on the mortgage loans than are
senior certificateholders.
o The rights of each class of subordinate certificates to receive
distributions of interest and principal are subordinate to the
rights of the senior certificates and each class of subordinate
certificates with a lower alphabetical designation. For example,
the Class B Certificates will not receive principal or interest on a
distribution date until the Class A Certificates have received the
amounts to which they are entitled on that distribution date.
o Losses that are realized on the mortgage loans will be
allocated first to the Class C Certificates then to the Class B
Certificates and so on, in reverse alphabetical order, until the
outstanding class balances of those classes have been reduced to
zero.
Modeling Assumptions Are Unlikely To Match
Actual Experience ............................ The "Assumed Final Maturity Date" and the tables set forth under
"Yield and Maturity Considerations" in this prospectus supplement
are
S-14
based on the assumptions described in such section under
"-Weighted Average Life".
Decrement and Sensitivity Tables Are Based
Upon Assumptions and Models .................. There will likely be discrepancies between the characteristics of
the actual mortgage loans and the characteristics of the assumed
mortgage loans used in preparing the decrement tables and the
sensitivity tables. Any such discrepancy may have an effect upon
the percentages of initial class balances outstanding set forth in
the decrement tables (and the weighted average lives of the offered
certificates) and the yields to maturity set forth in the yield
tables. In addition, to the extent that the mortgage loans that
actually are included in the mortgage pool have characteristics that
differ from those assumed in preparing the decrement tables and the
sensitivity tables, the class balance of a class of offered
certificates could be reduced to zero earlier or later than
indicated by the decrement tables and the yield to maturity may be
higher or lower than indicated in the sensitivity tables. It is
impossible to predict with certainty the rate at which the mortgage
loans will actually be repaid or that the mortgage loans will
otherwise perform consistently with such assumptions.
The models used in this prospectus supplement for
prepayments and defaults also do not purport to be a historical
description of prepayment or default experience or a prediction of
the anticipated rate of prepayment or default of any pool of
mortgage loans, including the mortgage loans contained in the
trust. It is highly unlikely that the mortgage loans of a loan
group will prepay or liquidate at any of the rates specified or that
losses will be incurred according to one particular pattern. The
assumed percentages of CPR and the loss severity percentages shown
are for illustrative purposes only. For a description of CPR, see
"Yield and Maturity Considerations" in this prospectus supplement.
The actual rates of prepayment and liquidation and loss severity
experience of the mortgage loans of a loan group may not correspond
to any of the assumptions made in this prospectus supplement. For
these reasons, the weighted average lives of the offered
certificates may differ from the weighted average lives shown in 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.
See also "Risk Factors-Prepayment Models Are Illustrative
Only and Do Not Predict Weighted Average Life and Maturity" in the
accompanying prospectus.
Geographic Concentration of the Mortgaged
Properties May Adversely Affect Payments on
S-15
Your Certificates; Concentrations of Mortgage
Loans and Borrowers May Subject the Trust
Fund to an Increased Risk of Loss............. [______] mortgage loans, which represent [____]% of the initial pool
balance, are secured by liens on mortgaged properties located in
[_____________] [List of all states with respect to which a
concentration of 10% or more exists.]. 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.
Increased Risk of Loss Associated With
Concentration of Mortgage Loans and Borrowers. Several of the mortgage loans have cut-off date balances that are
substantially higher than the average cut-off date balance. In
general, concentrations in a mortgage pool of loans with
larger-than-average balances can result in losses that are more
severe, relative to the size of the pool, than would be the case if
the aggregate balance of the pool were more evenly distributed.
Concentration of borrowers also poses increased risks. For
instance, if a borrower that owns several mortgaged properties
experiences financial difficulty at one mortgaged property, or at
another income-producing property that it owns, it could attempt to
avert foreclosure by filing a bankruptcy petition that might have
the effect of interrupting monthly payments for an indefinite period
on all of the related mortgage loans.
Balloon Loans May Present Greater Risk than
Fully-Amortizing Loans ....................... The mortgage loans have the amortization characteristics set forth
in the following table:
% of
Number of Initial
Mortgage Pool
Type of Amortization Loans Balance
-------------------------------------------------- ----------- ---------
Interest only.................................... [___] [___]%
IO, Balloon...................................... [___] [___]
Balloon.......................................... [___] [___]
Total............................................ [___] [___]%
The timing of certain balloon payments is as set forth in the following table:
% of
Number of Initial
Mortgage Pool
Type of Amortization Loans Balance
------------------------------------------------- ---------- ----------
Balloon Payment due during the period
between [DATE] and [DATE]..................... [___] [___]%
Interest Only until Maturity Date or
Anticipated Maturity Date..................... [___] [___]%
S-16
Mortgage loans with balloon payments involve a greater
likelihood of default than fully 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-Certain Factors
Affecting Delinquency, Foreclosure and Loss of the Mortgage
Loans-Increased Risk of Default Associated With Balloon Payments" in
the accompanying prospectus.
Commercial Real Estate Values May Fluctuate
and Adversely Affect Your Investment ......... There can be no assurance that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. The value of any
mortgaged property generally will change over time from its value on
the appraisal or sales date. If commercial real estate values
generally or in a particular geographic area decline, the
loan-to-value ratios shown in the tables in Annex A might not be a
reliable indicator of the rates of delinquencies, foreclosures and
losses that could occur on the mortgage loans. If the commercial
real estate market should experience an overall decline in property
values large enough to cause the outstanding balances of the
Mortgage Loans and any secondary financing on the related Mortgaged
Properties to equal or exceed the value of the Mortgaged Properties,
delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry or in the
sponsor's prior securitizations involving the depositor.
In addition, adverse economic conditions and other factors
(which may or may not affect real property values) may affect the
mortgagors' timely payment of scheduled payments of principal and
interest on the mortgage loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to any mortgage
pool. These other factors could include excessive building
resulting in an oversupply of commercial properties of a particular
type in a particular area or a decrease in employment reducing the
demand for such commercial properties in an area. To the extent
that credit enhancements do not cover such losses, your yield may be
adversely impacted.
[[___] Mortgaged Properties are Subject to
Certain Risks................................. Disclosure regarding property types with respect to which there
exists a material concentration in the trust fund, with appropriate
cross-reference to base prospectus disclosure.]
Materially Adverse Environmental Conditions
Will Subject the Trust Fund to Potential
Liability..................................... [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
S-17
o those cases in which an operations and maintenance plan or
periodic monitoring of nearby properties was recommended, which
recommendations are consistent with industry wide practices].
The pooling and servicing agreement to be dated as of the cut-off
date, among the depositor, the master servicer, the special
servicer, the trustee and the REMIC administrator, requires that the
master servicer obtain an environmental site assessment of a
mortgaged property securing a defaulted mortgage loan prior to
acquiring title thereto or assuming its operation. Such prohibition
effectively precludes enforcement of the security for the related
mortgage note until a satisfactory environmental site assessment is
obtained (or until any required remedial action is thereafter
taken), but will decrease the likelihood that the trust fund will
become liable for a material adverse environmental condition at the
mortgaged property. However, there can be no assurance that the
requirements of the pooling and servicing agreement will effectively
insulate the trust fund from potential liability for a materially
adverse environmental condition at any mortgaged property. See "The
Pooling and Servicing Agreements-Realization Upon Defaulted Mortgage
Loans", "Risk Factors-Certain Factors Affecting Delinquency,
Foreclosure and Loss of the Mortgage Loans-Adverse Environmental
Conditions May Subject a Mortgage Loan to Additional Risk" and
"Certain Legal Aspects of Mortgage Loans-Environmental
Considerations" in the accompanying prospectus.
[Different Underwriting Guidelines May Affect
Performance of the Mortgage Pool.............. To the extent all mortgage loans were not originated or acquired in
accordance with the description of the sponsor's underwriting
guidelines described in the prospectus (e.g., in cases when there is
more than one sponsor or loan seller with respect to a particular
series), such different underwriting guidelines used may be less
stringent than the general guidelines employed by the sponsor.
[Disclosure regarding any associated material risks, e.g., certain
of the mortgage loans may have been originated with less than
standard documentation or with higher maximum loan-to-value
ratios.] Accordingly, the mortgage loans may experience rates of
delinquencies, defaults, foreclosure, bankruptcy and loss that are
higher than those experienced by mortgage loans underwritten using
Bank of America's general underwriting standards.]
[Increases in Monthly Payments of Adjustable
Rate Mortgage Loans May Result in an Increased
Risk of Defaults.............................. [________] of the mortgage loans, which represent [____]% of the
initial pool balance, are adjustable rate mortgage loans. Increases
in the required monthly payments on adjustable rate mortgage loans
in excess of those assumed in the original underwriting of such
loans may result in a default rate higher than that on mortgage
loans with fixed mortgage rates.]
[Adjustable Rate Mortgage Loan Borrowers May
Be More Likely to Prepay...................... With respect to mortgage loans having adjustable interest rates,
mortgage interest rates on such mortgage loans at any time may not
equal the prevailing mortgage interest rates for similar adjustable
rate
S-18
loans, and accordingly the prepayment rate may be lower or
higher than would otherwise be anticipated. Moreover, some
mortgagors who prefer the certainty provided by fixed-rate mortgage
loans may nevertheless obtain adjustable rate mortgage loans at a
time when they regard the mortgage interest rates (and, therefore,
the payments) on fixed-rate mortgage loans as unacceptably high.
These mortgagors may be induced to refinance adjustable rate
mortgage loans when the mortgage interest rates and monthly payments
on comparable fixed-rate mortgage loans decline to levels which
these mortgagors regard as acceptable, even though these mortgage
interest rates and monthly payments may be significantly higher than
the current mortgage interest rates and monthly payments on the
mortgagors' adjustable rate mortgage loans. The ability to
refinance a mortgage loan will depend on a number of factors
prevailing at the time refinancing is desired, such as, among other
things, real estate values, the mortgagor's financial situation,
prevailing mortgage interest rates, the mortgagor's equity in the
related Mortgaged Property, tax laws and prevailing general economic
conditions.
Further, because the pass through rates on the certificates
will be based on the weighted average of the net mortgage interest
rates of the related mortgage loans, disproportionate principal
payments on the related mortgage loans having net mortgage interest
rates higher or lower than the then current pass through rates on
the certificates will affect the pass through rates for the
certificates for future periods and the yields on the certificates.
See "The Mortgage Pool" in this prospectus supplement.]
Increased Concentrations Resulting from
Principal Payments on the Mortgage Loans May
Expose Your Certificates to Risk.............. 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.
DESCRIPTION OF THE MORTGAGE POOL
General
The trust fund will consist primarily of [___] conventional, multifamily
and commercial mortgage loans with an Initial pool balance of
$[_______________]. Each Mortgage Loan is evidenced by a Mortgage Note and
secured by a Mortgage that creates a first mortgage lien on a fee simple and or
leasehold interest in a Mortgaged Property. All percentages of the Mortgage
Loans, or of any specified group of Mortgage Loans, referred to in this
prospectus supplement without further description are approximate percentages by
aggregate Cut-off Date Balance. The Cut-
S-19
off Date Balance of any Mortgage Loan is the unpaid principal balance thereof as
of the Cut-off Date, after application of all payments due on or before such
date, whether or not received.
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 the Delivery Date, the Depositor will acquire the Mortgage
Loans from the Mortgage Loan Seller pursuant to the mortgage loan purchase and
sale agreement and will then assign its interests in the Mortgage Loans, without
recourse, to the Trustee for the benefit of the certificateholders. See
"--[Significant Originators and Obligors]" in this prospectus supplement and
"The Pooling and Servicing Agreements-Assignment of Mortgage Loans; Repurchases"
in the accompanying prospectus.
The Mortgage Loans were originated between 20[__] and 20[__]. The Sponsor
originated [____] of the Mortgage Loans, which represent [___]% of the Initial
Pool Balance, and acquired the remaining Mortgage Loans from the respective
originators thereof, generally in accordance with the underwriting criteria
described in the accompanying prospectus under "Bank of America, National
Association, as Sponsor".
The Mortgage Loans were selected by the Sponsor, with advice from Banc of
America Securities LLC (the "Underwriter") as to the characteristics of the
Mortgage Loans in each loan group that will optimize marketability of the
certificates, from the Sponsor's portfolio of multifamily and commercial
mortgage loans, and were chosen to meet the requirements imposed by rating
agencies to achieve the credit support percentages listed in the table in the
Executive Summary.
Certain Terms and Conditions of the Mortgage Loans
Due Dates.
[___] of the Mortgage Loans, which represent [___]% of the Initial Pool
Balance, have Due Dates that occur on the first day of each month. The remaining
Mortgage Loans have Due Dates that occur on the [______] ([____]% of the
Mortgage Loans), [_____] ([____]% of the Mortgage Loans), [_____] ([____]% of
the Mortgage Loans), and [_______] ([____]% of the Mortgage Loans) day of each
month.
Mortgage Rates; Calculations of Interest. [____] of the Mortgage Loans,
which represent [____] of the Initial Pool Balance, bear interest at a per annum
rate that is fixed for the remaining term of the Mortgage Loan, except as
described below, each ARD loan will accrue interest at a higher rate after its
anticipated repayment date. As used in this prospectus supplement, the term
mortgage rate does not include the incremental increase in rate at which
interest may accrue on an ARD loan after its anticipated repayment date. As of
the Cut-Off Date, the mortgage rates of the Mortgage Loans ranged as shown in
the following chart:
Number of Aggregate Cut-off % of Initial
Range of Mortgage Rates Mortgage Loans Date Balance Pool Balance
- ------------------------------------------------------- ----------------- ------------------- --------------
[____]% - [____]%....................................... [___] $ [__________] [__]%
[____]% - [____]%....................................... [___] $ [__________] [__]%
[____]% - [____]%....................................... [___] $ [__________] [__]%
[____]% - [____]%....................................... [___] $ [__________] [__]%
[____]% - [____]%....................................... [___] $ [__________] [__]%
Total................................................... [___] $ [__________] 100%
[____________] of the Mortgage Loans, which represent [____]% of the
Initial Pool Balance, are ARM Loans. The ARM Loans bear interest at mortgage
rates that are subject to adjustment on periodically occurring Interest Rate
Adjustment Dates by adding the related Gross Margin to the applicable value of
the related Index, subject in [______] cases to rounding conventions and
lifetime minimum and/or maximum mortgage rates and, in the case of
S-20
[________] Mortgage Loans, which represent [____]% of the Initial Pool Balance,
to periodic minimum and/or maximum mortgage rates. The remaining Mortgage Loans
are Fixed Rate Loans. None of the ARM Loans is convertible into a Fixed Rate
Loan.
[Identification of the applicable Mortgage Loan Index.] The adjustments to
the mortgage rates on the ARM Loans may in each case be based on the value of
the related Index as available a specified number of days prior to the Interest
Rate Adjustment Date, or may be based on the value of the related Index as most
recently published as of an Interest Rate Adjustment Date or as of a designated
date preceding an Interest Rate Adjustment Date.
o [____] of the ARM Loans, which represent [___]% of the Initial Pool
Balance, provide for Interest Rate Adjustment Dates that occur
monthly;
o [____] of the ARM Loans, which represent [___]% of the Initial Pool
Balance, provide for Interest Rate Adjustment Dates that occur
semi-annually; and
o the remaining ARM Loans provide for Interest Rate Adjustment Dates
that occur annually.
The monthly payments on each ARM Loan are subject to adjustment on each
Payment Adjustment Date to an amount that would amortize fully the principal
balance of the Mortgage Loan over its then remaining amortization schedule and
pay interest at the mortgage rate in effect during the one month period
preceding such Payment Adjustment Date. The ARM Loans provide for "Payment
Adjustment Dates" that occur on the Due Date following each related Interest
Rate Adjustment Date. None of the ARM Loans provide for negative amortization.
[________] of the Mortgage Loans provide for monthly payments of principal
based on amortization schedules significantly longer than the remaining terms of
those Mortgage Loans. Thus, each of these Mortgage Loans will have a Balloon
Payment due at its stated maturity date, unless prepaid prior thereto.
No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose "Prepayment Premiums" in connection with
full or partial prepayments. Prepayment Premiums are payable to the Master
Servicer as additional servicing compensation, to the extent not otherwise
applied to offset Prepayment Interest Shortfalls, and may be waived by the
Master Servicer in accordance with the servicing standard described under
"Servicing of the Mortgage Loans-General" in this prospectus supplement.
Hyperamortization. [____] of the Mortgage Loans, which represent [____] of
the Initial Pool Balance, provide for changes in payments and accrual of
interest if it is not paid in full by the related anticipated repayment date.
Commencing on the anticipated repayment date, the ARD loans generally will bear
interest at a fixed per annum rate equal to the revised rate set forth in the
related Mortgage Note extending until final maturity. The excess interest rate
is the difference in the rate of the revised rate over the mortgage rate.
Interest accrued at the excess interest rate is referred to in this prospectus
supplement as Excess Interest. In addition to paying interest (at the revised
rate) from and after the anticipated repayment date, the borrower generally will
be required to apply any excess cash flow from the related Mortgaged Property,
after paying all permitted operating expenses and capital expenditures, to pay
accrued interest at the mortgage rate, then principal and then interest at the
excess interest rate on the ARD loan.
Amortization of Principal. [___] Mortgage Loans, which represent [__]% of
the Initial Pool Balance are balloon loans that provide for monthly payments of
principal based on amortization schedules significantly longer than the
respective remaining terms thereof, thereby leaving Balloon Payments due and
payable on their respective Maturity Date, unless prepaid prior thereto. In
addition, [___], of the Mortgage Loans, including the Interest Only, ARD loans,
representing [__]% of the Initial Pool Balance provide for payments of interest
only through to the end of their respective loan terms.
Prepayment Provisions. The Mortgage Loans generally provide for a
sequence of periods with different conditions relating to voluntary prepayments
consisting of one or more of the following:
(1) a Lock-out Period during which voluntary principal prepayments are
prohibited, followed by
S-21
(2) one or more Prepayment Premium Periods during which any voluntary
principal prepayment is to be accompanied by a Prepayment Premium (during
such a period defeasance may also be possible as an alternative as
described below under "--Defeasance"), followed by
(3) an Open Period during which voluntary principal prepayments may be
made without an accompanying Prepayment Premium.
The periods applicable to any particular Mortgage Loan are indicated in
Annex A under the Heading "Prepayment Penalty Description (Payments)".
Voluntary principal prepayments (after any Lock-out Period) may be made in
full or in some cases in part, subject to certain limitations and, during a
Prepayment Premium Period, payment of the applicable Prepayment Premium, as
applicable. As of the Cut-Off Date, the remaining Lock-out Periods ranged from
[__] to [__] scheduled monthly payments. As of the Cut-off Date, the weighted
average remaining Lock-out Period was [__] scheduled monthly payments. As of the
Cut-off Date, the Open Period ranged from [__] to [__] scheduled monthly
payments, prior to and including the final scheduled monthly payment at
maturity. The weighted average Open Period was [__] scheduled monthly payments.
Prepayment Premiums on the Mortgage Loans are generally calculated on a basis of
a yield maintenance formula (subject, in certain instances, to a minimum equal
to a specified percentage of the principal amount prepaid). The prepayment terms
for each Mortgage Loan are summarized in the table included in Annex A to this
prospectus supplement.
Prepayment Premiums actually collected on the Mortgage Loans will be
distributed to the respective classes of certificateholders in the amounts and
priorities described under "Description of the
Certificates--Distributions--Distributions of Prepayment Premiums" in this
prospectus supplement. The Depositor makes no representation as to the
enforceability of the provision of any Mortgage Loan requiring the payment of a
Prepayment Premium or as to the collectibility of any Prepayment Premium. See
"Risk Factors--Risks Related to the Mortgage Loans--Prepayment Premiums and
Yield Maintenance Charges Present Special Risks" in this prospectus supplement
and "Certain Legal Aspects of Mortgage Loans--Default Interest and Limitations
on Prepayments" in the accompanying prospectus.
Defeasance. [_____] Mortgage Loans, representing [__]% of the Initial
Pool Balance, permit the applicable borrower at any time during the related
Defeasance Lock-Out Period, which is at least two years from the Delivery Date,
provided no event of default exists, to obtain a release of a mortgaged property
from the lien of the related Mortgage by exercising the Defeasance Option. The
borrower must meet certain conditions in order to exercise its Defeasance
Option. Among other conditions, the borrower must pay on the related Release
Date:
(1) all interest accrued and unpaid on the principal balance of the
Mortgage Note to and including the Release Date;
(2) all other sums, excluding scheduled interest or principal
payments, due under the Mortgage Loan and all other loan documents executed
in connection therewith; and
(3) the related Collateral Substitution Deposit.
In addition, the borrower must deliver a security agreement granting the
trust fund a first priority lien on the Collateral Substitution Deposit and,
generally, an opinion of counsel to such effect. Simultaneously with such
actions, the related Mortgaged Property will be released from the lien
[Description of any exceptions, to the extent material.] Mortgaged Property not
released, in the case of a partial defeasance) will be substituted as the
collateral securing the Mortgage Loan. In general, a successor borrower
established or designated pursuant to the related Mortgage Loan documents will
assume all of the defeased obligations of a borrower exercising a Defeasance
Option under a mortgage loan and the borrower will be relieved of all of the
related defeased obligations. Under the Pooling and Servicing Agreement, the
Master Servicer is required to enforce any provisions of the related Mortgage
Loan documents that require, as a condition to the exercise by the borrower of
any defeasance rights, that the borrower pay any costs and expenses associated
with such exercise.
The Depositor makes no representation as to the enforceability of the
defeasance provisions of any Mortgage Loan.
S-22
Release or Substitution of Properties. The Mortgage Loans that are secured
by more than one Mortgaged Property and which permit release of one or more of
the related Mortgaged Properties generally require that: (1) prior to the
release of a related Mortgaged Property, between [100]% and [125]% of the
allocated loan amount for the Mortgaged Property be defeased and (2) certain
debt service coverage ratio and loan-to-value ratio tests be satisfied with
respect to the remaining Mortgaged Properties after the defeasance. [Description
of any exceptions, to the extent material.]
Furthermore, certain Mortgage Loans permit the release of specified parcels
of real estate or improvements that secure such Mortgage Loans but were not
assigned any material value or considered a source of any material cash flow for
purposes of determining the related Appraisal Value or Underwritten Cash Flow.
Such parcels of real estate or improvements are permitted to be released without
payment of a release price and consequent reduction of the principal balance of
the related Mortgage Loan or substitution of additional collateral if zoning and
other conditions are satisfied.
"Due-on-Sale" and "Due-on-Encumbrance" Provisions. The Mortgage Loans
generally contain both "due-on-sale" and "due-on-encumbrance" clauses that in
each case, subject to certain limited exceptions, permit the holder of the
Mortgage to accelerate the maturity of the related Mortgage Loan if the borrower
sells or otherwise transfers or encumbers the related Mortgaged Property or
prohibit the borrower from doing so without the consent of the mortgagee. See
"--Additional Mortgage Loan Information--Additional Financing" in this
prospectus supplement. Certain of the Mortgage Loans permit the transfer or
further encumbrance of the related Mortgaged Property if certain specified
conditions are satisfied or if the transfer is to a borrower reasonably
acceptable to the mortgagee. The Master Servicer and/or the Special Servicer, as
applicable, will determine, in a manner consistent with the Servicing Standard
and with the REMIC provisions, whether to exercise any right the mortgagee may
have under any such clause to accelerate payment of the related Mortgage Loan
upon, or to withhold its consent to, any transfer or further encumbrance of the
related Mortgaged Property, provided that the Master Servicer will not waive any
right that it may have, or grant any consent that it may otherwise withhold
without obtaining the consent of the Special Servicer. The Special Servicer's
consent will be deemed given if it does not respond within ten (10) business
days following receipt by the Special Servicer of the Master's Servicer's
request for such consent and all information reasonably requested by the Special
Servicer as such time frame may be extended if the Special Servicer is required
to seek the consent of the Directing Certificateholder, the mezzanine loan
holder or any Rating Agency, as described below. In addition, the Special
Servicer will not waive any right it has, or grant any consent that it may
otherwise withhold, under any related "due-on-sale" or "due-on-encumbrance"
clause for any Non-Specially Serviced Mortgage Loan that has a then Stated
Principal Balance that exceeds $2,500,000 or any Specially Serviced Mortgage
Loan unless the Directing Certificatholder has approved such waiver and consent,
which approval will be deemed given if the Directing Certificateholder does not
respond within ten (10) business days after the Special Servicer has given a
written notice of the matter and a written explanation of the surrounding
circumstances and a request for approval of a waiver or consent related to the
"due-on-encumbrance" or a "due-on-sale clause" to the Directing
Certificateholder.
Ground Leases and Other Non-Fee Interests. [___] Mortgage Loans, which
represent [__]% of the Initial Pool Balance, are, in each such case, secured in
whole or in part by a Mortgage on the applicable borrower's leasehold interest
in the related Mortgaged Property. Generally, either (i) the lessor has
subordinated its interest in the related Mortgaged Property to the interest of
the holder of the related Mortgage Loan or (ii) the lessor has agreed to give
the holder of the Mortgage Loan notice of, and has granted such holder the right
to cure, any default or breach by the lessee. See "Certain Legal Aspects of
Mortgage Loans--Foreclosure--Leasehold Considerations" in the accompanying
prospectus.
Additional Financing. The existence of subordinated indebtedness
encumbering a Mortgaged Property may increase the difficulty of refinancing the
related Mortgage Loan at maturity and the possibility that reduced cash flow
could result in deferred maintenance. Also, in the event that the holder of the
subordinated debt files for bankruptcy or is placed in involuntary receivership,
foreclosure on the Mortgaged Property could be delayed. In general, the Mortgage
Loans either prohibit the related borrower from encumbering the Mortgaged
Property with additional secured debt or require the consent of the holder of
the first lien prior to that encumbrance.
Certain information about additional debt that has been or may be incurred
is as set forth in the following table:
S-23
Number of % of Initial
Type of Additional Debt Mortgage Loans Pool Balance
---------------- --------------
Existing................................................ [ ] [ ]%
Secured.............................................. [ ] [ ]%
Unsecured (1)........................................ [ ] [ ]%
Future.................................................. [ ] [ ]%
Secured.............................................. [ ] [ ]%
Unsecured (1)........................................ [ ] [ ]%
Secured or Unsecured (1)............................. [ ] [ ]%
- ------------------
(1) Excludes unsecured trade payables.
[The information required by Item 1111(b)(9)(i)(E) of Regulation AB will be
provided in footnotes to the "Existing - Secured" item in the above chart or by
adding such information in further text below or in an annex.]
Regardless whether the terms of a Mortgage Loan prohibit the incurrence of
subordinate debt, the related borrower may be permitted to incur additional
indebtedness secured by furniture, fixtures and equipment, and to incur
additional unsecured indebtedness. In addition, although the Mortgage Loans
generally restrict the transfer or pledging of general partnership and managing
member interests in a borrower, subject to certain exceptions, the terms of the
Mortgage Loans generally permit, subject to certain limitations, the transfer or
pledge of a less than controlling portion of the limited partnership or managing
membership equity interests in a borrower. Moreover, in general the parent
entity of any borrower that does not meet the single purpose entity criteria may
not be restricted in any way from incurring mezzanine or other debt not secured
by the related Mortgaged Property.
Certain information about mezzanine debt that has been or may be incurred
is as set forth in the following table:
Number of % of Initial
Type of Mezzanine Debt Mortgage Loans Pool Balance
---------------- --------------
Future.................................................. [ ] [ ]%
Existing................................................ [ ] [ ]%
Total................................................... [ ] [ ]%
With respect to all but two [___] of these Mortgage Loans, the related
mezzanine lender has entered into a mezzanine intercreditor agreement with the
mortgagee, pursuant to which the related mezzanine lender, among other things:
o has agreed, under certain circumstances, not to enforce its rights to
realize upon collateral securing the mezzanine loan or take any
exercise enforcement action with respect to the mezzanine loan without
written confirmation from the Rating Agencies that such enforcement
action would not cause the downgrade, withdrawal or qualification of
the then current ratings of the certificates,
o has subordinated the mezzanine loan documents to the related Mortgage
Loan documents and
o has the option to purchase the related Mortgage Loan if such Mortgage
Loan becomes defaulted or to cure the default as set forth in such
mezzanine intercreditor agreement.
Certain Terms and Conditions of the MBS
[Description of any MBS included in the pool assets, including, to the
extent applicable and material, the information referenced as to be provided in
the base prospectus under "Description of the Trust Funds--MBS".]
Certain Underwriting Matters
Environmental Assessments. [Each] of the Mortgaged Properties was subject
to an environmental site assessment, an environmental site assessment update or
a transaction screen that was performed by an independent third-party
environmental consultant with respect to each Mortgaged Property securing a
mortgage loan in
S-24
connection with the origination of such Mortgage Loan. In some cases, a
third-party consultant also conducted a Phase II environmental site assessment
of a Mortgaged Property. With respect to an Environmental Report, if any, (i) no
such Environmental Report provides that as of the date of the report there is a
material violation of applicable environmental laws with respect to any known
circumstances or conditions relating to the related Mortgaged Property; or (ii)
if any such Environmental Report does reveal any such circumstances or
conditions with respect to the related Mortgaged Property and such circumstances
or conditions have not been subsequently remediated in all material respects,
then generally, with certain exceptions, one or more of the following was the
case: (A) the related borrower was required to provide additional security
and/or to obtain an operations and maintenance plan, (B) the related borrower
provided a "no further action" letter or other evidence acceptable to the
related originator, in its sole discretion, that applicable federal, state or
local governmental authorities had no current intention of taking any action,
and are not requiring any action, in respect of such condition or circumstance,
(C) such conditions or circumstances were investigated further and based upon
such additional investigation, and independent environmental consultant
recommended no further investigation or remediation, (D) the expenditure of
funds reasonably estimated to be necessary to effect such remediation is the
lesser of (a) 10% of the outstanding principal balance of the related Mortgage
Loan and (b) two million dollars, (E) there exists an escrow of funds reasonably
estimated to be sufficient for purposes of effecting such remediation, (F) the
related borrower or another responsible party is currently taking such actions,
if any, with respect to such circumstances or conditions as have been required
by the applicable governmental regulatory authority, (G) the related Mortgaged
Property is insured under a policy of insurance, subject to certain per
occurrence and aggregate limits and a deductible, against certain losses arising
from such circumstances and conditions or (H) a responsible party provided a
guaranty or indemnity to the related borrower to cover the costs of any required
investigation, testing, monitoring or remediation. There can be no assurance,
however, that a responsible party will be financially able to address the
subject condition or compelled to do so. See "Risk Factors--Risks Related to the
Mortgage Loans--Adverse Environmental Conditions May Reduce Cash Flow from a
Mortgaged Property" for more information regarding the environmental condition
of certain Mortgaged Properties.
Neither the Sponsor nor any other person will make any representation or
warranty with respect to environmental conditions arising after the Delivery
Date, and will not be obligated to repurchase or substitute for any Mortgage
Loan due to any such condition.
Generally. Certain federal, state and local laws, regulations and
ordinances govern the management, removal, encapsulation or disturbance of
asbestos-containing materials. Such laws, as well as common law, may impose
liability for releases of or exposure to asbestos containing materials and may
provide for third parties to seek recovery from owners or operators of real
properties for personal injuries associated with such releases.
Owners of residential housing constructed prior to 1978 are required by
federal law to disclose to potential residents or purchasers any known
lead-based paint hazards and violations can incur treble damages for any failure
to so notify. In addition, the ingestion of lead-based paint chips or dust
particles by children can result in lead poisoning, and the owner of a property
where such circumstances exist may be held liable for such injuries and for the
costs of removal or encapsulation of the lead-based paint. Testing for
lead-based paint or lead in the water was conducted with respect to certain of
the Mortgaged Properties, generally based on the age and/or condition of such
property.
The Environmental Protection Agency has identified certain health risks
associated with elevated radon gas in buildings, and has recommended that
certain mitigating measures be considered.
When recommended by Environmental Reports, operations and maintenance plans
(addressing in some cases asbestos containing materials, lead-based paint,
and/or radon) were generally required, except in the case of certain Mortgaged
Properties where the environmental consultant conducting the assessment also
identified the condition of the asbestos containing materials as good and
non-friable (i.e., not easily crumbled). In certain instances where related
Mortgage Loan documents required the submission of operations and maintenance
plans, these plans have yet to be received. There can be no assurance that
recommended operations and maintenance plans have been or will continue to be
implemented. In many cases, certain potentially adverse environmental conditions
were not tested for. For example, lead based paint and radon were tested only
with respect to Multifamily Mortgaged Properties and only if, in the case of
lead based paint, the age of the Mortgaged Property warranted such testing and,
in the case of radon, radon is prevalent in the geographic area where the
Mortgaged Property is located; however, at several Multifamily Mortgaged
Properties located in geographic areas where radon is prevalent, radon testing
was
S-25
not conducted. None of the testing referenced in the preceding sentence was
conducted in connection with a manufactured housing property.
Certain of the Mortgaged Properties have off-site leaking underground
storage tank sites located nearby which the Environmental Reports either have
indicated are not likely to contaminate the related Mortgaged Properties but may
require future monitoring or have identified a party not related to the borrower
as responsible for such condition. Certain other Mortgaged Properties may
contain contaminants in the soil or groundwater at levels which the
environmental consultant has advised are below regulatory levels or otherwise
are indicative of conditions typically not of regulatory concern and are not
likely to require any further action. In some cases, there was no further
investigation of a potentially adverse environmental condition. In certain
instances where the related Mortgage Loan documents required underground storage
tank repair or removal and the submission of a confirmation that this work has
been performed, the confirmations have yet to be received.
The information contained in this prospectus supplement regarding
environmental conditions at the Mortgaged Properties is based on the
Environmental Reports and has not been independently verified by the Sponsor,
the Depositor, the originators, the Underwriters, the Master Servicer, the
Special Servicer, the Trustee, the REMIC Administrator or any of their
respective affiliates. There can be no assurance that the Environmental Reports
identified all environmental conditions and risks, or that any such
environmental conditions will not have material adverse effect on the value or
cash flow of the related Mortgaged Property.
The Pooling and Servicing Agreement requires that the Special Servicer
obtain an environmental site assessment of a Mortgaged Property prior to
acquiring title thereto or assuming its operation. In the event a Phase I
environmental site assessment already exists that is less than 12 months old, a
new assessment will not be required under the Pooling and Servicing Agreement.
In the event a Phase I environmental site assessment already exists that is
between 12 and 18 months old, only an updated data base search will be required.
Such requirement precludes enforcement of the security for the related Mortgage
Loan until a satisfactory environmental site assessment is obtained (or until
any required remedial action is taken), but will decrease the likelihood that
the trust will become liable for a material adverse environmental condition at
the Mortgaged Property. However, there can be no assurance that the requirements
of the Pooling and Servicing Agreement will effectively insulate the trust from
potential liability for a materially adverse environmental condition at any
Mortgaged Property.
Property Condition Assessments. Inspections of each of the Mortgaged
Properties were conducted by independent licensed engineers in connection with
or subsequent to the origination of the related Mortgage Loan, except that in
connection with certain Mortgage Loans having an initial principal balance of
[$2,000,000] or less, a site inspection may not have been performed in
connection with the origination of any such Mortgage Loan. Such inspections were
generally commissioned to inspect the exterior walls, roofing, interior
construction, mechanical and electrical systems and general condition of the
site, buildings and other improvements located at a Mortgaged Property. With
respect to certain of the Mortgage Loans, the resulting reports indicated a
variety of deferred maintenance items and recommended capital improvements. The
estimated cost of the necessary repairs or replacements at a Mortgaged Property
was included in the related property condition assessment; and, in the case of
certain Mortgaged Properties, such estimated cost exceeded [$100,000]. In
general, with limited exception, cash reserves were established, or other
security obtained, to fund or secure the payment of such estimated deferred
maintenance or replacement items. In addition, mortgage loans may require
monthly deposits into cash reserve accounts to fund property maintenance
expenses.
Appraisals and Market Studies. An independent appraiser that was either a
member of the MAI or state certified performed an appraisal (or updated an
existing appraisal) of each of the related Mortgaged Properties in connection
with the origination of each Mortgage Loan in order to establish the appraised
value of the related Mortgaged Property or Properties. Such appraisal, appraisal
update or property valuation was prepared on or about the "Appraisal Date"
indicated on Annex A hereto, and except for certain Mortgaged Properties
involving operating businesses, the appraiser represented in such appraisal or
in a letter or other agreement that the appraisal conformed to the appraisal
guidelines set forth in USPAP. In general, such appraisals represent the
analysis and opinions of the respective appraisers at or before the time made,
and are not guarantees of, and may not be indicative of, present or future
value. There can be no assurance that another appraiser would not have arrived
at a different valuation, even if such appraiser used the same general approach
to and same method of appraising the property. In addition, appraisals seek to
establish the amount a typically motivated buyer would pay a typically motivated
seller. Such
S-26
amount could be significantly higher than the amount obtained from the sale of a
Mortgaged Property under a distress or liquidation sale.
None of the Sponsor, the Depositor, the originators, the Underwriters, the
Master Servicer, the Special Servicer, the Trustee, the REMIC Administrator or
any of their respective affiliates has prepared or conducted its own separate
appraisal or reappraisal of any Mortgaged Property.
Zoning and Building Code Compliance. Each originator has generally examined
whether the use and operation of the related Mortgaged Properties were in
material compliance with all zoning, land-use, ordinances, rules, regulations
and orders applicable to such Mortgaged Properties at the time such Mortgage
Loans were originated. Each originator may have considered, among other things,
legal opinions, certifications from government officials, zoning consultant's
reports and/or representations by the related borrower contained in the related
Mortgage Loan documents and information which is contained in appraisals and
surveys, title insurance endorsements, or property condition assessments
undertaken by independent licensed engineers. Certain violations may exist;
however, no originator has notice of any material existing violations with
respect to the Mortgaged Properties securing such Mortgage Loans which
materially and adversely affect (i) the value of the related Mortgaged Property
as determined by the appraisal performed in connection with the origination of
the related Mortgage Loan or (ii) the principal use of the Mortgaged Property as
of the date of the related Mortgage Loan's origination.
In some cases, the use, operation and/or structure of the related Mortgaged
Property constitutes a permitted nonconforming use and/or structure that may not
be rebuilt to its current state in the event of a material casualty event. With
respect to such Mortgaged Properties, the related originator has determined that
in the event of a material casualty affecting the Mortgaged Property that:
(1) the extent of the nonconformity is not material;
(2) insurance proceeds together with the value of the remaining
property would be available and sufficient to pay off the related Mortgage
in full;
(3) the Mortgaged Property, if permitted to be repaired or restored in
conformity with current law, would constitute adequate security for the
related Mortgage Loan; or
(4) the risk that the entire Mortgaged Property would suffer a
material casualty to such a magnitude that it could not be rebuilt to its
current state is remote.
Although each originator expects insurance proceeds to be available for
application to the related Mortgage Loan in the event of a material casualty, no
assurance can be given that such proceeds would be sufficient to pay off such
Mortgage Loan in full. In addition, if the Mortgaged Property were to be
repaired or restored in conformity with current law, no assurance can be given
as to what its value would be relative to the remaining balance of the related
Mortgage Loan or what would be the revenue producing potential of the property.
Hazard, Liability and Other Insurance. The Mortgage Loans generally require
that each Mortgaged Property be insured by a hazard insurance policy in an
amount (subject to an approved deductible) at least equal to the lesser of the
outstanding principal balance of the related Mortgage Loan and 100% of the
replacement cost of the improvements located on the related Mortgaged Property,
and if applicable, that the related hazard insurance policy contain appropriate
endorsements to avoid the application of co-insurance and not permit reduction
in insurance proceeds for depreciation.
In addition, if any material improvements on any portion of a Mortgaged
Property securing any Mortgage Loan was, at the time of the origination of such
Mortgage Loan, in an area identified in the Federal Register by the Federal
Emergency Management Agency as having special flood hazards, and flood insurance
was available, a flood insurance policy meeting any requirements of the
then-current guidelines of the Federal Insurance Administration is required to
be in effect with a generally acceptable insurance carrier, in an amount
representing coverage generally not less than the least of (a) the outstanding
principal balance of the related Mortgage Loan, (b) the full insurable value of
the related Mortgaged Property, (c) the maximum amount of insurance available
under the National Flood Insurance Act of 1973, as amended, or (d) 100% of the
replacement cost of the improvements located on the related Mortgaged Property.
S-27
In general, the standard form of hazard insurance policy covers physical
damage to, or destruction of, the improvements on the Mortgaged Property by
fire, lightning, explosion, smoke, windstorm and hail, riot or strike and civil
commotion, subject to the conditions and exclusions set forth in each policy.
Each Mortgage Loan generally also requires the related borrower to maintain
comprehensive general liability insurance against claims for personal and bodily
injury, death or property damage occurring on, in or about the related Mortgaged
Property in an amount generally equal to at least $[1,000,000].
Each Mortgage Loan generally further requires the related borrower to
maintain business interruption insurance in an amount not less than
approximately [100]% of the gross rental income from the related Mortgaged
Property for not less than [__] months or the restoration period plus [__] days,
except that business interruption insurance may not be required in cases where
the tenant is required to continue paying rent in the event of a casualty.
In general, the Mortgage Loans (including those secured by Mortgaged
Properties located in California) do not require earthquake insurance. [___] of
the Mortgaged Properties securing [___]% of the Initial Pool Balance are located
in areas that are considered a high earthquake risk. These areas include all or
parts of [identifications of locations]. No Mortgaged Property has a "probable
maximum loss" or "PML" in excess of 20%, with the exception of [identification
of any exceptions].
[The Index]
[Description of Index, including 5 year history.]
[Delinquent Mortgage Loans]
[Description of delinquent Mortgage Loans, if any, included in the trust
fund. As of the related cut-off date, delinquent loans included for any
particular takedown will not constitute 20% or more of the related pool assets,
and such pool assets will not include any non-performing loans.]
Split Loan Structures
The Mortgage Loans identified on Annex A as Loan Numbers [_____] are loans
that are part of split-loan structures, meaning that they are secured by a
Mortgaged Property that also secures another mortgage loan that is not part of
the trust fund and does not back any of the certificates. [Description of the
material payment priorities, servicing provisions and control rights under (and
any other material terms of) any intercreditor agreement governing such loans.]
Additional Mortgage Loan Information
Annex A to this prospectus supplement contains information concerning each
Mortgage Loan in the Mortgage Pool on an individual basis. The tables included
in Annex B to this prospectus supplement set forth the specified characteristics
of, in each case as indicated, the ARM Loans, the Fixed Rate Loans or all the
Mortgage Loans. Certain capitalized terms that appear in this prospectus
supplement are defined in "Glossary of Principal Definitions" in this prospectus
supplement. See Annex B to this prospectus supplement for certain information
with respect to capital improvements, replacement, tax, insurance and tenant
improvement reserve accounts, as well as certain other information with respect
to multifamily mortgaged properties, other than manufactured housing properties.
Annex A and Annex B are incorporated by reference and constitute part of this
prospectus supplement.
[10% and Other] Top 10 Mortgage Loans
Certain of the larger Mortgage Loans (by outstanding principal balance) are
described below in the following table [and text] [and in Annex ___]. Terms used
below relating to underwriting or property characteristics have the meanings
assigned to such terms under "Glossary of Principal Definitions" in this
prospectus supplement.
S-28
Percent
of Cut-off
Cut-off Initial Date Cut-off Maturity
Date Pool Property Balance Per Date LTV Date LTV Underwritten Mortgage
Loan Name Balance Balance Type SF/Unit/Pad Ratio Ratio DSCR Rate
--------- ------- ------- ---- ----------- ----- ----- ---- ----
- ------------------
(1) [Description (under this caption or in a referenced and incorporated Annex)
of any mortgage loans representing 10% or more of the pool assets to
include the information required by Item 1111(b)(9)(ii) of Regulation AB.]
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 constituted on the
Cut-off Date, as adjusted for the scheduled principal payments due on the
Mortgage Loans 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 in this prospectus supplement. The Depositor believes that the
information set forth herein is representative of the characteristics of the
Mortgage Pool as of the Cut-off Date, although the range of mortgage rates and
maturities, as well as the other characteristics of the Mortgage Loans described
herein, may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date and
will be filed, together with the Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from the Mortgage Pool as set forth in the preceding paragraph, such removal
will be noted in the Form 8-K.
[To be included for transactions where the issuer determines static pool data is
material:
Static Pool Information
[Certain static pool information will be made available by the Depositor on
[its] website at [_____________].][Information required by Item 1105 of
Regulation AB to the extent material.]]
Representations and Warranties; Repurchases and Substitutions
In the mortgage loan purchase and sale agreement, the Mortgage Loan Seller
has represented and warranted with respect to each Mortgage Loan, as of [the
Delivery Date], or as of such other date specifically provided in the
representation and warranty, among other things, that:
1) the information set forth in the Mortgage Loan Schedule attached
to the Pooling and Servicing Agreement (which will contain a limited
portion of the information set forth in Annex A to this prospectus
supplement) with respect to the Mortgage Loans is true, complete and
correct in all material respects as of the Cut-off Date;
2) based on the related lender's title insurance policy (or, if not
yet issued, a pro forma title policy or a "marked-up" commitment), each
Mortgage related to and delivered in connection with each Mortgage Loan
constitutes a valid and, subject to the exceptions set forth in paragraph
(3) below, enforceable first lien on the related Mortgaged Property, prior
to all other liens and encumbrances, except for Permitted Encumbrances.
3) the Mortgage(s) and Mortgage Note for each Mortgage Loan and all
other documents executed by or on behalf of the related borrower or any
guarantor of non-recourse exceptions and/or environmental liability
S-29
with respect to each Mortgage Loan are the legal, valid and binding
obligations of the related borrower (subject to any non-recourse provisions
contained in any of the foregoing agreements and any applicable state
anti-deficiency legislation), enforceable in accordance with their
respective terms, except as such enforcement may be limited by (a)
bankruptcy, insolvency, reorganization or similar laws affecting the rights
of creditors generally and (b) general principles of equity regardless of
whether such enforcement is considered in a proceeding in equity or at law,
and except that certain provisions in such Mortgage Loan documents may be
further limited or rendered unenforceable by applicable law, but (subject
to the limitations set forth in the foregoing clauses (a) and (b)) such
limitations or unenforceability will not render such loan documents invalid
as a whole or substantially interfere with the mortgagee's realization of
the principal benefits and/or security provided by such Mortgage Loan
documents;
4) no Mortgage Loan was, since origination, 30 days or more past due
in respect of any Monthly Payment, without giving effect to any applicable
grace period;
5) to the Mortgage Loan Seller's knowledge, there is no valid
defense, counterclaim or right of offset, abatement, diminution or
rescission available to the related borrower with respect to any Mortgage
Loan or Mortgage Note or other agreements executed in connection therewith;
6) to the Mortgage Loan Sellers' knowledge, there exists no material
default, breach, violation or event of acceleration under any Mortgage Note
or Mortgage in any such case to the extent the same materially and
adversely affects the value of the Mortgage Loan and related Mortgaged
Property;
7) in the case of each Mortgage Loan, the related Mortgaged Property
is (a) not the subject of any proceeding pending for the condemnation of
all or any material portion of any Mortgaged Property, and (b) free and
clear of any damage caused by fire or other casualty which would materially
and adversely affect its value as security for such Mortgage Loan (except
in any such case where an escrow of funds or insurance coverage exists that
is reasonably estimated to be sufficient to effect the necessary repairs
and maintenance);
8) at origination, each Mortgage Loan complied with or was exempt
from, all applicable usury laws;
9) in connection with the origination of the related Mortgage Loan,
one or more environmental site assessments, an update of a previously
conducted assessment or a transaction screen has been performed with
respect to each Mortgaged Property and the Mortgage Loan Seller has no
knowledge of any material and adverse environmental condition or
circumstance affecting such Mortgaged Property that was not disclosed in an
Environmental Report or borrower questionnaire;
10) each Mortgaged Property securing a Mortgage Loan is covered by a
title insurance policy (or, if not yet issued, a pro forma title policy or
a "marked-up" commitment) in the original principal amount of such Mortgage
Loan after all advances of principal, insuring that the related Mortgage is
a valid first priority lien on such Mortgaged Property subject only to the
exceptions stated therein;
11) the proceeds of each Mortgage Loan have been fully disbursed
(except in those cases where the full amount of the Mortgage Loan has been
disbursed but a portion thereof is being held in escrow or reserve accounts
pending the satisfaction of certain conditions relating to leasing, repairs
or other matters with respect to the related Mortgaged Property), and there
is no obligation for future advances with respect thereto;
12) the terms of each Mortgage have not been impaired, waived,
altered, satisfied, canceled, subordinated, rescinded or modified in any
manner which would materially interfere with the benefits of the security
intended to be provided by such Mortgage, except as specifically set forth
in a written instrument in the related Mortgage File;
13) there are no delinquent property taxes, assessments or other
outstanding charges affecting any Mortgaged Property securing a Mortgage
Loan that are a lien of priority equal to or higher than the lien of the
related Mortgage and that are not otherwise covered by an escrow of funds
sufficient to pay such charge;
14) the related borrower's interest in each Mortgaged Property
securing a Mortgage Loan includes a fee simple and/or leasehold estate or
interest in real property and the improvements thereon;
S-30
15) no Mortgage Loan contains any equity participation by the
mortgagee, is convertible by its terms into an equity ownership interest in
the related Mortgaged Property or the related borrower, provides for any
contingent or additional interest in the form of participation in the cash
flow of the related Mortgaged Property or provides for the negative
amortization of interest; and
16) the appraisal obtained in connection with the origination of each
Mortgage Loan, based upon the representation of the appraiser in a
supplemental letter or in the related appraisal, satisfies the appraisal
guidelines set forth in Title XI of the Financial Institutions Reform
Recovery and Enforcement Act of 1989 (as amended).
If the Mortgage Loan Seller has been notified of a material breach of any
of the above representations and warranties as described in this prospectus
supplement and the accompanying prospectus and if the Mortgage Loan Seller
cannot cure the breach within [__] days following its receipt of appropriate
notice, then the Mortgage Loan Seller will be obligated to repurchase the
affected Mortgage Loan within that [__]-day period or to substitute a qualified
substitute mortgage loan for the affected Mortgage Loan, with terms
substantially similar to those of the affected Mortgage Loan. The related
prospectus supplement will specify any further condition for substitution, which
may include an obligation of the party making the substitution to pay a
substitution shortfall amount (generally the amount by which the principal
balance of the qualified substitute mortgage loan is less than the purchase
price that would be paid in connection with a repurchase of the Mortgage Loan it
is being substituted for). The Purchase Price that the Mortgage Loan Seller must
pay for the affected Mortgage Loans is equal to the sum of
o the unpaid principal balance of the Mortgage Loan,
o unpaid accrued interest on the Mortgage Loan at the mortgage rate from
the date to which interest was last paid to the Due Date in the Due
Period in which the purchase is to occur, and
o certain servicing expenses that are reimbursable to the Master
Servicer and the Special Servicer.
The above repurchase or substitution obligations constitute the sole
remedies 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. The Depositor, the Master Servicer and their affiliates
[(other than the Mortgage Loan Seller)] are not obligated to repurchase or
substitute any affected Mortgage Loan in connection with a breach of the
Mortgage Loan Seller's representations and warranties. 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 are not correct in all material respects. See "The
Pooling and Servicing Agreements-Representations and Warranties; Repurchases" in
the accompanying prospectus.
THE SPONSOR
The Sponsor, Bank of America, National Association, is an indirect
wholly-owned subsidiary of Bank of America Corporation.
See "Bank of America, National Association, as Sponsor," "The Mortgage Loan
Program," "Bank of America, National Association, as Servicer" and "The Pooling
and Servicing Agreements" in the prospectus for more information about the
Sponsor, its securitization programs, its solicitation and underwriting criteria
used to originate the mortgage loans and its material roles and duties in this
securitization.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on December 13,
1995 under the name "NationsLink Funding Corporation" and filed a Certificate of
Amendment of Certificate of Incorporation changing its name to "Banc of America
Commercial Mortgage Inc." on August 24, 2000. The Depositor is a wholly-owned
subsidiary of the Sponsor. It is not expected that the Depositor will have any
business operations other than offering mortgage pass-through certificates and
related activities.
S-31
The Depositor maintains its principal executive office at 201 North Tryon
Street, Charlotte, North Carolina 28255. Its telephone number is 704-387-8239.
THE ISSUING ENTITY
The Issuing Entity will be a New York common law trust, formed on the
Closing Date pursuant to the Pooling Agreement. The Mortgage Loans will be
deposited by the Depositor into the trust under the Pooling Agreement. The trust
will have no officers or directors and no continuing duties other than to hold
the assets underlying the certificates and to issue the certificates. The fiscal
year end of the trust will be December 31 of each year.
The Trustee, the Master Servicer and the Special Servicer are the persons
authorized to act on behalf of the Issuing Entity under the Pooling Agreement
with respect to the mortgage loans and the certificates. The roles and
responsibilities of such persons are described in this prospectus supplement
under "The Trustee", "The Servicers" and "Servicing of the Mortgage Loans".
Additional information may also be found in the accompanying prospectus under
"Bank of America, National Association, as Servicer" and "The Pooling and
Servicing Agreements". Such persons are only permitted to take the actions
specifically provided in the Pooling Agreement. Under the Pooling Agreement,
they will not have the power on behalf of the trust to issue additional
certificates representing interests in the trust, borrow money on behalf of the
trust or make loans from the assets of the trust to any person or entity.
The Issuing Entity, as a common law trust, is not eligible to be a debtor
in a bankruptcy proceeding. In the event of the insolvency or bankruptcy of the
Sponsor or the Depositor, the transfer of the Mortgage Loans to the trust may be
challenged. See "Risk Factors--Special Powers of the FDIC in the Event of
Insolvency of the Sponsor Could Delay or Reduce Distributions on the
Certificates" and "--Insolvency of the Depositor May Delay or Reduce Collections
on Mortgage Loans" in the prospectus.
THE TRUSTEE
[__________________], a [form of organization], will act as Trustee under
the Pooling Agreement. [Description of Trustee's prior to experience to the
extent required by 1109(b) to be included.]
[The Trustee's principal corporate trust offices are located at
[__________________] and its office for certificate transfer services is located
at [__________________] (together, the "Corporate Trust Office"). The telephone
number of the Trustee is [____________]. The Depositor, the Sponsor, the
Servicer and the Underwriter may maintain banking and other commercial
relationships with the Trustee and its affiliates. The Trustee may appoint one
or more co-trustees if necessary to comply with the fiduciary requirements
imposed by any jurisdiction in which a Mortgaged Property is located.]
[Under the terms of the Pooling Agreement, the Trustee also is responsible
for securities administration, which includes pool performance calculations,
distribution calculations and the preparation of monthly distribution reports.
The Trustee does not independently verify the information received from the
Servicer that it uses for these calculations nor does it monitor access to and
activity in the Collection Account, compliance with covenants in the Pooling
Agreement or the basis for the addition, substitution or removal of Mortgage
Loans from the Mortgage Pool. As securities administrator, the Trustee is
responsible for the preparation of tax returns on behalf of the trust and the
preparation, for execution by the Depositor or the Master Servicer, of monthly
reports on Form 10-D (based on information included in the monthly distribution
date statements and other information provided by other transaction parties) and
annual reports on Form 10-K that are required to be filed with the SEC on behalf
of the trust.]
[The Trustee will also act as custodian of the Mortgage Files pursuant to
the Pooling Agreement. In its capacity as custodian, the Trustee will be
responsible to hold and safeguard the Mortgage Notes and other contents of the
Mortgage Files on behalf of the certificateholders. The Trustee will segregate
the Mortgage Files by boarding each in an electronic tracking system, which
identifies the owner of the Mortgage File and the Mortgage File's specific
location in the Trustee's vault.]
See "The Pooling and Servicing Agreements--The Trustee", "--Duties of the
Trustee", "--Certain Matters Regarding the Trustee" and "--Resignation and
Removal of the Trustee" in the accompanying prospectus for more
S-32
information about the Trustee and its obligations and rights (including
limitations on its liability and its right to indemnity and reimbursement in
certain circumstances) under the Pooling and Servicing Agreement.
SIGNIFICANT ORIGINATORS AND OBLIGORS
[Significant Originators]
[Description of significant originators apart from the sponsor and its
affiliates, if any, with respect to the Mortgage Loans to the extent required by
Item 1110 of Regulation AB , including identification of all mortgage loan
originators that originate 10% or more of the pool assets as required by Item
1110(a) of Regulation AB and the provision of the additional information with
respect to mortgage loan originators that originate 20% or more of the pool
assets as required by 1110(b) of Regulation AB.]
[Significant Obligors]
[Description of significant properties or obligors, if any, with respect to
the Mortgage Loans to the extent required by Item 1112 of Regulation AB ,
including identification of all significant obligors as required by Item 1112(a)
of Regulation AB and the provision of the additional information with respect to
significant obligors of 20% or more of the pool assets as required by 1112(b) of
Regulation AB.]
THE SERVICERS
The Master Servicer
The Sponsor, through its Capital Markets Servicing Group, will act as
Master Servicer with respect to the Mortgage Pool. See "Servicing of the
Mortgage Loans" in this prospectus supplement and "Bank of America, National
Association, as Servicer" in the accompanying prospectus.
The Special Servicer
[_______________________________], a [____________________], will be
responsible for the servicing and administration of the Specially Serviced
Mortgage Assets.
[Description of the Special Servicer.]
The information set forth in this prospectus supplement concerning the
Special Servicer has been provided by the Special Servicer.
Other Servicers
[Description of any other affiliated servicer, servicer of 10% or more of
the pool assets, back-up servicer or otherwise significant servicer, if any, of
the Mortgage Loans and include the information with respect thereto, to the
extent required by Item 1108 of Regulation AB.]
S-33
COMPENSATION AND EXPENSES
Fee Fee Rate(1) or Range(2)
------------------------------- -------------------------
Trustee Fee
Master Servicing Fee
Sub-Servicing Fee
Special Servicing Fee
Workout Fee
Liquidation Fee
- ------------------
1 The fee rate in the case of the Trustee Fee, the Master Servicing Fee and
the Sub-Servicing Fee is a rate per annum on the outstanding principal
balance of each mortgage loan. The fee rate in the case of the Workout Fee
and Liquidation Fee is a one-time percentage of the principal balance of
each specially serviced mortgage loan that is worked out or liquidated, as
applicable.
2 Where a range is indicated, the fee rates vary by mortgage loan. Annex A to
this prospectus supplement contains the individual rates applicable to each
mortgage loan.
Fees are paid in priority prior to any distributions to certificateholders;
a servicer will typically retain its fee from amounts it collects in respect of
the mortgage loans. [Description of possible changes in fees that may occur
without certificateholder consent, if any.] In the event the Trustee succeeds to
the role of Master Servicer, it will be entitled to the same Master Servicing
Fee and related compensation described below as the predecessor servicer and if
the Trustee appoints a successor servicer under the Pooling Agreement, the
Trustee may make such arrangements for the compensation of such successor out of
the payments on the Mortgage Loans serviced by the predecessor Master Servicer
as it and such successor shall agree, not to exceed the Master Servicing Fee
Rate.
[Description of fees of any other trustees (if multiple trustees are
involved).] Any co-trustee, if applicable, will be paid by the Trustee, without
reimbursement from the trust.
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
o be payable monthly on a loan-by-loan basis from amounts received in
respect of interest on each Mortgage Loan,
o will accrue in accordance with the terms of the related Mortgage Note
at a rate equal to [________]% per annum, in the case of Mortgage
Loans other than Specially Serviced Mortgage Loans, and [____]% per
annum, in the case of Specially Serviced Mortgage Loans, and
o 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 Permitted Investments, and the Master
Servicer will be entitled to retain any interest or other income earned on such
funds, but will be required to cover any losses from its own funds without any
right to reimbursement.
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"
S-34
o will be payable monthly on a loan-by-loan basis from amounts received
in respect of interest on each Specially Serviced Mortgage Loan and
each Mortgage Loan as to which the related Mortgaged Property has
become an REO Property,
o will accrue in accordance with the terms of the related Mortgage Note
at a rate equal to [_____]% per annum, in the case of Mortgage Loans
other than Specially Serviced Mortgage Loans, and [___]% per annum, in
the case of Specially Serviced Mortgage Loans, and
o 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"
o will equal a specified percentage (varying from [____]% to [____]%
(the "Workout Fee Rate") depending on the related unpaid principal
balance) of, and
o 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);
o provided that, in the case of Liquidation Proceeds, the otherwise
fixed Workout Fee Rate will be proportionately reduced to reflect the
extent to which, if at all, the principal portion of such Liquidation
Proceeds is less than the unpaid principal balance of the related
Mortgage Loan immediately prior to the receipt thereof.
As additional servicing compensation, the Special Servicer will be entitled
to retain all assumption and modification fees received on Mortgage Loans
serviced thereby.
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 "Servicing of the Mortgage Loans--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 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 in this prospectus supplement) on a date that
is prior to its Due Date in such Due Period, a Prepayment Interest Shortfall may
result. 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 in this prospectus supplement under
"Description of the Certificates--Advances", the Master Servicer will be
entitled to receive interest on Advances, and the Master Servicer and the
Special Servicer will be entitled to receive interest on reimbursable servicing
expenses, such interest to be paid, contemporaneously with the reimbursement of
the related Advance or servicing expense, out of any other collections on the
Mortgage Loans.
The Master Servicer generally will be required to pay all expenses incurred
by it in connection with its servicing activities under the Pooling and
Servicing Agreement, and will not be entitled to reimbursement therefor except
as expressly provided in the Pooling and Servicing Agreement. However, the
Master Servicer will be permitted to pay certain of those 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. 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 that property
S-35
(thereby reducing the portion of revenues that would otherwise be available for
distribution to certificateholders). See "Description of the
Certificates--Distributions--Method, Timing and Amount" in this prospectus
supplement and "The Pooling and Servicing Agreements--Certificate Account" and
"--Servicing Compensation and Payment of Expenses" in the accompanying
prospectus.
The Trustee is obligated to pay routine ongoing expenses incurred by it in
connection with its responsibilities under the Pooling and Servicing Agreement.
Those amounts will be paid by the Trustee out of its own funds, without
reimbursement. In addition to the Trustee Fee, the Trustee is also entitled to
all investment income earned on amounts on deposit in the Certificate Account.
The Depositor, the Servicer and the Trustee are entitled to indemnification
and reimbursement of certain expenses from the trust under the Pooling and
Servicing Agreement as discussed in the prospectus under the headings "The
Pooling and Servicing Agreements--Certain Matters Regarding the Master Servicer,
the Special Servicer, the REMIC Administrator and the Depositor" and "--The
Trustee".
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). Such servicing and administration will be 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. The above servicing and administration will be performed 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. The Master Servicer
will transfer its servicing responsibilities to the Special Servicer, with
respect to any Mortgage Loan
o which has a Balloon Payment which is past due or any other payment
which is more than [__] 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 [__] 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
S-36
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 [__] days, and prior to acceleration of amounts due
under the related Mortgage Note or commencement of any foreclosure or
similar proceedings, with respect to the above Mortgage Loans, the
Master Servicer will continue to receive payments on such Mortgage
Loan (including amounts collected by the Special Servicer), to make
certain calculations with respect to such Mortgage Loan and to make
remittances 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.
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 [__] days, the Special Servicer
will return servicing of such Mortgage Loan to the Master Servicer.
Set forth below is a description of certain pertinent provisions of the
Pooling and Servicing Agreement relating to the servicing of the Mortgage Loans.
Reference is also made to the accompanying prospectus, in particular to the
section captioned "The Pooling and Servicing Agreements", for additional
important information regarding the terms and conditions of the Pooling and
Servicing Agreement as they relate to the rights and obligations of the Master
Servicer and the Special Servicer thereunder.
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
(1) affect the amount or timing of any scheduled payments of
principal or interest on the Mortgage Loan or
(2) in its judgment, materially impair the security for the
Mortgage Loan or reduce the likelihood of timely payment of
amounts due under the Mortgage Loan;
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 the
modification, waiver or amendment is reasonably likely to produce a greater
recovery with respect to the Mortgage Loan, taking into account the time value
of money, than would liquidation.
(b) [description of any 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 File, an original counterpart of the agreement related to that
modification, waiver or amendment, promptly (and in any event within [__]
business days) following the execution thereof. Copies of each agreement that
effects a modification, waiver or amendment of any term of any Mortgage Loan are
to 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" in this prospectus supplement.
S-37
Asset Status Reports
The Special Servicer will be required to prepare a report (an "Asset Status
Report") for each mortgage loan which becomes a Specially Serviced Mortgage Loan
not later than [__] days after the servicing of the mortgage loan is transferred
to the Special Servicer. Each Asset Status Report will be delivered to the
Directing Certificateholder (as defined below), the Depositor and the Rating
Agencies, provided however, the Special Servicer will not be required to deliver
an Asset Status Report to the Directing Certificateholder if they are the same
entity. If the Directing Certificateholder does not disapprove an Asset Status
Report within [__] business days, the Special Servicer will be required to
implement the recommended action as outlined in the Asset Status Report. The
Directing Certificateholder may object to any Asset Status Report within [__]
business days of receipt; provided, however, that the Special Servicer will be
required to implement the recommended action as outlined in the Asset Status
Report if it makes a determination in accordance with the Servicing Standards
that the objection is not in the best interest of all the certificateholders or
violates the servicing standards. If the Directing Certificateholder disapproves
the Asset Status Report and the Special Servicer has not made the affirmative
determination described above, the Special Servicer will be required to revise
the Asset Status Report as soon as practicable thereafter, but in no event later
than [__] days after that disapproval. The Special Servicer will be required to
revise the Asset Status Report until the Directing Certificateholder fails to
disapprove the revised Asset Status Report as described above or until the
Special Servicer makes a determination that the objection is not in the best
interests of the certificateholders.
Inspections; Collection of Operating Information
The Special Servicer will perform physical inspections of each Mortgaged
Property at the times and in the manner as are consistent with the Special
Servicer's normal servicing procedures, but in any event
(1) at least once per calendar year, commencing in the
calendar year 200_, and
(2) if any scheduled payment becomes more than 60 days
delinquent on the related Mortgage Loan, as soon as practicable
after the occurrence of the delinquency. 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 on the Mortgaged Property.
With respect to each Mortgage Loan that requires the borrower to deliver
these 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, there can be no assurance 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 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" in
this prospectus supplement.
Additional Obligations of the Master Servicer with Respect to ARM Loans
The Master Servicer is responsible for calculating adjustments in the mortgage
rate and the Monthly Payment for each ARM Loan and for notifying the related
borrower of such adjustments. If the base index for any ARM Loan is not
published or is otherwise unavailable, then the Master Servicer is required to
select a comparable alternative index over which it has no direct control, that
is readily verifiable and that is acceptable under the terms of the related
Mortgage Note. If the mortgage rate or the Monthly Payment with respect to any
ARM Loan is not properly adjusted by the Master Servicer pursuant to the terms
of such Mortgage Loan and applicable law, the Master Servicer is required to
deposit in the Certificate Account on or prior to the Due Date of the affected
Monthly Payment, an amount equal to the excess, if any, of
S-38
(1) the amount that would have been received from the
borrower if the mortgage rate or Monthly Payment had been
properly adjusted, over
(2) the amount of such improperly adjusted Monthly Payment,
subject to reimbursement only out of such amounts as are
recovered from the borrower in respect of such excess.
DESCRIPTION OF THE CERTIFICATES
General
The certificates will be issued pursuant to 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 mortgage loan purchase and
sale agreement relating to Mortgage Loan document delivery
requirements and the representations and warranties of the Mortgage
Loan Seller regarding the Mortgage Loans.
The certificates will consist of the following four classes:
(1) the Class A Certificates (the "Senior Certificates");
(2) the Class B Certificates;
(3) the Class C Certificates; and the Class R Certificates;
and
(4) The Class A Certificates will have an initial
certificate balance of $[____________], which represents [____]%
of the Initial Pool Balance; the Class B Certificates will have
an initial certificate balance of $____________, which represents
[____]% of the Initial Pool Balance the Class C Certificates will
have an initial certificate balance of $[____________], which
represents [___]% of the Initial Pool Balance; and the Class R
Certificates will not have a certificate balance.
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 Certificates and the
Class R Certificates have not been registered under the Securities Act of 1933
and are not offered by this prospectus supplement.
The Offered Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its Participants in minimum denominations of
$[______] and integral multiples of $1. One certificate of each class may be
issued in a different amount in order to evidence the remainder of the initial
certificate balance of that class. The Class R Certificates will be issued in
registered, certificated form in minimum denominations of [20]% Percentage
Interest in that class. The "Percentage Interest" evidenced by any Offered
Certificate is equal to the initial denomination thereof as of the Delivery
Date, divided by the initial certificate balance of the class to which it
belongs.
S-39
The Offered Certificates will initially be represented by one or more
global certificates registered in the name of the nominee of DTC. The Depositor
has been informed by DTC that DTC's nominee will be Cede & Co. No Certificate
Owner will be entitled to receive a definitive certificate representing its
interest in such class, except as set forth below under "--Book-Entry
Registration of the Offered Certificates--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 Certificate Owners through its Participants, and all references in
this prospectus supplement to payments, notices, reports and statements to
holders of the 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 Certificate Owners through its Participants in
accordance with DTC procedures. See "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in the accompanying prospectus.
Until definitive certificates are issued, interests in each class will be
transferred on the book-entry records of DTC and its Participants.
[________________________] will initially serve as registrar (in such capacity,
the "Certificate Registrar") for purposes of recording and otherwise providing
for the registration of the Offered Certificates and of transfers, if issued, of
definitive certificates.
Book-Entry Registration of the Offered Certificates
General. Certificate Owners that are not Direct or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, the certificates may do so only through Direct and Indirect
Participants. In addition, Certificate Owners will receive all distributions of
principal of and interest on the certificates from the Trustee through DTC and
its Direct and Indirect Participants. Accordingly, Certificate Owners may
experience delays in their receipt of payments. Unless and until definitive
certificates are issued, it is anticipated that the only registered
certificateholder of the certificates will be Cede & Co., as nominee of DTC.
Certificate Owners will not be recognized by the Trustee or the Master Servicer
as certificateholders, as such term is used in the Pooling and Servicing
Agreement, and Certificate Owners will be permitted to receive information
furnished to certificateholders and to exercise the rights of certificateholders
only indirectly through DTC and its Direct and Indirect Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
the Offered Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, the Offered Certificates. Direct
and Indirect Participants with which Certificate Owners have accounts with
respect to the Offered Certificates similarly are required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will not
possess physical certificates evidencing their interests in the Offered
Certificates, the Rules provide a mechanism by which Certificate Owners, through
their Direct and Indirect Participants, will receive distributions and will be
able to transfer their interests in the Offered Certificates.
None of the Depositor, the Master Servicer or the Trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the Offered Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interest.
Definitive Class A Certificates. Definitive Offered Certificates will be
issued to Class A Certificate Owners or their nominees, respectively, rather
than to DTC or its nominee, only under the limited conditions set forth in the
accompanying prospectus under "Description of the Certificates--Book-Entry
Registration and Definitive Certificates."
Upon the occurrence of an event described in the accompanying prospectus in
the last paragraph under "Description of the Certificates--Book-Entry
Registration and Definitive Certificates," the Trustee is required to notify,
through DTC, Direct Participants who have ownership of Offered Certificates as
indicated on the records of DTC of the availability of definitive certificates.
Upon surrender by DTC of the definitive certificates representing the Offered
Certificates and upon receipt of instructions from DTC for re-registration, the
Trustee will reissue the Offered Certificates as definitive offered certificates
issued in the respective principal amounts owned by individual Offered
Certificate Owners. Thereafter the Trustee and the Master Servicer will
recognize the holders of such definitive offered certificates as
certificateholders under the Pooling and Servicing Agreement.
S-40
For additional information regarding DTC and certificates maintained on the
book-entry records thereof, see "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in the accompanying prospectus.
Distributions
Method, Timing and Amount. Distributions on the certificates will be made
by the [Trustee], to the extent of available funds, on the [11th] day of each
month or, if any such [11th] day is not a business day, then on the next
succeeding business day, commencing in [_________] 200[__] (each, a
"Distribution Date"). These distributions (other than the final distribution on
any certificate) will be made to the persons in whose names the certificates are
registered at the close of business on each Record Date, which will be the last
business day of the month preceding the month in which the related Distribution
Date occurs. Each 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 such transfer shall only be made 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.
Available Distribution Amount. 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:
(1) all Monthly Payments collected but due on a Due Date
subsequent to the related Due Period,
(2) all principal prepayments (together with related
payments of interest thereon and related Prepayment Premiums),
Liquidation Proceeds, Insurance and Condemnation Proceeds and
other unscheduled recoveries received subsequent to the related
Due Period, and
(3) all amounts in the Certificate Account that are due or
reimbursable to any person other than the certificateholders; and
(b) all Advances made by the Master Servicer with respect to such
Distribution Date. See "The Pooling and Servicing
Agreements--Certificate Account" in the accompanying 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 the discussion in the accompanying prospectus, the
Due Period is also the Prepayment Period. The "Determination Date" for each
Distribution Date is the [5th] day of the month in which such Distribution Date
occurs or, if any such [5th] day is not a business day, then the next preceding
business day.
Priority. 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:
[Description of applicable priority of payments, for example:
(1) to distributions of interest to the holders of the Class
A Certificates, pro rata among the respective classes thereof, in
an amount equal to all Distributable Certificate Interest in
respect of the
S-41
Senior 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 the Class A Certificates' Ownership
Percentage (as calculated immediately prior to such
Distribution Date), multiplied by 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 Senior 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 the Class B Certificates' Ownership
Percentage (as calculated immediately prior to such
Distribution Date), multiplied by the Scheduled Principal
Distribution Amount for such Distribution Date, plus
(b) if the certificate balances of the Senior
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;
(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.]
S-42
[Summary of cases in which classes of certificates may be entitled to
distributions from a credit support provider or from a particular group of
mortgage loans or otherwise from less than all of the mortgage loans (if
applicable and to the extent not already provided for in the priority of
payments itself).]
Pass-Through Rates. The "Pass-Through Rate" applicable to each class of
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:
(a) 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
(b) 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 such 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
(a) such Net Aggregate Prepayment Interest Shortfall, multiplied
by
(b) a fraction, the numerator of which is equal to the Accrued
Certificate Interest in respect of such class of certificates for such
Distribution Date, and the denominator of which is equal to the
Accrued Certificate Interest in respect of all the classes of
certificates for such Distribution Date.
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.
S-43
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 net of any
unreimbursed Advances]; and
(b) any other collections (exclusive of payments by borrowers)
received on the Mortgage Loans and any REO Properties during the
related Due Period, whether in the form of Liquidation Proceeds,
Insurance and Condemnation Proceeds, net income from REO Property or
otherwise, that were identified and applied by the Master Servicer as
recoveries of previously unadvanced principal of the related Mortgage
Loan [, net of any related Workout Fees payable therefrom to the
Special Servicer and net of any unreimbursed Advances].
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are in this prospectus supplement 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.
Distribution of Prepayment Premiums. On each Distribution Date, Prepayment
Premiums collected on the Mortgage Loans during the related Prepayment Premium
Period will be distributed by the Trustee as follows: [Identification of the
classes entitled to distributions of Prepayment Premiums and description of the
applicable percentages, formulas or other method of allocation to such classes.]
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 accompanying 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" in this prospectus supplement and in the accompanying prospectus, when
used in such context, will be deemed to also be references to or to also
include, as the case may be, any "REO Loans". Each REO Loan will generally be
deemed to have the same characteristics as its actual predecessor Mortgage Loan,
including the same adjustable or fixed mortgage rate (and, accordingly, the same
Net Mortgage Rate and effective Net Mortgage Rate) and the same unpaid principal
balance and Stated Principal Balance. Amounts due on such predecessor Mortgage
Loan, including any portion thereof payable or reimbursable to the Master
Servicer, will continue to be "due" in respect of the REO Loan; and amounts
received in respect of the related REO Property, net of payments to be made, or
reimbursement to the Master Servicer or the Special Servicer for payments
previously advanced, in connection with the operation and management of such
property, generally will be applied by the Master Servicer as if received on the
predecessor Mortgage Loan. However, notwithstanding the terms of the predecessor
Mortgage Loan, the Monthly Payment "due" on an REO Loan will in all cases, for
so long as the related Mortgaged Property is part of the trust fund, be deemed
to equal one month's interest thereon at the applicable mortgage rate.
S-44
Credit Support
Subordination. Credit support for the offered certificates will be provided
by subordination. 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 in this
prospectus supplement, to the rights of holders of the Senior Certificates. 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 in this prospectus supplement, 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 Senior 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 Senior 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--Priority" above. No other form of Credit Support will be
available for the benefit of the holders of the Offered Certificates.
Allocation to the Senior 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 Senior
Certificates are amortized faster than the Mortgage Loans, the percentage
interest evidenced by the Senior 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 Senior
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.
Allocation of Losses and Certain Expenses. 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
(a) the aggregate Stated Principal Balance of the Mortgage Pool
expected to be outstanding immediately following such Distribution
Date is less than
(b) 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.
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 arising from the inability of the Master Servicer and/or
Special Servicer to collect all amounts due and owing under any
such Mortgage Loan, including by reason of the fraud or
bankruptcy of a borrower or a casualty of any nature at a
Mortgaged
S-45
Property, to the extent not covered by insurance (such losses and
shortfalls, "Realized Losses"); provided that if any portion of
the debt due under a Mortgage Loan is forgiven, whether in
connection with a modification, waiver or amendment granted or
agreed to by the Master Servicer or Special Servicer or in
connection with a bankruptcy or similar proceeding involving the
related borrower, the amount so forgiven also will be treated as
a Realized Loss; and
o all Special Servicing Fees, Workout Fees and Liquidation Fees
paid to the Special Servicer, any interest paid to the Master
Servicer, the Special Servicer and/or the Trustee in respect of
unreimbursed Advances, the costs of various opinions of counsel
required or permitted to be obtained in connection with the
servicing of the Mortgage Loans and the administration of the
trust fund, property inspection costs incurred by the Special
Servicer for Specially Serviced Mortgage Loans to the extent paid
out of general collections, certain unanticipated, non-Mortgage
Loan specific expenses of the trust fund, including certain
reimbursements and indemnifications to the Trustee as described
under "The Pooling and Servicing Agreements--Certain Matters
Regarding the Trustee" in the accompanying prospectus, certain
reimbursements to the Master Servicer, the Special Servicer, the
REMIC Administrator and the Depositor as described under "The
Pooling and Servicing Agreements--Certain Matters Regarding the
Master Servicer, the Special Servicer, the REMIC Administrator
and the Depositor" in the accompanying 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 accompanying prospectus, if not advances by
the Master Servicer, any amounts expended on behalf of the trust
to remediate an adverse environmental condition at any Mortgaged
Property securing a defaulted mortgage loan (see "The Pooling and
Servicing Agreements--Realization Upon Defaulted Mortgage Loans"
in the accompanying prospectus), and any other expense of the
trust fund not specifically included in the calculation of a
Realized Loss for which there is no corresponding collection from
a borrower (such expenses, reimbursements and costs, "Additional
Trust Fund Expenses").
Accordingly, the allocation of Collateral Support Deficit as described
above will constitute an allocation of losses and other shortfalls experienced
by the trust fund.
Cash Flow Agreements
[Statement of the name, organizational form and general character of the
business of any third party derivative counterparty. Description of the terms of
the derivative instrument, to the extent material, as well as any material terms
regarding substitution of the derivative instrument. Statement regarding whether
the significance percentage is less than 10%, at least 10% but less than 20%, or
20% or more.] As used in the preceding sentence, "significance percentage"
refers to the percentage that the amount of the significance estimate represents
of the aggregate initial principal balance of [the mortgage loans][Class [___].
"Significance estimate" refers to the reasonable good-faith estimate of maximum
probable exposure, made in substantially the same manner as that used in the
sponsor's internal risk management process in respect of similar instruments.
[Summary financial information, if the significance percentage is 10% or more
but less than 20%, and further financial information if the significance
percentage is 20% or more, in each case to the extent required by Item 1115 of
Regulation AB.]]
Advances
With respect to each Distribution Date, the Master Servicer will be
obligated, subject to the recoverability determination described below, to make
P&I Advances out of its own funds or, subject to the replacement thereof as and
to the extent 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 generally equal to
the aggregate of all Monthly Payments (other than Balloon Payments and Excess
Interest) and any Assumed Monthly Payments, in each case net of related Master
Servicing Fees that were due or deemed due, as the case may be, in respect of
the Mortgage Loans during the related Collection Period and that were not paid
by or on behalf of the related borrowers or otherwise collected as of the close
of business on the business day prior to the Master Servicer Remittance Date.
The Master Servicer's obligations to make P&I Advances in respect of any
Mortgage Loan will continue through liquidation of such Mortgage Loan or
disposition of any REO Property acquired in respect thereof. Subject to the
recoverability determination described below, if the Master Servicer fails to
make a
S-46
required P&I Advance, then the Trustee will be required to make such P&I
Advance. Any such Advance by the Trustee would similarly be out of its own funds
or, subject to the replacement thereof as and to the extent 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.
The Master Servicer and the Trustee 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 and Condemnation Proceeds, Liquidation Proceeds or otherwise ("Related
Proceeds"). Notwithstanding the foregoing neither the Master Servicer nor the
Trustee will 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 and the Trustee
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. In arriving at a non-recoverability determination, the Master Servicer
will consider the factors as described in the accompanying prospectus under
"Description of the Certificates--Advances in Respect of Delinquencies".
[Description of any other factors to be considered in making a
non-recoverability determination.] The Trustee will be entitled to rely on any
non-recoverability determination made by the Master Servicer and the Trustee and
Master Servicer will be entitled to rely on the non-recoverability determination
made by the Special Servicer. Neither the Master Servicer nor the Trustee will
make a P&I Advance for Excess Interest or a Prepayment Premium. 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 "The Pooling and Servicing Agreements--Certificate Account"
in the accompanying prospectus.
In connection with its recovery of any Advance or reimbursable servicing
expense, each of the Master Servicer, the Special Servicer and the Trustee will
be entitled to be paid, out of any amounts then on deposit in the Certificate
Account, 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. 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 Senior 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 accompanying prospectus.
Appraisal Reductions
Promptly upon (i) a Mortgage Loan being modified by the Special Servicer,
(ii) a Mortgage Loan becoming 60 days past due with respect to a payment, (iii)
the passage of 60 days after the Special Servicer receives notice that the
related borrower has become the subject of a bankruptcy proceeding or a receiver
or similar official has been appointed with respect to the related Mortgaged
Property, (iv) the related Mortgaged Property becoming an REO Property, or (v)
the passage of 60 days after the third extension of a Mortgage Loan, the Special
Servicer will be required to obtain an appraisal of the related Mortgaged
Property. Such appraisal will be used by the Special Servicer to determine
whether an appraisal reduction amount exists with respect to the related
Mortgage Loan. If an appraisal reduction amount does exist with respect to such
Mortgage Loan, to the extent of any delinquencies in respect of such Mortgage
Loan, the Master Servicer is only required to advance a portion of the interest
that it would otherwise be required to advance, taking into account the
appraisal reduction amount of such Mortgage Loan.
Reports to Certificateholders; Certain Available Information
On each Distribution Date, the [Trustee] will be required to prepare a
statement (a "Distribution Date Statement") providing various items of
information relating to distributions made on such date with respect to the
S-47
relevant class and the recent status of the Mortgage Pool in accordance with
Item 1121 of Regulation AB (17 C.F.R. 229.1121). 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, see "Description of the
Certificates--Reports to Certificateholders" in the accompanying prospectus.
In addition, the Trustee and the Servicer will furnish to the Depositor and
the Trustee the compliance statements and attestation reports in accordance with
Item 1122 and 1123 of Regulation AB (17 C.F.R. 229.1122 and 229.1123) detailed
under "The Pooling and Servicing Agreements - Evidence as to Compliance" in the
prospectus.
Copies of these statements and reports will be filed with the SEC through
its EDGAR system located at "http://www.sec.gov" under the name of the Issuing
Entity for so long as the Issuing Entity is subject to the reporting requirement
of the Securities Exchange Act of 1934, as amended. The public also may read and
copy any materials filed with the SEC at its Public Reference Room located at
100 F Street, N.E., Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The Trustee will make the Distribution Date Statement available each month
to certificateholders and the other parties to the Pooling Agreement via the
Trustee's internet website. The Trustee will also make the periodic reports
described in the prospectus under "For More Information" and "Incorporation of
Certain Information by Reference" relating to the Issuing Entity available
through its website on the same date they are filed with the SEC. The Trustee's
internet website will initially be located at [_______________]. Assistance in
using the website can be obtained by calling the Trustee's customer service desk
at [____________]. Parties that are unable to use the website are entitled to
have a paper copy mailed to them at no charge via first class mail by calling
the customer service desk.
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 Delivery Date,
o all officer's certificates delivered to the Trustee since the Delivery
Date as described under "The Pooling and Servicing
Agreements--Evidence as to Compliance" in the accompanying prospectus,
o all accountants' reports delivered to the Trustee since the Delivery
Date as described under "The Pooling and Servicing
Agreements--Evidence as to Compliance" in the accompanying 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 Class A Certificates are issued, the
foregoing information will be available to Class A Certificate Owners only to
the extent it is forwarded by or otherwise available through DTC and its
Participants. Conveyance of notices and other communications by DTC to
Participants, and by Participants to
S-48
Class A Certificate Owners, will be governed by arrangements among them, subject
to any statutory or regulatory requirements as may be in effect from time to
time. The Master Servicer, the Special Servicer, the Trustee, the Depositor, the
REMIC Administrator and the Certificate Registrar are required to recognize as
certificateholders only those persons in whose names the certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A Certificates will be Cede & Co. as nominee for
DTC.
Voting Rights
At all times during the term of the Pooling and Servicing Agreement, the
voting rights for the series offered hereby (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
(1) the final payment (or advance in respect thereof) or other
liquidation of the last Mortgage Loan or REO Property subject thereto,
and
(2) 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
(a) the sum of
(1) the aggregate Purchase Price of all the Mortgage Loans
(exclusive of REO Loans) then included in the trust fund and
(2) 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
(b) the aggregate of amounts payable or reimbursable to the
Master Servicer under the Pooling and Servicing Agreement.
Such purchase will effect early retirement of the then outstanding Offered
Certificates, but the right of the Master Servicer 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 [__]% 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 "The Pooling and Servicing
Agreements--Certificate Account" in the accompanying prospectus), will be
applied generally as described above under "--Distributions--Priority", 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.
S-49
YIELD AND MATURITY CONSIDERATIONS
Yield Considerations
General. The yield on any Offered Certificate will depend on:
(1) the Pass-Through Rate in effect from time to time for such
certificate;
(2) 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
(3) 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 (other than the initial
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
(1) adjustments to the mortgage rates on the ARM Loans and
(2) changes in the relative composition of the Mortgage Pool as a
result of scheduled amortization, voluntary prepayments and
involuntary liquidations of the Mortgage Loans. See "Description of
the Mortgage Pool" in this prospectus supplement and "--Yield
Considerations--Rate and Timing of Principal Payments" below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by the
rate and timing of principal payments on the Mortgage Loans (including principal
prepayments on the Mortgage Loans resulting from both voluntary prepayments by
the mortgagors and involuntary liquidations). The rate and timing of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules thereof, the dates on which Balloon Payments are due and the rate and
timing of principal prepayments and other unscheduled collections thereon
(including for this purpose, collections made in connection with liquidations of
Mortgage Loans due to defaults, casualties or condemnations affecting the
Mortgaged Properties, or purchases of Mortgage Loans out of the trust fund).
Prepayments and, assuming the respective stated maturity dates therefor have not
occurred, liquidations and purchases of the Mortgage Loans, will result in
distributions on the Offered Certificates of amounts that would otherwise be
distributed over the remaining terms of the Mortgage Loans. Defaults on the
Mortgage Loans, particularly at or near their stated maturity dates, may result
in significant delays in payments of principal on the Mortgage Loans (and,
accordingly, on the Offered Certificates) while work-outs are negotiated or
foreclosures are completed. See "Servicing of the Mortgage Loans--Modifications,
Waivers and Amendments" in this prospectus supplement and "The Pooling and
Servicing Agreements--Realization Upon Defaulted Mortgage Loans" and "Certain
Legal Aspects of Mortgage Loans--Foreclosure" in the accompanying 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 a certificate could result in an actual yield to
the 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 a certificate could result in an
actual yield to the 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 the investor's Offered Certificates occurring at a rate
higher (or lower) than the rate anticipated by the investor during any
particular period would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
S-50
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:
o first, by the holders of the Class C Certificates, to the extent of
amounts otherwise distributable in respect of their certificates;
o second, by the holders of the Class B Certificates, to the extent of
amounts otherwise distributable in respect of their certificates; and
o last, by the holders of the Senior Certificates.
As more fully described in this prospectus supplement under "Description of
the Certificates--Distributions--Distributable Certificate Interest", Net
Aggregate Prepayment Interest Shortfalls will generally be borne by the
respective classes of 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,
o prevailing interest rates
o the terms of the Mortgage Loans (for example [_____________]),
o Prepayment Premiums,
o adjustable mortgage rates and amortization terms that require Balloon
Payments,
o the demographics and relative economic vitality of the areas in which
the Mortgaged Properties are located and
o the general supply and demand for rental properties in such areas
o the quality of management of the Mortgaged Properties,
o the servicing of the Mortgage Loans,
o possible changes in tax laws and
o other opportunities for investment. See "Risk Factors" and
"Description of the Mortgage Pool" in this prospectus supplement and
"Risk Factors" and "Yield and Maturity Considerations--Yield and
Prepayment Considerations" in the accompanying prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. Although most of the Mortgage Loans are ARM Loans, adjustments to the
mortgage rates thereon will generally be limited by lifetime and/or periodic
caps and floors and, in each case, will be based on the related Index (which may
not rise and fall consistently with mortgage interest rates then available) plus
the related Gross Margin (which may be different from margins then offered on
adjustable rate mortgage loans). See "Description of the Mortgage Pool--Certain
Terms and Conditions of the Mortgage Loans" and "--The Index" in this prospectus
supplement. As a result, the mortgage rates on the ARM Loans at any time may not
be comparable to prevailing market interest rates. In addition, as prevailing
market interest rates decline, and without regard to whether the mortgage rates
on the ARM Loans decline in a manner consistent therewith, related borrowers may
have an increased incentive to refinance for purposes of either
(1) converting to a fixed rate loan and thereby "locking in"
such rate, or
S-51
(2) taking advantage of a different index, margin or rate
cap or floor on another adjustable rate mortgage loan. The
Mortgage Loans may be prepaid at any time and, in [___] cases
(approximately [_____]% of the Initial Pool Balance), may be
prepaid in whole or in part without payment of a Prepayment
Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by Federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Mortgage Loans that will be prepaid or as to which
a default will have occurred as of any date or as to the overall rate of
prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will not
be made to certificateholders until a date that is scheduled to be at least
[_____] days and as many as [_____] days following the Due Dates for the
Mortgage Loans during the related Due Period, the effective yield to the holders
of the Offered Certificates will be lower than the yield that would otherwise be
produced by the applicable Pass-Through Rates and purchase prices (assuming such
prices did not account for such delay).
Unpaid Distributable Certificate Interest. As described under "Description
of the Certificates--Distributions--Priority" in this prospectus supplement, if
the portion of the Available Distribution Amount distributable in respect of
interest on any class of Offered Certificates on any Distribution Date is less
than the Distributable Certificate Interest then payable for such class, the
shortfall will be distributable to holders of such class of certificates on
subsequent Distribution Dates, to the extent of available funds. Any such
shortfall will not bear interest, however, and will therefore negatively affect
the yield to maturity of such class of certificates for so long as it is
outstanding.
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 the 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 and Condemnation Proceeds and Liquidation
Proceeds.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this prospectus supplement is the "CPR" model (as
described in the accompanying prospectus). 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 no prepayments are made on any Mortgage Loan during such
Mortgage Loan's Lock-out Period, if any, or during such Mortgage Loan's yield
maintenance period, if any, and are otherwise made on each of the Mortgage Loans
at the indicated CPRs. There is no assurance, however, that prepayments of the
Mortgage Loans (whether or not in a Lock-out Period or a yield maintenance
period) will conform to any particular CPR, and no representation is made that
the Mortgage Loans will prepay in accordance with the assumptions at any of the
CPRs shown or at any other particular prepayment rate, that all the Mortgage
Loans will prepay in accordance with the assumptions at the same rate or that
Mortgage Loans that are in a Lock-out Period or a yield maintenance period will
not prepay as a result of involuntary liquidations upon default or otherwise. A
"yield maintenance period" is any period during which a Mortgage Loan provides
that voluntary prepayments be accompanied by a Prepayment Premium calculated on
the basis of a yield maintenance formula.
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:
S-52
(1) 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
15th day of each month commencing in [________] 200[___;
(2) the mortgage rate in effect for each Mortgage Loan as of the
Cut-off Date will remain in effect
(a) in the case of each Fixed Rate Loan, to maturity and,
(b) in the case of each ARM Loan, until its next Interest
Rate Adjustment Date, when a new mortgage rate that is to remain
in effect to maturity will be calculated reflecting the value of
the related Index as of [________], 200[__], subject to such
Mortgage Loan's lifetime and/or periodic rate caps and floors, if
any;
(3) all Mortgage Loans accrue and pay interest on a 30/360 basis;
(4) the monthly principal and interest payment due for each
Mortgage Loan on the first Due Date following the Cut-off Date will
continue to be due
(a) in the case of each Fixed Rate Loan, on each Due Date
until maturity and
(b) in the case of each ARM Loan, until its next Payment
Adjustment Date, when a new payment that is to be due on each Due
Date until maturity will be calculated reflecting the appropriate
mortgage rate and remaining amortization term;
(5) 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
(6) the Mortgage Loan Seller will not be required to repurchase
or substitute 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.
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. 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.
See "Risk Factors--Modeling Assumptions Are Unlikely To Match Actual
Experience".
S-53
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
_________ 11, 2000..............................................
_________ 11, 2001..............................................
_________ 11, 2002..............................................
_________ 11, 2003..............................................
_________ 11, 2004..............................................
_________ 11, 2005..............................................
_________ 11, 2006..............................................
_________ 11, 2007..............................................
_________ 11, 2008..............................................
_________ 11, 2009..............................................
Weighted Average Life (years)(A)................................
- ------------------
(A) The weighted average life of a Class A Certificate is determined by
(1) 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,
(2) summing the results and
(3) 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
_________ 11, 2000..............................................
_________ 11, 2001..............................................
_________ 11, 2002..............................................
_________ 11, 2003..............................................
_________ 11, 2004..............................................
_________ 11, 2005..............................................
_________ 11, 2006..............................................
_________ 11, 2007..............................................
_________ 11, 2008..............................................
_________ 11, 2009..............................................
Weighted Average Life (years)(A)................................
- ------------------
(A) The weighted average life of a Class B Certificate is determined by (1)
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, (2) summing the results and (3) dividing the sum
by the aggregate amount of the reductions in the principal balance of such
Class B Certificate.
S-54
[The following disclosure is applicable to Stripped Interest Certificates, when
offered...
Yield Sensitivity of the Class X Certificates
The yield to maturity of the Class X Certificates will be especially
sensitive to the prepayment, repurchase, substitution and default experienced on
the Mortgage Loans, which may fluctuate significantly from time to time. A rapid
rate of principal payments will have a material negative effect on the yield to
maturity of the Class X Certificates. There can be no assurance that the
Mortgage Loans will prepay at any particular rate. Prospective investors in the
Class X Certificates should fully consider the associated risks, including the
risk that such investors may not fully recover their initial investment.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Class X Certificates to various constant rates of prepayment on
the Mortgage Loans by projecting the monthly aggregate payments of interest on
the Class X Certificates and computing the corresponding pre-tax yields to
maturity on a corporate bond equivalent basis. This computation is based on the
assumptions described in the third paragraph under the heading "--Weighted
Average Life" above, including the assumptions regarding the characteristics and
performance of the Mortgage Loans which differ from the actual characteristics
and performance thereof and assuming the aggregate purchase price set forth
below. Any differences between such assumptions and the actual characteristics
and performance of the Mortgage Loans and of the Class X Certificates may result
in yields being different from those shown in such table. Discrepancies between
assumed and actual characteristics and performance underscore the hypothetical
nature of the table, which is provided only to give a general sense of the
sensitivity of yields in varying prepayment scenarios.
Pre-Tax Yield to Maturity of the Class X Certificates
at the Following CPRs
Assumed Purchase Price 0% % % % % %
- ------------------------------------------------- ------ ------ ------ ------ ------ ------
$----------------............................... ____% ____% ____% ____% ____% ____%
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class X Certificates, would cause
the discounted present value of such assumed stream of cash flows to equal the
assumed purchase price listed in the table. Accrued interest is included in the
assumed purchase price and is used in computing the corporate bond equivalent
yields shown. These yields do not take into account the different interest rates
at which investors may be able to reinvest funds received by them as
distributions on the Class X Certificates, and thus do not reflect the return on
any investment in the Class X Certificates when any reinvestment rates other
than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Class X
Certificates is likely to differ from those shown in the tables, even if all of
the Mortgage Loans prepay at the indicated CPRs over any given time period or
over the entire life of the certificates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Class X Certificates will conform to
the yields described in this prospectus supplement. Investors are urged to make
their investment decisions based on the determinations as to anticipated rates
of prepayment under a variety of scenarios. Investors in the Class X
Certificates should fully consider the risk that a rapid rate of prepayments on
the Mortgage Loans could result in the failure of such investors to fully
recover their investments.]
[CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS]
[Identification of states and geographic regions relating to 10% or more of
the Mortgage Loans by principal balance, and description of unique legal
aspects, to the extent material.]
S-55
[Identification of any foreign countries in which Mortgaged Properties are
located and description of any unique legal aspects, to the extent material.
Mortgage Loans secured by properties located in foreign countries will not equal
or exceed 10% of the principal balance of the Mortgage Pool for any takedown.]
Other Aspects. Please see the discussion under "Certain Legal Aspects of
the Mortgage Loans" in the accompanying prospectus regarding [other] legal
aspects of the Mortgage Loans that you should consider prior to making any
investment in the certificates.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, [Cadwalader, Wickersham &
Taft LLP], counsel to the Depositor, will deliver the following opinion:
[Assuming compliance with the provisions of the Pooling and Servicing Agreement,
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
(1) the Class A, Class B[, Class X] and Class C Certificates will
evidence "regular interests" in such REMIC and
(2) the Class R Certificates will be the sole class of "residual
interests" in such REMIC, each within the meaning of the REMIC
Provisions in effect on the date hereof.] [Assuming compliance with
the Pooling and Servicing Agreement, for federal income tax purposes,
the trust fund will be classified as a grantor trust under Subpart E,
part I of subchapter J of the Code, and not as an association taxable
as a corporation or as a partnership.]
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--REMICs--Taxation of Owners of REMIC Regular Certificates-Original
Issue Discount" in the accompanying 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--REMICs--Taxation of Owners of REMIC Regular Certificates-Premium"
in the accompanying 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)(4)(A) 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-REMICs-Characterization of Investments
in REMIC Certificates" in the accompanying prospectus.
[________________________], a [_______________], will act as REMIC
Administrator for the trust fund. [The Master Servicer will be responsible for
the fees and normal disbursements of the REMIC Administrator.] See "Certain
Federal Income Tax Consequences-REMICs-Reporting and Other Administrative
Matters" and "The Pooling and Servicing Agreements-Certain Matters Regarding the
Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor", "--Events of Default" and "--Rights Upon Event of Default" in the
accompanying prospectus.
S-56
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences-REMICs" in the accompanying prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated [_____________], 200_ (the "Underwriting Agreement"), Banc of America
Securities LLC (the "Underwriter"), an affiliate of the Sponsor and the
Depositor, 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 Class A Certificates will be made only in book-entry form through the
Same Day Funds Settlement System of DTC, and that the delivery of the Class B
and Class R Certificates will be made at the offices of the Underwriter,
[_____________________], 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.
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 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. 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 be deemed
to be underwriters and the proceeds from the sale of the Offered Certificates
realized by the Underwriter and any dealers that participate with the
Underwriter in the distribution of the Offered Certificates will constitute
underwriting discounts and commissions.
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
accompanying 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 in this prospectus supplement
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 legality of the certificates will be
passed upon for the Depositor by Cadwalader, Wickersham & Taft LLP. Certain
legal matters relating to the certificates will be passed upon for the
Underwriter by Cadwalader, Wickersham & Taft LLP. Certain federal income tax
matters and other matters will be passed upon for the Depositor by Cadwalader,
Wickersham & Taft LLP.
S-57
RATING
It is a condition to issuance that the Senior Certificates be rated not
lower than "[__]", by [________________] and the Class B Certificates be rated
not lower than "[__]", by [____________________________________].
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the mortgage
pool, structural and legal aspects associated with the certificates, and the
extent to which the payment stream from the mortgage pool is adequate to make
payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding the likelihood or
frequency of prepayments (whether voluntary or involuntary) on the Mortgage
Loans, [The following disclosure is applicable to Stripped Interest
Certificates, when offered... or the possibility that as a result of prepayments
investors in the Class X Certificates may realize a lower than anticipated yield
or may fail to recover fully their initial investment.]
There can be no assurance as to whether any rating agency not requested to
rate the Offered Certificates will nonetheless issue a rating to 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
[___________________________]. In addition, the rating agencies that assign the
initial ratings of the offered certificates will monitor those ratings for so
long as the offered certificates remain outstanding. 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
[As long as the [______] Certificates are rated in one of the two highest
rating categories by [_________,] [__________,] or another nationally recognized
statistical rating organization, the [______] Certificates will constitute
"mortgage related securities" within the meaning of the Secondary Mortgage
Market Enhancement Act of 1984, as amended ("SMMEA").]
[The Class [______] Certificates will not constitute "mortgage related
securities" for purposes of SMMEA. The appropriate characterization of the
offered certificates under various legal investment restrictions, and the
ability of investors subject to these restrictions to purchase the [________]
Certificates, are subject to significant interpretive uncertainties.]
[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 Offered Certificates for legal investment, financial
institution regulatory or other purposes, or as to the ability of particular
investors to purchase the Offered Certificates under applicable legal investment
or other restrictions. The uncertainties described above (and any unfavorable
future determinations concerning the legal investment or financial institution
regulatory characteristics of the offered certificates) may adversely affect the
liquidity of the offered certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Certificates constitute legal
investments for them or are subject to investment, capital or other
restrictions.
See "Legal Investment" in the accompanying prospectus.
CERTAIN ERISA CONSIDERATIONS
A fiduciary of any retirement plan or other employee benefit plan or
arrangement, including individual retirement accounts and individual retirement
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 Title I of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code
(each, a "Plan") should carefully review with its legal advisors whether the
purchase or holding of Offered Certificates could give rise to a transaction
that is prohibited or is not otherwise permitted either
S-58
under ERISA or Section 4975 of the Code or whether there exists any statutory or
administrative exemption applicable thereto. Certain fiduciary and prohibited
transaction issues arise only if the assets of the trust constitute "plan
assets" for purposes of Part 4 of Title I of ERISA and Section 4975 of the Code
("Plan Assets"). Whether the assets of the trust will constitute Plan Assets at
any time will depend on a number of factors, including the portion of any class
of certificates that are held by "benefit plan investors" (as defined in U.S.
Department of Labor Regulation Section 2510.3-101).
The U.S. Department of Labor issued an individual prohibited transaction
exemption to NationsBank Corporation (predecessor in interest to Bank of America
Corporation) an individual prohibited transaction exemption, Prohibited
Transaction Exemption ("PTE") 93-31, as amended by PTE 97-34, PTE 2000-58 and
PTE 2002-41 (the "Exemption"). This exemption generally exempts from the
application of the prohibited transaction provisions of Sections 406(a) and (b)
and 407(a) of ERISA, and the excise taxes imposed on such prohibited
transactions pursuant to Sections 4975(a) and (b) of the Code, 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 Offered Certificates, underwritten by an
Exemption-Favored Party (as hereinafter defined), provided that certain
conditions set forth in the Exemption are satisfied. "Exemption-Favored Party"
shall include (a) Bank of America Corporation, (b) each of the Underwriters, (c)
any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with Bank of America
Corporation (such as Banc of America Securities LLC) or any other Underwriter,
and (d) any member of the underwriting syndicate or selling group of which a
person described in (a), (b) or (c) is a manager or co-manager with respect to
the Offered Certificates.
The Exemption sets forth five general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of an Offered
Certificate to be eligible for exemptive relief thereunder.
o First, the acquisition of such Offered Certificate 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.
o Second, the Offered Certificate 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 Group, a division of The McGraw Hill
Companies, Inc. ("Standard & Poor's"), Moody's Investors Service, Inc.
("Moody's"), or Fitch, Inc. ("Fitch").
o 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 Exemption-Favored Party, the Trustee, the Depositor,
the Master Servicer, the Special Servicer, any sub-servicer, the
Mortgage Loan Seller, any borrower with respect to Mortgage Loans
constituting more than 5% of the aggregate unamortized principal
balance of the Mortgage Pool as of the date of initial issuance of the
certificates and any affiliate of any of the aforementioned persons.
o Fourth, the sum of all payments made to and retained by the
Exemption-Favored Parties must represent not more than reasonable
compensation for underwriting the Offered 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.
o Fifth, the investing Plan must be an accredited investor as defined in
Rule 501(a)(1) of Regulation D of the Commission under the Securities
Act.
A fiduciary of a Plan contemplating a purchase of any class of Offered
Certificates in the secondary market must make its own determination that, at
the time of such purchase, such certificate continues to satisfy the second and
third general conditions set forth above. A fiduciary of a Plan contemplating
purchasing any class of Offered Certificates, whether in the initial issuance of
such certificates or in the secondary market, must make its own determination
that the first and fourth general conditions set forth above will be satisfied
with respect to such certificates as of the date of such purchase. A Plan's
authorizing fiduciary will be deemed to make a representation
S-59
regarding satisfaction of the fifth general condition set forth above in
connection with the purchase of any class of Offered Certificates.
The Exemption also requires that the trust meet the following requirements:
(i) the trust fund must consist solely of assets of the type that
have been included in other investment pools;
(ii) certificates evidencing interests in such other investment
pools must have been rated in one of the four highest categories of
Fitch, Moody's or S&P for at least one year prior to the Plan's
acquisition of an Offered Certificate; and
(iii) 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 Plan's acquisition of such certificate.
The Depositor has confirmed to its satisfaction that such requirements have
been satisfied as of the date hereof.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1) (A) through (D) of the Code, in connection
with
(i) the direct or indirect sale, exchange or transfer of Offered
Certificates in the initial issuance of Offered Certificates between
the Depositor or an Exemption-Favored Party and a Plan when the
Depositor, an Exemption-Favored Party, the Trustee, the Master
Servicer, the Special Servicer, a sub-servicer, the Mortgage Loan
Seller or a borrower is a party in interest (within the meaning of
Section 3(14) of ERISA) or a disqualified person (within the meaning
of Section 4975(e)(2) of the Code) (a "Party in Interest") with
respect to the investing Plan,
(ii) the direct or indirect acquisition or disposition in the
secondary market of the Offered Certificates by a Plan and
(iii) the continued holding of the Offered Certificates by a
Plan. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition
or holding of an Offered Certificate on behalf of an Excluded Plan (as
defined in the next sentence) 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.
Moreover, if the general conditions of the Exemption, as well as certain
other specific conditions set forth in the Exemption, are satisfied, the
Exemption may also 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
(1) the direct or indirect sale, exchange or transfer of the
Offered Certificates in the initial issuance of the Offered
Certificates between the Depositor or an Exemption-Favored Party
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 borrower with respect to 5% or less of the fair
market value of the Mortgage Pool or
(b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the
secondary market of Offered Certificates by a Plan and
(3) the continued holding of Offered Certificates by a Plan.
S-60
Further, if the general conditions of the Exemption, as well as certain
other conditions set forth in 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 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 Mortgage Pool.
Lastly, if 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 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 Offered Certificates.
Before purchasing an Offered Certificate, a fiduciary of a Plan should
itself confirm that
(i) the Offered 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 class
exemptions.
See "Certain ERISA Considerations" in the accompanying prospectus. There
can be no assurance that any such class exemption will apply with respect to any
particular Plan investment in the Offered Certificates or, even if it were
deemed to apply, that any exemption would apply to all transactions that may
occur in connection with such investment.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
Title I of ERISA or Section 4975 of the Code. However, such a governmental plan
may be subject to a federal, state or local law which is, to a material extent,
similar to the foregoing provisions of ERISA or the Code ("Similar Law"). A
fiduciary of a governmental plan should make its own determination as to the
need for and the availability of any exemption relief under Similar Law.
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.
The sale of Offered Certificates to a Plan is in no respect a
representation by the Depositor or the Underwriters that this investment meets
all relevant legal requirements with respect to investments by Plans generally
or by any particular Plan, or that this investment is appropriate for Plans
generally or for any particular Plan.
S-61
GLOSSARY
The following capitalized terms will have the respective meanings assigned
to them in this "Glossary" Section whenever they are used in this prospectus
supplement.
"Annual Debt Service" means the amount derived by multiplying the Monthly
Payment set forth for each Mortgage Loan in Annex A to this prospectus
supplement by twelve.
"Appraisal Value" means, for any Mortgaged Property, the appraiser's value
as stated in the related appraisal available to the Depositor as of the date
specified on Annex A, which may be an "as is" or "as stabilized" value.
"ARM Loans" means mortgage loans that are subject to adjustment of their
mortgage rate on specified dates.
"Balloon Payments" means certain payments under Mortgage Loans that provide
monthly payments of principal based on amortization schedules significantly
longer than the remaining terms of such mortgage loans, thereby leaving
substantial principal amounts due and payable on their respective maturity
dates, unless prepaid prior to that Mortgage Loan's maturity date.
"Cash Flow" means with respect to any Mortgaged Property, the total cash
flow available for Annual Debt Service on the related Mortgage Loan, generally
calculated as the excess of Revenues over Expenses, capital expenditures and
tenant improvements and leasing commissions.
(i) "Revenues" generally consist of certain revenues received in
respect of a Mortgaged Property, including, for example, (A) for the
Multifamily Mortgaged Properties, rental and other revenues; (B) for the
Commercial Mortgaged Properties, base rent (less mark to market adjustments
in some cases), percentage rent, expense reimbursements and other revenues;
and (C) for hotel Mortgaged Properties, guest room rates, food and beverage
charges, telephone charges and other revenues.
(ii) "Expenses" generally consist of all expenses incurred for a
Mortgaged Property, including for example, salaries and wages, the costs or
fees of utilities, repairs and maintenance, marketing, insurance,
management, landscaping, security (if provided at the Mortgaged Property)
and the amount of real estate taxes, general and administrative expenses,
ground lease payments, and other costs but without any deductions for debt
service, depreciation and amortization or capital expenditures therefor. In
the case of hotel Mortgaged Properties, Expenses include, for example,
expenses relating to guest rooms (hotels only), food and beverage costs,
telephone bills, and rental and other expenses, and such operating expenses
as general and administrative, marketing and franchise fees.
In certain cases, Full Year Cash Flow, Most Recent Cash Flow and/or U/W
Cash Flow have been adjusted by removing certain non recurring expenses and
revenue or by certain other normalizations. Such Cash Flow does not necessarily
reflect accrual of certain costs such as capital expenditures and leasing
commissions and does not reflect non cash items such as depreciation or
amortization. In some cases, capital expenditures and non recurring items may
have been treated by a borrower as an expense but were deducted from Most Recent
Expenses, Full Year Expenses or U/W Expenses to reflect normalized Most Recent
Cash Flow, Full Year Cash Flow or U/W Cash Flow, as the case may be. The
Depositor has not made any attempt to verify the accuracy of any information
provided by each borrower or to reflect changes that may have occurred since the
date of the information provided by each borrower for the related Mortgaged
Property. Such Cash Flow was not necessarily determined in accordance with GAAP.
Such Cash Flow is not a substitute for net income determined in accordance with
GAAP as a measure of the results of a Mortgaged Property's operations or a
substitute for cash flows from operating activities determined in accordance
with GAAP as a measure of liquidity. Moreover, in certain cases such Cash Flow
may reflect partial year annualizations.
"Certificate Owner" means a beneficial owner of an offered certificate.
"Collateral Substitution Deposit" means an amount that will be sufficient
to (a) purchase U.S. government obligations (or in some instances the applicable
Mortgage Loan documents may require the borrower to deliver the U.S. government
obligations referenced in this clause (3)) providing for payments on or prior
to, but as close as possible to, all successive scheduled payment dates from the
Release Date to the related maturity date or anticipated
S-62
repayment date (or, in certain cases, the commencement of the related Open
Period) in amounts sufficient to pay the scheduled payments due on such dates
under the Mortgage Loan or the defeased amount thereof in the case of a partial
defeasance and (b) pay any costs and expenses incurred in connection with the
purchase of such U.S. government obligations.
"Controlling Class" means, as of any date of determination, the outstanding
class of Sequential Pay Certificates with the lowest payment priority that has a
then outstanding certificate balance at least equal to 25% of its initial
certificate balance (or, if no class of Sequential Pay Certificates has a
certificate balance at least equal to 25% of its initial certificate balance,
then the Controlling Class will be the outstanding class of Sequential Pay
Certificates with the then largest outstanding class principal balance). The
Controlling Class as of the Delivery Date will be the Class C Certificates.
"Controlling Class Certificateholder" means each Holder (or Certificate
Owner, if applicable) of a certificate of the Controlling Class as certified to
the Trustee from time to time by such Holder (or Certificate Owner).
"Debt Service Coverage Ratio" means 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
o the amount of the monthly payment in effect as of the cut-off date
multiplied by 12.
"Defeasance Lock-out Period" or "DLP" means the time after the specified
period, which period is at least two years from the Delivery Date, during which
the related borrower may obtain the release of a Mortgaged Property from the
lien of the related Mortgage by exercising its Defeasance Option.
"Defeasance Option" means the option of the related borrower (provided no
event of default exists under the related Mortgage Loan and other conditions are
satisfied as described in this prospectus supplement) to obtain a release of a
Mortgaged Property from the lien of the related Mortgage during the Defeasance
Lock-out Period, which is at least two years from the Delivery Date.
"Definitive Class A Certificate" means a Class A Certificate in fully
registered, certificated form.
"Directing Certificateholder" means the Controlling Class Certificateholder
(or a representative selected by such Controlling Class Certificateholder to act
on its behalf) selected by the majority certificateholder of the Controlling
Class, as certified by the Trustee from time to time; provided, however, that
(i) absent such selection, or (ii) until a Directing Certificateholder is so
selected, or (iii) upon receipt of a notice from a majority of the Controlling
Class, by certificate balance, that a Directing Certificateholder is no longer
designated, the Controlling Class Certificateholder that owns the largest
aggregate certificate balance of the Controlling Class will be the Directing
Certificateholder.
"DTC" means The Depository Trust Company.
"Due Date" means the date on which a monthly payment on a mortgage loan is
first due.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Fixed Rate Loan" means those mortgage loans which bear interest at a fixed
mortgage rate.
"Full Year Cash Flow" means, with respect to any Mortgaged Property, the
Cash Flow derived therefrom that was available for debt service, calculated as
Full Year Revenues less Full Year Expenses, Full Year capital expenditures and
Full Year tenant improvements and leasing commissions. See also "Cash Flow"
above.
(i) "Full Year Revenues" are the Revenues received (or annualized or
estimated in certain cases) in respect of a Mortgaged Property for the 12
month period ended as of the Full Year End Date, based upon the latest
available annual operating statement and other information furnished by the
borrower for its most recently ended fiscal year.
S-63
(ii) "Full Year Expenses" are the Expenses incurred (or annualized or
estimated in certain cases) for a Mortgaged Property for the 12 month
period ended as of the Full Year End Date, based upon the latest available
annual operating statement and other information furnished by the borrower
for its most recently ended fiscal year. "Index" means the base index to
which a fixed number of basis points are added in connection with ARM
loans.
"Full Year End Date" means, with respect to each Mortgage Loan, the date
indicated on Annex A to this prospectus supplement as the "Full Year End Date"
with respect to such Mortgage Loan, which date is generally the end date with
respect to the period covered by the latest available annual operating statement
provided by the related borrower.
"Initial Pool Balance" means the initial aggregate principal balance of the
Mortgage Loans.
"Interest Rate Adjustment Date" means the date upon which the interest rate
is adjusted in connection with an ARM Loan.
"Lock-out Period" or "LOP" means a period under the terms of a Mortgage
Loan during which voluntary principal payments are prohibited.
"LTV Ratio" means LTV Ratio for any Mortgage Loan, as of any date of
determination, is a fraction, expressed as a percentage--
o the numerator of which is the original principal balance of such
Mortgage Loan or the balance as of the Cut-off Date of such Mortgage
Loan, as applicable, and
o 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.
"Mortgage" means a mortgage, deed of trust or other similar security
instrument securing a Mortgaged Property.
"Mortgage Loan" means the conventional, multifamily and commercial mortgage
loans primarily comprising the trust fund.
"Mortgage Note" means the promissory note evidencing the Mortgage Loan.
"Mortgaged Property" means a commercial or multifamily rental property that
has a Mortgage that creates a first mortgage lien.
"Most Recent Cash Flow" means, with respect to any Mortgaged Property for
the 12 month period ended on the Most Recent End Date, the Cash Flow derived
therefrom that was available for debt service, calculated as Most Recent
Revenues less Most Recent Expenses, Most Recent capital expenditures and Most
Recent tenant improvements and leasing commissions. See also "Cash Flow".
(i) "Most Recent Revenues" are the Revenues received (or annualized or
estimated in certain cases) in respect of a Mortgaged Property for the 12
month period ended on the Most Recent End Date, based upon operating
statements and other information furnished by the related borrower.
(ii) "Most Recent Expenses" are the Expenses incurred (or annualized or
estimated in certain cases) for a Mortgaged Property for the 12 month period
ended on the Most Recent End Date, based upon operating statements and other
information furnished by the related borrower. "Net Mortgage Rate" means
mortgage rate in effect for a Mortgage Loan reduced by [ ] basis points.
"Most Recent End Date" means, with respect to any Mortgage Loan, the date
indicated on Annex A to this prospectus supplement as the "Most Recent End Date"
with respect to such Mortgage Loan, which date is generally the end date with
respect to the period covered by the latest available operating statement
provided by the related borrower.
S-64
"Net Operating Income" means--
o the revenue derived from the use and operation of a Mortgaged Property
(consisting primarily of rental income and deposit forfeitures);
o less operating expenses (such as utilities, general administrative
expenses, management fees, advertising, repairs and maintenance); and
o less fixed expenses (such as insurance and real estate taxes).
Net Operating Income generally does not reflect capital expenditures.
"Non-Specially Serviced Mortgage Loan" means a Mortgage Loan that is not a
Specially Serviced Mortgage Loan.
"Open Period" means a period under the terms of a Mortgage Loan during
which voluntary principal prepayments may be made without an accompanying
Prepayment Premium.
"Prepayment Premium" means a premium, charge (including, but not limited
to, yield maintenance charges) or other fee due under the terms of a Mortgage
Loan in relation to a voluntary principal prepayment.
"Prepayment Premium Period" means a period under the terms of a Mortgage
Loan during which any voluntary principal prepayment is to be accompanied by a
Prepayment Premium.
"Release Date" means the Due Date upon which the related borrower can
exercise its Defeasance Option.
"Servicing Transfer Event" means, with respect to any Mortgage Loan, any of
the following events: [Identification of the events, e.g., the failure of the
related borrower to make a required payment that continues for a specified
period of time, that will cause such Mortgage Loan to be serviced by the Special
Servicer.]
"Specially Serviced Mortgage Loan" means any Mortgage Loan as to which a
Servicing Transfer Event has occurred.
"U/W Net Cash Flow" means, with respect to any Mortgaged Property, the Cash
Flow (as defined above) derived therefrom that was underwritten as available for
debt service, calculated as U/W Revenues less U/W Expenses, U/W Reserves and U/W
tenant improvements and leasing commissions.
(i) "U/W Revenues" are the anticipated Revenues in respect of a
Mortgaged Property, generally determined by means of an estimate made at
the origination of such Mortgage Loan or, as in some instances, as have
been subsequently updated. U/W Revenues have generally been calculated (a)
assuming that the occupancy rate for the Mortgaged Property was consistent
with the Mortgaged Property's current or historical rate, or the relevant
market rate, if such rate was less than the occupancy rate reflected in the
most recent rent roll or operating statements, as the case may be,
furnished by the related borrower, and (b) in the case of retail, office,
industrial and warehouse Mortgaged Properties, assuming a level of
reimbursements from tenants consistent with the terms of the related leases
or historical trends at the Mortgaged Property, and in certain cases,
assuming that a specified percentage of rent will become defaulted or
otherwise uncollectible. In addition, in the case of retail, office,
industrial and warehouse Mortgaged Properties, upward adjustments may have
been made with respect to such revenues to account for all or a portion of
the rents provided for under any new leases scheduled to take effect later
in the year. Also, in the case of certain Mortgaged Properties that are
operated as a hotel property and are subject to an operating lease with a
single operator, U/W Revenues were calculated based on revenues received by
the operator rather than rental payments received by the related borrower
under the operating lease.
(ii) "U/W Expenses" are the anticipated Expenses in respect of a
Mortgaged Property, generally determined by means of an estimate made at
the origination of such Mortgage Loan or as in some instances as may be
updated. U/W Expenses were generally assumed to be equal to historical
annual expenses reflected in the operating statements and other information
furnished by the borrower, except that such expenses were
S-65
generally modified by (a) if there was no management fee or a below market
management fee, assuming that a management fee was payable with respect to
the Mortgaged Property in an amount approximately equal to a percentage of
assumed gross revenues for the year, (b) adjusting certain historical
expense items upwards or downwards to amounts that reflect industry norms
for the particular type of property and/or taking into consideration
material changes in the operating position of the related Mortgaged
Property (such as newly signed leases and market data) and (c) adjusting
for non recurring items (such as capital expenditures) and tenant
improvement and leasing commissions, if applicable (in the case of certain
retail, office, industrial and warehouse Mortgaged Properties, adjustments
may have been made to account for tenant improvements and leasing
commissions at costs consistent with historical trends or prevailing market
conditions and, in other cases, operating expenses did not include such
costs).
Actual conditions at the Mortgaged Properties will differ, and may differ
substantially, from the assumed conditions used in calculating U/W Net Cash
Flow. In particular, the assumptions regarding tenant vacancies, tenant
improvements and leasing commissions, future rental rates, future expenses and
other conditions if and to the extent used in calculating U/W Net Cash Flow for
a Mortgaged Property, may differ substantially from actual conditions with
respect to such Mortgaged Property. There can be no assurance that the actual
costs of reletting and capital improvements will not exceed those estimated or
assumed in connection with the origination or purchase of the Mortgage Loans.
In most cases, U/W Net Cash Flow describes the cash flow available after
deductions for capital expenditures such as tenant improvements, leasing
commissions and structural reserves. In those cases where such "reserves" were
so included, no cash may have been actually escrowed. No representation is made
as to the future net cash flow of the properties, nor is U/W Net Cash Flow set
forth herein intended to represent such future net cash flow.
S-66
ANNEX A
Individual Mortgage Loan Information
------------------------------------
Fold-out chart containing the following information for each mortgage loan:
Sequence
Loan Number
Loan Seller
Property Name
Property Address
County
City
State
Zip Code
Property Type
Property Subtype
Original Balance
Cut-off Date Balance
Maturity Date Balance
Loan Type
Mortgage Rate
Administrative Fee Rate
Sub-Servicing Fee Rate
Net Mortgage Rate
Note Date
First Payment Date
Interest Accrual Method
Monthly Payment
Original Term to Maturity (months)
Original Amortization Term (months)
Interest Only Period
Seasoning (months)
Remaining Term to Maturity (months)
Maturity Date
Cross-Collateralized Loans
Related Loans
Prepayment
Penalty Description (payments)
Yield Maintenance Type
Appraisal Value
Appraisal Date
Cut-off Date LTV Ratio
Balloon LTV Ratio
Year Built/Renovated
Total Units/SF/Pads/Rooms
Units/SF/Pads/Rooms
Net Rentable Area (SF)
Loan Balance Per Unit/SF/Pad/Room
Occupancy Percent
Occupancy as of Date
A-1
U/W Revenues [*]
U/W Expenses [*]
U/W DSCR [*]
U/W Net Cash Flow [*]
U/W Replacement Reserves
U/W Replacement Reserves Per Unit/SF/Pad/Room
Most Recent Statement Type
Most Recent End Date
Most Recent Net Operating Income [**]
Full Year End Date
Full Year Net Operating Income [**]
Largest Tenant
Largest Tenant Leased SF
Largest Tenant % of Total SF
Largest Tenant Lease Expiration
Second Largest Tenant
Second Largest Tenant Leased SF
Second Largest Tenant % of Total SF Second Largest Tenant Lease Expiration Third
Largest Tenant Third Largest Tenant Leased SF Third Largest Tenant % of Total SF
Third Largest Tenant Lease Expiration % of Pool
[*] [These "U/W" items, together with the definition of "U/W Net Cash Flow" in
the Glossary, are intended to provide the information with respect to the net
cash flow and the components thereof required by Item 1111(b)(9)(i)(B) of
Regulation AB.]
[**] These "Net Operating Income" items, together with the definition of "Net
Operating Income" in the Glossary, are intended to provide the information with
respect to net operating income and the components thereof
A-2
ANNEX B
Summary Mortgage Loan Information
---------------------------------
Mortgage Rates as of the Cut-off Date
Number of Aggregate Percent by
Mortgage Cut-off Aggregate Cut-off
Range of Mortgage Rates(%) Loans Date Balance Date Balance
- ----------------------------------------------------------------- --------- -------------- -----------------
Total..........................................................
Weighted Average
Mortgage Rate (All Mortgage Loans):
[______]% per annum
Weighted Average
Mortgage Rate (ARM Loans): [____]% per annum
Weighted Average
Mortgage Rate (Fixed Rate Loans): [_____]% per annum
Gross Margins
Percent by
Aggregate
Number of Aggregate Cut-off Cut-off
Range of Mortgage Rates(%) ARM Loans Date Balance Date Balance
- ------------------------------------------------------------------- ----------- ----------------- ---------------
Total...........................................................
Weighted Average
Gross Margin: [____]%
Frequency of Adjustments to Mortgage Rates and Monthly Payments
for the ARM Loans
Percent by
Mortgage Rate Monthly Payment Number of Aggregate
Adjustment Adjustment Mortgage Aggregate Cut-off Cut-off Date
Frequency Frequency Loans Date Balance Balance
- -------------------- -------------- --------------- ----------- ----------------- -------------
Total.............
B-1
Maximum Lifetime Mortgage Rates for the ARM Loans
Percent by
Range of Maximum Number of Aggregate Cut-off Aggregate Cut-off
Lifetime Mortgage Rates (%) ARM Loans Date Balance Date Balance
--------------------------- --------- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): [_____]% per annum (A)
- ------------------
(A) This calculation does not include the [__________] ARM Loans without maximum
lifetime Mortgage Rates.
Minimum Lifetime Mortgage Rates for the ARM Loans
Percent by
Range of Minimum Number of Aggregate Cut-off Aggregate Cut-off
Lifetime Mortgage Rates (%) ARM Loans Date Balance Date Balance
--------------------------- --------- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Weighted Average Minimum Lifetime
Mortgage Rate (ARM Loans): [_____]% per annum (A)
- ------------------
(A) This calculation does not include the [__________] ARM Loans without minimum
lifetime Mortgage Rates.
Maximum Annual Mortgage Rates for the ARM Loans
Percent by
Range of Maximum Number of Aggregate Cut-off Aggregate Cut-off
Lifetime Mortgage Rates (%) ARM Loans Date Balance Date Balance
--------------------------- --------- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Weighted Average Maximum Annual
Mortgage Rate (ARM Loans): [_____]% per annum (A)
- ------------------
(A) This calculation does not include the [__________] ARM Loans without maximum
annual Mortgage Rates.
B-2
Minimum Annual Mortgage Rates for the ARM Loans
Percent by
Range of Minimum Number of Aggregate Cut-off Aggregate Cut-off
Lifetime Mortgage Rates (%) ARM Loans Date Balance Date Balance
--------------------------- --------- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Weighted Average Minimum Annual
Mortgage Rate (ARM Loans): [_____]% per annum (A)
- ------------------
(A) This calculation does not include the [__________] ARM Loans without maximum
annual Mortgage Rates.
Cut-off Date Balances
Number of Percent by
Cut-off Date Mortgage Aggregate Cut-off Aggregate Cut-off
Balance Range ($) Loans Date Balance Date Balance
--------------------------- --------- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Average Cut-off Date
Balance (All Mortgage
Loans): $[____________]
Average Cut-off Date
Balance (ARM Loans): $[____________]
Average Cut-off Date
Balance (Fixed Rate Loans): $[____________]
Types of Mortgaged Properties
Percent by
Aggregate Aggregate Aggregate
Number of Cut-off Cut-off Cut-off Date Weighted Average
Property Type Mortgage Loans Date Balance Balance Balance Occupancy Rate
- ---------------------------- ---------------- ------------ ------------ ------------ ----------------
Multifamily..............
[other property types]...
Total....................
B-3
Original Term to Stated Maturity (in Months)
Number of Percent by
Range in Original Mortgage Aggregate Cut-off Aggregate Cut-off
Terms (in Months) Loans Date Balance Date Balance
--------------------------- --------- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Weighted Average Original
Term to Stated Maturity
(All Mortgage Loans): [___] months
Weighted Average Original
Term to Stated Maturity
(ARM Loans): [___] months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): [___] months
Remaining Term to Stated Maturity (in Months)
as of the Cut-off Date
Number of Percent by
Range in Remaining Mortgage Aggregate Cut-off Aggregate Cut-off
Terms (in Months) Loans Date Balance Date Balance
--------------------------- --------- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Weighted Average Remaining
Term to Stated Maturity
(All Mortgage Loans): [___] months
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): [___] months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): [___] months
B-4
Original Amortization Term
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Original Amortization Term (months) Loans Date Balance Date Balance
----------------------------------- ----- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
(1) For Mortgage Loans which accrue interest on the basis of actual days
elapsed during each calendar month and a 360-day year, the amortization
term is the term in which the loan would amortize if interest is paid on
the basis of a 30-day month and a 360-day year. The actual amortization
term would be longer.
Remaining Stated Amortization Terms
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Remaining Stated Amortization Terms (months) Loans Date Balance Date Balance
-------------------------------------------- ----- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Year of Origination
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Year Loans Date Balance Date Balance
---- ----- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Year of Scheduled Maturity
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Year Loans Date Balance Date Balance
---- ----- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
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 ([____] ARM Loans and [___] Fixed Rate 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)
B-5
covered by each operating statement from which a Debt Service Coverage Ratio was
calculated is set forth in Annex A with respect to the related Mortgage Loan.
Debt Service Coverage Ratios(A)
Percent by
Range of Number of Aggregate Aggregate
Debt Service Mortgage Cut-off Cut-off
Coverage Ratios Loans Date Balance Date Balance
--------------- ----- ------------ ------------
Not Calculated (B)................................
Total
======== ============ ============
Weighted Average
Debt Service Coverage
Ratio (All Mortgage Loans): [______]x(C)
Weighted Average
Debt Service Coverage
Ratio (ARM Loans): [______]x(D)
Weighted Average
Debt Service Coverage
Ratio (Fixed Rate Loans): [______](E)
- ------------------
(A) The Debt Service Coverage Ratios are based on the most recently available
operating statements obtained from the respective mortgagors or the related
property managers.
(B) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements.
(C) This calculation does not include the [________] Mortgage Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the [________] ARM Loans as to which Debt
Service Coverage Ratios were not calculated.
(E) This calculation does not include the [________] Fixed Rate Loans as to
which Debt Service Coverage Ratios were not calculated.
The following tables set forth the range of LTV Ratios of the Mortgage
Loans at origination and the Cut-off Date.
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.
B-6
LTV Ratios at Maturity
Number of Percent by
Range of Original Mortgage Aggregate Cut-off Aggregate Cut-off
LTV Ratios(%) Loans Date Balance Date Balance
------------- ----- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Weighted Average Original LTV
Ratio (All Mortgage Loans):
[_____]%
Weighted Average Original LTV
Ratio (ARM Loans): [_____]%
Weighted Average Original LTV
Ratio (Fixed Rate Loans):
[_____]%
LTV Ratios at Cut-off Date
Number of Percent by
Range of LTV Ratios(%) Mortgage Aggregate Cut-off Aggregate Cut-off
as of Cut-off Date Loans Date Balance Date Balance
------------------ ----- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Weighted Average LTV Ratio as
of Cut-off Date (All
Mortgage Loans): [_____]%
Weighted Average LTV Ratio as
of Cut-off Date (ARM
Loans): [_____]%
Weighted Average LTV Ratio as
of Cut-off Date (Fixed Rate
Loans): [_____]%
The Mortgage Loans are secured by Mortgaged Properties located in [_____]
different states. The following table sets forth the states in which the
Mortgaged Properties are located:
B-7
Geographic Distribution
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
State Loans Date Balance Date Balance
----- ----- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Occupancy Rates
Number of Percent by
Range of Mortgage Aggregate Cut-off Aggregate Cut-off
Occupancy Rates(A) Loans Date Balance Date Balance
------------------ ----- ------------ ------------
--------- ------------ ------------
Total...................................................
========= ============ ============
Weighted Average Occupancy Rate (All Mortgage
Loans)(A): [_____]%
Weighted Average Occupancy Rate (ARM Loans)(A):
[-----]%
Weighted Average Occupancy Rate (Fixed Rate
Loans)(A): [_____]%
- ------------------
(A) Physical occupancy rates calculated based on rent rolls provided by the
respective Mortgagors or related property managers as of a date no more
than [___] months prior to the Cut-off Date.
Prepayment Restrictions in Effect as of the Cut-off Date
Weighted Averages
-----------------
% by Cum. %
Aggregate Aggregate of Indicative
Cut-off Cut-off Initial Stated Remaining Cut-off
Prepayment Number Date Date Pool Mortgage Remaining Amount. Implied Date
Restrictions of Loans Balance Balance Rate Rate Term (Mo.) Term (Mo.) DSCR DSR LTV
------------ -------- ------- ------- ---- ---- ---------- ---------- ---- --- ---
Locked Out (A)
Yield Maintenance (B)
Declining
Percentage Premium
____% Premium
____% Premium
No Prepayment
Restrictions
TOTALS
- ------------------
(A) The weighted average term to the expiration of the lock-out periods is
[___] years. [_____] of the Mortgage Loans within their lock-out periods
are subject to declining percentage Prepayment Premiums after the
expiration of their lock-out periods; the remaining Mortgage Loans are
subject to a yield maintenance-type Prepayment Premium following such
expiration.
(B) All Mortgage Loans subject to yield maintenance-type Prepayment Premiums
remain subject to payment of the Prepayment Premium until at least [___]
months prior to maturity.
B-8
================================================================================
You should rely on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus.
We are not offering the certificates in any state where the offer is not
permitted.
We do not claim the accuracy of the information in this prospectus
supplement and the accompanying prospectus as of any date other than the dates
stated on their respective covers.
Until [_______], all dealers that buy, sell or trade the offered
certificates, whether or not participating in this offering, may be required to
deliver a prospectus supplement and the accompanying prospectus. This is in
addition to the dealers' obligation to deliver a prospectus supplement and the
accompanying prospectus, when acting as underwriters and with respect to their
unsold allotments or subscriptions.
----------
TABLE OF CONTENTS
Prospectus Supplement
Executive Summary..............................................................v
Summary of Prospectus Supplement...............................................1
The Certificates...............................................................4
Risk Factors..................................................................11
Description of the Mortgage Pool..............................................19
The Sponsor...................................................................31
The Depositor.................................................................31
The Issuing Entity............................................................32
The Trustee...................................................................32
SIGNIFICANT ORIGINATORS AND OBLIGORS..........................................33
The Servicers.................................................................33
Compensation and Expenses.....................................................34
Servicing of the Mortgage Loans...............................................36
Description of the Certificates...............................................39
Yield and Maturity Considerations.............................................50
[Certain Legal Aspects of the Mortgage Loans].................................55
Certain Federal Income Tax Consequences.......................................56
Method of Distribution........................................................57
Legal Matters.................................................................57
Rating........................................................................58
Legal Investment..............................................................58
Certain ERISA Considerations..................................................58
Prospectus
Summary of Prospectus..........................................................1
Risk Factors...................................................................8
Prospectus Supplement.........................................................38
Capitalized Terms Used in this Prospectus.....................................39
Description of the Trust Funds................................................40
Yield and Maturity Considerations.............................................46
Bank of America, National Association, as Sponsor.............................50
The Depositor.................................................................52
The Mortgage Loan Program.....................................................52
Bank of America, National Association, as Servicer............................56
Description of the Certificates...............................................59
The Pooling and Servicing Agreements..........................................66
Description of Credit Support.................................................83
Certain Legal Aspects of Mortgage Loans.......................................89
Certain Federal Income Tax Consequences......................................101
State and Other Tax Consequences............................................125
Certain ERISA Considerations.................................................126
Legal Investment.............................................................128
Use of Proceeds..............................................................130
Method of Distribution.......................................................130
Legal Matters................................................................131
Rating.......................................................................131
Available Information........................................................132
================================================================================
$[_________]
Banc of America Commercial Mortgage Inc.
Mortgage Pass-Through
Certificates
Series 200_-_
Class A Certificates $[___________]
Class B Certificates $[___________]
Class X Certificates $[___________]
------------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------------
Banc of America Securities LLC
Dated [__________], 200[_]
================================================================================
VERSION 1
Prospectus
Banc of America Commercial Mortgage Inc.
Depositor
Bank of America, National Association
Sponsor
Mortgage Pass-Through Certificates
Consider carefully the risk factors beginning on page 8 in this prospectus.
Neither the certificates nor the underlying mortgage loans are insured by any
governmental agency.
The certificates will represent interests only in the related trust and will not
represent interests in or obligations of Banc of America Commercial Mortgage
Inc. or any of its affiliates, including Bank of America Corporation.
This prospectus may be used to offer and sell any series of certificates only if
accompanied by the prospectus supplement for that series.
Each Issuing Entity--
o will issue a series of mortgage pass-through certificates, which will
consist of one or more classes of certificates; and
o may own--
o multifamily and commercial mortgage loans; and
o mortgage-backed securities.
Each Pool of Mortgage Loans--
o will be sold to the related issuing entity by the depositor, who will have
in turn purchased the mortgage loans from the sponsor;
o will be underwritten to the standards described in this prospectus or the
accompanying prospectus supplement; and
o will be serviced by one or more servicers affiliated or unaffiliated with
the depositor.
Each Series of Certificates--
o will represent interests in the issuing entity and will be paid only from
the trust assets;
o provide for the accrual of interest based on a fixed, variable or
adjustable interest rate;
o will receive interest and principal payments based on the rate of payment
of principal and the timing of receipt of payments on the mortgage loans;
o may be offered through underwriters, which may include Banc of America
Securities LLC, an affiliate of the depositor; and
o will not be listed on any securities exchange.
Each Series of Certificates--
o may provide credit support by "subordinating" certain classes to other
classes of certificates; any subordinate classes will be entitled to
payment subject to the payment of more senior classes and will bear losses
before more senior classes; and
o may be entitled to the benefit of one or more of the following other types
of credit support as described in this prospectus and in more detail in
the accompanying prospectus supplement: guaranteed investment contracts,
insurance, guarantees, letters of credit, certificate insurance, surety
bonds, reserve funds, cash collateral accounts, pool insurance policies,
special hazard insurance policies, mortgagor bankruptcy bonds,
cross-collateralization, overcollateralization, excess interest and cash
flow agreements.
Neither the SEC nor any state securities commission has approved these
certificates or determined that this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
[_____________], 2005
2
For more information
Banc of America Commercial Mortgage Inc. has filed with the SEC additional
registration materials relating to the certificates. You may read and copy any
of these materials at the SEC's Public Reference Room at the following location:
SEC Public Reference Section
100 F Street, N.E.
Washington, D.C. 20549
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information that
has been filed electronically with the SEC. The Internet address is
http://www.sec.gov.
You may also contact Banc of America Commercial Mortgage Inc. in writing at Bank
of America Corporate Center, 214 North Tryon Street, Charlotte, North Carolina
28255, or by telephone at (704) 386-8509.
See also the sections captioned "Available Information" and "Incorporation of
Certain Information by Reference" appearing at the end of this prospectus.
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS.........................1
RISK FACTORS..................................9
The Limited Liquidity of Your
Certificates May Have an Adverse
Impact on Your Ability to Sell Your
Certificates.............................9
Book Entry System for Certain Classes
of Certificates May Decrease
Liquidity and Delay Payment..............9
Servicing Transfer Following Event of
Default May Result in Payment
Delays or Losses........................10
The Nature of Ratings Are Limited and
Will Not Guarantee that You Will
Receive Any Projected Return on
Your Certificates.......................10
The Ratings of Your Certificates May
Be Lowered or Withdrawn, Which May
Adversely Affect the Liquidity or
Market Value of Your Certificates.......11
The Limited Assets of Each Trust May
Adversely Impact Your Ability To
Recover Your Investment in the
Event of Loss on the Underlying
Mortgage Assets.........................11
The Limited Credit Support for Your
Certificates May Not Be Sufficient
to Prevent Loss on Your Certificates....11
Special Powers of the FDIC in the
Event of Insolvency of the Sponsor
Could Delay or Reduce Distributions
on the Certificates.....................12
Insolvency of the Depositor May Delay
or Reduce Collections on Mortgage
Loans...................................13
Distributions on Your Certificates and
Your Yield May Be Difficult To
Predict.................................13
Prepayments of the Underlying Mortgage
Loans Will Affect the Average Life
of Your Certificates and Your Yield.....14
Certificates Purchased at a Premium or
a Discount Will Be Sensitive to the
Rate of Principal Payment...............17
Other Factors Affecting Yield,
Weighted Average Life and Maturity......17
Prepayment Models Are Illustrative
Only and Do Not Predict Actual
Weighted Average Life and Maturity......19
Timing of Prepayments on the Mortgage
Loans May Result in Interest
Shortfalls on the Certificates..........19
Certain Factors Affecting Delinquency,
Foreclosure and Loss of the
Mortgage Loans..........................20
Exercise of Rights by Certain
Certificateholders May Be Adverse
to Other Certificateholders.............23
The Recording of the Mortgages in the
Name of MERS May Affect the Yield
on Your Certificates....................23
Borrower Defaults May Adversely Affect
Your Yield..............................23
The Borrower's Form of Entity May
Cause Special Risks.....................24
Borrower and Related Party Bankruptcy
Proceedings Entail Certain Risks........25
Tenancies in Common May Hinder or
Delay Recovery..........................25
Mortgaged Properties with Tenants
Present Special Risks...................26
-i-
Mortgaged Properties with Multiple
Tenants May Increase Reletting
Costs and Reduce Cash Flow..............27
Tenant Bankruptcy Adversely Affects
Property Performance....................27
Risks Related to Enforceability............27
Potential Absence of Attornment
Provisions Entails Risks................27
Risks Associated with Commercial
Lending May Be Different than those
for Residential Lending.................28
Poor Property Management Will Lower
the Performance of the Related
Mortgaged Property......................29
Particular Property Types Present
Special Risks...........................30
The Operation of the Mortgaged
Property upon Foreclosure of the
Mortgage Loan May Affect Tax Status.....35
One Action Rules May Limit Remedies........35
Property Value May Be Adversely
Affected Even When Current
Operating Income Is Not.................35
Leasehold Interests Are Subject to
Terms of the Ground Lease...............35
Collateral Securing Cooperative Loans
May Diminish in Value...................36
Condominium Ownership May Limit Use
and Improvements........................36
Zoning Laws and Use Restrictions May
Affect the Operation of a Mortgaged
Property or the Ability to Repair
or Restore a Mortgaged Property.........37
Some Mortgaged Properties May Not Be
Readily Convertible to Alternative
Uses....................................37
Appraisals Are Limited in Reflecting
the Value of a Mortgaged Property.......37
Risks Relating to Costs of Compliance
with Applicable Laws and Regulations....37
Additional Compensation to the
Servicer Will Affect Your Right to
Receive Distributions...................38
Liquidity for Certificates May Be
Limited.................................38
Mortgage Loan Repayments and
Prepayments Will Affect Payment.........38
Grace Periods Under the Mortgage Loans
May Impact the Master Servicer's
Obligation to Advance...................38
Risks to the Mortgaged Properties
Relating to Terrorist Attacks and
Foreign Conflicts.......................38
Inclusion of Delinquent Mortgage Loans
in a Mortgage Asset Pool................39
PROSPECTUS SUPPLEMENT........................39
CAPITALIZED TERMS USED IN THIS PROSPECTUS....40
DESCRIPTION OF THE TRUST FUNDS...............41
General....................................41
Mortgage Loans.............................41
MBS........................................45
Certificate Accounts.......................46
Credit Support.............................46
Cash Flow Agreements.......................46
YIELD AND MATURITY CONSIDERATIONS............47
General....................................47
Pass-Through Rate..........................47
Payment Delays.............................47
-ii-
Certain Shortfalls in Collections of
Interest................................47
Yield and Prepayment Considerations........47
Weighted Average Life and Maturity.........49
Other Factors Affecting Yield,
Weighted Average Life and Maturity......50
BANK OF AMERICA, NATIONAL ASSOCIATION,
AS SPONSOR................................51
Other Originators..........................53
THE DEPOSITOR................................53
THE MORTGAGE LOAN PROGRAM....................53
Commercial Mortgage Loan Underwriting......53
Representations and Warranties.............57
BANK OF AMERICA, NATIONAL ASSOCIATION,
AS SERVICER...............................57
General....................................57
Special Servicing..........................58
Other Servicers............................60
DESCRIPTION OF THE CERTIFICATES..............60
General....................................60
Distributions..............................61
Distributions of Interest on the
Certificates............................61
Distributions of Principal of the
Certificates............................62
Distributions on the Certificates
Concerning Prepayment Premiums or
Concerning Equity Participations........62
Allocation of Losses and Shortfalls........63
Advances in Respect of Delinquencies.......63
Reports to Certificateholders..............64
Voting Rights..............................65
Termination................................65
Book-Entry Registration and Definitive
Certificates............................66
THE POOLING AND SERVICING AGREEMENTS.........67
General....................................67
Assignment of Mortgage Loans;
Repurchases.............................68
Representations and Warranties;
Repurchases.............................69
Collection and Other Servicing
Procedures..............................70
Sub-Servicers..............................72
Certificate Account........................72
Modifications, Waivers and Amendments
of Mortgage Loans.......................75
Realization Upon Defaulted Mortgage
Loans...................................75
Hazard Insurance Policies..................77
Due-on-Sale and Due-on-Encumbrance
Provisions..............................77
Servicing Compensation and Payment of
Expenses................................78
Evidence as to Compliance..................78
Certain Matters Regarding the Master
Servicer, the Special Servicer, the
REMIC Administrator and the
Depositor...............................79
Events of Default..........................80
Rights Upon Event of Default...............81
Amendment..................................82
List of Certificateholders.................82
The Trustee................................83
Duties of the Trustee......................83
Certain Matters Regarding the Trustee......83
Resignation and Removal of the Trustee.....84
DESCRIPTION OF CREDIT SUPPORT................84
-iii-
General....................................84
Subordinate Certificates...................85
Insurance or Guarantees Concerning to
Mortgage Loans..........................85
Letter of Credit...........................85
Certificate Insurance and Surety Bonds.....86
Reserve Funds..............................86
Cash Collateral Account....................86
Pool Insurance Policy......................86
Special Hazard Insurance Policy............87
Mortgagor Bankruptcy Bond..................88
Cross Collateralization....................88
Overcollateralization......................89
Excess Interest............................89
Cash Flow Agreements.......................89
Credit Support with respect to MBS.........89
CASH FLOW AGREEMENTS.........................89
Guaranteed Investment Contracts............89
Yield Maintenance Agreements...............90
Swap Agreements............................90
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS......90
General....................................90
Types of Mortgage Instruments..............91
Leases and Rents...........................91
Personalty.................................92
Foreclosure................................92
Bankruptcy Laws............................95
Environmental Considerations...............97
Due-on-Sale and Due-on-Encumbrance
Provisions..............................98
Junior Liens; Rights of Holders of
Senior Liens............................98
Subordinate Financing......................99
Default Interest and Limitations on
Prepayments............................100
Applicability of Usury Laws...............100
Certain Laws and Regulations..............100
Americans with Disabilities Act...........101
Servicemembers Civil Relief Act...........101
Forfeiture for Drug and Money
Laundering Violations..................101
Federal Deposit Insurance Act;
Commercial Mortgage Loan Servicing.....102
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....102
General...................................102
REMICs....................................103
Grantor Trust Funds.......................119
Reportable Transactions...................127
STATE AND OTHER TAX CONSEQUENCES............127
CERTAIN ERISA CONSIDERATIONS................127
General...................................127
Plan Asset Regulations....................127
Insurance Company General Accounts........128
Consultation With Counsel.................129
Tax Exempt Investors......................129
LEGAL INVESTMENT............................129
USE OF PROCEEDS.............................131
METHOD OF DISTRIBUTION......................131
LEGAL MATTERS...............................132
RATING......................................133
AVAILABLE INFORMATION.......................133
-iv-
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE................................134
GLOSSARY....................................134
-v-
================================================================================
SUMMARY OF PROSPECTUS
This summary highlights selected information from this prospectus. It does
not contain all the information you need to consider in making your investment
decision. You should carefully review this prospectus and the related prospectus
supplement in their entirety before making any investment in the certificates of
any series. As used in this prospectus, "you" refers to a prospective investor
in certificates, and "we" refers to the depositor, Banc of America Commercial
Mortgage Inc. A "Glossary" appears at the end of this prospectus.
Securities Offered........... Mortgage pass-through certificates.
Sponsor(s)................... Bank of America, National Association will be a
sponsor of each series of certificates. There may
also be one or more other sponsors with respect to
a series of Certificates as described in the
related prospectus supplement. Any such additional
sponsor may or may not be affiliated with Bank of
America, National Association. The mortgage loans
either will be originated by the related sponsor
or purchased by the sponsor from various entities
that originated the mortgage loans either to the
sponsor's underwriting standards or to the
underwriting standards described in the related
prospectus supplement. Each sponsor will sell the
mortgage loans to the depositor on the closing
date specified in the related prospectus
supplement by means of a mortgage loan purchase
agreement between the sponsor and the depositor.
Depositor.................... Banc of America Commercial Mortgage Inc., a
Delaware corporation and a subsidiary of Bank of
America, National Association, has its principal
executive offices at 214 North Tryon Street,
Charlotte, North Carolina 28255, and its telephone
number is (704) 386-8509.
Issuing Entity............... The issuing entity for each series of
certificates will be a common law trust formed
for such series by the Depositor.
Trustee...................... The trustee for each series of certificates will
be named in the related prospectus supplement.
Master Servicer.............. If the trust includes mortgage loans, the
master servicer for the corresponding series of
certificates will be named in the prospectus
supplement.
Special Servicer............. If the trust includes mortgage loans, 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
prospectus supplement.
Other Servicers.............. In addition to the master servicer and the
special servicer, one or more other servicers
may perform servicing functions as subservicers
for the master servicer or special servicer or
otherwise as described in the related
prospectus supplement.
MBS Administrator............ If the trust includes mortgage-backed
securities, the entity responsible for
administering the mortgage-backed securities
will be named in the prospectus supplement.
REMIC Administrator.......... The person responsible for the various tax-related
administration duties for a series of certificates
concerning real estate mortgage investment
conduits will be named in the prospectus
supplement.
================================================================================
================================================================================
The Mortgage Loans........... Each series of certificates will, in general,
be backed by a pool of mortgage loans referred
to as a mortgage asset pool secured by first or
junior liens on--
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; or
o office buildings, retail stores, hotels
or motels, nursing homes, hospitals or
other health care-related facilities,
recreational vehicle and mobile home
parks, warehouse facilities,
mini-warehouse facilities, self-storage
facilities, industrial plants, parking
lots, entertainment or sports arenas,
restaurants, marinas, mixed use or
various other types of income-producing
properties or unimproved land.
However, no one of the following types of
properties will be overly-represented in the trust
at the time the trust is formed: (1) restaurants;
(2) entertainment or sports arenas; (3) marinas;
or (4) nursing homes, hospitals or other health
care-related facilities.
The mortgage loans will not be guaranteed or
insured by Banc of America Commercial Mortgage
Inc. or any of its affiliates or, unless otherwise
provided in the prospectus supplement, by any
governmental agency or by any other person.
If specified in the prospectus supplement, some
mortgage loans may be delinquent as of the date
the trust is formed.
As described in the prospectus supplement, a
mortgage loan may--
o provide for no accrual of interest or
for accrual of interest 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 mortgage
rate, or from a fixed to an adjustable
mortgage rate;
o provide for level payments to maturity
or for payments that adjust from time to
time to accommodate changes in the
mortgage rate or to reflect the
occurrence of certain events, and may
permit negative amortization;
o be fully amortizing or may be partially
amortizing or nonamortizing, with a
balloon payment due on its stated
maturity date;
o may permit the negative amortization or
deferral of accrued interest;
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;
o may permit defeasance and the release of
real property collateral in connection
with that defeasance;
================================================================================
2
================================================================================
o provide for payments of principal,
interest or both, on due dates that
occur monthly, quarterly, semi-annually
or at any other interval as specified in
the prospectus supplement; and
o may have two or more component parts,
each having characteristics that are
otherwise described in this prospectus
as being attributable to separate and
distinct mortgage loans.
Most, if not all, of the mortgage loans underlying
a series of offered certificates will be secured
by liens on real properties located in the United
States, its territories and possessions. However,
some of those mortgage loans may be secured by
liens on real properties located outside the
United States, its territories and possessions,
provided that foreign mortgage loans do not
represent 10% or more of the related mortgage
asset pool, by balance.
Each mortgage loan will have had an original term
to maturity of not more than 40 years. No mortgage
loan will have been originated by Banc of America
Commercial Mortgage Inc., although one of its
affiliates may have originated some of the
mortgage loans.
If any mortgage loan, or group of related mortgage
loans, involves unusual credit risk, financial
statements or other financial information
concerning the related mortgaged property will be
included in the related prospectus supplement.
As described in the prospectus supplement, the
trust may also 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 similar to the other mortgage
loans in the trust and which may or may not be
issued, insured or guaranteed by the United States
or any governmental agency.
Significant Originators...... In addition to the sponsor(s) or their affiliates,
one or more other persons may have originated the
mortgage loans backing the certificates of a
particular series. The related prospectus
supplement will describe any such originator with
respect to mortgage loans representing 10% or more
(by principal balance as of the applicable cut-off
date) of the mortgage loans backing such series.
Significant Obligors......... The related prospectus supplement also will
identify any significant obligor or mortgaged
property representing 10% or more (by principal
balance as of the applicable cut-off date) of the
mortgage loans backing the related series of
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 prospectus supplement and will
represent in total the entire beneficial
ownership interest in the trust.
As described in the prospectus supplement, the
certificates of each series may consist of one
or more classes that--
o are senior or subordinate to one or more
other classes of certificates in
entitlement to certain distributions on
the certificates;
================================================================================
-3-
================================================================================
o are "stripped principal certificates"
entitled to distributions of principal,
with disproportionate, nominal or no
distributions of interest;
o are "stripped interest certificates"
entitled to distributions of interest,
with disproportionate, nominal or no
distributions of principal;
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 that 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 trust;
o provide for distributions based solely
or primarily on specified mortgage
assets or a specified group of 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 trust attributable to prepayment
premiums, yield maintenance payments or
equity participations.
If specified in the prospectus supplement, a
series of certificates may include one or more
"controlled amortization classes," which will
entitle the holders 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 trust remains relatively
constant at the rate of prepayment used to
establish the specific principal payment schedule
for those certificates. Prepayment risk with
respect to a given mortgage asset pool does not
disappear, however, and the stability afforded to
a controlled amortization class comes at the
expense of one or more other classes of the same
series.
Each class of certificates, other than certain
classes of stripped interest certificates and
certain classes of REMIC residual certificates
will have an initial stated principal amount. Each
class of certificates, other than certain classes
of stripped principal certificates and certain
classes of REMIC residual certificates, will
accrue interest on its certificate balance or, in
the case of certain classes of stripped interest
certificates, on a notional amount, based on a
pass-through rate which may be fixed, variable or
adjustable. The prospectus supplement will specify
the certificate balance, notional amount and/or
pass-through rate for each class of certificates.
================================================================================
-4-
================================================================================
Distributions of Interest
on the Certificates........ Interest on each class of certificates (other than
certain classes of stripped principal certificates
and certain classes of REMIC residual
certificates) of each series will accrue at the
applicable pass-through rate on the certificate
balance and will be paid on a distribution date.
However, in the case of certain classes of
stripped interest certificates, the notional
amount outstanding from time to time will be paid
to certificateholders as provided in the
prospectus supplement on a specified distribution
date.
Distributions of interest concerning 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. Interest accrued concerning a class
of accrual certificates prior to the occurrence of
such an event will either be added to the
certificate balance or otherwise deferred as
described in the prospectus supplement.
Distributions of interest concerning 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 prospectus supplement.
Distributions of Principal
of the Certificates........ Each class of certificates of each series (other
than certain classes of stripped interest
certificates and certain classes of REMIC residual
certificates) will have a certificate balance. The
certificate balance of a class of certificates
outstanding from time to time will represent the
maximum amount that the holders are then entitled
to receive in respect of principal from future
cash flow on the assets in the trust. The initial
total certificate balance of all classes of a
series of certificates will not be greater than
the outstanding principal balance of the related
mortgage assets as of a specified cut-off date,
after application of scheduled payments due on or
before that date, whether or not received. As
described in the 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
certificates of the series then entitled until the
certificate balances of those certificates have
been reduced to zero. 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 assets in
the trust;
o 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;
o may be made, subject to certain
limitations, based on a specified
principal payment schedule; or
o may be contingent on the specified
principal payment schedule for another
class of the same series and the rate at
which payments and other collections of
principal on the mortgage assets in the
trust are received. Unless otherwise
specified in the prospectus supplement,
distributions of principal of any class
of certificates will be made on a pro
rata basis among all of the certificates
of that class.
================================================================================
-5-
================================================================================
Credit Support and Cash
Flow Agreements............ If specified in the prospectus supplement,
partial or full protection against certain
defaults and losses on the assets in the trust
may be provided to one or more classes of
certificates by (1) subordination of one or
more other classes of certificates to classes
in the same series, or by (2) one or more of
the following other types of credit support:
o.....guaranteed investment contracts;
o insurance, guarantees;
o letters of credit;
o certificate insurance;
o surety bonds;
o reserve funds, cash collateral accounts;
o pool insurance policies;
o special hazard insurance policies;
o mortgagor bankruptcy bonds;
o cross-collateralization;
o overcollateralization;
o excess interest; and
o cash flow agreements.
The above types of credit support and cash flow
agreements are described in more detail in this
prospectus under "Description of Credit Support"
and "Cash Flow Agreements".
Certain relevant information regarding any
applicable credit support or cash flow agreement
will be set forth in the prospectus supplement for
a series of certificates.
Advances..................... As specified in the prospectus supplement, if the
trust includes mortgage loans, the master
servicer, the special servicer, the trustee, any
provider of credit support, and/or another
specified person may be obligated to make, or have
the option of making, certain advances concerning
delinquent scheduled payments of principal and/or
interest on mortgage loans. Any advances made
concerning a particular mortgage loan will be
reimbursable from subsequent recoveries relating
to the particular mortgage loan and as described
in the prospectus supplement. If specified in the
prospectus supplement, any entity making advances
may be entitled to receive interest for a
specified period during which those advances are
outstanding, payable from amounts in the trust. If
the trust includes mortgaged-backed securities,
any comparable advancing obligation of a party to
the related pooling and servicing agreement, or of
a party to the related mortgage-backed securities
agreement, will be described in the prospectus
supplement.
================================================================================
-6-
================================================================================
[Information about Periodic Advances for the
previous three years, to the extent material and
to the extent data is available.]
Optional Termination......... If specified in the
prospectus supplement, a series of certificates
may be subject to optional early termination
through the repurchase of the mortgage assets in
the trust. If provided in the related prospectus
supplement, upon the reduction of the certificate
balance of a specified class or classes of
certificates by a specified percentage or amount,
a specified party may be authorized or required to
solicit bids for the purchase of all of the assets
of the trust, or of a sufficient portion of those
assets to retire that class or classes.
Certain Federal Income
Tax Consequences........... The certificates of each series will constitute
or evidence ownership of either--
o "regular interests" and "residual
interests" in the trust, or a designated
portion of the trust, treated as a REMIC
under Sections 860A through 860G of the
Code; or
o certificates in a trust treated as a
grantor trust under applicable
provisions of the Code.
If one or more REMIC elections are made,
certificates that are regular interests will be
treated as newly issued debt instruments of the
REMIC and must be accounted for under an accrual
method of accounting. Certificates that are
residual interests are not treated as debt
instruments, but rather must be treated according
to the rules prescribed in the Internal Revenue
Code for REMIC residual interests, including
restrictions on transfer and the reporting of net
income or loss of the REMIC, including the
possibility of a holder of such certificate having
taxable income without a corresponding
distribution of cash to pay taxes currently due.
If the certificates represent interests in a
grantor trust, beneficial owners of certificates
generally are treated as owning an undivided
beneficial interest in the mortgage loans that are
assets of the trust.
Investors are advised to consult their tax
advisors and to review "Certain Federal Income Tax
Consequences" in this prospectus and in the
prospectus supplement.
Certain ERISA
Considerations............. Fiduciaries of retirement plans and certain other
employee benefit plans and arrangements, including
individual retirement accounts, individual
retirement annuities, Keogh plans, and collective
investment funds and separate individual
retirement 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, Section 4975 of the
Internal Revenue Code of 1986, or any materially
similar provisions of federal, state or local law
should review with their legal advisors whether
the purchase or holding of certificates could give
rise to a transaction that is prohibited.
Legal Investment............. If so specified in the prospectus supplement,
certain classes of certificates will constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984, as amended. All investors whose
investment activities are subject to legal
================================================================================
-7-
================================================================================
investment laws and regulations, regulatory
capital requirements, or review by regulatory
authorities should consult with their own legal
advisors for assistance in determining whether
and to what extent the certificates constitute
legal investments for them.
See "Legal Investment" in this prospectus.
Rating....................... At their respective dates of issuance, each class
of certificates will be rated as of investment
grade by one or more nationally recognized
statistical rating agencies.
================================================================================
-8-
....... RISK FACTORS
In considering an investment in the certificates of any series, you should
consider carefully the following risk factors and the risk factors in the
prospectus supplement.
The Limited Liquidity of Your Certificates May Have an Adverse Impact on Your
Ability to Sell Your Certificates
The certificates of any series may have limited or no liquidity. You may be
forced to bear the risk of investing in the certificates for an indefinite
period of time. In addition, you may have no redemption rights, and the
certificates are subject to early retirement only under certain circumstances.
Lack of a Secondary Market May Limit the Liquidity of Your Certificate. We
cannot assure you that a secondary market for the certificates will develop or,
if it does develop, that it will provide certificateholders with liquidity of
investment or that it will continue for as long as the certificates remain
outstanding.
The prospectus supplement may indicate that an underwriter intends to
establish a secondary market in the certificates, although no underwriter will
be obligated to do so. Any secondary market may provide less liquidity to
investors than any comparable market for securities relating to single-family
mortgage loans. Unless specified in the prospectus supplement, the certificates
will not be listed on any securities exchange.
The Limited Nature of Ongoing Information Regarding Your Certificate May
Adversely Affect Liquidity. The primary source of ongoing information regarding
the certificates, including information regarding the status of the related
mortgage assets and any credit support for the certificates, will be the
periodic reports to certificateholders to be delivered pursuant to the related
Pooling and Servicing Agreement.
We cannot assure you that any additional ongoing information regarding the
certificates will be available through any other source. The limited nature of
the information concerning a series of certificates may adversely affect
liquidity, even if a secondary market for the certificates does develop.
The Liquidity of Your Certificate May Be Affected by External Sources
Including Interest Rate Movement. If a secondary market does develop for the
certificates, the market value of the certificates will be affected by several
factors, including--
o perceived liquidity;
o the anticipated cash flow (which may vary widely depending upon the
prepayment and default assumptions concerning the underlying
mortgage loans); and
o prevailing interest rates.
The price payable at any given time for certain classes of certificates may
be extremely sensitive to small fluctuations in prevailing interest rates. The
relative change in price for a certificate in response to an upward or downward
movement in prevailing interest rates may not necessarily equal the relative
change in price for the certificate in response to an equal but opposite
movement in those rates. Therefore, the sale of certificates by a holder in any
secondary market that may develop may be at a discount from the price paid by
the holder. We are not aware of any source through which price information about
the certificates will be generally available on an ongoing basis.
Book Entry System for Certain Classes of Certificates May Decrease Liquidity and
Delay Payment
Because transactions in the classes of book entry certificates of any series
generally can be effected only through DTC, DTC participants and indirect DTC
participants:
-9-
o your ability to pledge book entry certificates to someone who does
not participate in the DTC system, or to otherwise take action
relating to your book entry certificates, may be limited due to the
lack of a physical certificate;
o you may experience delays in your receipt of payments on book entry
certificates because distributions will be made by the trustee, or a
paying agent on behalf of the trustee, to Cede & Co., as nominee for
DTC, rather than directly to you; and
o you may experience delays in your receipt of payments on book-entry
certificates in the event of misapplication of payments by DTC, DTC
participants or indirect DTC participants or bankruptcy or
insolvency of those entities and your recourse will be limited to
your remedies against those entities.
Servicing Transfer Following Event of Default May Result in Payment Delays or
Losses
Following the occurrence of an event of default under a pooling agreement,
the trustee for the related series may, in its discretion or pursuant to
direction from certificateholders, remove the defaulting master servicer or
special servicer and succeed to its responsibilities, or may petition a court to
appoint a successor master servicer or special servicer. The trustee or the
successor master servicer or special servicer will be entitled to reimbursement
of its costs of effecting the servicing transfer from the predecessor master
servicer or special servicer, or from the assets of the related trust if the
predecessor fails to pay. In the event that reimbursement to the trustee or the
successor master servicer or special servicer is made from trust assets, the
resulting shortfall will be borne by holders of the related certificates, to the
extent not covered by any applicable credit support. In addition, during the
replacement process or for some time thereafter, mortgagors of the related
mortgage loans may delay making their monthly payments or may inadvertently
continue making payments to the predecessor master servicer or special servicer,
potentially resulting in delays in distributions on the related certificates.
The Nature of Ratings Are Limited and Will Not Guarantee that You Will Receive
Any Projected Return on Your Certificates
Any credit rating assigned by a rating agency to a class of certificates will
reflect only its assessment of the likelihood that holders of the certificates
will receive payments to which the certificateholders are entitled under the
related Pooling and Servicing Agreement. Such rating will not constitute an
assessment of the likelihood that--
o principal prepayments on the related mortgage loans will be made;
o the degree to which the rate of such prepayments might differ from
that originally anticipated; or
o the likelihood of early optional termination of the trust.
Any rating will not address the possibility that prepayment of the mortgage
loans at a higher or lower rate than anticipated by an investor may cause such
investor to experience a lower than anticipated yield or that an investor
purchasing a certificate at a significant premium might fail to recover its
initial investment under certain prepayment scenarios. Therefore, a rating
assigned by a rating agency does not guarantee or ensure the realization of any
anticipated yield on a class of certificates.
The amount, type and nature of credit support given a series of certificates
will be determined on the basis of criteria established by each rating agency
rating classes of the certificates of such series. Those criteria are sometimes
based upon an actuarial analysis of the behavior of mortgage loans in a larger
group. There can be no assurance that the historical data supporting any such
actuarial analysis will accurately reflect future experience, or that the data
derived from a large pool of mortgage loans will accurately predict the
delinquency, foreclosure or loss experience of any particular pool of mortgage
loans. In other cases, such criteria may be based upon determinations of the
values of the 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 the certificates of any series
may be insufficient to fully protect the holders of such certificates from
losses on the related mortgage asset pool.
-10-
The Ratings of Your Certificates May Be Lowered or Withdrawn, Which May
Adversely Affect the Liquidity or Market Value of Your Certificates
It is a condition to the issuance of the offered certificates that they be
rated in one of the four highest rating categories by at least one nationally
recognized statistical rating organization. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to maintain the rating on any
certificate, and accordingly, there can be no assurance to you that the ratings
assigned to any certificate on the date on which the certificate is originally
issued will not be lowered or withdrawn by a rating agency at any time
thereafter. The rating(s) of any series of certificates by any applicable rating
agency may be lowered following the initial issuance of the certificates as a
result of the downgrading of the obligations of any applicable credit support
provider, or as a result of losses on the related mortgage loans in excess of
the levels contemplated by the rating agency at the time of its initial rating
analysis. Neither the depositor nor the sponsor nor any of their respective
affiliates will have any obligation to replace or supplement any credit support,
or to take any other action to maintain any rating(s) of any series of
certificates. If any rating is revised or withdrawn, the liquidity or the market
value of your certificate may be adversely affected.
The Limited Assets of Each Trust May Adversely Impact Your Ability To Recover
Your Investment in the Event of Loss on the Underlying Mortgage Assets
Except for any related insurance policies, reserve funds, or other external
credit enhancement described in the prospectus supplement, the mortgage loans
included in a trust fund will be the sole source of payments on the certificates
of a series. Unless specified in the prospectus supplement, neither the
certificates nor the mortgage assets in the trust will be guaranteed or insured
by Banc of America Commercial Mortgage Inc. or any of its affiliates, by any
governmental agency or by any other person or entity. No certificate will
represent a claim against or security interest in the trust funds for any other
series. Therefore, if the related trust fund has insufficient assets to make
payments, no other assets will be available for payment of the deficiency, and
the holders of one or more classes of the certificates will be required to bear
the consequent loss.
In addition, the mortgage loans are generally non-recourse loans. If a
default occurs under any mortgage loan, recourse generally may be had only
against the specific properties and other assets that have been pledged to
secure the loan. Payment prior to maturity is consequently dependent primarily
on the sufficiency of the net operating income of the mortgaged property.
Payment at maturity is primarily dependent upon the market value of the
mortgaged property or the borrower's ability to refinance the property. We will
not have undertaken an evaluation of the financial condition of any borrower.
Amounts on deposit from time to time in certain accounts constituting part of
the trust, including the certificate account and any accounts maintained as
credit support, may be withdrawn for purposes other than the payment of
principal of or interest on the related series of certificates under certain
conditions. On any distribution occurring after losses or shortfalls in
collections on the mortgage assets have been incurred, all or a portion of those
losses or shortfalls will be borne on a disproportionate basis among classes of
certificates.
The Limited Credit Support for Your Certificates May Not Be Sufficient to
Prevent Loss on Your Certificates
The prospectus supplement for a series of certificates will describe any
credit support. The credit support may not cover all potential losses. 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 certificates.
A series of certificates may include one or more classes of subordinate
certificates, if provided in the prospectus supplement. 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 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 certificates of that series have been repaid in full.
-11-
The impact of losses and shortfalls experienced with respect to the mortgage
assets may fall primarily upon those classes of certificates having a later
right of payment.
If a form of credit support covers the certificates of more than one series
and losses on the related mortgage assets exceed the amount of the credit
support, it is possible that the holders of certificates of one (or more) series
will disproportionately benefit from that credit support, to the detriment of
the holders of certificates of one (or more) other series.
The amount of any applicable credit support supporting one or more classes of
certificates will be determined on the basis of criteria established by each
rating agency rating such classes of certificates based on an assumed level of
defaults, delinquencies and losses on the underlying mortgage assets and certain
other factors. However, we cannot assure you that the loss experience on the
related mortgage assets will not exceed such assumed levels. If the losses on
the related mortgage assets do exceed such assumed levels, the holders of one or
more classes of certificates will be required to bear such additional losses.
Special Powers of the FDIC in the Event of Insolvency of the Sponsor Could Delay
or Reduce Distributions on the Certificates
The mortgage loans will be originated or acquired by the sponsor, a national
bank whose deposits are insured to the applicable limits by the FDIC. If the
sponsor becomes insolvent, is in an unsound condition or engages in violations
of its bylaws or regulations applicable to it or if similar circumstances occur,
the FDIC could act as conservator and, if a receiver were appointed, would act
as a receiver for the sponsor. As receiver, the FDIC would have broad powers to:
o require the trust, as assignee of the depositor, to go through an
administrative claims procedure to establish its rights to payments
collected on the mortgage loans; or
o request a stay of proceedings to liquidate claims or otherwise
enforce contractual and legal remedies against the sponsor, or
o if the sponsor is a servicer for a series of certificates, repudiate
without compensation the sponsor's ongoing servicing obligations
under the pooling agreement, such as its duty to collect and remit
payments or otherwise service the mortgage loans.
If the FDIC were to take any of those actions, distributions on the
certificates could be delayed or reduced.
By statute, the FDIC as conservator or receiver of the sponsor is authorized
to repudiate any "contract" of the sponsor upon payment of "actual direct
compensatory damages." This authority may be interpreted by the FDIC to permit
it to repudiate the transfer of the mortgage loans to the depositor. Under an
FDIC regulation, however, the FDIC as conservator or receiver of a bank has
stated that it will not reclaim, recover or recharacterize a bank's transfer of
financial assets in connection with a securitization or participation, provided
that the transfer meets all conditions for sale accounting treatment under
generally accepted accounting principles, other than the "legal isolation"
condition as it applies to institutions for which the FDIC may be appointed as
conservator or receiver, was made for adequate consideration and was not made
fraudulently, in contemplation of insolvency, or with the intent to hinder,
delay or defraud the bank or its creditors. For purposes of the FDIC regulation,
the term securitization means, as relevant, the issuance by a special purpose
entity of beneficial interests the most senior class of which at time of
issuance is rated in one of the four highest categories assigned to long-term
debt or in an equivalent short-term category (within either of which there may
be sub-categories or gradations indicating relative standing) by one or more
nationally recognized statistical rating organizations. A special purpose
entity, as the term is used in the regulation, means a trust, corporation, or
other entity demonstrably distinct from the insured depository institution that
is primarily engaged in acquiring and holding (or transferring to another
special purpose entity) financial assets, and in activities related or
incidental to these actions, in connection with the issuance by the special
purpose entity (or by another special purpose entity that acquires financial
assets directly or indirectly from the special purpose entity) of beneficial
interests. The transactions contemplated by this prospectus and the related
prospectus supplement will be structured so that this FDIC regulation should
apply to the transfer of the mortgage loans from the sponsor to the depositor.
-12-
If a condition required under the FDIC regulation, or other statutory or
regulatory requirement applicable to the transaction, were found not to have
been satisfied, the FDIC as conservator or receiver might refuse to recognize
the sponsor's transfer of the mortgage loans to the depositor. In that event the
depositor could be limited to seeking recovery based upon its security interest
in the mortgage loans. The FDIC's statutory authority has been interpreted by
the FDIC and at least one court to permit the repudiation of a security interest
upon payment of actual direct compensatory damages measured as of the date of
conservatorship or receivership. These damages do not include damages for lost
profits or opportunity, and no damages would be paid for the period between the
date of conservatorship or receivership and the date of repudiation. The FDIC
could delay its decision whether to recognize the sponsor's transfer of the
mortgage loans for a reasonable period following its appointment as conservator
or receiver for the sponsor. If the FDIC were to refuse to recognize the
sponsor's transfer of the mortgage loans, distributions on the certificates
could be delayed or reduced.
If specified in the applicable prospectus supplement, the sponsor will also
act as servicer of the mortgage loans. If the FDIC acted as receiver for the
sponsor after the sponsor's insolvency, the FDIC could prevent the termination
of the sponsor as servicer of the mortgage loans, even if a contractual basis
for termination exists. This inability to terminate the sponsor as servicer
could result in a delay or possibly a reduction in distributions on the
certificates to the extent the sponsor received, but did not remit to the
trustee, mortgage loan collections received by the sponsor before the date of
insolvency or if the sponsor failed to make any required advances.
The collection of amounts with respect to the mortgage loans, which are the
source of repayment for the certificates, will depend significantly on the
performance by the master servicer and the special servicer of their respective
roles under the pooling agreement and any other servicing agreements described
in this prospectus supplement. You will not be a party to any of these
agreements and will be relying on the persons who are to perform their duties
under such agreements and upon such persons, and the trustee in particular, to
enforce the parties' obligations under such agreements. In the event of the
resignation or termination of the master servicer or the special servicer, the
trustee may assume the related responsibilities and servicing functions or name
a replacement as described under "The Pooling and Servicing Agreements--Rights
Upon Default". In particular, any interruption or delay associated with such
replacement could have a corresponding adverse affect on amounts collected on
the mortgage loans and available for distribution on the certificates.
Insolvency of the Depositor May Delay or Reduce Collections on Mortgage Loans
Neither the United States Bankruptcy Code nor similar applicable state laws
prohibit the depositor from filing a voluntary application for relief under
these laws. However, the transactions contemplated by this prospectus and the
related prospectus supplement will be structured so that the voluntary or
involuntary application for relief under the bankruptcy laws by the depositor is
unlikely. The depositor is a separate, limited purpose subsidiary, the
certificate of incorporation of which contains limitations on the nature of the
depositor's business, including the ability to incur debt other than debt
associated with the transactions contemplated by this prospectus, and
restrictions on the ability of the depositor to commence voluntary or
involuntary cases or proceedings under bankruptcy laws. Further, the transfer of
the mortgage loans to the related trust will be structured so that the trustee
has no recourse to the depositor, other than for breaches or representations and
warranties about the mortgage loans.
If the depositor were to become the subject of a proceeding under the
bankruptcy laws, a court could conclude that the transfer of the mortgage loans
from the depositor to the trust should not be characterized as an absolute
transfer, and accordingly, that the mortgage loans should be included as part of
the depositor's estate. Under these circumstances, the bankruptcy proceeding
could delay or reduce distributions on the certificates. In addition, a
bankruptcy proceeding could result in the temporary disruption of distributions
on the certificates.
Distributions on Your Certificates and Your Yield May Be Difficult To Predict
The yield on any offered certificate will depend on (a) the price at which
such certificate is purchased by an investor and (b) the rate, timing and amount
of distributions on such certificate. The rate, timing and amount of
distributions on any offered certificate will, in turn, depend on, among other
things:
o the pass through rate for such certificate;
-13-
o the rate and timing of principal payments (including principal prepayments)
and other principal collections on or in respect of the mortgage loans and the
extent to which such amounts are to be applied or otherwise result in a
reduction of the certificate balance of the class of certificates to which such
certificate belongs;
o the rate, timing and severity of realized losses and additional trust fund
expenses (each as described in this prospectus supplement) and the extent to
which such losses and expenses result in the failure to pay interest on, or a
reduction of the certificate balance of, the class of certificates to which such
certificate belongs;
o the timing and severity of any net aggregate prepayment interest shortfalls
(each as described in this prospectus supplement) and the extent to which such
shortfalls are allocated in reduction of the distributable certificate interest
payable on the class of certificates to which such certificate belongs;
o the extent to which prepayment premiums and yield maintenance charges are
collected and, in turn, distributed on the class of certificates to which such
certificate belongs; and
o the rate and timing of reimbursement of advances.
It is impossible to predict with certainty any of the factors described in
the preceding paragraph. Accordingly, investors may find it difficult to analyze
the effect that such factors might have on the yield to maturity of any class of
offered certificates.
Prepayments of the Underlying Mortgage Loans Will Affect the Average Life of
Your Certificates and Your Yield
As a result of prepayments on the mortgage loans in the trust, the amount and
timing of distributions of principal and/or interest on the certificates of the
related series may be highly unpredictable. Prepayments on the mortgage loans in
the trust will result in a faster rate of principal payments on one or more
classes of the related series of certificates than if payments on those mortgage
loans were made as scheduled. Therefore, the prepayment experience on the
mortgage loans in the trust may affect the average life of one or more classes
of certificates of the related series.
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 mortgage rates borne by the mortgage loans
included in the trust, principal prepayments on those mortgage loans are likely
to be higher than if prevailing interest rates remain at or above the rates
borne by those mortgage loans. Conversely, if prevailing interest rates rise
significantly above the mortgage rates borne by the mortgage loans included in
the trust, then principal prepayments on those mortgage loans are likely to be
lower than if prevailing interest rates remain at or below the mortgage rates
borne by those mortgage loans.
Voluntary prepayments, if permitted, generally require payment of a
prepayment premium or yield maintenance charge. Nevertheless, we cannot assure
you that the related borrowers will refrain from prepaying their mortgage loans
due to the existence of a prepayment premium or yield maintenance charge. Also,
we cannot assure you that involuntary prepayments will not occur.
As described in the related prospectus supplement, the terms of certain
mortgage loans, in connection with a partial release of the related mortgaged
property, may permit a voluntary partial defeasance or a partial prepayment at
any time with the delivery of the defeasance collateral or, the payment of a
prepayment premium or yield maintenance charge as applicable.
The rate at which voluntary prepayments occur on the mortgage loans will be
affected by a variety of factors, including:
o the terms of the mortgage loans;
o the length of any prepayment lockout period;
o the level of prevailing interest rates;
-14-
o the availability of mortgage credit;
o the applicable prepayment premiums or yield maintenance charges;
o the master servicer's or special servicer's ability to enforce those
charges or premiums;
o the occurrence of casualties or natural disasters; and
o economic, demographic, tax, legal or other factors.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
loan's interest rate, a borrower may have an increased incentive to refinance
its mortgage loan. Even in the case of adjustable rate mortgage loans, as
prevailing market interest rates decline, and without regard to whether the
mortgage interest rates on the adjustable rate mortgage loans decline in a
manner consistent therewith, the related borrowers may have an increased
incentive to refinance for purposes of either (1) converting to a fixed rate
loan and thereby "locking in" that rate or (2) taking advantage of a different
index, margin or rate cap or floor on another adjustable rate mortgage loan.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments. In addition,
some borrowers may be motivated by federal and state tax laws (which are subject
to change) to sell mortgaged properties prior to the exhaustion of tax
depreciation benefits. We will make no representation as to the particular
factors that will affect the prepayment of the mortgage loans in any trust fund,
as to the relative importance of those factors, as to the percentage of the
principal balance of the mortgage loans that will be paid as of any date or as
to the overall rate of prepayment on the mortgage loans.
No prepayment premium or yield maintenance charge will be generally required
for prepayments in connection with a casualty or condemnation. In addition, if a
mortgage loan seller repurchases any mortgage loan from the trust due to a
material breach of representations or warranties or a material document defect,
the repurchase price paid will be passed through to the holders of the
certificates with the same effect as if the mortgage loan had been prepaid in
part or in full, except that no prepayment premium or yield maintenance charge
would be payable. The repurchase price paid by a mortgage loan seller may not
include a liquidation fee if purchased within the timeframe set forth in the
pooling and servicing agreement. Such a repurchase may therefore adversely
affect the yield to maturity on your certificates.
We cannot assure you what as to the actual rate of prepayment on the mortgage
loans in the trust will be, or that the rate of prepayment will conform to any
model in any prospectus supplement. As a result, depending on the anticipated
rate of prepayment for the mortgage loans in the trust, the retirement of any
class of certificates of the related series could occur significantly earlier or
later, and its average life could be significantly shorter or longer, than
expected.
The extent to which prepayments on the mortgage loans in trust ultimately
affect the average life of any class of certificates of the related series will
depend on the terms and provisions of the certificates. A class of certificates
may provide that on any distribution date the holders of the certificates are
entitled to a pro rata share of the prepayments on the mortgage loans in the
trust fund that are distributable on that date.
A class of certificates that entitles the holders to a disproportionately
large share of the prepayments on the mortgage loans in the trust increases the
likelihood of early retirement of that class if the rate of prepayment is
relatively fast. This type of early retirement risk is sometimes referred to as
"call risk."
A class of certificates that entitles its holders to a disproportionately
small share of the prepayments on the mortgage loans in the trust increases the
likelihood of an extended average life of that class if the rate of prepayment
is relatively slow. This type of prolonged retirement risk is sometimes referred
to as "extension risk."
-15-
As described in the prospectus supplement, the respective entitlements of the
various classes of certificate-holders of any series to receive payments (and,
in particular, prepayments) of principal of the mortgage loans in the trust may
vary based on the occurrence of certain events (e.g., the retirement of one or
more classes of certificates of that series) or subject to certain contingencies
(e.g., prepayment and default rates with respect to those mortgage loans).
A series of certificates may include one or more controlled amortization
classes, which will entitle the holders 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 trust remains
relatively constant at the rate of prepayment used to establish the specific
principal payment schedule for the certificates. Prepayment risk concerning 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.
As described in the prospectus supplement, a companion class may entitle the
holders to a disproportionately large share of prepayments on the mortgage loans
in the trust when the rate of prepayment is relatively fast, and/or may entitle
the holders to a disproportionately small share of prepayments on the mortgage
loans in the trust when the rate of prepayment is relatively slow. A class of
certificates that entitles the holders of those certificates to a
disproportionately large share of the prepayments on the mortgage loans in the
related trust fund enhances the risk of early retirement of that class, or call
risk, if the rate of prepayment is relatively fast; while a class of
certificates that entitles the holders of those certificates to a
disproportionately small share of the prepayments on the mortgage loans in the
related trust fund enhances the risk of an extended average life of that class,
or extension risk, if the rate of prepayment is relatively slow. Thus, as
described in the related prospectus supplement, a companion class absorbs some
(but not all) of the "call risk" and/or "extension risk" that would otherwise
belong to the related controlled amortization class if all payments of principal
of the mortgage loans in the related trust fund were allocated on a pro rata
basis.
Each controlled amortization class will either be a planned amortization
class or a targeted amortization class or such other similar class as is
described in the prospectus supplement. In general, a planned amortization class
has a "prepayment collar", that is, a range of prepayment rates that can be
sustained without disruption, that determines the principal cash flow of those
certificates. That prepayment collar is not static, and may expand or contract
after the issuance of the planned amortization class depending on the actual
prepayment experience for the underlying mortgage loans. Distributions of
principal on a planned amortization class would be made in accordance with the
specified schedule so long as prepayments on the underlying mortgage loans
remain at a relatively constant rate within the prepayment collar and, as
described below, companion classes exist to absorb "excesses" or "shortfalls" in
principal payments on the underlying mortgage loans. If the rate of prepayment
on the underlying mortgage loans from time to time falls outside the prepayment
collar, or fluctuates significantly within the prepayment collar, especially for
any extended period of time, that event may have material consequences in
respect of the anticipated weighted average life and maturity for a planned
amortization class. A targeted amortization class is structured so that
principal distributions generally will be payable on it in accordance with its
specified principal payments schedule so long as the rate of prepayments on the
related mortgage assets remains relatively constant at the particular rate used
in establishing that schedule. A targeted amortization class will generally
afford the holders of those certificates some protection against early
retirement or some protection against an extended average life, but not both.
In general, the notional amount of a class of interest-only certificates will
either (1) be based on the principal balances of some or all of the mortgage
assets in the related trust fund or (2) equal the principal balances of one or
more of the other classes of certificates of the same series. Accordingly, the
yield on those interest-only certificates will be inversely related to the rate
at which payments and other collections of principal are received on those
mortgage assets or distributions are made in reduction of the principal balances
of those 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 those mortgage loans will negatively affect the yield to
investors in
-16-
interest-only certificates. If the offered certificates of a series
include those certificates, the related prospectus supplement will include a
table showing the effect of various assumed levels of prepayment on yields on
those certificates. Those tables will be intended to illustrate the sensitivity
of yields to various assumed prepayment rates and will not be intended to
predict, or to provide information that will enable investors to predict, yields
or prepayment rates.
Certificates Purchased at a Premium or a Discount Will Be Sensitive to the Rate
of Principal Payment
A series of certificates may include one or more classes offered at a premium
or discount. Yields on those classes of certificates will be sensitive, and in
some cases extremely sensitive, to prepayments on the mortgage loans in the
trust fund. If the amount of interest payable with respect to a class is
disproportionately large as compared to the amount of principal, as with certain
classes of stripped interest certificates, a holder might fail to recover its
original investment under some prepayment scenarios. The yield to maturity of
any class of certificates may vary from the anticipated yield due to the degree
to which the certificates are purchased at a discount or premium and the amount
and timing of distributions.
You should consider, in the case of any certificate purchased at a discount,
the risk that a slower than anticipated rate of principal payments on the
mortgage loans could result in an actual yield to such investor that is lower
than the anticipated yield. In the case of any certificate purchased at a
premium, you should consider the risk that a faster than anticipated rate of
principal payments could result in an actual yield to such investor that is
lower than the anticipated yield. Further information relating to yield on
certificates particularly sensitive to principal prepayments will be included in
the applicable prospectus supplement, including, in the case of interest only
certificates and principal only certificates, a table demonstrating the
particular sensitivity of those interest only certificates to the rate of
prepayments.
Other Factors Affecting Yield, Weighted Average Life and Maturity
Balloon Payments; Extensions of Maturity. Some or all of the mortgage loans
included in a particular trust fund may require that balloon payments be made at
maturity. Because the ability of a borrower to make a balloon payment typically
will depend upon its ability either to refinance the loan or to sell the related
mortgaged property, there is a risk that mortgage loans that require balloon
payments may default at maturity, or that the maturity of that mortgage loan may
be extended in connection with a workout. In the case of defaults, recovery of
proceeds may be delayed by, among other things, bankruptcy of the borrower or
adverse conditions in the market where the property is located. In order to
minimize losses on defaulted mortgage loans, the master servicer or a special
servicer, to the extent and under the circumstances set forth in this prospectus
and in the related prospectus supplement, may be authorized to modify mortgage
loans that are in default or as to which a payment default is imminent. Any
defaulted balloon payment or modification that extends the maturity of a
mortgage loan may delay distributions of principal on a class of offered
certificates and thereby extend the weighted average life of your certificates
and, if those certificates were purchased at a discount, reduce your yield.
Negative Amortization. The weighted average life of a class of certificates
can be affected by mortgage loans that permit negative amortization to occur. A
mortgage loan that provides for the payment of interest calculated at a rate
lower than the rate at which interest accrues on it 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.
This slower rate of mortgage loan amortization would correspondingly be
reflected in a slower rate of amortization for one or more classes of
certificates of the related series. In addition, negative amortization on one or
more mortgage loans in any trust fund may result in negative amortization on the
certificates of the related series. The related prospectus supplement will
describe, if applicable, the manner in which negative amortization in respect of
the mortgage loans in any trust fund is allocated among the respective classes
of certificates of the related series. The portion of any mortgage loan negative
amortization allocated to a class of certificates may result in a deferral of
some or all of the interest payable on them, which deferred interest may be
added to the principal balance of the certificates. Accordingly, the weighted
average lives of mortgage loans that permit negative amortization and that of
the classes of certificates to which the negative amortization would be
allocated or that would bear the effects of a slower rate of amortization on
those mortgage loans, may increase as a result of that feature.
-17-
Negative amortization also may occur in respect of an adjustable rate
mortgage loan that limits the amount by which its scheduled payment may adjust
in response to a change in its mortgage interest rate, provides that its
scheduled payment will adjust less frequently than its mortgage interest rate or
provides for constant scheduled payments notwithstanding adjustments to its
mortgage interest rate. Accordingly, during a period of declining interest
rates, the scheduled payment on that mortgage loan may exceed the amount
necessary to amortize the loan fully over its remaining amortization schedule
and pay interest at the then applicable mortgage interest rate, thereby
resulting in the accelerated amortization of that mortgage loan. This
acceleration in amortization of its principal balance will shorten the weighted
average life of that mortgage loan and, correspondingly, the weighted average
lives of those classes of certificates entitled to a portion of the principal
payments on that 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 (1) whether that offered certificate was
purchased at a premium or a discount and (2) the extent to which the payment
characteristics of those mortgage loans delay or accelerate the distributions of
principal on that certificate or, in the case of an interest-only certificate,
delay or accelerate the amortization of the notional amount of that certificate.
Foreclosures and Payment Plans. The number of foreclosures and the principal
amount of the mortgage loans that are foreclosed in relation to the number and
principal amount of mortgage loans that are repaid in accordance with their
terms will affect the weighted average lives of those mortgage loans and,
accordingly, the weighted average lives of and yields on the certificates of the
related series. Servicing decisions made with respect to the mortgage loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of mortgage loans in bankruptcy proceedings, may also have an
effect upon the payment patterns of particular mortgage loans and thus the
weighted average lives of and yields on the certificates of the related series.
Losses and Shortfalls on the Mortgage Assets. The yield on your certificates
will directly depend on the extent to which you 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 those losses and
shortfalls. In general, the earlier that any loss or shortfall occurs, the
greater will be the negative effect on yield for any class of certificates that
is required to bear the effects of the shortfall.
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, those allocations
may be effected by a reduction in the entitlements to interest and/or principal
balances of one or more classes of certificates, or by establishing a priority
of payments among those classes of certificates.
The yield to maturity on a class of Subordinate Certificates may be extremely
sensitive to losses and shortfalls in collections on the mortgage loans in the
related trust fund.
Additional Certificate Amortization. In addition to entitling the holders of
one or more classes of a series of certificates to a specified portion, which
may during specified periods range from none to all, of the principal payments
received on the mortgage assets in the related trust fund, one or more classes
of certificates of any series, including one or more classes of offered
certificates of those series, may provide for distributions of principal of
those certificates from (1) amounts attributable to interest accrued but not
currently distributable on one or more classes of accrual certificates, (2)
excess funds or (3) any other amounts described in the related prospectus
supplement. In general, "excess funds" as used above will represent that portion
of the amounts distributable in respect of the certificates of any series on any
distribution date that represent (1) 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 that series, or (2) 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
on, or principal of, those certificates.
The amortization of any class of certificates out of the sources described in
the preceding paragraph would shorten the weighted average life of those
certificates and, if those certificates were purchased at a premium, reduce the
yield on those certificates. The related prospectus supplement will discuss the
relevant factors to be considered in determining whether distributions of
principal of any class of certificates out of those sources would have any
material effect on the rate at which those certificates are amortized.
-18-
Optional Early Termination. If so specified in the related prospectus
supplement, a series of certificates may be subject to optional early
termination through the repurchase of the mortgage assets in the related trust
fund by the party or parties specified in the related prospectus supplement,
under the circumstances and in the manner set forth in the prospectus
supplement. If so provided in the related prospectus supplement, upon the
reduction of the principal balance of a specified class or classes of
certificates by a specified percentage or amount, the specified party 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 those mortgage
assets to retire that class or classes, as set forth in the related prospectus
supplement. In the absence of other factors, any early retirement of a class of
offered certificates would shorten the weighted average life of those
certificates and, if those certificates were purchased at premium, reduce the
yield on those certificates.
Prepayment Models Are Illustrative Only and Do Not Predict Actual 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 that series. Weighted average life
refers to the average amount of time that will elapse from the date of issuance
of an instrument until each dollar allocable as principal of that instrument is
repaid to the investor.
The weighted average life and maturity of a class of certificates of any
series will be influenced by the rate at which principal on the related mortgage
loans, whether in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes voluntary prepayments, liquidations due
to default and purchases of mortgage loans out of the related trust fund), is
paid to that class. Prepayment rates on loans are commonly measured relative to
a prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model.
CPR represents an assumed constant rate of prepayment each month (expressed as
an annual percentage) relative to the then outstanding principal balance of a
pool of loans for the life of those loans. SPA represents an assumed variable
rate of prepayment each month (expressed as an annual percentage) relative to
the then outstanding principal balance of a pool of loans, with different
prepayment assumptions often expressed as percentages of SPA. For example, a
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of the loans in the first month of the
life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month, and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of loans. Moreover, the
CPR and SPA models were developed based upon historical prepayment experience
for single-family loans. Thus, it is unlikely that the prepayment experience of
the mortgage loans included in any trust fund will conform to any particular
level of CPR or SPA.
The prospectus supplement with respect to each series of certificates will
contain tables, if applicable, setting forth the projected weighted average life
of each class of offered certificates of those series and the percentage of the
initial principal balance of each class that would be outstanding on specified
distribution dates based on the assumptions stated in that prospectus
supplement, including assumptions that prepayments on the related mortgage loans
are made at rates corresponding to various percentages of CPR or SPA, or at
other rates specified in that prospectus supplement. Those 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.
Timing of Prepayments on the Mortgage Loans May Result in Interest Shortfalls on
the Certificates
When a mortgage loan is prepaid in full, absent a provision in the mortgage
loan requiring the borrower to pay interest through the end of the applicable
interest accrual period, the mortgagor pays interest on the amount prepaid only
to the date of prepayment. Liquidation proceeds and amounts received in
settlement of insurance claims are also likely to include interest only to the
time of payment or settlement. When a mortgage loan is prepaid in full or in
part, an interest shortfall may result depending on the timing of the receipt of
the prepayment and the timing of when those prepayments are passed through to
certificateholders. To partially mitigate this reduction in yield, the
-19-
pooling agreement and/or underlying servicing agreements relating to a series
may provide, to the extent specified in the applicable prospectus supplement,
that for specified types of principal prepayments received, the applicable
master servicer will be obligated, on or before each distribution date, to pay
an amount equal to the lesser of (i) the aggregate interest shortfall with
respect to the distribution date resulting from those principal prepayments by
mortgagors and (ii) all or a portion of the master servicer's or the special
servicer's, as applicable, servicing compensation for the distribution date as
specified in the applicable prospectus supplement or other mechanisms specified
in the applicable prospectus supplement. To the extent these shortfalls from the
mortgage loans are not covered by the amount of compensating interest or other
mechanisms specified in the applicable prospectus supplement, they will be
allocated among the classes of interest bearing certificates as described in the
related prospectus supplement under "Description of the Certificates". No
comparable interest shortfall coverage will be provided by the master servicer
with respect to liquidations of any mortgage loans. Any interest shortfall
arising from liquidations will be covered by means of the subordination of the
rights of subordinate certificateholders or any other credit support
arrangements described in this prospectus.
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage
Loans
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 than loans made on the security of an owner-occupied
single-family property. The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent income
or assets of the borrower. Therefore, the value of an income-producing property
is directly related to the net operating income derived from such property.
If the net operating income of the property is reduced (for example, if
rental or occupancy rates decline or real estate tax rates or other operating
expenses increase), the borrower's ability to repay the loan may be impaired. A
number of the mortgage loans may be secured by liens on owner-occupied
properties or on properties leased to a single tenant or in which only a few
tenants produce a material amount of the rental income. As the primary component
of the net operating income of a property, rental income (and maintenance
payments from tenant stockholders of a cooperative) and the value of any
property are subject to the vagaries of the applicable real estate market and/or
business climate. Properties typically leased, occupied or used on a short-term
basis, such as 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 leased, occupied or
used for longer periods, such as (typically) warehouses, retail stores, office
buildings and industrial plants. Commercial Properties may be secured by
owner-occupied properties or properties leased to a single tenant. Therefore, a
decline in the financial condition of the borrower or a single tenant may have a
disproportionately greater effect on the net operating income from such
properties than would be the case with respect to properties with multiple
tenants.
Changes in the expense components of the net operating income of a property
due to the general economic climate or economic conditions in a locality or
industry segment, such as (1) increases in interest rates, real estate and
personal property tax rates and other operating expenses including energy costs,
(2) changes in governmental rules, regulations and fiscal policies, including
environmental legislation, and (3) acts of God may also affect the net operating
income and the value of the property and the risk of default on the related
mortgage loan. In some cases leases of properties may provide that the lessee,
rather than the mortgagor, is responsible for payment of certain of these
expenses. However, because leases are subject to default risks as well as when a
tenant's income is insufficient to cover its rent and operating expenses, the
existence of such "net of expense" provisions will only temper, not eliminate,
the impact of expense increases on the performance of the related mortgage loan.
Additional considerations may be presented by the type and use of a
particular property. For instance, 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.
Hotel, motel and restaurant properties are often operated pursuant to franchise,
management or operating agreements that may be terminable by the franchisor or
operator. The transferability of a hotel's or restaurant's operating, liquor and
other licenses upon a transfer of the hotel or the restaurant, whether through
purchase or foreclosure, is subject to local law requirements.
In addition, the concentration of default, foreclosure and loss risks in
mortgage loans in the trust will generally be greater than for pools of
single-family loans because mortgage loans in the trust generally will consist
of a
-20-
smaller number of higher balance loans than would a pool of single-family
loans of comparable aggregate unpaid principal balance.
Limited Recourse Nature of the Mortgage Loans May Make Recovery Difficult in
the Event that a Mortgage Loan Defaults. We anticipate that some or all of the
mortgage loans included in any trust fund will be nonrecourse loans or loans for
which recourse may be restricted or unenforceable. In this type of mortgage
loan, recourse in the event of borrower default will be limited to the specific
real property and other assets 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, 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 concerning a defaulted mortgage loan in
excess of the liquidation value of the related property.
Cross-Collateralization Provisions May Have Limitations on Their
Enforceability. A mortgage 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-collateralized group. Cash flows generated on these
type of mortgage loans are available to support debt service on, and ultimate
repayment of, the total indebtedness. These arrangements 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.
If the properties securing a group of mortgage loans which are
cross-collateralized are not all owned by the same entity, creditors of one or
more of the related borrowers could challenge the cross-collateralization
arrangement as a fraudulent conveyance. Under federal and 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 was then insolvent, was rendered
insolvent by such obligation or transfer or had unreasonably small capital for
its business. A creditor seeking to enforce remedies against a property subject
to such cross-collateralization to repay such creditor's claim against the
related borrower could assert that--
o such borrower was insolvent at the time the cross-collateralized
mortgage loans were made; and
o such borrower did not, when it allowed its property to be encumbered
by a lien securing the indebtedness represented by the other
mortgage loans in the group of cross-collateralized mortgage loans,
receive fair consideration or reasonably equivalent value for, in
effect, "guaranteeing" the performance of the other borrowers.
Although the borrower making such "guarantee" will be receiving "guarantees"
from each of the other borrowers in return, we cannot assure you that such
exchanged "guarantees" would be found to constitute fair consideration or be of
reasonably equivalent value.
The cross-collateralized mortgage loans may be secured by mortgage liens on
properties located in different states. Because of various state laws governing
foreclosure or the exercise of a power of sale and because foreclosure actions
are usually 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.
Increased Risk of Default Associated With Balloon Payments. Some of the
mortgage loans included in the trust may be nonamortizing or only partially
amortizing over their terms to maturity. These types of mortgage loans will
require substantial payments of principal and interest (that is, balloon
payments) at their stated maturity. These loans 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 property. The ability of a borrower to accomplish
either of these goals will be affected by--
o the value of the related property;
-21-
o the level of available mortgage rates at the time of sale or
refinancing;
o the borrower's equity in the related property;
o the financial condition and operating history of the borrower and
the related property;
o tax laws;
o rent control laws (pertaining to certain residential properties);
o Medicaid and Medicare reimbursement rates (pertaining to hospitals
and nursing homes);
o prevailing general economic conditions; and
o the availability of credit for loans secured by multifamily or
commercial property.
Neither Banc of America Commercial Mortgage Inc. nor any of its affiliates
will be required to refinance any mortgage loan.
As specified in the prospectus supplement, the master servicer or the special
servicer will be permitted (within prescribed limits) to extend and modify
mortgage loans that are in default or as to which a payment default is imminent.
Although the master servicer or the special servicer generally will be required
to determine that any such extension or modification is reasonably likely to
produce a greater recovery than liquidation, taking into account the time value
of money, we cannot assure you that any such extension or modification will in
fact increase the present value of receipts from or proceeds of the affected
mortgage loans.
The Lender Under a Mortgage Loan May Have Difficulty Collecting Rents Upon
the Default and/or Bankruptcy of the Related Borrower. Each mortgage loan
included in the trust secured by property that is subject to leases typically
will be secured by an assignment of leases and rents. Under such an assignment,
the mortgagor assigns to the mortgagee its right, title and interest as lessor
under the leases of the related property, and the income derived, 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 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.
The Enforceability of Due-on-Sale and Debt-Acceleration Clauses May Be
Limited in Certain Situations. Mortgages may contain a due-on-sale clause, which
permits the lender to accelerate the maturity of the mortgage loan if the
borrower sells, transfers or conveys the related property or its interest in the
property. Mortgages also may include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary or nonmonetary default of the
mortgagor. Such clauses are generally enforceable subject to certain exceptions.
The courts of all states will enforce clauses providing for acceleration in the
event of a material payment default. The equity courts of any state, however,
may refuse the foreclosure of a mortgage or deed of trust when an acceleration
of the indebtedness would be inequitable or unjust or the circumstances would
render the acceleration unconscionable.
Adverse Environmental Conditions May Subject a Mortgage Loan to Additional
Risk. Under the laws of certain states, contamination of real property may give
rise to a lien on the property to assure the costs of cleanup. In several
states, such a lien has priority over an existing mortgage lien on such
property. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, a lender may be liable, as an "owner" or "operator", for costs of
addressing releases or threatened releases of hazardous substances at a
property, if agents or employees of the lender have become sufficiently involved
in the operations of the borrower, regardless of whether the environmental
damage or threat was caused by the borrower or a prior owner. A lender also
risks such liability on foreclosure of the mortgage.
-22-
Certain Special Hazard Losses May Subject Your Certificates to an Increased
Risk of Loss. Unless otherwise specified in a prospectus supplement, the master
servicer and special servicer for the trust will be required to cause the
borrower on each mortgage loan in the trust to maintain such insurance coverage
in respect of the property as is required under the related mortgage, including
hazard insurance. As described in the prospectus supplement, the master servicer
and the special servicer may satisfy its obligation to cause hazard insurance to
be maintained with respect to any property through acquisition of a blanket
policy.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the properties will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms, and therefore will not contain identical terms and conditions, most
such policies typically do not cover any physical damage resulting from war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of risks. Unless the mortgage
specifically requires the mortgagor to insure against physical damage arising
from such causes, then, to the extent any consequent losses are not covered by
credit support, such losses may be borne, at least in part, by the holders of
one or more classes of certificates of the related series.
Exercise of Rights by Certain Certificateholders May Be Adverse to Other
Certificateholders
The pooling agreement for a series may permit the holder of a class of
subordinate certificates or a class of securities backed by a class of
certificates to instruct the special servicer with respect to workout
arrangements or foreclosure proceedings with respect to delinquent or other
specially serviced mortgage loans. This right is intended to permit the holder
of a class of certificates that is highly sensitive to losses on the mortgage
loans to attempt to mitigate losses by exercising limited power of direction
over servicing activities which accelerate or delay realization of losses on the
mortgage loans. Such directions may, however, be adverse to the interest of
those classes of senior certificates that are more sensitive to prepayments than
to losses on the mortgage loans. In particular, accelerating foreclosure will
adversely affect the yield to maturity on interest only certificates, while
delaying foreclosure will adversely affect the yield to maturity of principal
only certificates.
The Recording of the Mortgages in the Name of MERS May Affect the Yield on Your
Certificates
The mortgages or assignments of mortgage for some of the mortgage loans have
been or may be recorded in the name of Mortgage Electronic Registration Systems,
Inc. or MERS, solely as nominee for the mortgage loan seller and its successors
and assigns. Subsequent assignments of those mortgages are registered
electronically through the MERS system. However, if MERS discontinues the MERS
system and it becomes necessary to record an assignment of mortgage to the
trustee, then any related expenses will be paid by the trust and will reduce the
amount available to pay principal of and interest on the certificates.
The recording of mortgages in the name of MERS is a new practice in the
commercial mortgage lending industry. Public recording officers and others may
have limited, if any, experience with lenders seeking to foreclose mortgages,
assignments of which are registered with MERS. Accordingly, delays and
additional costs in commencing, prosecuting and completing foreclosure
proceedings and conducting foreclosure sales of the mortgaged properties could
result. Those delays and the additional costs could in turn delay the
distribution of liquidation proceeds to certificateholders and increase the
amount of losses on the loans.
Borrower Defaults May Adversely Affect Your Yield
The rate and timing of delinquencies or defaults on the mortgage loans will
affect:
o the aggregate amount of distributions on the offered certificates;
o their yield to maturity;
o the rate of principal payments; and
o their weighted average life.
-23-
If losses on the mortgage loans exceed the aggregate principal amount of the
classes of certificates subordinated to a particular class, such class will
suffer a loss equal to the full amount of such excess (up to the outstanding
principal amount of such certificate).
If you calculate your anticipated yield based on assumed rates of defaults
and losses that are lower than the default rate and losses actually experienced
and such losses are allocable to your certificates, your actual yield to
maturity will be lower than the assumed yield. Under certain extreme scenarios,
such yield could be negative. In general, the earlier a loss borne by you on
your certificates occurs, the greater the effect on your yield to maturity.
Even if losses on the mortgage loans are not borne by your certificates,
those losses may affect the weighted average life and yield to maturity of your
certificates. This may be so because those losses lead to your certificates
having a higher percentage ownership interest in the trust and related
distributions of principal payments on the mortgage loans than would otherwise
have been the case. The effect on the weighted average life and yield to
maturity of your certificates will depend upon the characteristics of the
remaining mortgage loans.
Additionally, delinquencies and defaults on the mortgage loans may
significantly delay the receipt of distributions by you on your certificates,
unless certain advances are made to cover delinquent payments or the
subordination of another class of certificates fully offsets the effects of any
such delinquency or default.
Additionally, the courts of any state may refuse the foreclosure of a
mortgage or deed of trust when an acceleration of the indebtedness would be
inequitable or unjust or the circumstances would render the action
unconscionable.
The Borrower's Form of Entity May Cause Special Risks
Most of the borrowers are legal entities rather than individuals. Mortgage
loans made to legal entities may entail risks of loss greater than those of
mortgage loans made to individuals. For example, a legal entity, as opposed to
an individual, may be more inclined to seek legal protection from its creditors
under the bankruptcy laws. Unlike individuals involved in bankruptcies, most of
the entities generally do not have personal assets and creditworthiness at
stake. The terms of the mortgage loans generally require that the borrowers
covenant to be single purpose entities, although in many cases the borrowers are
not required to observe all covenants and conditions that typically are required
in order for them to be viewed under standard rating agency criteria as "special
purpose entities". In addition, certain mortgage loans may not have borrower
principals. In general, borrowers' organizational documents or the terms of the
mortgage loans limit their activities to the ownership of only the related
mortgaged property or properties and limit the borrowers' ability to incur
additional indebtedness. These provisions are designed to mitigate the
possibility that the borrowers' financial condition would be adversely impacted
by factors unrelated to the mortgaged property and the mortgage loan in the
pool. However, we cannot assure you that the related borrowers will comply with
these requirements. The bankruptcy of a borrower, or a general partner or
managing member of a borrower, may impair the ability of the lender to enforce
its rights and remedies under the related mortgage.
Many of the borrowers are not special purpose entities structured to limit
the possibility of becoming insolvent or bankrupt, and therefore may be more
likely to become insolvent or the subject of a voluntary or involuntary
bankruptcy proceeding because such borrowers may be:
o operating entities with businesses distinct from the operation of the
mortgaged property with the associated liabilities and risks of operating an
ongoing business; or
o individuals that have personal liabilities unrelated to the mortgaged
property.
However, any borrower, even a special purpose entity structured to be
bankruptcy remote, as an owner of real estate will be subject to certain
potential liabilities and risks. We cannot provide assurances that any borrower
will not file for bankruptcy protection or that creditors of a borrower or a
corporate or individual general partner or managing member of a borrower will
not initiate a bankruptcy or similar proceeding against such borrower or
corporate or individual general partner or managing member.
-24-
Furthermore, with respect to any related borrowers, creditors of a common
parent in bankruptcy may seek to consolidate the assets of such borrowers with
those of the parent. Consolidation of the assets of such borrowers would likely
have an adverse effect on the funds available to make distributions on your
certificates, and may lead to a downgrade, withdrawal or qualification of the
ratings of your certificates. See "Certain Legal Aspects of Mortgage
Loans--Bankruptcy Laws" in this prospectus.
In addition, with respect to certain mortgage loans, the borrowers may own
the related mortgaged property as tenants in common. These mortgage loans may be
subject to prepayment, including during periods when prepayment might otherwise
be prohibited, as a result of partition. Although some of the related borrowers
may have purported to waive any right of partition, we cannot assure you that
any such waiver would be enforced by a court of competent jurisdiction.
Borrower and Related Party Bankruptcy Proceedings Entail Certain Risks
Under federal bankruptcy law, the filing of a petition in bankruptcy by or
against a borrower will stay the commencement or continuation of a foreclosure
action and delay the sale of the real property owned by that borrower. In
addition, even if a court determines that the value of the mortgaged property is
less than the principal balance of the mortgage loan it secures, the court may
prevent a lender from foreclosing on the mortgaged property (subject to certain
protections available to the lender). As part of a restructuring plan, a court
also may reduce the amount of secured indebtedness to the then value of the
mortgaged property, which action would make the lender a general unsecured
creditor for the difference between the then current value and the amount of its
outstanding mortgage indebtedness. A bankruptcy court also may: (1) grant a
debtor a reasonable time to cure a payment default on a mortgage loan; (2)
reduce periodic payments due under a mortgage loan; (3) change the rate of
interest due on a mortgage loan; or (4) otherwise alter the 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's trustee or the borrower, as
debtor in possession, has certain special powers to avoid, subordinate or
disallow debts. In certain circumstances, the claims of the securitization
trustee may be subordinated to financing obtained by a debtor in possession
subsequent to its bankruptcy.
Under federal bankruptcy law, the mortgagee will be stayed from enforcing a
borrower's assignment of rents and leases. Federal bankruptcy law also may
interfere with the master servicer's or special servicer's ability to enforce
lockbox requirements. The legal proceedings necessary to resolve these issues
can be time consuming 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.
Certain mortgage loans may have sponsors that have previously filed for
bankruptcy protection, which in some cases may have involved the same property
that currently secures the mortgage loan. In each case, the related entity or
person has emerged from bankruptcy. However, we cannot assure you that such
sponsors will not be more likely than other sponsors to utilize their rights in
bankruptcy in the event of any threatened action by the mortgagee to enforce its
rights under the related loan documents.
Tenancies in Common May Hinder or Delay Recovery
With respect to certain mortgage loans, the borrowers may own the related
mortgaged property as tenants in common. These mortgage loans may be subject to
prepayment, including during periods when prepayment might otherwise be
prohibited, as a result of partition. Although some of the related borrowers may
have purported to waive any right of partition, we cannot assure you that any
such waiver would be enforced by a court of competent jurisdiction.
In general, with respect to a tenant in common ownership structure, each
tenant in common owns an undivided share in the property and if such tenant in
common desires to sell its interest in the property (and is unable to find a
-25-
buyer or otherwise needs to force a partition) such tenant in common has the
ability to request that a court order a sale of the property and distribute the
proceeds to each tenant in common proportionally. As a result, if a borrower
exercises such right of partition, the related mortgage loans may be subject to
prepayment. In addition, the tenant in common structure may cause delays in the
enforcement of remedies; this may occur, for example, because of procedural or
substantive issues resulting from the existence of multiple borrowers under the
related loan, such as in bankruptcy, in which circumstance, each time a tenant
in common borrower files for bankruptcy, the bankruptcy court stay will be
reinstated.
In some cases, the related borrower may be a special purpose entity (in some
cases bankruptcy remote), reducing the risk of bankruptcy. There can be no
assurance that a bankruptcy proceeding by a single tenant in common borrower
will not delay enforcement of this pooled mortgage loan. Additionally, in some
cases, subject to the terms of the related mortgage loan documents, a borrower
or a tenant in common borrower may assign its interests to one or more tenant in
common borrowers. Such change to, or increase in, the number of tenant in common
borrowers increases the risks related to this ownership structure.
Mortgaged Properties with Tenants Present Special Risks
The income from, and market value of, the mortgaged properties leased to
various tenants would be adversely affected if:
o space in the mortgaged properties could not be leased or relet;
o tenants were unable to meet their lease obligations;
o leasing or re leasing is restricted by exclusive rights of tenants to lease
the mortgaged properties or other covenants not to lease space for certain uses
or activities, or covenants limiting the types of tenants to which space may be
leased;
o substantial re leasing costs were required and/or the cost of performing
landlord obligations under existing leases materially increased;
o a significant tenant were to become a debtor in a bankruptcy case; or
o rental payments could not be collected for any other reason.
Repayment of the mortgage loans secured by retail, offices and industrial and
warehouse properties will be affected by the expiration of leases and the
ability of the respective borrowers to renew the leases or relet the space on
comparable terms. In addition, if a significant portion of tenants have leases
which expire near or at maturity of the related mortgage loan, then it may make
it more difficult for the related borrower to seek refinancing or make any
applicable balloon payment. Certain of the mortgaged properties may be leased in
whole or in part by government sponsored tenants who have the right to cancel
their leases at any time or for lack of appropriations. Other tenants may have
the right to cancel or terminate their leases prior to the expiration of the
lease term or upon the occurrence of certain events including, but not limited
to, the loss of an anchor tenant at the mortgaged property. Additionally,
mortgage loans may have concentrations of leases expiring at varying rates in
varying percentages.
Even if vacated space is successfully relet, the costs associated with
reletting, including tenant improvements and leasing commissions, could be
substantial and could reduce cash flow from the mortgaged properties. Moreover,
if a tenant defaults in its obligations to a borrower, the borrower may incur
substantial costs and experience significant delays associated with enforcing
its rights and protecting its investment, including costs incurred in renovating
and reletting the property.
In addition, certain mortgaged properties may have tenants that are paying
rent but are not in occupancy or may have vacant space that is not leased, and
in certain cases, the occupancy percentage could be less than 80%. Any "dark"
space may cause the mortgaged property to be less desirable to other potential
tenants or the related tenant may be more likely to default in its obligations
under the lease. We cannot assure you that those tenants will continue to
fulfill their lease obligations or that the space will be relet.
-26-
Additionally, in certain jurisdictions, if tenant leases are subordinated to
the liens created by the mortgage but do not contain attornment provisions
(provisions requiring the tenant to recognize as landlord under the lease a
successor owner following foreclosure), the leases may terminate upon the
transfer of the property to a foreclosing lender or purchaser at foreclosure.
Accordingly, if a mortgaged property is located in such a jurisdiction and is
leased to one or more desirable tenants under leases that are subordinate to the
mortgage and do not contain attornment provisions, such mortgaged property could
experience a further decline in value if such tenants' leases were terminated.
With respect to certain of the mortgage loans, the related borrower has given
to certain tenants or others an option to purchase, a right of first refusal or
a right of first offer to purchase all or a portion of the mortgaged property in
the event a sale is contemplated, and such right is not subordinate to the
related mortgage. This may impede the mortgagee's ability to sell the related
mortgaged property at foreclosure, or, upon foreclosure, this may affect the
value and/or marketability of the related mortgaged property.
Mortgaged Properties with Multiple Tenants May Increase Reletting Costs
and Reduce Cash Flow
If a mortgaged property has multiple tenants, reletting expenditures may be
more frequent than in the case of mortgaged properties with fewer tenants,
thereby reducing the cash flow available for debt service payments. Multi
tenanted mortgaged properties also may experience higher continuing vacancy
rates and greater volatility in rental expenses.
Tenant Bankruptcy Adversely Affects Property Performance
The bankruptcy or insolvency of a major tenant, or a number of smaller
tenants, in retail, office, industrial and warehouse properties may adversely
affect the income produced by a mortgaged property. Under the federal bankruptcy
code a tenant has the option of assuming or rejecting any unexpired lease. If
the tenant rejects the lease, the landlord's claim for breach of the lease would
be a general unsecured claim against the tenant (absent collateral securing the
claim). The claim would be limited to the unpaid rent reserved under the lease
for the periods prior to the bankruptcy petition (or earlier surrender of the
leased premises) which are unrelated to the rejection, plus the greater of one
year's rent or 15% of the remaining reserved rent (but not more than three
year's rent). There are several cases in which one or more tenants at a
mortgaged property have declared bankruptcy. We cannot assure you that any such
tenant will affirm its lease.
Risks Related to Enforceability
All of the mortgages permit the lender to accelerate the debt upon default by
the borrower. The courts of all states will enforce acceleration clauses in the
event of a material payment default. Courts, however, may refuse to permit
foreclosure or acceleration if a default is deemed immaterial or the exercise of
those remedies would be unjust or unconscionable.
If a mortgaged property has tenants, the borrower typically assigns its
income as landlord to the lender as further security, while retaining a license
to collect rents as long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect rents. In certain
jurisdictions, such assignments may not be perfected as security interests until
the lender takes actual possession of the property's cash flow. In some
jurisdictions, the lender may not be entitled to collect rents until the lender
takes possession of the property and secures the appointment of a receiver. In
addition, as previously discussed, if bankruptcy or similar proceedings are
commenced by or for the borrower, the lender's ability to collect the rents may
be adversely affected.
Potential Absence of Attornment Provisions Entails Risks
In some jurisdictions, if tenant leases are subordinate to the liens created
by the mortgage and do not contain attornment provisions (i.e., provisions
requiring the tenant to recognize a successor owner following foreclosure as
landlord under the lease), the leases may terminate upon the transfer of the
property to a foreclosing lender or purchaser at foreclosure. Not all leases
were reviewed to ascertain the existence of attornment or subordination
provisions. Accordingly, if a mortgaged property is located in such a
jurisdiction and is leased to one or more desirable tenants under leases that
are subordinate to the mortgage and do not contain attornment provisions, such
-27-
mortgaged property could experience a further decline in value if such tenants'
leases were terminated. This is particularly likely if such tenants were paying
above market rents or could not be replaced.
If a lease is not subordinate to a mortgage, the trust will not possess the
right to dispossess the tenant upon foreclosure of the mortgaged property
(unless otherwise agreed to with the tenant). If the lease contains provisions
inconsistent with the mortgage (e.g., provisions relating to application of
insurance proceeds or condemnation awards) or which could affect the enforcement
of the lender's rights (e.g., a right of first refusal to purchase the
property), the provisions of the lease will take precedence over the provisions
of the mortgage.
Risks Associated with Commercial Lending May Be Different than those
for Residential Lending
The mortgaged properties consist solely of multifamily rental and commercial
properties. Commercial and multifamily lending is generally viewed as exposing a
lender to a greater risk of loss than residential one to four family lending
because it usually involves larger loans to a single borrower or a group of
related borrowers.
The repayment of a commercial or multifamily loan is typically dependent upon
the ability of the applicable property to produce cash flow through the
collection of rents or other operating revenues. Even the liquidation value of a
commercial property is determined, in substantial part, by the capitalization of
the property's cash flow. However, net operating income can be volatile and may
be insufficient to cover debt service on the loan at any given time.
The net operating incomes and property values of the mortgaged properties may
be adversely affected by a large number of factors. Some of these factors relate
to the properties themselves, such as:
o the age, design and construction quality of the properties;
o perceptions regarding the safety, convenience and attractiveness of the
properties;
o the proximity and attractiveness of competing properties;
o the adequacy of the property's management and maintenance;
o increases in operating expenses;
o an increase in the capital expenditures needed to maintain the
properties or make improvements;
o dependence upon a single tenant and concentration of tenants in a
particular business;
o a decline in the financial condition of a major tenant;
o an increase in vacancy rates; and
o a decline in rental rates as leases are renewed or entered into with new
tenants.
Other factors are more general in nature, such as:
o national, regional or local economic conditions, including plant closings,
military base closings, industry slowdowns and unemployment rates;
o local real estate conditions, such as an oversupply of retail space, office
space or multifamily housing;
o demographic factors;
o changes or continued weakness in specific industry segments;
o the public perception of safety for customers and clients;
o consumer confidence;
-28-
o consumer tastes and preferences;
o retroactive changes in building codes;
o conversion of a property to an alternative use;
o new construction in the market; and
o number and diversity of tenants.
The volatility of net operating income will be influenced by many of the
foregoing factors, as well as by:
o the length of tenant leases;
o the creditworthiness of tenants;
o in the case of rental properties, the rate at which new rentals occur;
o lease termination, rent abatement/offset, co tenancy or exclusivity
provisions of tenant leases;
o tenant defaults;
o the property's "operating leverage" which is generally the percentage of
total property expenses in relation to revenue, the ratio of fixed operating
expenses to those that vary with revenues, and the level of capital expenditures
required to maintain the property and to retain or replace tenants; and
o in the case of government sponsored tenants, the right of the tenant in
some instances to cancel a lease due to a lack of appropriations.
Poor Property Management Will Lower the Performance of the Related
Mortgaged Property
The successful operation of a real estate project depends upon the property
manager's performance and viability. The property manager is responsible for:
o responding to changes in the local market;
o planning and implementing the rental structure;
o operating the property and providing building services;
o managing operating expenses; and
o assuring that maintenance and capital improvements are carried out in a
timely fashion.
Properties deriving revenues primarily from short term sources, such as short
term or month to month leases, are generally more management intensive than
properties leased to creditworthy tenants under long term leases.
Good management, by controlling costs, providing services to tenants and
seeing to property maintenance and upkeep, can, in some cases, improve cash
flow, reduce vacancy, leasing and repair costs and preserve property value. Poor
management could impair short term cash flow and the long term viability of a
property.
We make no representation or warranty as to the skills of any present or
future managers. Additionally, we cannot assure you that the property managers
will be in a financial condition to fulfill their management responsibilities
throughout the terms of their respective management agreements.
Furthermore, we cannot assure you that the mortgaged properties will not have
related management which in the event that a related management company is
incapable of performing its duties may affect one or more sets of mortgaged
properties. We also cannot assure you that the mortgaged properties will not be
self managed by the related borrower, in which case such self management or
affiliated management may make it more difficult to
-29-
monitor the property management, replace that borrower as property manager in
the event that the borrower's management is detrimentally affecting the property
or ensure that the borrower provides all information necessary to manage the
mortgaged property to a replacement property manager in the event that the
borrower is replaced as property manager.
Particular Property Types Present Special Risks
Retail Properties.
Several factors may adversely affect the value and successful operation of a
retail property, including:
o changes in consumer spending patterns, local competitive conditions (such
as the supply of retail space or the existence or construction of new
competitive shopping centers or shopping malls);
o alternative forms of retailing (such as direct mail, video shopping
networks and internet web sites which reduce the need for retail space by retail
companies);
o the quality and philosophy of management;
o the safety, convenience and attractiveness of the property to tenants
and their customers or clients;
o the public perception of the safety of customers at shopping malls and
shopping centers;
o the need to make major repairs or improvements to satisfy the needs of
major tenants; and
o traffic patterns and access to major thoroughfares.
The general strength of retail sales also directly affects retail properties.
The retailing industry is currently undergoing consolidation due to many
factors, including growth in discount and alternative forms of retailing. If the
sales by tenants in the mortgaged properties that contain retail space were to
decline, the rents that are based on a percentage of revenues may also decline,
and tenants may be unable to pay the fixed portion of their rents or other
occupancy costs. The cessation of business by a significant tenant can adversely
affect a retail property, not only because of rent and other factors specific to
such tenant, but also because significant tenants at a retail property play an
important part in generating customer traffic and making a retail property a
desirable location for other tenants at such property. In addition, certain
tenants at retail properties may be entitled to terminate their leases if an
anchor tenant fails to renew or terminates its lease, becomes the subject of a
bankruptcy proceeding or ceases operations at such property.
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 shopping 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 and attract potential
customers.
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. Certain of the tenants or anchor stores of the
retail properties may have co tenancy clauses and/or operating covenants in
their leases or operating agreements which permit those tenants or anchor stores
to cease operating under certain conditions, including, without limitation,
certain other stores not being open for business at the mortgaged property or a
subject store not meeting the minimum sales requirement under its lease. In
addition, in the event that a "shadow anchor" fails to renew its lease,
terminates its lease or otherwise ceases to conduct business within a close
proximity to the mortgaged property, customer traffic at the mortgaged property
may be substantially reduced. We cannot assure you that such space will be
occupied or that the related mortgaged property will not suffer adverse economic
consequences.
-30-
Office Properties.
A large number of factors may adversely affect the value of office
properties, including:
o the number and quality of an office building's tenants;
o the physical attributes of the building in relation to competing
buildings (e.g., age, condition, design, access to transportation and ability
to offer certain amenities, such as sophisticated building systems);
o the desirability of the area as a business location;
o the strength and nature of the local economy (including labor costs and
quality, tax environment and quality of life for employees);
o an adverse change in population, patterns of telecommuting or sharing
of office space;
o local competitive conditions, including the supply of office space or
the existence or construction of new competitive office buildings;
o quality of management;
o changes in population and employment affecting the demand for office
space;
o properties not equipped for modern business becoming functionally
obsolete; and
o declines in the business of tenants, especially single tenanted
property.
In addition, there may be significant costs associated with tenant
improvements, leasing commissions and concessions in connection with reletting
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.
Medical office properties may be included in office properties. The
performance of a medical office property may depend on the proximity of such
property to a hospital or other health care establishment and on reimbursements
for patient fees from private or government sponsored insurance companies. The
sudden closure of a nearby hospital may adversely affect the value of a medical
office property. In addition, the performance of a medical office property may
depend on reimbursements for patient fees from private or government sponsored
insurers and issues related to reimbursement (ranging from non payment to delays
in payment) from such insurers could adversely impact cash flow at such
mortgaged properties. Moreover, medical office properties appeal to a narrow
market of tenants and the value of a medical office property may be adversely
affected by the availability of competing medical office properties.
Multifamily Properties.
Several 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 and willingness of management to provide adequate
maintenance and insurance;
o the types of services or amenities the property provides;
o the property's reputation;
o the level of mortgage interest rates (which may encourage tenants to
purchase rather than lease housing);
o the tenant mix, such as the tenant population being predominantly students
or being heavily dependent on workers from a particular business or personnel
from a local military base;
-31-
o the presence of competing properties;
o dependence on governmental programs that provide rental subsidies to
tenants pursuant to tenant voucher programs, which vouchers may be used at other
properties to influence tenant mobility;
o adverse local or national economic conditions which may limit the amount of
rent that may be charged and may result in a reduction of timely rent payments
or a reduction in occupancy levels; and
o state and local regulations which may affect the building owner's ability
to increase rent to market rent for an equivalent apartment.
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 bases on which a landlord may
terminate a tenancy or increase its rent or prohibit a landlord from terminating
a tenancy solely by reason of the sale of the owner's building.
In addition to state regulation of the landlord tenant relationship, numerous
counties and municipalities impose rent control on apartment buildings. These
ordinances may limit rent increases to fixed percentages, to percentages of
increases in the consumer price index, to increases set or approved by a
governmental agency, or to increases determined through mediation or binding
arbitration. 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 are secured by mortgaged properties that are
eligible (or become eligible in the future) for and have received low income
housing tax credits pursuant to Section 42 of the Internal Revenue Code in
respect of various units within the mortgaged property or have tenants that rely
on rent subsidies under various government funded programs, including the
Section 8 Tenant Based Assistance Rental Certificate Program of the United
States Department of Housing and Urban Development. Under HUD's Section 8
Tenant-Based Assistance Rental Voucher Program or Section 8 Tenant-Based
Assistance Rental Certificate Program (now combined into one voucher program),
the rents charged to some of the tenants are subsidized by housing assistance
payments. Those payments are made pursuant to housing assistance payments
contracts between the borrower and a local housing authority which receives
Section 8 funds from HUD. The term of each housing assistance payments contract
is limited to the term of the related tenant lease, generally one year,
renewable at the option of the tenant. Tenants may choose to move out of the
mortgaged properties and utilize their vouchers elsewhere, and we cannot assure
you that those units will be re-rented. The housing assistance payments
contracts impose certain management and maintenance obligations on the
borrowers, and housing assistance payments can be suspended, reduced, or
terminated if HUD or the local housing authority determines that the borrowers
have breached the housing assistance payments contracts. HUD may in the future
elect, or be required by Congress, to take actions with the effect of limiting
increases in rents subsidized under Section 8, or reducing rent levels currently
in effect. The ability of the respective borrowers to pay the housing assistance
payments loans, and the value of their mortgaged properties and consequent
ability to refinance the mortgage loans which are subject to housing assistance
payments contracts, could be adversely affected by some or all of the above
mentioned risks. We can give you no assurance that these or any similar 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.
Certain of the mortgage loans are secured or may be secured in the future by
mortgaged properties that are subject to certain affordable housing covenants,
in respect of various units within the mortgaged properties.
Hotel Properties.
Various factors may adversely affect the economic performance of a hotel,
including:
-32-
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, refurbishing and maintaining
existing facilities prior to the expiration of their anticipated useful lives;
o a deterioration in the financial strength or managerial capabilities of
the owner and operator of a hotel; 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 operations in Afghanistan and Iraq) caused
by changes in access, energy prices, strikes, relocation of highways,
construction of additional highways or other factors.
Because hotel rooms generally are rented for short periods of time, the
financial performance of hotels tends to be affected by adverse economic
conditions and competition more quickly than other types of commercial
properties.
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.
Hotels may be operated under franchise, management or operating agreements
that may be terminated by the franchisor, manager or operator. It may be
difficult to terminate a manager of a hotel after foreclosure of the related
mortgage.
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 management 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. Replacement franchises may require significantly higher
fees.
The transferability of a franchise license agreement is generally restricted.
In the event of a foreclosure, the lender or its agent may not have the right to
use the franchise license without the franchisor's consent. Conversely, in the
case of 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.
Self-Storage Properties.
Self storage properties are considered vulnerable to competition, because
both acquisition costs and break even occupancy are relatively low. The
conversion of self storage facilities to alternative uses would generally
require
-33-
substantial capital expenditures. Thus, if the operation of any of the self
storage properties becomes unprofitable due to:
o decreased demand;
o competition;
o age of improvements; or
o other factors affecting the borrower's ability to meet its obligations
on the related mortgage loan;
the liquidation value of that self storage mortgaged property may be
substantially less, relative to the amount owing on the mortgage loan, than if
the self storage property were readily adaptable to other uses.
Tenant privacy, anonymity and efficient access may heighten environmental
risks. No environmental assessment of a mortgaged property included an
inspection of the contents of the self storage units included in the self
storage properties and there is no assurance that all of the units included in
the self storage properties are free from hazardous substances or other
pollutants or contaminants or will remain so in the future.
Industrial and Warehouse Properties.
Among the significant factors determining the value of industrial and
warehouse properties are:
o the quality of tenants;
o building design and adaptability (e.g., clear heights, column spacing,
zoning restrictions, number of bays and bay depths, divisibility and truck
turning radius); and
o the location of the property (e.g., proximity to supply sources and
customers, availability of labor and accessibility to distribution channels).
In addition, industrial and warehouse properties may be adversely affected by
reduced demand for industrial and warehouse space occasioned by a decline in a
particular industrial site or in a particular industry segment, and a particular
industrial and warehouse property may be difficult to relet to another tenant or
may become functionally obsolete relative to newer properties.
Manufactured Housing Communities.
Significant factors determining the value of such properties are generally
similar to the factors affecting the value of multifamily properties. In
addition, these properties are special purpose properties that could not be
readily converted to general residential, retail or office use. In fact, certain
states also regulate changes in manufactured housing communities and require
that the landlord give written notice to its tenants a substantial period of
time prior to the projected change. Consequently, if the operation of any of
such properties becomes unprofitable such that the borrower becomes unable to
meet its obligation on the related mortgage loan, the liquidation value of the
related property may be substantially less, relative to the amount owing on the
mortgage loan, than would be the case if such properties were readily adaptable
to other uses.
Parking Garage Facilities.
Parking garage facilities present risks not associated with other properties.
Properties used for parking garages are more prone to environmental concerns
than other property types. Aspects of building site design and adaptability
affect the value of a parking garage facility. Site characteristics which are
valuable to a parking garage facility include location, clear ceiling heights,
column spacing, zoning restrictions, number of bays and bay depths,
divisibility, truck turning radius and overall functionality and accessibility.
In addition, because of the unique construction requirements of many parking
garage facilities, any vacant parking garage facility may not be easily
converted to other uses.
-34-
The Operation of the Mortgaged Property upon Foreclosure of the Mortgage Loan
May Affect Tax Status
If the trust were to acquire a mortgaged property subsequent to a default on
the related mortgage loan pursuant to a foreclosure or deed in lieu of
foreclosure, the special servicer would be required to retain an independent
contractor to operate and manage the mortgaged property. Among other things, the
independent contractor would not be permitted to perform construction work on
the mortgaged property unless such construction generally was at least 10%
complete at the time default on the related mortgage loan became imminent. In
addition, any net income from such operation and management, other than
qualifying "rents from real property" (as defined in Section 856(d) of the
Internal Revenue Code of 1986, as amended), or any rental income based on the
net profits of a tenant or sub tenant or allocable to a service that is non
customary in the area and for the type of building involved, will subject the
trust fund to federal (and possibly state or local) tax on such income at the
highest marginal corporate tax rate (currently 35%), thereby reducing net
proceeds available for distribution to certificateholders. In addition, if the
trust were to acquire one or more mortgaged properties pursuant to a foreclosure
or deed in lieu of foreclosure, upon acquisition of those mortgaged properties,
the trust may be required in certain jurisdictions, particularly in New York, to
pay state or local transfer or excise taxes upon liquidation of such mortgaged
properties. Such state or local taxes may reduce net proceeds available for
distribution to the certificateholders.
One Action Rules May Limit Remedies
Several states (including California) have laws that prohibit more than one
"judicial action" to enforce a mortgage obligation, and some courts have
construed the term "judicial action" broadly. Accordingly, the special servicer
is required to obtain advice of counsel prior to enforcing any of the trust
fund's rights under any of the mortgage loans that include mortgaged properties
where the rule could be applicable.
Property Value May Be Adversely Affected Even When Current Operating Income Is
Not
Various factors may adversely affect the value of a mortgaged property
without affecting the property's current net operating income. These factors
include, among others:
o the existence of, or changes in, governmental regulations, fiscal
policy, zoning or tax laws;
o potential environmental legislation or liabilities or other legal
liabilities;
o the availability of refinancing;
o changes in interest rate levels; and
o reduction in, or loss of, real estate tax abatements, exemptions, tax
incremental financing arrangements, or similar benefits.
Leasehold Interests Are Subject to Terms of the Ground Lease
Leasehold mortgages are subject to certain risks not associated with mortgage
loans secured by the fee estate of the mortgagor. The most significant of these
risks is that the ground lease may terminate if, among other reasons, the ground
lessee breaches or defaults in its obligations under the ground lease or there
is a bankruptcy of the ground lessee or the ground lessor. Accordingly, a
leasehold mortgagee may lose the collateral securing its leasehold mortgage. In
addition, although the consent of the ground lessor generally will not be
required for foreclosure, the terms and conditions of a leasehold mortgage may
be subject to the terms and conditions of the ground lease, and the rights of a
ground lessee or a leasehold mortgagee with respect to, among other things,
insurance, casualty and condemnation may be affected by the provisions of the
ground lease.
In Precision Indus. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir.
2003), the United States Court of Appeals for the Seventh Circuit ruled with
respect to an unrecorded lease of real property that where a statutory sale of
the fee interest in leased property occurs under Section 363(f) of the
Bankruptcy Code (11 U.S.C. ss. 363(f)) upon the bankruptcy of a landlord, such
sale terminates a lessee's possessory interest in the property, and the
purchaser assumes title free and clear of any interest, including any leasehold
estates.
-35-
Generally, each related ground lease requires the lessor to give the lender
notice of the borrower's defaults under the ground lease and an opportunity to
cure them; permits the leasehold interest to be assigned to the lender or the
purchaser at a foreclosure sale (in some cases only upon the consent of the
lessor) and contains certain other protective provisions typically included in a
"mortgageable" ground lease.
Upon the bankruptcy of a lessor or a lessee under a ground lease, the debtor
entity has the right to assume or reject the lease. If a debtor lessor rejects
the lease, the lessee has the right to remain in possession of its leased
premises for the rent otherwise payable under the lease for the term of the
lease (including renewals). If a debtor lessee/borrower rejects any or all of
the lease, the leasehold lender could succeed to the lessee/borrower's position
under the lease only if the lessor specifically grants the lender such right. If
both the lessor and the lessee/borrowers are involved in bankruptcy proceedings,
the trustee may be unable to enforce the bankrupt lessee/borrower's right to
refuse to treat a ground lease rejected by a bankrupt lessor as terminated. In
such circumstances, a lease could be terminated notwithstanding lender
protection provisions contained therein or in the mortgage.
Most of the ground leases securing the mortgaged properties provide that the
ground rent increases during the term of the lease. These increases may
adversely affect the cash flow and net income of the borrower from the mortgaged
property.
Collateral Securing Cooperative Loans May Diminish in Value
If specified in the related prospectus supplement, certain of the mortgage
loans may be cooperative loans. There are certain risks that differentiate
cooperative loans from other types of mortgage loans. Ordinarily, the
cooperative incurs a blanket mortgage in connection with the construction or
purchase of the cooperative's apartment building and the underlying land. The
interests of the occupants under proprietary leases or occupancy agreements to
which the cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage. If the cooperative is unable to meet the
payment obligations arising under its blanket mortgage, the mortgagee holding
the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of the collateral securing the
cooperative loans.
Condominium Ownership May Limit Use and Improvements
In the case of condominiums, a board of managers generally has discretion to
make decisions affecting the condominium building and there may be no assurance
that the borrower under a mortgage loan secured by one or more interests in that
condominium will have any control over decisions made by the related board of
managers. Thus, decisions made by that related board of managers, including
regarding assessments to be paid by the unit owners, insurance to be maintained
on the condominium building and many other decisions affecting the maintenance,
repair and, in the event of a casualty or condemnation, restoration of that
building, may have a significant impact on the mortgage loans in the trust fund
that are secured by mortgaged properties consisting of such condominium
interests. There can be no assurance that the related board of managers will
always act in the best interests of the borrower under those mortgage loans.
Further, due to the nature of condominiums, a default under the related mortgage
loan will not allow the special servicer the same flexibility in realizing on
the collateral as is generally available with respect to properties that are not
condominiums. The rights of other unit owners, the documents governing the
management of the condominium units and the state and local laws applicable to
condominium units must be considered. In addition, in the event of a casualty
with respect to such a mortgaged property, due to the possible existence of
multiple loss payees on any insurance policy covering that mortgaged property,
there could be a delay in the allocation of related insurance proceeds, if any.
Consequently, servicing and realizing upon the collateral described above could
subject the certificateholders to a greater delay, expense and risk than with
respect to a mortgage loan secured by a property that is not a condominium.
-36-
Zoning Laws and Use Restrictions May Affect the Operation of a Mortgaged
Property or the Ability to Repair or Restore a Mortgaged Property
Certain of the mortgaged properties may not comply with current zoning laws,
including density, use, parking and set back requirements, due to changes in
zoning requirements after such mortgaged properties were constructed. These
properties, as well as those for which variances or special permits were issued,
are considered to be a "legal non-conforming use" and/or the improvements are
considered to be "legal non-conforming structures". This means that the borrower
is not required to alter the use or structure to comply with the existing or new
law; however, the borrower may not be able to rebuild the premises "as is" in
the event of a casualty loss. This may adversely affect the cash flow of the
property following the casualty. If a casualty were to occur, we cannot assure
you that insurance proceeds would be available to pay the mortgage loan in full.
In addition, if the property were repaired or restored in conformity with the
current law, the value of the property or the revenue producing potential of the
property may not be equal to that which existed before the casualty.
In addition, certain of the mortgaged properties which are non conforming may
not be "legal non-conforming uses" or "legal non-conforming structures". The
failure of a mortgaged property to comply with zoning laws or to be a "legal
non-conforming use" or "legal non-conforming structure" may adversely affect
market value of the mortgaged property or the borrower's ability to continue to
use it in the manner it is currently being used.
In addition, certain of the mortgaged properties may be subject to certain
use restrictions imposed pursuant to restrictive covenants, reciprocal easement
agreements or operating agreements or, in the case of mortgaged properties that
are or constitute a portion of condominiums, condominium declarations or other
condominium use restrictions or regulations, especially in a situation where the
mortgaged property does not represent the entire condominium property. Such use
restrictions include, for example, limitations on the character of the
improvements or the properties, limitations affecting noise and parking
requirements, among other things, and limitations on the borrowers' right to
operate certain types of facilities within a prescribed radius. These
limitations could adversely affect the ability of the related borrower to lease
the mortgaged property on favorable terms, thus adversely affecting the
borrower's ability to fulfill its obligations under the related mortgage loan.
Some Mortgaged Properties May Not Be Readily Convertible to Alternative Uses
Some of the mortgaged properties may not be readily convertible to
alternative uses if those properties were to become unprofitable for any reason
or if those properties were designated as historic sites. Converting commercial
properties and manufactured housing communities to alternate uses generally
requires substantial capital expenditures. The liquidation value of a mortgaged
property consequently may be substantially less than would be the case if the
property were readily adaptable to other uses.
Zoning or other restrictions also may prevent alternative uses. See "--Zoning
Laws and Use Restrictions May Affect the Operation of a Mortgaged Property or
the Ability to Repair or Restore a Mortgaged Property" above.
Appraisals Are Limited in Reflecting the Value of a Mortgaged Property
Appraisals were obtained with respect to each of the mortgaged properties in
connection with the origination of the applicable mortgage loan. In general,
appraisals represent the analysis and opinion of qualified appraisers and are
not guarantees of present or future value. One appraiser may reach a different
conclusion than the conclusion that would be reached if a different appraiser
were appraising that property. Moreover, appraisals seek to establish the amount
a typically motivated buyer would pay a typically motivated seller and, in
certain cases, may have taken into consideration the purchase price paid by the
borrower. That amount could be significantly higher than the amount obtained
from the sale of a mortgaged property under a distress or liquidation sale. We
cannot assure you that the information set forth in this prospectus supplement
regarding appraised values or loan to value ratios accurately reflects past,
present or future market values of the mortgaged properties.
Risks Relating to Costs of Compliance with Applicable Laws and Regulations
A borrower may be required to incur costs to comply with various existing and
future federal, state or local laws and regulations applicable to the related
mortgaged property, for example, zoning laws and the Americans with Disabilities
Act of 1990, as amended, which requires all public accommodations to meet
certain federal
-37-
requirements related to access and use by persons with disabilities. See
"Certain Legal Aspects of Mortgage Loans--Americans with Disabilities Act" in
this prospectus. The expenditure of these costs or the imposition of injunctive
relief, penalties or fines in connection with the borrower's noncompliance could
negatively impact the borrower's cash flow and, consequently, its ability to pay
its mortgage loan.
Additional Compensation to the Servicer Will Affect Your Right to Receive
Distributions
To the extent described in this prospectus, the master servicer, the special
servicer or the trustee, as applicable, will be entitled to receive interest on
unreimbursed advances. This interest will generally accrue from the date on
which the related advance is made or the related expense is incurred through the
date of reimbursement. In addition, under certain circumstances, including
delinquencies in the payment of principal and interest, a mortgage loan will be
specially serviced and the special servicer will be entitled to compensation for
special servicing activities. The right to receive interest on advances or
special servicing compensation is senior to the rights of certificateholders to
receive distributions on the offered certificates. The payment of interest on
advances and the payment of compensation to the special servicer may lead to
shortfalls in amounts otherwise distributable on your certificates.
Liquidity for Certificates May Be Limited
The certificates will not be listed on any securities exchange or traded on
the NASDAQ Stock Market, and there is currently no secondary market for the
certificates. While the underwriters currently intend to make a secondary market
in the offered certificates, they are not obligated to do so. Accordingly, there
may not be an active or liquid secondary market for the certificates. Lack of
liquidity could result in a substantial decrease in the market value of the
certificates. Many other factors may affect the market value of the certificates
including the then prevailing interest rates.
Mortgage Loan Repayments and Prepayments Will Affect Payment
As principal payments or prepayments are made on a mortgage loan that is part
of a pool of mortgage loans, the pool will be subject to more concentrated risks
with respect to the diversity of mortgaged properties, types of mortgaged
properties and number of borrowers, as described in the prospectus supplement.
Classes that have a later sequential designation or a lower payment priority are
more likely to be exposed to this concentration risk than are classes with an
earlier sequential designation or a higher priority. This is the case because
principal on the offered certificates is generally payable in sequential order,
and no class entitled to distribution of principal generally receives principal
until the principal amount of the preceding class or classes entitled to receive
principal have been reduced to zero.
Grace Periods Under the Mortgage Loans May Impact the Master Servicer's
Obligation to Advance
The mortgage loans have grace periods for monthly payments ranging from zero
to ten days; provided, however, certain states by statute may override the terms
of some mortgage loans and increase such grace periods. In some cases, such
grace periods may run past the determination date. If borrowers pay at the end
of such grace periods rather than on the due dates for such monthly payments,
the master servicer will be required to make an advance for such monthly payment
(and monthly servicing reports will show significant advances as a result) even
though the borrower is not technically delinquent under the terms of its
mortgage loan. No interest will accrue on these advances made by the master
servicer until after the end of the related grace period. For purposes of the
foregoing discussions, a grace period is the number of days before a late
payment charge is due on a mortgage loan, which may be different from the date
an event of default would occur under the mortgage loan.
Risks to the Mortgaged Properties Relating to Terrorist Attacks and Foreign
Conflicts
On September 11, 2001, the United States was subjected to multiple terrorist
attacks which resulted in considerable uncertainty in the world financial
markets. The terrorist attacks on the World Trade Center and the Pentagon
suggest an increased likelihood that large public areas such as shopping malls
or large office buildings could become the target of terrorist attacks in the
future. The possibility of such attacks could (i) lead to damage to one or more
of the mortgaged properties if any such attacks occur, (ii) result in higher
costs for insurance premiums or make terrorism coverage unobtainable or (iii)
impact leasing patterns or shopping patterns which could adversely
-38-
impact leasing revenue and mall traffic and percentage rent. As a result, the
ability of the mortgaged properties to generate cash flow may be adversely
affected. In addition, the United States is engaged in continuing military
operations in Iraq, Afghanistan and elsewhere. It is uncertain what effect these
operations will have on domestic and world financial markets, economies, real
estate markets, insurance costs or business segments. The full impact of these
events is not yet known but could include, among other things, increased
volatility in the price of securities including the certificates. The terrorist
attacks may also adversely affect the revenues or costs of operation of the
mortgaged properties. With respect to shopping patterns, such events have
significantly reduced air travel throughout the United States and, therefore,
have had a negative effect on revenues in areas heavily dependent on tourism.
The decrease in air travel may have a negative effect on certain of the
mortgaged properties that are dependent on tourism or that are located in areas
heavily dependent on tourism which could reduce the ability of the affected
mortgaged properties to generate cash flow. The attacks also could result in
higher costs for insurance or for security, particularly for larger properties.
See "--Property Insurance May Not Protect Your Certificates from Loss in the
Event of Casualty or Loss" below and in the accompanying prospectus supplement.
Accordingly, these disruptions, uncertainties and costs could materially and
adversely affect your investment in the certificates.
Inclusion of Delinquent Mortgage Loans in a Mortgage Asset Pool
If provided in the prospectus supplement, the trust fund for a particular
series of certificates may include mortgage loans that are past due. However, in
no case will delinquent assets constitute 50% or more, as measured by dollar
volume, of the mortgage loans backing such series of certificates. As specified
in the related prospectus supplement, the servicing of such mortgage loans will
be performed by the special servicer. The same entity may act as both master
servicer and special servicer. Credit support provided with respect to a
particular series of certificates may not cover all losses related to such
delinquent mortgage loans, and investors should consider the risk that the
inclusion of such mortgage loans in the trust fund may adversely affect the rate
of defaults and prepayments concerning the subject mortgage asset pool and the
yield on the certificates of such series.
PROSPECTUS SUPPLEMENT
To the extent appropriate, the prospectus supplement relating to each series
of offered certificates will contain--
o a description of the class or classes of such offered certificates,
including the payment provisions with respect to each such class, the
aggregate principal amount (if any) of each such class, the rate at which
interest accrues from time to time (if at all), with respect to each such
class or the method of determining such rate, and whether interest with
respect to each such class will accrue from time to time on its aggregate
principal amount (if any) or on a specified notional amount (if at all);
o information with respect to any other classes of certificates of the same
series;
o the respective dates on which distributions are to be made;
o information as to the assets, including the mortgage assets, constituting
the related trust fund;
o the circumstances, if any, under which the related trust fund may be
subject to early termination;
o additional information with respect to the method of distribution of such
offered certificates;
o whether one or more REMIC elections will be made and the designation of
the "regular interests" and "residual interests" in each REMIC to be
created and the identity of the person responsible for the various
tax-related duties in respect of each REMIC to be created;
o the initial percentage ownership interest in the related trust fund to be
evidenced by each class of certificates of such series;
o information concerning the trustee of the related trust fund;
-39-
o if the related trust fund includes mortgage loans, information concerning
the master servicer and any special servicer of such mortgage loans and
the circumstances under which all or a portion, as specified, of the
servicing of a mortgage loan would transfer from the master servicer to
the special servicer;
o information as to the nature and extent of subordination of any class of
certificates of such series, including a class of offered certificates;
and
o whether such offered certificates will be initially issued in definitive
or book-entry form.
CAPITALIZED TERMS USED IN THIS PROSPECTUS
From time to time we use capitalized terms in this prospectus. Each of those
capitalized terms will have the meaning assigned to it in the "Glossary"
attached to this prospectus.
-40-
DESCRIPTION OF THE TRUST FUNDS
General
The primary assets of each trust fund will consist of mortgage assets which
will include--
o various types of multifamily or commercial mortgage loans;
o mortgage participations, pass-through certificates or other
mortgage-backed securities that evidence interests in, or that are secured
by pledges of, one or more of various types of multifamily or commercial
mortgage loans; or
o a combination of such mortgage loans and mortgage backed securities.
We will establish each trust fund and select each mortgage asset. We will
purchase mortgage assets to be included in the trust fund and select each
mortgage asset from the Mortgage Asset Seller who may not have originated the
mortgage asset or issued the MBS and may be our affiliate.
We will not insure or guaranty the mortgage assets nor will 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 (referred
to in this prospectus as mortgage notes) notes secured by mortgages, deeds of
trust or similar security instruments (referred to in this prospectus as
mortgages) that create first or junior liens on fee or leasehold estates in
properties consisting of--
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; or
o office buildings, retail stores and establishments, hotels or motels,
nursing homes, hospitals or other health care-related facilities,
recreational vehicle and mobile home parks, warehouse facilities,
mini-warehouse facilities, self-storage facilities, industrial plants,
parking lots, entertainment or sports arenas, restaurants, marinas, mixed
use or various other types of income-producing properties or unimproved
land.
These multifamily properties may include mixed commercial and residential
structures and apartment buildings owned by private cooperative housing
corporations. However, no one of the following types of commercial properties
will represent security for a material concentration of the mortgage loans in
any trust fund, based on principal balance at the time such trust fund is
formed: (1) restaurants; (2) entertainment or sports arenas; (3) marinas; or (4)
nursing homes, hospitals or other health care-related facilities. Unless
otherwise specified in the related prospectus supplement, each mortgage will
create a first priority mortgage lien on a borrower's fee estate in a mortgaged
property. If a mortgage creates a lien on a borrower's leasehold estate in a
property, then, unless otherwise specified in the related prospectus supplement,
the term of any such leasehold will exceed the term of the mortgage note by at
least ten years. Unless otherwise specified in the related prospectus
supplement, each mortgage loan will have been originated by a person other than
us; however, such person may be or may have been our affiliate.
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
-41-
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 mortgaged
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 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, any forbearance
arrangement then in effect, the condition of the related mortgaged property and
the ability of the mortgaged property to generate income to service the mortgage
debt.
Default and Loss Considerations with Respect to the Mortgage Loans. Mortgage
loans secured by liens on income-producing properties are substantially
different from loans made on the security of owner-occupied single-family homes.
The repayment of a loan secured by a lien on an income-producing property is
typically dependent upon the successful operation of such property (that is, its
ability to generate income). Moreover, as noted above, some or all of the
mortgage loans included in a particular trust fund may be nonrecourse loans.
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. 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 nonowner 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 plants. Commercial Properties may be owner-occupied or leased to
a small number of tenants. Thus, the Net Operating Income of such a mortgaged
property may depend substantially on the financial condition of the borrower or
a tenant, and mortgage loans secured by liens on such properties may pose 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. 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.
-42-
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. The lower the Loan-to-Value Ratio, the greater the percentage of the
borrower's equity in a mortgaged property, and thus (a) the greater the
incentive of the borrower to perform under the terms of the related mortgage
loan (in order to protect such equity) and (b) the greater the cushion provided
to the lender against loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure of
the 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), 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); and
o or upon a selection from or interpolation of the values derived from such
methods.
Each of these appraisal methods can present analytical difficulties. It is
often difficult to find truly comparable properties that have recently been
sold; the replacement cost of a property may have little to do with its current
market value; and income capitalization is inherently based on inexact
projections of income and expense and the selection of an appropriate
capitalization rate and discount rate. Where more than one of these appraisal
methods are used and provide significantly different results, an accurate
determination of value and, correspondingly, a reliable analysis of 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 that
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, there can be no assurance that all of such
factors will in fact have been prudently considered by the originators of the
mortgage loans, or that, for a particular mortgage loan, they are complete or
relevant. See "Risk Factors--Certain Factors Affecting Delinquency, Foreclosure
and Loss of the Mortgage Loans--General" and "--Certain Factors Affecting
Delinquency, Foreclosure and Loss of the Mortgage Loans--Increased Risk of
Default Associated With Balloon Payments" in this prospectus.
Payment Provisions of the Mortgage Loans. All of the mortgage loans will (1)
have had original terms to maturity of not more than 40 years and (2) provide
for scheduled payments of principal, interest or both, to be made on specified
dates that occur monthly, quarterly, semi-annually or annually. A mortgage loan
may--
o provide for no accrual of interest or for accrual of interest 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 Mortgage Rate, or from a fixed to an adjustable Mortgage Rate;
o provide for level payments to maturity or for payments that adjust from time
to time to accommodate changes in its 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 permit the negative amortization or deferral of accrued interest;
-43-
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;
o may permit defeasance and the release of real property collateral in
connection with that defeasance; and
o may have two or more component parts, each having characteristics that are
otherwise described in this prospectus as being attributable to separate and
distinct mortgage loans, 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, as described in the
related prospectus supplement. See "Certain Legal Aspects of the Mortgage
Loans--Default Interest and Limitations on Prepayments" in this prospectus
regarding the enforceability of prepayment premiums and yield maintenance
charges.
Mortgage Loan Information in Prospectus Supplements. Each prospectus
supplement will contain certain information pertaining to the mortgage loans in
the related trust fund, 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 of such terms to maturity, 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 of the Loan-to-Value-Ratios, and
the weighted average of such Loan-to-Value Ratios;
o the Mortgage Rates borne by the mortgage loans, or the range of the
Mortgage Rate, and the weighted average Mortgage Rate borne by the
mortgage loans;
o with respect to mortgage loans with adjustable Mortgage Rates, the index
or indices upon which such adjustments are based, the adjustment dates,
the range of gross margins and the weighted average gross margin, and any
limits on Mortgage Rate adjustments at the time of any adjustment and over
the life of such mortgage loan (the index will be one of the following:
one-month, three-month, six-month or one-year LIBOR (an average of the
interest rate on one-month, three-month, six-month or one-year
dollar-denominated deposits traded between banks in London), CMT (weekly
or monthly average yields of U.S. treasury short and long-term securities,
adjusted to a constant maturity), COFI (an index of the weighted average
interest rate paid by savings institutions in Nevada, Arizona and
California), MTA (a one-year average of the monthly average yields of U.S.
treasury securities) or the Prime Rate (an interest rate charged by banks
for short-term loans to their most creditworthy customers));
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 Debt Service
Coverage Ratios, 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 us that
pertains to the
-44-
provisions of leases and the nature of tenants of the mortgaged
properties. If we are unable to provide the specific information described
above at the time any offered certificates of a series are initially
offered, more general information of the nature described above will be
provided in the related prospectus supplement, and specific information
will be set forth in a report which will be available to purchasers of
those certificates at or before their initial issuance and will be filed
as part of a Current Report on Form 8-K with the Securities and Exchange
Commission within fifteen days following their issuance.
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 (1) private-label (that is, not issued, insured or guaranteed
by the United States or any agency or instrumentality of the United States)
mortgage pass-through certificates or other mortgage-backed securities or (2)
certificates issued and/or insured or guaranteed by the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association, the
Governmental National Mortgage Association or the Federal Agricultural Mortgage
Corporation; provided that, unless otherwise specified in the related prospectus
supplement, each MBS will evidence an interest in, or will be secured by a
pledge of, mortgage loans that conform to the descriptions of the mortgage loans
contained in this prospectus.
Except in the case of a pool of mortgage loans, each MBS included in a
mortgage asset pool: (a) either will (1) have been previously registered under
the Securities Act of 1933, as amended, (2) be exempt from such registration
requirements, or (3) have been held for at least the holding period specified in
Rule 144(k) under the Securities Act of 1933, as amended; and (b) will have been
acquired (other than from us or any of our affiliates) in bona fide secondary
market transactions.
Any MBS will have been issued pursuant to a MBS agreement which is a Pooling
and Servicing Agreement, an indenture or similar agreement. The issuer of the
MBS and/or the servicer of the underlying mortgage loans will be parties to the
MBS agreement, generally together with a trustee or, in the alternative, with
the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of the offered certificates described in this prospectus.
Distributions in respect of the MBS will be made by the issuer of the MBS, the
servicer of the MBS, or the trustee of the MBS agreement or the MBS trustee on
the dates specified in the related prospectus supplement. The issuer of the MBS
or the MBS servicer or another person specified in the related prospectus
supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related prospectus supplement.
Reserve funds, subordination or other credit support similar to that
described for the offered 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.
-45-
The prospectus supplement for a series of certificates that evidence
interests in MBS will specify, to the extent available--
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 issuer of the MBS, servicer of the MBS and trustee of the MBS, 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 available
and appropriate under the circumstances, such other information in respect
of the underlying mortgage loans described under "--Mortgage
Loans--Mortgage Loan Information in Prospectus Supplements"; and
o the characteristics of any cash flow agreements that relate to the MBS.
Certificate Accounts
Each trust fund will include one or more accounts established and maintained
on behalf of the certificateholders into which 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 in this prospectus and in
the related prospectus supplement. See "The Pooling and Servicing
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 of the types of credit
support described in this prospectus under "Description of Credit Support". The
amount and types of credit support, the identity of the entity providing it (if
applicable) and related information with respect to each type of credit support,
if any, will be set forth in the prospectus supplement for a series of
certificates. See "Risk Factors--The Limited Credit Support for Your
Certificates May Not Be Sufficient to Prevent Loss on Your Certificates" and
"Description of Credit Support" in this prospectus.
Cash Flow Agreements
If so provided in the prospectus supplement for a series of certificates, the
related trust fund may include guaranteed investment contracts pursuant to which
moneys held in the funds and accounts established for such series will be
invested at a specified rate. The related trust fund may also include certain
other agreements, such as 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 on one or more classes of
certificates. The principal terms of any such cash flow agreement, including,
without limitation, provisions relating to the timing, manner and amount of
payments and provisions relating to the termination of the cash flow agreement,
will be described in the related
-46-
prospectus supplement. The related prospectus supplement will also identify the
obligor under any such cash flow agreement. See "Description of Credit
Support--Cash Flow Agreements" in this prospectus.
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 on
the Underlying Mortgage Loans Will Affect the Average Life of Your Certificates
and Your Yield" in this prospectus. 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 the pass-through rate for each class of offered certificates of such
series or, in the case of a class of offered certificates with a variable or
adjustable pass-through rate, the method of determining the pass-through rate;
the effect, if any, of the prepayment of any mortgage loan on the pass-through
rate of one or more classes of offered certificates; and whether the
distributions of interest on the offered certificates of any class will be
dependent, in whole or in part, on the performance of any obligor under a cash
flow agreement.
Payment Delays
With respect to any series of certificates, a period of time will elapse
between the date upon which payments on the mortgage loans in the related trust
fund are due and the Distribution Date on which such payments are passed through
to certificateholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such mortgage loans were distributed to
certificateholders on 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 on any Distribution Date will generally
correspond to interest accrued on the mortgage loans to their respective Due
Dates during the related Due Period. If a prepayment on any mortgage loan is
distributable to Certificateholders on a particular Distribution Date, but such
prepayment is not accompanied by interest to the Due Date for such mortgage loan
in the related Due Period, then the interest charged to the borrower (net of
servicing and administrative fees) may be less 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 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 the
principal payments to reduce the principal balance (or notional amount, if
-47-
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
of the mortgage loans (which, in the case of mortgage loans, may change
periodically to accommodate adjustments to the corresponding Mortgage Rates),
the dates on which any balloon payments are due, and the rate of principal
prepayments (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), no assurance can be
given as to such rate.
The extent to which the yield to maturity of a class of offered certificates
of any series may vary from the anticipated yield will depend upon the degree to
which they are purchased at a discount or premium and when, and to what degree,
payments of principal on the mortgage loans in the related trust fund are in
turn distributed on such certificates (or, in the case of a class of Stripped
Interest Certificates, result in the reduction of the notional amount of the
Stripped Interest Certificates). An investor should consider, in the case of any
offered certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the mortgage loans in the related
trust fund could result in an actual yield to such investor that is lower than
the anticipated yield and, in the case of any offered certificate purchased at a
premium, the risk that a faster than anticipated rate of principal payments on
such mortgage loans could result in an actual yield to such investor that is
lower than the anticipated yield. In addition, if an investor purchases an
offered certificate at a discount (or premium), and principal payments are made
in reduction of the principal balance or notional amount of such investor's
offered certificates at a rate slower (or faster) than the rate anticipated by
the investor during any particular period, any consequent adverse effects on
such investor's yield would not be fully offset by a subsequent increase (or
decrease) in the rate of principal payments.
In general, the notional amount of a class of Stripped Interest Certificates
will either -
o be based on the principal balances of some or all of the mortgage assets
in the related trust fund; or
o equal the Certificate Balances of one or more of the other classes of
certificates of the same series.
Accordingly, the yield on such Stripped Interest Certificates will be inversely
related to the rate at which payments and other collections of principal are
received on such mortgage assets or distributions are made in reduction of the
Certificate Balances of such classes of certificates, as the case may be.
Consistent with the foregoing, if a class of certificates of any series
consists of Stripped Interest Certificates or Stripped Principal Certificates, a
lower than anticipated rate of principal prepayments on the mortgage loans in
the related trust fund will negatively affect the yield to investors in Stripped
Principal Certificates, and a higher than anticipated rate of principal
prepayments on such mortgage loans will negatively affect the yield to investors
in Stripped Interest Certificates. If the offered certificates of a series
include any such certificates, the related prospectus supplement will include a
table showing the effect of various 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, 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; and
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
-48-
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 adjustable rate mortgage loans, as prevailing
market interest rates decline, and without regard to whether the Mortgage Rates
on such adjustable rate mortgage loans decline in a manner consistent with the
prevailing market interest rates, the related borrowers may have an increased
incentive to refinance for purposes of either (1) converting to a fixed rate
loan and thereby "locking in" such rate or (2) 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 in the mortgaged
properties, to meet cash flow needs or to make other investments. In addition,
some borrowers may be motivated by federal and state tax laws (which are subject
to change) to sell mortgaged properties prior to the exhaustion of tax
depreciation benefits. We make no representation as to the particular factors
that will affect the 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 CPR prepayment model or the SPA prepayment model.
CPR represents an assumed constant rate of prepayment each month (expressed as
an annual percentage) relative to the then outstanding principal balance of a
pool of 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
-49-
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, 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 in this prospectus and in the related prospectus supplement, may be
authorized to modify mortgage loans that are in default or as to which a payment
default is imminent. Any defaulted balloon payment or modification that extends
the maturity of a mortgage loan may delay distributions of principal on a class
of offered certificates and thereby extend the weighted average life of such
certificates and, if such certificates were purchased at a discount, reduce the
yield.
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, 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,
which deferred interest may be added to the Certificate Balance of the
certificates. In addition, an adjustable rate mortgage 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 adjustable rate mortgage
loan that--
o limits the amount by which its scheduled payment may adjust in response to
a change in its Mortgage Rate;
o provides that its scheduled payment will adjust less frequently than its
Mortgage Rate; or
o provides for constant scheduled payments notwithstanding adjustments to
its Mortgage 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 Mortgage Rate, thereby resulting in the accelerated amortization of
such mortgage loan. Any such acceleration in amortization of its principal
balance will shorten the weighted average life of such mortgage
-50-
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 (1) whether such offered certificate was
purchased at a premium or a discount and (2) the extent to which the payment
characteristics of such mortgage loans delay or accelerate the distributions of
principal on such certificate (or, in the case of a Stripped Interest
Certificate, delay or accelerate the reduction of the notional amount of a
Stripped Interest Certificate). 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 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 of such
loss or shortfall.
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 (1) a reduction in the entitlements to interest and/or the
Certificate Balances of one or more such classes of certificates and/or (2)
establishing a priority of payments among such classes of certificates.
The yield to maturity on a class of Subordinate Certificates may be extremely
sensitive to losses and shortfalls in collections on the mortgage loans in the
related trust fund.
Additional Certificate Amortization. In addition to entitling the holders to
a specified portion (which may during specified periods range from none to all)
of the principal payments received on the mortgage assets in the related trust
fund, one or more classes of certificates of any series, including one or more
classes of offered certificates of such series, may provide for distributions of
principal 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.
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. 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.
BANK OF AMERICA, NATIONAL ASSOCIATION, AS SPONSOR
Bank of America, National Association ("Bank of America") will serve as a
sponsor of each series of Certificates. One or more entities, which may or may
not be affiliated with Bank of America, may also be a sponsor (each, a
"Sponsor") for a series of Certificates. Bank of America is an indirect
wholly-owned subsidiary of Bank of
-51-
America Corporation. Bank of America is engaged in a general consumer banking,
commercial banking, and trust business, offering a wide range of commercial,
corporate, international, financial market, retail and fiduciary banking
services. Bank of America is a national banking association chartered by the
Office of the Comptroller of the Currency (the "OCC") and is subject to the
regulation, supervision and examination of the OCC.
Bank of America and its affiliates have been active in the securitization
market since inception. Bank of America has sponsored publicly offered
securitization transactions since 1977. Bank of America and its affiliates have
been involved with the origination of auto loans, student loans, home equity
loans, credit card receivables, manufactured housing contracts, residential
mortgage loans and commercial mortgage loans, as well as less traditional asset
classes. Bank of America and its affiliates have also participated in a variety
of collateralized loan obligation transactions, synthetic securitizations, and
asset-backed commercial paper programs. Bank of America and its affiliates have
served as sponsors, issuers, dealers, and servicers in a wide array of
securitization transactions.
The Depositor's securitization program principally is used to fund Bank of
America's commercial real estate business unit's self-originated portfolio of
loans secured by first liens on multifamily and commercial properties. The
Depositor's securitization program may also include mortgage loans originated
through correspondent arrangements. While Bank of America currently does not
rely on securitization as a material funding source, the Depositor's
securitization program is a material funding source for Bank of America's
portfolio of commercial real estate mortgage loans similar to the mortgage
loans.
The tables below indicate the size and growth of the sponsor's commercial
mortgage loan origination program. Loans originated by the Sponsor have
historically included primarily a mix of multifamily, office, retail, hotel and
industrial and warehouse properties, though the Sponsor has also regularly
originated loans on a variety of other commercial property types, including but
not limited to self-storage facilities, manufactured housing communities,
parking garage facilities and golf courses.
ORIGINATION VOLUME
(Dollar Amount of Closed Loans)
YEAR
Property Type 2002 2003 2004 2005
- ------------- ------------ ------------ -------------- --------------
Multifamily $872,868,916 $773,759,737 $846,810,000 $1,923,132,683
Office $989,530,644 $2,519,410,500 $4,554,682,199 $4,707,688,429
Retail $967,447,740 $1,675,580,125 $2,693,464,540 $3,934,548,928
Industrial $95,233,700 $244,734,000 $442,700,000 $383,918,812
MHP(1) $0 $604,559,638 $827,847,923 $87,612,439
SS(2) $17,500,000 $127,118,000 $411,710,000 $294,366,598
Lodging $130,000,000 $346,350,000 $2,465,433,338 $4,087,452,198
- ------------- ------------ ------------ -------------- --------------
Total $3,072,581,000 $6,291,512,000 $12,242,648,000 $15,418,720,087
- ------------- ------------ ------------ -------------- --------------
- -
(1) Manufactured housing properties
(2) Self-storage properties.
Bank of America serves as a Sponsor and, if specified in the applicable
prospectus supplement, a master, primary and/or special servicer in the
Depositor's securitization program, in addition to owning all of the Depositor's
equity. Banc of America Securities LLC, which may act as an underwriter of
Certificates, is an affiliate of Bank of America and assists Bank of America and
the Depositor in connection with the selection of mortgage loans for various
transactions. See "Method of Distribution" in the applicable prospectus
supplement.
Bank of America's headquarters and its executive offices are located at 101
South Tryon Street, Charlotte, North Carolina 28255, and the telephone number is
(704) [386-5478].
See "The Mortgage Loan Program," "Bank of America, National Association, as
Servicer" and "The Pooling and Servicing Agreements" for more information about
the Sponsor's solicitation and underwriting criteria used to originate mortgage
loans similar to the mortgage loans and its material roles and duties in each
securitization.
-52-
Other Originators
If any originator or group of affiliated originators, apart from the Sponsor
and its affiliates, originated 10% or more of the mortgage loans in a trust
fund, the applicable prospectus supplement will disclose the identity of the
originator and, if such originator or group of affiliated originators originated
20% or more of the mortgage loans, the applicable prospectus supplement will
provide information about the originator's form of organization and, to the
extent material, a description of the originator's origination program and how
long it has been engaged in originating mortgage loans of the same type. Each
mortgage loan will have been underwritten either to the standards set forth
above in this prospectus or to other underwriting standards set forth in the
applicable prospectus supplement.
THE DEPOSITOR
Banc of America Commercial Mortgage Inc., (the "Depositor") is a Delaware
corporation and was organized on December 13, 1995 for the limited purpose of
acquiring, owning and transferring mortgage assets and selling interests in the
mortgage assets or bonds secured by the mortgage assets. The Depositor was
incorporated in the State of Delaware on December 13, 1995 under the name
"NationsLink Funding Corporation" and filed a Certificate of Amendment of
Certificate of Incorporation changing its name to "Banc of America Commercial
Mortgage Inc." on August 24, 2000. The Depositor is a subsidiary of Bank of
America, National Association. The Depositor maintains its principal office at
214 North Tryon Street, Charlotte, North Carolina 28255. Our telephone number is
(704) 386-8509.
Unless otherwise noted in the related prospectus supplement, neither we nor
any of our affiliates will insure or guarantee distributions on the certificates
of any series.
The Depositor and any director, officer, employee or agent of the Depositor
shall be indemnified by the trust fund and held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling and Servicing Agreement or the Certificates, other than any loss,
liability or expense related to any specific mortgage loan or mortgage loans and
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence in the performance of its duties under the Pooling and
Servicing Agreement or by reason of reckless disregard of its obligations and
duties under the Pooling and Servicing Agreement.
THE MORTGAGE LOAN PROGRAM
Commercial Mortgage Loan Underwriting
General
The Depositor will purchase the mortgage loans from Bank of America, as the
Sponsor. The mortgage loans will have been either (i) originated by Bank of
America or (ii) purchased by Bank of America from various entities that either
originated the mortgage loans or acquired the mortgage loans pursuant to
mortgage loan purchase programs operated by those entities. The mortgage loans
will have been underwritten materially in accordance with one or more of the
following: (i) Bank of America's general underwriting standards set forth below
under "Bank of America General Underwriting Standards or (ii) the underwriting
standards set forth in the applicable prospectus supplement.
The underwriting standards used by mortgage loan originators are intended to
evaluate the value and adequacy of the mortgage property as collateral and the
mortgagor's credit standing and repayment ability. The underwriting standards
used by originators other than Bank of America, unless such other originators
use standards materially similar to Bank of America's underwriting standards,
will be described in the applicable prospectus supplement.
General Underwriting Standards
Origination Channels. Bank of America originates mortgage loans (i) directly
to mortgagor/borrowers; (ii) indirectly to mortgagor/borrowers via the use of
mortgage loan brokers; and (iii) through other loan originators.
-53-
The Application. Regardless of the channel in which the loan was originated,
a mortgage application is completed containing information that assists in
evaluating the adequacy of the mortgaged property as collateral for the loan,
including the mortgagors credit standing and capacity to repay the loan. During
the application process, the applicant is required to authorize Bank of America
to obtain a credit report that summarizes the applicant's credit history and any
record of bankruptcy or prior foreclosure. In addition, the mortgagor and any
Borrower Principal is required to complete a Certificate of Financial Condition
which certifies to certain questions regarding it's prior credit history. If the
collateral is considered a multifamily dwelling, the mortgagor is also required
to submit a Home Mortgage Disclosure Act (HMDA) Data Collection Form which
provides certain information in order to allow the federal government to monitor
Bank of America's compliance with equal credit opportunity, fair housing, and
home mortgage disclosure laws.
Further, the Application requires supporting documentation (or other
verification) for all material data provided by the mortgagor described in a
checklist, including but not limited to the following:
o Rent Roll
o Existing Mortgage Verification
o Credit References
o Certified Financial Statements for mortgagor and Borrower Principals
o Tenant/Resident Leases
o Ground Leases
o Property operating Statement s o Real Estate Tax bills
o Purchase Contract (if applicable)
o Appraisal
o Engineering Report
o Seismic Report (if applicable)
o Environmental Report
o Site Plan
o Certificate of Occupancy
o Evidence of Zoning Compliance
o Insurance policies
o Borrower structure/authority documents
Underwriting Evaluation. Each mortgage loan underwritten to Bank of America's
general underwriting standards is underwritten in accordance with guidelines
established in Bank of America's CMBS Capital Markets Commercial Conduit
Guidelines and Procedures ("Guidelines"). These underwriting standards applied
by Bank of America are intended to evaluate the adequacy of the mortgaged
property as collateral for the loan and the mortgagor's repayment ability and
credit rating. The underwriting standards as established in the Guidelines are
continually updated to reflect prevailing conditions in the CMBS market, new
mortgage products, and the investment market for commercial loans.
-54-
Bank of America's commercial real estate finance group has the authority,
with the approval from the appropriate credit committee to originate fixed-rate,
first lien mortgage loans for securitization. Bank of America's commercial real
estate operation is a vertically integrated entity, staffed by real estate
professionals. Bank of America's loan underwriting group is an integral
component of the commercial real estate finance group which also includes
distinct groups responsible for loan origination and closing mortgage loans.
Upon receipt of a loan package, Bank of America's loan underwriters commence
an extensive review of the borrower's financial condition and creditworthiness
and the real estate which will secure the loan.
Loan Analysis. Generally, Bank of America performs both a credit analysis and
collateral analysis with respect to a loan applicant and the real estate that
will secure the loan. In general, credit analysis of the borrower and the real
estate includes a review of historical financial statements, including rent
rolls (generally unaudited), third party credit reports, judgment, lien,
bankruptcy and pending litigation searches and, if applicable, the loan payment
history of the borrower. Bank of America also performs a qualitative analysis
which incorporates independent credit checks and published debt and equity
information with respect to certain principals of the borrower as well as the
borrower itself. Borrowers are generally required to be single-purpose entities
although they are generally not required to be bankruptcy-remote entities. The
collateral analysis includes an analysis of the historical property operating
statements, rent rolls and a projection of future performance and a review of
tenant leases. Bank of America requires third party appraisals, as well as
environmental and building condition reports. Each report is reviewed for
acceptability by a Bank of America staff member for compliance with program
standards and such staff member approves or rejects such report. The results of
these reviews are incorporated into the underwriting report.
Loan Approval. Prior to commitment, all mortgage loans must be approved by
Bank of America in accordance with its credit policies.
Escrow Requirements. Bank of America requires most borrowers to fund various
escrows for taxes and insurance, capital expenses and replacement reserves.
Generally, the required escrows for mortgage loans originated by Bank of America
are as follows:
o Taxes--Typically an initial deposit and monthly escrow deposits equal to
1/12th of the annual property taxes (based on the most recent property
assessment and the current millage rate) are required to provide for
sufficient funds to satisfy all taxes and assessments.
o Insurance--If the property is insured under an individual policy (i.e. the
property is not covered by a blanket policy), typically an initial deposit
and monthly escrow deposits equal to 1/12th of the annual property
insurance premium are required to provide for sufficient funds to pay all
insurance premiums.
o Replacement Reserves--Replacement reserves are calculated in accordance
with the expected useful life of the components of the property during the
term of the mortgage loan.
o Immediate Repair / Environmental Remediation--Typically, an immediate
repair or remediation reserve is required. An initial deposit, upon
funding of the applicable mortgage loan, in an amount equal to at least
125% of the estimated costs of immediate repairs to be completed within
the first year of the mortgage loan pursuant to the building condition
report is required.
Tenant Improvement/Lease Commissions--In some cases, major tenants have lease
expirations within the mortgage loan term. To mitigate this risk, special
reserves may be required to be funded either at closing of the mortgage loan and
/ or during the mortgage loan term to cover certain anticipated leasing
commissions or tenant improvement costs which might be associated with
re-leasing the space occupied by such tenants.
Zoning and Building Code Compliance--Bank of America will generally examine
whether the use and operation of the mortgaged properties are in material
compliance with zoning and land-use related ordinances, rules, regulations and
orders applicable to the use of such mortgaged properties at the time such
mortgage loans are originated. The Mortgage Asset Seller will consider, among
other things, legal opinions, certifications from government officials, zoning
consultant's reports and/or representations by the related borrower contained in
the
-55-
related mortgage Loan documents and information which is contained in
appraisals and surveys, title insurance endorsements, or property condition
assessments undertaken by independent licensed engineers.
Hazard, Liability and Other Insurance--The mortgage loans generally require
that each mortgaged property be insured by a hazard insurance policy in an
amount (subject to an approved deductible) at least equal to the lesser of the
outstanding principal balance of the related mortgage loan and 100% of the
replacement cost of the improvements located on the related mortgaged property,
and if applicable, that the related hazard insurance policy contain appropriate
endorsements to avoid the application of co-insurance and not permit reduction
in insurance proceeds for depreciation; provided that, in the case of certain of
the mortgage loans, the hazard insurance may be in such other amounts as was
required by the related originators.
In addition, if any material improvements on any portion of a mortgaged
property securing any mortgage loan was, at the time of the origination of such
mortgage loan, in an area identified in the Federal Register by the Federal
Emergency management Agency as having special flood hazards, and flood insurance
was available, a flood insurance policy meeting any requirements of the
then-current guidelines of the Federal Insurance Administration is required to
be in effect with a generally acceptable insurance carrier, in an amount
representing coverage generally not less than the least of (a) the outstanding
principal balance of the related mortgage loan, (b) the full insurable value of
the related mortgaged property, (c) the maximum amount of insurance available
under the National Flood Insurance Act of 1973, or (d) 100% of the replacement
cost of the improvements located on the related mortgaged property.
In general, the standard form of hazard insurance policy covers physical
damage to, or destruction of, the improvements on the mortgaged property by
fire, lightning, explosion, smoke, windstorm and hail, riot or strike and civil
commotion, subject to the conditions and exclusions set forth in each policy.
Each mortgage loan generally also requires the related borrower to maintain
comprehensive general liability insurance against claims for personal and bodily
injury, death or property damage occurring on, in or about the relate mortgaged
property in an amount generally equal to at least $1,000,000.
Each mortgage loan generally further requires the related borrower to
maintain business interruption insurance in an amount not less than
approximately 100% of the gross rental income from the related mortgaged
property for not less than 12 months.
Required Third Party Reports
Bank of America underwriters utilize specific information provided by
licensed third party professionals in evaluating the collateral. The following
reports are ordered by Bank of America:
Appraisal. An independent appraiser that is either a member of MAI or state
certified is required to perform an appraisal (or updated an existing appraisal)
of each of the related mortgaged properties in connection with the origination
of each mortgage loan to establish the appraised value of the related mortgaged
property or properties. Such appraisal, appraisal update or property valuation
is prepared on or about the "Appraisal Date" indicated in the prospectus
supplement, and except for certain mortgaged properties involving operating
businesses, the appraiser represented in such appraisal or in a letter or other
agreement that the appraisal conformed to the appraisal guidelines set forth in
USPAP. In general, such appraisals represent the analysis and opinions of the
respective appraisers at or before the time made, and are not guarantees of, and
may not be indicative of, present or future value. All appraisals are in
compliance with FIRREA.
Property Condition Assessments. Inspections of each of the mortgaged
properties are conducted by independent licensed engineers in connection with or
subsequent to the origination of the related mortgage loan. Such inspections are
generally commissioned to inspect the exterior walls, roofing, interior
construction, mechanical and electrical systems and general condition of the
site, buildings and other improvements located at a mortgaged property. The
resulting reports may indicate deferred maintenance items and recommended
capital improvements. The estimated cost of the necessary repairs or
replacements at a mortgaged property is included in the related property
condition assessment. In general, with limited exception, cash reserves are
established, or other security obtained, to fund or secure the payment of such
estimated deferred maintenance or replacement items. In addition, various
mortgage loans require monthly deposits into cash reserve accounts to fund
property maintenance expenses.
-56-
Environmental Site Assessment ("ESA"). ESA's are information-gathering
investigations that identify environmental conditions that may impair, restrict
the use of, and/or impose an environmental liability to the mortgaged property.
A Phase I ESA consists of inquiries, interviews, inspections, and research of
public records to identify known or potential environmental concerns. A Phase II
ESA is a site specific investigation to determine the presence or absence of
environmental concerns identified in the Phase I ESA. Bank of America requires a
Phase I ESA for all properties regardless of age or location and each such
report must be in compliance with current standards prescribed by The American
Society of Testing and Materials (ASTM).
Seismic Reports. A seismic Report is required for all properties located in
Seismic Zones 3 or 4 as determined I accordance with the Uniform Building Code.
Representations and Warranties
As and to the extent described in the related prospectus supplement, the
Sponsor will make representations and warranties regarding the mortgage loans
that it transfers to the Depositor for a particular series of certificates.
BANK OF AMERICA, NATIONAL ASSOCIATION, AS SERVICER
General
Bank of America has been servicing commercial mortgage loans in excess of 14
years. The table below sets forth information about Bank of America's portfolio
of commercial mortgage loans as of the dates indicated:
As of As of As of
December 31, 2003 December 31, 2004 November 30, 2005
----------------- ---------------- ------------------
Commercial Mortgage Loans
By Number 8,747 10,349 10,480
By Aggregate Unpaid $26,691,677,800 $54,295,716,000 $70,000,000,000
Principal Balance (in
Millions)
Within this portfolio, as of December 31, 2005, are 4,253 commercial mortgage
loans with an unpaid principal balance of approximately $47.8 billion related to
commercial mortgage-backed securities.
As required by most Pooling and Servicing Agreements, Bank of America may be
required to advance funds for delinquent payments, subject to the servicer's
determination of recoverability. A servicer will advance funds as a P&I Advance
if a borrower's payment is late in order to provide a certain amount of
liquidity to the related trust fund month over month. Servicers will make
Servicing Advances or Property Protection Advances for unpaid items on
individual loans such as property taxes, insurance payments and life/safety
repairs, all subject to the servicers determination as to whether the advance
would be ultimately recoverable. Upon a determination of non-recoverability, the
servicer's advances are repaid first from funds available in the Collection
Account.
[Information about Periodic Advances for the previous three years, to the
extent material and to the extent data is available.]
Bank of America is a rated by Fitch and Standard & Poor's as a primary
servicer, master servicer and special servicer. Bank of America's ratings by
each of these agencies is outlined below:
Fitch Poor's Standard &
-------------- -------------
Primary Servicer CPS 2 Above Average
Master Servicer CMS 2 Above Average
Special Servicer CSS 3 Average
In addition to servicing loans for securitized commercial mortgages, Bank of
America also services loans that are held in its portfolio, whole loans that are
held in the portfolio of third parties and whole loans that are originated by
Bank of America and sold to a variety of investors.
-57-
Bank of America utilizes a mortgage-servicing technology platform with
multiple capabilities and reporting functions that is widely used within the
commercial mortgage industry. This platform allows Bank of America to process
mortgage servicing activities including but not limited to: (i) performing
account maintenance; (ii) tracking borrower communications; (iii) tracking real
estate tax escrow and payments, insurance escrow and payments, tracking
replacement reserve escrows, operating statement data and rent rolls; (iv)
entering and updating transaction data; and (v) generating various reports.
Bank of America has implemented and tested a business continuity plan. In
case of a disruption, all functions of the disrupted facility would be
transferred to a business recovery facility. The business recovery facility has
access to all data and tools necessary to continue servicing all mortgage loans.
Bank of America's business continuity plan is tested and updated annually.
Bank of America's servicing policies and procedures are updated annually to
keep pace with the changes in the industry and have been generally consistent
for the last three years in all material respects. The only significant changes
in Bank of America's policies and procedures have come in response to changes in
federal or state law or investor requirements, such as updates issued by Fannie
Mae or Freddie Mac. Bank of America may perform any of its obligations under a
pooling and servicing agreement through one or more third-party vendors,
affiliates or subsidiaries. Bank of America may engage third-party vendors to
provide technology or process efficiencies. Bank of America monitors its
third-party vendors in compliance with the guidelines reviewed by the OCC. Bank
of America has entered into contracts with third-party vendors for functions
such as annual property inspections, real estate tax payment and tracking,
hazard insurance, lockbox services and document printing. Bank of America may
also retain certain firms to act as a primary servicer and to provide cashiering
or non-cashiering sub-servicing on certain loans.
Loans are serviced in accordance with the loan agreements, mortgage
documents, pooling and servicing agreements, inter-creditor agreements, if
applicable, and the applicable servicing standard.
Custody services of original documents evidencing the mortgage loans for a
particular series will typically be performed by the related trustee. On
occasion, Bank of American as servicer may have custody of certain of such
documents as necessary for enforcement actions involving particular mortgage
loans or otherwise. To the extent Bank of America performs custodial functions
as servicer, documents will be maintained in its vault. Bank of America utilizes
an electronic tracking system to identify the owner of the related Mortgage
File.
Property Damage. When an underlying property is damaged and such damage is
covered by insurance, Bank of America takes certain actions to ensure that the
property is restored to its original condition. These actions include depositing
the insurance proceeds and funding the restoration of the property as we would a
construction loan. Bank of America maintains the staff to collect and review
insurance policies and/or certificates relating to the coverages required under
the mortgage loan documents. Bank of America may, from time to time, retain a
vendor to assist in the collection and review of insurance policies and/or
certificates relating to the coverages required under the mortgage loan
documents. The vendor provides a feed the Bank of America's loan servicing
system to provide updated information.
Special Servicing
Delinquencies, Losses, Bankruptcies and Recoveries
Bank of America monitors mortgage loans for a variety of situations that
present the risk of delinquency or loss to a trust. Those situations include,
without limitation, situations where a mortgagor has sold or transferred the
related mortgaged property, where there has been damage to the related mortgaged
property, where the mortgagor is late in making payments for any number of
reasons, and where the mortgagor has declared bankruptcy. The following is a
brief description of Bank of America's policies and procedures to respond to
each of these situations.
Collections and Loss Mitigation. Account status is monitored and efforts are
made to prevent a mortgage loan on which a payment is delinquent from going to
foreclosure. Based on account payment history, prior contact with the borrower,
property status, and various other factors, an appropriate course of action is
employed to make direct mail or phone contact with the borrower(s). All of the
preceding factors are considered when determining the appropriate timing for the
contact efforts.
-58-
Initial phone contact is pursued by Bank of America's collections department,
when a loan payment is not received after the applicable grace period. Each call
made by the collection department attempts to: (i) obtain the reason for
default; (ii) obtain information related to the mortgagor's current financial
situation; (iii) verify occupancy. Loans serviced by Bank of America have grace
periods of five to fifteen days after the Due Date in which a borrower can make
a monthly payment without incurring a penalty or late charge. In addition, a
mortgage loan is not considered delinquent unless a full monthly payment has not
been received by the close of business on the last day of the month of the Due
Date. For example, a mortgage loan with a Due Date of May 1 is considered
delinquent if a full monthly payment is not received by May 31.
Late charges are generally assessed after the Due Date at the expiration of a
grace period, if applicable. There may be situations, based on the customer or
account circumstances, where a late fee could be waived, providing the late fee
is not required to pay interest on advances to a trust fund in accordance with
the related pooling and servicing agreement. Generally, the borrower is sent a
reminder notice between the expiration of the grace period and 30 days
delinquent.
The borrower is sent a notice of default when the payment has not been made
after 30 days. Notice periods are more specifically spelled out in individual
loan documents. General default communications may continue with a late fee
notice, account billing statements, breach letters, loss mitigation
solicitations, occupancy and property status inquiries If after 30 days the
payment has not been received, generally Pooling and Servicing Agreements
require the loan to be transferred to special servicing for default processing.
In recognition of the fact that mortgage loans that are delinquent are at higher
risk for abandonment by the borrower, and may also face issues related to
maintenance, Bank of America has developed guidelines for inspecting properties
for which a monthly payment is delinquent. Depending on various factors, such as
the ability to contact the customer, the delinquency status of the account, and
the property occupancy status, Bank of America will hire a vendor to inspect the
related property to determine its condition. If the inspection results indicate
a need for property safeguarding measures, such as securing or winterizing, Bank
of America will ensure the appropriate safeguards are implemented in accordance
with industry, legal and investor standards.
Delinquent mortgage loans are reviewed for loss mitigation options, which can
include a promise to pay, repayment plan, forbearance, moratorium, modification,
special forbearance, deed-in-lieu of foreclosure, assumption, sale of property,
demand arrears, or foreclosure. Bank of America will opt for any one or more of
these mitigation options depending on various factors, but will pursue more
extensive loss mitigation solutions when a suitable arrangement for repayment or
promise to pay is not feasible because of the borrowers financial situation or
unwillingness to support the property. Payment activities on delinquent mortgage
loans are monitored to ensure the appropriate application of partial payments
where specific arrangements have been agreed to allow partial payments and to
ensure an appropriate response to situations in which a customer has paid with a
check that is returned for insufficient funds. Asset plans are prepared by the
60th day after the loan has been transferred to Bank of America, as special
servicer, per Pooling and Servicing Agreement requirements. If a workout or
modification can be achieved with the borrower on the asset, the asset may be
returned to the related trust fund as a corrected mortgage loan.
Bankruptcy. When a mortgagor files for bankruptcy, Bank of America's options
for recovery are more limited. Bank of America monitors bankruptcy proceedings
and develops appropriate responses based on a variety of factors, including: (i)
the chapter of the Bankruptcy Code under which the mortgagor filed; (ii)
federal, state and local regulations; (iii) determination-of-claim requirements;
(iv) motion requirements; and (v) specific orders issued through the applicable
court. Bank of America works in conjunction with its in-house and outside legal
counsel to file all proof of claims, review plans, make objections and file
motions for relief.
Foreclosure. Bank of America, as Special Servicer works in conjunction with
its in-house and outside legal counsel to foreclose a property when (i) it is
apparent that foreclosure is the only resolution for the asset; and/or (ii) it
determines in its reasonable judgment that it is in the best interest of the
related trust fund. Once the property is foreclosed and REO; Bank of America
will work with its pre-approved vendors to either (i) sell the property or (ii)
recondition, if necessary, and lease the property in preparation for
liquidation. Losses may be experienced on a mortgage loan during the real estate
owned process if the value of the property at time of liquidation is less than
the sum of the unpaid principal balance and all outstanding advances (including,
but not limited to, the outstanding unpaid principal balance of the mortgage
loan, interest advances, escrow advances, uncollected servicing fees, property
maintenance fees, attorney fees, and other necessary fees).
-59-
Other Servicers
In the event that Bank of America or another servicer appoints a subservicer
that meets the thresholds provided in Item 1108(a)(3) of Regulation AB (17 CFR
229.1108), the applicable prospectus supplement will provide the disclosure
required by Item 1108(b) and (c) of Regulation AB (17 CFR 229.1108). In the
event that such appointment occurs after the issuance of the related series of
Certificates, the Depositor will report such appointment on Form 8-K.
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 and Servicing
Agreement. As described in the related prospectus supplement, the certificates
of each series, including the certificates of such series being offered for
sale, may consist of one or more classes of certificates that, among other
things:
o provide for the accrual of interest on the Certificate Balance or
Notional Amount at a fixed, variable or adjustable rate;
o constitute Senior Certificates or Subordinate Certificates;
o constitute Stripped Interest Certificates or Stripped Principal
Certificates;
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 based solely or primarily on specified mortgage
assets or a specified group of mortgage assets in the related trust fund;
o provide for distributions of principal to be made, subject to available
funds, based on a specified principal payment schedule or other
methodology; or
o provide for distributions based on collections on the mortgage assets in
the related trust fund attributable to Prepayment Premiums and Equity
Participations.
If so specified in the related prospectus supplement, 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. 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
Stripped Interest Certificates insofar as it may also entitle the holders of
Stripped Interest Certificates 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 Stripped Interest Certificates or REMIC Residual Certificates,
notional amounts or percentage interests, specified in the related prospectus
supplement. As provided in the related prospectus supplement, one or more
classes of offered certificates of any series may be issued in fully registered,
definitive form or may be offered in book-entry format through the facilities of
DTC. The offered certificates of each series (if issued in fully registered
definitive form) may be transferred or exchanged, subject to any restrictions on
transfer described in the related prospectus supplement, at the location
specified in the related prospectus supplement, without the payment of any
service charges, other than any tax or other governmental charge payable in
connection with that transfer or exchange. Interests in a class of certificates
offered in book-entry format 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 (in
Europe) 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. 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, the Distribution Date for a series of
certificates will be the 11th day of each month (or, if any such 11th day is not
a business day, the next succeeding business day), commencing in the month
immediately following the month in which such series of certificates is issued.
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
Record Date, and the amount of each distribution will be determined as of the
close of business on the date specified in the related prospectus supplement.
All distributions with respect to each class of certificates on each
Distribution Date will be allocated pro rata among the outstanding certificates
in such class in proportion to the respective percentage interests evidenced by
those certificates 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
certificate-holder holds certificates in the requisite amount or denomination
specified in the prospectus supplement), 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 issued in fully registered definitive form or in book-entry format)
will be made only upon presentation and surrender of such certificates at the
location specified in the notice to certificateholders of such final
distribution.
Distributions of Interest on the Certificates
Each class of certificates of each series (other than certain classes of
Stripped Principal Certificates and certain classes of REMIC 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 in respect of any class of certificates (other than
a class of Accrual Certificates, which will be entitled to distributions of
accrued interest commencing only on the Distribution Date or under the
circumstances specified in the related prospectus supplement, and other than any
class of Stripped Principal Certificates or REMIC Residual Certificates that is
not entitled to any distributions of interest) will be made on each Distribution
Date based on the Accrued Certificate Interest for such class and such
Distribution Date, subject to the sufficiency of 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 of such Accrual
Certificates on each Distribution Date or otherwise deferred as described in the
related prospectus supplement. Unless otherwise provided in the related
prospectus supplement, the Accrued Certificate Interest for each Distribution
Date on a class of Stripped Interest Certificates will be similarly calculated
except that it will accrue on a Notional Amount. Reference to a Notional Amount
with respect to a class of Stripped Interest Certificates is solely for
convenience in making certain calculations and does not represent the right to
receive any distributions of principal. If so specified in the related
prospectus supplement, the amount of Accrued Certificate Interest that is
otherwise distributable on (or, in the case of Accrual Certificates, that may
otherwise be added to the Certificate Balance of) one or more classes of the
certificates of a series 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 on the Underlying Mortgage
Loans Will Affect the Average Life of Your Certificates and Your Yield" 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
Stripped Interest Certificates and certain classes of REMIC Residual
Certificates) will have a Certificate Balance, which, at any time, will equal
the then maximum amount that the holders of certificates of such class will be
entitled to receive 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 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 are required to commence, by the amount of any Accrued
Certificate Interest in respect of such Accrual Certificate (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, 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 Controlled Amortization Classes may be made, subject
to available funds, based on a specified principal payment schedule.
Distributions of principal with respect to Companion Classes 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 Concerning Prepayment Premiums or
Concerning Equity Participations
If so provided in the related prospectus supplement, Prepayment Premiums or
payments in respect of Equity Participations received on or in connection with
the mortgage assets in any trust fund will be distributed on each Distribution
Date to the holders of the class of certificates of the related series entitled
thereto in accordance with the provisions described in such prospectus
supplement. Alternatively, we or any of our affiliates may retain such items 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 (1) a reduction in the entitlements to interest and/or the
Certificate Balances of one or more such classes of certificates and/or (2)
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 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 recoveries on the
mortgage loans or another specifically identified source. Unless otherwise
specified in the related prospectus supplement, this will be based on the
advancing party's estimation of the value of the mortgaged property in relation
to the sum of the unpaid principal balance of the related mortgage loan, accrued
interest, the amount of previously unreimbursed Advances and anticipated
disposition expenses, and the advancing party's determination that the advance
would not ultimately be recoverable under any applicable insurance policies,
from proceeds of liquidation of the mortgage loan or otherwise. If previously
made by a master servicer, special servicer or trustee, such an 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 and
Servicing Agreement and described in such prospectus supplement.
The prospectus supplement for any series of certificates evidencing an
interest in a trust fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling and Servicing Agreement
or of a party to the agreement pursuant to which the MBS was issued.
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 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: o the amount of such distribution to holders
of such class of offered certificates that was applied to reduce the Certificate
Balance of such class;
o the amount of such distribution to holders of such class of offered
certificates that was applied to pay Accrued Certificate Interest;
o 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;
o the amount, if any, by which such distribution is less than the amounts to
which holders of such class of offered certificates are entitled; o if the
related trust fund includes mortgage loans, the aggregate amount of
advances included in such distribution;
o 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;
o information regarding the aggregate principal balance of the related
mortgage assets on or about such Distribution Date;
o if the related trust fund includes mortgage loans, information regarding
the number and aggregate principal balance of such mortgage loans that are
delinquent;
o 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 specified period, generally
corresponding in length to the period between Distribution Dates, during
which prepayments and other unscheduled collections on the mortgage loans
in the related trust fund must be received in order to be distributed on a
particular Distribution Date);
o 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;
-64-
o 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;
o 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;
o if the related trust fund includes one or more instruments of credit
support, such as a letter of credit, an insurance policy and/or a surety
bond, the amount of coverage under each such instrument as of the close of
business on such Distribution Date; and
o the amount of credit support being afforded by any classes of Subordinate
Certificates.
In the case of information furnished pursuant to the first 3 bulleted items
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.
Each Distribution Date Statement will be filed with the Securities and
Exchange Commission within 15 days after each Distribution Date on Form 10-D. In
addition, within a reasonable period of time after the end of each calendar
year, the master servicer, manager 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 the first 3 bulleted items
above, aggregated for such calendar year or the applicable portion 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 Internal Revenue Code of 1986, as amended,
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, manager or trustee, as the case may be, to include
in any Distribution Date Statement information regarding the mortgage loans
underlying such MBS will depend on the reports received with respect to such
MBS. In such cases, the related prospectus supplement will describe the
loan-specific information to be included in the Distribution Date Statements
that will be forwarded to the holders of the offered certificates of that series
in connection with distributions made to them.
Voting Rights
The voting rights evidenced by each series of certificates 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 and
Servicing Agreement and as otherwise specified in the related prospectus
supplement. See "The Pooling and Servicing 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 "The Pooling and Servicing Agreements--Events of Default", "--Rights Upon
Event of Default" and "--Resignation and Removal of the Trustee".
Termination
The obligations created by the Pooling and Servicing Agreement for each
series of certificates will terminate following (1) 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 (2)
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 and
Servicing Agreement. Written notice of termination of a Pooling and Servicing
Agreement will be given to
-65-
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 in the prospectus supplement, under the circumstances and in the
manner set forth in the prospectus supplement. If so provided in the related
prospectus supplement upon the reduction of the Certificate Balance of a
specified class or classes of certificates by a specified percentage or amount
or upon a specified date, a party designated in the prospectus supplement may be
authorized or required to solicit bids for the purchase of all the mortgage
assets of the related trust fund, or of a sufficient portion of such mortgage
assets to retire such class or classes, under the circumstances and in the
manner set forth in the prospectus supplement.
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 DTC or
its nominee.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking corporation" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its participating organizations and
facilitate the clearance and settlement of securities transactions between its
participating organizations through electronic computerized book-entry changes
in their accounts, thereby eliminating the need for physical movement of
securities certificates. DTC is owned by a number of its Direct Participants and
by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. The rules applicable to DTC and
its participating organizations are on file with the Securities and Exchange
Commission.
Purchases of book-entry certificates under the DTC system must be made by or
through Direct Participants, which will receive a credit for the book-entry
certificates on DTC's records. The ownership interest of each actual purchaser
of a Book-Entry Certificate is in turn to be recorded on the Direct and Indirect
Participants' records. Certificate Owners will not receive written confirmation
from DTC of their purchases, but Certificate Owners are expected to receive
written confirmations providing details of such transactions, as well as
periodic statements of their holdings, from the Direct or Indirect Participant
through which each Certificate Owner entered into the transaction. Transfers of
ownership interests in the book-entry certificates are to be accomplished by
entries made on the books of DTC's participating organizations acting on behalf
of Certificate Owners. Certificate Owners will not receive certificates
representing their ownership interests in the book-entry certificates, except in
the event that use of the book-entry system for the book-entry certificates of
any series is discontinued as described below.
DTC has no knowledge of the actual Certificate Owners of the book-entry
certificates; DTC's records reflect only the identity of the Direct Participants
to whose accounts such certificates are credited, which may or may not be the
Certificate Owners. DTC's participating organizations will remain responsible
for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants,
by Direct Participants to Indirect Participants, and by Direct Participants and
Indirect Participants to Certificate Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Distributions on the book-entry certificates will be made to DTC. DTC's
practice is to credit Direct Participants' accounts on the related Distribution
Date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on such date.
Disbursement of such distributions by DTC's participating organizations to
Certificate Owners will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name", and will be the responsibility of
each such participating organization (and not of DTC, the depositor or any
trustee, master servicer, special servicer or Manager), subject to any statutory
or regulatory
-66-
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 of book-entry certificates will be the nominee of DTC, and the
Certificate Owners will not be recognized as certificateholders under the
Pooling and Servicing Agreement. Certificate Owners will be permitted to
exercise the rights of certificateholders under the related Pooling and
Servicing Agreement only indirectly through DTC's participating organization who
in turn will exercise their rights through DTC. We have been informed that DTC
will take action permitted to be taken by a certificateholder under a Pooling
and Servicing Agreement only at the direction of one or more Direct Participants
to whose account with DTC interests in the book-entry certificates are credited.
Because DTC can act only on behalf of Direct Participants, who in turn act on
behalf of Indirect Participants and certain Certificate Owners, the ability of a
Certificate Owner to pledge its interest in book-entry certificates to persons
or entities that do not participate in the DTC system, or otherwise take actions
in respect of its interest in book-entry certificates, may be limited due to the
lack of a physical certificate evidencing such interest.
Unless otherwise specified in the related prospectus supplement, certificates
initially issued in book-entry form will be issued in fully registered
definitive form to Certificate Owners or their nominees, rather than to DTC or
its nominee, only if (1) 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 (2) the depositor notifies DTC of its intent to
terminate the book-entry system through DTC and, upon receipt of notice of such
intent from DTC, the Participants holding beneficial interests in the
Certificates agree to initiate such termination. Upon the occurrence of either
of the events described in the preceding sentence, DTC will be required to
notify all Direct Participants of the availability through DTC of Certificates
in fully registered form. 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 Certificates in fully registered definitive form 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 and Servicing Agreement.
THE POOLING AND SERVICING AGREEMENTS
General
The certificates of each series will be issued pursuant to a Pooling and
Servicing Agreement. In general, the parties to a Pooling and Servicing
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, the REMIC administrator. However, a Pooling and Servicing
Agreement that relates to a trust fund that includes MBS may include a manager
as a party, but may not include a master servicer, special servicer or other
servicer as a party. All parties to each Pooling and Servicing Agreement under
which certificates of a series are issued will be identified in the related
prospectus supplement. If so specified in the related prospectus supplement, an
affiliate of the depositor, or the mortgage asset seller may perform the
functions of master servicer, special servicer, manager 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 and Servicing Agreement or any affiliate
of any party may own certificates issued under the Pooling and Servicing
Agreement; however, unless other specified in the related prospectus supplement,
except with respect to required consents to certain amendments to a Pooling and
Servicing Agreement, certificates issued under the Pooling and Servicing
Agreement 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 and Servicing Agreement will vary depending upon the
nature of the certificates to be issued under the Pooling and Servicing
Agreement and the nature of the related trust fund. The following summaries
describe certain provisions that may appear in a Pooling and Servicing 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 and Servicing
-67-
Agreement that materially differs from the description of the Pooling and
Servicing Agreement contained in this prospectus and, if the related trust fund
includes MBS, will summarize all of the material provisions of the related
agreement that provided for the issuance of the MBS. The summaries in this
prospectus do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Pooling and
Servicing Agreement for each series of certificates and the description of such
provisions in the related prospectus supplement. We will provide a copy of the
Pooling and Servicing 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 in this
prospectus under "The Depositor".
Assignment of Mortgage Loans; Repurchases
At the time of issuance of any series of certificates, we will assign (or
cause to be assigned) to the designated trustee the mortgage loans to be
included in the related trust fund, 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 our
direction 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 and Servicing Agreement.
Such schedule generally will include detailed information that pertains to each
mortgage loan included in the related trust fund, which information will
typically include the address of the related mortgaged property and type of such
property; the Mortgage Rate and, if applicable, the applicable index, gross
margin, adjustment date and any rate cap information; the original and remaining
term to maturity; the amortization term; and the original and outstanding
principal balance.
In addition, unless otherwise specified in the related prospectus supplement,
we 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) the mortgage note endorsed, without recourse,
either in blank or to the order of such trustee (or its nominee), the mortgage
with evidence of recording indicated (except for any mortgage not returned from
the public recording office), 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 (except for any such
assignment not returned from the public recording office), and, 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 and
Servicing 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 we deliver
or cause 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 mortgage note has been lost or destroyed. In addition, if we
cannot deliver, with respect to any mortgage loan, the mortgage or any
intervening assignment with evidence of recording concurrently with the
execution and delivery of the related Pooling and Servicing Agreement because of
a delay caused by the public recording office, we 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. We will
deliver, or cause to be delivered, to the related trustee (or such custodian)
such mortgage or assignment with evidence of recording indicated after receipt
of such mortgage from the public recording office. If we cannot deliver, with
respect to any mortgage loan, the mortgage or any intervening assignment with
evidence of recording concurrently with the execution and delivery of the
related Pooling and Servicing Agreement because such mortgage or assignment has
been lost, we 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. 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 us or the originator of
such mortgage loan. Notwithstanding the foregoing, with respect to any mortgage
for which the related assignment of mortgage, assignment of assignment of
leases, security agreements and/or UCC financing statements has been recorded in
the name of Mortgage Electronic Registration Systems, Inc. ("MERS") or its
designee, no assignment of mortgage, assignment of assignment of leases,
security agreements and/or UCC financing statements in favor of the trustee will
be required to be prepared or delivered and instead, the mortgage loan seller
shall take all actions as are necessary to cause the trust to be shown as, and
the trustee shall take all actions necessary to confirm that it is shown as, the
owner of the related
-68-
mortgage loan on the records of MERS for purposes of the system or recording
transfers of beneficial ownership of mortgages maintained by MERS.
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 of the mortgage loan
documents, 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 Purchase Price, or at such other price
as will be specified in the related prospectus supplement. If so provided in the
prospectus supplement for a series of certificates, a mortgage asset seller, in
lieu of repurchasing a mortgage loan as to which there is missing or defective
loan documentation, will have the option, exercisable upon 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 we 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. Any such custodian may be one of our affiliates.
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 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
and Servicing Agreement;
o the enforceability of the related mortgage note and mortgage and the
existence of title insurance insuring the lien priority of the related
mortgage;
o the Warranting Party's title to the mortgage loan and the authority of the
Warranting Party to sell the mortgage loan; and o the payment status of
the mortgage loan.
It is expected that in most cases the Warranting Party will be the mortgage
asset seller; however, the Warranting Party may also be an affiliate of the
mortgage asset seller, the 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
and Servicing 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
-69-
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 and Servicing
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 and Servicing
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 (1) such procedures are consistent with the
terms of the related Pooling and Servicing Agreement and (2) 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 and Servicing 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; and
maintaining servicing records relating to 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
-70-
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 and Servicing
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 of
the mortgage loan, 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 and Servicing
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 monitor any mortgage loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related mortgaged property, initiate
corrective action in cooperation with the Mortgagor if cure is likely, inspect
the related mortgaged property and 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 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 collectibility 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.
In the case of mortgage loans secured by junior liens on the related
mortgaged properties, unless otherwise provided in the related prospectus
supplement, the master servicer will be required to file (or cause to be filed)
of record a request for notice of any action by a superior lienholder under a
senior lien for the protection of the related trustee's interest, where
permitted by local law and whenever applicable state law does not require that a
junior lienholder be named as a party defendant in foreclosure proceedings in
order to foreclose such junior lienholder's equity of redemption. Unless
otherwise specified in the related prospectus supplement, the master servicer
also will be required to notify any superior lienholder in writing of the
existence of the mortgage loan and request notification of any action (as
described below) to be taken against the mortgagor or the mortgaged property by
the superior
-71-
lienholder. If the master servicer is notified that any superior lienholder has
accelerated or intends to accelerate the obligations secured by the related
senior lien, or has declared or intends to declare a default under the mortgage
or the promissory note secured by that senior lien, or has filed or intends to
file an election to have the related mortgaged property sold or foreclosed,
then, unless otherwise specified in the related prospectus supplement, the
master servicer and the special servicer will each be required to take, on
behalf of the related trust fund, whatever actions are necessary to protect the
interests of the related certificateholders and/or to preserve the security of
the related mortgage loan, subject to the application of the REMIC Provisions.
Unless otherwise specified in the related prospectus supplement, the master
servicer or special servicer, as applicable, will be required to advance the
necessary funds to cure the default or reinstate the senior lien, if such
advance is in the best interests of the related certificateholders and the
master servicer or special servicer, as applicable, determines such advances are
recoverable out of payments on or proceeds of the related mortgage loan.
Sub-Servicers
A master servicer or special servicer may delegate its servicing obligations
in respect of the mortgage loans to one or more third-party sub-servicers;
provided that, unless otherwise specified in the related prospectus supplement,
such master servicer or special servicer will remain obligated under the related
Pooling and Servicing Agreement. A sub-servicer for any series of certificates
may be an affiliate of the depositor. Unless otherwise provided in the related
prospectus supplement, each subservicing agreement between a master servicer and
a sub-servicer must provide for servicing of the applicable mortgage loans
consistent with the related Pooling and Servicing Agreement. Unless otherwise
provided in the related prospectus supplement, 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 and Servicing 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 and Servicing
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
noninterest-bearing account and the funds held in the Certificate Account may be
invested pending each succeeding Distribution Date in United States government
securities and other obligations that are acceptable to each rating agency that
has rated any one or more classes of certificates of the related series. Unless
otherwise provided in the related prospectus supplement, any interest or other
income earned on funds in a Certificate Account will be paid to the related
master servicer, trustee or special servicer 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, a Certificate Account may contain funds relating to more than one
series of mortgage pass-through certificates and may contain other funds
representing payments on mortgage loans owned by the related master servicer or
special servicer or serviced by either on behalf of others.
Deposits. Unless otherwise provided in the related Pooling and Servicing
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
-72-
period following receipt (in the case of collections on or in respect of the
mortgage loans) or otherwise as provided in the related Pooling and Servicing
Agreement--
o all payments on account of principal, including principal prepayments, on
the mortgage loans;
o all payments on account of interest on the mortgage loans, including any
default interest collected, in each case net of any portion of such
default interest retained by the master servicer or the special servicer
as its servicing compensation or as compensation to the trustee;
o 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) and all other amounts
received and retained in connection with the liquidation of defaulted
mortgage loans or property acquired in respect of such defaulted mortgage
loans, by foreclosure or otherwise, together with the net operating income
(less reasonable reserves for future expenses) derived from the operation
of any mortgaged properties acquired by the trust fund through foreclosure
or otherwise;
o any amounts paid under any instrument or drawn from any fund that
constitutes credit support for the related series of certificates;
o any advances made with respect to delinquent scheduled payments of
principal and interest on the mortgage loans;
o any amounts paid under any cash flow agreement;
o all proceeds of the purchase of any mortgage loan, or property acquired in
respect of a mortgage loan, 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";
o 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;
o 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";
o 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
o any other amounts required to be deposited in the Certificate Account as
provided in the related Pooling and Servicing Agreement and described in
the related prospectus supplement.
Withdrawals. Unless otherwise provided in the related Pooling and Servicing
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--
o to make distributions to the certificateholders on each Distribution Date;
-73-
o to pay the master servicer or the special servicer any servicing fees not
previously retained by the master servicer or the special servicer, 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;
o 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 particular mortgage
loans in the trust fund and particular properties acquired in respect of
the trust fund. Reimbursement for advances made or expenses incurred that
are related to particular mortgage loans or properties will normally only
be made out of amounts that represent late payments collected on those
mortgage loans, Liquidation Proceeds, Insurance and Condemnation Proceeds
collected on those mortgage loans and properties, any form of credit
support related to those mortgage loans and net income collected on those
properties. However, if in the judgment of the master servicer, the
special servicer or such other person, as applicable, the advances and/or
expenses will not be recoverable from the above amounts, the reimbursement
will 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 and
Servicing 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;
o 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 the bulleted clause immediately listed above incurred by it while such
remain outstanding and unreimbursed;
o 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";
o 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";
o 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;
o if and to the extent described in the related prospectus supplement, to
reimburse prior draws on any form of credit support;
o 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;
o to pay any servicing expenses not otherwise required to be advanced by the
master servicer, the special servicer or any other specified person;
o if one or more elections have been made to treat the trust fund or
designated portions of the trust fund 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";
o to pay for the cost of various opinions of counsel obtained pursuant to
the related Pooling and Servicing Agreement for the benefit of
certificateholders;
-74-
o to make any other withdrawals permitted by the related Pooling and
Servicing Agreement and described in the related prospectus supplement;
and
o 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" as defined in the related prospectus
supplement; provided that, unless otherwise set forth in the related prospectus
supplement, the modification, waiver or amendment will--
o 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; 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 reasonably foreseeable or 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 unless inconsistent with the applicable "servicing standard", such
modification, waiver or amendment will not materially 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, 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 comparably convert ownership of, or acquire title to
the related mortgaged property, by operation of law or otherwise. In connection
with such foreclosure or other conversion of ownership, the special servicer
shall follow the servicing standard. A Pooling and Servicing Agreement may grant
the special servicer the right to direct the master servicer to advance costs
and expenses to be incurred in any such proceedings, and such advances may be
subject to reimbursement requirements. A Pooling and Servicing Agreement may
require the special servicer to consult with independent counsel regarding the
order and manner should foreclose upon or comparably proceed against such
properties if a mortgage loan or group of cross-collateralized mortgage loans
are secured by real properties in multiple states including certain states with
a statute, rule or regulation comparable to California's "one action" rule.
Unless otherwise provided in the related prospectus supplement, when applicable
state law permits the special servicer to select between judicial and
non-judicial foreclosure in respect of any mortgaged property, a special
servicer may make such selection so long as the selection is made in a manner
consistent with the servicing standard. 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:
(1) 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
-75-
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
(2) 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 (1)(b) above, is reasonably likely to
produce a greater recovery, taking into account the time value of money, than
not taking such actions. See "Certain Legal Aspects of Mortgage
Loans--Environmental Considerations".
A Pooling and Servicing 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 a right of first refusal
to purchase from the trust fund, at a predetermined price (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. In addition, unless otherwise specified in the related prospectus
supplement, the special servicer may offer to sell any defaulted mortgage loan
if and when the special servicer determines, consistent with its normal
servicing procedures, that such a sale would produce a greater recovery, taking
into account the time value of money, than would liquidation of the related
mortgaged property. In the absence of any such sale, the special servicer will
generally be required to proceed against the related mortgaged property, subject
to the discussion above.
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 before the close of the third calendar
year following the year of acquisition, unless (1) the IRS grants an extension
of time to sell such property or (2) the trustee receives an opinion of
independent counsel to the effect that the holding of the property by the trust
fund for longer than such period will not result in the imposition of a tax on
the trust fund or cause the trust fund (or any designated portion of the trust
fund) to fail to qualify as a REMIC under the Code at any time that any
certificate is outstanding. Subject to the foregoing 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 unless the method of operation that produces such
income would produce a greater after-tax return than a different method of
operation of such property. If the trust fund acquires title to any mortgaged
property, the special servicer, on behalf of the trust fund, may be required to
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 and Servicing 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 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.
Except as otherwise provided in the prospectus supplement, 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,
-76-
neither the special servicer nor the master servicer will be required to expend
its own funds to effect such restoration.
Hazard Insurance Policies
Unless otherwise specified in the related prospectus supplement, each Pooling
and Servicing Agreement will require the master servicer (or the special
servicer with respect to mortgage loans serviced by the special servicer) to use
reasonable efforts to cause each mortgage loan borrower to maintain a hazard
insurance policy that provides for such coverage as is required under the
related mortgage or, if the mortgage permits the holder 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
and Servicing 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, which may contain a deductible
clause (not in excess of a customary amount). 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
in the Certificate Account 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 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 (1) the
replacement cost of the improvements less physical depreciation and (2) 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
-77-
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 Provisions".
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 by the trustee 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 in the
prospectus supplement, may be required to be borne by the trust fund.
Evidence as to Compliance
The master servicer and each other servicer will deliver annually to the
trustee or master servicer, as applicable, on or before the date specified in
the applicable Pooling and Servicing Agreement or in the applicable other
servicing agreement (each such other servicing agreement, an "Underlying
Servicing Agreement"), an officer's certificate stating that (i) a review of the
servicer's or master servicer's activities during the preceding calendar year
and of performance under the applicable Pooling and Servicing Agreement or
Underlying Servicing Agreement has been made under the supervision of the
officer, and (ii) to the best of the officer's knowledge, based on the review,
the servicer or master servicer has fulfilled all its obligations under the
applicable Pooling and Servicing Agreement or Underlying Servicing Agreement
throughout the year, or, if there has been a default in the fulfillment of any
obligation, specifying the default known to the officer and the nature and
status of the default.
In addition, each party that participates in the servicing and administration
of more than 5% of the mortgage loans and other assets comprising a trust will
deliver annually to the Depositor and the trustee, a report (an "Assessment of
Compliance") that assesses compliance by that party with the servicing criteria
set forth in Item 1122(d) of Regulation AB (17 CFR 229.1122) and that contains
the following:
-78-
o a statement of the party's responsibility for assessing compliance with
the servicing criteria applicable to it;
o a statement that the party used the criteria in Item 1122(d) of Regulation
AB to assess compliance with the applicable servicing criteria;
o the party's assessment of compliance with the applicable servicing
criteria during and as of the end of the prior calendar year, setting
forth any material instance of noncompliance identified by the party; and
o a statement that a registered public accounting firm has issued an
attestation report on the party's assessment of compliance with the
applicable servicing criteria during and as of the end of the prior
calendar year.
Each party which is required to deliver an Assessment of Compliance will also
be required to simultaneously deliver a report (an "Attestation Report") of a
registered public accounting firm, prepared in accordance with the standards for
attestation engagements issued or adopted by the Public Company Accounting
Oversight Board, that expresses an opinion, or states that an opinion cannot be
expressed, concerning the party's assessment of compliance with the applicable
servicing criteria.
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor
Any entity serving as master servicer, special servicer or REMIC
administrator under a Pooling and Servicing Agreement may be an affiliate of the
depositor and may have other normal business relationships with the depositor or
the depositor's affiliates. Unless otherwise specified in the prospectus
supplement for a series of certificates, the related Pooling and Servicing
Agreement will permit the master servicer, the special servicer and any REMIC
administrator to resign from its obligations under the Pooling and Servicing
Agreement only upon a determination that such obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities carried on by it. 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 and Servicing
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
and Servicing Agreement.
Unless otherwise specified in the related prospectus supplement, each Pooling
and Servicing Agreement will further provide that none of the master servicer,
the special servicer, the REMIC administrator, the depositor, any extension
adviser 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 and Servicing
Agreement or for errors in judgment; provided, however, that none of the master
servicer, the special servicer, the REMIC administrator, the depositor, any
extension adviser 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 under the Pooling
and Servicing Agreement or by reason of reckless disregard of such obligations
and duties. Unless otherwise specified in the related prospectus supplement,
each Pooling and Servicing Agreement will further provide that the master
servicer, the special servicer, the REMIC administrator, the depositor, any
extension adviser 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 and Servicing Agreement or the related series of certificates;
provided, however, that such indemnification will not extend to any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of obligations or duties under such Pooling and
Servicing Agreement, or by reason of reckless disregard of such obligations or
duties. In addition, each Pooling and Servicing Agreement will provide that none
of the master servicer, the special servicer, the REMIC administrator, any
extension adviser
-79-
or the depositor will be under any obligation to appear in, prosecute or defend
any legal action that is not incidental to its respective responsibilities under
the Pooling and Servicing 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, any extension adviser 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 and Servicing
Agreement and the interests of the related series of certificateholders under
the Pooling and Servicing Agreement. In such event, the legal expenses and costs
of such action, and any liability resulting from such action, will be expenses,
costs and liabilities of the related series of certificateholders, and the
master servicer, the special servicer, the REMIC administrator, any extension
adviser or the depositor, as the case may be, will be entitled to charge the
related Certificate Account for this expense.
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 and Servicing 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 and Servicing 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 and Servicing
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, pursuant to, and at the time specified
by, the terms of the Pooling and Servicing Agreement;
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, pursuant
to, and at the time specified by, the terms of the Pooling and Servicing
Agreement;
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 and Servicing Agreement, which
failure continues unremedied for thirty days after written notice of such
failure has been given to the master servicer or the special servicer, as
the case may be, by any other party to the related Pooling and Servicing
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 and
Servicing 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 and Servicing Agreement, which
failure continues unremedied for thirty days after written notice of such
notice has been given to the REMIC administrator by any other party to the
related Pooling and Servicing Agreement, or to the REMIC administrator,
with a copy to each other party to the related Pooling and Servicing
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 certain events involving a determination by a rating agency that the
master servicer or the special servicer is no longer approved by such
rating agency to serve in such capacity; and
-80-
o certain events of insolvency, readjustment of debt, marshaling 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 (except
where related only to a Rating Agency's evaluation of the acceptability of such
entity to act in a particular capacity) 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 and Servicing
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 and
Servicing 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 and Servicing Agreement (except that if the defaulting party is required
to make advances under the Pooling and Servicing Agreement 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 and Servicing Agreement.
Pending such appointment, the trustee will be obligated to act in such capacity.
The trustee or a successor master servicer is entitled to be reimbursed for its
costs in effecting a servicing transfer from the predecessor master servicer. In
the event that the predecessor master servicer fails to reimburse the trustee or
successor servicer, the trustee or successor servicer will be entitled to
reimbursement from the assets of the related trust.
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 and Servicing
Agreement to institute any proceeding with respect to such Pooling and Servicing
Agreement unless such holder previously has given to the trustee written notice
of default and the continuance of such default 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 under the
Pooling and Servicing Agreement 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 and Servicing Agreement or to institute, conduct or
defend any litigation under the Pooling and Servicing Agreement or in relation
thereto at the request, order or direction of any of the holders of certificates
covered by such Pooling and Servicing Agreement, unless such certificateholders
have offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred in connection with such
litigation.
-81-
Amendment
Except as otherwise specified in the related prospectus supplement, each
Pooling and Servicing Agreement may be amended by the parties thereto, without
the consent of any of the holders of certificates covered by such Pooling and
Servicing Agreement, (1) to cure any ambiguity, (2) to correct or supplement any
provision in the Pooling and Servicing Agreement which may be inconsistent with
any other provision in the Pooling and Servicing Agreement or to correct any
error, (3) 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 result in the withdrawal,
downgrade or qualification of any of the then-current ratings on the
certificates, as evidenced by a letter from each applicable rating agency, (4)
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 of the trust fund) 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 and Servicing
Agreement, or (B) to restrict the transfer of the REMIC 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 withdrawn,
downgraded or qualified, 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 REMIC Residual Certificates to a non-permitted transferee
(See "Certain Federal Income Tax Consequences--REMICs--Tax and Restrictions on
Transfers of REMIC Residual Certificates to Certain Organizations" in the
accompanying prospectus supplement), (5) to make any other provisions with
respect to matters or questions arising under such Pooling and Servicing
Agreement or any other change; provided that such action will not adversely
affect in any material respect the interests of any certificateholder, or (6) to
amend specified provisions that are not material to holders of any class of
certificates offered by this prospectus.
The Pooling and Servicing Agreement may also be amended by the parties
thereto with the consent of the holders of certificates of each class affected
by an amendment 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 and Servicing Agreement or of modifying in any manner the rights of
the holders of certificates covered by such Pooling and Servicing Agreement,
except that no such amendment may (1) 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 (2) 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 and Servicing Agreement then outstanding.
Notwithstanding the foregoing, if one or more REMIC elections have been made
with respect to the related trust fund, the trustee will not be required to
consent to any amendment to a Pooling and Servicing 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 of the trust fund) 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 and Servicing 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.
-82-
The Trustee
The trustee under each Pooling and Servicing 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 generally will be responsible under each Pooling and Servicing
Agreement for providing general administrative services for the trust fund for
any series, including, among other things, (i) establishing and maintaining the
Certificate Account; (ii) calculation of the amounts payable to
Certificateholders on each Distribution Date; (iii) making distributions to
Certificateholders; (iv) preparation, for execution by the Depositor or the
related master servicer, of reports, including reports on Form 10-D and Form
10-K as may be required under the Securities Exchange Act of 1934, as amended;
(v) maintaining any mortgage pool insurance policy, mortgagor bankruptcy bond,
special hazard insurance policy or other form of credit enhancement that may be
required with respect to any series; and (vi) making Periodic Advances on the
mortgage loans to the limited extent described under "Description of the
Certificates--Advances in Respect of Delinquencies", if those amounts are not
advanced by the master servicer or another servicer.
The trustee for each series of certificates will make no representation as to
the validity or sufficiency of the related Pooling and Servicing 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 and Servicing 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 and Servicing 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. The trustee generally shall not be entitled to payment or
reimbursement for any routine ongoing expenses incurred by it in the ordinary
course of its duties as trustee under the Pooling and Servicing Agreement or for
any other expenses. If, however, one or more REMIC elections has been made, the
expense is unanticipated and did not arise from the trustee's gross negligence,
bad faith or willful misconduct, the trustee shall be entitled to reimbursement
from the trust fund for all reasonable expenses, disbursements and advances
incurred or made it in accordance with any of the provisions of the Pooling and
Servicing Agreement to the extent permitted by Treasury Regulations Section
1.860G-1(b)(3)(ii), which allows reimbursement for "unanticipated expenses."
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 and Servicing
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 under the Pooling and Servicing Agreement, 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 and Servicing Agreement or perform any of its
duties under the Pooling and Servicing Agreement either directly or by or
through agents or attorneys, and the trustee will not be responsible for any
willful misconduct or negligence on the part of any such agent or attorney
appointed by it with due care.
-83-
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 and Servicing 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 33 1/3% (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. Any costs associated with the
appointment of a successor trustee are required to be paid by the predecessor
trustee and, if not paid, will be reimbursed to the person incurring such costs
from the assets of the related trust. Notwithstanding the foregoing, if the
predecessor trustee has been removed by a vote of the holders of the
Certificates as provided in the paragraph above, any costs associated with the
appointment of a successor trustee will be reimbursed to the party incurring
such costs from the assets of the related trust. Notwithstanding anything in
this prospectus 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.
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 limited guarantees, financial guaranty
insurance policies, surety bonds, letters of credit, mortgage pool insurance
policies, reserve funds, cross collateralization, overcollateralization and
excess interest or 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 applicable prospectus supplement will describe the material
terms of such credit enhancement, including any limits on the timing or amount
of such credit enhancement or any conditions that must be met before such credit
enhancement may be accessed. If the provider of the credit enhancement is liable
or contingently liable to provide payments representing 10% or more of the cash
flow supporting any offered Class of Certificates, the applicable prospectus
supplement will disclose the name of the provider, the organizational form of
the provider, the general character of the business of the provider and the
financial information required by Item 1114(b)(2) of Regulation AB (17 CFR
229.1114). Copies of the limited guarantee, financial guaranty insurance policy,
surety bond, letter of credit, pool insurance policy, mortgagor bankruptcy bond,
special hazard insurance policy or Cash Flow Agreement, if any, relating to a
series of Certificates will be filed with the SEC as an exhibit to a Current
Report on Form 8-K.
Unless otherwise provided in the related prospectus supplement for a series
of certificates, the credit support will not provide protection against all
risks of loss and will not guarantee payment to certificateholders of all
amounts to which they are entitled under the related Pooling and Servicing
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 under the credit support not otherwise described in
this prospectus;
-84-
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.
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 Concerning 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 limited guarantee may
cover deficiencies in amounts otherwise payable on some or all of the
Certificates of a series. The limited guarantee may cover timely distributions
of interest or full distributions of principal or both on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. The limited guarantee may
provide additional protection against losses on the mortgage loans included in a
trust fund, provide payment of administrative expenses, or establish a minimum
reinvestment rate on the payments made on the mortgage loans or principal
payment rate on the mortgage loans. A limited guarantee will be limited in
amount to the dollar amount or percentage of the principal balance of the
mortgage loans or Certificates specified in the applicable prospectus
supplement. 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 of certificates will be covered by one or more letters of credit, issued
by a bank or other financial institution (which may be an affiliate of the
depositor) specified in such prospectus supplement. Under a letter of credit,
the providing institution will be obligated to honor draws in an aggregate fixed
dollar amount, net of unreimbursed payments under the letter of credit,
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 under
the letter of credit and may otherwise be reduced as described in the related
prospectus supplement. The obligations of the providing institution 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.
-85-
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 of certificates will be covered by financial guaranty 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. If
specified in the prospectus supplement, the financial guaranty insurance policy
will also guarantee against any payment made to a Certificateholder that is
subsequently recovered as a preferential transfer under the Bankruptcy Code. 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 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 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. Additional information concerning any reserve fund will be set
forth in the prospectus supplement, including the initial balance of the reserve
fund, the required reserve fund balance to be maintained, the purposes for which
funds in the reserve fund may be applied to make distributions to
Certificateholders and use of investment earnings from the reserve fund, if any.
Following each Distribution Date, amounts in a reserve fund in excess of any
amount required to be maintained in such reserve funds may be released from the
reserve fund under the conditions and to the extent specified in the related
prospectus supplement.
If so specified in the related prospectus supplement, amounts deposited in
any reserve fund will be invested in Permitted Investments. Unless otherwise
specified in the related prospectus supplement, any reinvestment income or other
gain from such investments will be credited to the related reserve fund for such
series, and any loss resulting from such investments will be charged to such
reserve fund. However, such income may be payable to any related master servicer
or another service provider as additional compensation for its services. The
reserve fund, if any, for a series will not be a part of the trust fund unless
otherwise specified in the related prospectus supplement.
Cash Collateral Account
If so specified in the related prospectus supplement, all or any portion of
credit enhancement for a series of certificates may be provided by the
establishment of a cash collateral account. A cash collateral account will be
similar to a reserve fund except that generally a cash collateral account is
funded initially by a loan from a cash collateral lender, the proceeds of which
are invested with the cash collateral lender or other eligible institution. The
loan from the cash collateral lender will be repaid from such amounts as are
specified in the related prospectus supplement. Amounts on deposit in the cash
collateral account will be available in generally the same manner described
above with respect to a reserve fund. As specified in the related prospectus
supplement, a cash collateral account may be deemed to be part of the assets of
the related trust, may be deemed to be part of the assets of a separate cash
collateral trust or may be deemed to be property of the party specified in the
related prospectus supplement and pledged for the benefit of the holders of one
or more classes of certificates of a series.
Pool Insurance Policy
If specified in the prospectus supplement relating to a series of
Certificates, credit enhancement may be provided by a mortgage pool insurance
policy for the mortgage loans in the related trust fund. Each mortgage pool
insurance policy, in accordance with the limitations described in this
prospectus and in the prospectus supplement, if any, will cover any loss by
reason of default on a mortgage loan in an amount equal to a percentage
specified in the
-86-
applicable prospectus supplement of the unpaid principal balance of the mortgage
loans. The master servicer generally will be required to use its best efforts to
maintain the mortgage pool insurance policy and to present claims to the pool
insurer. The mortgage pool insurance policies, however, are not blanket policies
against loss, since claims may only be made respecting particular defaulted
mortgage loans and only upon satisfaction of specified conditions precedent
described below. The mortgage pool insurance policies will generally not cover
losses due to a failure to pay or denial of a claim under a primary mortgage
insurance policy, regardless of the reason for nonpayment.
As more specifically provided in the related prospectus supplement, each
mortgage pool insurance policy will provide for conditions under which claims
may be presented and covered under the policy. Upon satisfaction of these
conditions, the pool insurer will have the option either (a) to purchase the
property securing the defaulted mortgage loan at a price equal to its unpaid
principal balance plus accrued and unpaid interest at the applicable Mortgage
Rate to the date of purchase plus certain Advances, or (b) to pay the amount by
which the sum of the unpaid principal balance of the defaulted mortgage loan
plus accrued and unpaid interest at the Mortgage Rate to the date of payment of
the claim plus certain Advances exceeds the proceeds received from an approved
sale of the mortgaged property, in either case net of certain amounts paid or
assumed to have been paid under any related primary mortgage insurance policy.
Certificateholders may experience a shortfall in the amount of interest
payable on the related Certificates in connection with the payment of claims
under a mortgage pool insurance policy because the pool insurer is only required
to remit unpaid interest through the date a claim is paid rather than through
the end of the month in which the claim is paid. In addition, Certificateholders
may also experience losses with respect to the related Certificates in
connection with payments made under a mortgage pool insurance policy to the
extent that the related master servicer or special servicer expends funds to
cover unpaid real estate taxes or to repair the related mortgaged property in
order to make a claim under a mortgage pool insurance policy, as those amounts
will not be covered by payments under the policy and will be reimbursable to the
related servicer from funds otherwise payable to the Certificateholders. If any
mortgaged property securing a defaulted mortgage loan is damaged and proceeds,
if any from the related hazard insurance policy or applicable special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the mortgage pool insurance policy, a
servicer will generally not be required to expend its own funds to restore the
damaged property unless it determines that (a) restoration will increase the
proceeds to one or more Classes of Certificates on liquidation of the mortgage
loan after reimbursement of the related servicer for its expenses and (b) the
expenses will be recoverable by it through Liquidation Proceeds or insurance
proceeds.
A mortgage pool insurance policy and some primary mortgage insurance policies
will generally not insure against loss sustained by reason of a default arising
from, among other things, fraud or negligence in the origination or servicing of
a mortgage loan, including misrepresentation by the mortgagor, the seller or
other persons involved in the origination of the mortgage loan, failure to
construct a mortgaged property in accordance with plans and specifications or
bankruptcy, unless as specified in the related prospectus supplement, an
endorsement to the mortgage pool insurance policy provides for insurance against
that type of loss.
The original amount of coverage under each mortgage pool insurance policy
will be reduced over the life of the related series of Certificates by the
aggregate amount of claims paid less the aggregate of the net amounts realized
by the pool insurer upon disposition of all foreclosed properties. The amount of
claims paid includes some expenses incurred by the related servicer as well as
accrued interest on delinquent mortgage loans to the date of payment of the
claim. Accordingly, if aggregate net claims paid under any mortgage pool
insurance policy reach the original policy limit, coverage under that mortgage
pool insurance policy will be exhausted and any further losses will be borne by
the related Certificates, to the extent not covered by other credit
enhancements.
Special Hazard Insurance Policy
Any insurance policy covering special hazard losses obtained for a trust will
be issued by the insurer named in the related prospectus supplement. Each
special hazard insurance policy will be subject to limitations described in this
paragraph and in the related prospectus supplement, if any, and will protect the
related Certificateholders from special hazard losses. Aggregate claims under a
special hazard insurance policy will be limited to the amount set forth in the
related Pooling and Servicing Agreement and will be subject to reduction as
described in the related
-87-
Pooling and Servicing Agreement. A special hazard insurance policy will provide
that no claim may be paid unless hazard and, if applicable, flood insurance on
the mortgaged property securing the mortgage loan has been kept in force and
other protection and preservation expenses have been paid by the related master
servicer or special servicer, as the case may be.
In accordance with the foregoing limitations, a special hazard insurance
policy will provide that, where there has been damage to the mortgaged property
securing a foreclosed mortgage loan, title to which has been acquired by the
insured, and to the extent the damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained by the mortgagor or the
related master servicer or special servicer, as the case may be, the insurer
will pay the lesser of (i) the cost of repair or replacement of the related
mortgaged property or (ii) upon transfer of the property to the insurer, the
unpaid principal balance of the mortgage loan at the time of acquisition of the
related property by foreclosure or deed in lieu of foreclosure, plus accrued
interest at the Mortgage Rate to the date of claim settlement and certain
expenses incurred by the related master servicer or special servicer, as the
case may be, with respect to the related mortgaged property.
If the mortgaged property is transferred to a third party in a sale approved
by the special hazard insurer, the amount that the special hazard insurer will
pay will be the amount under (ii) above reduced by the net proceeds of the sale
of the mortgaged property. If the unpaid principal balance plus accrued interest
and certain Advances is paid by the special hazard insurer, the amount of
further coverage under the related special hazard insurance policy will be
reduced by that amount less any net proceeds from the sale of the mortgaged
property. Any amount paid as the cost of repair of the property will further
reduce coverage by that amount. Restoration of the property with the proceeds
described under (i) above will satisfy the condition under any mortgage pool
insurance policy that the property be restored before a claim under the policy
may be validly presented with respect to the defaulted mortgage loan secured by
the related mortgaged property. The payment described under (ii) above will
render presentation of a claim relating to a mortgage loan under the related
mortgage pool insurance policy unnecessary. Therefore, so long as a mortgage
pool insurance policy remains in effect, the payment by the insurer under a
special hazard insurance policy of the cost of repair or of the unpaid principal
balance of the related mortgage loan plus accrued interest and certain Advances
will not affect the total insurance proceeds paid to Certificateholders, but
will affect the relative amounts of coverage remaining under the related special
hazard insurance policy and mortgage pool insurance policy.
Mortgagor Bankruptcy Bond
If specified in the related prospectus supplement, a bankruptcy bond to cover
losses resulting from proceedings under the federal Bankruptcy Code with respect
to a mortgage loan will be issued by an insurer named in the prospectus
supplement. Each bankruptcy bond will cover, to the extent specified in the
related prospectus supplement, certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a mortgage
loan or a reduction by the court of the unpaid principal balance of a mortgage
loan and will cover certain unpaid interest on the amount of a principal
reduction from the date of the filing of a bankruptcy petition. The required
amount of coverage under each bankruptcy bond will be set forth in the related
prospectus supplement.
Cross Collateralization
If specified in the applicable prospectus supplement, the beneficial
ownership of separate groups of mortgage loans included in a trust fund may be
evidenced by separate Classes of Certificates. In this case, credit support may
be provided by a cross collateralization feature which requires that
distributions be made to certain Classes from mortgage loan payments that would
otherwise be distributed to Subordinate Certificates evidencing a beneficial
ownership interest in other loan groups within the same trust fund. As a result,
the amount of credit enhancement available to a Class of Certificates against
future losses on the mortgage loans in which that Class represents an interest
may be reduced as the result of losses on a group of mortgage loans in which
that Class has no interest. The applicable prospectus supplement for a series
that includes a cross collateralization feature will describe its specific
operation.
-88-
Overcollateralization
If specified in the related prospectus supplement, subordination provisions
of a series may be used to accelerate to a limited extent the amortization of
one or more Classes of Certificates relative to the amortization of the related
mortgage loans. The accelerated amortization is achieved by the application of
certain excess interest to the payment of principal of one or more Classes of
Certificates. This acceleration feature creates, with respect to the mortgage
loans or a group of mortgage loans, overcollateralization which results from the
excess of the aggregate principal balance of the related mortgage loans, or
group of mortgage loans, over the Class Balance of the related Class or Classes
of Certificates. This acceleration may continue for the life of the related
Certificates, or may have a shorter duration. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related prospectus supplement,
this limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Excess Interest
If specified in the related prospectus supplement, the mortgage loans in a
trust may generate more interest than is necessary to pay the interest earned on
the Classes of Certificates each month. The excess interest may be used to
maintain overcollateralization, to pay interest that was previously earned but
not paid to certain Classes of Certificates and to reimburse certain Classes of
Certificates for losses and certain shortfalls that they experienced previously.
Cash Flow Agreements
If specified in the applicable prospectus supplement, amounts received by the
trustee under any Cash Flow Agreement described below under "Cash Flow
Agreements" may also be used to provide credit enhancement for one or more
Classes of Certificates.
Credit Support with respect to MBS
If so provided in the prospectus supplement for a series of certificates, any
MBS included in the related trust fund and/or the related underlying mortgage
loans may be covered by one or more of the types of credit support described in
this prospectus. The related prospectus supplement will specify, as to each such
form of credit support, the information indicated above with respect thereto, to
the extent such information is material and available.
CASH FLOW AGREEMENTS
If specified in the prospectus supplement, the trust fund may include cash
flow agreements consisting of one or more guaranteed investment contracts, swap
agreements or interest rate cap or floor agreements (also called yield
maintenance agreements), each of which agreements is intended to reduce the
effects of interest rate fluctuations on the assets or on one or more Classes of
Certificates (each, a "Cash Flow Agreement"). The applicable prospectus
supplement will describe the name, organizational form and general character of
the business of the counterparty under any Cash Flow Agreement. In addition, the
prospectus supplement for the related series of Certificates will disclose the
significance percentage, calculated in accordance with Item 1115 of Regulation
AB (17 CFR 229.1115). To the extent this percentage is (a) 10% or more but less
than 20%, the related prospectus supplement will provide financial data required
by Item 301 of Regulation S-K (17 CFR 229.301) or (b) greater than 20%, the
related prospectus supplement will provide financial statements required by Item
1115(b)(2) of Regulation AB (17 CFR 229.1115) and, in either case, the related
prospectus supplement will contain a description of the operation and material
terms of the Cash Flow Agreement, including, without limitation, conditions to
payment or limits on the timing or amount of payments and material provisions
relating to the termination or substitution of the Cash Flow Agreement. Copies
of the Cash Flow Agreement, if any, relating to a series of Certificates will be
filed with the SEC as an exhibit to a Current Report on Form 8-K.
Guaranteed Investment Contracts
If specified in the related prospectus supplement, the trustee on behalf of
the trust may enter into one or more guaranteed investment contracts. Guaranteed
investment contracts are generally used to maximize the investment
-89-
income on funds held between Distribution Dates pending distribution to
Certificateholders. Under a guaranteed investment contract, the issuer of the
contract, which is typically a highly rated financial institution, guarantees a
fixed or floating rate of interest over the life of the contract, as well as the
ultimate return of the principal. Any payments received from the issuer of the
contract by the trust will be distributed to the related Class or Classes of
Certificates as specified in the applicable prospectus supplement.
Yield Maintenance Agreements
If specified in the related prospectus supplement, the trustee on behalf of
the trust will enter into one or more yield maintenance agreements in order to
support the yield of one or more Classes of Certificates. The counterparty to a
yield maintenance agreement will receive an upfront payment and the trust will
have no ongoing payment obligations. Generally, if the index specified in the
applicable prospectus supplement, which index will be one-month, three-month,
six-month or one-year LIBOR, CMT, COFI, MTA or the Prime Rate, exceeds a
percentage for a particular date specified in the applicable prospectus
supplement, the counterparty to the yield maintenance agreement will be required
to pay to the trustee an amount equal to that excess multiplied by a notional
amount or the Class Balance or Balances of one or more Classes of Certificates
multiplied by one-twelfth. This amount may be adjusted to reflect the actual
number of days in the interest accrual period for the related Class or Classes
of Certificates and will be paid to the Class or Classes of Certificates as
specified in the related prospectus supplement.
Swap Agreements
If specified in the related prospectus supplement, the trustee on behalf of
the trust will enter into a swap agreement to support the yield on one or more
Classes of Certificates. Under the swap agreement, the trust will be obligated
to pay an amount equal to a certain percentage of a notional amount set forth in
the related prospectus supplement to the counterparty and the trust will be
entitled to receive an amount equal to one-month, three-month, six-month or
one-year LIBOR, CMT, COFI, MTA or the Prime Rate on the notional amount from the
counterparty, until the swap agreement is terminated. Only the net amount of the
two obligations will be paid by the appropriate party. In the event that the
trust is required to make a payment to the counterparty, that payment will be
paid on the related Distribution Date prior to distributions to
Certificateholders. Generally, any payments received from the counterparty by
the trust will be distributed to cover certain shortfalls as set forth in the
applicable 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 state law (which laws may
differ substantially), the summaries do not purport to be complete, to reflect
the laws of any particular state, or to encompass the laws of all states in
which the security for the mortgage loans (or mortgage loans underlying any MBS)
is situated. Accordingly, the summaries are qualified in their entirety by
reference to the applicable laws of those states. See "Description of the Trust
Funds--Mortgage Loans". For purposes of the following discussion, "mortgage
loan" includes a mortgage loan underlying an MBS.
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 in this
prospectus collectively referred to as "mortgages". A mortgage creates a lien
upon, or grants a title interest in, the real property covered by that mortgage,
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.
-90-
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
from such leases and rents, 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; 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 (in light of certain revisions to the Bankruptcy
Code which are effective for all bankruptcy cases commenced on or after October
22, 1994) constitute "cash collateral" and therefore cannot be used by the
bankruptcy debtor without lender's consent or a hearing at which the lender's
interest in the room rates is given adequate protection (e.g., the lender
receives cash payments from otherwise unencumbered 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".
In the case of office and retail properties, the bankruptcy or insolvency of
a major tenant or a number of smaller tenants may have an adverse impact on the
mortgaged properties affected and the income produced by such mortgaged
properties. Under bankruptcy law, a tenant has the option of assuming
(continuing), or rejecting (terminating) or, subject to certain conditions,
assigning to a third party any unexpired lease. If the tenant assumes its lease,
the tenant must cure all defaults under the lease and provide the landlord with
adequate assurance of its future performance under the lease. If the tenant
rejects the lease, the landlord's claim for breach of the lease would (absent
collateral securing the claim) be treated as a general unsecured claim. The
amount of the claim would be limited to the amount owed for unpaid pre-petition
lease payments unrelated to the rejection, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but not
to exceed three years' lease payments). If the tenant assigns its lease, the
tenant must cure all defaults under the lease and the proposed assignee must
demonstrate adequate assurance of future performance under the lease.
-91-
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 in the mortgage loan, 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.
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
-92-
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 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--Certain Factors Affecting Delinquency, Foreclosure and Loss of the
Mortgage Loans--Limited Recourse Nature of the Mortgage Loans".) 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
-93-
permitted if the former borrower pays only a portion of the sums due. The effect
of a statutory right of redemption is to diminish the ability of the lender to
sell the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
Anti-Deficiency Legislation. Some or all of the mortgage loans may be
nonrecourse loans, as to which recourse in the case of default will be limited
to the mortgaged property and such other assets, if any, that were pledged to
secure the mortgage loan. However, even if a mortgage loan by its terms provides
for recourse to the borrower's other assets, a lender's ability to realize upon
those assets may be limited by state law. For example, in some states a lender
cannot obtain a deficiency judgment against the borrower following foreclosure
or sale under a deed of trust. A deficiency judgment is a personal judgment
against the former borrower equal to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes may require the lender to exhaust the security afforded
under a mortgage before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of those states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the security. Consequently, lenders in those
states where such an election of remedy provision exists will usually proceed
first against the security. Finally, other statutory provisions, designed to
protect borrowers from exposure to large deficiency judgments that might result
from bidding at below-market values at the foreclosure sale, limit any
deficiency judgment to the excess of the outstanding debt over the fair market
value of the property at the time of the sale.
Leasehold Considerations. Mortgage loans may be secured by a mortgage on a
ground lease. Leasehold mortgages are subject to certain considerations not
associated with mortgage loans secured by the fee estate of the mortgagor. The
most significant of these consideration is that the ground lease creating the
leasehold estate could terminate, leaving the leasehold mortgagee without its
security. The ground lease may terminate, if among other reasons, the ground
lessee breaches or defaults in its obligations under the ground lease or there
is a bankruptcy of the ground lessee or the ground lessor. This possibility may
be minimized if the ground lease contains certain provisions protective of the
mortgagee, but the ground leases that secure mortgage loans may not contain all
of these protective provisions, and mortgages may not contain the other
protection discussed in the next paragraph. Protective ground lease provisions
include the right of the leasehold mortgagee to receive notices from the ground
lessor of any defaults by the mortgagor; the right to cure those defaults, with
adequate cure periods; if a default is not susceptible of cure by the leasehold
mortgagee, the right to acquire the leasehold estate through foreclosure or
otherwise; the ability of the ground lease to be assigned to and by the
leasehold mortgagee or purchaser at a foreclosure sale and for the simultaneous
release of the ground lessee's liabilities under the new lease; and the right of
the leasehold mortgagee to enter into a new ground lease with the ground lessor
on the same terms and conditions as the old ground lease upon a termination.
In addition to the preceding protections, a leasehold mortgagee may require
that the ground lease or leasehold mortgage prohibit the ground lessee from
treating the ground lease as terminated in the event of the ground lessor's
bankruptcy and rejection of the ground lease by the trustee for the
debtor-ground lessor. As further protection, a leasehold mortgage may provide
for the assignment of the debtor-ground lessee's right to reject a lease
pursuant to Section 365 of the Bankruptcy Code, although the enforceability of
that clause has not been established. Without the protections described in the
preceding paragraph, a leasehold mortgagee may lose the collateral securing its
leasehold mortgage. In addition, terms and conditions of a leasehold mortgage
are subject to the terms and conditions of the ground lease. Although certain
rights given to a ground lessee can be limited by the terms of a leasehold
mortgage, the rights of a ground lessee or a leasehold mortgagee with respect
to, among other things, insurance, casualty and condemnation will be governed by
the provisions of the ground lease.
Cooperative Shares. The cooperative shares owned by the tenant stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's certificate of incorporation and by
laws, as well as in the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant stockholder to pay rent or
other obligations or charges owed by the tenant stockholder, including
mechanics' liens against the cooperative apartment building incurred by the
tenant stockholder. The proprietary
-94-
lease or occupancy agreement generally permits the cooperative to terminate the
lease or agreement in the event an obligor fails to make payments or defaults in
the performance of covenants required thereunder. Typically, the lender and the
cooperative enter into a recognition agreement which establishes the rights and
obligations of both parties in the event of a default by the tenant stockholder
on its obligations under the proprietary lease or occupancy agreement. A default
by the tenant stockholder under the proprietary lease or occupancy agreement
will usually constitute a default under the security agreement between the
lender and the tenant stockholder.
The recognition agreement generally provides that, in the event that the
tenant stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided an opportunity to cure the default.
The recognition agreement typically provides that if the proprietary lease or
occupancy agreement is terminated, the cooperative will recognize the lender's
lien against proceeds from a sale of the cooperative apartment, subject,
however, to the cooperative's right to sums due under the proprietary lease or
occupancy agreement. The total amount owed to the cooperative by the tenant
stockholder, which the lender generally cannot restrict and does not monitor,
could reduce the value of the collateral below the outstanding principal balance
of the cooperative loan and accrued and unpaid interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited by the agreement in any rights it may have to dispossess the tenant
stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in accordance
with the provisions of Article 9 of the Uniform Commercial Code (the "UCC") and
the security agreement relating to those shares. Article 9 of the UCC requires
that a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the 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. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant stockholder is
generally responsible for the deficiency.
See "Risk Factors--Collateral Securing Cooperative Loans May Diminish in
Value" in this prospectus.
Bankruptcy Laws
Operation of the Bankruptcy Code and related state laws may interfere with or
affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences 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. For example, 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 bankruptcy courts have approved plans, based on the particular facts of
-95-
the reorganization case, that effected the cure of a mortgage loan default by
paying arrearages over a number of years. Also, a bankruptcy court may permit a
debtor, through its rehabilitative plan, to reinstate a loan mortgage payment
schedule even if the lender has obtained a final judgment of foreclosure prior
to the filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of a secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under the Bankruptcy
Code, a lender may be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents. Recent amendments to the
Bankruptcy Code, however, may minimize the impairment of the lender's ability to
enforce the borrower's assignment of rents and leases. In addition to the
inclusion of hotel revenues within the definition of "cash collateral" as noted
previously in the Section entitled "--Leases and Rents", the amendments provide
that a pre-petition security interest in rents or hotel revenues extends (unless
the bankruptcy court orders otherwise based on the equities of the case) to such
post-petition rents or revenues and is intended to overrule those cases that
held that a security interest in rents is unperfected under the laws of certain
states until the lender has taken some further action, such as commencing
foreclosure or obtaining a receiver prior to activation of the assignment of
rents.
If a borrower's ability to make payment on a mortgage loan is dependent on
its receipt of rent payments under a lease of the related property, that ability
may be impaired by the commencement of a bankruptcy case relating to a lessee
under such lease. Under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition. In addition, the Bankruptcy Code generally provides that a
trustee or debtor-in-possession may, subject to approval of the court, (1)
assume the lease and retain it or assign it to a third party or (2) reject the
lease. If the lease is assumed, the trustee or debtor-in-possession (or
assignee, if applicable) must cure any defaults under the lease, compensate the
lessor for its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, the lessor
will be treated as an unsecured creditor with respect to its claim for damages
for termination of the lease. The Bankruptcy Code also limits a lessor's damages
for lease rejection to the rent reserved by the lease (without regard to
acceleration) for the greater of one year, or 15%, not to exceed three years, of
the remaining term of the lease.
Pursuant to the federal doctrine of "substantive consolidation" or to the
(predominantly state law) doctrine of "piercing the corporate veil", a
bankruptcy court, in the exercise of its equitable powers, also has the
authority to order that the assets and liabilities of a related entity be
consolidated with those of an entity before it. Thus, property ostensibly the
property of one entity may be determined to be the property of a different
entity in bankruptcy, the automatic stay applicable to the second entity
extended to the first and the rights of creditors of the first entity impaired
in the fashion set forth above in the discussion of ordinary bankruptcy
principles. Depending on facts and circumstances not wholly in existence at the
time a loan is originated or transferred to the trust fund, the application of
any of these doctrines to one or more of the mortgagors in the context of the
bankruptcy of one or more of their affiliates could result in material
impairment of the rights of the Certificateholders.
For each mortgagor that is described as a "special purpose entity", "single
purpose entity" or "bankruptcy remote entity" in the related prospectus
supplement, the activities that may be conducted by such mortgagor and its
ability to incur debt are restricted by the applicable mortgage or the
organizational documents of such mortgagor in such manner as is intended to make
the likelihood of a bankruptcy proceeding being commenced by or against such
mortgagor remote, and such mortgagor has been organized and is designed to
operate in a manner such that its separate existence should be respected
notwithstanding a bankruptcy proceeding in respect of one or more affiliated
entities of such mortgagor. However, the depositor makes no representation as to
the likelihood of the institution of a bankruptcy proceeding by or in respect of
any mortgagor or the likelihood that the separate existence of any mortgagor
would be respected if there were to be a bankruptcy proceeding in respect of any
affiliated entity of a mortgagor.
-96-
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. 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 become sufficiently involved
in the management of such mortgaged property or the operations of the borrower.
Such liability may exist even if the lender did not cause or contribute to the
contamination and regardless of whether or not 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 Act of 1996,
amended, among other things, the provisions of CERCLA with respect to lender
liability and the secured creditor exemption. The Act offers substantial
protection of 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 Asset Conservation, Lender Liability and Deposit
Insurance Act of 1996 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
only if it exercises decision making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of operational functions of the mortgaged property. The
Asset Conservation, Lender Liability and Deposit Insurance Act of 1996 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.
In addition, the definition of "hazardous substances" under CERCLA
specifically excludes petroleum products. Subtitle I of the Resource
Conservation and Recovery Act governs underground petroleum storage tanks. Under
the Asset Conservation, Lender Liability and Deposit Insurance Act of 1996, the
protections accorded to lenders under CERCLA are also accorded to the holders of
security interests in underground storage tanks. It should be noted, however,
that liability for cleanup of petroleum contamination may be governed by state
law, which may not provide for any specific protection of secured creditors.
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
-97-
environmental conditions on a property. While it may be more difficult to hold a
lender liable in such cases, unanticipated or uninsured liabilities of the
borrower may jeopardize the borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against 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 of the
related series.
To reduce the likelihood of such a loss, unless otherwise specified in the
related prospectus supplement, the Pooling and Servicing 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 "The Pooling and Servicing 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
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 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 under the Garn Act.
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. In addition to the risks faced by the holder of a first lien,
holders of mortgage loans secured by junior liens also face the risk that
adequate funds will not be received in connection with a foreclosure on the
related mortgaged property 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
-98-
liquidation of the related mortgaged 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. 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 (1) the risk of delay in
distributions while a deficiency judgment against the borrower is obtained and
(2) the risk of loss if the deficiency judgment is not realized upon. Moreover,
deficiency judgments may not be available in certain jurisdictions or the
mortgage loan may be nonrecourse.
The rights of the trust fund (and therefore the certificateholders), as
beneficiary under a junior deed of trust or as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee or beneficiary under the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive rents, hazard insurance and condemnation
proceeds and to cause the property securing the mortgage loan to be sold upon
default of the mortgagor or trustor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the master servicer asserts its
subordinate interest in a property in foreclosure litigation or satisfies the
defaulted senior loan. As discussed more fully below, in many states a junior
mortgagee or beneficiary may satisfy a defaulted senior loan in full, adding the
amounts expended to the balance due on the junior loan. Absent a provision in
the senior mortgage, no notice of default is required to be given to the junior
mortgagee.
The form of the mortgage or deed of trust used by many institutional lenders
confers on the mortgagee or beneficiary the right both to receive all proceeds
collected under any hazard insurance policy and all awards made in connection
with any condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust, in such order as the
mortgage or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under the senior
mortgage or deed of trust will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgage or deed of trust. Proceeds in excess of the
amount of senior mortgage indebtedness will, in most cases, be applied to the
indebtedness of a junior mortgage or trust deed to the extent the junior
mortgage or deed of trust so provides. The laws of certain states may limit the
ability of mortgagees or beneficiaries to apply the proceeds of hazard insurance
and partial condemnation awards to the secured indebtedness. In such states, the
mortgagor or trustor must be allowed to use the proceeds of hazard insurance to
repair the damage unless the security of the mortgagee or beneficiary has been
impaired. Similarly, in certain states, the mortgagee or beneficiary is entitled
to the award for a partial condemnation of the real property security only to
the extent that its security is impaired.
The form of mortgage or deed of trust used by many institutional lenders
typically contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While such a clause is valid under the laws of most states, the priority of any
advance made under the clause depends, in some states, on whether the advance
was an "obligatory" or "optional" advance. If the mortgagee or beneficiary is
obligated to advance the additional amounts, the advance may be entitled to
receive the same priority as amounts initially made under the mortgage or deed
of trust, notwithstanding that there may be intervening junior mortgages or
deeds of trust and other liens between the date of recording of the mortgage or
deed of trust and the date of the future advance, and notwithstanding that the
mortgagee or beneficiary had actual knowledge of such intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance the additional amounts
and has actual knowledge of the intervening junior mortgages or deeds of trust
and other liens, the advance may be subordinate to such intervening junior
mortgages or deeds of trust and other liens. Priority of advances under a
"future advance" clause rests, in many other states, on state law giving
priority to all advances made under the loan agreement up to a "credit limit"
amount stated in the recorded mortgage.
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
-99-
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
Forms of notes and mortgages used by lenders may contain provisions
obligating the mortgagor to pay a late charge or additional interest if payments
are not timely made, and in some circumstances may provide for prepayment fees
or yield maintenance penalties if the obligation is paid prior to maturity or
prohibit such prepayment for a specified period. In certain states, there are or
may be specific limitations upon the late charges which a lender may collect
from a mortgagor for delinquent payments. Certain states also limit the amounts
that a lender may collect from a mortgagor as an additional charge if the loan
is prepaid. The enforceability under the laws of a number of states and the
Bankruptcy Code of provisions providing for prepayment fees of penalties upon,
or prohibition of, an involuntary prepayment is unclear, and no assurance can be
given that, at the time a prepayment premium is required to be made on a
mortgage loan in connection with an involuntary prepayment, the obligation to
make such payment, or the provisions of any such prohibition, will be
enforceable under applicable state law. The absence of a restraint on
prepayment, particularly with respect to mortgage loans having higher Mortgage
Rates, may increase the likelihood of refinancing or other early retirements of
the mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 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 of the Depository Institutions
Deregulation and Monetary Control Act of 1980 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 of the Depository Institutions Deregulation and Monetary
Control Act of 1980 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 of the Depository Institutions Deregulation and Monetary
Control Act of 1980. 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 of
the Depository Institutions Deregulation and Monetary Control Act of 1980 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 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.
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.
-100-
Americans with Disabilities Act
Under 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 (the "Relief Act"), a
borrower who enters military service after the origination of such borrower's
mortgage loan (including a borrower who was in reserve status and is called to
active duty after origination of the mortgage loan), upon notification by such
borrower, shall not be charged interest, including fees and charges, in excess
of 6% per annum during the period of such borrower's active duty status, 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. The California Military and
Veterans Code provides protection equivalent to that provided by the Relief Act
to California national guard members called up to active service by the Governor
of California, California national guard members called up to active service by
the President and reservists called to active duty. Because the Relief Act and
the California Military Code apply to borrowers who enter military service, no
information can be provided as to the number of mortgage loans that may be
affected by the Relief Act or the California Military and Veterans Code.
Application of the Relief Act or the California Military and Veterans Code 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 or the California Military and Veterans Code 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, application
of the Relief Act or the California Military and Veterans Code 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.
Forfeiture for Drug and Money Laundering Violations
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.
-101-
Federal Deposit Insurance Act; Commercial Mortgage Loan Servicing
Under the Federal Deposit Insurance Act, federal bank regulatory authorities,
including the Office of the Comptroller of the Currency (OCC), have the power to
determine if any activity or contractual obligation of a bank constitutes an
unsafe or unsound practice or violates a law, rule or regulation applicable to
such bank. If Bank of America, National Association or another bank is a
servicer and/or a mortgage loan seller for a series and the OCC, which has
primary regulatory authority over Bank of America, National Association and
other banks, were to find that any obligation of Bank of America, National
Association or such other bank under the related Pooling and Servicing Agreement
or other agreement or any activity of Bank of America, National Association or
such other bank constituted an unsafe or unsound practice or violated any law,
rule or regulation applicable to it, the OCC could order Bank of America,
National Association or such other bank among other things to rescind such
contractual obligation or terminate such activity.
In March 2003, the OCC issued a temporary cease and desist order against a
national bank (as to which no conservator or receiver had been appointed)
asserting that, contrary to safe and sound banking practices, the bank was
receiving inadequate servicing compensation in connection with several credit
card securitizations sponsored by its affiliates because of the size and
subordination of the contractual servicing fee, and ordered the bank, among
other things, to immediately resign as servicer, to cease all servicing activity
within 120 days and to immediately withhold funds from collections in an amount
sufficient to compensate if for its actual costs and expenses of servicing
(notwithstanding the priority of payments in the related securitization
agreements).
While the depositor does not believe that the OCC would consider, with
respect to any series, (i) provisions relating to Bank of America, National
Association or another bank acting as a servicer under the related Pooling and
Servicing Agreement, (ii) the payment or amount of the servicing compensation
payable to Bank of America, National Association or another bank or (iii) any
other obligation of Bank of America, National Association or another bank under
the related Pooling and Servicing Agreement or other contractual agreement under
which the depositor may purchase mortgage loans from Bank of America, National
Association or another bank, to be unsafe or unsound or violative of any law,
rule or regulation applicable to it, there can be no assurance that the OCC in
the future would not conclude otherwise. If the OCC did reach such a conclusion,
and ordered Bank of America, National Association or another bank to rescind or
amend any such agreement, payments on certificates could be delayed or reduced.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following general discussion of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of offered
certificates of any series thereof, to the extent it relates to matters of law
or legal conclusions with respect thereto, represents the opinion of counsel to
the depositor with respect to that series on the material matters associated
with such consequences, subject to any qualifications set forth in this
prospectus. Counsel to the depositor for each series will be Cadwalader,
Wickersham & Taft LLP, and a copy of the legal opinion of such counsel rendered
in connection with any series of certificates will be filed by the depositor
with the Securities and Exchange Commission on a Current Report on Form 8-K
within 15 days after the Closing Date for such series of certificates. This
discussion is directed primarily to certificateholders that hold the
certificates as "capital assets" within the meaning of Section 1221 of the Code
(although portions thereof may also apply to certificateholders who do not hold
certificates as capital assets) and it does not purport to discuss all federal
income tax consequences that may be applicable to the individual circumstances
of particular investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special treatment under the Code. Further,
the authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. Prospective investors should note that no rulings have been or
will be sought from the IRS with respect to any of the federal income tax
consequences discussed below, and no assurance can be given the IRS will not
take contrary positions. In addition to the federal income tax consequences
described in this prospectus, potential investors are advised to consider the
state and local tax consequences, if any, of the purchase, ownership and
disposition of offered certificates. See "State and Other Tax Consequences".
Prospective investors are encouraged to consult their tax advisors concerning
the federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of offered certificates.
-102-
The following discussion addresses securities of two general types: (1) REMIC
Certificates representing interests in a trust fund, or a portion thereof, that
the REMIC administrator will elect to have treated as a REMIC under the REMIC
Provisions of the Code, and (2) Grantor Trust Certificates representing
interests in a Grantor Trust Fund as to which no such election will be made. The
prospectus supplement for each series of certificates will indicate whether a
REMIC election (or elections) will be made for the related trust fund and, if
such an election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC. For purposes of this tax discussion,
references to a "Certificateholder" or a "holder" are to the beneficial owner of
a certificate.
The following discussion is limited in applicability to offered certificates.
Moreover, this discussion applies only to the extent that mortgage assets held
by a trust fund consist solely of mortgage loans. To the extent that other
mortgage assets, including REMIC certificates and mortgage pass-through
certificates, are to be held by a trust fund, the tax consequences associated
with the inclusion of such assets will be disclosed in the related prospectus
supplement. In addition, if cash flow agreements other than guaranteed
investment contracts are included in a trust fund, the anticipated material tax
consequences associated with such cash flow agreements also will be discussed in
the related prospectus supplement. See "Description of the Trust Funds--Cash
Flow Agreements".
Furthermore, the following discussion is based in part upon the rules
governing original issue discount that are set forth in Sections 1271-1273 and
1275 of the Code and in the OID Regulations, and in part upon the REMIC
Provisions and the REMIC Regulations. The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the certificates.
REMICs
Classification of REMICs. Upon the issuance of each series of REMIC
Certificates, counsel to the depositor will give its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement and any other governing documents, the related trust fund
(or each applicable portion thereof) will qualify as one or more REMICs and the
REMIC Certificates offered with respect thereto will be considered to evidence
ownership of REMIC Regular Certificates or REMIC Residual Certificates in a
REMIC within the meaning of the REMIC Provisions. The following general
discussion of the anticipated federal income tax consequences of the purchase,
ownership and disposition of REMIC Certificates, to the extent it relates to
matters of law or legal conclusions with respect thereto, represents the opinion
of counsel to the depositor for the applicable series as specified in the
related prospectus supplement, subject to any qualifications set forth in this
prospectus. In addition, counsel to the depositor have prepared or reviewed the
statements in this prospectus under the heading "Certain Federal Income Tax
Consequences--REMICs," and are of the opinion that such statements are correct
in all material respects. Such statements are intended as an explanatory
discussion of the possible effects of the classification of any trust fund (or
applicable portion thereof) as one or more REMICs for federal income tax
purposes on investors generally and of related tax matters affecting investors
generally, but do not purport to furnish information in the level of detail or
with the attention to an investor's specific tax circumstances that would be
provided by an investor's own tax advisor. Accordingly, each investor is
encouraged to consult its own tax advisors with regard to the tax consequences
to it of investing in REMIC Certificates.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the trust
fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the trust fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any trust fund as
a REMIC will be inadvertently terminated.
Characterization of Investments in REMIC Certificates. In general, unless
otherwise provided in the related prospectus supplement, the REMIC Certificates
will be "real estate assets" within the meaning of Section 856(c)(5)(B) of the
Code and assets described in Section 7701(a)(19)(C) of the Code in the same
proportion
-103-
that the assets of the REMIC underlying such certificates would be so treated.
However, to the extent that the REMIC assets constitute mortgages on property
not used for residential or certain other prescribed purposes, the REMIC
Certificates will not be treated as assets qualifying under Section
7701(a)(19)(C). Moreover, if 95% or more of the assets of the REMIC qualify for
any of the foregoing characterizations at all times during a calendar year, the
REMIC Certificates will qualify for the corresponding status in their entirety
for that calendar year. Interest (including original issue discount) on the
REMIC Regular Certificates and income allocated to the REMIC Residual
Certificates will be interest described in Section 856(c)(3)(B) of the Code to
the extent that such certificates are treated as "real estate assets" within the
meaning of Section 856(c)(5)(B) of the Code. In addition, except as otherwise
provided in the applicable prospectus supplement, the REMIC Regular Certificates
will be "qualified mortgages" for a REMIC within the meaning of Section
860G(a)(3) of the Code. The determination as to the percentage of the REMIC's
assets that constitute assets described in the foregoing sections of the Code
will be made with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC during such calendar
quarter. The REMIC Administrator will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
Tiered REMIC Structures. For certain series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
trust fund as REMICs for federal income tax purposes. As to each such series of
REMIC Certificates, in the opinion of counsel to the depositor, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the Tiered REMICs will each qualify as a REMIC and the REMIC Certificates issued
by the Tiered REMICs, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(B) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates.
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the "constant yield" method described below,
in advance of the receipt of the cash attributable to such income. In addition,
Section 1272(a)(6) of the Code provides special rules applicable to REMIC
Regular Certificates and certain other debt instruments issued with original
issue discount. Final regulations have not been issued under that section.
The Code requires that a reasonable prepayment assumption be used with
respect to mortgage loans held by a REMIC in computing the accrual of original
issue discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Committee Report indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The Prepayment Assumption used in reporting original issue discount
for each series of REMIC Regular Certificates will be consistent with this
standard and will be disclosed in the related prospectus supplement. However,
neither the depositor nor any other person will make any representation that the
mortgage loans will in fact prepay at a rate conforming to the Prepayment
Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to
-104-
bond houses, brokers and underwriters). If less than a substantial amount of a
particular class of REMIC Regular Certificates is sold for cash on or prior to
the Closing Date, the issue price for such class will be the fair market value
of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest".
"Qualified stated interest" is interest that is unconditionally payable at least
annually (during the entire term of the instrument) at a single fixed rate, or,
as discussed below under "Variable Rate REMIC Regular Certificates," at a
qualified variable rate.
If the accrued interest to be paid on the first Distribution Date is computed
with respect to a period that begins prior to the Closing Date, a portion of the
purchase price paid for a REMIC Regular Certificate will reflect such accrued
interest. In such cases, information returns provided to the Certificateholders
and the IRS will be based on the position that the portion of the purchase price
paid for the interest accrued with respect to periods prior to the Closing Date
is treated as part of the overall cost of such REMIC Regular Certificate (and
not as a separate asset the cost of which is recovered entirely out of interest
received on the next Distribution Date) and that portion of the interest paid on
the first Distribution Date in excess of interest accrued for a number of days
corresponding to the number of days from the Closing Date to the first
Distribution Date should be included in the stated redemption price of such
REMIC Regular Certificate. However, the OID Regulations state that all or some
portion of such accrued interest may be treated as a separate asset the cost of
which is recovered entirely out of interest paid on the first Distribution Date.
It is unclear how an election to do so would be made under the OID Regulations
and whether such an election could be made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which is
the amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or an
initial interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of such de minimis
original issue discount and a fraction, the numerator of which is the amount of
such principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--Taxation
of Owners of REMIC Regular Certificates--Market Discount" below for a
description of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period", that is, unless otherwise stated in the related
prospectus supplement, each period that begins on a date that corresponds to a
Distribution Date (or in the case of the first such period, begins on the
Closing Date) and ends on the day preceding the immediately following
Distribution Date, a calculation will be made of the portion of the original
issue discount that accrued during such accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess, if any,
of (1) the sum of (a) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (b) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (2) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
(1) assuming that distributions on the REMIC Regular Certificate will be
received in future periods based on the mortgage loans being prepaid at a rate
equal to the Prepayment Assumption, (2) using a discount rate equal to the
original yield to maturity of the Certificate and (3) taking into
-105-
account events (including actual prepayments) that have occurred before the
close of the accrual period. For these purposes, the original yield to maturity
of the Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the mortgage loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price", in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (1) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (2) the daily portions of original issue
discount for all days during such accrual period prior to such day.
The IRS proposed regulations on August 24, 2004 that create a special rule
for accruing original issue discount on REMIC Regular Certificates providing for
a delay between record and payment dates, such that the period over which
original issue discount accrues coincides with the period over which the
certificateholder's right to interest payment accrues under the governing
contract provisions rather than over the period between distribution dates. If
the proposed regulations are adopted in the same form as proposed, taxpayers
would be required to accrue interest from the issue date to the first record
date, but would not be required to accrue interest after the last record date.
The proposed regulations are limited to REMIC Regular Certificates with delayed
payment for periods of fewer than 32 days. The proposed regulations are proposed
to apply to any REMIC Regular Certificate issued after the date the final
regulations are published in the Federal Register.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates may
provide for interest based on a variable rate. Under the OID Regulations,
interest is treated as payable at a variable rate if, generally, (1) the issue
price does not exceed the original principal balance by more than a specified
amount and (2) the interest compounds or is payable at least annually at current
values of (a) one or more "qualified floating rates", (b) a single fixed rate
and one or more qualified floating rates, (c) a single "objective rate", or (d)
a single fixed rate and a single objective rate that is a "qualified inverse
floating rate". A floating rate is a qualified floating rate if variations in
the rate can reasonably be expected to measure contemporaneous variations in the
cost of newly borrowed funds, where the rate is subject to a fixed multiple that
is greater than 0.65, but not more than 1.35. The rate may also be increased or
decreased by a fixed spread or subject to a fixed cap or floor, or a cap or
floor that is not reasonably expected as of the issue date to affect the yield
of the instrument significantly. An objective rate (other than a qualified
floating rate) is a rate that is determined using a single fixed formula and
that is based on objective financial or economic information; provided that the
information is not (1) within the control of the issuer or a related party or
(2) unique to the circumstances of the issuer or a related party. A qualified
inverse floating rate is a rate equal to a fixed rate minus a qualified floating
rate that inversely reflects contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified floating rate
may nevertheless be an objective rate. A class of REMIC Regular Certificates may
be issued under this prospectus that does not have a variable rate under the OID
Regulations, for example, a class that bears different rates at different times
during the period it is outstanding so that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is
possible that a class of this type may be considered to bear "contingent
interest" within the meaning of the OID Regulations. The OID Regulations, as
they relate to the treatment of contingent interest, are by their terms not
applicable to REMIC Regular Certificates. However, if final regulations dealing
with contingent interest with respect to REMIC Regular Certificates apply the
same principles as the OID Regulations, those regulations may lead to different
timing of income inclusion than would be the case under the OID Regulations.
Furthermore, application of those principles could lead to the characterization
of gain on the sale of contingent interest REMIC Regular Certificates as
ordinary income. Investors should consult their tax advisors regarding the
appropriate treatment of
-106-
any REMIC Regular Certificate that does not pay interest at a fixed rate or
variable rate as described in this paragraph.
Under the REMIC Regulations, a REMIC Regular Certificate (1) bearing a rate
that qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two or
more variable rates), including a rate based on the average cost of funds of one
or more financial institutions, or a positive or negative multiple of a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the mortgage loans, including a rate
that is subject to one or more caps or floors, or (2) bearing one or more of
these variable rates for one or more periods or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods
qualifies as a regular interest in a REMIC. Accordingly, unless otherwise
indicated in the applicable prospectus supplement, REMIC Regular Certificates
that qualify as regular interests under this rule will be treated 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 REMIC Regular
Certificate bearing a variable rate of interest will accrue in the manner
described above under "--Original Issue Discount" with the yield to maturity and
future payments on that REMIC Regular Certificate generally to be determined by
assuming that interest will be payable for the life of the REMIC Regular
Certificate based on the initial rate for the relevant class. Unless otherwise
specified in the applicable prospectus supplement, variable interest will be
treated as qualified stated interest, other than variable interest on an
interest-only 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, REMIC Regular Certificates bearing an interest
rate that is a weighted average of the net interest rates on mortgage loans
having fixed or adjustable rates, will be treated 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 those REMIC 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 for the initial interest accrual period 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 interest rate on the REMIC
Regular Certificates.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a Certificateholder generally will be required to allocate the portion
of each such distribution representing stated redemption price first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest and
discount (including de minimis market or original issue discount) in income as
interest, and to amortize premium, based on a constant yield method. If such an
election were made with respect to a REMIC Regular Certificate with market
discount, the Certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election or thereafter, including de minimis market
discount discussed in the following paragraph. Similarly, a Certificateholder
that made this election for a Certificate that is acquired at a premium would be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that such Certificateholder
owns or acquires. See "--Taxation of Owners of REMIC Regular
Certificates--Premium" below. Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable except with the approval of the IRS.
-107-
However, market discount with respect to a REMIC Regular Certificate will be
considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (1) on the basis of a constant yield
method, (2) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (3) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above. Although final Treasury regulations issued
under Section 171 of the Code do not by their terms apply to prepayable
obligations such as REMIC Regular Certificates, the Committee Report states that
the same rules that apply to accrual of market discount (which rules will
require use of a Prepayment Assumption in
-108-
accruing market discount with respect to REMIC Regular Certificates without
regard to whether such certificates have original issue discount) will also
apply in amortizing bond premium.
Realized Losses. Under Section 166 of the Code, both corporate holders of the
REMIC Regular Certificates and non-corporate holders of the REMIC Regular
Certificates that acquire such certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their certificates become wholly or partially
worthless as the result of one or more realized losses on the mortgage loans.
However, it appears that a non-corporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its Certificate Balance has been reduced
to zero) and that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the mortgage loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a realized
loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of such loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates.
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC generally is not subject to entity-level taxation, except with
regard to prohibited transactions and certain other transactions. See
"--Prohibited Transactions Tax and Other Taxes" below. Rather, the taxable
income or net loss of a REMIC is generally taken into account by the holder of
the REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates
will be subject to tax rules that differ significantly from those that would
apply if the REMIC Residual Certificates were treated for federal income tax
purposes as direct ownership interests in the mortgage loans or as debt
instruments issued by the REMIC.
A REMIC Residual Certificateholder generally will be required to report its
daily portion of the taxable income or, subject to the limitations noted in this
discussion, the net loss of the REMIC for each day during a calendar quarter
that such holder owned such REMIC Residual Certificate. For this purpose, the
taxable income or net loss of the REMIC will be allocated to each day in the
calendar quarter ratably using a "30 days per month/90 days per quarter/360 days
per year" convention unless otherwise disclosed in the related prospectus
supplement. The daily amounts so allocated will then be allocated among the
REMIC Residual Certificateholders in proportion to their respective ownership
interests on such day. Any amount included in the gross income or allowed as a
loss of any REMIC Residual Certificateholder by virtue of this paragraph will be
treated as ordinary income or loss. The taxable income of the REMIC will be
determined under the rules described below in "--Taxable Income of the REMIC"
and will be taxable to the REMIC Residual Certificateholders without regard to
the timing or amount of cash distributions by the REMIC until the REMIC's
termination. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses".
A holder of a REMIC Residual Certificate that purchased such Certificate from
a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the
-109-
corresponding period. Consequently, REMIC Residual Certificateholders should
have other sources of funds sufficient to pay any federal income taxes due as a
result of their ownership of REMIC Residual Certificates or unrelated deductions
against which income may be offset, subject to the rules relating to "excess
inclusions" and "noneconomic" residual interests discussed below. The fact that
the tax liability associated with the income allocated to REMIC Residual
Certificateholders may exceed the cash distributions received by such REMIC
Residual Certificateholders for the corresponding period may significantly
adversely affect such REMIC Residual Certificateholders' after-tax rate of
return. Such disparity between income and distributions may not be offset by
corresponding losses or reductions of income attributable to the REMIC Residual
Certificateholder until subsequent tax years and, then, may not be completely
offset due to changes in the Code, tax rates or character of the income or loss.
Taxable Income of the REMIC. The taxable income of the REMIC will equal the
income from the mortgage loans (including interest, market discount and, if
applicable, original issue discount and less premium) and other assets of the
REMIC plus any cancellation of indebtedness income due to the allocation of
realized losses to REMIC Regular Certificates, less the deductions allowed to
the REMIC for interest (including original issue discount and reduced by any
premium on issuance) on the REMIC Regular Certificates (and any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby), amortization of any premium on the mortgage loans, bad debt losses with
respect to the mortgage loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, such Class's fair market value). Such aggregate basis will be
allocated among the mortgage loans and the other assets of the REMIC in
proportion to their respective fair market values. The issue price of any REMIC
Certificates offered hereby will be determined in the manner described above
under "--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount". The issue price of a REMIC Certificate received in exchange for an
interest in the mortgage loans or other property will equal the fair market
value of such interests in the mortgage loans or other property. Accordingly, if
one or more classes of REMIC Certificates are retained initially rather than
sold, the REMIC Administrator may be required to estimate the fair market value
of such interests in order to determine the basis of the REMIC in the mortgage
loans and other property held by the REMIC.
The method of accrual by the REMIC of original issue discount income and
market discount income with respect to mortgage loans that it holds will be
equivalent to the method for accruing original issue discount income for holders
of REMIC Regular Certificates (that is, under the constant yield method taking
into account the Prepayment Assumption), but without regard to the de minimis
rule applicable to REMIC Regular Certificates. However, a REMIC that acquires
loans at a market discount must include such market discount in income
currently, as it accrues, on a constant yield basis. See "--Taxation of Owners
of REMIC Regular Certificates" above, which describes a method for accruing such
discount income that is analogous to that required to be used by a REMIC as to
mortgage loans with market discount that it holds.
A mortgage loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis in that mortgage loan, determined
as described in the preceding paragraph, is less than (or greater than) its
stated redemption price. Any such discount will be includible in the income of
the REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will elect under Section 171 of the Code to amortize any premium
on the mortgage loans. Premium on any mortgage loan to which such election
applies may be amortized under a constant yield method, presumably taking into
account a Prepayment Assumption. Further, such an election would not apply to
any mortgage loan originated on or before September 27, 1985. Instead, premium
on such a mortgage loan should be allocated among the principal payments thereon
and be deductible by the REMIC as those payments become due or upon the
prepayment of such mortgage loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described
-110-
above under "--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount", except that the de minimis rule and the adjustments for subsequent
holders of REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
described in that section will not apply.
If a class of REMIC Regular Certificates is issued with an Issue Premium, the
REMIC will have additional income in each taxable year in an amount equal to the
portion of the Issue Premium that is considered to be amortized or repaid in
that year. Although the matter is not entirely certain, it is likely that Issue
Premium would be amortized under a constant yield method in a manner analogous
to the method of accruing original issue discount described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount".
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual
-111-
Certificate would have in the hands of an original holder see "--Taxation of
Owners of REMIC Residual Certificates--General" above.
Regulations have been issued addressing the federal income tax treatment of
"inducement fees" received by transferees of non-economic residual interests.
These regulations 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 safe
harbor methods, inducement fees are permitted to be included in income (i) 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 (ii) 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
is required to be taken into account at the time of the sale of disposition.
Prospective purchasers of the REMIC Residual Certificates should consult with
their tax advisors regarding the effect of these regulations.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Certificate will be subject to federal income tax in all events. In general, the
"excess inclusions" with respect to a REMIC Residual Certificate for any
calendar quarter will be the excess, if any, of (1) the daily portions of REMIC
taxable income allocable to such REMIC Residual Certificate over (2) the sum of
the "daily accruals" (as defined below) for each day during such quarter that
such REMIC Residual Certificate was held by such REMIC Residual
Certificateholder. The daily accruals of a REMIC Residual Certificateholder will
be determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Certificate at the beginning of the calendar quarter and 120% of the "long-term
Federal rate" in effect on the Closing Date. For this purpose, the adjusted
issue price of a REMIC Residual Certificate as of the beginning of any calendar
quarter will be equal to the issue price of the REMIC Residual Certificate,
increased by the sum of the daily accruals for all prior quarters and decreased
(but not below zero) by any distributions made with respect to such REMIC
Residual Certificate before the beginning of such quarter. The issue price of a
REMIC Residual Certificate is the initial offering price to the public
(excluding bond houses and brokers) at which a substantial amount of the REMIC
Residual Certificates were sold. The "long-term Federal rate" is an average of
current yields on Treasury securities with a remaining term of greater than nine
years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (1) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (2) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (3) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates" below.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax". If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate,
-112-
which rate is computed and published monthly by the IRS) on the REMIC Residual
Certificate equals at least the present value of the expected tax on the
anticipated excess inclusions, and (2) the transferor reasonably expects that
the transferee will receive distributions with respect to the REMIC Residual
Certificate at or after the time the taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. 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. Under the REMIC
Regulations, a safe harbor is provided if (1) 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, (2) 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 (3) the transferee represents to the transferor that it will not
cause income from the REMIC 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 person. Accordingly, all
transfers of REMIC Residual Certificates that may constitute noneconomic
residual interests will be subject to certain restrictions under the terms of
the related Pooling and Servicing Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require the transferee to provide an affidavit to certify to the matters in the
preceding sentence. The transferor must have no actual knowledge or reason to
know that those statements are false.
In addition to the three conditions set forth above, the REMIC Regulations
contain a fourth requirement that must be satisfied in one of two alternative
ways for the transferor to have a "safe harbor" against ignoring the transfer:
(1) the present value of the anticipated tax liabilities associated with
holding the noneconomic residual interest not exceed the sum of:
(i) the present value of any consideration given to the transferee to
acquire the interest;
(ii) the present value of the expected future distributions on the
interest; and
(iii) the present value of the anticipated tax savings associated with
holding the interest as the REMIC generates losses.
For purposes of the computations under this "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 minimum tax rate specified in Section 55 of the Code.
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 the transfer and the compounding period used by the transferee; or
(2) (i) the transferee must be a domestic "C" corporation (other than a
corporation exempt from taxation of a regulated investment company or real
estate investment trust) that meets certain gross and net asset tests
(generally, $100 million of gross assets and $10 million of net assets for
the current year and the two preceding fiscal years);
(ii) the transferee must agree in writing that it will transfer the
REMIC Residual Certificate only to a subsequent transferee that is an
eligible corporation and meets the requirements for a safe harbor
transfer; and
(iii) the facts and circumstances known to the transferor on or before
the date of the transfer must not reasonably indicate that the taxes
associated with ownership of the REMIC Residual Certificate will not be
paid by the transferee.
The related prospectus supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions,
-113-
and the depositor will make no representation that a REMIC Residual Certificate
will not be considered "noneconomic" for purposes of the above-described rules.
See "--Foreign Investors in REMIC Certificates" below for additional
restrictions applicable to transfers of certain REMIC Residual Certificates to
foreign persons.
Mark-to-Market Rules. The IRS has issued regulations, relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. This mark-to-market requirement applies to all securities owned by a
dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The mark-to-market regulations provide that for
purposes of this requirement, a REMIC Residual Certificate will not be treated
as a security and thus generally may not be marked to market.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and expenses
of a REMIC generally will be allocated to certain types of holders of the
related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
such types of holders of the related REMIC Regular Certificates. Unless
otherwise stated in the related prospectus supplement, such fees and expenses
will be allocated to the related REMIC Residual Certificates in their entirety
and not to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates the
holders of which receive an allocation of fees and expenses in accordance with
the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (1) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (2) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate 2% of a taxpayer's adjusted gross income. In
addition, Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (1) 3% of the excess of the
individual's adjusted gross income over such amount or (2) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by REMIC Certificateholders that are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Furthermore, in determining the alternative minimum taxable income
of such a holder of a REMIC Certificate that is an individual, estate or trust,
or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors are encouraged to
consult with their tax advisors prior to making an investment in such
certificates.
Under tax legislation enacted in 2001, the limitations on deductions under
Section 68 will be phased out beginning in 2006 and will be eliminated after
2009.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Certificate.
The adjusted basis of a REMIC Regular Certificate generally will equal the cost
of such REMIC Regular Certificate to such Certificateholder, increased by income
reported by such Certificateholder with respect to such REMIC Regular
Certificate (including original issue discount and market discount income) and
reduced (but not below zero) by distributions on such REMIC Regular Certificate
received by such Certificateholder and by any amortized premium. The adjusted
basis of a REMIC Residual Certificate will be determined as described above
under "--Taxation of Owners of REMIC Residual Certificates--Basis Rules, Net
Losses and Distributions". Except as provided in the following four paragraphs,
any such gain or loss will be capital gain or loss; provided such REMIC
Certificate is held as a capital asset (generally, property held for investment)
within the meaning of Section 1221 of the Code. The Code as of the date of this
prospectus provides for tax rates for individuals on ordinary income that are
higher than the tax rates for long-term capital gains of individuals for
property held for more than one year. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
-114-
Gain from the sale of a REMIC Regular Certificate that might otherwise be a
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (1) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on treasury
securities having a maturity comparable to that of the certificate based on the
application of the Prepayment Assumption to such certificate), determined as of
the date of purchase of such REMIC Regular Certificate, over (2) the amount of
ordinary income actually includible in the seller's income prior to such sale.
In addition, gain recognized on the sale of a REMIC Regular Certificate by a
seller who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium".
REMIC Certificates will be "evidences of indebtedness" within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a REMIC Certificate by a bank or thrift institution to which such Section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that might
otherwise be capital gain may be treated as ordinary income to the extent that
such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury Department regulations yet to be
issued, if the seller of a REMIC Residual Certificate reacquires such REMIC
Residual Certificate, or acquires any other residual interest in a REMIC or any
similar interest in a "taxable mortgage pool" (as defined in Section 7701(i) of
the Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
Prohibited Transactions Tax and Other Taxes. The Code imposes a tax on REMICs
equal to 100% of the net income derived from "prohibited transactions". In
general, subject to certain specified exceptions a prohibited transaction means
the disposition of a mortgage loan, the receipt of income from a source other
than a mortgage loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the mortgage loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition of a tax on the
REMIC equal to 100% of the value of the contributed property. Each Pooling and
Servicing Agreement will include provisions designed to prevent the acceptance
of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property", determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate
-115-
investment trust. As provided in each Pooling and Servicing Agreement, a REMIC
may recognize "net income from foreclosure property" subject to federal income
tax to the extent that the REMIC Administrator determines that such method of
operation will result in a greater after-tax return to the trust fund than any
other method of operation.
Unless otherwise disclosed in the related prospectus supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related prospectus supplement, and to the
extent permitted by then applicable laws, any prohibited transactions tax or
contributions tax will be borne by the related REMIC administrator, master
servicer, special servicer, manager or trustee, in any case out of its own
funds; provided that such person has sufficient assets to do so; provided,
further, that such tax arises out of a breach of such person's obligations under
the related Pooling and Servicing Agreement and in respect of compliance with
applicable laws and regulations. Any such tax not borne by a REMIC
administrator, a master servicer, special servicer, manager or trustee will be
charged against the related trust fund resulting in a reduction in amounts
payable to holders of the related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations. If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (1) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate) of the total anticipated
excess inclusions with respect to such REMIC Residual Certificate for periods
after the transfer and (2) the highest marginal federal income tax rate
applicable to corporations. The anticipated excess inclusions must be determined
as of the date that the REMIC Residual Certificate is transferred and must be
based on events that have occurred up to the time of such transfer, the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Such a tax
generally would be imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Moreover, an entity will not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that (1) residual interests in
such entity are not held by disqualified organizations and (2) information
necessary for the application of the tax described herein will be made
available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in each Pooling and Servicing Agreement, and will be discussed in any
prospectus supplement relating to the offering of any REMIC Residual
Certificate.
In addition, if a "pass-through entity" (as defined below) includes in income
excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (1) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(2) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (1) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (2) a statement under penalties of perjury that such record
holder is not a disqualified organization.
If an "electing large partnership" holds a REMIC 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.
For these purposes, a "disqualified organization" means (1) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (2) any organization
(other than a cooperative described in Section 521 of the Code) that is
-116-
exempt from federal income tax, unless it is subject to the tax imposed by
Section 511 of the Code or (3) any organization described in Section
1381(a)(2)(C) of the Code. In addition, a "pass-through entity" means any
regulated investment company, real estate investment trust, trust, partnership
or certain other entities described in Section 860E(e)(6) of the Code. In
addition, a person holding an interest in a pass-through entity as a nominee for
another person will, with respect to such interest, be treated as a pass-through
entity. For these purposes, an "electing large partnership" means a partnership
(other than a service partnership or certain commodity pools) having more than
100 members that has elected to apply certain simplified reporting provisions
under the Code.
Termination. A REMIC will terminate immediately after the Distribution Date
following receipt by the REMIC of the final payment in respect of the mortgage
loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in such Certificate, such REMIC Residual Certificateholder should
(but may not) be treated as realizing a loss equal to the amount of such
difference, and such loss may be treated as a capital loss.
Reporting and Other Administrative Matters. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related prospectus supplement, the holder of the
largest percentage interest in a class of REMIC Residual Certificates will be
the "tax matters person" with respect to the related REMIC, and the REMIC
administrator will file REMIC federal income tax returns on behalf of the
related REMIC, and will be designated as and will act as agent of, and
attorney-in-fact for, the tax matters person with respect to the REMIC in all
respects.
As the tax matters person, the REMIC administrator, subject to certain notice
requirements and various restrictions and limitations, generally will have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders generally will be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the REMIC Administrator, as tax matters person, and the IRS concerning
any such REMIC item. Adjustments made to the REMIC tax return may require a
REMIC Residual Certificateholder to make corresponding adjustments on its
return, and an audit of the REMIC's tax return, or the adjustments resulting
from such an audit, could result in an audit of a REMIC Residual
Certificateholder's return. Any person that holds a REMIC Residual Certificate
as a nominee for another person may be required to furnish to the related REMIC,
in a manner to be provided in Treasury Department regulations, the name and
address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury Department regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals will
be provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. Reporting with
respect to REMIC Residual Certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury Department
regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will include
a statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount".
Unless otherwise specified in the related prospectus supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the REMIC administrator.
-117-
Backup Withholding with Respect to REMIC Certificates. Payments of interest
and principal, and proceeds from the sale of REMIC Certificates, may be subject
to "backup withholding tax" at a rate of 28% (increasing to 30% after 2010)
unless the recipient of such payments is a U.S. Person and provides IRS Form W-9
with the correct taxpayer identification number; is a non-U.S. Person and
provides IRS Form W-8BEN identifying the non-U.S. Person and stating that the
beneficial owner is not a U.S. Person; or can be treated as an exempt recipient
within the meaning of Treasury Regulations Section 1.6049-4(c)(1)(ii). Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax. Information
reporting requirements may also apply regardless of whether withholding is
required. Furthermore, certain penalties may be imposed by the IRS on a
recipient of payments that is required to supply information but that does not
do so in the proper manner.
Foreign Investors in REMIC Certificates. A REMIC Regular Certificateholder
that is not a U.S. Person and is not subject to federal income tax as a result
of any direct or indirect connection to the United States in addition to its
ownership of a REMIC Regular Certificate will not, unless otherwise disclosed in
the related prospectus supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate;
provided that the holder provides appropriate documentation. The appropriate
documentation includes Form W-8BEN, if the non-U.S. Person is a corporation or
individual eligible for the benefits of the portfolio interest exemption or an
exemption based on a treaty; Form W-8ECI if the non-U.S. Person is eligible for
an exemption on the basis of its income from the REMIC Regular Certificate being
effectively connected to a United States trade or business; Form W-8BEN or Form
W-8IMY if the non-U.S. Person is a trust, depending on whether such trust is
classified as the beneficial owner of the REMIC Regular Certificate; and Form
W-8IMY, with supporting documentation as specified in the Treasury Regulations,
required to substantiate exemptions from withholding on behalf of its partners,
if the non-U.S. Person is a partnership. An intermediary (other than a
partnership) must provide Form W-8IMY, revealing all required information,
including its name, address, taxpayer identification number, the country under
the laws of which it is created, and certification that it is not acting for its
own account. A "qualified intermediary" must certify that it has provided, or
will provide, a withholding statement as required under Treasury Regulations
Section 1.1441-1(e)(5)(v), but need not disclose the identify of this account
holders on its Form W-8IMY, and may certify its account holders' status without
including each beneficial owner's certification. A non-"qualified intermediary"
must additionally certify that it has provided, or will provide, a withholding
on behalf of its associated with the appropriate Form W-8 and W-9 required to
substantiate exemptions from withholding on behalf of its beneficial owners. The
term "intermediary" means a person acting as custodian, a broker, nominee or
otherwise as an agent for the beneficial owner of a REMIC Regular Certificate. A
"qualified intermediary" is generally a foreign financial institution or
clearing organization or a non-U.S. branch or office of a U.S. financial
institution or clearing organization that is a party to a withholding agreement
with the IRS.
It is possible that the IRS may assert that the foregoing tax exemption
should not apply with respect to a REMIC Regular Certificate held by a REMIC
Residual Certificateholder that owns directly or indirectly a 10% or greater
interest in the REMIC Residual Certificates. If the holder does not qualify for
exemption, distributions of interest, including distributions in respect of
accrued original issue discount, to such holder may be subject to a tax rate of
30%.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included in
the estate of a nonresident alien individual and would not be subject to United
States estate taxes. However, Certificateholders who are nonresident alien
individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related prospectus supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related Pooling and Servicing Agreement.
Grantor Trust Funds
Classification of Grantor Trust Funds. With respect to each series of Grantor
Trust Certificates, in the opinion of counsel to the depositor for such series,
assuming compliance with all provisions of the related Pooling and Servicing
Agreement, the related Grantor Trust Fund will be classified as a grantor trust
under subpart E, part I of
-118-
subchapter J of the Code and not as a partnership or an association taxable as a
corporation. The following general discussion of the anticipated federal income
tax consequences of the purchase, ownership and disposition of Grantor Trust
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of counsel to the depositor for the
applicable series as specified in the related prospectus supplement, subject to
any qualifications set forth in this prospectus. In addition, counsel to the
depositor has prepared or reviewed the statements in this prospectus under the
heading "Certain Federal Income Tax Consequences--Grantor Trust Funds," and is
of the opinion that such statements are correct in all material respects. Such
statements are intended as an explanatory discussion of the possible effects of
the classification of any Grantor Trust Fund as a grantor trust for federal
income tax purposes on investors generally and of related tax matters affecting
investors generally, but do not purport to furnish information in the level of
detail or with the attention to an investor's specific tax circumstances that
would be provided by an investor's own tax advisor. Accordingly, each investor
is advised to consult its own tax advisors with regard to the tax consequences
to it of investing in Grantor Trust Certificates.
Characterization of Investments in Grantor Trust Certificates.
Grantor Trust Fractional Interest Certificates. In the case of Grantor Trust
Fractional Interest Certificates, unless otherwise disclosed in the related
prospectus supplement, counsel to the depositor will deliver an opinion that, in
general, Grantor Trust Fractional Interest Certificates will represent interests
in (1) "loans . . . secured by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code; (2) "obligation[s] (including any
participation or certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3) of the Code; and (3) "real estate assets" within the meaning
of Section 856(c)(5)(B) of the Code. In addition, counsel to the depositor will
deliver an opinion that interest on Grantor Trust Fractional Interest
Certificates will to the same extent be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code.
Grantor Trust Strip Certificates. Even if Grantor Trust Strip Certificates
evidence an interest in a Grantor Trust Fund consisting of mortgage loans that
are "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code and "real estate assets" within the
meaning of Section 856(c)(5)(B) of the Code, and the interest on which is
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, it is unclear whether the Grantor
Trust Strip Certificates, and the income therefrom, will be so characterized.
However, the policies underlying such sections (namely, to encourage or require
investments in mortgage loans by thrift institutions and real estate investment
trusts) may suggest that such characterization is appropriate. Counsel to the
depositor will not deliver any opinion on these questions. Prospective
purchasers to which such characterization of an investment in Grantor Trust
Strip Certificates is material should consult their tax advisors regarding
whether the Grantor Trust Strip Certificates, and the income therefrom, will be
so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
Taxation of Owners of Grantor Trust Fractional Interest Certificates.
General. Holders of a particular series of Grantor Trust Fractional Interest
Certificates generally will be required to report on their federal income tax
returns their shares of the entire income from the mortgage loans (including
amounts used to pay reasonable servicing fees and other expenses) and will be
entitled to deduct their shares of any such reasonable servicing fees and other
expenses. Because of stripped interests, market or original issue discount, or
premium, the amount includible in income on account of a Grantor Trust
Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the mortgage loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount
-119-
will be reduced by the lesser of (1) 3% of the excess of the individual's
adjusted gross income over such amount or (2) 80% of the amount of itemized
deductions otherwise allowable for the taxable year. The amount of additional
taxable income reportable by holders of Grantor Trust Fractional Interest
Certificates who are subject to the limitations of either Section 67 or Section
68 of the Code may be substantial. Further, Certificateholders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holder's alternative
minimum taxable income. Under tax legislation enacted in 2001, this limitation
on deductions under Section 68 will be phased out beginning in 2006 and will be
eliminated after 2009. Although it is not entirely clear, it appears that in
transactions in which multiple classes of Grantor Trust Certificates (including
Grantor Trust Strip Certificates) are issued, such fees and expenses should be
allocated among the classes of Grantor Trust Certificates using a method that
recognizes that each such class benefits from the related services. In the
absence of statutory or administrative clarification as to the method to be
used, it currently is intended to base information returns or reports to the IRS
and Certificateholders on a method that allocates such expenses among classes of
Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (1) a class of Grantor
Trust Strip Certificates is issued as part of the same series of certificates or
(2) the depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on a mortgage asset. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. The
related prospectus supplement will include information regarding servicing fees
paid to a master servicer, a special servicer, any sub-servicer or their
respective affiliates.
If Stripped Bond Rules Apply. If the stripped bond rules apply, each Grantor
Trust Fractional Interest Certificate will be treated as having been issued with
"original issue discount" within the meaning of Section 1273(a) of the Code,
subject, however, to the discussion below regarding the treatment of certain
stripped bonds as market discount bonds and the discussion regarding de minimis
market discount. See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--Market Discount" below. Under the stripped bond rules, the holder
of a Grantor Trust Fractional Interest Certificate (whether a cash or accrual
method taxpayer) will be required to report interest income from its Grantor
Trust Fractional Interest Certificate for each month in an amount equal to the
income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser of the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest", if any, as well as such certificate's share of reasonable servicing
fees and other expenses. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest". In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "--Sales of Grantor Trust Certificates" below) and the yield of such
Grantor Trust Fractional Interest Certificate to such holder. Such yield would
be computed as the rate (compounded based on the regular interval between
payment dates) that, if used to discount the holder's share of future payments
on the mortgage loans, would cause the present value of those future payments to
equal the price at which the holder purchased such Certificate. In computing
yield under the stripped bond rules, a Certificateholder's share of future
payments on the mortgage loans will not include any payments made in respect of
any ownership interest in the mortgage loans retained by the depositor, the
master servicer, the special servicer, any sub-servicer or their respective
affiliates, but will include such Certificateholder's share of any reasonable
servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (1) the use of a reasonable
prepayment assumption in accruing original issue discount and (2) adjustments in
the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions
-120-
would be applicable to the Grantor Trust Fractional Interest Certificates or
whether use of a reasonable prepayment assumption may be required or permitted
without reliance on these rules. It is also uncertain, if a prepayment
assumption is used, whether the assumed prepayment rate would be determined
based on conditions at the time of the first sale of the Grantor Trust
Fractional Interest Certificate or, with respect to any holder, at the time of
purchase of the Grantor Trust Fractional Interest Certificate by that holder.
Certificateholders are advised to consult their tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired at a
price equal to the principal amount of the mortgage loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a mortgage loan prepays in
full, the holder of a Grantor Trust Fractional Interest Certificate acquired at
a discount or a premium generally will recognize ordinary income or loss equal
to the difference between the portion of the prepaid principal amount of the
mortgage loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the mortgage loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. See "--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" above. It is
unclear whether any other adjustments would be required to reflect differences
between an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is currently
intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
Prepayment Assumption that will be disclosed in the related prospectus
supplement and on a constant yield computed using a representative initial
offering price for each class of certificates. However, neither the depositor
nor any other person will make any representation that the mortgage loans will
in fact prepay at a rate conforming to such Prepayment Assumption or any other
rate and Certificateholders should bear in mind that the use of a representative
initial offering price will mean that such information returns or reports, even
if otherwise accepted as accurate by the IRS, will in any event be accurate only
as to the initial Certificateholders of each series who bought at that price.
In light of the application of Section 1286 of the Code, a beneficial owner
of a stripped bond generally will be required to compute accruals of original
issue discount based on its yield, possibly taking into account its own
prepayment assumption. The information necessary to perform the related
calculations for information reporting purposes, however, generally will not be
available to the trustee. Accordingly, any information reporting provided by the
trustee with respect to these stripped bonds, which information will be based on
pricing information as of the closing date, will largely fail to reflect the
accurate accruals of original issue discount for these certificates. Prospective
investors therefore should be aware that the timing of accruals of original
issue discount applicable to a stripped bond generally will be different than
that reported to holders and the IRS. Prospective investors should consult their
own tax advisors regarding their obligation to compute and include in income the
correct amount of original issue discount accruals and any possible tax
consequences to them if they should fail to do so.
Under Treasury regulations Section 1.1286-1, certain stripped bonds are to be
treated as market discount bonds and, accordingly, any purchaser of such a bond
is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (1) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (2) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the mortgage loans, the related prospectus supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond
-121-
rules is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the mortgage loans, then such original issue
discount or market discount will be considered to be de minimis. Original issue
discount or market discount of only a de minimis amount will be included in
income in the same manner as de minimis original issue and market discount
described in "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--If Stripped Bond Rules Do Not Apply" and "--Market Discount"
below.
If Stripped Bond Rules Do Not Apply. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required to
report its share of the interest income on the mortgage loans in accordance with
such Certificateholder's normal method of accounting. The original issue
discount rules will apply, even if the stripped bond rules do not apply, to a
Grantor Trust Fractional Interest Certificate to the extent it evidences an
interest in mortgage loans issued with original issue discount.
The original issue discount, if any, on the mortgage loans will equal the
difference between the stated redemption price of such mortgage loans and their
issue price. For a definition of "stated redemption price," see "--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount" above. In
general, the issue price of a mortgage loan will be the amount received by the
borrower from the lender under the terms of the mortgage loan, less any "points"
paid by the borrower, and the stated redemption price of a mortgage loan will
equal its principal amount, unless the mortgage loan provides for an initial
"teaser," or below-market interest rate. The determination as to whether
original issue discount will be considered to be de minimis will be calculated
using the same test as in the REMIC discussion. See "--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount" above.
In the case of mortgage loans bearing adjustable or variable interest rates,
the related prospectus supplement will describe the manner in which such rules
will be applied with respect to those mortgage loans by the trustee or master
servicer, as applicable, in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all original
issue discount with respect to a mortgage loan will be required to be accrued
and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related prospectus
supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to mortgage loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that purchases
such Grantor Trust Fractional Interest Certificate at a cost less than such
certificate's allocable portion of the aggregate remaining stated redemption
price of the mortgage loans held in the related trust fund will also be required
to include in gross income such certificate's daily portions of any original
issue discount with respect to such mortgage loans. However, each such daily
portion will be reduced, if the cost of such Grantor Trust Fractional Interest
Certificate to such purchaser is in excess of such Certificate's allocable
portion of the aggregate "adjusted issue prices" of the mortgage loans held in
the related trust fund, approximately in proportion to the ratio such excess
bears to such Certificate's allocable portion of the aggregate original issue
discount remaining to be accrued on such mortgage loans. The adjusted issue
price of a mortgage loan on any given day equals the sum of (1) the adjusted
issue price (or, in the case of the first accrual period, the issue price) of
such mortgage loan at the beginning of the accrual period that includes such day
and (2) the daily portions of original issue discount for all days during such
accrual period prior to such day. The adjusted issue price of a mortgage loan at
the beginning of any accrual period will equal the issue price of such mortgage
loan, increased by the aggregate amount of original issue discount with respect
to such mortgage loan that accrued in prior accrual periods, and reduced by the
amount of any payments made on such mortgage loan in prior accrual periods of
amounts included in its stated redemption price.
Unless otherwise provided in the related prospectus supplement, the trustee
or master servicer, as applicable, will provide to any holder of a Grantor Trust
Fractional Interest Certificate such information as such holder may
-122-
reasonably request from time to time with respect to original issue discount
accruing on Grantor Trust Fractional Interest Certificates. See "--Grantor Trust
Reporting" below.
Market Discount. If the stripped bond rules do not apply to a Grantor Trust
Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a mortgage loan is considered to have been purchased at a "market
discount", that is, in the case of a mortgage loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above), or in the case of a mortgage loan issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through such month that has not previously been included in
income, but limited, in the case of the portion of such discount that is
allocable to any mortgage loan, to the payment of stated redemption price on
such mortgage loan that is received by (or, in the case of accrual basis
Certificateholders, due to) the trust fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing
under rules similar to those described in "--Taxation of Owners of REMIC Regular
Interests--Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period market discount on the mortgage loans should accrue, at the
holder's option: (1) on the basis of a constant yield method, (2) in the case of
a mortgage loan issued without original issue discount, in an amount that bears
the same ratio to the total remaining market discount as the stated interest
paid in the accrual period bears to the total stated interest remaining to be
paid on the mortgage loan as of the beginning of the accrual period, or (3) in
the case of a mortgage loan issued with original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining at the beginning of the accrual period. The prepayment
assumption, if any, used in calculating the accrual of original issue discount
is to be used in calculating the accrual of market discount. The effect of using
a prepayment assumption could be to accelerate the reporting of such discount
income. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect such regulations might have on
the tax treatment of a mortgage loan purchased at a discount in the secondary
market.
Because the mortgage loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to mortgage loans may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described above in "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above within the exception that it is
less likely that a prepayment assumption will be used for purposes of such rules
with respect to the mortgage loans.
Further, under the rules described above in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount", any discount that is not original
issue discount and exceeds a de minimis amount may require the deferral of
interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the mortgage loans.
Premium. If a Certificateholder is treated as acquiring the underlying
mortgage loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to mortgage loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to mortgage loans originated before September 28, 1985 or to mortgage
loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the mortgage loan and be allowed as a
deduction as such
-123-
payments are made (or, for a Certificateholder using the accrual method of
accounting, when such payments of stated redemption price are due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a mortgage loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss equal to the difference between
the portion of the prepaid principal amount of the mortgage loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the mortgage loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption and the actual rate of prepayments.
Taxation of Owners of Grantor Trust Strip Certificates. The "stripped coupon"
rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates--If Stripped Bond Rules Apply", no
regulations or published rulings under Section 1286 of the Code have been issued
and some uncertainty exists as to how it will be applied to securities such as
the Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust
Strip Certificates should consult their tax advisors concerning the method to be
used in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons", although they provide
general guidance as to how the original issue discount sections of the Code will
be applied. In addition, the discussion below is subject to the discussion under
"--Possible Application of Proposed Contingent Payment Rules" below and assumes
that the holder of a Grantor Trust Strip Certificate will not own any Grantor
Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount will
be required to be accrued in each month on the Grantor Trust Strip Certificates
based on a constant yield method. In effect, each holder of Grantor Trust Strip
Certificates would include as interest income in each month an amount equal to
the product of such holder's adjusted basis in such Grantor Trust Strip
Certificate at the beginning of such month and the yield of such Grantor Trust
Strip Certificate to such holder. Such yield would be calculated based on the
price paid for that Grantor Trust Strip Certificate by its holder and the
payments remaining to be made thereon at the time of the purchase, plus an
allocable portion of the servicing fees and expenses to be paid with respect to
the mortgage loans. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related prospectus supplement and on a constant
yield computed using a representative initial offering price for each class of
certificates. However, neither the depositor nor any other person will make any
representation that the mortgage loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series
-124-
who bought at that price. Prospective purchasers of the Grantor Trust Strip
Certificates are encouraged to consult their tax advisors regarding the use of
the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a mortgage
loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete mortgage loans, or if the Prepayment
Assumption is not used, then when a mortgage loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such mortgage loan.
Possible Application of Contingent Payment Rules. The coupon stripping rules'
general treatment of stripped coupons is to regard them as newly issued debt
instruments in the hands of each purchaser. To the extent that payments on the
Grantor Trust Strip Certificates would cease if the mortgage loans were prepaid
in full, the Grantor Trust Strip Certificates could be considered to be debt
instruments providing for contingent payments. Under the OID Regulations, debt
instruments providing for contingent payments are not subject to the same rules
as debt instruments providing for noncontingent payments. Treasury Department
regulations have been promulgated regarding contingent payment debt instruments,
but it appears that Grantor Trust Strip Certificates, due to their similarity to
other mortgage-backed securities (such as REMIC regular interests and debt
instruments subject to Section 1272(a)(6) of the Code) that are expressly
excepted from the application of such Regulations, may also be excepted from
such regulations. Like the OID Regulations, the contingent payment regulations
do not specifically address securities, such as the Grantor Trust Strip
Certificates, that are subject to the stripped bond rules of Section 1286 of the
Code.
If the contingent payment rules similar to those under the OID Regulations
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to apply a "noncontingent bond method." Under the "noncontingent bond method,"
the issuer of a Grantor Trust Strip Certificate determines a projected payment
schedule. Holders of Grantor Trust Strip Certificates are bound by the issuer's
projected payment schedule. The projected payment schedule consists of all
noncontingent payments and a projected amount for each contingent payment based
on the comparable yield (as described below) of the Grantor Trust Strip
Certificate. The projected amount of each payment is determined so that the
projected payment schedule reflects the projected yield. The projected amount of
each payment must reasonably reflect the relative expected values of the
payments to be received by the holders of a Grantor Trust Strip Certificate. The
comparable yield referred to above is a rate that, as of the issue date,
reflects the yield at which the issuer would issue a fixed rate debt instrument
with terms and conditions similar to the contingent payment debt instrument,
including general market conditions, the credit quality of the issuer, and the
terms and conditions of the mortgage loans. The holder of a Grantor Trust Strip
Certificate would be required to include as interest income in each month the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period multiplied by the comparable yield.
Certificateholders should consult their tax advisors concerning the possible
application of the contingent payment rules to the Grantor Trust Strip
Certificates.
Sales of Grantor Trust Certificates. Any gain or loss, equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange of
a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Certificate. The Code as of the date of this prospectus generally provides for
tax rates of non-corporate taxpayers on ordinary income that are higher than the
rates on long-term capital gains (generally, property held for more than one
year). No such rate differential exists for corporations. In addition, the
distinction between a capital gain or loss and ordinary income or loss remains
relevant for other purposes.
-125-
Gain or loss from the sale of a Grantor Trust Certificate may be partially or
wholly ordinary and not capital in certain circumstances. Gain attributable to
accrued and unrecognized market discount will be treated as ordinary income, as
will gain or loss recognized by banks and other financial institutions subject
to Section 582(c) of the Code. Furthermore, a portion of any gain that might
otherwise be capital gain may be treated as ordinary income to the extent that
the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for that taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Grantor Trust Reporting. Unless otherwise provided in the related prospectus
supplement, the trustee or master servicer, as applicable, will furnish to each
holder of a Grantor Trust Certificate with each distribution a statement setting
forth the amount of such distribution allocable to principal on the underlying
mortgage loans and to interest thereon at the related pass-through rate. In
addition, the trustee or master servicer, as applicable, will furnish, within a
reasonable time after the end of each calendar year, to each holder of a Grantor
Trust Certificate who was such a holder at any time during such year,
information regarding the amount of servicing compensation received by the
master servicer, the special servicer or any sub-servicer, and such other
customary factual information as the depositor or the reporting party deems
necessary or desirable to enable holders of Grantor Trust Certificates to
prepare their tax returns and will furnish comparable information to the IRS as
and when required by law to do so. Because the rules for accruing discount and
amortizing premium with respect to the Grantor Trust Certificates are uncertain
in various respects, there is no assurance the IRS will agree with the trustee's
or master servicer's, as the case may be, information reports of such items of
income and expense. Moreover, such information reports, even if otherwise
accepted as accurate by the IRS, will in any event be accurate only as to the
initial Certificateholders that bought their certificates at the representative
initial offering price used in preparing such reports.
Backup Withholding. In general, the rules described above in
"--REMICs--Backup Withholding with Respect to REMIC Certificates" will also
apply to Grantor Trust Certificates.
Foreign Investors. In general, the discussion with respect to REMIC Regular
Certificates in "--REMICs--Foreign Investors in REMIC Certificates" above
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, unless otherwise disclosed in the related prospectus supplement, be
eligible for exemption from U.S. withholding tax, subject to the conditions
described in such discussion, only to the extent the related mortgage loans were
originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
nonresident alien individual.
On June 20, 2002, the IRS 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 Regulations Section 301.7701-4(c), in which any interest is held
by a middleman, which includes, but is not limited to (i) a custodian of a
person's account, (ii) a nominee and (iii) 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 passed and the regulations have not
been finalized. It is unclear when, or if, these regulations will become final.
-126-
Reportable Transactions
Any holder of an offered certificate that reports any item or items of
income, gain, expense, or loss in respect of that certificate for tax purposes
in an amount that differs from the amount reported for book purposes by more
than $10 million, on a gross basis, in any taxable year may be subject to
certain disclosure requirements for "reportable transactions." Prospective
investors are encouraged to consult their tax advisers concerning any possible
tax return disclosure obligation with respect to the offered 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 and local tax law may differ substantially from the
corresponding federal law, and the discussion above does not purport to describe
any aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors are encouraged to consult their tax advisors with respect
to the various tax consequences of investments in the offered certificates.
CERTAIN ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended, and the Code
impose certain requirements on retirement plans, and on certain other employee
benefit plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts
(and as applicable, insurance company general accounts) in which such plans,
accounts or arrangements are invested that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code ("Plans"), and
on persons who are fiduciaries with respect to such Plans, in connection with
the investment of Plan assets. Certain employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)), and, if no election has
been made under Section 410(d) of the Code, church plans (as defined in Section
3(33) of ERISA) are not subject to ERISA requirements. However, such plans may
be subject to the provisions of other applicable federal and state law
materially similar to ERISA or the Code. Moreover, 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 who have certain specified relationships to the Plan, unless a statutory
or administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code or a penalty imposed pursuant to Section
502(i) of ERISA, unless a statutory or administrative exemption is available.
These prohibited transactions generally are set forth in Section 406 of ERISA
and Section 4975 of the Code.
Plan Asset Regulations
A Plan's investment in offered certificates may cause the underlying mortgage
assets and other assets included in a related trust fund to be deemed assets of
such Plan. The Plan Asset Regulations provide that when a Plan acquires an
equity interest in an entity, the Plan's assets include both such equity
interest and an undivided interest in each of the underlying assets of the
entity, unless certain exceptions not applicable here apply, or unless the
equity participation in the entity by "benefit plan investors" (i.e., Plans and
certain employee benefit plans not subject to ERISA) is not "significant", both
as defined in the Plan Asset Regulations. 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.
-127-
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" Ginnie Mae, Freddie Mac, Farmer Mac and Fannie Mae
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 certificates if such MBS are included in the trust fund.
The DOL has granted to certain underwriters administrative exemptions, each
an "Exemption", for certain mortgage-backed and asset-backed certificates
underwritten in whole or in part by the underwriters. An Exemption might be
applicable to the initial purchase, the holding, and the subsequent resale by a
Plan of certain certificates, such as the offered certificates, underwritten by
the underwriters, representing interests in pass-through trusts that consist of
certain receivables, loans and other obligations; provided that the conditions
and requirements of the Exemption are satisfied. The loans described in the
Exemptions include mortgage loans such as the mortgage assets. However, it
should be noted that in issuing the Exemptions, the DOL may not have considered
interests in pools of the exact nature as some of the offered certificates. If
all of the conditions of an Exemption are met, whether or not a Plan's assets
would be deemed to include an ownership interest in the mortgage assets, the
acquisition, holding and resale of the offered certificates by Plans would be
exempt from certain of the prohibited transaction provisions of ERISA and the
Code.
Insurance Company General Accounts
Sections I and III of PTCE 95-60 exempt from the application of the
prohibited transaction provisions of Sections 406(a), 406(b) and 407(a) of ERISA
and Section 4975 of the Code transactions in connection with the servicing,
management and operation of a trust (such as the trust) in which an insurance
company general account has an interest as a result of its acquisition of
certificates issued by the trust; provided that certain conditions are
satisfied. If these conditions are met, insurance company general accounts would
be allowed to purchase certain classes of certificates which do not meet the
requirements of any of the Exemptions solely because they (1) are subordinated
to other classes of certificates in the trust and/or (2) have not received a
rating at the time of the acquisition in one of the four highest rating
categories from a nationally recognized statistical rating agency. All other
conditions of one of the Exemptions would have to be satisfied in order for PTCE
95-60 to be available. Before purchasing such class of certificates, an
insurance company general account seeking to rely on Sections I and III of PTCE
95-60 should itself confirm that all applicable conditions and other
requirements have been satisfied.
The Small Business Job Protection Act of 1996 added a new Section 401(c) to
ERISA, which provides certain exemptive relief from the provisions of Part 4 of
Title I of ERISA and Section 4975 of the Code, including the prohibited
transaction restrictions imposed by ERISA and the related excise taxes imposed
by the Code, for transactions involving an insurance company general account.
Pursuant to Section 401(c) of ERISA, the DOL has issued final regulations
providing guidance for the purpose of determining, in cases where insurance
policies supported by an insurer's general account are issued to or for the
benefit of a Plan on or before December 31, 1998, which general account assets
constitute Plan assets. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan assets.
-128-
In addition, because Section 401(c) does not relate to insurance company
separate accounts, separate account assets are still treated as Plan assets of
any Plan invested in such separate account. Insurance companies contemplating
the investment of general account assets in the offered certificates should
consult with their legal counsel with respect to the applicability of Section
401(c) of ERISA.
Consultation With Counsel
Any Plan fiduciary which proposes to purchase offered certificates on behalf
of or with assets of a Plan should consider its general fiduciary obligations
under ERISA and should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and the availability of
any prohibited transaction exemption in connection with any planned purchase.
Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section 501 of
the Code nonetheless will be subject to federal income taxation to the extent
that its income is "unrelated business taxable income" within the meaning of
Section 512 of the Code. All "excess inclusions" of a REMIC allocated to a REMIC
Residual Certificate held by a Plan will be considered unrelated business
taxable income and thus will be subject to federal income tax. See "Certain
Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions".
LEGAL INVESTMENT
If so specified in the related prospectus supplement, certain classes of the
offered certificates will constitute "mortgage related securities" for purposes
of SMMEA. Generally, the only classes of the offered certificates which will
qualify as "mortgage related securities" will be those that (1) are rated in one
of two highest rating categories by at least one nationally recognized
statistical rating organization; and (2) are part of a series evidencing
interests in a trust fund consisting of loans originated by certain types of
originators specified in SMMEA and secured by first liens on real estate. The
appropriate characterization of those offered 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 offered 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 offered certificates qualifying as "mortgage related
securities" will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities, including
depository institutions, insurance companies, 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 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 before the October
3, 1991 cutoff for those enactments, limiting to various 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, offered certificates satisfying the rating and qualified originator
requirements for "mortgage related securities," but evidencing interests in a
trust fund consisting, in whole or in part, of first liens on one or more
parcels of real estate upon which are located one or more commercial structures,
states were authorized to enact legislation, on or before September 23, 2001,
specifically referring to Section 347 and prohibiting or restricting the
purchase, holding or investment by state-regulated entities in those types of
offered certificates. Accordingly, the investors affected by any state
legislation overriding the
-129-
preemptive effect of SMMEA will be authorized to invest in offered certificates
qualifying as "mortgage related securities" only to the extent provided in that
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.
Section 24 (Seventh), subject in each case to those regulations as the
applicable federal regulatory authority may prescribe. In this connection, 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. Section 1.5 concerning "safety and soundness" and retention of credit
information), certain "Type IV securities," defined in 12 C.F.R. Section 1.2(m)
to include certain "commercial mortgage-related securities" and "residential
mortgage-related securities." As so defined, "commercial mortgage-related
security" and "residential mortgage-related security" mean, in relevant part,
"mortgage related security" within the meaning of SMMEA; provided that, in the
case of a "commercial mortgage-related security," it "represents ownership of a
promissory note or certificate of interest or participation that is directly
secured by a first lien on one or more parcels of real estate upon which one or
more commercial structures are located and that is fully secured by interests in
a pool of loans to numerous obligors." In the absence of any rule or
administrative interpretation by the OCC defining the term "numerous obligors,"
no representation is made as to whether any of the offered certificates will
qualify as "commercial mortgage-related securities," and thus as "Type IV
securities," for investment by national banks. The National Credit Union
Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part 703, which
permit federal credit unions to invest in "mortgage related securities", other
than stripped mortgage related securities (unless the credit union complies with
the requirements of 12 C.F.R. Section 703.16(e) for investing in those
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. Section 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. Section 742.4(b)(2). 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
offered certificates.
All depository institutions considering an investment in the offered
certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" of the Federal Financial
Institutions Examination Council, which has been adopted by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the OCC and the OTS, effective May 26, 1998, and by the NCUA,
effective October 1, 1998. That 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.
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 offered certificates, as
certain series or classes may be deemed unsuitable investments, or may otherwise
be restricted, under those rules, policies or guidelines (in certain instances
irrespective of SMMEA).
The foregoing does not take into consideration the applicability of statutes,
rules, regulations, orders, guidelines or agreements generally governing
investments made by a particular investor, including, but not limited to,
"prudent investor" provisions, percentage-of-assets limits, provisions which may
restrict or prohibit investment in securities which are not "interest-bearing"
or "income-paying," and, with regard to any offered certificates issued in
book-entry form, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Except as to the status of certain classes of offered certificates as
"mortgage related securities," no representations are made as to the proper
characterization of the offered certificates for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase offered certificates under
applicable legal investment restrictions. The uncertainties described above (and
any
-130-
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the offered certificates) may
adversely affect the liquidity of the offered certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the offered certificates of any class or
series 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 trust assets 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
re-offering by underwriters, which may include Banc of America Securities
LLC, an affiliate of the depositor;
2. By placements by the depositor with institutional investors through
dealers; and
3. By direct placements by the depositor with institutional investors, in
which event the Depositor will be an underwriter with respect to the
Certificates; and
4. By inclusion as underlying securities backing another series of
mortgage pass-through certificates issued by an entity of which the Depositor
or an affiliate of the Depositor may act as the depositor. In the event that
the Depositor or an affiliate of the Depositor acts as depositor with respect
to the other series of mortgage pass-through certificates, the Depositor or
its affiliate will be an underwriter with respect to the underlying
securities.
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 from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Such underwriters may be
broker-dealers affiliated with the depositor whose identities and relationships
to the depositor will be as set forth in the related prospectus supplement. The
managing underwriter or underwriters with respect to the offer and sale of
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.
-131-
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 will 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 will 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
to such liabilities.
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.
If specified in the prospectus supplement relating to a series of
Certificates, the Depositor or any of its affiliates may purchase some or all of
one or more Classes of Certificates of the series from the underwriter or
underwriters at a price specified or described in the prospectus supplement.
This party may then, from time to time, offer and sell, pursuant to this
prospectus, some or all of the Certificates it purchased directly, through one
or more underwriters to be designated at the time of the offering of the
Certificates or through dealers acting as agent and/or principal. Any of these
offerings may be restricted in the matter specified in the applicable prospectus
supplement. These transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices. The underwriters and
dealers participating in the purchaser's offering of Certificates may receive
compensation in the form of underwriting discounts or commissions from the
purchaser and these dealers may receive commissions from the investors
purchasing Certificates for whom they may act as agent (which discounts or
commissions will not exceed those customary in those types of transactions). Any
dealer that participates in the distribution of these Certificates will be an
"underwriter" within the meaning of the Securities Act, and any commissions and
discounts received by a dealer and any profit on the resale of these
Certificates by a dealer will be underwriting discounts and commissions under
the Securities Act.
LEGAL MATTERS
Certain legal matters relating to the certificates will be passed upon for
the depositor by Cadwalader, Wickersham & Taft LLP. Certain legal matters
relating to the certificates will be passed upon for the underwriter by the
counsel described in the related prospectus supplement under "Legal Matters".
Certain federal income tax matters and other matters will be passed upon for
the depositor by Cadwalader, Wickersham & Taft LLP.
RATING
It is a condition to the issuance of any class of offered certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one rating agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders 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
-132-
the likelihood of principal prepayments by borrowers or of the degree by which
such prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of Stripped Interest Certificates 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.
AVAILABLE INFORMATION
The depositor 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 or in 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 Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public Reference
Section, 100 F Street, N.E., Washington, D.C. 20549, and at its Midwest Regional
Offices located as follows: Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an internet site that contains reports, proxy and information
statements, and other information that has been filed electronically with the
SEC. The Internet address is http://www.sec.gov.
No dealer, salesman, or other person has been authorized to give any
information, or to make any representations, other than those contained in this
prospectus or any related prospectus supplement, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the depositor or any other person. Neither the delivery of this prospectus or
any related prospectus supplement nor any sale made under this prospectus or any
related prospectus supplement shall under any circumstances create an
implication that there has been no change in the information in this prospectus
since the date of this prospectus or in such prospectus supplement since the
date of the prospectus supplement. This prospectus and any related prospectus
supplement are not an offer to sell or a solicitation of an offer to buy any
security in any jurisdiction in which it is unlawful to make such offer or
solicitation.
The master servicer, the trustee or another specified person will cause to be
provided to registered holders of the offered certificates of each series
periodic unaudited reports concerning the related trust fund. If beneficial
interests in a class or series of offered certificates are being held and
transferred in book-entry format through the facilities of The DTC as described
in this prospectus, then unless otherwise provided in the related prospectus
supplement, such reports will be sent on behalf of the related trust fund to a
nominee of DTC as the registered holder of the offered certificates. Conveyance
of notices and other communications by DTC to its participating organizations,
and directly or indirectly through such participating organizations to the
beneficial owners of the applicable offered certificates, will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time. See "Description of the
Certificates--Reports to Certificateholders" and "--Book-Entry Registration and
Definitive Certificates".
The depositor 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 and the rules and regulations of the
Securities and Exchange Commission. The depositor intends to make a written
request to the staff of the Securities and Exchange Commission that the staff
either (1) issue an order pursuant to Section 12(h) of the Securities Exchange
Act of 1934, as amended, exempting the depositor from certain reporting
requirements under the Securities Exchange Act of 1934, as amended, with respect
to each trust fund or (2) state that the staff will not recommend that the
Commission take enforcement action if the depositor fulfills its reporting
obligations as described in its written request. If such request is granted, the
depositor will file or cause to be filed with the Securities and Exchange
Commission as to each trust fund the periodic unaudited reports to holders of
the offered
-133-
certificates referenced in the preceding paragraph; however, because of the
nature of the trust funds, it is unlikely that any significant additional
information will be filed. In addition, because of the limited number of
certificateholders expected for each series, the depositor anticipates that a
significant portion of such reporting requirements will be permanently suspended
following the first fiscal year for the related trust fund.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The depositor hereby incorporates by reference all documents and reports
filed or caused to be filed by the depositor with respect to a trust fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, prior to the termination of an offering of offered
certificates evidencing interests in that trust fund. The depositor will provide
or cause to be provided without charge to each person to whom this prospectus is
delivered in connection with the offering of one or more classes of offered
certificates, upon written or oral request of such person, a copy of any or all
documents or reports incorporated in this prospectus 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).
Such requests to the depositor should be directed in writing to its principal
executive offices at 214 North Tryon Street, Charlotte, North Carolina 28255, or
by telephone at (704) 386-8509.
GLOSSARY
The following capitalized terms will have the respective meanings assigned to
them in this "Glossary" section whenever they are used in this prospectus.
"401(c) Regulations" means those regulations issued by the DOL which provide
guidance for the purpose of determining, in cases where insurance policies
supported by an insurer's general account are issued to or for the benefit of a
Plan on or before December 31, 1998, which general account assets constitute
Plan assets.
"Accrued Certificate Interest" means for each Distribution Date an amount
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.
"Accrual Certificates" means one or more classes of certificates that may not
be entitled to distributions of interest until the occurrence of certain events,
such as the retirement of one or more other classes of certificates.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"Available Distribution Amount" means unless otherwise provided in the
related prospectus supplement for any series of certificates and any
Distribution Date the total of all payments or other collections (or advances in
lieu of such collections and advances) 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.
"Bankruptcy Code" means the U.S. Bankruptcy Code.
"CERCLA" means the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended.
"Certificate Account" means for the trust fund one or more 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 this
prospectus and the related prospectus supplement.
"Certificate Balance" means the initial stated principal amount of each
individual class of certificates for a given series other than real estate
mortgage investment conduit residual certificates or certain classes of stripped
interest certificates.
"Certificate Owner" means the actual purchaser of a book-entry certificate.
-134-
"Closing Date" means date of the initial issuance of the certificates of a
given series.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Property" means office buildings, retail stores and
establishments, hotels or motels, nursing homes, hospitals or other health
care-related facilities, recreational vehicle and mobile home parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
plants, parking lots, entertainment or sports arenas, restaurants, marinas,
mixed use or various other types of income-producing properties or unimproved
land comprising some or all of the mortgaged properties included in the trust
fund.
"Committee Report" means the Conference Committee Report accompanying the Tax
Reform Act of 1986.
"Companion Class" means one or more classes of certificate where
distributions of principal with respect to one or more other classes of
certificates 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.
"Controlled Amortization Class" means one or more classes of certificates
where distributions of principal may be made, subject to available funds, based
on a specified principal payment schedule.
"CPR" means the constant prepayment rate model representing 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 mortgage loans.
"Cut-off Date" means the specified date initial aggregate outstanding
principal balance of the related mortgage assets as of a specified date.
"Debt Service Coverage Ratio" means at any given time for a mortgage loan 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 to it that are secured by the
related mortgaged property.
"Determination Date" means the date upon which that all scheduled payments on
the mortgage loans in the trust fund are received or advanced by the master
servicer, special servicer or other specified person will be distributed to
certificateholders of the related series on the next succeeding Distribution
Date.
"Direct Participant" means the securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations
that maintain accounts with DTC.
"Distribution Date" means the date as described in the prospectus supplement
upon which distributions on or with respect to the certificates will be made.
"DOL" means the United States Department of Labor.
"DTC" means The Depository Trust Company.
"Due Date" means a specified date upon which scheduled payments of interest,
principal or both are to be made under a mortgage loan and may occur monthly,
quarterly, semi-annually or annually.
"Due Period" means a specified time period (generally corresponding in length
to the period between Distribution Dates).
"Equity Participation" means a provision under a mortgage loan 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.
-135-
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Funds" means in general 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 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 trust fund that do not
constitute payments of interest or principal.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fannie Mae" means Federal National Mortgage Association.
"Freddie Mac" means Federal Home Loan Mortgage Corporation.
"Garn Act" means the Garn-St Germain Depository Institutions Act of 1982.
"Ginnie Mae" means Governmental National Mortgage Association.
"Grantor Trust Certificates" means certificates in a trust treated as a
grantor trust under applicable provisions of the Code.
"Grantor Trust Fractional Interest Certificate" means a Grantor Trust
Certificate representing an undivided equitable ownership interest in the
principal of the mortgage loans constituting the related Grantor Trust Fund,
together with interest at a pass-through rate.
"Grantor Trust Fund" means that portion of the trust fund as to which no
REMIC election has been made.
"Grantor Trust Strip Certificate" means a Grantor Trust Certificate
representing ownership of all or a portion of the difference between interest
paid on the mortgage loans constituting the related Grantor Trust Fund (net of
normal administration fees) and interest paid to the holders of Grantor Trust
Fractional Interest Certificates issued with respect to such Grantor Trust Fund.
"Indirect Participant" means those banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly.
"Insurance and Condemnation Proceeds" means proceeds applied to the
restoration of a mortgaged property or released to the related borrower in
connection with the full or partial condemnation of such mortgaged property.
"IRS" means the Internal Revenue Service.
"Issue Premium" means, in the case of a class of REMIC Regular Certificates
issued at a price in excess of the stated redemption price of that class, the
amount of such excess.
"Liquidation Proceeds" means all proceeds received under any hazard, title or
other insurance policy (other than Insurance and Condemnation Proceeds) and all
other amounts received and retained in connection with the liquidation of
defaulted mortgage loans or property acquired in respect of such defaulted
mortgage loans, by foreclosure or otherwise.
"Loan-to-Value Ratio" means for a mortgage loan the ratio (expressed as a
percentage) of --
o the then outstanding principal balance of the mortgage loan and any other
loans senior that are secured by the related mortgaged property to
o 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 the mortgage loan.
-136-
"Lock-out Period" means the period in which prepayments are prohibited under
a mortgage loan.
"MBS" means mortgage participations, pass-through certificates or other
mortgage-backed securities that may comprise the assets of the trust fund.
"MERS" means Mortgage Electronic Registration Systems, Inc.
"Mortgage Asset Seller" means the entity from whom the depositor purchased a
mortgage asset either directly or indirectly, included in the trust fund. The
Mortgage Asset Seller may or may not be the originator of the related mortgage
loan or the issuer of the MBS and may be an affiliate of the depositor.
"Mortgage Rate" means the rate at which a mortgage loan accrues interest
which may be fixed over its term or that adjusts from time to time, converted at
the borrower's election from an adjustable to a fixed rate, or from a fixed to
an adjustable rate.
"Multifamily Properties" means 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 comprising some or
all of the mortgaged properties included in the trust fund.
"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 noncash 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.
"NCUA" means the National Credit Union Administration.
"Notional Amount" means the amount upon which a Stripped Interest Certificate
is calculated to accrue interest which 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.
"OCC" means the Office of the Comptroller of the Currency.
"OID Regulations" means the Treasury Department regulations issued under
Sections 1271-1273 and 1275 of the Code.
"OTS" means the Office of Thrift Supervision.
"Parties in Interest" means "parties in interest" as defined in ERISA and
"disqualified person" as defined in Section 4975 of the Code.
"Percentage Interest" means the undivided percentage interest represented by
an offered certificate of a particular class which 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.
"Permitted Investments" means government securities and other obligations
that are acceptable to each rating agency that has rated any one or more classes
of certificates of the related series into which funds from the Certificate
Account may be invested.
-137-
"Plan" means retirement plans, and on certain other employee benefit plans
and arrangements, including individual retirement accounts, individual
retirement annuities, Keogh plans and collective investment funds and separate
accounts (and as applicable, insurance company general accounts) in which such
plans, accounts or arrangements are invested that are subject to the fiduciary
responsibility provisions of ERISA or Section 4975 of the Code.
"Plan Asset Regulations" means Section 2510.3-101 of the regulations issued
by the DOL, concerning what constitutes assets of a Plan.
"Pooling and Servicing Agreement" means pooling and servicing agreement or
other agreement specified in the related prospectus supplement pursuant to which
certificates of each series will be issued.
"Prepayment Assumption" means the prepayment assumption used in reporting
original issue discount for each series of REMIC Regular Certificates or, if
applicable, Grantor Trust Certificates, as disclosed in the related prospectus
supplement.
"Prepayment Interest Shortfall" means the result when 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
than the corresponding amount of interest accrued and otherwise payable on the
certificates of the related series.
"Prepayment Premium" means the payment of any premium or yield maintenance
charge in connection with certain prepayments under a mortgage loan.
"PTCE 95-60" means Prohibited Transaction Class Exemption 95-60.
"Purchase Price" means the price as specified in the prospectus supplement at
which a Mortgage Asset Seller will be required to repurchase a mortgage loan
under the conditions set forth in the prospectus supplement.
"Record Date" means last business day of the month preceding the month in
which the applicable Distribution Date occurs.
"Relief Act" means the Servicemembers Relief Act.
"REMIC" means a real estate mortgage investment conduit, within the meaning
of, and formed in accordance with, the REMIC Provisions of the Code.
"REMIC Certificates" means certificates representing interests in a trust
fund, or a portion of the trust fund, that the REMIC administrator will elect to
have treated as REMIC.
"REMIC Provisions" means Sections 860A through 860G of the Code.
"REMIC Regular Certificates" means certificates evidencing or constituting
ownership of "regular interests" in the trust fund or a designated portion of
the trust under the REMIC Provisions.
"REMIC Regulations" means the Treasury Department regulations issued under
the REMIC Provisions.
"REMIC Residual Certificateholder" means the holder of a REMIC Residual
Certificate.
"REMIC Residual Certificates" means certificates evidencing or constituting
ownership of "residual interests" in the trust or a designated portion of the
trust under the REMIC Provisions.
"REO Properties" means mortgaged properties acquired on behalf of the trust
fund through foreclosure, deed-in-lieu of foreclosure or otherwise.
"RICO" means the Racketeer Influenced and Corrupt Organizations statute.
-138-
"Senior Certificates" means certificates in a given series that are senior to
one or more other classes of certificates in entitlement to certain
distributions;
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
"SPA" means the standard prepayment assumption representing 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,.
"Stripped Interest Certificate" means those certificates entitled to
distributions of interest, with disproportionate, nominal or no distributions of
principal.
"Stripped Principal Certificate" means entitled to distributions of
principal, with disproportionate, nominal or no distributions of interest;
"Subordinate Certificates" means certificates in a given series that are
subordinate to one or more other classes of certificates in entitlement to
certain distributions;
"Tiered REMIC" means designated portions of the trust fund treated as two or
more REMICs.
"Treasury Department" means the United States Treasury Department.
"UCC" means for any jurisdiction the Uniform Commercial Code as in effect in
that jurisdiction.
"U.S. Person" means--
o a citizen or resident of the United States;
o a corporation or partnership created or organized in, or under the laws
of, the United States, any state or the District of Columbia, including an
entity treated as a corporation or partnership for federal income tax
purposes;
o an estate whose income is subject to United States federal income tax
purposes regardless of the source of its income; or
o a trust as to which--
1. a court in the United States is able to exercise primary supervision
over the administration of the trust, and
2. one or more United States persons have the authority to control all
substantial decisions of the trust.
In addition, to the extent provided in the Treasury Department
regulations, a trust will be a U.S. Person if it was in existence on August
20, 1996 and it elected to be treated as a U.S. Person.
"Voting Rights" means the voting rights evidenced by each series of
certificates.
"Warranting Party" means a party that makes certain representations and
warranties regarding the mortgage loans.
-139-
VERSION 2
[Healthcare Concentration]
Prospectus
Banc of America Commercial Mortgage Inc.
Depositor
Bank of America, National Association
Sponsor
Mortgage Pass-Through Certificates
Each Issuing Entity--
o will issue a series of mortgage pass-through certificates, which will
consist of one or more classes of certificates; and
o may own--
o multifamily and commercial mortgage loans; and
o mortgage-backed securities.
Each Pool of Mortgage Loans--
o will be sold to the related issuing entity by the depositor, who will have
in turn purchased the mortgage loans from the sponsor;
o will be underwritten to the standards described in this prospectus or the
accompanying prospectus supplement; and
o will be serviced by one or more servicers affiliated or unaffiliated with
the depositor.
Each Series of Certificates--
o will represent interests in the issuing entity and will be paid only from
the trust assets;
o provide for the accrual of interest based on a fixed, variable or
adjustable interest rate;
o will receive interest and principal payments based on the rate of payment
of principal and the timing of receipt of payments on the mortgage loans;
o may be offered through underwriters, which may include Banc of America
Securities LLC, an affiliate of the depositor; and
o will not be listed on any securities exchange.
Each Series of Certificates--
o may provide credit support by "subordinating" certain classes to other
classes of certificates; any subordinate classes will be entitled to
payment subject to the payment of more senior classes and will bear losses
before more senior classes; and
o may be entitled to the benefit of one or more of the following other types
of credit support as described in this prospectus and in more detail in
the accompanying prospectus supplement: guaranteed investment contracts,
insurance, guarantees, letters of credit, certificate insurance, surety
bonds, reserve funds, cash collateral accounts, pool insurance policies,
special hazard insurance policies, mortgagor bankruptcy bonds,
cross-collateralization, overcollateralization, excess interest and cash
flow agreements.
Neither the SEC nor any state securities commission has approved these
certificates or determined that this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
[_____________], 2005
Consider carefully the risk factors beginning on page 9 in this prospectus.
Neither the certificates nor the underlying mortgage loans are insured by any
governmental agency.
The certificates will represent interests only in the related trust and will not
represent interests in or obligations of Banc of America Commercial Mortgage
Inc. or any of its affiliates, including Bank of America Corporation.
This prospectus may be used to offer and sell any series of certificates only if
accompanied by the prospectus supplement for that series.
- --------------------------------------------------------------------------------
For more information
Banc of America Commercial Mortgage Inc. has filed with the SEC additional
registration materials relating to the certificates. You may read and copy
any of these materials at the SEC's Public Reference Room at the following
location:
SEC Public Reference Section
100 F Street, N.E.
Washington, D.C. 20549
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information that
has been filed electronically with the SEC. The Internet address is
http://www.sec.gov.
You may also contact Banc of America Commercial Mortgage Inc. in writing at Bank
of America Corporate Center, 214 North Tryon Street, Charlotte, North Carolina
28255, or by telephone at (704) 386-8509.
See also the sections captioned "Available Information" and "Incorporation of
Certain Information by Reference" appearing at the end of this prospectus.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS.........................1
RISK FACTORS..................................9
The Limited Liquidity of Your
Certificates May Have an Adverse
Impact on Your Ability to Sell Your
Certificates.............................9
Book Entry System for Certain Classes
of Certificates May Decrease
Liquidity and Delay Payment..............9
Servicing Transfer Following Event of
Default May Result in Payment
Delays or Losses........................10
The Nature of Ratings Are Limited and
Will Not Guarantee that You Will
Receive Any Projected Return on
Your Certificates.......................10
The Ratings of Your Certificates May
Be Lowered or Withdrawn, Which May
Adversely Affect the Liquidity or
Market Value of Your Certificates.......11
The Limited Assets of Each Trust May
Adversely Impact Your Ability To
Recover Your Investment in the
Event of Loss on the Underlying
Mortgage Assets.........................11
The Limited Credit Support for Your
Certificates May Not Be Sufficient
to Prevent Loss on Your Certificates....11
Special Powers of the FDIC in the
Event of Insolvency of the Sponsor
Could Delay or Reduce Distributions
on the Certificates.....................12
Insolvency of the Depositor May Delay
or Reduce Collections on Mortgage
Loans...................................13
Distributions on Your Certificates and
Your Yield May Be Difficult To
Predict.................................13
Prepayments of the Underlying Mortgage
Loans Will Affect the Average Life
of Your Certificates and Your Yield.....14
Certificates Purchased at a Premium or
a Discount Will Be Sensitive to the
Rate of Principal Payment...............17
Other Factors Affecting Yield,
Weighted Average Life and Maturity......17
Prepayment Models Are Illustrative
Only and Do Not Predict Actual
Weighted Average Life and Maturity......19
Timing of Prepayments on the Mortgage
Loans May Result in Interest
Shortfalls on the Certificates..........19
Certain Factors Affecting Delinquency,
Foreclosure and Loss of the
Mortgage Loans..........................20
Exercise of Rights by Certain
Certificateholders May Be Adverse
to Other Certificateholders.............23
The Recording of the Mortgages in the
Name of MERS May Affect the Yield
on Your Certificates....................23
Borrower Defaults May Adversely Affect
Your Yield..............................23
The Borrower's Form of Entity May
Cause Special Risks.....................24
Borrower and Related Party Bankruptcy
Proceedings Entail Certain Risks........25
Tenancies in Common May Hinder or
Delay Recovery..........................25
Mortgaged Properties with Tenants
Present Special Risks...................26
Mortgaged Properties with Multiple
Tenants May Increase Reletting
Costs and Reduce Cash Flow..............27
Tenant Bankruptcy Adversely Affects
Property Performance....................27
Risks Related to Enforceability............27
Potential Absence of Attornment
Provisions Entails Risks................27
Risks Associated with Commercial
Lending May Be Different than those
for Residential Lending.................28
Poor Property Management Will Lower
the Performance of the Related
Mortgaged Property......................29
Particular Property Types Present
Special Risks...........................30
The Operation of the Mortgaged
Property upon Foreclosure of the
Mortgage Loan May Affect Tax Status.....35
One Action Rules May Limit Remedies........35
Property Value May Be Adversely
Affected Even When Current
Operating Income Is Not.................35
Leasehold Interests Are Subject to
Terms of the Ground Lease...............35
Collateral Securing Cooperative Loans
May Diminish in Value...................36
Condominium Ownership May Limit Use
and Improvements........................36
Zoning Laws and Use Restrictions May
Affect the Operation of a Mortgaged
Property or the Ability to Repair
or Restore a Mortgaged Property.........37
Some Mortgaged Properties May Not Be
Readily Convertible to Alternative
Uses....................................37
Appraisals Are Limited in Reflecting
the Value of a Mortgaged Property.......37
Risks Relating to Costs of Compliance
with Applicable Laws and Regulations....37
Additional Compensation to the
Servicer Will Affect Your Right to
Receive Distributions...................38
Liquidity for Certificates May Be
Limited.................................38
Mortgage Loan Repayments and
Prepayments Will Affect Payment.........38
Grace Periods Under the Mortgage Loans
May Impact the Master Servicer's
Obligation to Advance...................38
Risks to the Mortgaged Properties
Relating to Terrorist Attacks and
Foreign Conflicts.......................38
Inclusion of Delinquent Mortgage Loans
in a Mortgage Asset Pool................39
Health Care-Related Properties May
Have Certain Risks Related to
Governmental Subsidy and Government
Regulation..............................39
PROSPECTUS SUPPLEMENT........................39
CAPITALIZED TERMS USED IN THIS PROSPECTUS....40
DESCRIPTION OF THE TRUST FUNDS...............41
General....................................41
Mortgage Loans.............................41
MBS........................................46
Certificate Accounts.......................48
Credit Support.............................48
Cash Flow Agreements.......................48
YIELD AND MATURITY CONSIDERATIONS............48
General....................................48
Pass-Through Rate..........................48
Payment Delays.............................49
Certain Shortfalls in Collections of
Interest................................49
Yield and Prepayment Considerations........49
Weighted Average Life and Maturity.........51
Other Factors Affecting Yield,
Weighted Average Life and Maturity......51
BANK OF AMERICA, NATIONAL ASSOCIATION,
AS SPONSOR................................53
Other Originators..........................54
THE DEPOSITOR................................54
THE MORTGAGE LOAN PROGRAM....................55
Commercial Mortgage Loan Underwriting......55
Representations and Warranties.............58
BANK OF AMERICA, NATIONAL ASSOCIATION,
AS SERVICER...............................59
General....................................59
Special Servicing..........................60
Other Servicers............................61
DESCRIPTION OF THE CERTIFICATES..............62
General....................................62
Distributions..............................63
Distributions of Interest on the
Certificates............................63
Distributions of Principal of the
Certificates............................64
Distributions on the Certificates
Concerning Prepayment Premiums or
Concerning Equity Participations........64
Allocation of Losses and Shortfalls........64
Advances in Respect of Delinquencies.......65
Reports to Certificateholders..............66
Voting Rights..............................67
Termination................................67
Book-Entry Registration and Definitive
Certificates............................68
THE POOLING AND SERVICING AGREEMENTS.........69
General....................................69
Assignment of Mortgage Loans;
Repurchases.............................70
Representations and Warranties;
Repurchases.............................71
Collection and Other Servicing
Procedures..............................72
Sub-Servicers..............................74
Certificate Account........................74
Modifications, Waivers and Amendments
of Mortgage Loans.......................76
Realization Upon Defaulted Mortgage
Loans...................................77
Hazard Insurance Policies..................78
Due-on-Sale and Due-on-Encumbrance
Provisions..............................79
Servicing Compensation and Payment of
Expenses................................79
Evidence as to Compliance..................80
Certain Matters Regarding the Master
Servicer, the Special Servicer, the
REMIC Administrator and the
Depositor...............................81
Events of Default..........................82
Rights Upon Event of Default...............83
Amendment..................................83
List of Certificateholders.................84
The Trustee................................84
Duties of the Trustee......................84
Certain Matters Regarding the Trustee......85
Resignation and Removal of the Trustee.....85
DESCRIPTION OF CREDIT SUPPORT................86
General....................................86
Subordinate Certificates...................86
Insurance or Guarantees Concerning to
Mortgage Loans..........................87
Letter of Credit...........................87
Certificate Insurance and Surety Bonds.....87
Reserve Funds..............................88
Cash Collateral Account....................88
Pool Insurance Policy......................88
Special Hazard Insurance Policy............89
Mortgagor Bankruptcy Bond..................90
Cross Collateralization....................90
Overcollateralization......................90
Excess Interest............................91
Cash Flow Agreements.......................91
Credit Support with respect to MBS.........91
CASH FLOW AGREEMENTS.........................91
Guaranteed Investment Contracts............91
Yield Maintenance Agreements...............91
Swap Agreements............................92
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS......92
General....................................92
Types of Mortgage Instruments..............92
Leases and Rents...........................93
Personalty.................................93
Foreclosure................................94
Bankruptcy Laws............................97
Environmental Considerations...............98
Due-on-Sale and Due-on-Encumbrance
Provisions.............................100
Junior Liens; Rights of Holders of
Senior Liens...........................100
Subordinate Financing.....................101
Default Interest and Limitations on
Prepayments............................101
Applicability of Usury Laws...............102
Certain Laws and Regulations..............102
Americans with Disabilities Act...........102
Servicemembers Civil Relief Act...........102
Forfeiture for Drug and Money
Laundering Violations..................103
Federal Deposit Insurance Act;
Commercial Mortgage Loan Servicing.....103
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....104
General...................................104
REMICs....................................105
Grantor Trust Funds.......................120
Reportable Transactions...................128
STATE AND OTHER TAX CONSEQUENCES............129
CERTAIN ERISA CONSIDERATIONS................129
General...................................129
Plan Asset Regulations....................129
Insurance Company General Accounts........130
Consultation With Counsel.................131
Tax Exempt Investors......................131
LEGAL INVESTMENT............................131
USE OF PROCEEDS.............................133
METHOD OF DISTRIBUTION......................133
LEGAL MATTERS...............................134
RATING......................................134
AVAILABLE INFORMATION.......................135
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE................................136
GLOSSARY....................................136
SUMMARY OF PROSPECTUS
This summary highlights selected information from this prospectus. It does
not contain all the information you need to consider in making your investment
decision. You should carefully review this prospectus and the related prospectus
supplement in their entirety before making any investment in the certificates of
any series. As used in this prospectus, "you" refers to a prospective investor
in certificates, and "we" refers to the depositor, Banc of America Commercial
Mortgage Inc. A "Glossary" appears at the end of this prospectus.
Securities Offered........... Mortgage pass-through certificates.
Sponsor(s)................... Bank of America, National Association will be a
sponsor of each series of certificates. There may
also be one or more other sponsors with respect to
a series of Certificates as described in the
related prospectus supplement. Any such additional
sponsor may or may not be affiliated with Bank of
America, National Association. The mortgage loans
either will be originated by the related sponsor
or purchased by the sponsor from various entities
that originated the mortgage loans either to the
sponsor's underwriting standards or to the
underwriting standards described in the related
prospectus supplement. Each sponsor will sell the
mortgage loans to the depositor on the closing
date specified in the related prospectus
supplement by means of a mortgage loan purchase
agreement between the sponsor and the depositor.
Depositor.................... Banc of America Commercial Mortgage Inc., a
Delaware corporation and a subsidiary of Bank of
America, National Association, has its principal
executive offices at 214 North Tryon Street,
Charlotte, North Carolina 28255, and its telephone
number is (704) 386-8509.
Issuing Entity............... The issuing entity for each series of
certificates will be a common law trust formed
for such series by the Depositor.
Trustee...................... The trustee for each series of certificates will
be named in the related prospectus supplement.
Master Servicer.............. If the trust includes mortgage loans, the
master servicer for the corresponding series of
certificates will be named in the prospectus
supplement.
Special Servicer............. If the trust includes mortgage loans, 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
prospectus supplement.
Other Servicers.............. In addition to the master servicer and the
special servicer, one or more other servicers
may perform servicing functions as subservicers
for the master servicer or special servicer or
otherwise as described in the related
prospectus supplement.
MBS Administrator............ If the trust includes mortgage-backed
securities, the entity responsible for
administering the mortgage-backed securities
will be named in the prospectus supplement.
REMIC Administrator.......... The person responsible for the various tax-related
administration duties for a series of certificates
concerning real estate mortgage investment
conduits will be named in the prospectus
supplement.
The Mortgage Loans........... Each series of certificates will, in general,
be backed by a pool of mortgage loans referred
to as a mortgage asset pool secured by first or
junior liens on--
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; or
o office buildings, retail stores, hotels or
motels, nursing homes, hospitals or other health
care-related facilities (as described immediately
below), recreational vehicle and mobile home
parks, warehouse facilities, mini-warehouse
facilities, self-storage facilities, industrial
plants, parking lots, entertainment or sports
arenas, restaurants, marinas, mixed use or various
other types of income-producing properties or
unimproved land.
The health care-related facilities described in
the second bulleted paragraph above may include--
o facilities providing acute medical care
services;
o skilled nursing facilities;
o nursing homes;
o congregate care homes;
o assisted living facilities; and
o senior and age restricted housing.
However, no one of the following types of
properties will be overly-represented in the trust
at the time the trust is formed: (1) restaurants;
(2) entertainment or sports arenas; (3) marinas;
or (4) nursing homes, hospitals or other health
care-related facilities.
The mortgage loans will not be guaranteed or
insured by Banc of America Commercial Mortgage
Inc. or any of its affiliates or, unless otherwise
provided in the prospectus supplement, by any
governmental agency or by any other person.
If specified in the prospectus supplement, some
mortgage loans may be delinquent as of the date
the trust is formed.
As described in the prospectus supplement, a
mortgage loan may--
o provide for no accrual of interest or for
accrual of interest 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 mortgage rate, or from a fixed to
an adjustable mortgage rate;
o provide for level payments to maturity or
for payments that adjust from time to time
to accommodate changes in the mortgage rate
or to reflect the occurrence of certain
events, and may permit negative
amortization;
-2-
o be fully amortizing or may be partially
amortizing or nonamortizing, with a balloon
payment due on its stated maturity date;
o may permit the negative amortization or
deferral of accrued interest;
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;
o may permit defeasance and the release of
real property collateral in connection with
that defeasance;
o provide for payments of principal, interest
or both, on due dates that occur monthly,
quarterly, semi-annually or at any other
interval as specified in the prospectus
supplement; and
o may have two or more component parts, each
having characteristics that are otherwise
described in this prospectus as being
attributable to separate and distinct
mortgage loans.
Most, if not all, of the mortgage loans underlying
a series of offered certificates will be secured
by liens on real properties located in the United
States, its territories and possessions. However,
some of those mortgage loans may be secured by
liens on real properties located outside the
United States, its territories and possessions,
provided that foreign mortgage loans do not
represent 10% or more of the related mortgage
asset pool, by balance.
Each mortgage loan will have had an original term
to maturity of not more than 40 years. No mortgage
loan will have been originated by Banc of America
Commercial Mortgage Inc., although one of its
affiliates may have originated some of the
mortgage loans.
If any mortgage loan, or group of related mortgage
loans, involves unusual credit risk, financial
statements or other financial information
concerning the related mortgaged property will be
included in the related prospectus supplement.
As described in the prospectus supplement, the
trust may also 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 similar to the other mortgage
loans in the trust and which may or may not be
issued, insured or guaranteed by the United States
or any governmental agency.
Significant Originators...... In addition to the sponsor(s) or their affiliates,
one or more other persons may have originated the
mortgage loans backing the certificates of a
particular series. The related prospectus
supplement will describe any such originator with
respect to mortgage loans representing 10% or more
(by principal balance as of the applicable cut-off
date) of the mortgage loans backing such series.
Significant Obligors......... The related prospectus supplement also will
identify any significant obligor or mortgaged
property representing 10% or more (by principal
-3-
balance as of the applicable cut-off date) of the
mortgage loans backing the related series of
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 prospectus supplement and will represent in
total the entire beneficial ownership interest in
the trust.
As described in the prospectus supplement, the
certificates of each series may consist of one
or more classes that--
o are senior or subordinate to one or more
other classes of certificates in entitlement
to certain distributions on the
certificates;
o are "stripped principal certificates"
entitled to distributions of principal, with
disproportionate, nominal or no
distributions of interest;
o are "stripped interest certificates"
entitled to distributions of interest, with
disproportionate, nominal or no
distributions of principal;
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 that 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 trust;
o provide for distributions based solely or
primarily on specified mortgage assets or a
specified group of 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
trust attributable to prepayment premiums,
yield maintenance payments or equity
participations.
If specified in the prospectus supplement, a
series of certificates may include one or more
"controlled amortization classes," which will
entitle the holders 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 trust remains relatively
constant at the rate of prepayment used to
establish the specific principal payment schedule
for those certificates. Prepayment risk with
respect to a given mortgage asset pool does not
disappear, however, and the stability afforded to
a controlled
-4-
amortization class comes at the expense of one or
more other classes of the same series.
Each class of certificates, other than certain
classes of stripped interest certificates and
certain classes of REMIC residual certificates
will have an initial stated principal amount. Each
class of certificates, other than certain classes
of stripped principal certificates and certain
classes of REMIC residual certificates, will
accrue interest on its certificate balance or, in
the case of certain classes of stripped interest
certificates, on a notional amount, based on a
pass-through rate which may be fixed, variable or
adjustable. The prospectus supplement will specify
the certificate balance, notional amount and/or
pass-through rate for each class of certificates.
Distributions of
Interest on the
Certificates............... Interest on each class of certificates (other than
certain classes of stripped principal certificates
and certain classes of REMIC residual
certificates) of each series will accrue at the
applicable pass-through rate on the certificate
balance and will be paid on a distribution date.
However, in the case of certain classes of
stripped interest certificates, the notional
amount outstanding from time to time will be paid
to certificateholders as provided in the
prospectus supplement on a specified distribution
date.
Distributions of interest concerning 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. Interest accrued concerning a class
of accrual certificates prior to the occurrence of
such an event will either be added to the
certificate balance or otherwise deferred as
described in the prospectus supplement.
Distributions of interest concerning 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 prospectus supplement.
Distributions of
Principal of the
Certificates............... Each class of certificates of each series (other
than certain classes of stripped interest
certificates and certain classes of REMIC residual
certificates) will have a certificate balance. The
certificate balance of a class of certificates
outstanding from time to time will represent the
maximum amount that the holders are then entitled
to receive in respect of principal from future
cash flow on the assets in the trust. The initial
total certificate balance of all classes of a
series of certificates will not be greater than
the outstanding principal balance of the related
mortgage assets as of a specified cut-off date,
after application of scheduled payments due on or
before that date, whether or not received. As
described in the 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
certificates of the series then entitled until the
certificate balances of those certificates have
been reduced to zero. 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 assets in the trust;
-5-
o 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;
o may be made, subject to certain limitations,
based on a specified principal payment
schedule; or
o may be contingent on the specified principal
payment schedule for another class of the
same series and the rate at which payments
and other collections of principal on the
mortgage assets in the trust are received.
Unless otherwise specified in the prospectus
supplement, distributions of principal of
any class of certificates will be made on a
pro rata basis among all of the certificates
of that class.
Credit Support and Cash
Flow Agreements............
If specified in the prospectus supplement, partial
or full protection against certain defaults and
losses on the assets in the trust may be provided
to one or more classes of certificates by (1)
subordination of one or more other classes of
certificates to classes in the same series, or by
(2) one or more of the following other types of
credit support:
o guaranteed investment contracts;
o insurance, guarantees;
o letters of credit;
o certificate insurance;
o surety bonds;
o reserve funds, cash collateral accounts;
o pool insurance policies;
o special hazard insurance policies;
o mortgagor bankruptcy bonds;
o cross-collateralization;
o overcollateralization;
o excess interest; and
o cash flow agreements.
The above types of credit support and cash flow
agreements are described in more detail in this
prospectus under "Description of Credit Support"
and "Cash Flow Agreements".
Certain relevant information regarding any
applicable credit support or cash flow agreement
will be set forth in the prospectus supplement for
a series of certificates.
Advances..................... As specified in the prospectus supplement, if the
trust includes mortgage loans, the master
servicer, the special servicer, the trustee,
-6-
any provider of credit support, and/or another
specified person may be obligated to make, or have
the option of making, certain advances concerning
delinquent scheduled payments of principal and/or
interest on mortgage loans. Any advances made
concerning a particular mortgage loan will be
reimbursable from subsequent recoveries relating
to the particular mortgage loan and as described
in the prospectus supplement. If specified in the
prospectus supplement, any entity making advances
may be entitled to receive interest for a
specified period during which those advances are
outstanding, payable from amounts in the trust. If
the trust includes mortgaged-backed securities,
any comparable advancing obligation of a party to
the related pooling and servicing agreement, or of
a party to the related mortgage-backed securities
agreement, will be described in the prospectus
supplement.
[Information about Periodic Advances for the
previous three years, to the extent material and
to the extent data is available.]
Optional Termination......... If specified in the prospectus supplement, a
series of certificates may be subject to optional
early termination through the repurchase of the
mortgage assets in the trust. If provided in the
related prospectus supplement, upon the reduction
of the certificate balance of a specified class or
classes of certificates by a specified percentage
or amount, a specified party may be authorized or
required to solicit bids for the purchase of all
of the assets of the trust, or of a sufficient
portion of those assets to retire that class or
classes.
Certain Federal Income
Tax Consequences........... The certificates of each series will constitute
or evidence ownership of either--
o "regular interests" and "residual interests"
in the trust, or a designated portion of the
trust, treated as a REMIC under Sections
860A through 860G of the Code; or
o certificates in a trust treated as a grantor
trust under applicable provisions of the
Code.
If one or more REMIC elections are made,
certificates that are regular interests will be
treated as newly issued debt instruments of the
REMIC and must be accounted for under an accrual
method of accounting. Certificates that are
residual interests are not treated as debt
instruments, but rather must be treated according
to the rules prescribed in the Internal Revenue
Code for REMIC residual interests, including
restrictions on transfer and the reporting of net
income or loss of the REMIC, including the
possibility of a holder of such certificate having
taxable income without a corresponding
distribution of cash to pay taxes currently due.
If the certificates represent interests in a
grantor trust, beneficial owners of certificates
generally are treated as owning an undivided
beneficial interest in the mortgage loans that are
assets of the trust.
Investors are advised to consult their tax
advisors and to review "Certain Federal Income Tax
Consequences" in this prospectus and in the
prospectus supplement.
-7-
Certain ERISA Considerations. Fiduciaries of retirement plans and certain other
employee benefit plans and arrangements, including
individual retirement accounts, individual
retirement annuities, Keogh plans, and collective
investment funds and separate individual
retirement 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, Section 4975 of the
Internal Revenue Code of 1986, or any materially
similar provisions of federal, state or local law
should review with their legal advisors whether
the purchase or holding of certificates could give
rise to a transaction that is prohibited.
Legal Investment............. If so specified in the prospectus supplement,
certain classes of certificates will constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984,
as amended. 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 for assistance in
determining whether and to what extent the
certificates constitute legal investments for
them.
See "Legal Investment" in this prospectus.
Rating....................... At their respective dates of issuance, each class
of certificates will be rated as of investment
grade by one or more nationally recognized
statistical rating agencies.
-8-
RISK FACTORS
In considering an investment in the certificates of any series, you should
consider carefully the following risk factors and the risk factors in the
prospectus supplement.
The Limited Liquidity of Your Certificates May Have an Adverse Impact on Your
Ability to Sell Your Certificates
The certificates of any series may have limited or no liquidity. You may be
forced to bear the risk of investing in the certificates for an indefinite
period of time. In addition, you may have no redemption rights, and the
certificates are subject to early retirement only under certain circumstances.
Lack of a Secondary Market May Limit the Liquidity of Your Certificate. We
cannot assure you that a secondary market for the certificates will develop or,
if it does develop, that it will provide certificateholders with liquidity of
investment or that it will continue for as long as the certificates remain
outstanding.
The prospectus supplement may indicate that an underwriter intends to
establish a secondary market in the certificates, although no underwriter will
be obligated to do so. Any secondary market may provide less liquidity to
investors than any comparable market for securities relating to single-family
mortgage loans. Unless specified in the prospectus supplement, the certificates
will not be listed on any securities exchange.
The Limited Nature of Ongoing Information Regarding Your Certificate May
Adversely Affect Liquidity. The primary source of ongoing information regarding
the certificates, including information regarding the status of the related
mortgage assets and any credit support for the certificates, will be the
periodic reports to certificateholders to be delivered pursuant to the related
Pooling and Servicing Agreement.
We cannot assure you that any additional ongoing information regarding the
certificates will be available through any other source. The limited nature of
the information concerning a series of certificates may adversely affect
liquidity, even if a secondary market for the certificates does develop.
The Liquidity of Your Certificate May Be Affected by External Sources
Including Interest Rate Movement. If a secondary market does develop for the
certificates, the market value of the certificates will be affected by several
factors, including--
o perceived liquidity;
o the anticipated cash flow (which may vary widely depending upon the
prepayment and default assumptions concerning the underlying mortgage
loans); and
o prevailing interest rates.
The price payable at any given time for certain classes of certificates may
be extremely sensitive to small fluctuations in prevailing interest rates. The
relative change in price for a certificate in response to an upward or downward
movement in prevailing interest rates may not necessarily equal the relative
change in price for the certificate in response to an equal but opposite
movement in those rates. Therefore, the sale of certificates by a holder in any
secondary market that may develop may be at a discount from the price paid by
the holder. We are not aware of any source through which price information about
the certificates will be generally available on an ongoing basis.
Book Entry System for Certain Classes of Certificates May Decrease Liquidity and
Delay Payment
Because transactions in the classes of book entry certificates of any series
generally can be effected only through DTC, DTC participants and indirect DTC
participants:
-9-
o your ability to pledge book entry certificates to someone who does not
participate in the DTC system, or to otherwise take action relating to
your book entry certificates, may be limited due to the lack of a
physical certificate;
o you may experience delays in your receipt of payments on book entry
certificates because distributions will be made by the trustee, or a
paying agent on behalf of the trustee, to Cede & Co., as nominee for DTC,
rather than directly to you; and
o you may experience delays in your receipt of payments on book-entry
certificates in the event of misapplication of payments by DTC, DTC
participants or indirect DTC participants or bankruptcy or insolvency of
those entities and your recourse will be limited to your remedies against
those entities.
Servicing Transfer Following Event of Default May Result in Payment
Delays or Losses
Following the occurrence of an event of default under a pooling agreement,
the trustee for the related series may, in its discretion or pursuant to
direction from certificateholders, remove the defaulting master servicer or
special servicer and succeed to its responsibilities, or may petition a court to
appoint a successor master servicer or special servicer. The trustee or the
successor master servicer or special servicer will be entitled to reimbursement
of its costs of effecting the servicing transfer from the predecessor master
servicer or special servicer, or from the assets of the related trust if the
predecessor fails to pay. In the event that reimbursement to the trustee or the
successor master servicer or special servicer is made from trust assets, the
resulting shortfall will be borne by holders of the related certificates, to the
extent not covered by any applicable credit support. In addition, during the
replacement process or for some time thereafter, mortgagors of the related
mortgage loans may delay making their monthly payments or may inadvertently
continue making payments to the predecessor master servicer or special servicer,
potentially resulting in delays in distributions on the related certificates.
The Nature of Ratings Are Limited and Will Not Guarantee that You Will Receive
Any Projected Return on Your Certificates
Any credit rating assigned by a rating agency to a class of certificates will
reflect only its assessment of the likelihood that holders of the certificates
will receive payments to which the certificateholders are entitled under the
related Pooling and Servicing Agreement. Such rating will not constitute an
assessment of the likelihood that--
o principal prepayments on the related mortgage loans will be made;
o the degree to which the rate of such prepayments might differ from that
originally anticipated; or
o the likelihood of early optional termination of the trust.
Any rating will not address the possibility that prepayment of the mortgage
loans at a higher or lower rate than anticipated by an investor may cause such
investor to experience a lower than anticipated yield or that an investor
purchasing a certificate at a significant premium might fail to recover its
initial investment under certain prepayment scenarios. Therefore, a rating
assigned by a rating agency does not guarantee or ensure the realization of any
anticipated yield on a class of certificates.
The amount, type and nature of credit support given a series of certificates
will be determined on the basis of criteria established by each rating agency
rating classes of the certificates of such series. Those criteria are sometimes
based upon an actuarial analysis of the behavior of mortgage loans in a larger
group. There can be no assurance that the historical data supporting any such
actuarial analysis will accurately reflect future experience, or that the data
derived from a large pool of mortgage loans will accurately predict the
delinquency, foreclosure or loss experience of any particular pool of mortgage
loans. In other cases, such criteria may be based upon determinations of the
values of the 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 the certificates of any series
may be insufficient to fully protect the holders of such certificates from
losses on the related mortgage asset pool.
-10-
The Ratings of Your Certificates May Be Lowered or Withdrawn, Which May
Adversely Affect the Liquidity or Market Value of Your Certificates
It is a condition to the issuance of the offered certificates that they be
rated in one of the four highest rating categories by at least one nationally
recognized statistical rating organization. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to maintain the rating on any
certificate, and accordingly, there can be no assurance to you that the ratings
assigned to any certificate on the date on which the certificate is originally
issued will not be lowered or withdrawn by a rating agency at any time
thereafter. The rating(s) of any series of certificates by any applicable rating
agency may be lowered following the initial issuance of the certificates as a
result of the downgrading of the obligations of any applicable credit support
provider, or as a result of losses on the related mortgage loans in excess of
the levels contemplated by the rating agency at the time of its initial rating
analysis. Neither the depositor nor the sponsor nor any of their respective
affiliates will have any obligation to replace or supplement any credit support,
or to take any other action to maintain any rating(s) of any series of
certificates. If any rating is revised or withdrawn, the liquidity or the market
value of your certificate may be adversely affected.
The Limited Assets of Each Trust May Adversely Impact Your Ability To Recover
Your Investment in the Event of Loss on the Underlying Mortgage Assets
Except for any related insurance policies, reserve funds, or other external
credit enhancement described in the prospectus supplement, the mortgage loans
included in a trust fund will be the sole source of payments on the certificates
of a series. Unless specified in the prospectus supplement, neither the
certificates nor the mortgage assets in the trust will be guaranteed or insured
by Banc of America Commercial Mortgage Inc. or any of its affiliates, by any
governmental agency or by any other person or entity. No certificate will
represent a claim against or security interest in the trust funds for any other
series. Therefore, if the related trust fund has insufficient assets to make
payments, no other assets will be available for payment of the deficiency, and
the holders of one or more classes of the certificates will be required to bear
the consequent loss.
In addition, the mortgage loans are generally non-recourse loans. If a
default occurs under any mortgage loan, recourse generally may be had only
against the specific properties and other assets that have been pledged to
secure the loan. Payment prior to maturity is consequently dependent primarily
on the sufficiency of the net operating income of the mortgaged property.
Payment at maturity is primarily dependent upon the market value of the
mortgaged property or the borrower's ability to refinance the property. We will
not have undertaken an evaluation of the financial condition of any borrower.
Amounts on deposit from time to time in certain accounts constituting part of
the trust, including the certificate account and any accounts maintained as
credit support, may be withdrawn for purposes other than the payment of
principal of or interest on the related series of certificates under certain
conditions. On any distribution occurring after losses or shortfalls in
collections on the mortgage assets have been incurred, all or a portion of those
losses or shortfalls will be borne on a disproportionate basis among classes of
certificates.
The Limited Credit Support for Your Certificates May Not Be Sufficient to
Prevent Loss on Your Certificates
The prospectus supplement for a series of certificates will describe any
credit support. The credit support may not cover all potential losses. 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 certificates.
A series of certificates may include one or more classes of subordinate
certificates, if provided in the prospectus supplement. 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 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 certificates of that series have been repaid in full.
-11-
The impact of losses and shortfalls experienced with respect to the mortgage
assets may fall primarily upon those classes of certificates having a later
right of payment.
If a form of credit support covers the certificates of more than one series
and losses on the related mortgage assets exceed the amount of the credit
support, it is possible that the holders of certificates of one (or more) series
will disproportionately benefit from that credit support, to the detriment of
the holders of certificates of one (or more) other series.
The amount of any applicable credit support supporting one or more classes of
certificates will be determined on the basis of criteria established by each
rating agency rating such classes of certificates based on an assumed level of
defaults, delinquencies and losses on the underlying mortgage assets and certain
other factors. However, we cannot assure you that the loss experience on the
related mortgage assets will not exceed such assumed levels. If the losses on
the related mortgage assets do exceed such assumed levels, the holders of one or
more classes of certificates will be required to bear such additional losses.
Special Powers of the FDIC in the Event of Insolvency of the Sponsor
Could Delay or Reduce Distributions on the Certificates
The mortgage loans will be originated or acquired by the sponsor, a national
bank whose deposits are insured to the applicable limits by the FDIC. If the
sponsor becomes insolvent, is in an unsound condition or engages in violations
of its bylaws or regulations applicable to it or if similar circumstances occur,
the FDIC could act as conservator and, if a receiver were appointed, would act
as a receiver for the sponsor. As receiver, the FDIC would have broad powers to:
o require the trust, as assignee of the depositor, to go through an
administrative claims procedure to establish its rights to payments
collected on the mortgage loans; or
o request a stay of proceedings to liquidate claims or otherwise enforce
contractual and legal remedies against the sponsor, or
o if the sponsor is a servicer for a series of certificates, repudiate
without compensation the sponsor's ongoing servicing obligations under
the pooling agreement, such as its duty to collect and remit payments or
otherwise service the mortgage loans.
If the FDIC were to take any of those actions, distributions on the
certificates could be delayed or reduced.
By statute, the FDIC as conservator or receiver of the sponsor is authorized
to repudiate any "contract" of the sponsor upon payment of "actual direct
compensatory damages." This authority may be interpreted by the FDIC to permit
it to repudiate the transfer of the mortgage loans to the depositor. Under an
FDIC regulation, however, the FDIC as conservator or receiver of a bank has
stated that it will not reclaim, recover or recharacterize a bank's transfer of
financial assets in connection with a securitization or participation, provided
that the transfer meets all conditions for sale accounting treatment under
generally accepted accounting principles, other than the "legal isolation"
condition as it applies to institutions for which the FDIC may be appointed as
conservator or receiver, was made for adequate consideration and was not made
fraudulently, in contemplation of insolvency, or with the intent to hinder,
delay or defraud the bank or its creditors. For purposes of the FDIC regulation,
the term securitization means, as relevant, the issuance by a special purpose
entity of beneficial interests the most senior class of which at time of
issuance is rated in one of the four highest categories assigned to long-term
debt or in an equivalent short-term category (within either of which there may
be sub-categories or gradations indicating relative standing) by one or more
nationally recognized statistical rating organizations. A special purpose
entity, as the term is used in the regulation, means a trust, corporation, or
other entity demonstrably distinct from the insured depository institution that
is primarily engaged in acquiring and holding (or transferring to another
special purpose entity) financial assets, and in activities related or
incidental to these actions, in connection with the issuance by the special
purpose entity (or by another special purpose entity that acquires financial
assets directly or indirectly from the special purpose entity) of beneficial
interests. The transactions contemplated by this prospectus and the related
prospectus supplement will be structured so that this FDIC regulation should
apply to the transfer of the mortgage loans from the sponsor to the depositor.
-12-
If a condition required under the FDIC regulation, or other statutory or
regulatory requirement applicable to the transaction, were found not to have
been satisfied, the FDIC as conservator or receiver might refuse to recognize
the sponsor's transfer of the mortgage loans to the depositor. In that event the
depositor could be limited to seeking recovery based upon its security interest
in the mortgage loans. The FDIC's statutory authority has been interpreted by
the FDIC and at least one court to permit the repudiation of a security interest
upon payment of actual direct compensatory damages measured as of the date of
conservatorship or receivership. These damages do not include damages for lost
profits or opportunity, and no damages would be paid for the period between the
date of conservatorship or receivership and the date of repudiation. The FDIC
could delay its decision whether to recognize the sponsor's transfer of the
mortgage loans for a reasonable period following its appointment as conservator
or receiver for the sponsor. If the FDIC were to refuse to recognize the
sponsor's transfer of the mortgage loans, distributions on the certificates
could be delayed or reduced.
If specified in the applicable prospectus supplement, the sponsor will also
act as servicer of the mortgage loans. If the FDIC acted as receiver for the
sponsor after the sponsor's insolvency, the FDIC could prevent the termination
of the sponsor as servicer of the mortgage loans, even if a contractual basis
for termination exists. This inability to terminate the sponsor as servicer
could result in a delay or possibly a reduction in distributions on the
certificates to the extent the sponsor received, but did not remit to the
trustee, mortgage loan collections received by the sponsor before the date of
insolvency or if the sponsor failed to make any required advances.
The collection of amounts with respect to the mortgage loans, which are the
source of repayment for the certificates, will depend significantly on the
performance by the master servicer and the special servicer of their respective
roles under the pooling agreement and any other servicing agreements described
in this prospectus supplement. You will not be a party to any of these
agreements and will be relying on the persons who are to perform their duties
under such agreements and upon such persons, and the trustee in particular, to
enforce the parties' obligations under such agreements. In the event of the
resignation or termination of the master servicer or the special servicer, the
trustee may assume the related responsibilities and servicing functions or name
a replacement as described under "The Pooling and Servicing Agreements--Rights
Upon Default". In particular, any interruption or delay associated with such
replacement could have a corresponding adverse affect on amounts collected on
the mortgage loans and available for distribution on the certificates.
Insolvency of the Depositor May Delay or Reduce Collections on Mortgage Loans
Neither the United States Bankruptcy Code nor similar applicable state laws
prohibit the depositor from filing a voluntary application for relief under
these laws. However, the transactions contemplated by this prospectus and the
related prospectus supplement will be structured so that the voluntary or
involuntary application for relief under the bankruptcy laws by the depositor is
unlikely. The depositor is a separate, limited purpose subsidiary, the
certificate of incorporation of which contains limitations on the nature of the
depositor's business, including the ability to incur debt other than debt
associated with the transactions contemplated by this prospectus, and
restrictions on the ability of the depositor to commence voluntary or
involuntary cases or proceedings under bankruptcy laws. Further, the transfer of
the mortgage loans to the related trust will be structured so that the trustee
has no recourse to the depositor, other than for breaches or representations and
warranties about the mortgage loans.
If the depositor were to become the subject of a proceeding under the
bankruptcy laws, a court could conclude that the transfer of the mortgage loans
from the depositor to the trust should not be characterized as an absolute
transfer, and accordingly, that the mortgage loans should be included as part of
the depositor's estate. Under these circumstances, the bankruptcy proceeding
could delay or reduce distributions on the certificates. In addition, a
bankruptcy proceeding could result in the temporary disruption of distributions
on the certificates.
Distributions on Your Certificates and Your Yield May Be Difficult To Predict
The yield on any offered certificate will depend on (a) the price at which
such certificate is purchased by an investor and (b) the rate, timing and amount
of distributions on such certificate. The rate, timing and amount of
distributions on any offered certificate will, in turn, depend on, among other
things:
o the pass through rate for such certificate;
-13-
o the rate and timing of principal payments (including principal
prepayments) and other principal collections on or in respect of the
mortgage loans and the extent to which such amounts are to be applied or
otherwise result in a reduction of the certificate balance of the class
of certificates to which such certificate belongs;
o the rate, timing and severity of realized losses and additional trust
fund expenses (each as described in this prospectus supplement) and the
extent to which such losses and expenses result in the failure to pay
interest on, or a reduction of the certificate balance of, the class of
certificates to which such certificate belongs;
o the timing and severity of any net aggregate prepayment interest
shortfalls (each as described in this prospectus supplement) and the
extent to which such shortfalls are allocated in reduction of the
distributable certificate interest payable on the class of certificates
to which such certificate belongs;
o the extent to which prepayment premiums and yield maintenance charges are
collected and, in turn, distributed on the class of certificates to which
such certificate belongs; and
o the rate and timing of reimbursement of advances.
It is impossible to predict with certainty any of the factors described in
the preceding paragraph. Accordingly, investors may find it difficult to analyze
the effect that such factors might have on the yield to maturity of any class of
offered certificates.
Prepayments of the Underlying Mortgage Loans Will Affect the Average Life of
Your Certificates and Your Yield
As a result of prepayments on the mortgage loans in the trust, the amount and
timing of distributions of principal and/or interest on the certificates of the
related series may be highly unpredictable. Prepayments on the mortgage loans in
the trust will result in a faster rate of principal payments on one or more
classes of the related series of certificates than if payments on those mortgage
loans were made as scheduled. Therefore, the prepayment experience on the
mortgage loans in the trust may affect the average life of one or more classes
of certificates of the related series.
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 mortgage rates borne by the mortgage loans
included in the trust, principal prepayments on those mortgage loans are likely
to be higher than if prevailing interest rates remain at or above the rates
borne by those mortgage loans. Conversely, if prevailing interest rates rise
significantly above the mortgage rates borne by the mortgage loans included in
the trust, then principal prepayments on those mortgage loans are likely to be
lower than if prevailing interest rates remain at or below the mortgage rates
borne by those mortgage loans.
Voluntary prepayments, if permitted, generally require payment of a
prepayment premium or yield maintenance charge. Nevertheless, we cannot assure
you that the related borrowers will refrain from prepaying their mortgage loans
due to the existence of a prepayment premium or yield maintenance charge. Also,
we cannot assure you that involuntary prepayments will not occur.
As described in the related prospectus supplement, the terms of certain
mortgage loans, in connection with a partial release of the related mortgaged
property, may permit a voluntary partial defeasance or a partial prepayment at
any time with the delivery of the defeasance collateral or, the payment of a
prepayment premium or yield maintenance charge as applicable.
The rate at which voluntary prepayments occur on the mortgage loans will be
affected by a variety of factors, including:
o the terms of the mortgage loans;
o the length of any prepayment lockout period;
o the level of prevailing interest rates;
-14-
o the availability of mortgage credit;
o the applicable prepayment premiums or yield maintenance charges;
o the master servicer's or special servicer's ability to enforce those
charges or premiums;
o the occurrence of casualties or natural disasters; and
o economic, demographic, tax, legal or other factors.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
loan's interest rate, a borrower may have an increased incentive to refinance
its mortgage loan. Even in the case of adjustable rate mortgage loans, as
prevailing market interest rates decline, and without regard to whether the
mortgage interest rates on the adjustable rate mortgage loans decline in a
manner consistent therewith, the related borrowers may have an increased
incentive to refinance for purposes of either (1) converting to a fixed rate
loan and thereby "locking in" that rate or (2) taking advantage of a different
index, margin or rate cap or floor on another adjustable rate mortgage loan.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments. In addition,
some borrowers may be motivated by federal and state tax laws (which are subject
to change) to sell mortgaged properties prior to the exhaustion of tax
depreciation benefits. We will make no representation as to the particular
factors that will affect the prepayment of the mortgage loans in any trust fund,
as to the relative importance of those factors, as to the percentage of the
principal balance of the mortgage loans that will be paid as of any date or as
to the overall rate of prepayment on the mortgage loans.
No prepayment premium or yield maintenance charge will be generally required
for prepayments in connection with a casualty or condemnation. In addition, if a
mortgage loan seller repurchases any mortgage loan from the trust due to a
material breach of representations or warranties or a material document defect,
the repurchase price paid will be passed through to the holders of the
certificates with the same effect as if the mortgage loan had been prepaid in
part or in full, except that no prepayment premium or yield maintenance charge
would be payable. The repurchase price paid by a mortgage loan seller may not
include a liquidation fee if purchased within the timeframe set forth in the
pooling and servicing agreement. Such a repurchase may therefore adversely
affect the yield to maturity on your certificates.
We cannot assure you what as to the actual rate of prepayment on the mortgage
loans in the trust will be, or that the rate of prepayment will conform to any
model in any prospectus supplement. As a result, depending on the anticipated
rate of prepayment for the mortgage loans in the trust, the retirement of any
class of certificates of the related series could occur significantly earlier or
later, and its average life could be significantly shorter or longer, than
expected.
The extent to which prepayments on the mortgage loans in trust ultimately
affect the average life of any class of certificates of the related series will
depend on the terms and provisions of the certificates. A class of certificates
may provide that on any distribution date the holders of the certificates are
entitled to a pro rata share of the prepayments on the mortgage loans in the
trust fund that are distributable on that date.
A class of certificates that entitles the holders to a disproportionately
large share of the prepayments on the mortgage loans in the trust increases the
likelihood of early retirement of that class if the rate of prepayment is
relatively fast. This type of early retirement risk is sometimes referred to as
"call risk."
A class of certificates that entitles its holders to a disproportionately
small share of the prepayments on the mortgage loans in the trust increases the
likelihood of an extended average life of that class if the rate of prepayment
is relatively slow. This type of prolonged retirement risk is sometimes referred
to as "extension risk."
-15-
As described in the prospectus supplement, the respective entitlements of the
various classes of certificate-holders of any series to receive payments (and,
in particular, prepayments) of principal of the mortgage loans in the trust may
vary based on the occurrence of certain events (e.g., the retirement of one or
more classes of certificates of that series) or subject to certain contingencies
(e.g., prepayment and default rates with respect to those mortgage loans).
A series of certificates may include one or more controlled amortization
classes, which will entitle the holders 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 trust remains
relatively constant at the rate of prepayment used to establish the specific
principal payment schedule for the certificates. Prepayment risk concerning 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.
As described in the prospectus supplement, a companion class may entitle the
holders to a disproportionately large share of prepayments on the mortgage loans
in the trust when the rate of prepayment is relatively fast, and/or may entitle
the holders to a disproportionately small share of prepayments on the mortgage
loans in the trust when the rate of prepayment is relatively slow. A class of
certificates that entitles the holders of those certificates to a
disproportionately large share of the prepayments on the mortgage loans in the
related trust fund enhances the risk of early retirement of that class, or call
risk, if the rate of prepayment is relatively fast; while a class of
certificates that entitles the holders of those certificates to a
disproportionately small share of the prepayments on the mortgage loans in the
related trust fund enhances the risk of an extended average life of that class,
or extension risk, if the rate of prepayment is relatively slow. Thus, as
described in the related prospectus supplement, a companion class absorbs some
(but not all) of the "call risk" and/or "extension risk" that would otherwise
belong to the related controlled amortization class if all payments of principal
of the mortgage loans in the related trust fund were allocated on a pro rata
basis.
Each controlled amortization class will either be a planned amortization
class or a targeted amortization class or such other similar class as is
described in the prospectus supplement. In general, a planned amortization class
has a "prepayment collar", that is, a range of prepayment rates that can be
sustained without disruption, that determines the principal cash flow of those
certificates. That prepayment collar is not static, and may expand or contract
after the issuance of the planned amortization class depending on the actual
prepayment experience for the underlying mortgage loans. Distributions of
principal on a planned amortization class would be made in accordance with the
specified schedule so long as prepayments on the underlying mortgage loans
remain at a relatively constant rate within the prepayment collar and, as
described below, companion classes exist to absorb "excesses" or "shortfalls" in
principal payments on the underlying mortgage loans. If the rate of prepayment
on the underlying mortgage loans from time to time falls outside the prepayment
collar, or fluctuates significantly within the prepayment collar, especially for
any extended period of time, that event may have material consequences in
respect of the anticipated weighted average life and maturity for a planned
amortization class. A targeted amortization class is structured so that
principal distributions generally will be payable on it in accordance with its
specified principal payments schedule so long as the rate of prepayments on the
related mortgage assets remains relatively constant at the particular rate used
in establishing that schedule. A targeted amortization class will generally
afford the holders of those certificates some protection against early
retirement or some protection against an extended average life, but not both.
In general, the notional amount of a class of interest-only certificates will
either (1) be based on the principal balances of some or all of the mortgage
assets in the related trust fund or (2) equal the principal balances of one or
more of the other classes of certificates of the same series. Accordingly, the
yield on those interest-only certificates will be inversely related to the rate
at which payments and other collections of principal are received on those
mortgage assets or distributions are made in reduction of the principal balances
of those 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 those mortgage loans will negatively affect the yield to
investors in
-16-
interest-only certificates. If the offered certificates of a series include
those certificates, the related prospectus supplement will include a table
showing the effect of various assumed levels of prepayment on yields on those
certificates. Those tables will be intended to illustrate the sensitivity of
yields to various assumed prepayment rates and will not be intended to predict,
or to provide information that will enable investors to predict, yields or
prepayment rates.
Certificates Purchased at a Premium or a Discount Will Be Sensitive to the Rate
of Principal Payment
A series of certificates may include one or more classes offered at a premium
or discount. Yields on those classes of certificates will be sensitive, and in
some cases extremely sensitive, to prepayments on the mortgage loans in the
trust fund. If the amount of interest payable with respect to a class is
disproportionately large as compared to the amount of principal, as with certain
classes of stripped interest certificates, a holder might fail to recover its
original investment under some prepayment scenarios. The yield to maturity of
any class of certificates may vary from the anticipated yield due to the degree
to which the certificates are purchased at a discount or premium and the amount
and timing of distributions.
You should consider, in the case of any certificate purchased at a discount,
the risk that a slower than anticipated rate of principal payments on the
mortgage loans could result in an actual yield to such investor that is lower
than the anticipated yield. In the case of any certificate purchased at a
premium, you should consider the risk that a faster than anticipated rate of
principal payments could result in an actual yield to such investor that is
lower than the anticipated yield. Further information relating to yield on
certificates particularly sensitive to principal prepayments will be included in
the applicable prospectus supplement, including, in the case of interest only
certificates and principal only certificates, a table demonstrating the
particular sensitivity of those interest only certificates to the rate of
prepayments.
Other Factors Affecting Yield, Weighted Average Life and Maturity
Balloon Payments; Extensions of Maturity. Some or all of the mortgage loans
included in a particular trust fund may require that balloon payments be made at
maturity. Because the ability of a borrower to make a balloon payment typically
will depend upon its ability either to refinance the loan or to sell the related
mortgaged property, there is a risk that mortgage loans that require balloon
payments may default at maturity, or that the maturity of that mortgage loan may
be extended in connection with a workout. In the case of defaults, recovery of
proceeds may be delayed by, among other things, bankruptcy of the borrower or
adverse conditions in the market where the property is located. In order to
minimize losses on defaulted mortgage loans, the master servicer or a special
servicer, to the extent and under the circumstances set forth in this prospectus
and in the related prospectus supplement, may be authorized to modify mortgage
loans that are in default or as to which a payment default is imminent. Any
defaulted balloon payment or modification that extends the maturity of a
mortgage loan may delay distributions of principal on a class of offered
certificates and thereby extend the weighted average life of your certificates
and, if those certificates were purchased at a discount, reduce your yield.
Negative Amortization. The weighted average life of a class of certificates
can be affected by mortgage loans that permit negative amortization to occur. A
mortgage loan that provides for the payment of interest calculated at a rate
lower than the rate at which interest accrues on it 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.
This slower rate of mortgage loan amortization would correspondingly be
reflected in a slower rate of amortization for one or more classes of
certificates of the related series. In addition, negative amortization on one or
more mortgage loans in any trust fund may result in negative amortization on the
certificates of the related series. The related prospectus supplement will
describe, if applicable, the manner in which negative amortization in respect of
the mortgage loans in any trust fund is allocated among the respective classes
of certificates of the related series. The portion of any mortgage loan negative
amortization allocated to a class of certificates may result in a deferral of
some or all of the interest payable on them, which deferred interest may be
added to the principal balance of the certificates. Accordingly, the weighted
average lives of mortgage loans that permit negative amortization and that of
the classes of certificates to which the negative amortization would be
allocated or that would bear the effects of a slower rate of amortization on
those mortgage loans, may increase as a result of that feature.
-17-
Negative amortization also may occur in respect of an adjustable rate
mortgage loan that limits the amount by which its scheduled payment may adjust
in response to a change in its mortgage interest rate, provides that its
scheduled payment will adjust less frequently than its mortgage interest rate or
provides for constant scheduled payments notwithstanding adjustments to its
mortgage interest rate. Accordingly, during a period of declining interest
rates, the scheduled payment on that mortgage loan may exceed the amount
necessary to amortize the loan fully over its remaining amortization schedule
and pay interest at the then applicable mortgage interest rate, thereby
resulting in the accelerated amortization of that mortgage loan. This
acceleration in amortization of its principal balance will shorten the weighted
average life of that mortgage loan and, correspondingly, the weighted average
lives of those classes of certificates entitled to a portion of the principal
payments on that 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 (1) whether that offered certificate was
purchased at a premium or a discount and (2) the extent to which the payment
characteristics of those mortgage loans delay or accelerate the distributions of
principal on that certificate or, in the case of an interest-only certificate,
delay or accelerate the amortization of the notional amount of that certificate.
Foreclosures and Payment Plans. The number of foreclosures and the principal
amount of the mortgage loans that are foreclosed in relation to the number and
principal amount of mortgage loans that are repaid in accordance with their
terms will affect the weighted average lives of those mortgage loans and,
accordingly, the weighted average lives of and yields on the certificates of the
related series. Servicing decisions made with respect to the mortgage loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of mortgage loans in bankruptcy proceedings, may also have an
effect upon the payment patterns of particular mortgage loans and thus the
weighted average lives of and yields on the certificates of the related series.
Losses and Shortfalls on the Mortgage Assets. The yield on your certificates
will directly depend on the extent to which you 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 those losses and
shortfalls. In general, the earlier that any loss or shortfall occurs, the
greater will be the negative effect on yield for any class of certificates that
is required to bear the effects of the shortfall.
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, those allocations
may be effected by a reduction in the entitlements to interest and/or principal
balances of one or more classes of certificates, or by establishing a priority
of payments among those classes of certificates.
The yield to maturity on a class of Subordinate Certificates may be extremely
sensitive to losses and shortfalls in collections on the mortgage loans in the
related trust fund.
Additional Certificate Amortization. In addition to entitling the holders of
one or more classes of a series of certificates to a specified portion, which
may during specified periods range from none to all, of the principal payments
received on the mortgage assets in the related trust fund, one or more classes
of certificates of any series, including one or more classes of offered
certificates of those series, may provide for distributions of principal of
those certificates from (1) amounts attributable to interest accrued but not
currently distributable on one or more classes of accrual certificates, (2)
excess funds or (3) any other amounts described in the related prospectus
supplement. In general, "excess funds" as used above will represent that portion
of the amounts distributable in respect of the certificates of any series on any
distribution date that represent (1) 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 that series, or (2) 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
on, or principal of, those certificates.
The amortization of any class of certificates out of the sources described in
the preceding paragraph would shorten the weighted average life of those
certificates and, if those certificates were purchased at a premium, reduce the
yield on those certificates. The related prospectus supplement will discuss the
relevant factors to be considered in determining whether distributions of
principal of any class of certificates out of those sources would have any
material effect on the rate at which those certificates are amortized.
-18-
Optional Early Termination. If so specified in the related prospectus
supplement, a series of certificates may be subject to optional early
termination through the repurchase of the mortgage assets in the related trust
fund by the party or parties specified in the related prospectus supplement,
under the circumstances and in the manner set forth in the prospectus
supplement. If so provided in the related prospectus supplement, upon the
reduction of the principal balance of a specified class or classes of
certificates by a specified percentage or amount, the specified party 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 those mortgage
assets to retire that class or classes, as set forth in the related prospectus
supplement. In the absence of other factors, any early retirement of a class of
offered certificates would shorten the weighted average life of those
certificates and, if those certificates were purchased at premium, reduce the
yield on those certificates.
Prepayment Models Are Illustrative Only and Do Not Predict Actual 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 that series. Weighted average life
refers to the average amount of time that will elapse from the date of issuance
of an instrument until each dollar allocable as principal of that instrument is
repaid to the investor.
The weighted average life and maturity of a class of certificates of any
series will be influenced by the rate at which principal on the related mortgage
loans, whether in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes voluntary prepayments, liquidations due
to default and purchases of mortgage loans out of the related trust fund), is
paid to that class. Prepayment rates on loans are commonly measured relative to
a prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model.
CPR represents an assumed constant rate of prepayment each month (expressed as
an annual percentage) relative to the then outstanding principal balance of a
pool of loans for the life of those loans. SPA represents an assumed variable
rate of prepayment each month (expressed as an annual percentage) relative to
the then outstanding principal balance of a pool of loans, with different
prepayment assumptions often expressed as percentages of SPA. For example, a
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of the loans in the first month of the
life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month, and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of loans. Moreover, the
CPR and SPA models were developed based upon historical prepayment experience
for single-family loans. Thus, it is unlikely that the prepayment experience of
the mortgage loans included in any trust fund will conform to any particular
level of CPR or SPA.
The prospectus supplement with respect to each series of certificates will
contain tables, if applicable, setting forth the projected weighted average life
of each class of offered certificates of those series and the percentage of the
initial principal balance of each class that would be outstanding on specified
distribution dates based on the assumptions stated in that prospectus
supplement, including assumptions that prepayments on the related mortgage loans
are made at rates corresponding to various percentages of CPR or SPA, or at
other rates specified in that prospectus supplement. Those 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.
Timing of Prepayments on the Mortgage Loans May Result in Interest Shortfalls on
the Certificates
When a mortgage loan is prepaid in full, absent a provision in the mortgage
loan requiring the borrower to pay interest through the end of the applicable
interest accrual period, the mortgagor pays interest on the amount prepaid only
to the date of prepayment. Liquidation proceeds and amounts received in
settlement of insurance claims are also likely to include interest only to the
time of payment or settlement. When a mortgage loan is prepaid in full or in
part, an interest shortfall may result depending on the timing of the receipt of
the prepayment and the timing of when those prepayments are passed through to
certificateholders. To partially mitigate this reduction in yield, the
-19-
pooling agreement and/or underlying servicing agreements relating to a series
may provide, to the extent specified in the applicable prospectus supplement,
that for specified types of principal prepayments received, the applicable
master servicer will be obligated, on or before each distribution date, to pay
an amount equal to the lesser of (i) the aggregate interest shortfall with
respect to the distribution date resulting from those principal prepayments by
mortgagors and (ii) all or a portion of the master servicer's or the special
servicer's, as applicable, servicing compensation for the distribution date as
specified in the applicable prospectus supplement or other mechanisms specified
in the applicable prospectus supplement. To the extent these shortfalls from the
mortgage loans are not covered by the amount of compensating interest or other
mechanisms specified in the applicable prospectus supplement, they will be
allocated among the classes of interest bearing certificates as described in the
related prospectus supplement under "Description of the Certificates". No
comparable interest shortfall coverage will be provided by the master servicer
with respect to liquidations of any mortgage loans. Any interest shortfall
arising from liquidations will be covered by means of the subordination of the
rights of subordinate certificateholders or any other credit support
arrangements described in this prospectus.
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage
Loans
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 than loans made on the security of an owner-occupied
single-family property. The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent income
or assets of the borrower. Therefore, the value of an income-producing property
is directly related to the net operating income derived from such property.
If the net operating income of the property is reduced (for example, if
rental or occupancy rates decline or real estate tax rates or other operating
expenses increase), the borrower's ability to repay the loan may be impaired. A
number of the mortgage loans may be secured by liens on owner-occupied
properties or on properties leased to a single tenant or in which only a few
tenants produce a material amount of the rental income. As the primary component
of the net operating income of a property, rental income (and maintenance
payments from tenant stockholders of a cooperative) and the value of any
property are subject to the vagaries of the applicable real estate market and/or
business climate. Properties typically leased, occupied or used on a short-term
basis, such as 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 leased, occupied or
used for longer periods, such as (typically) warehouses, retail stores, office
buildings and industrial plants. Commercial Properties may be secured by
owner-occupied properties or properties leased to a single tenant. Therefore, a
decline in the financial condition of the borrower or a single tenant may have a
disproportionately greater effect on the net operating income from such
properties than would be the case with respect to properties with multiple
tenants.
Changes in the expense components of the net operating income of a property
due to the general economic climate or economic conditions in a locality or
industry segment, such as (1) increases in interest rates, real estate and
personal property tax rates and other operating expenses including energy costs,
(2) changes in governmental rules, regulations and fiscal policies, including
environmental legislation, and (3) acts of God may also affect the net operating
income and the value of the property and the risk of default on the related
mortgage loan. In some cases leases of properties may provide that the lessee,
rather than the mortgagor, is responsible for payment of certain of these
expenses. However, because leases are subject to default risks as well as when a
tenant's income is insufficient to cover its rent and operating expenses, the
existence of such "net of expense" provisions will only temper, not eliminate,
the impact of expense increases on the performance of the related mortgage loan.
Additional considerations may be presented by the type and use of a
particular property. For instance, 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.
Hotel, motel and restaurant properties are often operated pursuant to franchise,
management or operating agreements that may be terminable by the franchisor or
operator. The transferability of a hotel's or restaurant's operating, liquor and
other licenses upon a transfer of the hotel or the restaurant, whether through
purchase or foreclosure, is subject to local law requirements.
In addition, the concentration of default, foreclosure and loss risks in
mortgage loans in the trust will generally be greater than for pools of
single-family loans because mortgage loans in the trust generally will consist
of a
-20-
smaller number of higher balance loans than would a pool of single-family
loans of comparable aggregate unpaid principal balance.
Limited Recourse Nature of the Mortgage Loans May Make Recovery Difficult in
the Event that a Mortgage Loan Defaults. We anticipate that some or all of the
mortgage loans included in any trust fund will be nonrecourse loans or loans for
which recourse may be restricted or unenforceable. In this type of mortgage
loan, recourse in the event of borrower default will be limited to the specific
real property and other assets 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, 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 concerning a defaulted mortgage loan in
excess of the liquidation value of the related property.
Cross-Collateralization Provisions May Have Limitations on Their
Enforceability. A mortgage 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-collateralized group. Cash flows generated on these
type of mortgage loans are available to support debt service on, and ultimate
repayment of, the total indebtedness. These arrangements 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.
If the properties securing a group of mortgage loans which are
cross-collateralized are not all owned by the same entity, creditors of one or
more of the related borrowers could challenge the cross-collateralization
arrangement as a fraudulent conveyance. Under federal and 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 was then insolvent, was rendered
insolvent by such obligation or transfer or had unreasonably small capital for
its business. A creditor seeking to enforce remedies against a property subject
to such cross-collateralization to repay such creditor's claim against the
related borrower could assert that--
o such borrower was insolvent at the time the cross-collateralized mortgage
loans were made; and
o such borrower did not, when it allowed its property to be encumbered by a
lien securing the indebtedness represented by the other mortgage loans in
the group of cross-collateralized mortgage loans, receive fair
consideration or reasonably equivalent value for, in effect,
"guaranteeing" the performance of the other borrowers.
Although the borrower making such "guarantee" will be receiving "guarantees"
from each of the other borrowers in return, we cannot assure you that such
exchanged "guarantees" would be found to constitute fair consideration or be of
reasonably equivalent value.
The cross-collateralized mortgage loans may be secured by mortgage liens on
properties located in different states. Because of various state laws governing
foreclosure or the exercise of a power of sale and because foreclosure actions
are usually 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.
Increased Risk of Default Associated With Balloon Payments. Some of the
mortgage loans included in the trust may be nonamortizing or only partially
amortizing over their terms to maturity. These types of mortgage loans will
require substantial payments of principal and interest (that is, balloon
payments) at their stated maturity. These loans 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 property. The ability of a borrower to accomplish
either of these goals will be affected by--
o the value of the related property;
-21-
o the level of available mortgage rates at the time of sale or refinancing;
o the borrower's equity in the related property;
o the financial condition and operating history of the borrower and the
related property;
o tax laws;
o rent control laws (pertaining to certain residential properties);
o Medicaid and Medicare reimbursement rates (pertaining to hospitals and
nursing homes);
o prevailing general economic conditions; and
o the availability of credit for loans secured by multifamily or commercial
property.
Neither Banc of America Commercial Mortgage Inc. nor any of its affiliates
will be required to refinance any mortgage loan.
As specified in the prospectus supplement, the master servicer or the special
servicer will be permitted (within prescribed limits) to extend and modify
mortgage loans that are in default or as to which a payment default is imminent.
Although the master servicer or the special servicer generally will be required
to determine that any such extension or modification is reasonably likely to
produce a greater recovery than liquidation, taking into account the time value
of money, we cannot assure you that any such extension or modification will in
fact increase the present value of receipts from or proceeds of the affected
mortgage loans.
The Lender Under a Mortgage Loan May Have Difficulty Collecting Rents Upon
the Default and/or Bankruptcy of the Related Borrower. Each mortgage loan
included in the trust secured by property that is subject to leases typically
will be secured by an assignment of leases and rents. Under such an assignment,
the mortgagor assigns to the mortgagee its right, title and interest as lessor
under the leases of the related property, and the income derived, 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 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.
The Enforceability of Due-on-Sale and Debt-Acceleration Clauses May Be
Limited in Certain Situations. Mortgages may contain a due-on-sale clause, which
permits the lender to accelerate the maturity of the mortgage loan if the
borrower sells, transfers or conveys the related property or its interest in the
property. Mortgages also may include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary or nonmonetary default of the
mortgagor. Such clauses are generally enforceable subject to certain exceptions.
The courts of all states will enforce clauses providing for acceleration in the
event of a material payment default. The equity courts of any state, however,
may refuse the foreclosure of a mortgage or deed of trust when an acceleration
of the indebtedness would be inequitable or unjust or the circumstances would
render the acceleration unconscionable.
Adverse Environmental Conditions May Subject a Mortgage Loan to Additional
Risk. Under the laws of certain states, contamination of real property may give
rise to a lien on the property to assure the costs of cleanup. In several
states, such a lien has priority over an existing mortgage lien on such
property. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, a lender may be liable, as an "owner" or "operator", for costs of
addressing releases or threatened releases of hazardous substances at a
property, if agents or employees of the lender have become sufficiently involved
in the operations of the borrower, regardless of whether the environmental
damage or threat was caused by the borrower or a prior owner. A lender also
risks such liability on foreclosure of the mortgage.
-22-
Certain Special Hazard Losses May Subject Your Certificates to an Increased
Risk of Loss. Unless otherwise specified in a prospectus supplement, the master
servicer and special servicer for the trust will be required to cause the
borrower on each mortgage loan in the trust to maintain such insurance coverage
in respect of the property as is required under the related mortgage, including
hazard insurance. As described in the prospectus supplement, the master servicer
and the special servicer may satisfy its obligation to cause hazard insurance to
be maintained with respect to any property through acquisition of a blanket
policy.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the properties will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms, and therefore will not contain identical terms and conditions, most
such policies typically do not cover any physical damage resulting from war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of risks. Unless the mortgage
specifically requires the mortgagor to insure against physical damage arising
from such causes, then, to the extent any consequent losses are not covered by
credit support, such losses may be borne, at least in part, by the holders of
one or more classes of certificates of the related series.
Exercise of Rights by Certain Certificateholders May Be Adverse to Other
Certificateholders
The pooling agreement for a series may permit the holder of a class of
subordinate certificates or a class of securities backed by a class of
certificates to instruct the special servicer with respect to workout
arrangements or foreclosure proceedings with respect to delinquent or other
specially serviced mortgage loans. This right is intended to permit the holder
of a class of certificates that is highly sensitive to losses on the mortgage
loans to attempt to mitigate losses by exercising limited power of direction
over servicing activities which accelerate or delay realization of losses on the
mortgage loans. Such directions may, however, be adverse to the interest of
those classes of senior certificates that are more sensitive to prepayments than
to losses on the mortgage loans. In particular, accelerating foreclosure will
adversely affect the yield to maturity on interest only certificates, while
delaying foreclosure will adversely affect the yield to maturity of principal
only certificates.
The Recording of the Mortgages in the Name of MERS May Affect the Yield on Your
Certificates
The mortgages or assignments of mortgage for some of the mortgage loans have
been or may be recorded in the name of Mortgage Electronic Registration Systems,
Inc. or MERS, solely as nominee for the mortgage loan seller and its successors
and assigns. Subsequent assignments of those mortgages are registered
electronically through the MERS system. However, if MERS discontinues the MERS
system and it becomes necessary to record an assignment of mortgage to the
trustee, then any related expenses will be paid by the trust and will reduce the
amount available to pay principal of and interest on the certificates.
The recording of mortgages in the name of MERS is a new practice in the
commercial mortgage lending industry. Public recording officers and others may
have limited, if any, experience with lenders seeking to foreclose mortgages,
assignments of which are registered with MERS. Accordingly, delays and
additional costs in commencing, prosecuting and completing foreclosure
proceedings and conducting foreclosure sales of the mortgaged properties could
result. Those delays and the additional costs could in turn delay the
distribution of liquidation proceeds to certificateholders and increase the
amount of losses on the loans.
Borrower Defaults May Adversely Affect Your Yield
The rate and timing of delinquencies or defaults on the mortgage loans will
affect:
o the aggregate amount of distributions on the offered certificates;
o their yield to maturity;
o the rate of principal payments; and
o their weighted average life.
-23-
If losses on the mortgage loans exceed the aggregate principal amount of the
classes of certificates subordinated to a particular class, such class will
suffer a loss equal to the full amount of such excess (up to the outstanding
principal amount of such certificate).
If you calculate your anticipated yield based on assumed rates of defaults
and losses that are lower than the default rate and losses actually experienced
and such losses are allocable to your certificates, your actual yield to
maturity will be lower than the assumed yield. Under certain extreme scenarios,
such yield could be negative. In general, the earlier a loss borne by you on
your certificates occurs, the greater the effect on your yield to maturity.
Even if losses on the mortgage loans are not borne by your certificates,
those losses may affect the weighted average life and yield to maturity of your
certificates. This may be so because those losses lead to your certificates
having a higher percentage ownership interest in the trust and related
distributions of principal payments on the mortgage loans than would otherwise
have been the case. The effect on the weighted average life and yield to
maturity of your certificates will depend upon the characteristics of the
remaining mortgage loans.
Additionally, delinquencies and defaults on the mortgage loans may
significantly delay the receipt of distributions by you on your certificates,
unless certain advances are made to cover delinquent payments or the
subordination of another class of certificates fully offsets the effects of any
such delinquency or default.
Additionally, the courts of any state may refuse the foreclosure of a
mortgage or deed of trust when an acceleration of the indebtedness would be
inequitable or unjust or the circumstances would render the action
unconscionable.
The Borrower's Form of Entity May Cause Special Risks
Most of the borrowers are legal entities rather than individuals. Mortgage
loans made to legal entities may entail risks of loss greater than those of
mortgage loans made to individuals. For example, a legal entity, as opposed to
an individual, may be more inclined to seek legal protection from its creditors
under the bankruptcy laws. Unlike individuals involved in bankruptcies, most of
the entities generally do not have personal assets and creditworthiness at
stake. The terms of the mortgage loans generally require that the borrowers
covenant to be single purpose entities, although in many cases the borrowers are
not required to observe all covenants and conditions that typically are required
in order for them to be viewed under standard rating agency criteria as "special
purpose entities". In addition, certain mortgage loans may not have borrower
principals. In general, borrowers' organizational documents or the terms of the
mortgage loans limit their activities to the ownership of only the related
mortgaged property or properties and limit the borrowers' ability to incur
additional indebtedness. These provisions are designed to mitigate the
possibility that the borrowers' financial condition would be adversely impacted
by factors unrelated to the mortgaged property and the mortgage loan in the
pool. However, we cannot assure you that the related borrowers will comply with
these requirements. The bankruptcy of a borrower, or a general partner or
managing member of a borrower, may impair the ability of the lender to enforce
its rights and remedies under the related mortgage.
Many of the borrowers are not special purpose entities structured to limit
the possibility of becoming insolvent or bankrupt, and therefore may be more
likely to become insolvent or the subject of a voluntary or involuntary
bankruptcy proceeding because such borrowers may be:
o operating entities with businesses distinct from the operation of the
mortgaged property with the associated liabilities and risks of operating
an ongoing business; or
o individuals that have personal liabilities unrelated to the mortgaged
property.
However, any borrower, even a special purpose entity structured to be
bankruptcy remote, as an owner of real estate will be subject to certain
potential liabilities and risks. We cannot provide assurances that any borrower
will not file for bankruptcy protection or that creditors of a borrower or a
corporate or individual general partner or managing member of a borrower will
not initiate a bankruptcy or similar proceeding against such borrower or
corporate or individual general partner or managing member.
-24-
Furthermore, with respect to any related borrowers, creditors of a common
parent in bankruptcy may seek to consolidate the assets of such borrowers with
those of the parent. Consolidation of the assets of such borrowers would likely
have an adverse effect on the funds available to make distributions on your
certificates, and may lead to a downgrade, withdrawal or qualification of the
ratings of your certificates. See "Certain Legal Aspects of Mortgage
Loans--Bankruptcy Laws" in this prospectus.
In addition, with respect to certain mortgage loans, the borrowers may own
the related mortgaged property as tenants in common. These mortgage loans may be
subject to prepayment, including during periods when prepayment might otherwise
be prohibited, as a result of partition. Although some of the related borrowers
may have purported to waive any right of partition, we cannot assure you that
any such waiver would be enforced by a court of competent jurisdiction.
Borrower and Related Party Bankruptcy Proceedings Entail Certain Risks
Under federal bankruptcy law, the filing of a petition in bankruptcy by or
against a borrower will stay the commencement or continuation of a foreclosure
action and delay the sale of the real property owned by that borrower. In
addition, even if a court determines that the value of the mortgaged property is
less than the principal balance of the mortgage loan it secures, the court may
prevent a lender from foreclosing on the mortgaged property (subject to certain
protections available to the lender). As part of a restructuring plan, a court
also may reduce the amount of secured indebtedness to the then value of the
mortgaged property, which action would make the lender a general unsecured
creditor for the difference between the then current value and the amount of its
outstanding mortgage indebtedness. A bankruptcy court also may: (1) grant a
debtor a reasonable time to cure a payment default on a mortgage loan; (2)
reduce periodic payments due under a mortgage loan; (3) change the rate of
interest due on a mortgage loan; or (4) otherwise alter the 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's trustee or the borrower, as
debtor in possession, has certain special powers to avoid, subordinate or
disallow debts. In certain circumstances, the claims of the securitization
trustee may be subordinated to financing obtained by a debtor in possession
subsequent to its bankruptcy.
Under federal bankruptcy law, the mortgagee will be stayed from enforcing a
borrower's assignment of rents and leases. Federal bankruptcy law also may
interfere with the master servicer's or special servicer's ability to enforce
lockbox requirements. The legal proceedings necessary to resolve these issues
can be time consuming 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.
Certain mortgage loans may have sponsors that have previously filed for
bankruptcy protection, which in some cases may have involved the same property
that currently secures the mortgage loan. In each case, the related entity or
person has emerged from bankruptcy. However, we cannot assure you that such
sponsors will not be more likely than other sponsors to utilize their rights in
bankruptcy in the event of any threatened action by the mortgagee to enforce its
rights under the related loan documents.
Tenancies in Common May Hinder or Delay Recovery
With respect to certain mortgage loans, the borrowers may own the related
mortgaged property as tenants in common. These mortgage loans may be subject to
prepayment, including during periods when prepayment might otherwise be
prohibited, as a result of partition. Although some of the related borrowers may
have purported to waive any right of partition, we cannot assure you that any
such waiver would be enforced by a court of competent jurisdiction.
In general, with respect to a tenant in common ownership structure, each
tenant in common owns an undivided share in the property and if such tenant in
common desires to sell its interest in the property (and is unable to find a
-25-
buyer or otherwise needs to force a partition) such tenant in common has the
ability to request that a court order a sale of the property and distribute the
proceeds to each tenant in common proportionally. As a result, if a borrower
exercises such right of partition, the related mortgage loans may be subject to
prepayment. In addition, the tenant in common structure may cause delays in the
enforcement of remedies; this may occur, for example, because of procedural or
substantive issues resulting from the existence of multiple borrowers under the
related loan, such as in bankruptcy, in which circumstance, each time a tenant
in common borrower files for bankruptcy, the bankruptcy court stay will be
reinstated.
In some cases, the related borrower may be a special purpose entity (in some
cases bankruptcy remote), reducing the risk of bankruptcy. There can be no
assurance that a bankruptcy proceeding by a single tenant in common borrower
will not delay enforcement of this pooled mortgage loan. Additionally, in some
cases, subject to the terms of the related mortgage loan documents, a borrower
or a tenant in common borrower may assign its interests to one or more tenant in
common borrowers. Such change to, or increase in, the number of tenant in common
borrowers increases the risks related to this ownership structure.
Mortgaged Properties with Tenants Present Special Risks
The income from, and market value of, the mortgaged properties leased to
various tenants would be adversely affected if:
o space in the mortgaged properties could not be leased or relet;
o tenants were unable to meet their lease obligations;
o leasing or re leasing is restricted by exclusive rights of tenants to
lease the mortgaged properties or other covenants not to lease space for
certain uses or activities, or covenants limiting the types of tenants to
which space may be leased;
o substantial re leasing costs were required and/or the cost of performing
landlord obligations under existing leases materially increased;
o a significant tenant were to become a debtor in a bankruptcy case; or
o rental payments could not be collected for any other reason.
Repayment of the mortgage loans secured by retail, offices and industrial and
warehouse properties will be affected by the expiration of leases and the
ability of the respective borrowers to renew the leases or relet the space on
comparable terms. In addition, if a significant portion of tenants have leases
which expire near or at maturity of the related mortgage loan, then it may make
it more difficult for the related borrower to seek refinancing or make any
applicable balloon payment. Certain of the mortgaged properties may be leased in
whole or in part by government sponsored tenants who have the right to cancel
their leases at any time or for lack of appropriations. Other tenants may have
the right to cancel or terminate their leases prior to the expiration of the
lease term or upon the occurrence of certain events including, but not limited
to, the loss of an anchor tenant at the mortgaged property. Additionally,
mortgage loans may have concentrations of leases expiring at varying rates in
varying percentages.
Even if vacated space is successfully relet, the costs associated with
reletting, including tenant improvements and leasing commissions, could be
substantial and could reduce cash flow from the mortgaged properties. Moreover,
if a tenant defaults in its obligations to a borrower, the borrower may incur
substantial costs and experience significant delays associated with enforcing
its rights and protecting its investment, including costs incurred in renovating
and reletting the property.
In addition, certain mortgaged properties may have tenants that are paying
rent but are not in occupancy or may have vacant space that is not leased, and
in certain cases, the occupancy percentage could be less than 80%. Any "dark"
space may cause the mortgaged property to be less desirable to other potential
tenants or the related tenant may be more likely to default in its obligations
under the lease. We cannot assure you that those tenants will continue to
fulfill their lease obligations or that the space will be relet.
-26-
Additionally, in certain jurisdictions, if tenant leases are subordinated to
the liens created by the mortgage but do not contain attornment provisions
(provisions requiring the tenant to recognize as landlord under the lease a
successor owner following foreclosure), the leases may terminate upon the
transfer of the property to a foreclosing lender or purchaser at foreclosure.
Accordingly, if a mortgaged property is located in such a jurisdiction and is
leased to one or more desirable tenants under leases that are subordinate to the
mortgage and do not contain attornment provisions, such mortgaged property could
experience a further decline in value if such tenants' leases were terminated.
With respect to certain of the mortgage loans, the related borrower has given
to certain tenants or others an option to purchase, a right of first refusal or
a right of first offer to purchase all or a portion of the mortgaged property in
the event a sale is contemplated, and such right is not subordinate to the
related mortgage. This may impede the mortgagee's ability to sell the related
mortgaged property at foreclosure, or, upon foreclosure, this may affect the
value and/or marketability of the related mortgaged property.
Mortgaged Properties with Multiple Tenants May Increase Reletting Costs and
Reduce Cash Flow
If a mortgaged property has multiple tenants, reletting expenditures may be
more frequent than in the case of mortgaged properties with fewer tenants,
thereby reducing the cash flow available for debt service payments. Multi
tenanted mortgaged properties also may experience higher continuing vacancy
rates and greater volatility in rental expenses.
Tenant Bankruptcy Adversely Affects Property Performance
The bankruptcy or insolvency of a major tenant, or a number of smaller
tenants, in retail, office, industrial and warehouse properties may adversely
affect the income produced by a mortgaged property. Under the federal bankruptcy
code a tenant has the option of assuming or rejecting any unexpired lease. If
the tenant rejects the lease, the landlord's claim for breach of the lease would
be a general unsecured claim against the tenant (absent collateral securing the
claim). The claim would be limited to the unpaid rent reserved under the lease
for the periods prior to the bankruptcy petition (or earlier surrender of the
leased premises) which are unrelated to the rejection, plus the greater of one
year's rent or 15% of the remaining reserved rent (but not more than three
year's rent). There are several cases in which one or more tenants at a
mortgaged property have declared bankruptcy. We cannot assure you that any such
tenant will affirm its lease.
Risks Related to Enforceability
All of the mortgages permit the lender to accelerate the debt upon default by
the borrower. The courts of all states will enforce acceleration clauses in the
event of a material payment default. Courts, however, may refuse to permit
foreclosure or acceleration if a default is deemed immaterial or the exercise of
those remedies would be unjust or unconscionable.
If a mortgaged property has tenants, the borrower typically assigns its
income as landlord to the lender as further security, while retaining a license
to collect rents as long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect rents. In certain
jurisdictions, such assignments may not be perfected as security interests until
the lender takes actual possession of the property's cash flow. In some
jurisdictions, the lender may not be entitled to collect rents until the lender
takes possession of the property and secures the appointment of a receiver. In
addition, as previously discussed, if bankruptcy or similar proceedings are
commenced by or for the borrower, the lender's ability to collect the rents may
be adversely affected.
Potential Absence of Attornment Provisions Entails Risks
In some jurisdictions, if tenant leases are subordinate to the liens created
by the mortgage and do not contain attornment provisions (i.e., provisions
requiring the tenant to recognize a successor owner following foreclosure as
landlord under the lease), the leases may terminate upon the transfer of the
property to a foreclosing lender or purchaser at foreclosure. Not all leases
were reviewed to ascertain the existence of attornment or subordination
provisions. Accordingly, if a mortgaged property is located in such a
jurisdiction and is leased to one or more desirable tenants under leases that
are subordinate to the mortgage and do not contain attornment provisions, such
-27-
mortgaged property could experience a further decline in value if such tenants'
leases were terminated. This is particularly likely if such tenants were paying
above market rents or could not be replaced.
If a lease is not subordinate to a mortgage, the trust will not possess the
right to dispossess the tenant upon foreclosure of the mortgaged property
(unless otherwise agreed to with the tenant). If the lease contains provisions
inconsistent with the mortgage (e.g., provisions relating to application of
insurance proceeds or condemnation awards) or which could affect the enforcement
of the lender's rights (e.g., a right of first refusal to purchase the
property), the provisions of the lease will take precedence over the provisions
of the mortgage.
Risks Associated with Commercial Lending May Be Different than those for
Residential Lending
The mortgaged properties consist solely of multifamily rental and commercial
properties. Commercial and multifamily lending is generally viewed as exposing a
lender to a greater risk of loss than residential one to four family lending
because it usually involves larger loans to a single borrower or a group of
related borrowers.
The repayment of a commercial or multifamily loan is typically dependent upon
the ability of the applicable property to produce cash flow through the
collection of rents or other operating revenues. Even the liquidation value of a
commercial property is determined, in substantial part, by the capitalization of
the property's cash flow. However, net operating income can be volatile and may
be insufficient to cover debt service on the loan at any given time.
The net operating incomes and property values of the mortgaged properties may
be adversely affected by a large number of factors. Some of these factors relate
to the properties themselves, such as:
o the age, design and construction quality of the properties;
o perceptions regarding the safety, convenience and attractiveness of the
properties;
o the proximity and attractiveness of competing properties;
o the adequacy of the property's management and maintenance;
o increases in operating expenses;
o an increase in the capital expenditures needed to maintain the properties
or make improvements;
o dependence upon a single tenant and concentration of tenants in a
particular business;
o a decline in the financial condition of a major tenant;
o an increase in vacancy rates; and
o a decline in rental rates as leases are renewed or entered into with new
tenants.
Other factors are more general in nature, such as:
o national, regional or local economic conditions, including plant
closings, military base closings, industry slowdowns and unemployment
rates;
o local real estate conditions, such as an oversupply of retail space,
office space or multifamily housing;
o demographic factors;
o changes or continued weakness in specific industry segments;
o the public perception of safety for customers and clients;
o consumer confidence;
-28-
o consumer tastes and preferences;
o retroactive changes in building codes;
o conversion of a property to an alternative use;
o new construction in the market; and
o number and diversity of tenants.
The volatility of net operating income will be influenced by many of the
foregoing factors, as well as by:
o the length of tenant leases;
o the creditworthiness of tenants;
o in the case of rental properties, the rate at which new rentals occur;
o lease termination, rent abatement/offset, co tenancy or exclusivity
provisions of tenant leases;
o tenant defaults;
o the property's "operating leverage" which is generally the percentage of
total property expenses in relation to revenue, the ratio of fixed
operating expenses to those that vary with revenues, and the level of
capital expenditures required to maintain the property and to retain or
replace tenants; and
o in the case of government sponsored tenants, the right of the tenant in
some instances to cancel a lease due to a lack of appropriations.
Poor Property Management Will Lower the Performance of the Related Mortgaged
Property
The successful operation of a real estate project depends upon the property
manager's performance and viability. The property manager is responsible for:
o responding to changes in the local market;
o planning and implementing the rental structure;
o operating the property and providing building services;
o managing operating expenses; and
o assuring that maintenance and capital improvements are carried out in a
timely fashion.
Properties deriving revenues primarily from short term sources, such as short
term or month to month leases, are generally more management intensive than
properties leased to creditworthy tenants under long term leases.
Good management, by controlling costs, providing services to tenants and
seeing to property maintenance and upkeep, can, in some cases, improve cash
flow, reduce vacancy, leasing and repair costs and preserve property value. Poor
management could impair short term cash flow and the long term viability of a
property.
We make no representation or warranty as to the skills of any present or
future managers. Additionally, we cannot assure you that the property managers
will be in a financial condition to fulfill their management responsibilities
throughout the terms of their respective management agreements.
Furthermore, we cannot assure you that the mortgaged properties will not have
related management which in the event that a related management company is
incapable of performing its duties may affect one or more sets of mortgaged
properties. We also cannot assure you that the mortgaged properties will not be
self managed by the related borrower, in which case such self management or
affiliated management may make it more difficult to
-29-
monitor the property management, replace that borrower as property manager in
the event that the borrower's management is detrimentally affecting the property
or ensure that the borrower provides all information necessary to manage the
mortgaged property to a replacement property manager in the event that the
borrower is replaced as property manager.
Particular Property Types Present Special Risks
Retail Properties.
Several factors may adversely affect the value and successful operation of a
retail property, including:
o changes in consumer spending patterns, local competitive conditions (such
as the supply of retail space or the existence or construction of new
competitive shopping centers or shopping malls);
o alternative forms of retailing (such as direct mail, video shopping
networks and internet web sites which reduce the need for retail space by
retail companies);
o the quality and philosophy of management;
o the safety, convenience and attractiveness of the property to tenants and
their customers or clients;
o the public perception of the safety of customers at shopping malls and
shopping centers;
o the need to make major repairs or improvements to satisfy the needs of
major tenants; and
o traffic patterns and access to major thoroughfares.
The general strength of retail sales also directly affects retail properties.
The retailing industry is currently undergoing consolidation due to many
factors, including growth in discount and alternative forms of retailing. If the
sales by tenants in the mortgaged properties that contain retail space were to
decline, the rents that are based on a percentage of revenues may also decline,
and tenants may be unable to pay the fixed portion of their rents or other
occupancy costs. The cessation of business by a significant tenant can adversely
affect a retail property, not only because of rent and other factors specific to
such tenant, but also because significant tenants at a retail property play an
important part in generating customer traffic and making a retail property a
desirable location for other tenants at such property. In addition, certain
tenants at retail properties may be entitled to terminate their leases if an
anchor tenant fails to renew or terminates its lease, becomes the subject of a
bankruptcy proceeding or ceases operations at such property.
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 shopping 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 and attract potential
customers.
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. Certain of the tenants or anchor stores of the
retail properties may have co tenancy clauses and/or operating covenants in
their leases or operating agreements which permit those tenants or anchor stores
to cease operating under certain conditions, including, without limitation,
certain other stores not being open for business at the mortgaged property or a
subject store not meeting the minimum sales requirement under its lease. In
addition, in the event that a "shadow anchor" fails to renew its lease,
terminates its lease or otherwise ceases to conduct business within a close
proximity to the mortgaged property, customer traffic at the mortgaged property
may be substantially reduced. We cannot assure you that such space will be
occupied or that the related mortgaged property will not suffer adverse economic
consequences.
-30-
Office Properties.
A large number of factors may adversely affect the value of office
properties, including:
o the number and quality of an office building's tenants;
o the physical attributes of the building in relation to competing
buildings (e.g., age, condition, design, access to transportation and
ability to offer certain amenities, such as sophisticated building
systems);
o the desirability of the area as a business location;
o the strength and nature of the local economy (including labor costs and
quality, tax environment and quality of life for employees);
o an adverse change in population, patterns of telecommuting or sharing of
office space;
o local competitive conditions, including the supply of office space or the
existence or construction of new competitive office buildings;
o quality of management;
o changes in population and employment affecting the demand for office
space;
o properties not equipped for modern business becoming functionally
obsolete; and
o declines in the business of tenants, especially single tenanted property.
In addition, there may be significant costs associated with tenant
improvements, leasing commissions and concessions in connection with reletting
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.
Medical office properties may be included in office properties. The
performance of a medical office property may depend on the proximity of such
property to a hospital or other health care establishment and on reimbursements
for patient fees from private or government sponsored insurance companies. The
sudden closure of a nearby hospital may adversely affect the value of a medical
office property. In addition, the performance of a medical office property may
depend on reimbursements for patient fees from private or government sponsored
insurers and issues related to reimbursement (ranging from non payment to delays
in payment) from such insurers could adversely impact cash flow at such
mortgaged properties. Moreover, medical office properties appeal to a narrow
market of tenants and the value of a medical office property may be adversely
affected by the availability of competing medical office properties.
Multifamily Properties.
Several 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 and willingness of management to provide adequate maintenance
and insurance;
o the types of services or amenities the property provides;
o the property's reputation;
o the level of mortgage interest rates (which may encourage tenants to
purchase rather than lease housing);
o the tenant mix, such as the tenant population being predominantly
students or being heavily dependent on workers from a particular business
or personnel from a local military base;
-31-
o the presence of competing properties;
o dependence on governmental programs that provide rental subsidies to
tenants pursuant to tenant voucher programs, which vouchers may be used
at other properties to influence tenant mobility;
o adverse local or national economic conditions which may limit the amount
of rent that may be charged and may result in a reduction of timely rent
payments or a reduction in occupancy levels; and
o state and local regulations which may affect the building owner's ability
to increase rent to market rent for an equivalent apartment.
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 bases on which a landlord may
terminate a tenancy or increase its rent or prohibit a landlord from terminating
a tenancy solely by reason of the sale of the owner's building.
In addition to state regulation of the landlord tenant relationship, numerous
counties and municipalities impose rent control on apartment buildings. These
ordinances may limit rent increases to fixed percentages, to percentages of
increases in the consumer price index, to increases set or approved by a
governmental agency, or to increases determined through mediation or binding
arbitration. 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 are secured by mortgaged properties that are
eligible (or become eligible in the future) for and have received low income
housing tax credits pursuant to Section 42 of the Internal Revenue Code in
respect of various units within the mortgaged property or have tenants that rely
on rent subsidies under various government funded programs, including the
Section 8 Tenant Based Assistance Rental Certificate Program of the United
States Department of Housing and Urban Development. Under HUD's Section 8
Tenant-Based Assistance Rental Voucher Program or Section 8 Tenant-Based
Assistance Rental Certificate Program (now combined into one voucher program),
the rents charged to some of the tenants are subsidized by housing assistance
payments. Those payments are made pursuant to housing assistance payments
contracts between the borrower and a local housing authority which receives
Section 8 funds from HUD. The term of each housing assistance payments contract
is limited to the term of the related tenant lease, generally one year,
renewable at the option of the tenant. Tenants may choose to move out of the
mortgaged properties and utilize their vouchers elsewhere, and we cannot assure
you that those units will be re-rented. The housing assistance payments
contracts impose certain management and maintenance obligations on the
borrowers, and housing assistance payments can be suspended, reduced, or
terminated if HUD or the local housing authority determines that the borrowers
have breached the housing assistance payments contracts. HUD may in the future
elect, or be required by Congress, to take actions with the effect of limiting
increases in rents subsidized under Section 8, or reducing rent levels currently
in effect. The ability of the respective borrowers to pay the housing assistance
payments loans, and the value of their mortgaged properties and consequent
ability to refinance the mortgage loans which are subject to housing assistance
payments contracts, could be adversely affected by some or all of the above
mentioned risks. We can give you no assurance that these or any similar 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.
Certain of the mortgage loans are secured or may be secured in the future by
mortgaged properties that are subject to certain affordable housing covenants,
in respect of various units within the mortgaged properties.
Hotel Properties.
Various factors may adversely affect the economic performance of a hotel,
including:
-32-
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, refurbishing and maintaining
existing facilities prior to the expiration of their anticipated useful
lives;
o a deterioration in the financial strength or managerial capabilities of
the owner and operator of a hotel; 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 operations in Afghanistan and
Iraq) caused by changes in access, energy prices, strikes, relocation of
highways, construction of additional highways or other factors.
Because hotel rooms generally are rented for short periods of time, the
financial performance of hotels tends to be affected by adverse economic
conditions and competition more quickly than other types of commercial
properties.
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.
Hotels may be operated under franchise, management or operating agreements
that may be terminated by the franchisor, manager or operator. It may be
difficult to terminate a manager of a hotel after foreclosure of the related
mortgage.
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 management 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. Replacement franchises may require significantly higher
fees.
The transferability of a franchise license agreement is generally restricted.
In the event of a foreclosure, the lender or its agent may not have the right to
use the franchise license without the franchisor's consent. Conversely, in the
case of 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.
Self-Storage Properties.
Self storage properties are considered vulnerable to competition, because
both acquisition costs and break even occupancy are relatively low. The
conversion of self storage facilities to alternative uses would generally
require
-33-
substantial capital expenditures. Thus, if the operation of any of the self
storage properties becomes unprofitable due to:
o decreased demand;
o competition;
o age of improvements; or
o other factors affecting the borrower's ability to meet its obligations on
the related mortgage loan;
the liquidation value of that self storage mortgaged property may be
substantially less, relative to the amount owing on the mortgage loan, than if
the self storage property were readily adaptable to other uses.
Tenant privacy, anonymity and efficient access may heighten environmental
risks. No environmental assessment of a mortgaged property included an
inspection of the contents of the self storage units included in the self
storage properties and there is no assurance that all of the units included in
the self storage properties are free from hazardous substances or other
pollutants or contaminants or will remain so in the future.
Industrial and Warehouse Properties.
Among the significant factors determining the value of industrial and
warehouse properties are:
o the quality of tenants;
o building design and adaptability (e.g., clear heights, column spacing,
zoning restrictions, number of bays and bay depths, divisibility and
truck turning radius); and
o the location of the property (e.g., proximity to supply sources and
customers, availability of labor and accessibility to distribution
channels).
In addition, industrial and warehouse properties may be adversely affected by
reduced demand for industrial and warehouse space occasioned by a decline in a
particular industrial site or in a particular industry segment, and a particular
industrial and warehouse property may be difficult to relet to another tenant or
may become functionally obsolete relative to newer properties.
Manufactured Housing Communities.
Significant factors determining the value of such properties are generally
similar to the factors affecting the value of multifamily properties. In
addition, these properties are special purpose properties that could not be
readily converted to general residential, retail or office use. In fact, certain
states also regulate changes in manufactured housing communities and require
that the landlord give written notice to its tenants a substantial period of
time prior to the projected change. Consequently, if the operation of any of
such properties becomes unprofitable such that the borrower becomes unable to
meet its obligation on the related mortgage loan, the liquidation value of the
related property may be substantially less, relative to the amount owing on the
mortgage loan, than would be the case if such properties were readily adaptable
to other uses.
Parking Garage Facilities.
Parking garage facilities present risks not associated with other properties.
Properties used for parking garages are more prone to environmental concerns
than other property types. Aspects of building site design and adaptability
affect the value of a parking garage facility. Site characteristics which are
valuable to a parking garage facility include location, clear ceiling heights,
column spacing, zoning restrictions, number of bays and bay depths,
divisibility, truck turning radius and overall functionality and accessibility.
In addition, because of the unique construction requirements of many parking
garage facilities, any vacant parking garage facility may not be easily
converted to other uses.
-34-
The Operation of the Mortgaged Property upon Foreclosure of the Mortgage Loan
May Affect Tax Status
If the trust were to acquire a mortgaged property subsequent to a default on
the related mortgage loan pursuant to a foreclosure or deed in lieu of
foreclosure, the special servicer would be required to retain an independent
contractor to operate and manage the mortgaged property. Among other things, the
independent contractor would not be permitted to perform construction work on
the mortgaged property unless such construction generally was at least 10%
complete at the time default on the related mortgage loan became imminent. In
addition, any net income from such operation and management, other than
qualifying "rents from real property" (as defined in Section 856(d) of the
Internal Revenue Code of 1986, as amended), or any rental income based on the
net profits of a tenant or sub tenant or allocable to a service that is non
customary in the area and for the type of building involved, will subject the
trust fund to federal (and possibly state or local) tax on such income at the
highest marginal corporate tax rate (currently 35%), thereby reducing net
proceeds available for distribution to certificateholders. In addition, if the
trust were to acquire one or more mortgaged properties pursuant to a foreclosure
or deed in lieu of foreclosure, upon acquisition of those mortgaged properties,
the trust may be required in certain jurisdictions, particularly in New York, to
pay state or local transfer or excise taxes upon liquidation of such mortgaged
properties. Such state or local taxes may reduce net proceeds available for
distribution to the certificateholders.
One Action Rules May Limit Remedies
Several states (including California) have laws that prohibit more than one
"judicial action" to enforce a mortgage obligation, and some courts have
construed the term "judicial action" broadly. Accordingly, the special servicer
is required to obtain advice of counsel prior to enforcing any of the trust
fund's rights under any of the mortgage loans that include mortgaged properties
where the rule could be applicable.
Property Value May Be Adversely Affected Even When Current Operating
Income Is Not
Various factors may adversely affect the value of a mortgaged property
without affecting the property's current net operating income. These factors
include, among others:
o the existence of, or changes in, governmental regulations, fiscal policy,
zoning or tax laws;
o potential environmental legislation or liabilities or other legal
liabilities;
o the availability of refinancing;
o changes in interest rate levels; and
o reduction in, or loss of, real estate tax abatements, exemptions, tax
incremental financing arrangements, or similar benefits.
Leasehold Interests Are Subject to Terms of the Ground Lease
Leasehold mortgages are subject to certain risks not associated with mortgage
loans secured by the fee estate of the mortgagor. The most significant of these
risks is that the ground lease may terminate if, among other reasons, the ground
lessee breaches or defaults in its obligations under the ground lease or there
is a bankruptcy of the ground lessee or the ground lessor. Accordingly, a
leasehold mortgagee may lose the collateral securing its leasehold mortgage. In
addition, although the consent of the ground lessor generally will not be
required for foreclosure, the terms and conditions of a leasehold mortgage may
be subject to the terms and conditions of the ground lease, and the rights of a
ground lessee or a leasehold mortgagee with respect to, among other things,
insurance, casualty and condemnation may be affected by the provisions of the
ground lease.
In Precision Indus. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir.
2003), the United States Court of Appeals for the Seventh Circuit ruled with
respect to an unrecorded lease of real property that where a statutory sale of
the fee interest in leased property occurs under Section 363(f) of the
Bankruptcy Code (11 U.S.C. ss. 363(f)) upon the bankruptcy of a landlord, such
sale terminates a lessee's possessory interest in the property, and the
purchaser assumes title free and clear of any interest, including any leasehold
estates.
-35-
Generally, each related ground lease requires the lessor to give the lender
notice of the borrower's defaults under the ground lease and an opportunity to
cure them; permits the leasehold interest to be assigned to the lender or the
purchaser at a foreclosure sale (in some cases only upon the consent of the
lessor) and contains certain other protective provisions typically included in a
"mortgageable" ground lease.
Upon the bankruptcy of a lessor or a lessee under a ground lease, the debtor
entity has the right to assume or reject the lease. If a debtor lessor rejects
the lease, the lessee has the right to remain in possession of its leased
premises for the rent otherwise payable under the lease for the term of the
lease (including renewals). If a debtor lessee/borrower rejects any or all of
the lease, the leasehold lender could succeed to the lessee/borrower's position
under the lease only if the lessor specifically grants the lender such right. If
both the lessor and the lessee/borrowers are involved in bankruptcy proceedings,
the trustee may be unable to enforce the bankrupt lessee/borrower's right to
refuse to treat a ground lease rejected by a bankrupt lessor as terminated. In
such circumstances, a lease could be terminated notwithstanding lender
protection provisions contained therein or in the mortgage.
Most of the ground leases securing the mortgaged properties provide that the
ground rent increases during the term of the lease. These increases may
adversely affect the cash flow and net income of the borrower from the mortgaged
property.
Collateral Securing Cooperative Loans May Diminish in Value
If specified in the related prospectus supplement, certain of the mortgage
loans may be cooperative loans. There are certain risks that differentiate
cooperative loans from other types of mortgage loans. Ordinarily, the
cooperative incurs a blanket mortgage in connection with the construction or
purchase of the cooperative's apartment building and the underlying land. The
interests of the occupants under proprietary leases or occupancy agreements to
which the cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage. If the cooperative is unable to meet the
payment obligations arising under its blanket mortgage, the mortgagee holding
the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of the collateral securing the
cooperative loans.
Condominium Ownership May Limit Use and Improvements
In the case of condominiums, a board of managers generally has discretion to
make decisions affecting the condominium building and there may be no assurance
that the borrower under a mortgage loan secured by one or more interests in that
condominium will have any control over decisions made by the related board of
managers. Thus, decisions made by that related board of managers, including
regarding assessments to be paid by the unit owners, insurance to be maintained
on the condominium building and many other decisions affecting the maintenance,
repair and, in the event of a casualty or condemnation, restoration of that
building, may have a significant impact on the mortgage loans in the trust fund
that are secured by mortgaged properties consisting of such condominium
interests. There can be no assurance that the related board of managers will
always act in the best interests of the borrower under those mortgage loans.
Further, due to the nature of condominiums, a default under the related mortgage
loan will not allow the special servicer the same flexibility in realizing on
the collateral as is generally available with respect to properties that are not
condominiums. The rights of other unit owners, the documents governing the
management of the condominium units and the state and local laws applicable to
condominium units must be considered. In addition, in the event of a casualty
with respect to such a mortgaged property, due to the possible existence of
multiple loss payees on any insurance policy covering that mortgaged property,
there could be a delay in the allocation of related insurance proceeds, if any.
Consequently, servicing and realizing upon the collateral described above could
subject the certificateholders to a greater delay, expense and risk than with
respect to a mortgage loan secured by a property that is not a condominium.
-36-
Zoning Laws and Use Restrictions May Affect the Operation of a Mortgaged
Property or the Ability to Repair or Restore a Mortgaged Property
Certain of the mortgaged properties may not comply with current zoning laws,
including density, use, parking and set back requirements, due to changes in
zoning requirements after such mortgaged properties were constructed. These
properties, as well as those for which variances or special permits were issued,
are considered to be a "legal non-conforming use" and/or the improvements are
considered to be "legal non-conforming structures". This means that the borrower
is not required to alter the use or structure to comply with the existing or new
law; however, the borrower may not be able to rebuild the premises "as is" in
the event of a casualty loss. This may adversely affect the cash flow of the
property following the casualty. If a casualty were to occur, we cannot assure
you that insurance proceeds would be available to pay the mortgage loan in full.
In addition, if the property were repaired or restored in conformity with the
current law, the value of the property or the revenue producing potential of the
property may not be equal to that which existed before the casualty.
In addition, certain of the mortgaged properties which are non conforming may
not be "legal non-conforming uses" or "legal non-conforming structures". The
failure of a mortgaged property to comply with zoning laws or to be a "legal
non-conforming use" or "legal non-conforming structure" may adversely affect
market value of the mortgaged property or the borrower's ability to continue to
use it in the manner it is currently being used.
In addition, certain of the mortgaged properties may be subject to certain
use restrictions imposed pursuant to restrictive covenants, reciprocal easement
agreements or operating agreements or, in the case of mortgaged properties that
are or constitute a portion of condominiums, condominium declarations or other
condominium use restrictions or regulations, especially in a situation where the
mortgaged property does not represent the entire condominium property. Such use
restrictions include, for example, limitations on the character of the
improvements or the properties, limitations affecting noise and parking
requirements, among other things, and limitations on the borrowers' right to
operate certain types of facilities within a prescribed radius. These
limitations could adversely affect the ability of the related borrower to lease
the mortgaged property on favorable terms, thus adversely affecting the
borrower's ability to fulfill its obligations under the related mortgage loan.
Some Mortgaged Properties May Not Be Readily Convertible to Alternative Uses
Some of the mortgaged properties may not be readily convertible to
alternative uses if those properties were to become unprofitable for any reason
or if those properties were designated as historic sites. Converting commercial
properties and manufactured housing communities to alternate uses generally
requires substantial capital expenditures. The liquidation value of a mortgaged
property consequently may be substantially less than would be the case if the
property were readily adaptable to other uses.
Zoning or other restrictions also may prevent alternative uses. See "--Zoning
Laws and Use Restrictions May Affect the Operation of a Mortgaged Property or
the Ability to Repair or Restore a Mortgaged Property" above.
Appraisals Are Limited in Reflecting the Value of a Mortgaged Property
Appraisals were obtained with respect to each of the mortgaged properties in
connection with the origination of the applicable mortgage loan. In general,
appraisals represent the analysis and opinion of qualified appraisers and are
not guarantees of present or future value. One appraiser may reach a different
conclusion than the conclusion that would be reached if a different appraiser
were appraising that property. Moreover, appraisals seek to establish the amount
a typically motivated buyer would pay a typically motivated seller and, in
certain cases, may have taken into consideration the purchase price paid by the
borrower. That amount could be significantly higher than the amount obtained
from the sale of a mortgaged property under a distress or liquidation sale. We
cannot assure you that the information set forth in this prospectus supplement
regarding appraised values or loan to value ratios accurately reflects past,
present or future market values of the mortgaged properties.
Risks Relating to Costs of Compliance with Applicable Laws and Regulations
A borrower may be required to incur costs to comply with various existing and
future federal, state or local laws and regulations applicable to the related
mortgaged property, for example, zoning laws and the Americans with Disabilities
Act of 1990, as amended, which requires all public accommodations to meet
certain federal
-37-
requirements related to access and use by persons with disabilities. See
"Certain Legal Aspects of Mortgage Loans--Americans with Disabilities Act" in
this prospectus. The expenditure of these costs or the imposition of injunctive
relief, penalties or fines in connection with the borrower's noncompliance could
negatively impact the borrower's cash flow and, consequently, its ability to pay
its mortgage loan.
Additional Compensation to the Servicer Will Affect Your Right to Receive
Distributions
To the extent described in this prospectus, the master servicer, the special
servicer or the trustee, as applicable, will be entitled to receive interest on
unreimbursed advances. This interest will generally accrue from the date on
which the related advance is made or the related expense is incurred through the
date of reimbursement. In addition, under certain circumstances, including
delinquencies in the payment of principal and interest, a mortgage loan will be
specially serviced and the special servicer will be entitled to compensation for
special servicing activities. The right to receive interest on advances or
special servicing compensation is senior to the rights of certificateholders to
receive distributions on the offered certificates. The payment of interest on
advances and the payment of compensation to the special servicer may lead to
shortfalls in amounts otherwise distributable on your certificates.
Liquidity for Certificates May Be Limited
The certificates will not be listed on any securities exchange or traded on
the NASDAQ Stock Market, and there is currently no secondary market for the
certificates. While the underwriters currently intend to make a secondary market
in the offered certificates, they are not obligated to do so. Accordingly, there
may not be an active or liquid secondary market for the certificates. Lack of
liquidity could result in a substantial decrease in the market value of the
certificates. Many other factors may affect the market value of the certificates
including the then prevailing interest rates.
Mortgage Loan Repayments and Prepayments Will Affect Payment
As principal payments or prepayments are made on a mortgage loan that is part
of a pool of mortgage loans, the pool will be subject to more concentrated risks
with respect to the diversity of mortgaged properties, types of mortgaged
properties and number of borrowers, as described in the prospectus supplement.
Classes that have a later sequential designation or a lower payment priority are
more likely to be exposed to this concentration risk than are classes with an
earlier sequential designation or a higher priority. This is the case because
principal on the offered certificates is generally payable in sequential order,
and no class entitled to distribution of principal generally receives principal
until the principal amount of the preceding class or classes entitled to receive
principal have been reduced to zero.
Grace Periods Under the Mortgage Loans May Impact the Master Servicer's
Obligation to Advance
The mortgage loans have grace periods for monthly payments ranging from zero
to ten days; provided, however, certain states by statute may override the terms
of some mortgage loans and increase such grace periods. In some cases, such
grace periods may run past the determination date. If borrowers pay at the end
of such grace periods rather than on the due dates for such monthly payments,
the master servicer will be required to make an advance for such monthly payment
(and monthly servicing reports will show significant advances as a result) even
though the borrower is not technically delinquent under the terms of its
mortgage loan. No interest will accrue on these advances made by the master
servicer until after the end of the related grace period. For purposes of the
foregoing discussions, a grace period is the number of days before a late
payment charge is due on a mortgage loan, which may be different from the date
an event of default would occur under the mortgage loan.
Risks to the Mortgaged Properties Relating to Terrorist Attacks and Foreign
Conflicts
On September 11, 2001, the United States was subjected to multiple terrorist
attacks which resulted in considerable uncertainty in the world financial
markets. The terrorist attacks on the World Trade Center and the Pentagon
suggest an increased likelihood that large public areas such as shopping malls
or large office buildings could become the target of terrorist attacks in the
future. The possibility of such attacks could (i) lead to damage to one or more
of the mortgaged properties if any such attacks occur, (ii) result in higher
costs for insurance premiums or make terrorism coverage unobtainable or (iii)
impact leasing patterns or shopping patterns which could adversely
-38-
impact leasing revenue and mall traffic and percentage rent. As a result, the
ability of the mortgaged properties to generate cash flow may be adversely
affected. In addition, the United States is engaged in continuing military
operations in Iraq, Afghanistan and elsewhere. It is uncertain what effect these
operations will have on domestic and world financial markets, economies, real
estate markets, insurance costs or business segments. The full impact of these
events is not yet known but could include, among other things, increased
volatility in the price of securities including the certificates. The terrorist
attacks may also adversely affect the revenues or costs of operation of the
mortgaged properties. With respect to shopping patterns, such events have
significantly reduced air travel throughout the United States and, therefore,
have had a negative effect on revenues in areas heavily dependent on tourism.
The decrease in air travel may have a negative effect on certain of the
mortgaged properties that are dependent on tourism or that are located in areas
heavily dependent on tourism which could reduce the ability of the affected
mortgaged properties to generate cash flow. The attacks also could result in
higher costs for insurance or for security, particularly for larger properties.
See "--Property Insurance May Not Protect Your Certificates from Loss in the
Event of Casualty or Loss" below and in the accompanying prospectus supplement.
Accordingly, these disruptions, uncertainties and costs could materially and
adversely affect your investment in the certificates.
Inclusion of Delinquent Mortgage Loans in a Mortgage Asset Pool
If provided in the prospectus supplement, the trust fund for a particular
series of certificates may include mortgage loans that are past due. However, in
no case will delinquent assets constitute 50% or more, as measured by dollar
volume, of the mortgage loans backing such series of certificates. As specified
in the related prospectus supplement, the servicing of such mortgage loans will
be performed by the special servicer. The same entity may act as both master
servicer and special servicer. Credit support provided with respect to a
particular series of certificates may not cover all losses related to such
delinquent mortgage loans, and investors should consider the risk that the
inclusion of such mortgage loans in the trust fund may adversely affect the rate
of defaults and prepayments concerning the subject mortgage asset pool and the
yield on the certificates of such series.
Health Care-Related Properties May Have Certain Risks Related to Governmental
Subsidy and Government Regulation
Certain types of health care facilities typically receive a substantial
portion of their revenues from government reimbursement programs, primarily
Medicaid and Medicare. Medicaid and Medicare are subject to statutory and
regulatory changes, retroactive rate adjustments, administrative rulings, policy
interpretations, delays by fiscal intermediaries and government funding
restrictions. Accordingly, we cannot assure you that payments under government
reimbursement programs will, in the future, be sufficient to fully reimburse the
cost of caring for program beneficiaries. If such payments are insufficient, net
operating income of those health care facilities that receive revenues from
those sources, and consequently the ability of the related borrowers to meet
their obligations under any mortgage loans secured thereby, could be adversely
affected.
Health care facilities are generally subject to federal and state laws and
licensing requirements that relate to the adequacy of medical care, distribution
of pharmaceuticals, rate setting, equipment, personnel, operating policies and
additions to facilities and services. The failure of an operator to maintain or
renew any required license or regulatory approval could prevent it from
continuing operations at a health care facility or, if applicable, bar it from
participation in government reimbursement programs. Furthermore, under
applicable federal and state laws and regulations, Medicare and Medicaid
reimbursements are generally not permitted to be made to any person other than
the provider who actually furnished the related medical goods and services.
Therefore, in the event of foreclosure, none of the trustee, the master
servicer, the special servicer or a subsequent lessee or operator of any health
care facilities securing a defaulted mortgage loan would generally be entitled
to obtain from federal or state governments any outstanding reimbursement
payments relating to services furnished at such property prior to such
foreclosure. Any of the aforementioned events may adversely affect the ability
of a borrower to meet its obligations under a mortgage loan secured by health
care facilities.
PROSPECTUS SUPPLEMENT
To the extent appropriate, the prospectus supplement relating to each series
of offered certificates will contain--
-39-
o a description of the class or classes of such offered certificates,
including the payment provisions with respect to each such class, the
aggregate principal amount (if any) of each such class, the rate at which
interest accrues from time to time (if at all), with respect to each such
class or the method of determining such rate, and whether interest with
respect to each such class will accrue from time to time on its aggregate
principal amount (if any) or on a specified notional amount (if at all);
o information with respect to any other classes of certificates of the same
series;
o the respective dates on which distributions are to be made;
o information as to the assets, including the mortgage assets, constituting
the related trust fund;
o the circumstances, if any, under which the related trust fund may be
subject to early termination;
o additional information with respect to the method of distribution of such
offered certificates;
o whether one or more REMIC elections will be made and the designation of
the "regular interests" and "residual interests" in each REMIC to be
created and the identity of the person responsible for the various
tax-related duties in respect of each REMIC to be created;
o the initial percentage ownership interest in the related trust fund to be
evidenced by each class of certificates of such series;
o information concerning the trustee of the related trust fund;
o if the related trust fund includes mortgage loans, information concerning
the master servicer and any special servicer of such mortgage loans and
the circumstances under which all or a portion, as specified, of the
servicing of a mortgage loan would transfer from the master servicer to
the special servicer;
o information as to the nature and extent of subordination of any class of
certificates of such series, including a class of offered certificates;
and
o whether such offered certificates will be initially issued in definitive
or book-entry form.
CAPITALIZED TERMS USED IN THIS PROSPECTUS
From time to time we use capitalized terms in this prospectus. Each of those
capitalized terms will have the meaning assigned to it in the "Glossary"
attached to this prospectus.
-40-
DESCRIPTION OF THE TRUST FUNDS
General
The primary assets of each trust fund will consist of mortgage assets which
will include--
o various types of multifamily or commercial mortgage loans;
o mortgage participations, pass-through certificates or other
mortgage-backed securities that evidence interests in, or that are
secured by pledges of, one or more of various types of multifamily or
commercial mortgage loans; or
o a combination of such mortgage loans and mortgage backed securities.
We will establish each trust fund and select each mortgage asset. We will
purchase mortgage assets to be included in the trust fund and select each
mortgage asset from the Mortgage Asset Seller who may not have originated the
mortgage asset or issued the MBS and may be our affiliate.
We will not insure or guaranty the mortgage assets nor will 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 (referred
to in this prospectus as mortgage notes) notes secured by mortgages, deeds of
trust or similar security instruments (referred to in this prospectus as
mortgages) that create first or junior liens on fee or leasehold estates in
properties consisting of--
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; or
o office buildings, retail stores and establishments, hotels or motels,
nursing homes, hospitals or other health care-related facilities,
recreational vehicle and mobile home parks, warehouse facilities,
mini-warehouse facilities, self-storage facilities, industrial plants,
parking lots, entertainment or sports arenas, restaurants, marinas, mixed
use or various other types of income-producing properties or unimproved
land.
These multifamily properties may include mixed commercial and residential
structures and apartment buildings owned by private cooperative housing
corporations. However, no one of the following types of commercial properties
will represent security for a material concentration of the mortgage loans in
any trust fund, based on principal balance at the time such trust fund is
formed: (1) restaurants; (2) entertainment or sports arenas; (3) marinas; or (4)
nursing homes, hospitals or other health care-related facilities. Unless
otherwise specified in the related prospectus supplement, each mortgage will
create a first priority mortgage lien on a borrower's fee estate in a mortgaged
property. If a mortgage creates a lien on a borrower's leasehold estate in a
property, then, unless otherwise specified in the related prospectus supplement,
the term of any such leasehold will exceed the term of the mortgage note by at
least ten years. Unless otherwise specified in the related prospectus
supplement, each mortgage loan will have been originated by a person other than
us; however, such person may be or may have been our affiliate.
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
-41-
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 mortgaged
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 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, any forbearance
arrangement then in effect, the condition of the related mortgaged property and
the ability of the mortgaged property to generate income to service the mortgage
debt.
Default and Loss Considerations with Respect to the Mortgage Loans. Mortgage
loans secured by liens on income-producing properties are substantially
different from loans made on the security of owner-occupied single-family homes.
The repayment of a loan secured by a lien on an income-producing property is
typically dependent upon the successful operation of such property (that is, its
ability to generate income). Moreover, as noted above, some or all of the
mortgage loans included in a particular trust fund may be nonrecourse loans.
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. 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 nonowner 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 plants. Commercial Properties may be owner-occupied or leased to
a small number of tenants. Thus, the Net Operating Income of such a mortgaged
property may depend substantially on the financial condition of the borrower or
a tenant, and mortgage loans secured by liens on such properties may pose 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. 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.
-42-
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. The lower the Loan-to-Value Ratio, the greater the percentage of the
borrower's equity in a mortgaged property, and thus (a) the greater the
incentive of the borrower to perform under the terms of the related mortgage
loan (in order to protect such equity) and (b) the greater the cushion provided
to the lender against loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure of
the 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), 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); and
o or upon a selection from or interpolation of the values derived from such
methods.
Each of these appraisal methods can present analytical difficulties. It is
often difficult to find truly comparable properties that have recently been
sold; the replacement cost of a property may have little to do with its current
market value; and income capitalization is inherently based on inexact
projections of income and expense and the selection of an appropriate
capitalization rate and discount rate. Where more than one of these appraisal
methods are used and provide significantly different results, an accurate
determination of value and, correspondingly, a reliable analysis of 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 that
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, there can be no assurance that all of such
factors will in fact have been prudently considered by the originators of the
mortgage loans, or that, for a particular mortgage loan, they are complete or
relevant. See "Risk Factors--Certain Factors Affecting Delinquency, Foreclosure
and Loss of the Mortgage Loans--General" and "--Certain Factors Affecting
Delinquency, Foreclosure and Loss of the Mortgage Loans--Increased Risk of
Default Associated With Balloon Payments" in this prospectus.
Payment Provisions of the Mortgage Loans. All of the mortgage loans will (1)
have had original terms to maturity of not more than 40 years and (2) provide
for scheduled payments of principal, interest or both, to be made on specified
dates that occur monthly, quarterly, semi-annually or annually. A mortgage loan
may--
o provide for no accrual of interest or for accrual of interest 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 Mortgage Rate, or from a fixed to an adjustable
Mortgage Rate;
o provide for level payments to maturity or for payments that adjust from
time to time to accommodate changes in its 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 permit the negative amortization or deferral of accrued interest;
-43-
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;
o may permit defeasance and the release of real property collateral in
connection with that defeasance; and
o may have two or more component parts, each having characteristics that
are otherwise described in this prospectus as being attributable to
separate and distinct mortgage loans, 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, as described in the
related prospectus supplement. See "Certain Legal Aspects of the Mortgage
Loans--Default Interest and Limitations on Prepayments" in this prospectus
regarding the enforceability of prepayment premiums and yield maintenance
charges.
Mortgage Loan Information in Prospectus Supplements. Each prospectus
supplement will contain certain information pertaining to the mortgage loans in
the related trust fund, 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 of such terms to maturity, 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 of the Loan-to-Value-Ratios, and
the weighted average of such Loan-to-Value Ratios;
o the Mortgage Rates borne by the mortgage loans, or the range of the
Mortgage Rate, and the weighted average Mortgage Rate borne by the
mortgage loans;
o with respect to mortgage loans with adjustable Mortgage Rates, the index
or indices upon which such adjustments are based, the adjustment dates,
the range of gross margins and the weighted average gross margin, and any
limits on Mortgage Rate adjustments at the time of any adjustment and
over the life of such mortgage loan (the index will be one of the
following: one-month, three-month, six-month or one-year LIBOR (an
average of the interest rate on one-month, three-month, six-month or
one-year dollar-denominated deposits traded between banks in London), CMT
(weekly or monthly average yields of U.S. treasury short and long-term
securities, adjusted to a constant maturity), COFI (an index of the
weighted average interest rate paid by savings institutions in Nevada,
Arizona and California), MTA (a one-year average of the monthly average
yields of U.S. treasury securities) or the Prime Rate (an interest rate
charged by banks for short-term loans to their most creditworthy
customers));
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 Debt Service
Coverage Ratios, 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 us that
pertains to the
-44-
provisions of leases and the nature of tenants of the mortgaged
properties. If we are unable to provide the specific information
described above at the time any offered certificates of a series are
initially offered, more general information of the nature described above
will be provided in the related prospectus supplement, and specific
information will be set forth in a report which will be available to
purchasers of those certificates at or before their initial issuance and
will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission within fifteen days following their issuance.
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.
Mortgage Loans Secured by Health Care-Related Properties. The mortgaged
properties may include health care related facilities which include--
o senior housing generally consisting of facilities with respect to which
the residents are ambulatory, handle their own affairs and typically are
couples whose children have left the home and at which the accommodations
are usually apartment style;
o assisted living facilities consisting of typically single or double room
occupancy, dormitory-style housing facilities which provide food service,
cleaning and some personal care and with respect to which the tenants are
able to medicate themselves but may require assistance with certain daily
routines;
o skilled nursing facilities that provide services to post trauma and frail
residents with limited mobility who require extensive medical treatment;
and
o acute care facilities generally consisting of hospital and other
facilities providing short-term, acute medical care services.
Certain types of health care-related properties, particularly acute care
facilities, skilled nursing facilities and some assisted living facilities,
typically receive a substantial portion of their revenues from government
reimbursement programs, primarily Medicaid and Medicare. Medicaid and Medicare
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings, policy interpretations, delays by fiscal intermediaries
and government funding restrictions. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers, and
there exist various proposals for national health care reform that could further
limit those payments. Therefore, we cannot assure you that payments under
government reimbursement programs will, in the future, be sufficient to fully
reimburse the cost of caring for program beneficiaries. If such payments are
insufficient, net operating income of those health care-related facilities that
receive revenues from those sources, and consequently the ability of the related
borrowers to meet their obligations under any mortgage loans secured thereby,
could be adversely affected.
Moreover, health care-related facilities are generally subject to federal and
state laws that relate to the adequacy of medical care, distribution of
pharmaceuticals, rate setting, equipment, personnel, operating policies and
additions to facilities and services. In addition, facilities where such care or
other medical services are provided are subject to periodic inspection by
governmental authorities to determine compliance with various standards
necessary to continued licensing under state law and continued participation in
the Medicaid and Medicare reimbursement
-45-
programs. Providers of assisted living services are also subject to state
licensing requirements in certain states. The failure of an operator to maintain
or renew any required license or regulatory approval could prevent it from
continuing operations at a health care-related facility or, if applicable, bar
it from participation in government reimbursement programs. Furthermore, under
applicable federal and state laws and regulations, Medicare and Medicaid
reimbursements are generally not permitted to be made to any person other than
the provider who actually furnished the related medical goods and services.
Accordingly, in the event of foreclosure, none of the trustee, the master
servicer, the special servicer or a subsequent lessee or operator of any health
care-related facility securing a defaulted mortgage loan would generally be
entitled to obtain from federal or state governments any outstanding
reimbursement payments relating to services furnished at such property prior to
such foreclosure. Any of the aforementioned events may adversely affect the
ability of the related borrowers to meet their mortgage loan obligations.
Government regulation applying specifically to acute care facilities, skilled
nursing facilities and certain types of assisted living facilities includes
health planning legislation, enacted by most states, intended, at least in part,
to regulate the supply of nursing beds. The most common method of control is the
requirement that a state authority first make a determination of need, evidenced
by its issuance of a certificate of need, before a long-term care provider can
establish a new facility, add beds to an existing facility or, in some states,
take certain other actions (for example, acquire major medical equipment, make
major capital expenditures, add services, refinance long-term debt, or transfer
ownership of a facility). States also regulate nursing bed supply in other ways.
For example, some states have imposed moratoria on the licensing of new beds, or
on the certification of new Medicaid beds, or have discouraged the construction
of new nursing facilities by limiting Medicaid reimbursements allocable to the
cost of new construction and equipment. In general, a certificate of need is
site specific and operator specific; it cannot be transferred from one site to
another, or to another operator, without the approval of the appropriate state
agency. Accordingly, if a mortgage loan secured by a lien on such a health
care-related mortgaged property were foreclosed upon, the purchaser at
foreclosure might be required to obtain a new certificate of need or an
appropriate exemption. In addition, compliance by a purchaser with applicable
regulations may in any case require the engagement of a new operator and the
issuance of a new operating license. Upon a foreclosure, a state regulatory
agency may be willing to expedite any necessary review and approval process to
avoid interruption of care to a facility's residents, but there can be no
assurance that any will do so or that any necessary licenses or approvals will
be issued.
Further government regulation applicable to health care-related facilities is
found in the form of federal and state "fraud and abuse" laws that generally
prohibit payment or fee-splitting arrangements between health care providers
that are designed to induce or encourage the referral of patients to, or the
recommendation of, a particular provider for medical products or services.
Violation of these restrictions can result in license revocation, civil and
criminal penalties, and exclusion from participation in Medicare or Medicaid
programs. The state law restrictions in this area vary considerably from state
to state. Moreover, the federal anti- kickback law includes broad language that
potentially could be applied to a wide range of referral arrangements, and
regulations designed to create "safe harbors" under the law provide only limited
guidance. Accordingly, there can be no assurance that such laws will be
interpreted in a manner consistent with the practices of the owners or operators
of the health care-related properties that are subject to such laws.
The operators of health care-related facilities are likely to compete on a
local and regional basis with others that operate similar facilities, some of
which competitors may be better capitalized, may offer services not offered by
such operators, or may be owned by non-profit organizations or government
agencies supported by endowments, charitable contributions, tax revenues and
other sources not available to such operators. The successful operation of a
health care-related facility will generally depend upon the number of competing
facilities in the local market, as well as upon other factors such as its age,
appearance, reputation and management, the types of services it provides and,
where applicable, the quality of care and the cost of that care. The inability
of a health care-related property to flourish in a competitive market may
increase the likelihood of foreclosure on the related mortgage loan, possibly
affecting the yield on one or more classes of the related series of offered
certificates.
MBS
MBS may include (1) private-label (that is, not issued, insured or guaranteed
by the United States or any agency or instrumentality of the United States)
mortgage pass-through certificates or other mortgage-backed securities or (2)
certificates issued and/or insured or guaranteed by the Federal Home Loan
Mortgage Corporation, the Federal
-46-
National Mortgage Association, the Governmental National Mortgage Association or
the Federal Agricultural Mortgage Corporation; provided that, unless otherwise
specified in the related prospectus supplement, each MBS will evidence an
interest in, or will be secured by a pledge of, mortgage loans that conform to
the descriptions of the mortgage loans contained in this prospectus.
Except in the case of a pool of mortgage loans, each MBS included in a
mortgage asset pool: (a) either will (1) have been previously registered under
the Securities Act of 1933, as amended, (2) be exempt from such registration
requirements, or (3) have been held for at least the holding period specified in
Rule 144(k) under the Securities Act of 1933, as amended; and (b) will have been
acquired (other than from us or any of our affiliates) in bona fide secondary
market transactions.
Any MBS will have been issued pursuant to a MBS agreement which is a Pooling
and Servicing Agreement, an indenture or similar agreement. The issuer of the
MBS and/or the servicer of the underlying mortgage loans will be parties to the
MBS agreement, generally together with a trustee or, in the alternative, with
the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of the offered certificates described in this prospectus.
Distributions in respect of the MBS will be made by the issuer of the MBS, the
servicer of the MBS, or the trustee of the MBS agreement or the MBS trustee on
the dates specified in the related prospectus supplement. The issuer of the MBS
or the MBS servicer or another person specified in the related prospectus
supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related prospectus supplement.
Reserve funds, subordination or other credit support similar to that
described for the offered certificates under "Description of Credit Support" may
have been provided with respect to the MBS. The type, characteristics and amount
of such credit support, if any, will be a function of the characteristics of the
underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The prospectus supplement for a series of certificates that evidence
interests in MBS will specify, to the extent available--
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 issuer of the MBS, servicer of the MBS and trustee of the MBS, 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
available and appropriate under the circumstances, such other information
in respect of the underlying mortgage loans described under "--Mortgage
Loans--Mortgage Loan Information in Prospectus Supplements"; and
o the characteristics of any cash flow agreements that relate to the MBS.
-47-
Certificate Accounts
Each trust fund will include one or more accounts 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 in this prospectus and in
the related prospectus supplement. See "The Pooling and Servicing
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 of the types of credit
support described in this prospectus under "Description of Credit Support". The
amount and types of credit support, the identity of the entity providing it (if
applicable) and related information with respect to each type of credit support,
if any, will be set forth in the prospectus supplement for a series of
certificates. See "Risk Factors--The Limited Credit Support for Your
Certificates May Not Be Sufficient to Prevent Loss on Your Certificates" and
"Description of Credit Support" in this prospectus.
Cash Flow Agreements
If so provided in the prospectus supplement for a series of certificates, the
related trust fund may include guaranteed investment contracts pursuant to which
moneys held in the funds and accounts established for such series will be
invested at a specified rate. The related trust fund may also include certain
other agreements, such as 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 on one or more classes of
certificates. The principal terms of any such cash flow agreement, including,
without limitation, provisions relating to the timing, manner and amount of
payments and provisions relating to the termination of the cash flow agreement,
will be described in the related prospectus supplement. The related prospectus
supplement will also identify the obligor under any such cash flow agreement.
See "Description of Credit Support--Cash Flow Agreements" in this prospectus.
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 on
the Underlying Mortgage Loans Will Affect the Average Life of Your Certificates
and Your Yield" in this prospectus. 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 the pass-through rate for each class of offered certificates of such
series or, in the case of a class of offered certificates with a variable or
adjustable pass-through rate, the method of determining the pass-through rate;
the effect, if any, of the prepayment of any mortgage loan on the pass-through
rate of one or more classes of offered certificates; and whether the
distributions of interest on the offered certificates of any class will be
dependent, in whole or in part, on the performance of any obligor under a cash
flow agreement.
-48-
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 on any Distribution Date will generally
correspond to interest accrued on the mortgage loans to their respective Due
Dates during the related Due Period. If a prepayment on any mortgage loan is
distributable to Certificateholders on a particular Distribution Date, but such
prepayment is not accompanied by interest to the Due Date for such mortgage loan
in the related Due Period, then the interest charged to the borrower (net of
servicing and administrative fees) may be less 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 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 the
principal payments 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
of the mortgage loans (which, in the case of mortgage loans, may change
periodically to accommodate adjustments to the corresponding Mortgage Rates),
the dates on which any balloon payments are due, and the rate of principal
prepayments (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), no assurance can be
given as to such rate.
The extent to which the yield to maturity of a class of offered certificates
of any series may vary from the anticipated yield will depend upon the degree to
which they are purchased at a discount or premium and when, and to what degree,
payments of principal on the mortgage loans in the related trust fund are in
turn distributed on such certificates (or, in the case of a class of Stripped
Interest Certificates, result in the reduction of the notional amount of the
Stripped Interest Certificates). An investor should consider, in the case of any
offered certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the mortgage loans in the related
trust fund could result in an actual yield to such investor that is lower than
the anticipated yield and, in the case of any offered certificate purchased at a
premium, the risk that a faster than anticipated rate of principal payments on
such mortgage loans could result in an actual yield to such investor that is
lower than the anticipated yield. In addition, if an investor purchases an
offered certificate at a discount (or premium), and principal payments are made
in reduction of the principal balance or notional amount of such investor's
offered certificates at a rate slower (or faster) than the rate anticipated by
the investor during any particular period, any consequent adverse effects on
such investor's yield would not be fully offset by a subsequent increase (or
decrease) in the rate of principal payments.
In general, the notional amount of a class of Stripped Interest Certificates
will either -
o be based on the principal balances of some or all of the mortgage assets
in the related trust fund; or
o equal the Certificate Balances of one or more of the other classes of
certificates of the same series.
-49-
Accordingly, the yield on such Stripped Interest Certificates will be inversely
related to the rate at which payments and other collections of principal are
received on such mortgage assets or distributions are made in reduction of the
Certificate Balances of such classes of certificates, as the case may be.
Consistent with the foregoing, if a class of certificates of any series
consists of Stripped Interest Certificates or Stripped Principal Certificates, a
lower than anticipated rate of principal prepayments on the mortgage loans in
the related trust fund will negatively affect the yield to investors in Stripped
Principal Certificates, and a higher than anticipated rate of principal
prepayments on such mortgage loans will negatively affect the yield to investors
in Stripped Interest Certificates. If the offered certificates of a series
include any such certificates, the related prospectus supplement will include a
table showing the effect of various 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, 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; and
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 adjustable rate mortgage loans, as prevailing
market interest rates decline, and without regard to whether the Mortgage Rates
on such adjustable rate mortgage loans decline in a manner consistent with the
prevailing market interest rates, the related borrowers may have an increased
incentive to refinance for purposes of either (1) converting to a fixed rate
loan and thereby "locking in" such rate or (2) 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 in the mortgaged
properties, to meet cash flow needs or to make other investments. In addition,
some borrowers may be motivated by federal and state tax laws (which are subject
to change) to sell mortgaged properties prior to the exhaustion of tax
depreciation benefits. We make no representation as to the particular factors
that will affect the 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.
-50-
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 CPR prepayment model or the SPA prepayment model.
CPR represents an assumed constant rate of prepayment each month (expressed as
an annual percentage) relative to the then outstanding principal balance of a
pool of 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, 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 in this prospectus and in the related prospectus supplement, may be
authorized to modify mortgage loans that are in default or as to which a payment
default is imminent. Any defaulted balloon payment or modification that extends
the maturity of a mortgage loan may delay distributions of principal on a class
of offered certificates and thereby extend the weighted average life of such
certificates and, if such certificates were purchased at a discount, reduce the
yield.
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
-51-
calculated at a rate lower than the rate at which interest accrues, 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,
which deferred interest may be added to the Certificate Balance of the
certificates. In addition, an adjustable rate mortgage 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 adjustable rate mortgage
loan that--
o limits the amount by which its scheduled payment may adjust in response
to a change in its Mortgage Rate;
o provides that its scheduled payment will adjust less frequently than its
Mortgage Rate; or
o provides for constant scheduled payments notwithstanding adjustments to
its Mortgage 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 Mortgage Rate, thereby resulting in the accelerated amortization of
such mortgage loan. Any such acceleration in amortization of its principal
balance will shorten the weighted average life of such mortgage loan and,
correspondingly, the weighted average lives of those classes of certificates
entitled to a portion of the principal payments on such mortgage loan.
The extent to which the yield on any offered certificate will be affected by
the inclusion in the related trust fund of mortgage loans that permit negative
amortization, will depend upon (1) whether such offered certificate was
purchased at a premium or a discount and (2) the extent to which the payment
characteristics of such mortgage loans delay or accelerate the distributions of
principal on such certificate (or, in the case of a Stripped Interest
Certificate, delay or accelerate the reduction of the notional amount of a
Stripped Interest Certificate). 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 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 of such
loss or shortfall.
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 (1) a reduction in the entitlements to interest and/or the
Certificate Balances of one or more such classes of certificates and/or (2)
establishing a priority of payments among such classes of certificates.
-52-
The yield to maturity on a class of Subordinate Certificates may be extremely
sensitive to losses and shortfalls in collections on the mortgage loans in the
related trust fund.
Additional Certificate Amortization. In addition to entitling the holders to
a specified portion (which may during specified periods range from none to all)
of the principal payments received on the mortgage assets in the related trust
fund, one or more classes of certificates of any series, including one or more
classes of offered certificates of such series, may provide for distributions of
principal 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.
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. 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.
BANK OF AMERICA, NATIONAL ASSOCIATION, AS SPONSOR
Bank of America, National Association ("Bank of America") will serve as a
sponsor of each series of Certificates. One or more entities, which may or may
not be affiliated with Bank of America, may also be a sponsor (each, a
"Sponsor") for a series of Certificates. Bank of America is an indirect
wholly-owned subsidiary of Bank of America Corporation. Bank of America is
engaged in a general consumer banking, commercial banking, and trust business,
offering a wide range of commercial, corporate, international, financial market,
retail and fiduciary banking services. Bank of America is a national banking
association chartered by the Office of the Comptroller of the Currency (the
"OCC") and is subject to the regulation, supervision and examination of the OCC.
Bank of America and its affiliates have been active in the securitization
market since inception. Bank of America has sponsored publicly offered
securitization transactions since 1977. Bank of America and its affiliates have
been involved with the origination of auto loans, student loans, home equity
loans, credit card receivables, manufactured housing contracts, residential
mortgage loans and commercial mortgage loans, as well as less traditional asset
classes. Bank of America and its affiliates have also participated in a variety
of collateralized loan obligation transactions, synthetic securitizations, and
asset-backed commercial paper programs. Bank of America and its affiliates have
served as sponsors, issuers, dealers, and servicers in a wide array of
securitization transactions.
The Depositor's securitization program principally is used to fund Bank of
America's commercial real estate business unit's self-originated portfolio of
loans secured by first liens on multifamily and commercial properties. The
Depositor's securitization program may also include mortgage loans originated
through correspondent arrangements. While Bank of America currently does not
rely on securitization as a material funding source, the Depositor's
securitization program is a material funding source for Bank of America's
portfolio of commercial real estate mortgage loans similar to the mortgage
loans.
The tables below indicate the size and growth of the sponsor's commercial
mortgage loan origination program. Loans originated by the Sponsor have
historically included primarily a mix of multifamily, office, retail, hotel and
industrial and warehouse properties, though the Sponsor has also regularly
originated loans on a variety of other commercial property types, including but
not limited to self-storage facilities, manufactured housing communities,
parking garage facilities and golf courses.
-53-
ORIGINATION VOLUME
(Dollar Amount of Closed Loans)
YEAR
--------------------------------------------------------------
Property Type 2002 2003 2004 2005
- ---------------- ------------- --------------- --------------- ----------------
Multifamily $872,868,916 $773,759,737 $846,810,000 $1,923,132,683
Office $989,530,644 $2,519,410,500 $4,554,682,199 $4,707,688,429
Retail $967,447,740 $1,675,580,125 $2,693,464,540 $3,934,548,928
Industrial $95,233,700 $244,734,000 $442,700,000 $383,918,812
MHP(1) $0 $604,559,638 $827,847,923 $87,612,439
SS(2) $17,500,000 $127,118,000 $411,710,000 $294,366,598
Lodging $130,000,000 $346,350,000 $2,465,433,338 $4,087,452,198
- ---------------- ------------- --------------- --------------- ----------------
Total $3,072,581,000 $6,291,512,000 $12,242,648,000 $15,418,720,087
- ------------
(1) Manufactured housing properties
(2) Self-storage properties.
Bank of America serves as a Sponsor and, if specified in the applicable
prospectus supplement, a master, primary and/or special servicer in the
Depositor's securitization program, in addition to owning all of the Depositor's
equity. Banc of America Securities LLC, which may act as an underwriter of
Certificates, is an affiliate of Bank of America and assists Bank of America and
the Depositor in connection with the selection of mortgage loans for various
transactions. See "Method of Distribution" in the applicable prospectus
supplement.
Bank of America's headquarters and its executive offices are located at 101
South Tryon Street, Charlotte, North Carolina 28255, and the telephone number is
(704) [386-5478].
See "The Mortgage Loan Program," "Bank of America, National Association, as
Servicer" and "The Pooling and Servicing Agreements" for more information about
the Sponsor's solicitation and underwriting criteria used to originate mortgage
loans similar to the mortgage loans and its material roles and duties in each
securitization.
Other Originators
If any originator or group of affiliated originators, apart from the Sponsor
and its affiliates, originated 10% or more of the mortgage loans in a trust
fund, the applicable prospectus supplement will disclose the identity of the
originator and, if such originator or group of affiliated originators originated
20% or more of the mortgage loans, the applicable prospectus supplement will
provide information about the originator's form of organization and, to the
extent material, a description of the originator's origination program and how
long it has been engaged in originating mortgage loans of the same type. Each
mortgage loan will have been underwritten either to the standards set forth
above in this prospectus or to other underwriting standards set forth in the
applicable prospectus supplement.
THE DEPOSITOR
Banc of America Commercial Mortgage Inc., (the "Depositor") is a Delaware
corporation and was organized on December 13, 1995 for the limited purpose of
acquiring, owning and transferring mortgage assets and selling interests in the
mortgage assets or bonds secured by the mortgage assets. The Depositor was
incorporated in the State of Delaware on December 13, 1995 under the name
"NationsLink Funding Corporation" and filed a Certificate of Amendment of
Certificate of Incorporation changing its name to "Banc of America Commercial
Mortgage Inc." on August 24, 2000. The Depositor is a subsidiary of Bank of
America, National Association. The Depositor maintains its principal office at
214 North Tryon Street, Charlotte, North Carolina 28255. Our telephone number is
(704) 386-8509.
Unless otherwise noted in the related prospectus supplement, neither we nor
any of our affiliates will insure or guarantee distributions on the certificates
of any series.
-54-
The Depositor and any director, officer, employee or agent of the Depositor
shall be indemnified by the trust fund and held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling and Servicing Agreement or the Certificates, other than any loss,
liability or expense related to any specific mortgage loan or mortgage loans and
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence in the performance of its duties under the Pooling and
Servicing Agreement or by reason of reckless disregard of its obligations and
duties under the Pooling and Servicing Agreement.
THE MORTGAGE LOAN PROGRAM
Commercial Mortgage Loan Underwriting
General
The Depositor will purchase the mortgage loans from Bank of America, as the
Sponsor. The mortgage loans will have been either (i) originated by Bank of
America or (ii) purchased by Bank of America from various entities that either
originated the mortgage loans or acquired the mortgage loans pursuant to
mortgage loan purchase programs operated by those entities. The mortgage loans
will have been underwritten materially in accordance with one or more of the
following: (i) Bank of America's general underwriting standards set forth below
under "Bank of America General Underwriting Standards or (ii) the underwriting
standards set forth in the applicable prospectus supplement.
The underwriting standards used by mortgage loan originators are intended to
evaluate the value and adequacy of the mortgage property as collateral and the
mortgagor's credit standing and repayment ability. The underwriting standards
used by originators other than Bank of America, unless such other originators
use standards materially similar to Bank of America's underwriting standards,
will be described in the applicable prospectus supplement.
General Underwriting Standards
Origination Channels. Bank of America originates mortgage loans (i) directly
to mortgagor/borrowers; (ii) indirectly to mortgagor/borrowers via the use of
mortgage loan brokers; and (iii) through other loan originators.
The Application. Regardless of the channel in which the loan was originated,
a mortgage application is completed containing information that assists in
evaluating the adequacy of the mortgaged property as collateral for the loan,
including the mortgagors credit standing and capacity to repay the loan. During
the application process, the applicant is required to authorize Bank of America
to obtain a credit report that summarizes the applicant's credit history and any
record of bankruptcy or prior foreclosure. In addition, the mortgagor and any
Borrower Principal is required to complete a Certificate of Financial Condition
which certifies to certain questions regarding it's prior credit history. If the
collateral is considered a multifamily dwelling, the mortgagor is also required
to submit a Home Mortgage Disclosure Act (HMDA) Data Collection Form which
provides certain information in order to allow the federal government to monitor
Bank of America's compliance with equal credit opportunity, fair housing, and
home mortgage disclosure laws.
Further, the Application requires supporting documentation (or other
verification) for all material data provided by the mortgagor described in a
checklist, including but not limited to the following:
o Rent Roll
o Existing Mortgage Verification
o Credit References
o Certified Financial Statements for mortgagor and Borrower Principals
o Tenant/Resident Leases
-55-
o Ground Leases
o Property operating Statements
o Real Estate Tax bills
o Purchase Contract (if applicable)
o Appraisal
o Engineering Report
o Seismic Report (if applicable)
o Environmental Report
o Site Plan
o Certificate of Occupancy
o Evidence of Zoning Compliance
o Insurance policies
o Borrower structure/authority documents
Underwriting Evaluation. Each mortgage loan underwritten to Bank of America's
general underwriting standards is underwritten in accordance with guidelines
established in Bank of America's CMBS Capital Markets Commercial Conduit
Guidelines and Procedures ("Guidelines"). These underwriting standards applied
by Bank of America are intended to evaluate the adequacy of the mortgaged
property as collateral for the loan and the mortgagor's repayment ability and
credit rating. The underwriting standards as established in the Guidelines are
continually updated to reflect prevailing conditions in the CMBS market, new
mortgage products, and the investment market for commercial loans.
Bank of America's commercial real estate finance group has the authority,
with the approval from the appropriate credit committee to originate fixed-rate,
first lien mortgage loans for securitization. Bank of America's commercial real
estate operation is a vertically integrated entity, staffed by real estate
professionals. Bank of America's loan underwriting group is an integral
component of the commercial real estate finance group which also includes
distinct groups responsible for loan origination and closing mortgage loans.
Upon receipt of a loan package, Bank of America's loan underwriters commence
an extensive review of the borrower's financial condition and creditworthiness
and the real estate which will secure the loan.
Loan Analysis. Generally, Bank of America performs both a credit analysis and
collateral analysis with respect to a loan applicant and the real estate
that will secure the loan. In general, credit analysis of the borrower
and the real estate includes a review of historical financial statements,
including rent rolls (generally unaudited), third party credit reports,
judgment, lien, bankruptcy and pending litigation searches and, if
applicable, the loan payment history of the borrower. Bank of America
also performs a qualitative analysis which incorporates independent
credit checks and published debt and equity information with respect to
certain principals of the borrower as well as the borrower itself.
Borrowers are generally required to be single-purpose entities although
they are generally not required to be bankruptcy-remote entities. The
collateral analysis includes an analysis of the historical property
operating statements, rent rolls and a projection of future performance
and a review of tenant leases. Bank of America requires third party
appraisals, as well as environmental and building condition reports. Each
report is reviewed for acceptability by a Bank of America staff member
for compliance with program standards and such staff member approves or
rejects such report. The results of these reviews are incorporated into
the underwriting report.
-56-
Loan Approval. Prior to commitment, all mortgage loans must be approved by
Bank of America in accordance with its credit policies.
Escrow Requirements. Bank of America requires most borrowers to fund various
escrows for taxes and insurance, capital expenses and replacement reserves.
Generally, the required escrows for mortgage loans originated by Bank of America
are as follows:
o Taxes--Typically an initial deposit and monthly escrow deposits equal to
1/12th of the annual property taxes (based on the most recent property
assessment and the current millage rate) are required to provide for
sufficient funds to satisfy all taxes and assessments.
o Insurance--If the property is insured under an individual policy (i.e.
the property is not covered by a blanket policy), typically an initial
deposit and monthly escrow deposits equal to 1/12th of the annual
property insurance premium are required to provide for sufficient funds
to pay all insurance premiums.
o Replacement Reserves--Replacement reserves are calculated in accordance
with the expected useful life of the components of the property during
the term of the mortgage loan.
o Immediate Repair / Environmental Remediation--Typically, an immediate
repair or remediation reserve is required. An initial deposit, upon
funding of the applicable mortgage loan, in an amount equal to at least
125% of the estimated costs of immediate repairs to be completed within
the first year of the mortgage loan pursuant to the building condition
report is required.
Tenant Improvement/Lease Commissions--In some cases, major tenants have lease
expirations within the mortgage loan term. To mitigate this risk, special
reserves may be required to be funded either at closing of the mortgage loan and
/ or during the mortgage loan term to cover certain anticipated leasing
commissions or tenant improvement costs which might be associated with
re-leasing the space occupied by such tenants.
Zoning and Building Code Compliance--Bank of America will generally examine
whether the use and operation of the mortgaged properties are in material
compliance with zoning and land-use related ordinances, rules, regulations and
orders applicable to the use of such mortgaged properties at the time such
mortgage loans are originated. The Mortgage Asset Seller will consider, among
other things, legal opinions, certifications from government officials, zoning
consultant's reports and/or representations by the related borrower contained in
the related mortgage Loan documents and information which is contained in
appraisals and surveys, title insurance endorsements, or property condition
assessments undertaken by independent licensed engineers.
Hazard, Liability and Other Insurance--The mortgage loans generally require
that each mortgaged property be insured by a hazard insurance policy in an
amount (subject to an approved deductible) at least equal to the lesser of the
outstanding principal balance of the related mortgage loan and 100% of the
replacement cost of the improvements located on the related mortgaged property,
and if applicable, that the related hazard insurance policy contain appropriate
endorsements to avoid the application of co-insurance and not permit reduction
in insurance proceeds for depreciation; provided that, in the case of certain of
the mortgage loans, the hazard insurance may be in such other amounts as was
required by the related originators.
In addition, if any material improvements on any portion of a mortgaged
property securing any mortgage loan was, at the time of the origination of such
mortgage loan, in an area identified in the Federal Register by the Federal
Emergency management Agency as having special flood hazards, and flood insurance
was available, a flood insurance policy meeting any requirements of the
then-current guidelines of the Federal Insurance Administration is required to
be in effect with a generally acceptable insurance carrier, in an amount
representing coverage generally not less than the least of (a) the outstanding
principal balance of the related mortgage loan, (b) the full insurable value of
the related mortgaged property, (c) the maximum amount of insurance available
under the National Flood Insurance Act of 1973, or (d) 100% of the replacement
cost of the improvements located on the related mortgaged property.
-57-
In general, the standard form of hazard insurance policy covers physical
damage to, or destruction of, the improvements on the mortgaged property by
fire, lightning, explosion, smoke, windstorm and hail, riot or strike and civil
commotion, subject to the conditions and exclusions set forth in each policy.
Each mortgage loan generally also requires the related borrower to maintain
comprehensive general liability insurance against claims for personal and bodily
injury, death or property damage occurring on, in or about the relate mortgaged
property in an amount generally equal to at least $1,000,000.
Each mortgage loan generally further requires the related borrower to
maintain business interruption insurance in an amount not less than
approximately 100% of the gross rental income from the related mortgaged
property for not less than 12 months.
Required Third Party Reports
Bank of America underwriters utilize specific information provided by
licensed third party professionals in evaluating the collateral. The following
reports are ordered by Bank of America:
Appraisal. An independent appraiser that is either a member of MAI or state
certified is required to perform an appraisal (or updated an existing appraisal)
of each of the related mortgaged properties in connection with the origination
of each mortgage loan to establish the appraised value of the related mortgaged
property or properties. Such appraisal, appraisal update or property valuation
is prepared on or about the "Appraisal Date" indicated in the prospectus
supplement, and except for certain mortgaged properties involving operating
businesses, the appraiser represented in such appraisal or in a letter or other
agreement that the appraisal conformed to the appraisal guidelines set forth in
USPAP. In general, such appraisals represent the analysis and opinions of the
respective appraisers at or before the time made, and are not guarantees of, and
may not be indicative of, present or future value. All appraisals are in
compliance with FIRREA.
Property Condition Assessments. Inspections of each of the mortgaged
properties are conducted by independent licensed engineers in connection with or
subsequent to the origination of the related mortgage loan. Such inspections are
generally commissioned to inspect the exterior walls, roofing, interior
construction, mechanical and electrical systems and general condition of the
site, buildings and other improvements located at a mortgaged property. The
resulting reports may indicate deferred maintenance items and recommended
capital improvements. The estimated cost of the necessary repairs or
replacements at a mortgaged property is included in the related property
condition assessment. In general, with limited exception, cash reserves are
established, or other security obtained, to fund or secure the payment of such
estimated deferred maintenance or replacement items. In addition, various
mortgage loans require monthly deposits into cash reserve accounts to fund
property maintenance expenses.
Environmental Site Assessment ("ESA"). ESA's are information-gathering
investigations that identify environmental conditions that may impair, restrict
the use of, and/or impose an environmental liability to the mortgaged property.
A Phase I ESA consists of inquiries, interviews, inspections, and research of
public records to identify known or potential environmental concerns. A Phase II
ESA is a site specific investigation to determine the presence or absence of
environmental concerns identified in the Phase I ESA. Bank of America requires a
Phase I ESA for all properties regardless of age or location and each such
report must be in compliance with current standards prescribed by The American
Society of Testing and Materials (ASTM).
Seismic Reports. A seismic Report is required for all properties located in
Seismic Zones 3 or 4 as determined I accordance with the Uniform Building Code.
Representations and Warranties
As and to the extent described in the related prospectus supplement, the
Sponsor will make representations and warranties regarding the mortgage loans
that it transfers to the Depositor for a particular series of certificates.
-58-
BANK OF AMERICA, NATIONAL ASSOCIATION, AS SERVICER
General
Bank of America has been servicing commercial mortgage loans in excess of 14
years. The table below sets forth information about Bank of America's portfolio
of commercial mortgage loans as of the dates indicated:
As of As of As of
December 31, December 31, November 30,
2003 2004 2005
--------------- --------------- ---------------
Commercial Mortgage Loans
By Number 8,747 10,349 10,480
By Aggregate Unpaid $26,691,677,800 $54,295,716,000 $70,000,000,000
Principal Balance (in
Millions)
Within this portfolio, as of December 31, 2005, are 4,253 commercial mortgage
loans with an unpaid principal balance of approximately $47.8 billion related to
commercial mortgage-backed securities.
As required by most Pooling and Servicing Agreements, Bank of America may be
required to advance funds for delinquent payments, subject to the servicer's
determination of recoverability. A servicer will advance funds as a P&I Advance
if a borrower's payment is late in order to provide a certain amount of
liquidity to the related trust fund month over month. Servicers will make
Servicing Advances or Property Protection Advances for unpaid items on
individual loans such as property taxes, insurance payments and life/safety
repairs, all subject to the servicers determination as to whether the advance
would be ultimately recoverable. Upon a determination of non-recoverability, the
servicer's advances are repaid first from funds available in the Collection
Account.
[Information about Periodic Advances for the previous three years, to the
extent material and to the extent data is available.]
Bank of America is a rated by Fitch and Standard & Poor's as a primary
servicer, master servicer and special servicer. Bank of America's ratings by
each of these agencies is outlined below:
Fitch Standard & Poor's
---------------- -----------------
Primary Servicer CPS 2 Above Average
Master Servicer CMS 2 Above Average
Special Servicer CSS 3 Average
In addition to servicing loans for securitized commercial mortgages, Bank of
America also services loans that are held in its portfolio, whole loans that are
held in the portfolio of third parties and whole loans that are originated by
Bank of America and sold to a variety of investors.
Bank of America utilizes a mortgage-servicing technology platform with
multiple capabilities and reporting functions that is widely used within the
commercial mortgage industry. This platform allows Bank of America to process
mortgage servicing activities including but not limited to: (i) performing
account maintenance; (ii) tracking borrower communications; (iii) tracking real
estate tax escrow and payments, insurance escrow and payments, tracking
replacement reserve escrows, operating statement data and rent rolls; (iv)
entering and updating transaction data; and (v) generating various reports.
Bank of America has implemented and tested a business continuity plan. In
case of a disruption, all functions of the disrupted facility would be
transferred to a business recovery facility. The business recovery facility has
access to all data and tools necessary to continue servicing all mortgage loans.
Bank of America's business continuity plan is tested and updated annually.
Bank of America's servicing policies and procedures are updated annually to
keep pace with the changes in the industry and have been generally consistent
for the last three years in all material respects. The only significant changes
in Bank of America's policies and procedures have come in response to changes in
federal or state law or
-59-
investor requirements, such as updates issued by Fannie Mae or Freddie Mac. Bank
of America may perform any of its obligations under a pooling and servicing
agreement through one or more third-party vendors, affiliates or subsidiaries.
Bank of America may engage third-party vendors to provide technology or process
efficiencies. Bank of America monitors its third-party vendors in compliance
with the guidelines reviewed by the OCC. Bank of America has entered into
contracts with third-party vendors for functions such as annual property
inspections, real estate tax payment and tracking, hazard insurance, lockbox
services and document printing. Bank of America may also retain certain firms to
act as a primary servicer and to provide cashiering or non-cashiering
sub-servicing on certain loans.
Loans are serviced in accordance with the loan agreements, mortgage
documents, pooling and servicing agreements, inter-creditor agreements, if
applicable, and the applicable servicing standard.
Custody services of original documents evidencing the mortgage loans for a
particular series will typically be performed by the related trustee. On
occasion, Bank of American as servicer may have custody of certain of such
documents as necessary for enforcement actions involving particular mortgage
loans or otherwise. To the extent Bank of America performs custodial functions
as servicer, documents will be maintained in its vault. Bank of America utilizes
an electronic tracking system to identify the owner of the related Mortgage
File.
Property Damage. When an underlying property is damaged and such damage is
covered by insurance, Bank of America takes certain actions to ensure that the
property is restored to its original condition. These actions include depositing
the insurance proceeds and funding the restoration of the property as we would a
construction loan. Bank of America maintains the staff to collect and review
insurance policies and/or certificates relating to the coverages required under
the mortgage loan documents. Bank of America may, from time to time, retain a
vendor to assist in the collection and review of insurance policies and/or
certificates relating to the coverages required under the mortgage loan
documents. The vendor provides a feed the Bank of America's loan servicing
system to provide updated information.
Special Servicing
Delinquencies, Losses, Bankruptcies and Recoveries
Bank of America monitors mortgage loans for a variety of situations that
present the risk of delinquency or loss to a trust. Those situations include,
without limitation, situations where a mortgagor has sold or transferred the
related mortgaged property, where there has been damage to the related mortgaged
property, where the mortgagor is late in making payments for any number of
reasons, and where the mortgagor has declared bankruptcy. The following is a
brief description of Bank of America's policies and procedures to respond to
each of these situations.
Collections and Loss Mitigation. Account status is monitored and efforts are
made to prevent a mortgage loan on which a payment is delinquent from going to
foreclosure. Based on account payment history, prior contact with the borrower,
property status, and various other factors, an appropriate course of action is
employed to make direct mail or phone contact with the borrower(s). All of the
preceding factors are considered when determining the appropriate timing for the
contact efforts.
Initial phone contact is pursued by Bank of America's collections department,
when a loan payment is not received after the applicable grace period. Each call
made by the collection department attempts to: (i) obtain the reason for
default; (ii) obtain information related to the mortgagor's current financial
situation; (iii) verify occupancy. Loans serviced by Bank of America have grace
periods of five to fifteen days after the Due Date in which a borrower can make
a monthly payment without incurring a penalty or late charge. In addition, a
mortgage loan is not considered delinquent unless a full monthly payment has not
been received by the close of business on the last day of the month of the Due
Date. For example, a mortgage loan with a Due Date of May 1 is considered
delinquent if a full monthly payment is not received by May 31.
Late charges are generally assessed after the Due Date at the expiration of a
grace period, if applicable. There may be situations, based on the customer or
account circumstances, where a late fee could be waived, providing the late fee
is not required to pay interest on advances to a trust fund in accordance with
the related pooling and servicing agreement. Generally, the borrower is sent a
reminder notice between the expiration of the grace period and 30 days
delinquent.
-60-
The borrower is sent a notice of default when the payment has not been made
after 30 days. Notice periods are more specifically spelled out in individual
loan documents. General default communications may continue with a late fee
notice, account billing statements, breach letters, loss mitigation
solicitations, occupancy and property status inquiries If after 30 days the
payment has not been received, generally Pooling and Servicing Agreements
require the loan to be transferred to special servicing for default processing.
In recognition of the fact that mortgage loans that are delinquent are at higher
risk for abandonment by the borrower, and may also face issues related to
maintenance, Bank of America has developed guidelines for inspecting properties
for which a monthly payment is delinquent. Depending on various factors, such as
the ability to contact the customer, the delinquency status of the account, and
the property occupancy status, Bank of America will hire a vendor to inspect the
related property to determine its condition. If the inspection results indicate
a need for property safeguarding measures, such as securing or winterizing, Bank
of America will ensure the appropriate safeguards are implemented in accordance
with industry, legal and investor standards.
Delinquent mortgage loans are reviewed for loss mitigation options, which can
include a promise to pay, repayment plan, forbearance, moratorium, modification,
special forbearance, deed-in-lieu of foreclosure, assumption, sale of property,
demand arrears, or foreclosure. Bank of America will opt for any one or more of
these mitigation options depending on various factors, but will pursue more
extensive loss mitigation solutions when a suitable arrangement for repayment or
promise to pay is not feasible because of the borrowers financial situation or
unwillingness to support the property. Payment activities on delinquent mortgage
loans are monitored to ensure the appropriate application of partial payments
where specific arrangements have been agreed to allow partial payments and to
ensure an appropriate response to situations in which a customer has paid with a
check that is returned for insufficient funds. Asset plans are prepared by the
60th day after the loan has been transferred to Bank of America, as special
servicer, per Pooling and Servicing Agreement requirements. If a workout or
modification can be achieved with the borrower on the asset, the asset may be
returned to the related trust fund as a corrected mortgage loan.
Bankruptcy. When a mortgagor files for bankruptcy, Bank of America's options
for recovery are more limited. Bank of America monitors bankruptcy proceedings
and develops appropriate responses based on a variety of factors, including: (i)
the chapter of the Bankruptcy Code under which the mortgagor filed; (ii)
federal, state and local regulations; (iii) determination-of-claim requirements;
(iv) motion requirements; and (v) specific orders issued through the applicable
court. Bank of America works in conjunction with its in-house and outside legal
counsel to file all proof of claims, review plans, make objections and file
motions for relief.
Foreclosure. Bank of America, as Special Servicer works in conjunction with
its in-house and outside legal counsel to foreclose a property when (i) it is
apparent that foreclosure is the only resolution for the asset; and/or (ii) it
determines in its reasonable judgment that it is in the best interest of the
related trust fund. Once the property is foreclosed and REO; Bank of America
will work with its pre-approved vendors to either (i) sell the property or (ii)
recondition, if necessary, and lease the property in preparation for
liquidation. Losses may be experienced on a mortgage loan during the real estate
owned process if the value of the property at time of liquidation is less than
the sum of the unpaid principal balance and all outstanding advances (including,
but not limited to, the outstanding unpaid principal balance of the mortgage
loan, interest advances, escrow advances, uncollected servicing fees, property
maintenance fees, attorney fees, and other necessary fees).
Other Servicers
In the event that Bank of America or another servicer appoints a subservicer
that meets the thresholds provided in Item 1108(a)(3) of Regulation AB (17 CFR
229.1108), the applicable prospectus supplement will provide the disclosure
required by Item 1108(b) and (c) of Regulation AB (17 CFR 229.1108). In the
event that such appointment occurs after the issuance of the related series of
Certificates, the Depositor will report such appointment on Form 8-K.
-61-
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 and Servicing
Agreement. As described in the related prospectus supplement, the certificates
of each series, including the certificates of such series being offered for
sale, may consist of one or more classes of certificates that, among other
things:
o provide for the accrual of interest on the Certificate Balance or
Notional Amount at a fixed, variable or adjustable rate;
o constitute Senior Certificates or Subordinate Certificates;
o constitute Stripped Interest Certificates or Stripped Principal
Certificates;
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 based solely or primarily on specified mortgage
assets or a specified group of mortgage assets in the related trust fund;
o provide for distributions of principal to be made, subject to available
funds, based on a specified principal payment schedule or other
methodology; or
o provide for distributions based on collections on the mortgage assets in
the related trust fund attributable to Prepayment Premiums and Equity
Participations.
If so specified in the related prospectus supplement, 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. 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
Stripped Interest Certificates insofar as it may also entitle the holders of
Stripped Interest Certificates 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 Stripped Interest Certificates or REMIC Residual Certificates,
notional amounts or percentage interests, specified in the related prospectus
supplement. As provided in the related prospectus supplement, one or more
classes of offered certificates of any series may be issued in fully registered,
definitive form or may be offered in book-entry format through the facilities of
DTC. The offered certificates of each series (if issued in fully registered
definitive form) may be transferred or exchanged, subject to any restrictions on
transfer described in the related prospectus supplement, at the location
specified in the related prospectus supplement, without the payment of any
service charges, other than any tax or other governmental charge payable in
connection with that transfer or exchange. Interests in a class of certificates
offered in book-entry format 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 (in
Europe) if they are participants in DTC.
-62-
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. 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, the Distribution Date for a series of
certificates will be the 11th day of each month (or, if any such 11th day is not
a business day, the next succeeding business day), commencing in the month
immediately following the month in which such series of certificates is issued.
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
Record Date, and the amount of each distribution will be determined as of the
close of business on the date specified in the related prospectus supplement.
All distributions with respect to each class of certificates on each
Distribution Date will be allocated pro rata among the outstanding certificates
in such class in proportion to the respective percentage interests evidenced by
those certificates 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
certificate-holder holds certificates in the requisite amount or denomination
specified in the prospectus supplement), 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 issued in fully registered definitive form or in book-entry format)
will be made only upon presentation and surrender of such certificates at the
location specified in the notice to certificateholders of such final
distribution.
Distributions of Interest on the Certificates
Each class of certificates of each series (other than certain classes of
Stripped Principal Certificates and certain classes of REMIC 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 in respect of any class of certificates (other than
a class of Accrual Certificates, which will be entitled to distributions of
accrued interest commencing only on the Distribution Date or under the
circumstances specified in the related prospectus supplement, and other than any
class of Stripped Principal Certificates or REMIC Residual Certificates that is
not entitled to any distributions of interest) will be made on each Distribution
Date based on the Accrued Certificate Interest for such class and such
Distribution Date, subject to the sufficiency of 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 of such Accrual
Certificates on each Distribution Date or otherwise deferred as described in the
related prospectus supplement. Unless otherwise provided in the related
prospectus supplement, the Accrued Certificate Interest for each Distribution
Date on a class of Stripped Interest Certificates will be similarly calculated
except that it will accrue on a Notional Amount. Reference to a Notional Amount
with respect to a class of Stripped Interest Certificates is solely for
convenience in making certain calculations and does not represent the right to
receive any distributions of principal. If so specified in the related
prospectus supplement, the amount of Accrued Certificate Interest that is
otherwise distributable on (or, in the case of Accrual Certificates, that may
otherwise be added to the Certificate Balance of) one or more classes of the
certificates of a series 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
-63-
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 on the Underlying Mortgage Loans Will Affect the Average
Life of Your Certificates and Your Yield" 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
Stripped Interest Certificates and certain classes of REMIC Residual
Certificates) will have a Certificate Balance, which, at any time, will equal
the then maximum amount that the holders of certificates of such class will be
entitled to receive 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 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 are required to commence, by the amount of any Accrued
Certificate Interest in respect of such Accrual Certificate (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, 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 Controlled Amortization Classes may be made, subject
to available funds, based on a specified principal payment schedule.
Distributions of principal with respect to Companion Classes 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 Concerning Prepayment Premiums or Concerning
Equity Participations
If so provided in the related prospectus supplement, Prepayment Premiums or
payments in respect of Equity Participations received on or in connection with
the mortgage assets in any trust fund will be distributed on each Distribution
Date to the holders of the class of certificates of the related series entitled
thereto in accordance with the provisions described in such prospectus
supplement. Alternatively, we or any of our affiliates may retain such items 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
-64-
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 (1) a reduction in the entitlements to interest and/or the
Certificate Balances of one or more such classes of certificates and/or (2)
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 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 recoveries on the
mortgage loans or another specifically identified source. Unless otherwise
specified in the related prospectus supplement, this will be based on the
advancing party's estimation of the value of the mortgaged property in relation
to the sum of the unpaid principal balance of the related mortgage loan, accrued
interest, the amount of previously unreimbursed Advances and anticipated
disposition expenses, and the advancing party's determination that the advance
would not ultimately be recoverable under any applicable insurance policies,
from proceeds of liquidation of the mortgage loan or otherwise. If previously
made by a master servicer, special servicer or trustee, such an 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 and
Servicing Agreement and described in such prospectus supplement.
The prospectus supplement for any series of certificates evidencing an
interest in a trust fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling and Servicing Agreement
or of a party to the agreement pursuant to which the MBS was issued.
-65-
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 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:
o the amount of such distribution to holders of such class of offered
certificates that was applied to reduce the Certificate Balance of such
class;
o the amount of such distribution to holders of such class of offered
certificates that was applied to pay Accrued Certificate Interest;
o 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;
o the amount, if any, by which such distribution is less than the amounts
to which holders of such class of offered certificates are entitled;
o if the related trust fund includes mortgage loans, the aggregate amount
of advances included in such distribution;
o 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;
o information regarding the aggregate principal balance of the related
mortgage assets on or about such Distribution Date;
o if the related trust fund includes mortgage loans, information regarding
the number and aggregate principal balance of such mortgage loans that
are delinquent;
o 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 specified period,
generally corresponding in length to the period between Distribution
Dates, during which prepayments and other unscheduled collections on the
mortgage loans in the related trust fund must be received in order to be
distributed on a particular Distribution Date);
o 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;
o 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;
o 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;
-66-
o if the related trust fund includes one or more instruments of credit
support, such as a letter of credit, an insurance policy and/or a surety
bond, the amount of coverage under each such instrument as of the close
of business on such Distribution Date; and
o the amount of credit support being afforded by any classes of Subordinate
Certificates.
In the case of information furnished pursuant to the first 3 bulleted items
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.
Each Distribution Date Statement will be filed with the Securities and
Exchange Commission within 15 days after each Distribution Date on Form 10-D. In
addition, within a reasonable period of time after the end of each calendar
year, the master servicer, manager 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 the first 3 bulleted items
above, aggregated for such calendar year or the applicable portion 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 Internal Revenue Code of 1986, as amended,
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, manager or trustee, as the case may be, to include
in any Distribution Date Statement information regarding the mortgage loans
underlying such MBS will depend on the reports received with respect to such
MBS. In such cases, the related prospectus supplement will describe the
loan-specific information to be included in the Distribution Date Statements
that will be forwarded to the holders of the offered certificates of that series
in connection with distributions made to them.
Voting Rights
The voting rights evidenced by each series of certificates 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 and
Servicing Agreement and as otherwise specified in the related prospectus
supplement. See "The Pooling and Servicing 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 "The Pooling and Servicing Agreements--Events of Default", "--Rights Upon
Event of Default" and "--Resignation and Removal of the Trustee".
Termination
The obligations created by the Pooling and Servicing Agreement for each
series of certificates will terminate following (1) 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 (2)
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 and
Servicing Agreement. Written notice of termination of a Pooling and Servicing
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 in the prospectus supplement, under the circumstances and in the
manner set forth in the prospectus supplement. If so provided in the related
prospectus supplement upon the reduction of the Certificate Balance of a
specified class or classes of certificates by a specified percentage or amount
or upon a specified date, a party designated in the prospectus supplement may be
authorized or required to solicit bids for the purchase of all the mortgage
assets of the
-67-
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.
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 DTC or
its nominee.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking corporation" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its participating organizations and
facilitate the clearance and settlement of securities transactions between its
participating organizations through electronic computerized book-entry changes
in their accounts, thereby eliminating the need for physical movement of
securities certificates. DTC is owned by a number of its Direct Participants and
by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. The rules applicable to DTC and
its participating organizations are on file with the Securities and Exchange
Commission.
Purchases of book-entry certificates under the DTC system must be made by or
through Direct Participants, which will receive a credit for the book-entry
certificates on DTC's records. The ownership interest of each actual purchaser
of a Book-Entry Certificate is in turn to be recorded on the Direct and Indirect
Participants' records. Certificate Owners will not receive written confirmation
from DTC of their purchases, but Certificate Owners are expected to receive
written confirmations providing details of such transactions, as well as
periodic statements of their holdings, from the Direct or Indirect Participant
through which each Certificate Owner entered into the transaction. Transfers of
ownership interests in the book-entry certificates are to be accomplished by
entries made on the books of DTC's participating organizations acting on behalf
of Certificate Owners. Certificate Owners will not receive certificates
representing their ownership interests in the book-entry certificates, except in
the event that use of the book-entry system for the book-entry certificates of
any series is discontinued as described below.
DTC has no knowledge of the actual Certificate Owners of the book-entry
certificates; DTC's records reflect only the identity of the Direct Participants
to whose accounts such certificates are credited, which may or may not be the
Certificate Owners. DTC's participating organizations will remain responsible
for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants,
by Direct Participants to Indirect Participants, and by Direct Participants and
Indirect Participants to Certificate Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Distributions on the book-entry certificates will be made to DTC. DTC's
practice is to credit Direct Participants' accounts on the related Distribution
Date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on such date.
Disbursement of such distributions by DTC's participating organizations to
Certificate Owners will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name", and will be the responsibility of
each such participating organization (and not of DTC, the depositor or any
trustee, master servicer, special servicer or Manager), 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 of book-entry certificates will be the nominee of DTC, and the
Certificate Owners will not be recognized as certificateholders under the
Pooling and Servicing Agreement. Certificate Owners will be permitted to
exercise the rights of certificateholders under the related Pooling and
Servicing Agreement only indirectly through DTC's participating organization who
in turn will exercise their rights through DTC. We have been informed that DTC
will take action permitted to be taken by a certificateholder under a Pooling
and Servicing Agreement only at the direction of one or more Direct Participants
to whose account with DTC interests in the book-entry certificates are credited.
-68-
Because DTC can act only on behalf of Direct Participants, who in turn act on
behalf of Indirect Participants and certain Certificate Owners, the ability of a
Certificate Owner to pledge its interest in book-entry certificates to persons
or entities that do not participate in the DTC system, or otherwise take actions
in respect of its interest in book-entry certificates, may be limited due to the
lack of a physical certificate evidencing such interest.
Unless otherwise specified in the related prospectus supplement, certificates
initially issued in book-entry form will be issued in fully registered
definitive form to Certificate Owners or their nominees, rather than to DTC or
its nominee, only if (1) 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 (2) the depositor notifies DTC of its intent to
terminate the book-entry system through DTC and, upon receipt of notice of such
intent from DTC, the Participants holding beneficial interests in the
Certificates agree to initiate such termination. Upon the occurrence of either
of the events described in the preceding sentence, DTC will be required to
notify all Direct Participants of the availability through DTC of Certificates
in fully registered form. 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 Certificates in fully registered definitive form 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 and Servicing Agreement.
THE POOLING AND SERVICING AGREEMENTS
General
The certificates of each series will be issued pursuant to a Pooling and
Servicing Agreement. In general, the parties to a Pooling and Servicing
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, the REMIC administrator. However, a Pooling and Servicing
Agreement that relates to a trust fund that includes MBS may include a manager
as a party, but may not include a master servicer, special servicer or other
servicer as a party. All parties to each Pooling and Servicing Agreement under
which certificates of a series are issued will be identified in the related
prospectus supplement. If so specified in the related prospectus supplement, an
affiliate of the depositor, or the mortgage asset seller may perform the
functions of master servicer, special servicer, manager 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 and Servicing Agreement or any affiliate
of any party may own certificates issued under the Pooling and Servicing
Agreement; however, unless other specified in the related prospectus supplement,
except with respect to required consents to certain amendments to a Pooling and
Servicing Agreement, certificates issued under the Pooling and Servicing
Agreement 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 and Servicing Agreement will vary depending upon the
nature of the certificates to be issued under the Pooling and Servicing
Agreement and the nature of the related trust fund. The following summaries
describe certain provisions that may appear in a Pooling and Servicing 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 and Servicing Agreement that materially differs
from the description of the Pooling and Servicing Agreement contained in this
prospectus and, if the related trust fund includes MBS, will summarize all of
the material provisions of the related agreement that provided for the issuance
of the MBS. The summaries in this prospectus do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement for each series of
certificates and the description of such provisions in the related prospectus
supplement. We will provide a copy of the Pooling and Servicing 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 in this prospectus under "The
Depositor".
-69-
Assignment of Mortgage Loans; Repurchases
At the time of issuance of any series of certificates, we will assign (or
cause to be assigned) to the designated trustee the mortgage loans to be
included in the related trust fund, 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 our
direction 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 and Servicing Agreement.
Such schedule generally will include detailed information that pertains to each
mortgage loan included in the related trust fund, which information will
typically include the address of the related mortgaged property and type of such
property; the Mortgage Rate and, if applicable, the applicable index, gross
margin, adjustment date and any rate cap information; the original and remaining
term to maturity; the amortization term; and the original and outstanding
principal balance.
In addition, unless otherwise specified in the related prospectus supplement,
we 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) the mortgage note endorsed, without recourse,
either in blank or to the order of such trustee (or its nominee), the mortgage
with evidence of recording indicated (except for any mortgage not returned from
the public recording office), 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 (except for any such
assignment not returned from the public recording office), and, 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 and
Servicing 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 we deliver
or cause 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 mortgage note has been lost or destroyed. In addition, if we
cannot deliver, with respect to any mortgage loan, the mortgage or any
intervening assignment with evidence of recording concurrently with the
execution and delivery of the related Pooling and Servicing Agreement because of
a delay caused by the public recording office, we 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. We will
deliver, or cause to be delivered, to the related trustee (or such custodian)
such mortgage or assignment with evidence of recording indicated after receipt
of such mortgage from the public recording office. If we cannot deliver, with
respect to any mortgage loan, the mortgage or any intervening assignment with
evidence of recording concurrently with the execution and delivery of the
related Pooling and Servicing Agreement because such mortgage or assignment has
been lost, we 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. 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 us or the originator of
such mortgage loan. Notwithstanding the foregoing, with respect to any mortgage
for which the related assignment of mortgage, assignment of assignment of
leases, security agreements and/or UCC financing statements has been recorded in
the name of Mortgage Electronic Registration Systems, Inc. ("MERS") or its
designee, no assignment of mortgage, assignment of assignment of leases,
security agreements and/or UCC financing statements in favor of the trustee will
be required to be prepared or delivered and instead, the mortgage loan seller
shall take all actions as are necessary to cause the trust to be shown as, and
the trustee shall take all actions necessary to confirm that it is shown as, the
owner of the related mortgage loan on the records of MERS for purposes of the
system or recording transfers of beneficial ownership of mortgages maintained by
MERS.
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 of the mortgage loan
documents, 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
-70-
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
Purchase Price, or at such other price as will be specified in the related
prospectus supplement. If so provided in the prospectus supplement for a series
of certificates, a mortgage asset seller, in lieu of repurchasing a mortgage
loan as to which there is missing or defective loan documentation, will have the
option, exercisable upon 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 we 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. Any such custodian may be one of our affiliates.
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 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
and Servicing Agreement;
o the enforceability of the related mortgage note and mortgage and the
existence of title insurance insuring the lien priority of the related
mortgage;
o the Warranting Party's title to the mortgage loan and the authority of
the Warranting Party to sell the mortgage loan; and
o the payment status of the mortgage loan.
It is expected that in most cases the Warranting Party will be the mortgage
asset seller; however, the Warranting Party may also be an affiliate of the
mortgage asset seller, the 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
and Servicing 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
-71-
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 and Servicing
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 and Servicing
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 (1) such procedures are consistent with the
terms of the related Pooling and Servicing Agreement and (2) 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 and Servicing 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; and
maintaining servicing records relating to 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 and Servicing
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 of
the mortgage loan, 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
-72-
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 and Servicing 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 monitor any mortgage loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related mortgaged property, initiate
corrective action in cooperation with the Mortgagor if cure is likely, inspect
the related mortgaged property and 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 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 collectibility 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.
In the case of mortgage loans secured by junior liens on the related
mortgaged properties, unless otherwise provided in the related prospectus
supplement, the master servicer will be required to file (or cause to be filed)
of record a request for notice of any action by a superior lienholder under a
senior lien for the protection of the related trustee's interest, where
permitted by local law and whenever applicable state law does not require that a
junior lienholder be named as a party defendant in foreclosure proceedings in
order to foreclose such junior lienholder's equity of redemption. Unless
otherwise specified in the related prospectus supplement, the master servicer
also will be required to notify any superior lienholder in writing of the
existence of the mortgage loan and request notification of any action (as
described below) to be taken against the mortgagor or the mortgaged property by
the superior lienholder. If the master servicer is notified that any superior
lienholder has accelerated or intends to accelerate the obligations secured by
the related senior lien, or has declared or intends to declare a default under
the mortgage or the promissory note secured by that senior lien, or has filed or
intends to file an election to have the related mortgaged property sold or
foreclosed, then, unless otherwise specified in the related prospectus
supplement, the master servicer and the special servicer will each be required
to take, on behalf of the related trust fund, whatever actions are necessary to
protect the interests of the related certificateholders and/or to preserve the
security of the related mortgage loan, subject to the application of the REMIC
Provisions. Unless otherwise specified in the related prospectus supplement, the
master servicer or special servicer, as applicable, will be required to advance
the necessary funds to cure the default or reinstate the senior lien, if such
advance is in the best interests of the related
-73-
certificateholders and the master servicer or special servicer, as applicable,
determines such advances are recoverable out of payments on or proceeds of the
related mortgage loan.
Sub-Servicers
A master servicer or special servicer may delegate its servicing obligations
in respect of the mortgage loans to one or more third-party sub-servicers;
provided that, unless otherwise specified in the related prospectus supplement,
such master servicer or special servicer will remain obligated under the related
Pooling and Servicing Agreement. A sub-servicer for any series of certificates
may be an affiliate of the depositor. Unless otherwise provided in the related
prospectus supplement, each subservicing agreement between a master servicer and
a sub-servicer must provide for servicing of the applicable mortgage loans
consistent with the related Pooling and Servicing Agreement. Unless otherwise
provided in the related prospectus supplement, 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 and Servicing 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 and Servicing
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
noninterest-bearing account and the funds held in the Certificate Account may be
invested pending each succeeding Distribution Date in United States government
securities and other obligations that are acceptable to each rating agency that
has rated any one or more classes of certificates of the related series. Unless
otherwise provided in the related prospectus supplement, any interest or other
income earned on funds in a Certificate Account will be paid to the related
master servicer, trustee or special servicer 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, a Certificate Account may contain funds relating to more than one
series of mortgage pass-through certificates and may contain other funds
representing payments on mortgage loans owned by the related master servicer or
special servicer or serviced by either on behalf of others.
Deposits. Unless otherwise provided in the related Pooling and Servicing
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 and Servicing Agreement--
o all payments on account of principal, including principal prepayments, on
the mortgage loans;
o all payments on account of interest on the mortgage loans, including any
default interest collected, in each case net of any portion of such
default interest retained by the master servicer or the special servicer
as its servicing compensation or as compensation to the trustee;
-74-
o 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) and all
other amounts received and retained in connection with the liquidation of
defaulted mortgage loans or property acquired in respect of such
defaulted mortgage loans, by foreclosure or otherwise, together with the
net operating income (less reasonable reserves for future expenses)
derived from the operation of any mortgaged properties acquired by the
trust fund through foreclosure or otherwise;
o any amounts paid under any instrument or drawn from any fund that
constitutes credit support for the related series of certificates;
o any advances made with respect to delinquent scheduled payments of
principal and interest on the mortgage loans;
o any amounts paid under any cash flow agreement;
o all proceeds of the purchase of any mortgage loan, or property acquired
in respect of a mortgage loan, 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";
o 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;
o 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";
o 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
o any other amounts required to be deposited in the Certificate Account as
provided in the related Pooling and Servicing Agreement and described in
the related prospectus supplement.
Withdrawals. Unless otherwise provided in the related Pooling and Servicing
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--
o to make distributions to the certificateholders on each Distribution
Date;
o to pay the master servicer or the special servicer any servicing fees not
previously retained by the master servicer or the special servicer, 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;
o 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 particular mortgage
loans in the trust fund and particular properties acquired in respect of
the trust fund. Reimbursement for advances made or expenses incurred that
are related to particular mortgage loans or properties will normally only
be made out of amounts that represent late payments collected on those
mortgage loans, Liquidation Proceeds, Insurance and Condemnation Proceeds
collected on those mortgage loans and properties, any form of credit
support
-75-
related to those mortgage loans and net income collected on those
properties. However, if in the judgment of the master servicer, the
special servicer or such other person, as applicable, the advances and/or
expenses will not be recoverable from the above amounts, the reimbursement
will 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 and
Servicing 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;
o 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 the bulleted clause immediately listed above incurred by it while such
remain outstanding and unreimbursed;
o 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";
o 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";
o 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;
o if and to the extent described in the related prospectus supplement, to
reimburse prior draws on any form of credit support;
o 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;
o to pay any servicing expenses not otherwise required to be advanced by
the master servicer, the special servicer or any other specified person;
o if one or more elections have been made to treat the trust fund or
designated portions of the trust fund 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";
o to pay for the cost of various opinions of counsel obtained pursuant to
the related Pooling and Servicing Agreement for the benefit of
certificateholders;
o to make any other withdrawals permitted by the related Pooling and
Servicing Agreement and described in the related prospectus supplement;
and
o 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" as defined in the related prospectus
supplement; provided that, unless otherwise set forth in the related prospectus
supplement, the modification, waiver or amendment will--
-76-
o 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; 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 reasonably foreseeable or 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 unless inconsistent with the applicable "servicing standard", such
modification, waiver or amendment will not materially 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, 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 comparably convert ownership of, or acquire title to
the related mortgaged property, by operation of law or otherwise. In connection
with such foreclosure or other conversion of ownership, the special servicer
shall follow the servicing standard. A Pooling and Servicing Agreement may grant
the special servicer the right to direct the master servicer to advance costs
and expenses to be incurred in any such proceedings, and such advances may be
subject to reimbursement requirements. A Pooling and Servicing Agreement may
require the special servicer to consult with independent counsel regarding the
order and manner should foreclose upon or comparably proceed against such
properties if a mortgage loan or group of cross-collateralized mortgage loans
are secured by real properties in multiple states including certain states with
a statute, rule or regulation comparable to California's "one action" rule.
Unless otherwise provided in the related prospectus supplement, when applicable
state law permits the special servicer to select between judicial and
non-judicial foreclosure in respect of any mortgaged property, a special
servicer may make such selection so long as the selection is made in a manner
consistent with the servicing standard. 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:
(1) 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
(2) 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 (1)(b) above, is reasonably likely to
produce a greater recovery, taking into account the time value of money, than
not taking such actions. See "Certain Legal Aspects of Mortgage
Loans--Environmental Considerations".
A Pooling and Servicing 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 a right of first refusal
to
-77-
purchase from the trust fund, at a predetermined price (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. In addition, unless otherwise specified in the related prospectus
supplement, the special servicer may offer to sell any defaulted mortgage loan
if and when the special servicer determines, consistent with its normal
servicing procedures, that such a sale would produce a greater recovery, taking
into account the time value of money, than would liquidation of the related
mortgaged property. In the absence of any such sale, the special servicer will
generally be required to proceed against the related mortgaged property, subject
to the discussion above.
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 before the close of the third calendar
year following the year of acquisition, unless (1) the IRS grants an extension
of time to sell such property or (2) the trustee receives an opinion of
independent counsel to the effect that the holding of the property by the trust
fund for longer than such period will not result in the imposition of a tax on
the trust fund or cause the trust fund (or any designated portion of the trust
fund) to fail to qualify as a REMIC under the Code at any time that any
certificate is outstanding. Subject to the foregoing 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 unless the method of operation that produces such
income would produce a greater after-tax return than a different method of
operation of such property. If the trust fund acquires title to any mortgaged
property, the special servicer, on behalf of the trust fund, may be required to
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 and Servicing 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 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.
Except as otherwise provided in the prospectus supplement, 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.
Hazard Insurance Policies
Unless otherwise specified in the related prospectus supplement, each Pooling
and Servicing Agreement will require the master servicer (or the special
servicer with respect to mortgage loans serviced by the special servicer) to use
reasonable efforts to cause each mortgage loan borrower to maintain a hazard
insurance policy that provides for such coverage as is required under the
related mortgage or, if the mortgage permits the holder 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
-78-
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
and Servicing 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, which may contain a deductible
clause (not in excess of a customary amount). 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
in the Certificate Account 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 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 (1) the
replacement cost of the improvements less physical depreciation and (2) 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 Provisions".
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--
-79-
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 by the trustee 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 in the
prospectus supplement, may be required to be borne by the trust fund.
Evidence as to Compliance
The master servicer and each other servicer will deliver annually to the
trustee or master servicer, as applicable, on or before the date specified in
the applicable Pooling and Servicing Agreement or in the applicable other
servicing agreement (each such other servicing agreement, an "Underlying
Servicing Agreement", an officer's certificate stating that (i) a review of the
servicer's or master servicer's activities during the preceding calendar year
and of performance under the applicable Pooling and Servicing Agreement or
Underlying Servicing Agreement has been made under the supervision of the
officer, and (ii) to the best of the officer's knowledge, based on the review,
the servicer or master servicer has fulfilled all its obligations under the
applicable Pooling and Servicing Agreement or Underlying Servicing Agreement
throughout the year, or, if there has been a default in the fulfillment of any
obligation, specifying the default known to the officer and the nature and
status of the default.
In addition, each party that participates in the servicing and administration
of more than 5% of the mortgage loans and other assets comprising a trust will
deliver annually to the Depositor and the trustee, a report (an "Assessment of
Compliance") that assesses compliance by that party with the servicing criteria
set forth in Item 1122(d) of Regulation AB (17 CFR 229.1122) and that contains
the following:
o a statement of the party's responsibility for assessing compliance with
the servicing criteria applicable to it;
o a statement that the party used the criteria in Item 1122(d) of
Regulation AB to assess compliance with the applicable servicing
criteria;
o the party's assessment of compliance with the applicable servicing
criteria during and as of the end of the prior calendar year, setting
forth any material instance of noncompliance identified by the party; and
o a statement that a registered public accounting firm has issued an
attestation report on the party's assessment of compliance with the
applicable servicing criteria during and as of the end of the prior
calendar year.
-80-
Each party which is required to deliver an Assessment of Compliance will also
be required to simultaneously deliver a report (an "Attestation Report") of a
registered public accounting firm, prepared in accordance with the standards for
attestation engagements issued or adopted by the Public Company Accounting
Oversight Board, that expresses an opinion, or states that an opinion cannot be
expressed, concerning the party's assessment of compliance with the applicable
servicing criteria.
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor
Any entity serving as master servicer, special servicer or REMIC
administrator under a Pooling and Servicing Agreement may be an affiliate of the
depositor and may have other normal business relationships with the depositor or
the depositor's affiliates. Unless otherwise specified in the prospectus
supplement for a series of certificates, the related Pooling and Servicing
Agreement will permit the master servicer, the special servicer and any REMIC
administrator to resign from its obligations under the Pooling and Servicing
Agreement only upon a determination that such obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities carried on by it. 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 and Servicing
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
and Servicing Agreement.
Unless otherwise specified in the related prospectus supplement, each Pooling
and Servicing Agreement will further provide that none of the master servicer,
the special servicer, the REMIC administrator, the depositor, any extension
adviser 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 and Servicing
Agreement or for errors in judgment; provided, however, that none of the master
servicer, the special servicer, the REMIC administrator, the depositor, any
extension adviser 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 under the Pooling
and Servicing Agreement or by reason of reckless disregard of such obligations
and duties. Unless otherwise specified in the related prospectus supplement,
each Pooling and Servicing Agreement will further provide that the master
servicer, the special servicer, the REMIC administrator, the depositor, any
extension adviser 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 and Servicing Agreement or the related series of certificates;
provided, however, that such indemnification will not extend to any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of obligations or duties under such Pooling and
Servicing Agreement, or by reason of reckless disregard of such obligations or
duties. In addition, each Pooling and Servicing Agreement will provide that none
of the master servicer, the special servicer, the REMIC administrator, any
extension adviser or the depositor will be under any obligation to appear in,
prosecute or defend any legal action that is not incidental to its respective
responsibilities under the Pooling and Servicing 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, any extension adviser
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 and Servicing Agreement and the interests of the related series of
certificateholders under the Pooling and Servicing Agreement. In such event, the
legal expenses and costs of such action, and any liability resulting from such
action, will be expenses, costs and liabilities of the related series of
certificateholders, and the master servicer, the special servicer, the REMIC
administrator, any extension adviser or the depositor, as the case may be, will
be entitled to charge the related Certificate Account for this expense.
-81-
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 and Servicing 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 and Servicing 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 and Servicing
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, pursuant to, and at the time specified
by, the terms of the Pooling and Servicing Agreement;
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,
pursuant to, and at the time specified by, the terms of the Pooling and
Servicing Agreement;
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 and Servicing Agreement, which
failure continues unremedied for thirty days after written notice of such
failure has been given to the master servicer or the special servicer, as
the case may be, by any other party to the related Pooling and Servicing
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 and
Servicing 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 and Servicing Agreement, which
failure continues unremedied for thirty days after written notice of such
notice has been given to the REMIC administrator by any other party to
the related Pooling and Servicing Agreement, or to the REMIC
administrator, with a copy to each other party to the related Pooling and
Servicing 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 certain events involving a determination by a rating agency that the
master servicer or the special servicer is no longer approved by such
rating agency to serve in such capacity; and
o certain events of insolvency, readjustment of debt, marshaling 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
-82-
(except where related only to a Rating Agency's evaluation of the acceptability
of such entity to act in a particular capacity) 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 and Servicing
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 and
Servicing 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 and Servicing Agreement (except that if the defaulting party is required
to make advances under the Pooling and Servicing Agreement 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 and Servicing Agreement.
Pending such appointment, the trustee will be obligated to act in such capacity.
The trustee or a successor master servicer is entitled to be reimbursed for its
costs in effecting a servicing transfer from the predecessor master servicer. In
the event that the predecessor master servicer fails to reimburse the trustee or
successor servicer, the trustee or successor servicer will be entitled to
reimbursement from the assets of the related trust.
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 and Servicing
Agreement to institute any proceeding with respect to such Pooling and Servicing
Agreement unless such holder previously has given to the trustee written notice
of default and the continuance of such default 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 under the
Pooling and Servicing Agreement 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 and Servicing Agreement or to institute, conduct or
defend any litigation under the Pooling and Servicing Agreement or in relation
thereto at the request, order or direction of any of the holders of certificates
covered by such Pooling and Servicing Agreement, unless such certificateholders
have offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred in connection with such
litigation.
Amendment
Except as otherwise specified in the related prospectus supplement, each
Pooling and Servicing Agreement may be amended by the parties thereto, without
the consent of any of the holders of certificates covered by such Pooling and
Servicing Agreement, (1) to cure any ambiguity, (2) to correct or supplement any
provision in the Pooling and Servicing Agreement which may be inconsistent with
any other provision in the Pooling and Servicing Agreement or to correct any
error, (3) 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 result in the withdrawal,
downgrade or qualification of any of the then-current ratings on the
certificates, as evidenced by a letter from each applicable rating agency, (4)
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
-83-
any designated portion of the trust fund) 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 and Servicing
Agreement, or (B) to restrict the transfer of the REMIC 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 withdrawn,
downgraded or qualified, 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 REMIC Residual Certificates to a non-permitted transferee
(See "Certain Federal Income Tax Consequences--REMICs--Tax and Restrictions on
Transfers of REMIC Residual Certificates to Certain Organizations" in the
accompanying prospectus supplement), (5) to make any other provisions with
respect to matters or questions arising under such Pooling and Servicing
Agreement or any other change; provided that such action will not adversely
affect in any material respect the interests of any certificateholder, or (6) to
amend specified provisions that are not material to holders of any class of
certificates offered by this prospectus.
The Pooling and Servicing Agreement may also be amended by the parties
thereto with the consent of the holders of certificates of each class affected
by an amendment 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 and Servicing Agreement or of modifying in any manner the rights of
the holders of certificates covered by such Pooling and Servicing Agreement,
except that no such amendment may (1) 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 (2) 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 and Servicing Agreement then outstanding.
Notwithstanding the foregoing, if one or more REMIC elections have been made
with respect to the related trust fund, the trustee will not be required to
consent to any amendment to a Pooling and Servicing 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 of the trust fund) 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 and Servicing 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.
The Trustee
The trustee under each Pooling and Servicing 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 generally will be responsible under each Pooling and Servicing
Agreement for providing general administrative services for the trust fund for
any series, including, among other things, (i) establishing and
-84-
maintaining the Certificate Account; (ii) calculation of the amounts payable to
Certificateholders on each Distribution Date; (iii) making distributions to
Certificateholders; (iv) preparation, for execution by the Depositor or the
related master servicer, of reports, including reports on Form 10-D and Form
10-K as may be required under the Securities Exchange Act of 1934, as amended;
(v) maintaining any mortgage pool insurance policy, mortgagor bankruptcy bond,
special hazard insurance policy or other form of credit enhancement that may be
required with respect to any series; and (vi) making Periodic Advances on the
mortgage loans to the limited extent described under "Description of the
Certificates--Advances in Respect of Delinquencies", if those amounts are not
advanced by the master servicer or another servicer.
The trustee for each series of certificates will make no representation as to
the validity or sufficiency of the related Pooling and Servicing 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 and Servicing 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 and Servicing 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. The trustee generally shall not be entitled to payment or
reimbursement for any routine ongoing expenses incurred by it in the ordinary
course of its duties as trustee under the Pooling and Servicing Agreement or for
any other expenses. If, however, one or more REMIC elections has been made, the
expense is unanticipated and did not arise from the trustee's gross negligence,
bad faith or willful misconduct, the trustee shall be entitled to reimbursement
from the trust fund for all reasonable expenses, disbursements and advances
incurred or made it in accordance with any of the provisions of the Pooling and
Servicing Agreement to the extent permitted by Treasury Regulations Section
1.860G-1(b)(3)(ii), which allows reimbursement for "unanticipated expenses."
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 and Servicing
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 under the Pooling and Servicing Agreement, 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 and Servicing Agreement or perform any of its
duties under the Pooling and Servicing Agreement either directly or by or
through agents or attorneys, and the trustee will not be responsible for any
willful misconduct or 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 and Servicing 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 33 1/3% (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. Any costs associated with the
appointment of a successor trustee are required to be paid by the predecessor
trustee and, if not paid, will be reimbursed to the person incurring such costs
from the assets of the
-85-
related trust. Notwithstanding the foregoing, if the predecessor trustee has
been removed by a vote of the holders of the Certificates as provided in the
paragraph above, any costs associated with the appointment of a successor
trustee will be reimbursed to the party incurring such costs from the assets of
the related trust. Notwithstanding anything in this prospectus 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.
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 limited guarantees, financial guaranty
insurance policies, surety bonds, letters of credit, mortgage pool insurance
policies, reserve funds, cross collateralization, overcollateralization and
excess interest or 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 applicable prospectus supplement will describe the material
terms of such credit enhancement, including any limits on the timing or amount
of such credit enhancement or any conditions that must be met before such credit
enhancement may be accessed. If the provider of the credit enhancement is liable
or contingently liable to provide payments representing 10% or more of the cash
flow supporting any offered Class of Certificates, the applicable prospectus
supplement will disclose the name of the provider, the organizational form of
the provider, the general character of the business of the provider and the
financial information required by Item 1114(b)(2) of Regulation AB (17 CFR
229.1114). Copies of the limited guarantee, financial guaranty insurance policy,
surety bond, letter of credit, pool insurance policy, mortgagor bankruptcy bond,
special hazard insurance policy or Cash Flow Agreement, if any, relating to a
series of Certificates will be filed with the SEC as an exhibit to a Current
Report on Form 8-K.
Unless otherwise provided in the related prospectus supplement for a series
of certificates, the credit support will not provide protection against all
risks of loss and will not guarantee payment to certificateholders of all
amounts to which they are entitled under the related Pooling and Servicing
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 under the credit support not otherwise described
in this prospectus;
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
-86-
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.
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 Concerning 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 limited guarantee may
cover deficiencies in amounts otherwise payable on some or all of the
Certificates of a series. The limited guarantee may cover timely distributions
of interest or full distributions of principal or both on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. The limited guarantee may
provide additional protection against losses on the mortgage loans included in a
trust fund, provide payment of administrative expenses, or establish a minimum
reinvestment rate on the payments made on the mortgage loans or principal
payment rate on the mortgage loans. A limited guarantee will be limited in
amount to the dollar amount or percentage of the principal balance of the
mortgage loans or Certificates specified in the applicable prospectus
supplement. 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 of certificates will be covered by one or more letters of credit, issued
by a bank or other financial institution (which may be an affiliate of the
depositor) specified in such prospectus supplement. Under a letter of credit,
the providing institution will be obligated to honor draws in an aggregate fixed
dollar amount, net of unreimbursed payments under the letter of credit,
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 under
the letter of credit and may otherwise be reduced as described in the related
prospectus supplement. The obligations of the providing institution 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 of certificates will be covered by financial guaranty 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. If
specified in the prospectus supplement, the financial guaranty insurance policy
will also guarantee against any payment made to a Certificateholder that is
subsequently recovered as a preferential transfer under the Bankruptcy Code. The
related prospectus supplement will describe any limitations on the draws that
may be made under any such instrument.
-87-
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 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 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. Additional information concerning any reserve fund will be set
forth in the prospectus supplement, including the initial balance of the reserve
fund, the required reserve fund balance to be maintained, the purposes for which
funds in the reserve fund may be applied to make distributions to
Certificateholders and use of investment earnings from the reserve fund, if any.
Following each Distribution Date, amounts in a reserve fund in excess of any
amount required to be maintained in such reserve funds may be released from the
reserve fund under the conditions and to the extent specified in the related
prospectus supplement.
If so specified in the related prospectus supplement, amounts deposited in
any reserve fund will be invested in Permitted Investments. Unless otherwise
specified in the related prospectus supplement, any reinvestment income or other
gain from such investments will be credited to the related reserve fund for such
series, and any loss resulting from such investments will be charged to such
reserve fund. However, such income may be payable to any related master servicer
or another service provider as additional compensation for its services. The
reserve fund, if any, for a series will not be a part of the trust fund unless
otherwise specified in the related prospectus supplement.
Cash Collateral Account
If so specified in the related prospectus supplement, all or any portion of
credit enhancement for a series of certificates may be provided by the
establishment of a cash collateral account. A cash collateral account will be
similar to a reserve fund except that generally a cash collateral account is
funded initially by a loan from a cash collateral lender, the proceeds of which
are invested with the cash collateral lender or other eligible institution. The
loan from the cash collateral lender will be repaid from such amounts as are
specified in the related prospectus supplement. Amounts on deposit in the cash
collateral account will be available in generally the same manner described
above with respect to a reserve fund. As specified in the related prospectus
supplement, a cash collateral account may be deemed to be part of the assets of
the related trust, may be deemed to be part of the assets of a separate cash
collateral trust or may be deemed to be property of the party specified in the
related prospectus supplement and pledged for the benefit of the holders of one
or more classes of certificates of a series.
Pool Insurance Policy
If specified in the prospectus supplement relating to a series of
Certificates, credit enhancement may be provided by a mortgage pool insurance
policy for the mortgage loans in the related trust fund. Each mortgage pool
insurance policy, in accordance with the limitations described in this
prospectus and in the prospectus supplement, if any, will cover any loss by
reason of default on a mortgage loan in an amount equal to a percentage
specified in the applicable prospectus supplement of the unpaid principal
balance of the mortgage loans. The master servicer generally will be required to
use its best efforts to maintain the mortgage pool insurance policy and to
present claims to the pool insurer. The mortgage pool insurance policies,
however, are not blanket policies against loss, since claims may only be made
respecting particular defaulted mortgage loans and only upon satisfaction of
specified conditions precedent described below. The mortgage pool insurance
policies will generally not cover losses due to a failure to pay or denial of a
claim under a primary mortgage insurance policy, regardless of the reason for
nonpayment.
As more specifically provided in the related prospectus supplement, each
mortgage pool insurance policy will provide for conditions under which claims
may be presented and covered under the policy. Upon satisfaction of these
conditions, the pool insurer will have the option either (a) to purchase the
property securing the defaulted mortgage loan at a price equal to its unpaid
principal balance plus accrued and unpaid interest at the applicable
-88-
Mortgage Rate to the date of purchase plus certain Advances, or (b) to pay the
amount by which the sum of the unpaid principal balance of the defaulted
mortgage loan plus accrued and unpaid interest at the Mortgage Rate to the date
of payment of the claim plus certain Advances exceeds the proceeds received from
an approved sale of the mortgaged property, in either case net of certain
amounts paid or assumed to have been paid under any related primary mortgage
insurance policy.
Certificateholders may experience a shortfall in the amount of interest
payable on the related Certificates in connection with the payment of claims
under a mortgage pool insurance policy because the pool insurer is only required
to remit unpaid interest through the date a claim is paid rather than through
the end of the month in which the claim is paid. In addition, Certificateholders
may also experience losses with respect to the related Certificates in
connection with payments made under a mortgage pool insurance policy to the
extent that the related master servicer or special servicer expends funds to
cover unpaid real estate taxes or to repair the related mortgaged property in
order to make a claim under a mortgage pool insurance policy, as those amounts
will not be covered by payments under the policy and will be reimbursable to the
related servicer from funds otherwise payable to the Certificateholders. If any
mortgaged property securing a defaulted mortgage loan is damaged and proceeds,
if any from the related hazard insurance policy or applicable special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the mortgage pool insurance policy, a
servicer will generally not be required to expend its own funds to restore the
damaged property unless it determines that (a) restoration will increase the
proceeds to one or more Classes of Certificates on liquidation of the mortgage
loan after reimbursement of the related servicer for its expenses and (b) the
expenses will be recoverable by it through Liquidation Proceeds or insurance
proceeds.
A mortgage pool insurance policy and some primary mortgage insurance policies
will generally not insure against loss sustained by reason of a default arising
from, among other things, fraud or negligence in the origination or servicing of
a mortgage loan, including misrepresentation by the mortgagor, the seller or
other persons involved in the origination of the mortgage loan, failure to
construct a mortgaged property in accordance with plans and specifications or
bankruptcy, unless as specified in the related prospectus supplement, an
endorsement to the mortgage pool insurance policy provides for insurance against
that type of loss.
The original amount of coverage under each mortgage pool insurance policy
will be reduced over the life of the related series of Certificates by the
aggregate amount of claims paid less the aggregate of the net amounts realized
by the pool insurer upon disposition of all foreclosed properties. The amount of
claims paid includes some expenses incurred by the related servicer as well as
accrued interest on delinquent mortgage loans to the date of payment of the
claim. Accordingly, if aggregate net claims paid under any mortgage pool
insurance policy reach the original policy limit, coverage under that mortgage
pool insurance policy will be exhausted and any further losses will be borne by
the related Certificates, to the extent not covered by other credit
enhancements.
Special Hazard Insurance Policy
Any insurance policy covering special hazard losses obtained for a trust will
be issued by the insurer named in the related prospectus supplement. Each
special hazard insurance policy will be subject to limitations described in this
paragraph and in the related prospectus supplement, if any, and will protect the
related Certificateholders from special hazard losses. Aggregate claims under a
special hazard insurance policy will be limited to the amount set forth in the
related Pooling and Servicing Agreement and will be subject to reduction as
described in the related Pooling and Servicing Agreement. A special hazard
insurance policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the mortgaged property securing the mortgage loan
has been kept in force and other protection and preservation expenses have been
paid by the related master servicer or special servicer, as the case may be.
In accordance with the foregoing limitations, a special hazard insurance
policy will provide that, where there has been damage to the mortgaged property
securing a foreclosed mortgage loan, title to which has been acquired by the
insured, and to the extent the damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained by the mortgagor or the
related master servicer or special servicer, as the case may be, the insurer
will pay the lesser of (i) the cost of repair or replacement of the related
mortgaged property or (ii) upon transfer of the property to the insurer, the
unpaid principal balance of the mortgage loan at the time of acquisition of the
related property by foreclosure or deed in lieu of foreclosure, plus accrued
interest at the Mortgage Rate to the date of claim
-89-
settlement and certain expenses incurred by the related master servicer or
special servicer, as the case may be, with respect to the related mortgaged
property.
If the mortgaged property is transferred to a third party in a sale approved
by the special hazard insurer, the amount that the special hazard insurer will
pay will be the amount under (ii) above reduced by the net proceeds of the sale
of the mortgaged property. If the unpaid principal balance plus accrued interest
and certain Advances is paid by the special hazard insurer, the amount of
further coverage under the related special hazard insurance policy will be
reduced by that amount less any net proceeds from the sale of the mortgaged
property. Any amount paid as the cost of repair of the property will further
reduce coverage by that amount. Restoration of the property with the proceeds
described under (i) above will satisfy the condition under any mortgage pool
insurance policy that the property be restored before a claim under the policy
may be validly presented with respect to the defaulted mortgage loan secured by
the related mortgaged property. The payment described under (ii) above will
render presentation of a claim relating to a mortgage loan under the related
mortgage pool insurance policy unnecessary. Therefore, so long as a mortgage
pool insurance policy remains in effect, the payment by the insurer under a
special hazard insurance policy of the cost of repair or of the unpaid principal
balance of the related mortgage loan plus accrued interest and certain Advances
will not affect the total insurance proceeds paid to Certificateholders, but
will affect the relative amounts of coverage remaining under the related special
hazard insurance policy and mortgage pool insurance policy.
Mortgagor Bankruptcy Bond
If specified in the related prospectus supplement, a bankruptcy bond to cover
losses resulting from proceedings under the federal Bankruptcy Code with respect
to a mortgage loan will be issued by an insurer named in the prospectus
supplement. Each bankruptcy bond will cover, to the extent specified in the
related prospectus supplement, certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a mortgage
loan or a reduction by the court of the unpaid principal balance of a mortgage
loan and will cover certain unpaid interest on the amount of a principal
reduction from the date of the filing of a bankruptcy petition. The required
amount of coverage under each bankruptcy bond will be set forth in the related
prospectus supplement.
Cross Collateralization
If specified in the applicable prospectus supplement, the beneficial
ownership of separate groups of mortgage loans included in a trust fund may be
evidenced by separate Classes of Certificates. In this case, credit support may
be provided by a cross collateralization feature which requires that
distributions be made to certain Classes from mortgage loan payments that would
otherwise be distributed to Subordinate Certificates evidencing a beneficial
ownership interest in other loan groups within the same trust fund. As a result,
the amount of credit enhancement available to a Class of Certificates against
future losses on the mortgage loans in which that Class represents an interest
may be reduced as the result of losses on a group of mortgage loans in which
that Class has no interest. The applicable prospectus supplement for a series
that includes a cross collateralization feature will describe its specific
operation.
Overcollateralization
If specified in the related prospectus supplement, subordination provisions
of a series may be used to accelerate to a limited extent the amortization of
one or more Classes of Certificates relative to the amortization of the related
mortgage loans. The accelerated amortization is achieved by the application of
certain excess interest to the payment of principal of one or more Classes of
Certificates. This acceleration feature creates, with respect to the mortgage
loans or a group of mortgage loans, overcollateralization which results from the
excess of the aggregate principal balance of the related mortgage loans, or
group of mortgage loans, over the Class Balance of the related Class or Classes
of Certificates. This acceleration may continue for the life of the related
Certificates, or may have a shorter duration. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related prospectus supplement,
this limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
-90-
Excess Interest
If specified in the related prospectus supplement, the mortgage loans in a
trust may generate more interest than is necessary to pay the interest earned on
the Classes of Certificates each month. The excess interest may be used to
maintain overcollateralization, to pay interest that was previously earned but
not paid to certain Classes of Certificates and to reimburse certain Classes of
Certificates for losses and certain shortfalls that they experienced previously.
Cash Flow Agreements
If specified in the applicable prospectus supplement, amounts received by the
trustee under any Cash Flow Agreement described below under "--Cash Flow
Agreements" may also be used to provide credit enhancement for one or more
Classes of Certificates.
Credit Support with respect to MBS
If so provided in the prospectus supplement for a series of certificates, any
MBS included in the related trust fund and/or the related underlying mortgage
loans may be covered by one or more of the types of credit support described in
this prospectus. The related prospectus supplement will specify, as to each such
form of credit support, the information indicated above with respect thereto, to
the extent such information is material and available.
CASH FLOW AGREEMENTS
If specified in the prospectus supplement, the trust fund may include cash
flow agreements consisting of one or more guaranteed investment contracts, swap
agreements or interest rate cap or floor agreements (also called yield
maintenance agreements), each of which agreements is intended to reduce the
effects of interest rate fluctuations on the assets or on one or more Classes of
Certificates (each, a "Cash Flow Agreement"). The applicable prospectus
supplement will describe the name, organizational form and general character of
the business of the counterparty under any Cash Flow Agreement. In addition, the
prospectus supplement for the related series of Certificates will disclose the
significance percentage, calculated in accordance with Item 1115 of Regulation
AB (17 CFR 229.1115). To the extent this percentage is (a) 10% or more but less
than 20%, the related prospectus supplement will provide financial data required
by Item 301 of Regulation S-K (17 CFR 229.301) or (b) greater than 20%, the
related prospectus supplement will provide financial statements required by Item
1115(b)(2) of Regulation AB (17 CFR 229.1115) and, in either case, the related
prospectus supplement will contain a description of the operation and material
terms of the Cash Flow Agreement, including, without limitation, conditions to
payment or limits on the timing or amount of payments and material provisions
relating to the termination or substitution of the Cash Flow Agreement. Copies
of the Cash Flow Agreement, if any, relating to a series of Certificates will be
filed with the SEC as an exhibit to a Current Report on Form 8-K.
Guaranteed Investment Contracts
If specified in the related prospectus supplement, the trustee on behalf of
the trust may enter into one or more guaranteed investment contracts. Guaranteed
investment contracts are generally used to maximize the investment income on
funds held between Distribution Dates pending distribution to
Certificateholders. Under a guaranteed investment contract, the issuer of the
contract, which is typically a highly rated financial institution, guarantees a
fixed or floating rate of interest over the life of the contract, as well as the
ultimate return of the principal. Any payments received from the issuer of the
contract by the trust will be distributed to the related Class or Classes of
Certificates as specified in the applicable prospectus supplement.
Yield Maintenance Agreements
If specified in the related prospectus supplement, the trustee on behalf of
the trust will enter into one or more yield maintenance agreements in order to
support the yield of one or more Classes of Certificates. The counterparty to a
yield maintenance agreement will receive an upfront payment and the trust will
have no ongoing payment obligations. Generally, if the index specified in the
applicable prospectus supplement, which index will be one-month, three-month,
six-month or one-year LIBOR, CMT, COFI, MTA or the Prime Rate, exceeds a
percentage for
-91-
a particular date specified in the applicable prospectus supplement, the
counterparty to the yield maintenance agreement will be required to pay to the
trustee an amount equal to that excess multiplied by a notional amount or the
Class Balance or Balances of one or more Classes of Certificates multiplied by
one-twelfth. This amount may be adjusted to reflect the actual number of days in
the interest accrual period for the related Class or Classes of Certificates and
will be paid to the Class or Classes of Certificates as specified in the related
prospectus supplement.
Swap Agreements
If specified in the related prospectus supplement, the trustee on behalf of
the trust will enter into a swap agreement to support the yield on one or more
Classes of Certificates. Under the swap agreement, the trust will be obligated
to pay an amount equal to a certain percentage of a notional amount set forth in
the related prospectus supplement to the counterparty and the trust will be
entitled to receive an amount equal to one-month, three-month, six-month or
one-year LIBOR, CMT, COFI, MTA or the Prime Rate on the notional amount from the
counterparty, until the swap agreement is terminated. Only the net amount of the
two obligations will be paid by the appropriate party. In the event that the
trust is required to make a payment to the counterparty, that payment will be
paid on the related Distribution Date prior to distributions to
Certificateholders. Generally, any payments received from the counterparty by
the trust will be distributed to cover certain shortfalls as set forth in the
applicable 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 state law (which laws may
differ substantially), the summaries do not purport to be complete, to reflect
the laws of any particular state, or to encompass the laws of all states in
which the security for the mortgage loans (or mortgage loans underlying any MBS)
is situated. Accordingly, the summaries are qualified in their entirety by
reference to the applicable laws of those states. See "Description of the Trust
Funds--Mortgage Loans". For purposes of the following discussion, "mortgage
loan" includes a mortgage loan underlying an MBS.
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 in this
prospectus collectively referred to as "mortgages". A mortgage creates a lien
upon, or grants a title interest in, the real property covered by that mortgage,
and represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on the terms of the mortgage and, in some cases, on the
terms of separate subordination agreements or intercreditor agreements with
others that hold interests in the real property, the knowledge of the parties to
the mortgage and, generally, the order of recordation of the mortgage in the
appropriate public recording office. However, the lien of a recorded mortgage
will generally be subordinate to later-arising liens for real estate taxes and
assessments and other charges imposed under governmental police powers.
Types of Mortgage Instruments
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
borrower), a trustee to whom the real property is conveyed, and a beneficiary
(the lender) for whose benefit the conveyance is made. Under a deed of trust,
the trustor grants the property, irrevocably until the debt is paid, in trust
and generally with a power of sale, to the trustee to secure repayment of the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties, 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
-92-
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
from such leases and rents, 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; 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 (in light of certain revisions to the Bankruptcy
Code which are effective for all bankruptcy cases commenced on or after October
22, 1994) constitute "cash collateral" and therefore cannot be used by the
bankruptcy debtor without lender's consent or a hearing at which the lender's
interest in the room rates is given adequate protection (e.g., the lender
receives cash payments from otherwise unencumbered 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".
In the case of office and retail properties, the bankruptcy or insolvency of
a major tenant or a number of smaller tenants may have an adverse impact on the
mortgaged properties affected and the income produced by such mortgaged
properties. Under bankruptcy law, a tenant has the option of assuming
(continuing), or rejecting (terminating) or, subject to certain conditions,
assigning to a third party any unexpired lease. If the tenant assumes its lease,
the tenant must cure all defaults under the lease and provide the landlord with
adequate assurance of its future performance under the lease. If the tenant
rejects the lease, the landlord's claim for breach of the lease would (absent
collateral securing the claim) be treated as a general unsecured claim. The
amount of the claim would be limited to the amount owed for unpaid pre-petition
lease payments unrelated to the rejection, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but not
to exceed three years' lease payments). If the tenant assigns its lease, the
tenant must cure all defaults under the lease and the proposed assignee must
demonstrate adequate assurance of future performance under the lease.
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 in the mortgage loan, 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.
-93-
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
-94-
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--Certain Factors Affecting Delinquency, Foreclosure and Loss of the
Mortgage Loans--Limited Recourse Nature of the Mortgage Loans".) 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 a lender
cannot obtain a deficiency judgment against the borrower following foreclosure
or sale under a deed of
-95-
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 a
ground lease. Leasehold mortgages are subject to certain considerations not
associated with mortgage loans secured by the fee estate of the mortgagor. The
most significant of these consideration is that the ground lease creating the
leasehold estate could terminate, leaving the leasehold mortgagee without its
security. The ground lease may terminate, if among other reasons, the ground
lessee breaches or defaults in its obligations under the ground lease or there
is a bankruptcy of the ground lessee or the ground lessor. This possibility may
be minimized if the ground lease contains certain provisions protective of the
mortgagee, but the ground leases that secure mortgage loans may not contain all
of these protective provisions, and mortgages may not contain the other
protection discussed in the next paragraph. Protective ground lease provisions
include the right of the leasehold mortgagee to receive notices from the ground
lessor of any defaults by the mortgagor; the right to cure those defaults, with
adequate cure periods; if a default is not susceptible of cure by the leasehold
mortgagee, the right to acquire the leasehold estate through foreclosure or
otherwise; the ability of the ground lease to be assigned to and by the
leasehold mortgagee or purchaser at a foreclosure sale and for the simultaneous
release of the ground lessee's liabilities under the new lease; and the right of
the leasehold mortgagee to enter into a new ground lease with the ground lessor
on the same terms and conditions as the old ground lease upon a termination.
In addition to the preceding protections, a leasehold mortgagee may require
that the ground lease or leasehold mortgage prohibit the ground lessee from
treating the ground lease as terminated in the event of the ground lessor's
bankruptcy and rejection of the ground lease by the trustee for the
debtor-ground lessor. As further protection, a leasehold mortgage may provide
for the assignment of the debtor-ground lessee's right to reject a lease
pursuant to Section 365 of the Bankruptcy Code, although the enforceability of
that clause has not been established. Without the protections described in the
preceding paragraph, a leasehold mortgagee may lose the collateral securing its
leasehold mortgage. In addition, terms and conditions of a leasehold mortgage
are subject to the terms and conditions of the ground lease. Although certain
rights given to a ground lessee can be limited by the terms of a leasehold
mortgage, the rights of a ground lessee or a leasehold mortgagee with respect
to, among other things, insurance, casualty and condemnation will be governed by
the provisions of the ground lease.
Cooperative Shares. The cooperative shares owned by the tenant stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's certificate of incorporation and by
laws, as well as in the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant stockholder to pay rent or
other obligations or charges owed by the tenant stockholder, including
mechanics' liens against the cooperative apartment building incurred by the
tenant stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate the lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the tenant
stockholder under the proprietary lease or occupancy agreement will usually
constitute a default under the security agreement between the lender and the
tenant stockholder.
The recognition agreement generally provides that, in the event that the
tenant stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided an opportunity to cure the default.
The recognition agreement typically provides that if the proprietary lease or
occupancy agreement is terminated, the cooperative will recognize the lender's
lien against proceeds from a sale of the cooperative apartment, subject,
however, to the cooperative's right to sums due
-96-
under the proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and unpaid
interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited by the agreement in any rights it may have to dispossess the tenant
stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in accordance
with the provisions of Article 9 of the Uniform Commercial Code (the "UCC") and
the security agreement relating to those shares. Article 9 of the UCC requires
that a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the 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. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant stockholder is
generally responsible for the deficiency.
See "Risk Factors--Collateral Securing Cooperative Loans May Diminish in
Value" in this prospectus.
Bankruptcy Laws
Operation of the Bankruptcy Code and related state laws may interfere with or
affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences 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. For example, 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 bankruptcy courts have approved plans, based on the particular facts of the
reorganization case, that effected the cure of a mortgage loan default by paying
arrearages over a number of years. Also, a bankruptcy court may permit a debtor,
through its rehabilitative plan, to reinstate a loan mortgage payment schedule
even if the lender has obtained a final judgment of foreclosure prior to the
filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of a secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under the Bankruptcy
Code, a lender may be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents. Recent amendments to the
Bankruptcy Code, however, may minimize the impairment of the lender's ability to
enforce the borrower's assignment of rents and leases. In addition to the
inclusion of hotel revenues within the definition of "cash collateral" as noted
previously in the Section entitled "--Leases and Rents", the amendments provide
that a
-97-
pre-petition security interest in rents or hotel revenues extends (unless the
bankruptcy court orders otherwise based on the equities of the case) to such
post-petition rents or revenues and is intended to overrule those cases that
held that a security interest in rents is unperfected under the laws of certain
states until the lender has taken some further action, such as commencing
foreclosure or obtaining a receiver prior to activation of the assignment of
rents.
If a borrower's ability to make payment on a mortgage loan is dependent on
its receipt of rent payments under a lease of the related property, that ability
may be impaired by the commencement of a bankruptcy case relating to a lessee
under such lease. Under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition. In addition, the Bankruptcy Code generally provides that a
trustee or debtor-in-possession may, subject to approval of the court, (1)
assume the lease and retain it or assign it to a third party or (2) reject the
lease. If the lease is assumed, the trustee or debtor-in-possession (or
assignee, if applicable) must cure any defaults under the lease, compensate the
lessor for its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, the lessor
will be treated as an unsecured creditor with respect to its claim for damages
for termination of the lease. The Bankruptcy Code also limits a lessor's damages
for lease rejection to the rent reserved by the lease (without regard to
acceleration) for the greater of one year, or 15%, not to exceed three years, of
the remaining term of the lease.
Pursuant to the federal doctrine of "substantive consolidation" or to the
(predominantly state law) doctrine of "piercing the corporate veil", a
bankruptcy court, in the exercise of its equitable powers, also has the
authority to order that the assets and liabilities of a related entity be
consolidated with those of an entity before it. Thus, property ostensibly the
property of one entity may be determined to be the property of a different
entity in bankruptcy, the automatic stay applicable to the second entity
extended to the first and the rights of creditors of the first entity impaired
in the fashion set forth above in the discussion of ordinary bankruptcy
principles. Depending on facts and circumstances not wholly in existence at the
time a loan is originated or transferred to the trust fund, the application of
any of these doctrines to one or more of the mortgagors in the context of the
bankruptcy of one or more of their affiliates could result in material
impairment of the rights of the Certificateholders.
For each mortgagor that is described as a "special purpose entity", "single
purpose entity" or "bankruptcy remote entity" in the related prospectus
supplement, the activities that may be conducted by such mortgagor and its
ability to incur debt are restricted by the applicable mortgage or the
organizational documents of such mortgagor in such manner as is intended to make
the likelihood of a bankruptcy proceeding being commenced by or against such
mortgagor remote, and such mortgagor has been organized and is designed to
operate in a manner such that its separate existence should be respected
notwithstanding a bankruptcy proceeding in respect of one or more affiliated
entities of such mortgagor. However, the depositor makes no representation as to
the likelihood of the institution of a bankruptcy proceeding by or in respect of
any mortgagor or the likelihood that the separate existence of any mortgagor
would be respected if there were to be a bankruptcy proceeding in respect of any
affiliated entity of a mortgagor.
Environmental 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. 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 become sufficiently involved
in the management of
-98-
such mortgaged property or the operations of the borrower. Such liability may
exist even if the lender did not cause or contribute to the contamination and
regardless of whether or not 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 Act of 1996,
amended, among other things, the provisions of CERCLA with respect to lender
liability and the secured creditor exemption. The Act offers substantial
protection of 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 Asset Conservation, Lender Liability and Deposit
Insurance Act of 1996 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
only if it exercises decision making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of operational functions of the mortgaged property. The
Asset Conservation, Lender Liability and Deposit Insurance Act of 1996 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.
In addition, the definition of "hazardous substances" under CERCLA
specifically excludes petroleum products. Subtitle I of the Resource
Conservation and Recovery Act governs underground petroleum storage tanks. Under
the Asset Conservation, Lender Liability and Deposit Insurance Act of 1996, the
protections accorded to lenders under CERCLA are also accorded to the holders of
security interests in underground storage tanks. It should be noted, however,
that liability for cleanup of petroleum contamination may be governed by state
law, which may not provide for any specific protection of secured creditors.
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
in such cases, unanticipated or uninsured liabilities of the borrower may
jeopardize the borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against 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 of the
related series.
To reduce the likelihood of such a loss, unless otherwise specified in the
related prospectus supplement, the Pooling and Servicing 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 "The Pooling and Servicing Agreements--Realization Upon Defaulted Mortgage
Loans".
-99-
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
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 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 under the Garn Act.
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. In addition to the risks faced by the holder of a first lien,
holders of mortgage loans secured by junior liens also face the risk that
adequate funds will not be received in connection with a foreclosure on the
related mortgaged property 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 mortgaged 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. 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 (1) the risk of delay in distributions
while a deficiency judgment against the borrower is obtained and (2) the risk of
loss if the deficiency judgment is not realized upon. Moreover, deficiency
judgments may not be available in certain jurisdictions or the mortgage loan may
be nonrecourse.
The rights of the trust fund (and therefore the certificateholders), as
beneficiary under a junior deed of trust or as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee or beneficiary under the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive rents, hazard insurance and condemnation
proceeds and to cause the property securing the mortgage loan to be sold upon
default of the mortgagor or trustor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the master servicer asserts its
subordinate interest in a property in foreclosure litigation or satisfies the
defaulted
-100-
senior loan. As discussed more fully below, in many states a junior mortgagee or
beneficiary may satisfy a defaulted senior loan in full, adding the amounts
expended to the balance due on the junior loan. Absent a provision in the senior
mortgage, no notice of default is required to be given to the junior mortgagee.
The form of the mortgage or deed of trust used by many institutional lenders
confers on the mortgagee or beneficiary the right both to receive all proceeds
collected under any hazard insurance policy and all awards made in connection
with any condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust, in such order as the
mortgage or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under the senior
mortgage or deed of trust will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgage or deed of trust. Proceeds in excess of the
amount of senior mortgage indebtedness will, in most cases, be applied to the
indebtedness of a junior mortgage or trust deed to the extent the junior
mortgage or deed of trust so provides. The laws of certain states may limit the
ability of mortgagees or beneficiaries to apply the proceeds of hazard insurance
and partial condemnation awards to the secured indebtedness. In such states, the
mortgagor or trustor must be allowed to use the proceeds of hazard insurance to
repair the damage unless the security of the mortgagee or beneficiary has been
impaired. Similarly, in certain states, the mortgagee or beneficiary is entitled
to the award for a partial condemnation of the real property security only to
the extent that its security is impaired.
The form of mortgage or deed of trust used by many institutional lenders
typically contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While such a clause is valid under the laws of most states, the priority of any
advance made under the clause depends, in some states, on whether the advance
was an "obligatory" or "optional" advance. If the mortgagee or beneficiary is
obligated to advance the additional amounts, the advance may be entitled to
receive the same priority as amounts initially made under the mortgage or deed
of trust, notwithstanding that there may be intervening junior mortgages or
deeds of trust and other liens between the date of recording of the mortgage or
deed of trust and the date of the future advance, and notwithstanding that the
mortgagee or beneficiary had actual knowledge of such intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance the additional amounts
and has actual knowledge of the intervening junior mortgages or deeds of trust
and other liens, the advance may be subordinate to such intervening junior
mortgages or deeds of trust and other liens. Priority of advances under a
"future advance" clause rests, in many other states, on state law giving
priority to all advances made under the loan agreement up to a "credit limit"
amount stated in the recorded mortgage.
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
Forms of notes and mortgages used by lenders may contain provisions
obligating the mortgagor to pay a late charge or additional interest if payments
are not timely made, and in some circumstances may provide for prepayment fees
or yield maintenance penalties if the obligation is paid prior to maturity or
prohibit such prepayment for a specified period. In certain states, there are or
may be specific limitations upon the late charges
-101-
which a lender may collect from a mortgagor for delinquent payments. Certain
states also limit the amounts that a lender may collect from a mortgagor as an
additional charge if the loan is prepaid. The enforceability under the laws of a
number of states and the Bankruptcy Code of provisions providing for prepayment
fees of penalties upon, or prohibition of, an involuntary prepayment is unclear,
and no assurance can be given that, at the time a prepayment premium is required
to be made on a mortgage loan in connection with an involuntary prepayment, the
obligation to make such payment, or the provisions of any such prohibition, will
be enforceable under applicable state law. The absence of a restraint on
prepayment, particularly with respect to mortgage loans having higher Mortgage
Rates, may increase the likelihood of refinancing or other early retirements of
the mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 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 of the Depository Institutions
Deregulation and Monetary Control Act of 1980 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 of the Depository Institutions Deregulation and Monetary
Control Act of 1980 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 of the Depository Institutions Deregulation and Monetary
Control Act of 1980. 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 of
the Depository Institutions Deregulation and Monetary Control Act of 1980 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 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.
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.
Americans with Disabilities Act
Under 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 (the "Relief Act"), a
borrower who enters military service after the origination of such borrower's
mortgage loan (including a borrower who was in reserve status and
-102-
is called to active duty after origination of the mortgage loan), upon
notification by such borrower, shall not be charged interest, including fees and
charges, in excess of 6% per annum during the period of such borrower's active
duty status, 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. The California
Military and Veterans Code provides protection equivalent to that provided by
the Relief Act to California national guard members called up to active service
by the Governor of California, California national guard members called up to
active service by the President and reservists called to active duty. Because
the Relief Act and the California Military Code apply to borrowers who enter
military service, no information can be provided as to the number of mortgage
loans that may be affected by the Relief Act or the California Military and
Veterans Code. Application of the Relief Act or the California Military and
Veterans Code 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 or the California
Military and Veterans Code 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, application of the Relief Act or the California
Military and Veterans Code 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.
Forfeiture for Drug and Money Laundering Violations
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.
Federal Deposit Insurance Act; Commercial Mortgage Loan Servicing
Under the Federal Deposit Insurance Act, federal bank regulatory authorities,
including the Office of the Comptroller of the Currency (OCC), have the power to
determine if any activity or contractual obligation of a bank constitutes an
unsafe or unsound practice or violates a law, rule or regulation applicable to
such bank. If Bank of America, National Association or another bank is a
servicer and/or a mortgage loan seller for a series and the OCC, which has
primary regulatory authority over Bank of America, National Association and
other banks, were to find that any obligation of Bank of America, National
Association or such other bank under the related Pooling and Servicing Agreement
or other agreement or any activity of Bank of America, National Association or
such other bank constituted an unsafe or unsound practice or violated any law,
rule or regulation applicable to it, the OCC could order Bank of America,
National Association or such other bank among other things to rescind such
contractual obligation or terminate such activity.
In March 2003, the OCC issued a temporary cease and desist order against a
national bank (as to which no conservator or receiver had been appointed)
asserting that, contrary to safe and sound banking practices, the bank was
receiving inadequate servicing compensation in connection with several credit
card securitizations sponsored by its affiliates because of the size and
subordination of the contractual servicing fee, and ordered the bank, among
other things, to immediately resign as servicer, to cease all servicing activity
within 120 days and to immediately
-103-
withhold funds from collections in an amount sufficient to compensate if for its
actual costs and expenses of servicing (notwithstanding the priority of payments
in the related securitization agreements).
While the depositor does not believe that the OCC would consider, with
respect to any series, (i) provisions relating to Bank of America, National
Association or another bank acting as a servicer under the related Pooling and
Servicing Agreement, (ii) the payment or amount of the servicing compensation
payable to Bank of America, National Association or another bank or (iii) any
other obligation of Bank of America, National Association or another bank under
the related Pooling and Servicing Agreement or other contractual agreement under
which the depositor may purchase mortgage loans from Bank of America, National
Association or another bank, to be unsafe or unsound or violative of any law,
rule or regulation applicable to it, there can be no assurance that the OCC in
the future would not conclude otherwise. If the OCC did reach such a conclusion,
and ordered Bank of America, National Association or another bank to rescind or
amend any such agreement, payments on certificates could be delayed or reduced.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following general discussion of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of offered
certificates of any series thereof, to the extent it relates to matters of law
or legal conclusions with respect thereto, represents the opinion of counsel to
the depositor with respect to that series on the material matters associated
with such consequences, subject to any qualifications set forth in this
prospectus. Counsel to the depositor for each series will be Cadwalader,
Wickersham & Taft LLP, and a copy of the legal opinion of such counsel rendered
in connection with any series of certificates will be filed by the depositor
with the Securities and Exchange Commission on a Current Report on Form 8-K
within 15 days after the Closing Date for such series of certificates. This
discussion is directed primarily to certificateholders that hold the
certificates as "capital assets" within the meaning of Section 1221 of the Code
(although portions thereof may also apply to certificateholders who do not hold
certificates as capital assets) and it does not purport to discuss all federal
income tax consequences that may be applicable to the individual circumstances
of particular investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special treatment under the Code. Further,
the authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. Prospective investors should note that no rulings have been or
will be sought from the IRS with respect to any of the federal income tax
consequences discussed below, and no assurance can be given the IRS will not
take contrary positions. In addition to the federal income tax consequences
described in this prospectus, potential investors are advised to consider the
state and local tax consequences, if any, of the purchase, ownership and
disposition of offered certificates. See "State and Other Tax Consequences".
Prospective investors are encouraged to consult their tax advisors concerning
the federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of offered certificates.
The following discussion addresses securities of two general types: (1) REMIC
Certificates representing interests in a trust fund, or a portion thereof, that
the REMIC administrator will elect to have treated as a REMIC under the REMIC
Provisions of the Code, and (2) Grantor Trust Certificates representing
interests in a Grantor Trust Fund as to which no such election will be made. The
prospectus supplement for each series of certificates will indicate whether a
REMIC election (or elections) will be made for the related trust fund and, if
such an election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC. For purposes of this tax discussion,
references to a "Certificateholder" or a "holder" are to the beneficial owner of
a certificate.
The following discussion is limited in applicability to offered certificates.
Moreover, this discussion applies only to the extent that mortgage assets held
by a trust fund consist solely of mortgage loans. To the extent that other
mortgage assets, including REMIC certificates and mortgage pass-through
certificates, are to be held by a trust fund, the tax consequences associated
with the inclusion of such assets will be disclosed in the related prospectus
supplement. In addition, if cash flow agreements other than guaranteed
investment contracts are included in a trust fund, the anticipated material tax
consequences associated with such cash flow agreements also will be discussed in
the related prospectus supplement. See "Description of the Trust Funds--Cash
Flow Agreements".
-104-
Furthermore, the following discussion is based in part upon the rules
governing original issue discount that are set forth in Sections 1271-1273 and
1275 of the Code and in the OID Regulations, and in part upon the REMIC
Provisions and the REMIC Regulations. The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the certificates.
REMICs
Classification of REMICs. Upon the issuance of each series of REMIC
Certificates, counsel to the depositor will give its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement and any other governing documents, the related trust fund
(or each applicable portion thereof) will qualify as one or more REMICs and the
REMIC Certificates offered with respect thereto will be considered to evidence
ownership of REMIC Regular Certificates or REMIC Residual Certificates in a
REMIC within the meaning of the REMIC Provisions. The following general
discussion of the anticipated federal income tax consequences of the purchase,
ownership and disposition of REMIC Certificates, to the extent it relates to
matters of law or legal conclusions with respect thereto, represents the opinion
of counsel to the depositor for the applicable series as specified in the
related prospectus supplement, subject to any qualifications set forth in this
prospectus. In addition, counsel to the depositor have prepared or reviewed the
statements in this prospectus under the heading "Certain Federal Income Tax
Consequences--REMICs," and are of the opinion that such statements are correct
in all material respects. Such statements are intended as an explanatory
discussion of the possible effects of the classification of any trust fund (or
applicable portion thereof) as one or more REMICs for federal income tax
purposes on investors generally and of related tax matters affecting investors
generally, but do not purport to furnish information in the level of detail or
with the attention to an investor's specific tax circumstances that would be
provided by an investor's own tax advisor. Accordingly, each investor is
encouraged to consult its own tax advisors with regard to the tax consequences
to it of investing in REMIC Certificates.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the trust
fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the trust fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any trust fund as
a REMIC will be inadvertently terminated.
Characterization of Investments in REMIC Certificates. In general, unless
otherwise provided in the related prospectus supplement, the REMIC Certificates
will be "real estate assets" within the meaning of Section 856(c)(5)(B) of the
Code and assets described in Section 7701(a)(19)(C) of the Code in the same
proportion that the assets of the REMIC underlying such certificates would be so
treated. However, to the extent that the REMIC assets constitute mortgages on
property not used for residential or certain other prescribed purposes, the
REMIC Certificates will not be treated as assets qualifying under Section
7701(a)(19)(C). Moreover, if 95% or more of the assets of the REMIC qualify for
any of the foregoing characterizations at all times during a calendar year, the
REMIC Certificates will qualify for the corresponding status in their entirety
for that calendar year. Interest (including original issue discount) on the
REMIC Regular Certificates and income allocated to the REMIC Residual
Certificates will be interest described in Section 856(c)(3)(B) of the Code to
the extent that such certificates are treated as "real estate assets" within the
meaning of Section 856(c)(5)(B) of the Code. In addition, except as otherwise
provided in the applicable prospectus supplement, the REMIC Regular Certificates
will be "qualified mortgages" for a REMIC within the meaning of Section
860G(a)(3) of the Code. The determination as to the percentage of the REMIC's
assets that constitute assets described in the foregoing sections of the Code
will be made with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC during such calendar
quarter. The REMIC Administrator will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
-105-
Tiered REMIC Structures. For certain series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
trust fund as REMICs for federal income tax purposes. As to each such series of
REMIC Certificates, in the opinion of counsel to the depositor, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the Tiered REMICs will each qualify as a REMIC and the REMIC Certificates issued
by the Tiered REMICs, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(B) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates.
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the "constant yield" method described below,
in advance of the receipt of the cash attributable to such income. In addition,
Section 1272(a)(6) of the Code provides special rules applicable to REMIC
Regular Certificates and certain other debt instruments issued with original
issue discount. Final regulations have not been issued under that section.
The Code requires that a reasonable prepayment assumption be used with
respect to mortgage loans held by a REMIC in computing the accrual of original
issue discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Committee Report indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The Prepayment Assumption used in reporting original issue discount
for each series of REMIC Regular Certificates will be consistent with this
standard and will be disclosed in the related prospectus supplement. However,
neither the depositor nor any other person will make any representation that the
mortgage loans will in fact prepay at a rate conforming to the Prepayment
Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the Closing Date, the issue price
for such class will be the fair market value of such class on the Closing Date.
Under the OID Regulations, the stated redemption price of a REMIC Regular
Certificate is equal to the total of all payments to be made on such Certificate
other than "qualified stated interest". "Qualified stated interest" is interest
that is unconditionally payable at least annually (during the entire term of the
instrument) at a single fixed rate, or, as discussed below under "Variable Rate
REMIC Regular Certificates," at a qualified variable rate.
If the accrued interest to be paid on the first Distribution Date is computed
with respect to a period that begins prior to the Closing Date, a portion of the
purchase price paid for a REMIC Regular Certificate will reflect such accrued
interest. In such cases, information returns provided to the Certificateholders
and the IRS will be based on the position that the portion of the purchase price
paid for the interest accrued with respect to periods prior to the Closing Date
is treated as part of the overall cost of such REMIC Regular Certificate (and
not as a separate asset the cost of which is recovered entirely out of interest
received on the next Distribution Date) and that portion of the interest paid on
the first Distribution Date in excess of interest accrued for a number of days
corresponding to the
-106-
number of days from the Closing Date to the first Distribution Date should be
included in the stated redemption price of such REMIC Regular Certificate.
However, the OID Regulations state that all or some portion of such accrued
interest may be treated as a separate asset the cost of which is recovered
entirely out of interest paid on the first Distribution Date. It is unclear how
an election to do so would be made under the OID Regulations and whether such an
election could be made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which is
the amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or an
initial interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of such de minimis
original issue discount and a fraction, the numerator of which is the amount of
such principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--Taxation
of Owners of REMIC Regular Certificates--Market Discount" below for a
description of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period", that is, unless otherwise stated in the related
prospectus supplement, each period that begins on a date that corresponds to a
Distribution Date (or in the case of the first such period, begins on the
Closing Date) and ends on the day preceding the immediately following
Distribution Date, a calculation will be made of the portion of the original
issue discount that accrued during such accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess, if any,
of (1) the sum of (a) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (b) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (2) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
(1) assuming that distributions on the REMIC Regular Certificate will be
received in future periods based on the mortgage loans being prepaid at a rate
equal to the Prepayment Assumption, (2) using a discount rate equal to the
original yield to maturity of the Certificate and (3) taking into account events
(including actual prepayments) that have occurred before the close of the
accrual period. For these purposes, the original yield to maturity of the
Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the mortgage loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price",
-107-
in proportion to the ratio such excess bears to the aggregate original issue
discount remaining to be accrued on such REMIC Regular Certificate. The adjusted
issue price of a REMIC Regular Certificate on any given day equals the sum of
(1) the adjusted issue price (or, in the case of the first accrual period, the
issue price) of such Certificate at the beginning of the accrual period which
includes such day and (2) the daily portions of original issue discount for all
days during such accrual period prior to such day.
The IRS proposed regulations on August 24, 2004 that create a special rule
for accruing original issue discount on REMIC Regular Certificates providing for
a delay between record and payment dates, such that the period over which
original issue discount accrues coincides with the period over which the
certificateholder's right to interest payment accrues under the governing
contract provisions rather than over the period between distribution dates. If
the proposed regulations are adopted in the same form as proposed, taxpayers
would be required to accrue interest from the issue date to the first record
date, but would not be required to accrue interest after the last record date.
The proposed regulations are limited to REMIC Regular Certificates with delayed
payment for periods of fewer than 32 days. The proposed regulations are proposed
to apply to any REMIC Regular Certificate issued after the date the final
regulations are published in the Federal Register.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates may
provide for interest based on a variable rate. Under the OID Regulations,
interest is treated as payable at a variable rate if, generally, (1) the issue
price does not exceed the original principal balance by more than a specified
amount and (2) the interest compounds or is payable at least annually at current
values of (a) one or more "qualified floating rates", (b) a single fixed rate
and one or more qualified floating rates, (c) a single "objective rate", or (d)
a single fixed rate and a single objective rate that is a "qualified inverse
floating rate". A floating rate is a qualified floating rate if variations in
the rate can reasonably be expected to measure contemporaneous variations in the
cost of newly borrowed funds, where the rate is subject to a fixed multiple that
is greater than 0.65, but not more than 1.35. The rate may also be increased or
decreased by a fixed spread or subject to a fixed cap or floor, or a cap or
floor that is not reasonably expected as of the issue date to affect the yield
of the instrument significantly. An objective rate (other than a qualified
floating rate) is a rate that is determined using a single fixed formula and
that is based on objective financial or economic information; provided that the
information is not (1) within the control of the issuer or a related party or
(2) unique to the circumstances of the issuer or a related party. A qualified
inverse floating rate is a rate equal to a fixed rate minus a qualified floating
rate that inversely reflects contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified floating rate
may nevertheless be an objective rate. A class of REMIC Regular Certificates may
be issued under this prospectus that does not have a variable rate under the OID
Regulations, for example, a class that bears different rates at different times
during the period it is outstanding so that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is
possible that a class of this type may be considered to bear "contingent
interest" within the meaning of the OID Regulations. The OID Regulations, as
they relate to the treatment of contingent interest, are by their terms not
applicable to REMIC Regular Certificates. However, if final regulations dealing
with contingent interest with respect to REMIC Regular Certificates apply the
same principles as the OID Regulations, those regulations may lead to different
timing of income inclusion than would be the case under the OID Regulations.
Furthermore, application of those principles could lead to the characterization
of gain on the sale of contingent interest REMIC Regular Certificates as
ordinary income. Investors should consult their tax advisors regarding the
appropriate treatment of any REMIC Regular Certificate that does not pay
interest at a fixed rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a REMIC Regular Certificate (1) bearing a rate
that qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two or
more variable rates), including a rate based on the average cost of funds of one
or more financial institutions, or a positive or negative multiple of a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the mortgage loans, including a rate
that is subject to one or more caps or floors, or (2) bearing one or more of
these variable rates for one or more periods or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods
qualifies as a regular interest in a REMIC. Accordingly, unless otherwise
indicated in the applicable prospectus supplement, REMIC Regular Certificates
that qualify as regular interests under this rule will be treated in the same
manner as obligations bearing a variable rate for original issue discount
reporting purposes.
-108-
The amount of original issue discount with respect to a REMIC Regular
Certificate bearing a variable rate of interest will accrue in the manner
described above under "--Original Issue Discount" with the yield to maturity and
future payments on that REMIC Regular Certificate generally to be determined by
assuming that interest will be payable for the life of the REMIC Regular
Certificate based on the initial rate for the relevant class. Unless otherwise
specified in the applicable prospectus supplement, variable interest will be
treated as qualified stated interest, other than variable interest on an
interest-only 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, REMIC Regular Certificates bearing an interest
rate that is a weighted average of the net interest rates on mortgage loans
having fixed or adjustable rates, will be treated 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 those REMIC 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 for the initial interest accrual period 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 interest rate on the REMIC
Regular Certificates.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a Certificateholder generally will be required to allocate the portion
of each such distribution representing stated redemption price first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest and
discount (including de minimis market or original issue discount) in income as
interest, and to amortize premium, based on a constant yield method. If such an
election were made with respect to a REMIC Regular Certificate with market
discount, the Certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election or thereafter, including de minimis market
discount discussed in the following paragraph. Similarly, a Certificateholder
that made this election for a Certificate that is acquired at a premium would be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that such Certificateholder
owns or acquires. See "--Taxation of Owners of REMIC Regular
Certificates--Premium" below. Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable except with the approval of the IRS.
However, market discount with respect to a REMIC Regular Certificate will be
considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
-109-
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (1) on the basis of a constant yield
method, (2) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (3) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above. Although final Treasury regulations issued
under Section 171 of the Code do not by their terms apply to prepayable
obligations such as REMIC Regular Certificates, the Committee Report states that
the same rules that apply to accrual of market discount (which rules will
require use of a Prepayment Assumption in accruing market discount with respect
to REMIC Regular Certificates without regard to whether such certificates have
original issue discount) will also apply in amortizing bond premium.
Realized Losses. Under Section 166 of the Code, both corporate holders of the
REMIC Regular Certificates and non-corporate holders of the REMIC Regular
Certificates that acquire such certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their certificates become wholly or partially
worthless as the result of one or more realized losses on the mortgage loans.
However, it appears that a non-corporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its Certificate Balance has been reduced
to zero) and that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
-110-
delinquencies on the mortgage loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a realized
loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of such loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates.
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC generally is not subject to entity-level taxation, except with
regard to prohibited transactions and certain other transactions. See
"--Prohibited Transactions Tax and Other Taxes" below. Rather, the taxable
income or net loss of a REMIC is generally taken into account by the holder of
the REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates
will be subject to tax rules that differ significantly from those that would
apply if the REMIC Residual Certificates were treated for federal income tax
purposes as direct ownership interests in the mortgage loans or as debt
instruments issued by the REMIC.
A REMIC Residual Certificateholder generally will be required to report its
daily portion of the taxable income or, subject to the limitations noted in this
discussion, the net loss of the REMIC for each day during a calendar quarter
that such holder owned such REMIC Residual Certificate. For this purpose, the
taxable income or net loss of the REMIC will be allocated to each day in the
calendar quarter ratably using a "30 days per month/90 days per quarter/360 days
per year" convention unless otherwise disclosed in the related prospectus
supplement. The daily amounts so allocated will then be allocated among the
REMIC Residual Certificateholders in proportion to their respective ownership
interests on such day. Any amount included in the gross income or allowed as a
loss of any REMIC Residual Certificateholder by virtue of this paragraph will be
treated as ordinary income or loss. The taxable income of the REMIC will be
determined under the rules described below in "--Taxable Income of the REMIC"
and will be taxable to the REMIC Residual Certificateholders without regard to
the timing or amount of cash distributions by the REMIC until the REMIC's
termination. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses".
A holder of a REMIC Residual Certificate that purchased such Certificate from
a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions" and
"noneconomic" residual interests discussed below. The fact that the tax
liability associated with the income allocated to REMIC Residual
Certificateholders may exceed the cash distributions received by such REMIC
Residual Certificateholders for the corresponding period may significantly
adversely affect such REMIC Residual Certificateholders' after-tax rate of
return. Such disparity between income and distributions may not be offset by
corresponding losses or reductions of income attributable to the REMIC Residual
Certificateholder until subsequent tax years and, then, may not be completely
offset due to changes in the Code, tax rates or character of the income or loss.
Taxable Income of the REMIC. The taxable income of the REMIC will equal the
income from the mortgage loans (including interest, market discount and, if
applicable, original issue discount and less premium) and other
-111-
assets of the REMIC plus any cancellation of indebtedness income due to the
allocation of realized losses to REMIC Regular Certificates, less the deductions
allowed to the REMIC for interest (including original issue discount and reduced
by any premium on issuance) on the REMIC Regular Certificates (and any other
class of REMIC Certificates constituting "regular interests" in the REMIC not
offered hereby), amortization of any premium on the mortgage loans, bad debt
losses with respect to the mortgage loans and, except as described below, for
servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, such Class's fair market value). Such aggregate basis will be
allocated among the mortgage loans and the other assets of the REMIC in
proportion to their respective fair market values. The issue price of any REMIC
Certificates offered hereby will be determined in the manner described above
under "--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount". The issue price of a REMIC Certificate received in exchange for an
interest in the mortgage loans or other property will equal the fair market
value of such interests in the mortgage loans or other property. Accordingly, if
one or more classes of REMIC Certificates are retained initially rather than
sold, the REMIC Administrator may be required to estimate the fair market value
of such interests in order to determine the basis of the REMIC in the mortgage
loans and other property held by the REMIC.
The method of accrual by the REMIC of original issue discount income and
market discount income with respect to mortgage loans that it holds will be
equivalent to the method for accruing original issue discount income for holders
of REMIC Regular Certificates (that is, under the constant yield method taking
into account the Prepayment Assumption), but without regard to the de minimis
rule applicable to REMIC Regular Certificates. However, a REMIC that acquires
loans at a market discount must include such market discount in income
currently, as it accrues, on a constant yield basis. See "--Taxation of Owners
of REMIC Regular Certificates" above, which describes a method for accruing such
discount income that is analogous to that required to be used by a REMIC as to
mortgage loans with market discount that it holds.
A mortgage loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis in that mortgage loan, determined
as described in the preceding paragraph, is less than (or greater than) its
stated redemption price. Any such discount will be includible in the income of
the REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will elect under Section 171 of the Code to amortize any premium
on the mortgage loans. Premium on any mortgage loan to which such election
applies may be amortized under a constant yield method, presumably taking into
account a Prepayment Assumption. Further, such an election would not apply to
any mortgage loan originated on or before September 27, 1985. Instead, premium
on such a mortgage loan should be allocated among the principal payments thereon
and be deductible by the REMIC as those payments become due or upon the
prepayment of such mortgage loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount", except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described in that section will not apply.
If a class of REMIC Regular Certificates is issued with an Issue Premium, the
REMIC will have additional income in each taxable year in an amount equal to the
portion of the Issue Premium that is considered to be amortized or repaid in
that year. Although the matter is not entirely certain, it is likely that Issue
Premium would be amortized under a constant yield method in a manner analogous
to the method of accruing original issue discount described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount".
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no
-112-
item of income, gain, loss or deduction allocable to a prohibited transaction
will be taken into account. See "--Prohibited Transactions Tax and Other Taxes"
below. Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
Regulations have been issued addressing the federal income tax treatment of
"inducement fees" received by transferees of non-economic residual interests.
These regulations 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 safe
harbor methods, inducement fees are permitted to be included in income (i) 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 (ii) 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
is required to be taken into account at
-113-
the time of the sale of disposition. Prospective purchasers of the REMIC
Residual Certificates should consult with their tax advisors regarding the
effect of these regulations.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Certificate will be subject to federal income tax in all events. In general, the
"excess inclusions" with respect to a REMIC Residual Certificate for any
calendar quarter will be the excess, if any, of (1) the daily portions of REMIC
taxable income allocable to such REMIC Residual Certificate over (2) the sum of
the "daily accruals" (as defined below) for each day during such quarter that
such REMIC Residual Certificate was held by such REMIC Residual
Certificateholder. The daily accruals of a REMIC Residual Certificateholder will
be determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Certificate at the beginning of the calendar quarter and 120% of the "long-term
Federal rate" in effect on the Closing Date. For this purpose, the adjusted
issue price of a REMIC Residual Certificate as of the beginning of any calendar
quarter will be equal to the issue price of the REMIC Residual Certificate,
increased by the sum of the daily accruals for all prior quarters and decreased
(but not below zero) by any distributions made with respect to such REMIC
Residual Certificate before the beginning of such quarter. The issue price of a
REMIC Residual Certificate is the initial offering price to the public
(excluding bond houses and brokers) at which a substantial amount of the REMIC
Residual Certificates were sold. The "long-term Federal rate" is an average of
current yields on Treasury securities with a remaining term of greater than nine
years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (1) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (2) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (3) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates" below.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax". If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. 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. Under the REMIC
Regulations, a safe harbor is provided if (1) 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, (2) 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
-114-
transferee intends to pay taxes associated with holding the residual interest as
they become due and (3) the transferee represents to the transferor that it will
not cause income from the REMIC 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 person.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling and Servicing Agreement that are intended to reduce
the possibility of any such transfer being disregarded. Such restrictions will
require the transferee to provide an affidavit to certify to the matters in the
preceding sentence. The transferor must have no actual knowledge or reason to
know that those statements are false.
In addition to the three conditions set forth above, the REMIC Regulations
contain a fourth requirement that must be satisfied in one of two alternative
ways for the transferor to have a "safe harbor" against ignoring the transfer:
(1) the present value of the anticipated tax liabilities associated
with holding the noneconomic residual interest not exceed the sum of:
(i) the present value of any consideration given to the
transferee to acquire the interest;
(ii) the present value of the expected future distributions on
the interest; and
(iii) the present value of the anticipated tax savings
associated with holding the interest as the REMIC generates losses.
For purposes of the computations under this "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 minimum tax rate specified in Section 55 of the Code.
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 the transfer and the compounding period used by the transferee; or
(2) (i) the transferee must be a domestic "C" corporation (other
than a corporation exempt from taxation of a regulated investment company
or real estate investment trust) that meets certain gross and net asset
tests (generally, $100 million of gross assets and $10 million of net
assets for the current year and the two preceding fiscal years);
(ii) the transferee must agree in writing that it will
transfer the REMIC Residual Certificate only to a subsequent
transferee that is an eligible corporation and meets the
requirements for a safe harbor transfer; and
(iii) the facts and circumstances known to the transferor on
or before the date of the transfer must not reasonably indicate that
the taxes associated with ownership of the REMIC Residual
Certificate will not be paid by the transferee.
The related prospectus supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of certain REMIC Residual
Certificates to foreign persons.
Mark-to-Market Rules. The IRS has issued regulations, relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. This mark-to-market requirement applies to all securities owned by a
dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The mark-to-market regulations provide that for
purposes of this requirement, a REMIC Residual Certificate will not be treated
as a security and thus generally may not be marked to market.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and expenses
of a REMIC generally will be allocated to certain types of holders of the
related REMIC Residual Certificates. The applicable Treasury
-115-
regulations indicate, however, that in the case of a REMIC that is similar to a
single class grantor trust, all or a portion of such fees and expenses should be
allocated to such types of holders of the related REMIC Regular Certificates.
Unless otherwise stated in the related prospectus supplement, such fees and
expenses will be allocated to the related REMIC Residual Certificates in their
entirety and not to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates the
holders of which receive an allocation of fees and expenses in accordance with
the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (1) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (2) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate 2% of a taxpayer's adjusted gross income. In
addition, Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (1) 3% of the excess of the
individual's adjusted gross income over such amount or (2) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by REMIC Certificateholders that are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Furthermore, in determining the alternative minimum taxable income
of such a holder of a REMIC Certificate that is an individual, estate or trust,
or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors are encouraged to
consult with their tax advisors prior to making an investment in such
certificates.
Under tax legislation enacted in 2001, the limitations on deductions under
Section 68 will be phased out beginning in 2006 and will be eliminated after
2009.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Certificate.
The adjusted basis of a REMIC Regular Certificate generally will equal the cost
of such REMIC Regular Certificate to such Certificateholder, increased by income
reported by such Certificateholder with respect to such REMIC Regular
Certificate (including original issue discount and market discount income) and
reduced (but not below zero) by distributions on such REMIC Regular Certificate
received by such Certificateholder and by any amortized premium. The adjusted
basis of a REMIC Residual Certificate will be determined as described above
under "--Taxation of Owners of REMIC Residual Certificates--Basis Rules, Net
Losses and Distributions". Except as provided in the following four paragraphs,
any such gain or loss will be capital gain or loss; provided such REMIC
Certificate is held as a capital asset (generally, property held for investment)
within the meaning of Section 1221 of the Code. The Code as of the date of this
prospectus provides for tax rates for individuals on ordinary income that are
higher than the tax rates for long-term capital gains of individuals for
property held for more than one year. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be a
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (1) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on treasury
securities having a maturity comparable to that of the certificate based on the
application of the Prepayment Assumption to such certificate), determined as of
the date of purchase of such REMIC Regular Certificate, over (2) the amount of
ordinary income actually includible in the seller's income prior to such sale.
In addition, gain recognized on the sale of a REMIC Regular Certificate by a
seller who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any
-116-
market discount included in income under the rules described above under
"--Taxation of Owners of REMIC Regular Certificates--Market Discount" and
"--Premium".
REMIC Certificates will be "evidences of indebtedness" within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a REMIC Certificate by a bank or thrift institution to which such Section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that might
otherwise be capital gain may be treated as ordinary income to the extent that
such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury Department regulations yet to be
issued, if the seller of a REMIC Residual Certificate reacquires such REMIC
Residual Certificate, or acquires any other residual interest in a REMIC or any
similar interest in a "taxable mortgage pool" (as defined in Section 7701(i) of
the Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
Prohibited Transactions Tax and Other Taxes. The Code imposes a tax on REMICs
equal to 100% of the net income derived from "prohibited transactions". In
general, subject to certain specified exceptions a prohibited transaction means
the disposition of a mortgage loan, the receipt of income from a source other
than a mortgage loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the mortgage loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition of a tax on the
REMIC equal to 100% of the value of the contributed property. Each Pooling and
Servicing Agreement will include provisions designed to prevent the acceptance
of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property", determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
As provided in each Pooling and Servicing Agreement, a REMIC may recognize "net
income from foreclosure property" subject to federal income tax to the extent
that the REMIC Administrator determines that such method of operation will
result in a greater after-tax return to the trust fund than any other method of
operation.
Unless otherwise disclosed in the related prospectus supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related prospectus supplement, and to the
extent permitted by then applicable laws, any prohibited transactions tax or
contributions tax will be borne by the related REMIC administrator, master
servicer, special servicer, manager or trustee, in any case out of its own
funds; provided that such person has
-117-
sufficient assets to do so; provided, further, that such tax arises out of a
breach of such person's obligations under the related Pooling and Servicing
Agreement and in respect of compliance with applicable laws and regulations. Any
such tax not borne by a REMIC administrator, a master servicer, special
servicer, manager or trustee will be charged against the related trust fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations. If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (1) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate) of the total anticipated
excess inclusions with respect to such REMIC Residual Certificate for periods
after the transfer and (2) the highest marginal federal income tax rate
applicable to corporations. The anticipated excess inclusions must be determined
as of the date that the REMIC Residual Certificate is transferred and must be
based on events that have occurred up to the time of such transfer, the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Such a tax
generally would be imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Moreover, an entity will not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that (1) residual interests in
such entity are not held by disqualified organizations and (2) information
necessary for the application of the tax described herein will be made
available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in each Pooling and Servicing Agreement, and will be discussed in any
prospectus supplement relating to the offering of any REMIC Residual
Certificate.
In addition, if a "pass-through entity" (as defined below) includes in income
excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (1) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(2) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (1) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (2) a statement under penalties of perjury that such record
holder is not a disqualified organization.
If an "electing large partnership" holds a REMIC 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.
For these purposes, a "disqualified organization" means (1) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (2) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (3) any organization described in Section 1381(a)(2)(C) of the
Code. In addition, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity. For
these purposes, an "electing large partnership" means a partnership (other than
a service partnership or certain commodity pools) having more than 100 members
that has elected to apply certain simplified reporting provisions under the
Code.
Termination. A REMIC will terminate immediately after the Distribution Date
following receipt by the REMIC of the final payment in respect of the mortgage
loans or upon a sale of the REMIC's assets following the adoption
-118-
by the REMIC of a plan of complete liquidation. The last distribution on a REMIC
Regular Certificate will be treated as a payment in retirement of a debt
instrument. In the case of a REMIC Residual Certificate, if the last
distribution on such REMIC Residual Certificate is less than the REMIC Residual
Certificateholder's adjusted basis in such Certificate, such REMIC Residual
Certificateholder should (but may not) be treated as realizing a loss equal to
the amount of such difference, and such loss may be treated as a capital loss.
Reporting and Other Administrative Matters. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related prospectus supplement, the holder of the
largest percentage interest in a class of REMIC Residual Certificates will be
the "tax matters person" with respect to the related REMIC, and the REMIC
administrator will file REMIC federal income tax returns on behalf of the
related REMIC, and will be designated as and will act as agent of, and
attorney-in-fact for, the tax matters person with respect to the REMIC in all
respects.
As the tax matters person, the REMIC administrator, subject to certain notice
requirements and various restrictions and limitations, generally will have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders generally will be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the REMIC Administrator, as tax matters person, and the IRS concerning
any such REMIC item. Adjustments made to the REMIC tax return may require a
REMIC Residual Certificateholder to make corresponding adjustments on its
return, and an audit of the REMIC's tax return, or the adjustments resulting
from such an audit, could result in an audit of a REMIC Residual
Certificateholder's return. Any person that holds a REMIC Residual Certificate
as a nominee for another person may be required to furnish to the related REMIC,
in a manner to be provided in Treasury Department regulations, the name and
address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury Department regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals will
be provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. Reporting with
respect to REMIC Residual Certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury Department
regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will include
a statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount".
Unless otherwise specified in the related prospectus supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the REMIC administrator.
Backup Withholding with Respect to REMIC Certificates. Payments of interest
and principal, and proceeds from the sale of REMIC Certificates, may be subject
to "backup withholding tax" at a rate of 28% (increasing to 30% after 2010)
unless the recipient of such payments is a U.S. Person and provides IRS Form W-9
with the correct taxpayer identification number; is a non-U.S. Person and
provides IRS Form W-8BEN identifying the non-U.S. Person and stating that the
beneficial owner is not a U.S. Person; or can be treated as an exempt recipient
within the meaning of Treasury Regulations Section 1.6049-4(c)(1)(ii). Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax. Information
reporting requirements may also apply regardless of whether withholding is
required. Furthermore, certain penalties
-119-
may be imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
Foreign Investors in REMIC Certificates. A REMIC Regular Certificateholder
that is not a U.S. Person and is not subject to federal income tax as a result
of any direct or indirect connection to the United States in addition to its
ownership of a REMIC Regular Certificate will not, unless otherwise disclosed in
the related prospectus supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate;
provided that the holder provides appropriate documentation. The appropriate
documentation includes Form W-8BEN, if the non-U.S. Person is a corporation or
individual eligible for the benefits of the portfolio interest exemption or an
exemption based on a treaty; Form W-8ECI if the non-U.S. Person is eligible for
an exemption on the basis of its income from the REMIC Regular Certificate being
effectively connected to a United States trade or business; Form W-8BEN or Form
W-8IMY if the non-U.S. Person is a trust, depending on whether such trust is
classified as the beneficial owner of the REMIC Regular Certificate; and Form
W-8IMY, with supporting documentation as specified in the Treasury Regulations,
required to substantiate exemptions from withholding on behalf of its partners,
if the non-U.S. Person is a partnership. An intermediary (other than a
partnership) must provide Form W-8IMY, revealing all required information,
including its name, address, taxpayer identification number, the country under
the laws of which it is created, and certification that it is not acting for its
own account. A "qualified intermediary" must certify that it has provided, or
will provide, a withholding statement as required under Treasury Regulations
Section 1.1441-1(e)(5)(v), but need not disclose the identify of this account
holders on its Form W-8IMY, and may certify its account holders' status without
including each beneficial owner's certification. A non-"qualified intermediary"
must additionally certify that it has provided, or will provide, a withholding
on behalf of its associated with the appropriate Form W-8 and W-9 required to
substantiate exemptions from withholding on behalf of its beneficial owners. The
term "intermediary" means a person acting as custodian, a broker, nominee or
otherwise as an agent for the beneficial owner of a REMIC Regular Certificate. A
"qualified intermediary" is generally a foreign financial institution or
clearing organization or a non-U.S. branch or office of a U.S. financial
institution or clearing organization that is a party to a withholding agreement
with the IRS.
It is possible that the IRS may assert that the foregoing tax exemption
should not apply with respect to a REMIC Regular Certificate held by a REMIC
Residual Certificateholder that owns directly or indirectly a 10% or greater
interest in the REMIC Residual Certificates. If the holder does not qualify for
exemption, distributions of interest, including distributions in respect of
accrued original issue discount, to such holder may be subject to a tax rate of
30%.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included in
the estate of a nonresident alien individual and would not be subject to United
States estate taxes. However, Certificateholders who are nonresident alien
individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related prospectus supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related Pooling and Servicing Agreement.
Grantor Trust Funds
Classification of Grantor Trust Funds. With respect to each series of Grantor
Trust Certificates, in the opinion of counsel to the depositor for such series,
assuming compliance with all provisions of the related Pooling and Servicing
Agreement, the related Grantor Trust Fund will be classified as a grantor trust
under subpart E, part I of subchapter J of the Code and not as a partnership or
an association taxable as a corporation. The following general discussion of the
anticipated federal income tax consequences of the purchase, ownership and
disposition of Grantor Trust Certificates, to the extent it relates to matters
of law or legal conclusions with respect thereto, represents the opinion of
counsel to the depositor for the applicable series as specified in the related
prospectus supplement, subject to any qualifications set forth in this
prospectus. In addition, counsel to the depositor has prepared or reviewed the
statements in this prospectus under the heading "Certain Federal Income Tax
Consequences--Grantor Trust Funds," and is of the opinion that such statements
are correct in all material respects. Such statements are intended as an
explanatory discussion of the possible effects of the classification of any
Grantor Trust Fund as a
-120-
grantor trust for federal income tax purposes on investors generally and of
related tax matters affecting investors generally, but do not purport to furnish
information in the level of detail or with the attention to an investor's
specific tax circumstances that would be provided by an investor's own tax
advisor. Accordingly, each investor is advised to consult its own tax advisors
with regard to the tax consequences to it of investing in Grantor Trust
Certificates.
Characterization of Investments in Grantor Trust Certificates.
Grantor Trust Fractional Interest Certificates. In the case of Grantor Trust
Fractional Interest Certificates, unless otherwise disclosed in the related
prospectus supplement, counsel to the depositor will deliver an opinion that, in
general, Grantor Trust Fractional Interest Certificates will represent interests
in (1) "loans . . . secured by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code; (2) "obligation[s] (including any
participation or certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3) of the Code; and (3) "real estate assets" within the meaning
of Section 856(c)(5)(B) of the Code. In addition, counsel to the depositor will
deliver an opinion that interest on Grantor Trust Fractional Interest
Certificates will to the same extent be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code.
Grantor Trust Strip Certificates. Even if Grantor Trust Strip Certificates
evidence an interest in a Grantor Trust Fund consisting of mortgage loans that
are "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code and "real estate assets" within the
meaning of Section 856(c)(5)(B) of the Code, and the interest on which is
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, it is unclear whether the Grantor
Trust Strip Certificates, and the income therefrom, will be so characterized.
However, the policies underlying such sections (namely, to encourage or require
investments in mortgage loans by thrift institutions and real estate investment
trusts) may suggest that such characterization is appropriate. Counsel to the
depositor will not deliver any opinion on these questions. Prospective
purchasers to which such characterization of an investment in Grantor Trust
Strip Certificates is material should consult their tax advisors regarding
whether the Grantor Trust Strip Certificates, and the income therefrom, will be
so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
Taxation of Owners of Grantor Trust Fractional Interest Certificates.
General. Holders of a particular series of Grantor Trust Fractional Interest
Certificates generally will be required to report on their federal income tax
returns their shares of the entire income from the mortgage loans (including
amounts used to pay reasonable servicing fees and other expenses) and will be
entitled to deduct their shares of any such reasonable servicing fees and other
expenses. Because of stripped interests, market or original issue discount, or
premium, the amount includible in income on account of a Grantor Trust
Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the mortgage loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (1) 3% of the excess
of the individual's adjusted gross income over such amount or (2) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of Grantor Trust
Fractional Interest Certificates who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Under tax legislation enacted in
2001, this limitation on deductions under Section 68 will be phased out
beginning in 2006 and will be eliminated after 2009. Although it is not entirely
clear, it appears that in transactions in which multiple classes of Grantor
Trust Certificates
-121-
(including Grantor Trust Strip Certificates) are issued, such fees and expenses
should be allocated among the classes of Grantor Trust Certificates using a
method that recognizes that each such class benefits from the related services.
In the absence of statutory or administrative clarification as to the method to
be used, it currently is intended to base information returns or reports to the
IRS and Certificateholders on a method that allocates such expenses among
classes of Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (1) a class of Grantor
Trust Strip Certificates is issued as part of the same series of certificates or
(2) the depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on a mortgage asset. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. The
related prospectus supplement will include information regarding servicing fees
paid to a master servicer, a special servicer, any sub-servicer or their
respective affiliates.
If Stripped Bond Rules Apply. If the stripped bond rules apply, each Grantor
Trust Fractional Interest Certificate will be treated as having been issued with
"original issue discount" within the meaning of Section 1273(a) of the Code,
subject, however, to the discussion below regarding the treatment of certain
stripped bonds as market discount bonds and the discussion regarding de minimis
market discount. See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--Market Discount" below. Under the stripped bond rules, the holder
of a Grantor Trust Fractional Interest Certificate (whether a cash or accrual
method taxpayer) will be required to report interest income from its Grantor
Trust Fractional Interest Certificate for each month in an amount equal to the
income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser of the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest", if any, as well as such certificate's share of reasonable servicing
fees and other expenses. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest". In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "--Sales of Grantor Trust Certificates" below) and the yield of such
Grantor Trust Fractional Interest Certificate to such holder. Such yield would
be computed as the rate (compounded based on the regular interval between
payment dates) that, if used to discount the holder's share of future payments
on the mortgage loans, would cause the present value of those future payments to
equal the price at which the holder purchased such Certificate. In computing
yield under the stripped bond rules, a Certificateholder's share of future
payments on the mortgage loans will not include any payments made in respect of
any ownership interest in the mortgage loans retained by the depositor, the
master servicer, the special servicer, any sub-servicer or their respective
affiliates, but will include such Certificateholder's share of any reasonable
servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (1) the use of a reasonable
prepayment assumption in accruing original issue discount and (2) adjustments in
the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a reasonable prepayment assumption may be required or permitted without
reliance on these rules. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Fractional
Interest Certificate or, with respect to any holder, at the time of purchase of
the Grantor Trust Fractional Interest Certificate by that holder.
Certificateholders are advised to consult their tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
-122-
In the case of a Grantor Trust Fractional Interest Certificate acquired at a
price equal to the principal amount of the mortgage loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a mortgage loan prepays in
full, the holder of a Grantor Trust Fractional Interest Certificate acquired at
a discount or a premium generally will recognize ordinary income or loss equal
to the difference between the portion of the prepaid principal amount of the
mortgage loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the mortgage loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. See "--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" above. It is
unclear whether any other adjustments would be required to reflect differences
between an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is currently
intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
Prepayment Assumption that will be disclosed in the related prospectus
supplement and on a constant yield computed using a representative initial
offering price for each class of certificates. However, neither the depositor
nor any other person will make any representation that the mortgage loans will
in fact prepay at a rate conforming to such Prepayment Assumption or any other
rate and Certificateholders should bear in mind that the use of a representative
initial offering price will mean that such information returns or reports, even
if otherwise accepted as accurate by the IRS, will in any event be accurate only
as to the initial Certificateholders of each series who bought at that price.
In light of the application of Section 1286 of the Code, a beneficial owner
of a stripped bond generally will be required to compute accruals of original
issue discount based on its yield, possibly taking into account its own
prepayment assumption. The information necessary to perform the related
calculations for information reporting purposes, however, generally will not be
available to the trustee. Accordingly, any information reporting provided by the
trustee with respect to these stripped bonds, which information will be based on
pricing information as of the closing date, will largely fail to reflect the
accurate accruals of original issue discount for these certificates. Prospective
investors therefore should be aware that the timing of accruals of original
issue discount applicable to a stripped bond generally will be different than
that reported to holders and the IRS. Prospective investors should consult their
own tax advisors regarding their obligation to compute and include in income the
correct amount of original issue discount accruals and any possible tax
consequences to them if they should fail to do so.
Under Treasury regulations Section 1.1286-1, certain stripped bonds are to be
treated as market discount bonds and, accordingly, any purchaser of such a bond
is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (1) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (2) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the mortgage loans, the related prospectus supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the mortgage loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates--If Stripped Bond Rules Do Not Apply" and
"--Market Discount" below.
If Stripped Bond Rules Do Not Apply. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be
-123-
required to report its share of the interest income on the mortgage loans in
accordance with such Certificateholder's normal method of accounting. The
original issue discount rules will apply, even if the stripped bond rules do not
apply, to a Grantor Trust Fractional Interest Certificate to the extent it
evidences an interest in mortgage loans issued with original issue discount.
The original issue discount, if any, on the mortgage loans will equal the
difference between the stated redemption price of such mortgage loans and their
issue price. For a definition of "stated redemption price," see "--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount" above. In
general, the issue price of a mortgage loan will be the amount received by the
borrower from the lender under the terms of the mortgage loan, less any "points"
paid by the borrower, and the stated redemption price of a mortgage loan will
equal its principal amount, unless the mortgage loan provides for an initial
"teaser," or below-market interest rate. The determination as to whether
original issue discount will be considered to be de minimis will be calculated
using the same test as in the REMIC discussion. See "--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount" above.
In the case of mortgage loans bearing adjustable or variable interest rates,
the related prospectus supplement will describe the manner in which such rules
will be applied with respect to those mortgage loans by the trustee or master
servicer, as applicable, in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all original
issue discount with respect to a mortgage loan will be required to be accrued
and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related prospectus
supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to mortgage loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that purchases
such Grantor Trust Fractional Interest Certificate at a cost less than such
certificate's allocable portion of the aggregate remaining stated redemption
price of the mortgage loans held in the related trust fund will also be required
to include in gross income such certificate's daily portions of any original
issue discount with respect to such mortgage loans. However, each such daily
portion will be reduced, if the cost of such Grantor Trust Fractional Interest
Certificate to such purchaser is in excess of such Certificate's allocable
portion of the aggregate "adjusted issue prices" of the mortgage loans held in
the related trust fund, approximately in proportion to the ratio such excess
bears to such Certificate's allocable portion of the aggregate original issue
discount remaining to be accrued on such mortgage loans. The adjusted issue
price of a mortgage loan on any given day equals the sum of (1) the adjusted
issue price (or, in the case of the first accrual period, the issue price) of
such mortgage loan at the beginning of the accrual period that includes such day
and (2) the daily portions of original issue discount for all days during such
accrual period prior to such day. The adjusted issue price of a mortgage loan at
the beginning of any accrual period will equal the issue price of such mortgage
loan, increased by the aggregate amount of original issue discount with respect
to such mortgage loan that accrued in prior accrual periods, and reduced by the
amount of any payments made on such mortgage loan in prior accrual periods of
amounts included in its stated redemption price.
Unless otherwise provided in the related prospectus supplement, the trustee
or master servicer, as applicable, will provide to any holder of a Grantor Trust
Fractional Interest Certificate such information as such holder may reasonably
request from time to time with respect to original issue discount accruing on
Grantor Trust Fractional Interest Certificates. See "--Grantor Trust Reporting"
below.
Market Discount. If the stripped bond rules do not apply to a Grantor Trust
Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a mortgage loan is considered to have been purchased at a "market
discount", that is, in the case of a mortgage loan issued without original issue
discount, at a
-124-
purchase price less than its remaining stated redemption price (as defined
above), or in the case of a mortgage loan issued with original issue discount,
at a purchase price less than its adjusted issue price (as defined above). If
market discount is in excess of a de minimis amount (as described below), the
holder generally will be required to include in income in each month the amount
of such discount that has accrued (under the rules described in the next
paragraph) through such month that has not previously been included in income,
but limited, in the case of the portion of such discount that is allocable to
any mortgage loan, to the payment of stated redemption price on such mortgage
loan that is received by (or, in the case of accrual basis Certificateholders,
due to) the trust fund in that month. A Certificateholder may elect to include
market discount in income currently as it accrues (under a constant yield method
based on the yield of the Certificate to such holder) rather than including it
on a deferred basis in accordance with the foregoing under rules similar to
those described in "--Taxation of Owners of REMIC Regular Interests--Market
Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period market discount on the mortgage loans should accrue, at the
holder's option: (1) on the basis of a constant yield method, (2) in the case of
a mortgage loan issued without original issue discount, in an amount that bears
the same ratio to the total remaining market discount as the stated interest
paid in the accrual period bears to the total stated interest remaining to be
paid on the mortgage loan as of the beginning of the accrual period, or (3) in
the case of a mortgage loan issued with original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining at the beginning of the accrual period. The prepayment
assumption, if any, used in calculating the accrual of original issue discount
is to be used in calculating the accrual of market discount. The effect of using
a prepayment assumption could be to accelerate the reporting of such discount
income. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect such regulations might have on
the tax treatment of a mortgage loan purchased at a discount in the secondary
market.
Because the mortgage loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to mortgage loans may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described above in "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above within the exception that it is
less likely that a prepayment assumption will be used for purposes of such rules
with respect to the mortgage loans.
Further, under the rules described above in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount", any discount that is not original
issue discount and exceeds a de minimis amount may require the deferral of
interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the mortgage loans.
Premium. If a Certificateholder is treated as acquiring the underlying
mortgage loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to mortgage loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to mortgage loans originated before September 28, 1985 or to mortgage
loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the mortgage loan and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a mortgage loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss equal to the difference between
the portion of the prepaid principal amount of the mortgage loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the mortgage loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
-125-
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption and the actual rate of prepayments.
Taxation of Owners of Grantor Trust Strip Certificates. The "stripped coupon"
rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates--If Stripped Bond Rules Apply", no
regulations or published rulings under Section 1286 of the Code have been issued
and some uncertainty exists as to how it will be applied to securities such as
the Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust
Strip Certificates should consult their tax advisors concerning the method to be
used in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons", although they provide
general guidance as to how the original issue discount sections of the Code will
be applied. In addition, the discussion below is subject to the discussion under
"--Possible Application of Proposed Contingent Payment Rules" below and assumes
that the holder of a Grantor Trust Strip Certificate will not own any Grantor
Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount will
be required to be accrued in each month on the Grantor Trust Strip Certificates
based on a constant yield method. In effect, each holder of Grantor Trust Strip
Certificates would include as interest income in each month an amount equal to
the product of such holder's adjusted basis in such Grantor Trust Strip
Certificate at the beginning of such month and the yield of such Grantor Trust
Strip Certificate to such holder. Such yield would be calculated based on the
price paid for that Grantor Trust Strip Certificate by its holder and the
payments remaining to be made thereon at the time of the purchase, plus an
allocable portion of the servicing fees and expenses to be paid with respect to
the mortgage loans. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related prospectus supplement and on a constant
yield computed using a representative initial offering price for each class of
certificates. However, neither the depositor nor any other person will make any
representation that the mortgage loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price. Prospective
purchasers of the Grantor Trust Strip Certificates are encouraged to consult
their tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a mortgage
loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete mortgage loans, or if the Prepayment
Assumption
-126-
is not used, then when a mortgage loan is prepaid, the holder of a Grantor Trust
Strip Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of the Grantor Trust Strip Certificate that is allocable to
such mortgage loan.
Possible Application of Contingent Payment Rules. The coupon stripping rules'
general treatment of stripped coupons is to regard them as newly issued debt
instruments in the hands of each purchaser. To the extent that payments on the
Grantor Trust Strip Certificates would cease if the mortgage loans were prepaid
in full, the Grantor Trust Strip Certificates could be considered to be debt
instruments providing for contingent payments. Under the OID Regulations, debt
instruments providing for contingent payments are not subject to the same rules
as debt instruments providing for noncontingent payments. Treasury Department
regulations have been promulgated regarding contingent payment debt instruments,
but it appears that Grantor Trust Strip Certificates, due to their similarity to
other mortgage-backed securities (such as REMIC regular interests and debt
instruments subject to Section 1272(a)(6) of the Code) that are expressly
excepted from the application of such Regulations, may also be excepted from
such regulations. Like the OID Regulations, the contingent payment regulations
do not specifically address securities, such as the Grantor Trust Strip
Certificates, that are subject to the stripped bond rules of Section 1286 of the
Code.
If the contingent payment rules similar to those under the OID Regulations
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to apply a "noncontingent bond method." Under the "noncontingent bond method,"
the issuer of a Grantor Trust Strip Certificate determines a projected payment
schedule. Holders of Grantor Trust Strip Certificates are bound by the issuer's
projected payment schedule. The projected payment schedule consists of all
noncontingent payments and a projected amount for each contingent payment based
on the comparable yield (as described below) of the Grantor Trust Strip
Certificate. The projected amount of each payment is determined so that the
projected payment schedule reflects the projected yield. The projected amount of
each payment must reasonably reflect the relative expected values of the
payments to be received by the holders of a Grantor Trust Strip Certificate. The
comparable yield referred to above is a rate that, as of the issue date,
reflects the yield at which the issuer would issue a fixed rate debt instrument
with terms and conditions similar to the contingent payment debt instrument,
including general market conditions, the credit quality of the issuer, and the
terms and conditions of the mortgage loans. The holder of a Grantor Trust Strip
Certificate would be required to include as interest income in each month the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period multiplied by the comparable yield.
Certificateholders should consult their tax advisors concerning the possible
application of the contingent payment rules to the Grantor Trust Strip
Certificates.
Sales of Grantor Trust Certificates. Any gain or loss, equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange of
a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Certificate. The Code as of the date of this prospectus generally provides for
tax rates of non-corporate taxpayers on ordinary income that are higher than the
rates on long-term capital gains (generally, property held for more than one
year). No such rate differential exists for corporations. In addition, the
distinction between a capital gain or loss and ordinary income or loss remains
relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be partially or
wholly ordinary and not capital in certain circumstances. Gain attributable to
accrued and unrecognized market discount will be treated as ordinary income, as
will gain or loss recognized by banks and other financial institutions subject
to Section 582(c) of the Code. Furthermore, a portion of any gain that might
otherwise be capital gain may be treated as ordinary income to the extent that
the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount
-127-
of interest that would have accrued on the taxpayer's net investment at 120% of
the appropriate "applicable Federal rate" (which rate is computed and published
monthly by the IRS) at the time the taxpayer enters into the conversion
transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for that taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Grantor Trust Reporting. Unless otherwise provided in the related prospectus
supplement, the trustee or master servicer, as applicable, will furnish to each
holder of a Grantor Trust Certificate with each distribution a statement setting
forth the amount of such distribution allocable to principal on the underlying
mortgage loans and to interest thereon at the related pass-through rate. In
addition, the trustee or master servicer, as applicable, will furnish, within a
reasonable time after the end of each calendar year, to each holder of a Grantor
Trust Certificate who was such a holder at any time during such year,
information regarding the amount of servicing compensation received by the
master servicer, the special servicer or any sub-servicer, and such other
customary factual information as the depositor or the reporting party deems
necessary or desirable to enable holders of Grantor Trust Certificates to
prepare their tax returns and will furnish comparable information to the IRS as
and when required by law to do so. Because the rules for accruing discount and
amortizing premium with respect to the Grantor Trust Certificates are uncertain
in various respects, there is no assurance the IRS will agree with the trustee's
or master servicer's, as the case may be, information reports of such items of
income and expense. Moreover, such information reports, even if otherwise
accepted as accurate by the IRS, will in any event be accurate only as to the
initial Certificateholders that bought their certificates at the representative
initial offering price used in preparing such reports.
Backup Withholding. In general, the rules described above in
"--REMICs--Backup Withholding with Respect to REMIC Certificates" will also
apply to Grantor Trust Certificates.
Foreign Investors. In general, the discussion with respect to REMIC Regular
Certificates in "--REMICs--Foreign Investors in REMIC Certificates" above
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, unless otherwise disclosed in the related prospectus supplement, be
eligible for exemption from U.S. withholding tax, subject to the conditions
described in such discussion, only to the extent the related mortgage loans were
originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
nonresident alien individual.
On June 20, 2002, the IRS 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 Regulations Section 301.7701-4(c), in which any interest is held
by a middleman, which includes, but is not limited to (i) a custodian of a
person's account, (ii) a nominee and (iii) 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 passed and the regulations have not
been finalized. It is unclear when, or if, these regulations will become final.
Reportable Transactions
Any holder of an offered certificate that reports any item or items of
income, gain, expense, or loss in respect of that certificate for tax purposes
in an amount that differs from the amount reported for book purposes by more
than $10 million, on a gross basis, in any taxable year may be subject to
certain disclosure requirements for "reportable transactions." Prospective
investors are encouraged to consult their tax advisers concerning any possible
tax return disclosure obligation with respect to the offered certificates.
-128-
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 and local tax law may differ substantially from the
corresponding federal law, and the discussion above does not purport to describe
any aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors are encouraged to consult their tax advisors with respect
to the various tax consequences of investments in the offered certificates.
CERTAIN ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended, and the Code
impose certain requirements on retirement plans, and on certain other employee
benefit plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts
(and as applicable, insurance company general accounts) in which such plans,
accounts or arrangements are invested that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code ("Plans"), and
on persons who are fiduciaries with respect to such Plans, in connection with
the investment of Plan assets. Certain employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)), and, if no election has
been made under Section 410(d) of the Code, church plans (as defined in Section
3(33) of ERISA) are not subject to ERISA requirements. However, such plans may
be subject to the provisions of other applicable federal and state law
materially similar to ERISA or the Code. Moreover, 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 who have certain specified relationships to the Plan, unless a statutory
or administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code or a penalty imposed pursuant to Section
502(i) of ERISA, unless a statutory or administrative exemption is available.
These prohibited transactions generally are set forth in Section 406 of ERISA
and Section 4975 of the Code.
Plan Asset Regulations
A Plan's investment in offered certificates may cause the underlying mortgage
assets and other assets included in a related trust fund to be deemed assets of
such Plan. The Plan Asset Regulations provide that when a Plan acquires an
equity interest in an entity, the Plan's assets include both such equity
interest and an undivided interest in each of the underlying assets of the
entity, unless certain exceptions not applicable here apply, or unless the
equity participation in the entity by "benefit plan investors" (i.e., Plans and
certain employee benefit plans not subject to ERISA) is not "significant", both
as defined in the Plan Asset Regulations. 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.
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
-129-
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" Ginnie Mae, Freddie Mac, Farmer Mac and Fannie Mae
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 certificates if such MBS are included in the trust fund.
The DOL has granted to certain underwriters administrative exemptions, each
an "Exemption", for certain mortgage-backed and asset-backed certificates
underwritten in whole or in part by the underwriters. An Exemption might be
applicable to the initial purchase, the holding, and the subsequent resale by a
Plan of certain certificates, such as the offered certificates, underwritten by
the underwriters, representing interests in pass-through trusts that consist of
certain receivables, loans and other obligations; provided that the conditions
and requirements of the Exemption are satisfied. The loans described in the
Exemptions include mortgage loans such as the mortgage assets. However, it
should be noted that in issuing the Exemptions, the DOL may not have considered
interests in pools of the exact nature as some of the offered certificates. If
all of the conditions of an Exemption are met, whether or not a Plan's assets
would be deemed to include an ownership interest in the mortgage assets, the
acquisition, holding and resale of the offered certificates by Plans would be
exempt from certain of the prohibited transaction provisions of ERISA and the
Code.
Insurance Company General Accounts
Sections I and III of PTCE 95-60 exempt from the application of the
prohibited transaction provisions of Sections 406(a), 406(b) and 407(a) of ERISA
and Section 4975 of the Code transactions in connection with the servicing,
management and operation of a trust (such as the trust) in which an insurance
company general account has an interest as a result of its acquisition of
certificates issued by the trust; provided that certain conditions are
satisfied. If these conditions are met, insurance company general accounts would
be allowed to purchase certain classes of certificates which do not meet the
requirements of any of the Exemptions solely because they (1) are subordinated
to other classes of certificates in the trust and/or (2) have not received a
rating at the time of the acquisition in one of the four highest rating
categories from a nationally recognized statistical rating agency. All other
conditions of one of the Exemptions would have to be satisfied in order for PTCE
95-60 to be available. Before purchasing such class of certificates, an
insurance company general account seeking to rely on Sections I and III of PTCE
95-60 should itself confirm that all applicable conditions and other
requirements have been satisfied.
The Small Business Job Protection Act of 1996 added a new Section 401(c) to
ERISA, which provides certain exemptive relief from the provisions of Part 4 of
Title I of ERISA and Section 4975 of the Code, including the prohibited
transaction restrictions imposed by ERISA and the related excise taxes imposed
by the Code, for transactions involving an insurance company general account.
Pursuant to Section 401(c) of ERISA, the DOL has issued final regulations
providing guidance for the purpose of determining, in cases where insurance
policies supported by an insurer's general account are issued to or for the
benefit of a Plan on or before December 31, 1998, which general account assets
constitute Plan assets. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the offered certificates should consult with their
legal counsel with respect to the applicability of Section 401(c) of ERISA.
-130-
Consultation With Counsel
Any Plan fiduciary which proposes to purchase offered certificates on behalf
of or with assets of a Plan should consider its general fiduciary obligations
under ERISA and should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and the availability of
any prohibited transaction exemption in connection with any planned purchase.
Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section 501 of
the Code nonetheless will be subject to federal income taxation to the extent
that its income is "unrelated business taxable income" within the meaning of
Section 512 of the Code. All "excess inclusions" of a REMIC allocated to a REMIC
Residual Certificate held by a Plan will be considered unrelated business
taxable income and thus will be subject to federal income tax. See "Certain
Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions".
LEGAL INVESTMENT
If so specified in the related prospectus supplement, certain classes of the
offered certificates will constitute "mortgage related securities" for purposes
of SMMEA. Generally, the only classes of the offered certificates which will
qualify as "mortgage related securities" will be those that (1) are rated in one
of two highest rating categories by at least one nationally recognized
statistical rating organization; and (2) are part of a series evidencing
interests in a trust fund consisting of loans originated by certain types of
originators specified in SMMEA and secured by first liens on real estate. The
appropriate characterization of those offered 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 offered 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 offered certificates qualifying as "mortgage related
securities" will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities, including
depository institutions, insurance companies, 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 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 before the October
3, 1991 cutoff for those enactments, limiting to various 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, offered certificates satisfying the rating and qualified originator
requirements for "mortgage related securities," but evidencing interests in a
trust fund consisting, in whole or in part, of first liens on one or more
parcels of real estate upon which are located one or more commercial structures,
states were authorized to enact legislation, on or before September 23, 2001,
specifically referring to Section 347 and prohibiting or restricting the
purchase, holding or investment by state-regulated entities in those types of
offered certificates. Accordingly, the investors affected by any state
legislation overriding the preemptive effect of SMMEA will be authorized to
invest in offered certificates qualifying as "mortgage related securities" only
to the extent provided in that 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
-131-
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. Section 24 (Seventh), subject in
each case to those regulations as the applicable federal regulatory authority
may prescribe. In this connection, 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. Section 1.5 concerning
"safety and soundness" and retention of credit information), certain "Type IV
securities," defined in 12 C.F.R. Section 1.2(m) to include certain "commercial
mortgage-related securities" and "residential mortgage-related securities." As
so defined, "commercial mortgage-related security" and "residential
mortgage-related security" mean, in relevant part, "mortgage related security"
within the meaning of SMMEA; provided that, in the case of a "commercial
mortgage-related security," it "represents ownership of a promissory note or
certificate of interest or participation that is directly secured by a first
lien on one or more parcels of real estate upon which one or more commercial
structures are located and that is fully secured by interests in a pool of loans
to numerous obligors." In the absence of any rule or administrative
interpretation by the OCC defining the term "numerous obligors," no
representation is made as to whether any of the offered certificates will
qualify as "commercial mortgage-related securities," and thus as "Type IV
securities," for investment by national banks. The National Credit Union
Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part 703, which
permit federal credit unions to invest in "mortgage related securities", other
than stripped mortgage related securities (unless the credit union complies with
the requirements of 12 C.F.R. Section 703.16(e) for investing in those
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. Section 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. Section 742.4(b)(2). 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
offered certificates.
All depository institutions considering an investment in the offered
certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" of the Federal Financial
Institutions Examination Council, which has been adopted by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the OCC and the OTS, effective May 26, 1998, and by the NCUA,
effective October 1, 1998. That 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.
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 offered certificates, as
certain series or classes may be deemed unsuitable investments, or may otherwise
be restricted, under those rules, policies or guidelines (in certain instances
irrespective of SMMEA).
The foregoing does not take into consideration the applicability of statutes,
rules, regulations, orders, guidelines or agreements generally governing
investments made by a particular investor, including, but not limited to,
"prudent investor" provisions, percentage-of-assets limits, provisions which may
restrict or prohibit investment in securities which are not "interest-bearing"
or "income-paying," and, with regard to any offered certificates issued in
book-entry form, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Except as to the status of certain classes of offered certificates as
"mortgage related securities," no representations are made as to the proper
characterization of the offered certificates for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase offered certificates under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the offered certificates) may
adversely affect the liquidity of the offered certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the offered certificates of any class or
series constitute legal investments or
-132-
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 trust assets 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
re-offering by underwriters, which may include Banc of America Securities
LLC, an affiliate of the depositor;
2. By placements by the depositor with institutional investors through
dealers; and
3. By direct placements by the depositor with institutional investors, in
which event the Depositor will be an underwriter with respect to the
Certificates; and
4. By inclusion as underlying securities backing another series of
mortgage pass-through certificates issued by an entity of which the Depositor
or an affiliate of the Depositor may act as the depositor. In the event that
the Depositor or an affiliate of the Depositor acts as depositor with respect
to the other series of mortgage pass-through certificates, the Depositor or
its affiliate will be an underwriter with respect to the underlying
securities.
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 from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Such underwriters may be
broker-dealers affiliated with the depositor whose identities and relationships
to the depositor will be as set forth in the related prospectus supplement. The
managing underwriter or underwriters with respect to the offer and sale of
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 will 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 will be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended.
-133-
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
to such liabilities.
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.
If specified in the prospectus supplement relating to a series of
Certificates, the Depositor or any of its affiliates may purchase some or all of
one or more Classes of Certificates of the series from the underwriter or
underwriters at a price specified or described in the prospectus supplement.
This party may then, from time to time, offer and sell, pursuant to this
prospectus, some or all of the Certificates it purchased directly, through one
or more underwriters to be designated at the time of the offering of the
Certificates or through dealers acting as agent and/or principal. Any of these
offerings may be restricted in the matter specified in the applicable prospectus
supplement. These transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices. The underwriters and
dealers participating in the purchaser's offering of Certificates may receive
compensation in the form of underwriting discounts or commissions from the
purchaser and these dealers may receive commissions from the investors
purchasing Certificates for whom they may act as agent (which discounts or
commissions will not exceed those customary in those types of transactions). Any
dealer that participates in the distribution of these Certificates will be an
"underwriter" within the meaning of the Securities Act, and any commissions and
discounts received by a dealer and any profit on the resale of these
Certificates by a dealer will be underwriting discounts and commissions under
the Securities Act.
LEGAL MATTERS
Certain legal matters relating to the certificates will be passed upon for
the depositor by Cadwalader, Wickersham & Taft LLP. Certain legal matters
relating to the certificates will be passed upon for the underwriter by the
counsel described in the related prospectus supplement under "Legal Matters".
Certain federal income tax matters and other matters will be passed upon for the
depositor by Cadwalader, Wickersham & Taft LLP.
RATING
It is a condition to the issuance of any class of offered certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one rating agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders of all collections on the underlying mortgage assets to
which such holders are entitled. These ratings address the structural, legal and
issuer-related aspects associated with such certificates, the nature of the
underlying mortgage assets and the credit quality of the guarantor, if any.
Ratings on mortgage pass-through certificates do not represent any assessment of
the likelihood of principal prepayments by borrowers or of the degree by which
such prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of Stripped Interest Certificates 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.
-134-
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.
AVAILABLE INFORMATION
The depositor 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 or in 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 Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public Reference
Section, 100 F Street, N.E., Washington, D.C. 20549, and at its Midwest Regional
Offices located as follows: Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an internet site that contains reports, proxy and information
statements, and other information that has been filed electronically with the
SEC. The Internet address is http://www.sec.gov.
No dealer, salesman, or other person has been authorized to give any
information, or to make any representations, other than those contained in this
prospectus or any related prospectus supplement, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the depositor or any other person. Neither the delivery of this prospectus or
any related prospectus supplement nor any sale made under this prospectus or any
related prospectus supplement shall under any circumstances create an
implication that there has been no change in the information in this prospectus
since the date of this prospectus or in such prospectus supplement since the
date of the prospectus supplement. This prospectus and any related prospectus
supplement are not an offer to sell or a solicitation of an offer to buy any
security in any jurisdiction in which it is unlawful to make such offer or
solicitation.
The master servicer, the trustee or another specified person will cause to be
provided to registered holders of the offered certificates of each series
periodic unaudited reports concerning the related trust fund. If beneficial
interests in a class or series of offered certificates are being held and
transferred in book-entry format through the facilities of The DTC as described
in this prospectus, then unless otherwise provided in the related prospectus
supplement, such reports will be sent on behalf of the related trust fund to a
nominee of DTC as the registered holder of the offered certificates. Conveyance
of notices and other communications by DTC to its participating organizations,
and directly or indirectly through such participating organizations to the
beneficial owners of the applicable offered certificates, will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time. See "Description of the
Certificates--Reports to Certificateholders" and "--Book-Entry Registration and
Definitive Certificates".
The depositor 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 and the rules and regulations of the
Securities and Exchange Commission. The depositor intends to make a written
request to the staff of the Securities and Exchange Commission that the staff
either (1) issue an order pursuant to Section 12(h) of the Securities Exchange
Act of 1934, as amended, exempting the depositor from certain reporting
requirements under the Securities Exchange Act of 1934, as amended, with respect
to each trust fund or (2) state that the staff will not recommend that the
Commission take enforcement action if the depositor fulfills its reporting
obligations as described in its written request. If such request is granted, the
depositor will file or cause to be filed with the Securities and Exchange
Commission as to each trust fund the periodic unaudited reports to holders of
the offered certificates referenced in the preceding paragraph; however, because
of the nature of the trust funds, it is unlikely that any significant additional
information will be filed. In addition, because of the limited number of
certificateholders expected for each series, the depositor anticipates that a
significant portion of such reporting requirements will be permanently suspended
following the first fiscal year for the related trust fund.
-135-
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The depositor hereby incorporates by reference all documents and reports
filed or caused to be filed by the depositor with respect to a trust fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, prior to the termination of an offering of offered
certificates evidencing interests in that trust fund. The depositor will provide
or cause to be provided without charge to each person to whom this prospectus is
delivered in connection with the offering of one or more classes of offered
certificates, upon written or oral request of such person, a copy of any or all
documents or reports incorporated in this prospectus 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).
Such requests to the depositor should be directed in writing to its principal
executive offices at 214 North Tryon Street, Charlotte, North Carolina 28255, or
by telephone at (704) 386-8509.
GLOSSARY
The following capitalized terms will have the respective meanings assigned to
them in this "Glossary" section whenever they are used in this prospectus.
"401(c) Regulations" means those regulations issued by the DOL which provide
guidance for the purpose of determining, in cases where insurance policies
supported by an insurer's general account are issued to or for the benefit of a
Plan on or before December 31, 1998, which general account assets constitute
Plan assets.
"Accrued Certificate Interest" means for each Distribution Date an amount
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.
"Accrual Certificates" means one or more classes of certificates that may not
be entitled to distributions of interest until the occurrence of certain events,
such as the retirement of one or more other classes of certificates.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"Available Distribution Amount" means unless otherwise provided in the
related prospectus supplement for any series of certificates and any
Distribution Date the total of all payments or other collections (or advances in
lieu of such collections and advances) 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.
"Bankruptcy Code" means the U.S. Bankruptcy Code.
"CERCLA" means the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended.
"Certificate Account" means for the trust fund one or more 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 this
prospectus and the related prospectus supplement.
"Certificate Balance" means the initial stated principal amount of each
individual class of certificates for a given series other than real estate
mortgage investment conduit residual certificates or certain classes of stripped
interest certificates.
"Certificate Owner" means the actual purchaser of a book-entry certificate.
"Closing Date" means date of the initial issuance of the certificates of a
given series.
"Code" means the Internal Revenue Code of 1986, as amended.
-136-
"Commercial Property" means office buildings, retail stores and
establishments, hotels or motels, nursing homes, hospitals or other health
care-related facilities, recreational vehicle and mobile home parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
plants, parking lots, entertainment or sports arenas, restaurants, marinas,
mixed use or various other types of income-producing properties or unimproved
land comprising some or all of the mortgaged properties included in the trust
fund.
"Committee Report" means the Conference Committee Report accompanying the Tax
Reform Act of 1986.
"Companion Class" means one or more classes of certificate where
distributions of principal with respect to one or more other classes of
certificates 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.
"Controlled Amortization Class" means one or more classes of certificates
where distributions of principal may be made, subject to available funds, based
on a specified principal payment schedule.
"CPR" means the constant prepayment rate model representing 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 mortgage loans.
"Cut-off Date" means the specified date initial aggregate outstanding
principal balance of the related mortgage assets as of a specified date.
"Debt Service Coverage Ratio" means at any given time for a mortgage loan 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 to it that are secured by the
related mortgaged property.
"Determination Date" means the date upon which that all scheduled payments on
the mortgage loans in the trust fund are received or advanced by the master
servicer, special servicer or other specified person will be distributed to
certificateholders of the related series on the next succeeding Distribution
Date.
"Direct Participant" means the securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations
that maintain accounts with DTC.
"Distribution Date" means the date as described in the prospectus supplement
upon which distributions on or with respect to the certificates will be made.
"DOL" means the United States Department of Labor.
"DTC" means The Depository Trust Company.
"Due Date" means a specified date upon which scheduled payments of interest,
principal or both are to be made under a mortgage loan and may occur monthly,
quarterly, semi-annually or annually.
"Due Period" means a specified time period (generally corresponding in length
to the period between Distribution Dates).
"Equity Participation" means a provision under a mortgage loan 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.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Funds" means in general that portion of the amounts distributable in
respect of the certificates of any series on any Distribution Date that
represent--
-137-
o interest received or advanced on the mortgage assets in the 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 trust fund that do not
constitute payments of interest or principal.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fannie Mae" means Federal National Mortgage Association.
"Freddie Mac" means Federal Home Loan Mortgage Corporation.
"Garn Act" means the Garn-St Germain Depository Institutions Act of 1982.
"Ginnie Mae" means Governmental National Mortgage Association.
"Grantor Trust Certificates" means certificates in a trust treated as a
grantor trust under applicable provisions of the Code.
"Grantor Trust Fractional Interest Certificate" means a Grantor Trust
Certificate representing an undivided equitable ownership interest in the
principal of the mortgage loans constituting the related Grantor Trust Fund,
together with interest at a pass-through rate.
"Grantor Trust Fund" means that portion of the trust fund as to which no
REMIC election has been made.
"Grantor Trust Strip Certificate" means a Grantor Trust Certificate
representing ownership of all or a portion of the difference between interest
paid on the mortgage loans constituting the related Grantor Trust Fund (net of
normal administration fees) and interest paid to the holders of Grantor Trust
Fractional Interest Certificates issued with respect to such Grantor Trust Fund.
"Indirect Participant" means those banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly.
"Insurance and Condemnation Proceeds" means proceeds applied to the
restoration of a mortgaged property or released to the related borrower in
connection with the full or partial condemnation of such mortgaged property.
"IRS" means the Internal Revenue Service.
"Issue Premium" means, in the case of a class of REMIC Regular Certificates
issued at a price in excess of the stated redemption price of that class, the
amount of such excess.
"Liquidation Proceeds" means all proceeds received under any hazard, title or
other insurance policy (other than Insurance and Condemnation Proceeds) and all
other amounts received and retained in connection with the liquidation of
defaulted mortgage loans or property acquired in respect of such defaulted
mortgage loans, by foreclosure or otherwise.
"Loan-to-Value Ratio" means for a mortgage loan the ratio (expressed as a
percentage) of --
o the then outstanding principal balance of the mortgage loan and any other
loans senior that are secured by the related mortgaged property to
o 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 the mortgage loan.
"Lock-out Period" means the period in which prepayments are prohibited under
a mortgage loan.
"MBS" means mortgage participations, pass-through certificates or other
mortgage-backed securities that may comprise the assets of the trust fund.
-138-
"MERS" means Mortgage Electronic Registration Systems, Inc.
"Mortgage Asset Seller" means the entity from whom the depositor purchased a
mortgage asset either directly or indirectly, included in the trust fund. The
Mortgage Asset Seller may or may not be the originator of the related mortgage
loan or the issuer of the MBS and may be an affiliate of the depositor.
"Mortgage Rate" means the rate at which a mortgage loan accrues interest
which may be fixed over its term or that adjusts from time to time, converted at
the borrower's election from an adjustable to a fixed rate, or from a fixed to
an adjustable rate.
"Multifamily Properties" means 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 comprising some or
all of the mortgaged properties included in the trust fund.
"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 noncash 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.
"NCUA" means the National Credit Union Administration.
"Notional Amount" means the amount upon which a Stripped Interest Certificate
is calculated to accrue interest which 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.
"OCC" means the Office of the Comptroller of the Currency.
"OID Regulations" means the Treasury Department regulations issued under
Sections 1271-1273 and 1275 of the Code.
"OTS" means the Office of Thrift Supervision.
"Parties in Interest" means "parties in interest" as defined in ERISA and
"disqualified person" as defined in Section 4975 of the Code.
"Percentage Interest" means the undivided percentage interest represented by
an offered certificate of a particular class which 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.
"Permitted Investments" means government securities and other obligations
that are acceptable to each rating agency that has rated any one or more classes
of certificates of the related series into which funds from the Certificate
Account may be invested.
"Plan" means retirement plans, and on certain other employee benefit plans
and arrangements, including individual retirement accounts, individual
retirement annuities, Keogh plans and collective investment funds and separate
accounts (and as applicable, insurance company general accounts) in which such
plans, accounts or arrangements are invested that are subject to the fiduciary
responsibility provisions of ERISA or Section 4975 of the Code.
-139-
"Plan Asset Regulations" means Section 2510.3-101 of the regulations issued
by the DOL, concerning what constitutes assets of a Plan.
"Pooling and Servicing Agreement" means pooling and servicing agreement or
other agreement specified in the related prospectus supplement pursuant to which
certificates of each series will be issued.
"Prepayment Assumption" means the prepayment assumption used in reporting
original issue discount for each series of REMIC Regular Certificates or, if
applicable, Grantor Trust Certificates, as disclosed in the related prospectus
supplement.
"Prepayment Interest Shortfall" means the result when 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
than the corresponding amount of interest accrued and otherwise payable on the
certificates of the related series.
"Prepayment Premium" means the payment of any premium or yield maintenance
charge in connection with certain prepayments under a mortgage loan.
"PTCE 95-60" means Prohibited Transaction Class Exemption 95-60.
"Purchase Price" means the price as specified in the prospectus supplement at
which a Mortgage Asset Seller will be required to repurchase a mortgage loan
under the conditions set forth in the prospectus supplement.
"Record Date" means last business day of the month preceding the month in
which the applicable Distribution Date occurs.
"Relief Act" means the Servicemembers Relief Act.
"REMIC" means a real estate mortgage investment conduit, within the meaning
of, and formed in accordance with, the REMIC Provisions of the Code.
"REMIC Certificates" means certificates representing interests in a trust
fund, or a portion of the trust fund, that the REMIC administrator will elect to
have treated as REMIC.
"REMIC Provisions" means Sections 860A through 860G of the Code.
"REMIC Regular Certificates" means certificates evidencing or constituting
ownership of "regular interests" in the trust fund or a designated portion of
the trust under the REMIC Provisions.
"REMIC Regulations" means the Treasury Department regulations issued under
the REMIC Provisions.
"REMIC Residual Certificateholder" means the holder of a REMIC Residual
Certificate.
"REMIC Residual Certificates" means certificates evidencing or constituting
ownership of "residual interests" in the trust or a designated portion of the
trust under the REMIC Provisions.
"REO Properties" means mortgaged properties acquired on behalf of the trust
fund through foreclosure, deed-in-lieu of foreclosure or otherwise.
"RICO" means the Racketeer Influenced and Corrupt Organizations statute.
"Senior Certificates" means certificates in a given series that are senior to
one or more other classes of certificates in entitlement to certain
distributions;
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
-140-
"SPA" means the standard prepayment assumption representing 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,.
"Stripped Interest Certificate" means those certificates entitled to
distributions of interest, with disproportionate, nominal or no distributions of
principal.
"Stripped Principal Certificate" means entitled to distributions of
principal, with disproportionate, nominal or no distributions of interest;
"Subordinate Certificates" means certificates in a given series that are
subordinate to one or more other classes of certificates in entitlement to
certain distributions;
"Tiered REMIC" means designated portions of the trust fund treated as two or
more REMICs.
"Treasury Department" means the United States Treasury Department.
"UCC" means for any jurisdiction the Uniform Commercial Code as in effect in
that jurisdiction.
"U.S. Person" means--
o a citizen or resident of the United States;
o a corporation or partnership created or organized in, or under the laws
of, the United States, any state or the District of Columbia, including
an entity treated as a corporation or partnership for federal income tax
purposes;
o an estate whose income is subject to United States federal income tax
purposes regardless of the source of its income; or
o a trust as to which--
1. a court in the United States is able to exercise primary supervision
over the administration of the trust, and
2. one or more United States persons have the authority to control all
substantial decisions of the trust.
In addition, to the extent provided in the Treasury Department
regulations, a trust will be a U.S. Person if it was in existence on August
20, 1996 and it elected to be treated as a U.S. Person.
"Voting Rights" means the voting rights evidenced by each series of
certificates.
"Warranting Party" means a party that makes certain representations and
warranties regarding the mortgage loans.
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........................$1,952,750.00
Legal Fees and Expenses..................................... 5,400,000.00
Accounting Fees and Expenses..................................2,400,000.00
Trustee's Fees and Expenses
(including counsel fees)................................. 720,000.00
Blue Sky Fees and Expenses......................................150,000.00
Printing and Engraving Fees................................. 3,000,000.00
Rating Agency Fees......................................... 28,800,000.00
Miscellaneous............................................... 1,500,000.00
Total ......................................................$43,922,750.00
Item 15. Indemnification of Directors and Officers
The pooling and servicing agreements will provide that no director,
officer, employee or agent of the registrant is liable to the trust fund or the
certificateholders referred to therein, except for such person's own willful
misfeasance, bad faith, gross negligence in the performance of duties or
reckless disregard of obligations and duties. The pooling and servicing
agreements will further provide that, with the exceptions stated above, a
director, officer, employee or agent of the registrant is entitled to be
indemnified against any loss, liability or expense incurred in connection with
legal action relating to such pooling and servicing agreements and related
certificates other than such expenses related to particular mortgage assets as
described therein.
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
from certain information furnished to the registrant by or on behalf of such
indemnifying party.
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, 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 reasonable 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 the
person
acted in any of the capacities set forth above, against expenses (including
attorneys' fees) actually and reasonably incurred by him 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 but in view of all the
circumstances of the case, 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 to the extent a present or former
director or officer of a corporation has been successful on the merits or
otherwise 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; that
indemnification or advancement of expenses provided for by Section 145 shall not
be deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled; and empowers the corporation to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation 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 any
liability asserted against such person and 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 liability
under Section 145.
The by-laws of the registrant provide, in effect, that to the extent
and under the circumstances permitted by applicable law, including subsections
(a) and (b) of Section 145 of the General Corporation Law of the State of
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 threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative 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
Exhibits --
1.1 - Form of Underwriting Agreement.
4.1(a) - Form of Pooling and Servicing Agreement.
4.1(b) - Form of Mortgage Loan Purchase and Sale Agreement.
5.1 - Opinion of Cadwalader, Wickersham & Taft LLP with respect to
legality.
8.1 - Opinion of Cadwalader, Wickersham & Taft LLP with respect to
certain tax matters (to be included with Exhibit 5.1).
23.2 - Consent of Cadwalader, Wickersham & Taft LLP (to be included
with Exhibit 5.1).
24.1 - Power of Attorney *.
- -------------------------
* Previously filed.
2
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(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:
(A) Paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply
if the registration statement is on Form S-8 (17 CFR ss. 239.16b), and the
information required to be included in a post-effective amendment by those
paragraphs is contained in reports filed with or furnished to the Commission by
the registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) that are incorporated by
reference in the registration statement; and
(B) Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section
do not apply if the registration statement is on Form S-3 (17 CFR ss. 239.13) or
Form F-3 (17 CFR ss. 239.33) and the information required to be included in a
post-effective amendment by those paragraphs is contained in reports filed with
or furnished to the Commission by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement, or is contained in a form of prospectus
filed pursuant to Rule 424(b) (17 CFR ss. 230.424(b)) that is part of the
registration statement.
(C) Provided further, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement is for an offering of
asset-backed securities on Form S-1 (17 CFR ss. 239.11) or Form S-3 (17 CFR ss.
239.13), and the information required to be included in a post-effective
amendment is provided pursuant to Item 1100(c) of Regulation AB (17 CFR ss.
229.1100(c)).
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) that, for the purpose of determining liability under the Securities
Act of 1933 to any purchaser:
3
(i) each prospectus filed by the registrant pursuant to Rule
424(b)(3) shall be deemed to be part of the registration statement as of the
date the filed prospectus was deemed part of and included in the registration
statement;
(ii) each prospectus required to be filed pursuant to Rule
424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on
Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or
(x) for the purpose of providing the information required by Section 10(a) of
the Securities Act of 1933 shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of prospectus is
first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in Rule
430B, for liability purposes of the issuer and any person that is at that date
an underwriter, such date shall be deemed to be a new effective date of the
registration statement relating to the securities in the registration statement
to which that prospectus relates, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof; provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such effective date, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such effective date; and
(5) that, for the purpose of determining liability of the registrant under
the Securities Act of 1933 to any purchaser in the initial distribution of the
securities, the undersigned registrant undertakes that in a primary offering of
securities of the undersigned registrant pursuant to the registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned registrant will be a seller
to the purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) any free writing prospectus relating to the offering prepared
by or on behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(iii) the portion of any other free writing prospectus relating to
the offering containing material information about the undersigned registrant or
its securities provided by or on behalf of the undersigned registrant; and
(iv) any other communication that is an offer in the offering made
by the undersigned registrant to the purchaser.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the this registration statement shall
be deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) For offerings of securities registered hereby that commence after December
31, 2005, the registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 of a third party that is incorporated by reference in the registration
statement in
4
accordance with Item 1100(c)(1) of Regulation AB (17 CFR 229.1100(c)(1)) 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.
(d) For offerings of securities registered hereby that commence after December
31, 2005, the registrant hereby undertakes that, except as otherwise provided by
Item 1105 of Regulation AB (17 CFR 229.1105), information provided in response
to that Item pursuant to Rule 312 of Regulation S-T (17 CFR 232.312) through the
specified internet address in the prospectus supplement is deemed to be a part
of the prospectus included in the registration statement. In addition, the
registrant hereby undertakes to provide to any person without charge, upon
request, a copy of the information provided in response to Item 1105 of
Regulation AB pursuant to Rule 312 of Regulation S-T through the specified
internet address as of the date of the prospectus included in the registration
statement if a subsequent update or change is made to the information.
(e) 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.
(f) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful 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 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 of 1933 and will be governed by the
final adjudication of such issue.
5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Charlotte, State of North Carolina, on the 24th
day of February 2006.
BANC OF AMERICA COMMERCIAL MORTGAGE INC.
By: *
------------------------------------
Rochelle R. Dobbs
Director (President)
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed below by the following
persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
*
- --------------------------- Director (President)
Rochelle R. Dobbs Chief Executive Officer February __, 2006
*
- --------------------------- Director
George G. Ellison February __, 2006
* Chief Accounting
- --------------------------- Officer and Chief
Edward J. Vaccaro Financial Officer February __, 2006
/s/ Stephen L. Hogue
- --------------------------- Attorney-in-Fact(1)
Stephen L. Hogue February 24, 2006
- ----------------------------
(1) Stephen L. Hogue, by signing his name hereto, does sign this document on
behalf of the persons indicated above pursuant to a power of attorney duly
executed by such persons and filed with the Securities and Exchange Commission.
EXHIBIT INDEX
Exhibit Number
1.1 Form of Underwriting Agreement.
4.1(a) Form of Pooling and Servicing Agreement.
4.1(b) Form of Mortgage Loan Purchase and Sale Agreement.
5.1 Opinion of Cadwalader, Wickersham & Taft LLP with
respect to legality.
8.1 Opinion of Cadwalader, Wickersham & Taft LLP with
respect to certain tax matters (to be included with
Exhibit 5.1).
23.2 Consent of Cadwalader, Wickersham & Taft LLP (to be
included with Exhibit 5.1).
24.1 Power of Attorney*.
- ------------------------
* Previously filed.
EXHIBITS